Fodder Material Combined

CHANGES IN INDUSTRIAL & LABOUR
POLICY, INDUSTRIAL DEVELOPMENT IN

INDIA
FODDER MATERIAL
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Contents
1 Industrial Policy ......................................................................................................................................4
1.1 Introduction ....................................................................................................................................4
1.2 Evolution of India’s Industrial Policy ...............................................................................................4
1.3 Industrial Policies of India prior to Independence ..........................................................................5
1.3.1 India’s Economic Activity before Independence .....................................................................5
1.3.2 Situation of India during the Colonial Period ..........................................................................5
1.4 Industrial Policies of India after Independence up to 1990............................................................5
1.4.1 Industrial Policy Resolution, 1948 ...........................................................................................5
1.4.2 Industries (Development and Regulation) Act (IDRA), 1951 ...................................................6
1.4.3 Industrial Policy Resolution, 1956 ...........................................................................................7
1.4.4 Monopolies Commission .........................................................................................................7
1.4.5 Industrial Policy Statement, 1973............................................................................................8
1.4.6 Industrial Policy Statement, 1977............................................................................................8
1.4.7 Industrial Policy, 1980..............................................................................................................9
1.4.8 Industrial Policy Resolution, 1985 & 1986 .............................................................................10
1.4.9 New Industrial Policy of 1991 ................................................................................................11
1.4.10 National Manufacturing Policy 2011 .....................................................................................14
1.4.11 Make in India .........................................................................................................................16
2 Phases of Industrial Growth .................................................................................................................19
2.1 The First Phase of Rapid Growth (1950-51 to 1965-66) ...............................................................19
2.1.1 Government’s Key Role .........................................................................................................19
2.1.2 Expansion of Private Sector ...................................................................................................20
2.2 The Second Phase of Deceleration (1965-66 to 1979-80) ............................................................21
2.2.1 Supply Side Constraints .........................................................................................................21
2.2.2 Demand Side Constraints ......................................................................................................21
2.2.3 The Third Phase of Recovery & Revival (1980-81 to 1989-90) ..............................................22
2.2.4 The Phase of Industrial Growth under New Economic Policy (1991-2007) ..........................23
2.2.5 The Period Post-2011 Till Now ..............................................................................................25
3 Public Sector: Evolution, Reforms and Performance ...........................................................................25
3.1 Objectives of PSUs ........................................................................................................................25
3.2 Performance..................................................................................................................................26
3.3 Public Sector & Economic Reforms ...............................................................................................27
3.4 Disinvestment and Privatisation ...................................................................................................28

3.4.1 Advantages of Disinvestment / Privatisation ........................................................................29
3.4.2 Criticism of Disinvestment .....................................................................................................30
4 Special Economic Zones .......................................................................................................................30
4.1 What is SEZ? ..................................................................................................................................30
4.2 Benefits of SEZ...............................................................................................................................31
4.3 Criticism of SEZ ..............................................................................................................................31
4.4 SEZ Policy Review Committee Report ...........................................................................................32
5 Micro, Small and Medium Enterprises .................................................................................................33
5.1 Introduction ..................................................................................................................................33
5.2 Importance of MSMEs for Indian Economy ..................................................................................34
5.3 MSME Redefined...........................................................................................................................34
5.4 Factors which led to growth of MSMEs ........................................................................................34
5.5 Issues, Challenges and Steps Taken ..............................................................................................35
5.6 Initiatives to Promote MSMEs ......................................................................................................37
5.7 Way Forward .................................................................................................................................38
6 Changes in Labour Policy in India .........................................................................................................40
6.1 Introduction ..................................................................................................................................40
6.2 Arguments against Labour market regulation ..............................................................................40
6.3 Arguments in favour of Labour market regulation and institution ..............................................41
6.4 Regulatory Legislation in India: A brief historical account ...........................................................41
6.4.1 Major Acts governing conditions of work .............................................................................42
6.4.2 Major Acts relating to wages and remuneration ..................................................................43
6.4.3 Major Acts on social security and Insurance .........................................................................43
6.4.4 Major Acts relating to employment security and industrial relation ....................................44
6.5 Labour market reforms: The way forward ....................................................................................45
6.6 Recent Legislative Measures .........................................................................................................45
6.6.1 Code on Wages. 2019 ............................................................................................................47
6.6.2 Industrial Relations Code, 2020 .............................................................................................48
6.6.3 Code on Social Security, 2020................................................................................................50
6.6.4 Occupational Safety, Health and Working Conditions Code, 2020 .......................................52
7 Employment Scenario in India..............................................................................................................54
7.1 Sectoral Distribution .....................................................................................................................54
7.1.1 Why have we not been able to pull labour out of agriculture? ............................................54
7.1.2 What are the ramifications of not being able to pull labour out of agriculture? .................54

7.1.3 How to pull labour out of agriculture? ..................................................................................55
7.2 Informal versus Formal .................................................................................................................56
7.2.1 Why have we not been able to create as many formal jobs as we would like? ...................56
7.2.2 What are the ramifications of not being able to create as many formal jobs as we need? .57
7.2.3 How to create more jobs in the formal sector? ....................................................................58
7.2.4 How to Ameliorate the Working Conditions of Labourers in the Informal Sector ...............61
7.3 Relevance of MGNREGA ...............................................................................................................63
7.3.1 Key Features of MGNREGA ....................................................................................................63
7.3.2 Underlying Challenges ...........................................................................................................64
7.3.3 Way Forward..........................................................................................................................65
1 Industrial Policy
1.1 Introduction
• The industrial policy means the procedures, principles, policies, rules and regulations which control
the industrial undertaking of the country and pattern of industrialization.
• It explains the approach of Government in context to the development of industrial sector.
• In India the key objective of the economic policy is to achieve self-reliance in all sectors of the
economy and to develop socialistic pattern of society.
• The industrial policy in the pre-reform period i.e. before 1991 put greater emphasis on the state
intervention in the field of industrial development.
• These policies no doubt have resulted into the creation of diversified industrial structure but caused
a number of inefficiencies, distortions and rigidities in the system.
• Thus, during late 70s and 80s, Government initiated liberalization measures in the industrial policy
framework.
• The drastic liberalization measures were however, carried out in 1991.
We shall be studying these policies in detail.
1.2 Evolution of India’s Industrial Policy

The evolution of India's industrial policies can be seen by dividing the entire study into three
phases namely: -
✓ First, Industrial Policies of India prior to Independence;
✓ Second, Industrial Policies of India after Independence up to 1990 and;
✓ Third, Industrial Policy of 1991 and thereafter policies.

1.3 Industrial Policies of India prior to Independence
1.3.1 India’s Economic Activity before Independence

• India was never an industrially developed country prior to independence.
• It was an agrarian country where in handicrafts attained supremacy unmatched anywhere else in the
world.
• India with abundance of natural wealth had attained excellence in handicrafts.
• There are very few lines of economic activity which became traditional in nature and could be
included under the products produced under the factory system of 19th and 20th century.
• For instance, silk manufacturing, utensil manufacturing, wood works, some products under
pharmaceuticals etc. could be categorized as industrial activity.
1.3.2 Situation of India during the Colonial Period

• During the colonial period, industrial policies and economic policies were shaped by the British
Government in favour of British interests.
• The tariff policy pursued by British rulers in India was based on the principal of one-way free trade
while the Indian interest for industrialization in India remained deliberately neglected.
• Interestingly, imports were tariff free whereas the exports were not duty free.
• This one-sided free trade in raw material and semi and manufactured items was the established
norm which very partially was industry oriented, but the industrialization could not take place in
India. It took place in England.
• Though the British Government established Department of Commerce and Industry in 1905 but the
activities pursued through this department favored industrial activity in England.
• Thereafter, the prevailing Government established board of Scientific and Industrial Research in
1940 but not much could come out of it.
• In 1945, the government had announced an industrial policy but this policy could never see the light.
• The industrial policy drafted in 1945 was referred as the Industrial Policy of 1946 also but since the
said policy was drafted in haste so it could not satisfy the new leaders of independent country.
1.4 Industrial Policies of India after Independence up to 1990
1.4.1 Industrial Policy Resolution, 1948

• The first important industrial policy statement was made in the Industrial policy Resolution (IPR),
1948.
• The main thrust of IPR, 1948 was to lay down the foundation of mixed economy whereby the private
and public sector was accepted as important components in the development of industrial economy
of India.

The major highlights of the policy are:
✓ Some of the important industries were put under the Central List such as coal, power, railways,
civil aviation, arms and ammunition, defence, etc.
✓ Some other industries (usually of medium category) were put under a State List such as paper,
medicines, textiles, cycles, rickshaws, two-wheelers, etc.
✓ Rest of the industries (not covered by either the central or the state lists) were left open for
private sector investment—with many of them having the provision of compulsory licencing.
• IPR, 1948 gave public sector vast area to operate.

• Government took the role of catalytic agent of industrial development.
• The resolution assigned complementary role to small-scale and cottage industries.
• The foreign capital which was seen with suspect in the pre-independent era was recognized as an
important tool to speedup up industrial development.
1.4.2 Industries (Development and Regulation) Act (IDRA), 1951

• IDRA, 1951 is the key legislation in the industrial regulatory framework.
• IDRA, 1951 gave powers to the government to regulate industry in a number of ways.
• The main instruments were the regulation of capacity (and hence output) and power to control prices.
• It specified a schedule of industries that were subject to licensing.
• Even the expansion of these industries required prior permission of the government which means
the output capacity was highly regulated.
• The Government was also empowered to control the distribution and prices of output produced by
industries listed in the schedule.
• The IDR Act gave very wide powers to the Government.
• This resulted in more or less complete control by the bureaucracy on the industrial development of
the country.
The main provisions of the IDRA, 1951 were
• All existing undertakings at the commencement of the Act, except those owned by the Central
Government were compulsorily required to register with the designated authority.
• No one except the central Government would be permitted to set up any new industrial undertaking
“except under and in accordance with a licence issued in that behalf by the Central Government.”
• Such a license or permission prescribed a variety of conditions, such as, location, minimum standards
in respect of size and techniques to be used, which the Central Government may approve.

• Such licenses and clearances were also required in cases of ‘substantial expansion’ of an existing
industrial undertaking.
1.4.3 Industrial Policy Resolution, 1956

IPR, 1956 is the next important policy statement. The important provisions are as follows:
• New classification of Industries: IPR, 1956 divided the industries into the following three categories:
✓ Schedule A industries: This schedule had 17 industrial areas in which the Centre was given
complete monopoly. The industries set up under this provision were known as the Central Public
Sector Undertakings (CPSUs) later getting popularity as ‘PSUs’. Though the number of industries
were only 17, the number of PSUs set up by the Government of India went to 254 by 1991. These
included those industrial units too which were taken over by the government between 1960 to
1980 under the nationalisation drives. These industries belonged to Schedules B and C (other than
Schedule A).
✓ Schedule B industries: There were 12 industrial areas put under this schedule in which the state
governments were supposed to take up the initiatives with a more expansive follow up by the
private sector. This schedule also carried the provisions of compulsory licencing. It should be
noted here that neither the states nor the private sector had monopolies in these industries
unlike Schedule A, which provided monopoly to the Centre.
✓ Schedule C industries: All industrial areas left out of Schedules A and B were put under this in
which the private enterprises had the provisions to set up industries. Many of them had the
provisions of licencing and have necessarily to fit into the framework of the social and economic
policy of the state and were subject to control and regulation in terms of the Industries
Development and Regulation (IDR) Act and other relevant legislations.
Thus, the IPR, 1956 emphasized the mutual existence of public and private sector industries.
• Encouragement to Small-scale and Cottage Industries: In order to strengthen the small-scale sector
supportive measures were suggested in terms of cheap credit, subsidies, reservation etc.
• Emphasized on Reduction of Regional Disparities: Fiscal concessions were granted to open industries
in backward regions. Public sector enterprises were given greater role to develop these areas.
The basic rationale of IPR, 1956 was that the state had to be given primary role for industrial
development as capital was scarce and entrepreneurship was not strong. The public sector was enlarged
dramatically so as to allow it to hold commanding heights of the economy.
1.4.4 Monopolies Commission

• In April 1964, the Government of India appointed a Monopolies Inquiry Commission “to inquire into
the existence and effect of concentration of economic power in private hands.”

• The Commission looked at concentration of economic power in the area of industry.
• On the basis of recommendation of the commission, Monopolistic and Restrictive Trade Practices Act
(MRTP Act), 1969 was enacted. The act sought to control the establishment and expansion of all
industrial units that have asset size over a particular limit. The firms with assets of ₹25 crore or more
were put under obligation of taking permission from the Government of India before any expansion,
greenfield venture and takeover of other firms (as per the MRTP Act). Such firms came to be known
as the ‘MRTP Companies’. The upper limit (known as the ‘MRTP limit’) for such companies was
revised upward to ₹50 crore in 1980 and ₹100 crore in 1985.
1.4.5 Industrial Policy Statement, 1973

• A new classificatory term i.e., core industries was created. The industries which were of fundamental
importance for the development of industries were put in this category such as iron and steel,
cement, coal, crude oil, oil refining and electricity. In the future, these industries came to be known
as basic industries, infrastructure industries in the country.
• Out of the six core industries defined by the policy, the private sector may apply for licences for the
industries which were not a part of schedule A of the Industrial Policy, 1956. The private firms eligible
to apply for such licences were supposed to have their total assets at ₹20 crore or more.
• Some industries were put under the reserved list in which only the small or medium industries could
be set up.
• The concept of ‘joint sector’ was developed which allowed partnership among the Centre, state and
the private sector while setting up some industries. The governments had the discretionary power
to exit such ventures in future. Here, the government wanted to promote the private sector with state
support.
• The Government of India had been facing the foreign exchange crunch during that time. To regulate
foreign exchange the Foreign Exchange Regulation Act (FERA) was passed in 1973. Experts have called
it a ‘draconian’ Act which hampered the growth and modernisation of Indian industries.
• A limited permission to foreign investment was given, with the multinational corporations (MNCs)
being allowed to set up subsidiaries in the country.
1.4.6 Industrial Policy Statement, 1977

The Industrial Policy Statement of 1977 was chalked out by a different political set up from the past with
a different political fervour—the dominant voice in the government was having an anti-Indira stance
with an inclination towards the Gandhian-socialistic views towards the economy. We see such elements
in this policy statement:
The main elements of the new policy were:

✓ Foreign investment in the unnecessary areas were prohibited (opposite to the IPS of 1973 which
promoted foreign investment via technology transfer in the areas of lack of capital or technology). In
practice, there was a complete ‘no’ to foreign investment.
✓ Development of Small-Scale Sector:
• The main thrust of the new industrial policy was an effective promotion of cottage and small
industries.
• Government initiated wide-spread promotional and supportive measures to encourage small
sector.
• The small sector was classified into 3 categories viz. Cottage and household industries which
provide self-employment; tiny sector and small-scale industries.
• The purpose of the classification was to specifically design policy measures for each category.
• The policy statement considerably expanded the list of reserved items for exclusive manufacture
in the small-scale sector.
• The District Industries Centres (DICs) were set to promote the expansion of small and cottage
industries at a mass scale.
✓ Restrictive Approach towards Large Business Houses
• The large-scale sector was allowed in basic, capital goods and high-tech industries.
• The policy emphasized that the funds from financial institutions should be made available largely
for the development of small sector.
• The large sector should generate internal finance for financing new projects or expansion of
existing business.
✓ Expanding Role of Public sector
• The industrial policy stated that the public sector would be used not only in the strategic areas
but also as a stabilizing force for maintaining essential supplier for the consumer.
• Further, the policy statement reiterated restrictive policy towards foreign capital whereby the
majority interest in ownership and effective control should rest in Indian hands.
1.4.7 Industrial Policy, 1980
The year 1980 saw the return of the same political party at the Centre. The new government revised the
Industrial Policy of 1977 with few exceptions in the Industrial Policy Resolution, 1980. Foreign investment
via the technology transfer route was allowed again (similar to the provisions of the IPS, 1973).

• The industrial policy 1980 emphasized that the public sector is the pillar of economic infrastructure
for reasons of its greater reliability, for the large investments required and the longer gestation
periods of the projects crucial for economic development.
• The IPR, 1956 forms the basis of this statement.
The important features of the policy were:
✓ Effective Management of Public Sector: The policy emphasized the revival of efficiency of public
sector undertaking.
✓ Liberalization of Industrial licensing:
• The policy statement provided liberalized measures in the licensing in terms of automatic
approval to increase capacity of existing units under MRTP and FERA.
• The asset limit under MRTP was increased. The ‘MRTP Limit’ was revised upward to ₹50 crore to
promote setting of bigger companies.
• The relaxation from licensing was provided for large number of industries.
• The broad-banding concept was introduced so that flexibility is granted to the industries to
decide the product mix without applying for a new license.
✓ Redefining Small-Scale Industries
• The investment limit to define SSI was increased to boost the development of this sector.
• In case of tiny sector, the investment limit was raised to Rs.1 lakh; for small scale unit the
investment limit was raised from Rs.10 lakh to Rs.20 lakh and for ancillaries from Rs.15 lakh to
Rs.25 lakh.
Industrial policy, 1980 focused attention on the need for promoting competition in the domestic market,
technological up gradation and modernization. The policy laid the foundation for an increasingly
competitive export based industries and for encouraging foreign investment in high-technology areas.
1.4.8 Industrial Policy Resolution, 1985 & 1986

The industrial policy resolutions announced by the governments in 1985 and 1986 were very much similar
in nature and the latter tried to promote the initiative of the former. The main highlights of the policies
are:
• Foreign investment was further simplified with more industrial areas being open for their entries. The
dominant method of foreign investment remained as in the past, i.e., technology transfer, but now
the equity holding of the MNCs in the Indian subsidiaries could be upto 49 per cent with the Indian
partner holding the rest of the 51 per cent shares.
• The ‘MRTP Limit’ was revised upward to ₹100 crore—promoting the idea of bigger companies.
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• The provision of industrial licencing was simplified. Compulsory licencing now remained for 64
industries only.
• High level attention on the sunrise industries such as telecommunication, computerisation and
electronics.
• Modernisation and the profitability aspects of public sector undertakings were emphasised.
• Industries based on imported raw materials got a boost.
• Under the overall regime of FERA, some relaxations concerning the use of foreign exchange was
permitted so that essential technology could be assimilated into Indian industries and international
standard could be achieved.
• The agriculture sector was attended with a new scientific approach with many technology missions
being launched by the government.
These industrial provisions were attempted at liberalising the economy without any slogan of ‘economic
reforms’. The government of the time had the mood and willingness of going for the kind of economic
reforms which India pursued post-1991 but it lacked the required political support.
The industrial policies conjoined with the overall micro-economic policy followed by the government had
one major loophole that it was more dependent on foreign capital with a big part being costlier ones.
Once the economy could not meet industrial performance, it became tough for India to service the
external borrowings—the external events (the Gulf war, 1990–91) vitiated the situation, too. Finally, by
the end of 1980s India was in the grip of a severe balance of payment crisis with higher rate of inflation
(over 13 per cent) and higher fiscal deficit (over 8 per cent). The deep crisis put the economy in a financial
crunch, which made India opt for a new way of economic management in the coming times.
1.4.9 New Industrial Policy of 1991

• With the gradual liberalization of the 1956 Industrial policy in the mid-eighties the tempo of
industrial development started picking up.
• But the industry was still feeling the burden of many controls and regulations.
• For a faster growth of industry, it was necessary that even these impediments should be removed.
• The new government by Shri Narasimha Rao, which took office in June 1991, announced a package of
liberalization measures under its Industrial Policy on July 24, 1991.
Economic Background of New Industrial Policy, 1991:

India was faced with severe balance of payment crisis by June 1991. Basically, in early 1990s, there were
inter-connected set of events, which were growing unfavourable for the Indian economy:
• Due to the Gulf War (1990–91), the higher oil prices were rapidly depleting India’s foreign reserves.
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• Sharp decline in the private remittances from the overseas Indian workers in the wake of the Gulf
War, specially from the Gulf region.
• Inflation peaking at nearly 17 per cent.
• The gross fiscal deficit of the Central Government reaching 8.4 per cent of the GDP.
• By the month of June 1991, India’s foreign exchange had declined to just two weeks of import
coverage.
1.4.9.1 Objectives of New Industrial Policy

The financial support India received from the IMF to fight out the BoP crisis of 1990–91 were having a tag
of conditions to be fulfilled by India. These IMF conditionalities required the Indian economy to go for a
structural re-adjustment. As the nature and scope of the economy were moulded by the various industrial
policies India did follow till date, any desired change in the economic structure had to be induced with
the help of another industrial policy. The new industrial policy, announced by the government on 23 July,
1991 had initiated a bigger process of economic reforms in the country, seriously motivated towards the
structural readjustment naturally obliged to ‘fulfill’ IMF conditionalities.
The New Industrial Policy, 1991 seeks to liberate the industry from the shackles of licensing system and
drastically reduce the role of public sector and encourage foreign participation in India’s industrial
development.
The broad objectives of New Industrial Policy are as follows:
✓ Liberalizing the industry from the regulatory devices such as licenses and controls.
✓ Enhancing support to the small-scale sector.
✓ Increasing competitiveness of industries for the benefit of the common man.
✓ Ensuring running of public enterprises on business lines and thus cutting their losses.
✓ Providing more incentives for industrialization of the backward areas, and
✓ Ensuring rapid industrial development in a competitive environment.
De-reservation of the Industries
The industries which were reserved for the Central Government by the IPR, 1956, were cut down to
only eight. In coming years many other industries were also opened for private sector investment.
De-licensing of the Industries
The number of industries put under the compulsory provision of licencing (belonging to Schedules B
and C as per the IPR, 1956) were cut down to only 18. Reforms regarding the area were further
followed and presently there are only four industries which carry the burden of compulsory licencing:
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• Aero space and defence related electronics
• Gun powder, industrial explosives and detonating fuse
• Dangerous chemicals
• Tobacco, cigarette and related products
Abolition of the MRTP Limit
The MRTP limit was ₹100 crore so that the mergers, acquisitions and takeovers of the industries could
become possible. In 2002, a competition Act was passed which has replaced the MRTP Act. In place
of the MRTP commission, the Competition Commission has started functioning (though there are
still some hitches regarding the compositional form of the latter and its real functions and
jurisdictions).
Promotion to Foreign Investment
Functioning as a typical closed economy, the Indian economy had never shown any good faith
towards foreign capital. The new industrial policy was a pathbreaking step in this regard. Not only the
draconian FERA was committed to be diluted, but the government went to encourage foreign
investment (FI) in both its forms—direct and indirect.
The direct form of FI was called as the foreign direct investment (FDI) under which the MNCs were
allowed to set up their firms in India in the different sectors varying from 26 per cent to 100 per cent
ownership with them—Enron and Coke being the flag-bearers. The FDI started in 1991 itself.
The indirect form of foreign investment (i.e., in the assets owned by the Indian firms in equity capital)
was called the portfolio investment scheme (PIS) in the country, which formally commenced in 1994.
Under the PIS the foreign institutional investors (FIIs) having good track record are allowed to invest
in the Indian security/stock market. The FIIs need to register themselves as a stock broker with SEBI.
It means India has not allowed individual foreign investment in the security market still, only
institutional investment has been allowed till now.
FERA Replaced by FEMA
The government committed in 1991 itself to replace the draconian FERA with a highly liberal FEMA,
which same into effected in the year 2000–01 with a sun-set clause of two years.
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Location of Industries
Related provisions were simplified by the policy which was highly cumbersome and had time-consuming
process. Now, the industries were classified into ‘polluting’ and ‘non-polluting’ categories and a highly
simple provision deciding their location was announced:
• Non-polluting industries might be set up anywhere.

• Polluting industries to be set up at least 25 kms away from the million cities.
Compulsion of Phased Production Abolished
With the compulsion of phased production abolished, now the private firms could go for producing as
many goods and models simultaneously. Now the capacity and capital of industries could be utilised to
their optimum level.
Compulsion to Convert Loans into Shares Abolished
The policy of nationalisation started by the Government of India in the late 1960s was based on the sound
logic of greater public benefit and had its origin in the idea of welfare state—it was criticised by the victims
and the experts alike. In the early 1970s, the Government of India came with a new idea of it. The major
banks of the country were now fully nationalised (14 in number by that time), which had to mobilise
resources for the purpose of planned development of India. The private companies who had borrowed
capital from these banks (when the banks were privately owned) now wanted their loans to be paid back.
The government came with a novel provision for the companies who were unable to repay their loans
(most of them were like it)—they could opt to convert their loan amounts into equity shares and hand
them over to the banks. The private companies which opted this route (this was a compulsory option)
ultimately became a government-owned company as the banks were owned by the Government of
India—this was an indirect route to nationalise private firms. Such a compulsion which hampered the
growth and development of the Indian industries was withdrawn by the government in 1991.
1.4.10 National Manufacturing Policy 2011

The Government of India has announced a national manufacturing policy with the objective of enhancing
the share of manufacturing in GDP to 25% within a decade and creating 100 million jobs. It also seeks to
empower rural youth by imparting necessary skill sets to make them employable. Sustainable
development is integral to the spirit of the policy and technological value addition in manufacturing has
received special focus.
The share of manufacturing in India’s GDP has stagnated at 15-16% since 1980 while the share in
comparable economies in Asia is much higher at 25 to 34%.
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Inadequate physical infrastructure, complex regulatory environment and inadequate availability of
skilled manpower have constrained the growth of manufacturing in India.
Recognizing that the manufacturing sector has a multiplier effect on the creation of jobs, even in allied
sectors, the government has brought out this policy.
The policy is based on the principle of industrial growth in partnership with the States. The Central
Government will create the enabling policy frame work, provide incentives for infrastructure
development on a Public Private Partnership (PPP) basis through appropriate financing instruments, and
State Governments will be encouraged to adopt the instrumentalities provided in the policy.
The proposals in the policy are generally sector neutral, location neutral and technology neutral except
incentivization of green technology. While the National Investment and Manufacturing Zones (NIMZs)
are an important instrumentality, the proposals contained in the Policy apply to manufacturing industry
throughout the country including wherever industry is able to organize itself into clusters and adopt a
model of self-regulation as enunciated.
1.4.10.1 Objectives of the Policy

▪ Increase manufacturing sector growth to 14-15 per cent in the medium term.
▪ Increase share of manufacturing in the GDP to 25 per cent by 2022.
▪ Create 100 million additional jobs in the manufacturing sector by 2022.
▪ Skill development of the rural population and urban poor so that they can be absorbed in the
manufacturing sector.
▪ Increase domestic value addition and technological advancement in the manufacturing.
▪ Increase global competitiveness of Indian manufacturing firms.
1.4.10.2 Government’s Policy Support

▪ The manufacturing policy proposes to create an enabling environment for the growth of
manufacturing in India.
▪ The NMP envisages simplification of business regulations significantly.
▪ The NMP proposes the development of the MSMEs sector. The proposal includes technological
upgradations of the MSMEs; adoption of business-friendly policies; equity investments.
▪ Skill Development of the youth is the most important part of the NMP.
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▪ Setting up of National Investment and Manufacturing Zones (NIMZ) with significant incentives like
easy land acquisitions, integrated industrial township development, world-class physical
infrastructure.
▪ A total of 12 NMIZ have been announced so far by the government. Out of the total 12, 8 NIMZ are
located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is planned to build in; Nagpur; Tumkur
(Karnataka); Chittoor (Andhra Pradesh); Medak (Andhra Pradesh).
1.4.11 Make in India
Government of India has launched the “Make in India” campaign on September 25, 2014 to provide
investors – both domestic and overseas – a conducive environment to manufacture in India and at the
same time create job opportunities.
1.4.11.1 Achievable Targets

▪ Target of an increase in manufacturing sector growth to 12-14% per annum over the medium term.
▪ An increase in the share of manufacturing in the country’s Gross Domestic Product from 16% to 25%
by 2022.
▪ To create 100 million additional jobs by 2022 in manufacturing sector.
▪ Creation of appropriate skill sets among rural migrants and the urban poor for inclusive growth.
▪ An increase in domestic value addition and technological depth in manufacturing.
▪ Enhancing the global competitiveness of the Indian manufacturing sector.
▪ Ensuring sustainability of growth, particularly with regard to environment.
1.4.11.2 Favourable Milestones

▪ India has already marked its presence as one of the fastest growing economies of the world.
▪ The country is expected to rank amongst the world’s top three growth economies and amongst the
top three manufacturing destinations by 2020.
▪ Favourable demographic dividends for the next 2-3 decades. Sustained availability of quality
workforce.
▪ The cost of manpower is relatively low as compared to other countries.
▪ Responsible business houses operating with credibility and professionalism.
▪ Strong consumerism in the domestic market.
▪ Strong technical and engineering capabilities backed by top-notch scientific and technical institutes.
▪ Well-regulated and stable financial markets open to foreign investors.

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1.4.11.3 Sectors under Make in India
Make in India initiative has been reviewed and is now focusing on 27 sectors under Make in India 2.0.
Department for Promotion of Industry and Internal Trade is coordinating action plans for 15
manufacturing sectors while Department of Commerce is coordinating 12 service sectors.
Manufacturing Sectors
1. Aerospace and Defence

2. Automotive and Auto Components
3. Pharmaceuticals and Medical Devices
4. Bio-Technology
5. Capital Goods
6. Textile and Apparels
7. Chemicals and Petro chemicals
8. Electronics System Design and Manufacturing (ESDM)
9. Leather & Footwear
10. Food Processing
11. Gems and Jewellery
12. Shipping
13. Railways
14. Construction
15. New and Renewable Energy
Service Sector
16. Information Technology & Information Technology enabled Services (IT &ITeS)
17. Tourism and Hospitality Services
18. Medical Value Travel
19. Transport and Logistics Services
20. Accounting and Finance Services
21. Audio Visual Services
22. Legal Services
23. Communication Services
24. Construction and Related Engineering Services
25. Environmental Services
26. Financial Services
27. Education Services
1.4.11.4 Importance of Make in India

▪ The share of Industrial Manufacturing in India’s GDP is 14-15%, which is way below its actual
potential. The program aims to increase this share to 25%.
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▪ India’s economic performance is a story of “Jobless Growth”. India has failed to generate jobs for his
youth entering the labour force. The main reason for low job creation is that the manufacturing sector
has failed to take off and still remains dismal.
▪ If India failed to develop a competitive manufacturing sector now than it will be trapped in a “Middle
Income Trap”, where India will not be able to grow at a higher growth rate (India will remain a middle-
income country with a deficient and uncompetitive economic system).
▪ No country in the World has become rich and developed without developing its Manufacturing
sector. The story is true for Britain (Industrial Revolution), USA (In the 1900s), Japan (Since 1950s),
East Asian Tigers (In 1970s), China (Since 1990s).
▪ The employment elasticity of the manufacturing sector is highest. Manufacturing is the only sector
that has the potential to create jobs at a faster rate and absorb excess labour from agriculture. A
weak manufacturing sector, therefore, is a curse for the economy.
▪ The service led growth as witnessed by India since 1991 reforms is not sustainable in the long run as
the employment elasticity of the services sector is one of the lowest.
▪ People start consuming services on a large scale once they cross a certain minimum threshold of
Income. In the absence of minimum threshold income, the demand for services will stagnate in the
future and the phenomenon of the service led growth will be reversed.
▪ The key for India to sustain its service-led growth is to make sure that its manufacturing sector is
well developed. A well-developed manufacturing sector will absorb low skilled labours from
agriculture sector and employ the productively in factories. Similarly, the high skilled workers will be
employed in the High-Tech End of Manufacturing like Electrical Engineering, Aerospace, Automobiles,
Defence Manufacturing etc.
▪ Moreover, the benefits from the programme are likely to be multiple and can address issues on
economic growth and employment generation as well as fuel consumer demand.
1.4.11.5 Steps taken to support Make in India

▪ Improving Ease of Doing Business and promoting use of technology;
▪ Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the economy on a
vast scale;
▪ Introduction of new and improved infrastructure through industrial corridors, industrial clusters and
smart cities;
▪ Strengthening IPR infrastructure to nurture innovation; and
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▪ Building a new mindset in government to partner industry instead of working as a regulator in
Economic Growth of the country.
The Government has taken various measures for the success of Make in India ‘campaign as under:
▪ Development of Industrial Corridors

▪ Liberalisation of the FDI in the majority of sectors to attract investments.
▪ Easing of Laws, Rules and Regulations
▪ Investment Security and Stable and Conducive Government Policies.
2 Phases of Industrial Growth
It is necessary to understand the ups and downs of India’s industrial performance by looking into the
factors responsible for it. We can analyse this in five phases: the first phase of rapid growth from 1951
to 1966, the second phase of low growth (and deceleration) from 1966-80, the third phase of recovery
and revival of growth in the 1980s and the fourth phase of growth with a renewed vigour during the
period of New Economic Policy (or economic reforms) in the 1990s and thereafter the fifth phase that
began in the aftermath of global financial crisis. An analysis of the underlying causes will enable us to
understand the measures that can help promote industrial growth in a faster, efficient and equitable
manner.
2.1 The First Phase of Rapid Growth (1950-51 to 1965-66)

There were several factors that influenced the industrial growth during this period. These factors emerged
in the changed political context after the country’s independence. The anti-industry attitude of the British
Government before 1947 was replaced by the strongly pro-industry aims of the Indian Government.
Planning came to be the medium of development. Beginning with the Second Five-Year Plan, the
government gave a very high priority to the development of industries with a particular emphasis on
basic and capital goods industries.
2.1.1 Government’s Key Role

During this phase the government played the most important role in which a number of industries were
set up in the public sector. Most of these were basic and capital goods industries like electricity, steel,
machinery, etc. These were the industries in which the gestation period was long and required
investment levels were very high, and therefore the fruits could be realised over a long term time frame.
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The government simultaneously undertook measures to ensure that these (and other) industries in the
private sector also developed. Although little was provided in the First Plan (1951-56) for industries, the
second (1956-61) and the third plans (1961-66) laid a firm foundation for industrial development.
The amount of resources was stepped up from a small 3 percent of total outlay in the First Plan to as much
as 30 percent in the Second Plan and 35 percent in the Third Plan. Apart from setting up industries, the
government provided resources and facilities for the private sector to start industries on its own or jointly
with the government, in the areas ear-marked for the private sector. Such help was extended by the
establishment of public financial institutions to provide capital, large protection to domestic industries
through high import duties including quantitative restrictions on imports, regulation of the use of
resources to direct them along the lines laid down, etc. Activities in respect of industrial research and
development were also undertaken by the government which benefited both the private as well as the
public sector industries.
2.1.2 Expansion of Private Sector

The private sector also contributed considerably to industrial growth. Expansion of private sector took
place principally on three counts.
One, the entrepreneurial class, which had emerged before the freedom of the country, found further
opportunities to investment as they had already gained experience in the running of many consumer
goods industries. Private industries were also set up in the basic sectors like steels, machinery, etc. This
enabled them to expand in the existing industries and also set up new ones.
Two, profitability of the investment in industries increased due to measures like restriction on imports
which enabled private entrepreneurs to tap domestic market without fear of foreign competition. Oddly
enough, for a capital scarce country, interest rates remained low, keeping cost of investment also low.
There were also many inducements in the form of tax concessions for the establishment of new
industries. Large funds were also made available to this sector by the new financial institutions set up by
government.
Three, owing to industrial policy of India which permitted the entry of foreign capital under reasonable
conditions, the inflow of private foreign capital increased. Most of the aid (in the form of loan on
concessional terms) received from foreign countries was for industrial development. The twin benefits
that India got from such aids were funds in the form of foreign exchange (which enabled India to tackle
its balance of payment position which arose due to lack of exportable items) and technical know-how. A
fact of important relevance in this respect is that there was spectacular growth in educational
infrastructure, in the form of engineering colleges, IITs, management institutions, and entrepreneurship
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development institutions. This institutional infrastructural growth gave India the required strength in
generating skilled manpower. The role of both the government and the private sector is notable in this
regard.
It is thus evident that the state not only acted as the catalyst for the industrial growth by undertaking the
task of developing industries itself, but also created an environment conducive for the private sector to
contribute to the industrial development of the country. It was thus a state engineered growth.
2.2 The Second Phase of Deceleration (1965-66 to 1979-80)

The industrial growth experienced during the Second and the Third Five Year Plan periods could not be
sustained. In fact, there was discernible reduction in the growth rates. There are several reasons put
forward for this downturn which can be broadly classified into two broad categories, namely, the supply
side constraints and the demand side constraints.
2.2.1 Supply Side Constraints

In the first place there were some major disturbances caused by wars (with China in 1962 and with
Pakistan in 1965 & 1971), the draughts in 1965 & 1966 and the steep rise in oil prices in 1973 (first ‘oil’
shock).
Second was the reduced availability of critical inputs for production like power, infrastructure and raw
material. Imports became costlier and fluctuations in agricultural production adversely affected the
agrobased industries.
Third was the organisational weakness due to which many industries fell sick. Many industries were
functioning at sub-optimal capacity owing to poor inventory control and financial management. There
were losses due to work stoppage which adversely affected the production.
A fourth factor was the controls and regulatory measures. In the earlier years, these controls and
regulatory measures were essential when saving/ investments were low. With improvement in the
saving/investment ratio the controls and regulatory measures had become restrictive in character acting
as impediments to industrial growth.
2.2.2 Demand Side Constraints

Among the demand side factors inhibiting industrial growth, the principal ones are the following.
One was the declining demand due to policies of import substitution. For instance, till about the mid-
1960s, industries were setup to replace imported goods. With time, the policies on this front resulted in
the slow-down of industrial production. There was need for additional generation of domestic demand
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which did not take place. This affected the capital goods industries as it was the import of these goods
which were replaced under the policy of import substitution initiated in the Second Plan.
Two, there was a decline in the growth of public sector investment resulting in a corresponding decline
in the private sector investment. The gross fixed investment which grew at the rate of 12.2 percent
during the period 1951-66, came down steeply registering negative growth (- 0.47 percent) during the
period 1966-72. It, however, recovered to 8.0 percent during 1971-78. Since the public sector acted as
the leader, there was a general slackening of investment level in the economy. Associated with this
trend, there was a rise in the incremental capital output ratio for the industrial output. What it actually
amounted to was that the relative share of material and depreciation cost per unit of output went up.
Three, the weak performance of agriculture adversely affected the demand for industrial goods. The
slow growth in agricultural output, for many years since mid-1960s, resulted in a decline in the demand
for the products of the industrial sector. To an extent, the terms of trade, favourable to agriculture (as a
result of relatively higher rise in agricultural prices in comparison with the price of manufactures), acted
adversely for the industry. Barring large farmers having large surpluses to sell and benefit from it, vast
number of the poor had to spend more on the purchase of food, resulting in reduced demand for
industrial consumption. This also affected the demand for capital goods via saving and investment.
Four, the small rise in the per capita income and the worsening of inequalities in income distribution
also caused a slow-down in the demand for industrial goods. On the one hand, there was a trend in the
stabilisation of demand for consumer goods, particularly durable goods, owing to the small proportion
of rich people in the country. On the other hand, large proportion of population with low buying power
for industrial goods, were increasingly finding it difficult to keep up the pressure for industrial demand.
As a result, the already narrow market for the industrial goods shrank further. It needs, however, to be
added that these causes had operated at different times, for different periods and with varied intensities.
However, cumulatively, their adverse impact on the economy was significant.
2.2.3 The Third Phase of Recovery & Revival (1980-81 to 1989-90)

The factors behind the resurgence of growth in the 1980s were exactly similar to those that contributed
for its deceleration in the mid-sixties. Empirical evidence which pointed out to favourable trends included:
▪ Improvement in the rate of growth (and pattern) of gross domestic capital formation in general and
public investment in particular;
▪ Step-up in infrastructure investment and more efficient management of the infrastructure facilities;
▪ Trends in the inter-sectoral terms of trade favouring the agricultural sector;
▪ Increase in the use of manufactured inputs in crop production;
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▪ Growth in per capita agriculture incomes and
▪ Reforms in industrial and trade policies contributing to revival of growth in industrial output.
▪ Role of technology and increased R&D activity and better access to imported technology under
technical collaboration projects; and
▪ Massive flow of remittances from the middle east during 1974-1980 resulting in large foreign
exchange reserves which led to further liberalisation of imports.
Thus, from 1980 onwards, due to the above factors coupled with improvement in domestic political
environment, industrial policy witnessed greater pragmatism. This process was further assisted by factors
like: (i) a gradual loosening of controls, (ii) greater freedom to import technology, (iii) flow of foreign
private capital facilitating modernisation of the manufacturing sector, etc.
Greater realism in policy-making also included: (i) stepping up of public investment in infrastructure and
energy production and (ii) investment in rural development for diffusion of green revolution technology
and for a ‘direct’ attack on poverty. The ‘second oil shock’ was successfully met by increasing domestic
oil production and import substitution in fertilisers in a short time. The second half of the 1980s also
witnessed considerable de-licensing and relaxation of import controls facilitating up-gradation of
industrial technology. This was achieved by a greater reliance on the private corporate sector with fiscal
incentives extended for stock market-based financing of industrial investment. Also, in the 1980s, many
branches of manufacturing like automotive industry, cement, cotton spinning, food processing, and
polyester filament yarn, witnessed modernisation and expansion of scales of production. As a result,
industrial export growth also improved in the second half of the 1980s. Thus, the turnaround in the
industrial output growth in the decade of 1980s is variedly attributed to liberalisation, improvement in
public investment and private sector performance.
2.2.4 The Phase of Industrial Growth under New Economic Policy (1991-2007)
During this phase, industry and trade policy reforms were accelerated. Public investment contracted
sharply to reign in the fiscal imbalance. Financing of industrial development changed considerably as part
of the financial sector reform which cut into directed lending. Although formal changes in industrial
labour laws were avoided due to lack of political consensus, there were adequate signals to employers
that the government would not come in the way of restructuring the industrial relations.
While the trend in the growth rate in the 1990s is the same as in the previous decade of 1980s, the yearly
growth rates showed a marked difference. After an expected contraction in response to the external
payment crisis in 1991-92, industrial output rebounded rapidly in the following four years, reaching a
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new peak in 1995-96 with an annual growth rate in output of over 14 per cent. The sharp upturn is widely
credited to policy reforms leading to a liberalised and competitive industrial atmosphere. However, the
expectation of further acceleration with more reforms was short-lived as the growth rate steadily
decelerated in the following seven years, except for a minor improvement in the year1999-2000.
The policy initiatives of the 1990s were based in theory from the mainstream economics. They were, in
principle, expected to set right what was widely believed to have been wrong with India’s industrialisation
effort. As the noted economist, T N Srinivasan argued, the reforms were based on an understanding of
the experience of Indian development strategy since the 1950s that delivered ‘neither rapid growth nor
appreciably greater equity’. In the words of an yet another leading economist, Jagdish Bhagwati’s views,
the three main elements of India’s policy framework that stifled growth and efficiency were: (i)
extensive bureaucratic controls over production, investment and trade; (ii) inward looking trade and
foreign investment policies, and (iii) a substantial public sector going well beyond the conventional
confines of public utilities and infrastructure. The control system followed by India has also been argued
differently to imply that the industrial policy pursued was responsible for persistent fiscal deficits and
periodic balance of payment crises. Although in broad terms, none of these features of the policy
framework remained any more after 1991, the question that still remains to be answered is one of ‘why
the growth of the industrial sector, especially the manufacturing sector’s growth, slowed down in the
mid-1990s’?
The slowdown (or lack of sustained improvement witnessed in some years of 1990s) is also attributed to
the delayed reforms in other complementing areas of the economy. It is argued that measures like: (i) a
quick and sharp reduction in tariffs to the average levels of many Asian economies; (ii) scaling down the
remaining restrictions on foreign direct investment, and (iii) removal of rigidities in the industrial labour
market would deliver better fruits of reforms. If this argument is given credence, then the hastening of
the reforms in the post-1990s, compared with the moderate liberalisation policies practiced during the
decade of late 1970s and early1980s, ought to have improved the industrial growth rate during the
1990s. However, this has not happened as the industrial growth rates of 1980s (6.5%) and the period in
post-1990s, from 1991-2004 (5.8%). Notwithstanding the lower long term average in the latter period as
compared to the former, it is relevant to recall that the year 2006-07 marked an yet another solitary year
when both the registered and the unregistered segment of manufacturing recorded significantly high
growth rates. Thus, although high sustained growth rates in the industrial performance is not observed
during the post 1991-years, with the reforms in the complementary sectors (e.g. finance, insurance)
introduced in the post-2000 years, the industrial growth of the decade 2001-2010, compared with the
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decade of 1991- 2000, should be higher if the positive relationship between the pace of reforms and the
economic outcomes, argued by many, holds good.
2.2.5 The Period Post-2011 Till Now

The period starting from 2011-12 saw a severe slowdown in the industrial growth and production. The
slowdown during the period is due to:
▪ Weak Demand for exports from the Developed Western Countries due to Global Financial Crisis.
▪ The slowdown in the Domestic Demand.
▪ High Interest in India maintained by the RBI, due to persistently high Inflation.
▪ The slowdown in the Private Investment by the private sector due to weak returns on the
investments.
▪ Rising NPAs of the Public-Sector banks has led to weak credit and lending offered by them.
▪ Failure of past projects of the private sector.
▪ Government reluctance to increase Public investment due to the stand of maintaining a low fiscal
deficit.
▪ Uncertain Global Recovery.
▪ European Debt Crisis.
▪ The slowdown in the prices of commodities in International Commodity markets mainly due to weak
Chinese growth. The weakness in the prices has hit the Indian agriculture sector where prices of the
Agriculture commodities has remained low, leading to collapse of income in the rural areas.
The annual growth rate of IIP has been decelerating post-2011. The IIP fell from 8.2% in 2010-11 to 2.9%
in 21011-12. The IIP further fell to 1.1% in 2012-13, negative 0.1 percent in 2013-14 and 2.8% in 2014-15.
3 Public Sector: Evolution, Reforms and Performance

Since the beginning of socio-economic planning after Independence, the public sector played a
preeminent role in India. Commanding the heights of the economy were to be in the hands of the public
sector—basically, infrastructure and basic industries such as heavy engineering, power, metals and so
on. PSEs dominated the Industrial Policy Statement, 1948, and Industrial Policy Resolution of 1956. They
were opted for by the government partly as the government wanted to steer the economy towards
planning goals rapidly and also because of pragmatic compulsions, like the negligible presence of the
private sector in manufacturing and their unwillingness to take up the unprofitable work of investing in
infrastructure.
3.1 Objectives of PSUs
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• Build a self-reliant economy.
• Prevent/reduce concentration of private economic power.
• Establish sound economic infrastructure.
• Set up industries in the backward regions, thus helping bring about balanced regional development.
• Assist in ancillarization, thus spreading the benefits of industrialization.
• Create sufficient levels of employment and set standards of labour welfare.
• Selling goods and services at reasonable prices so as to serve consumers, keeping prices affordable
and helping non-inflationary growth process.
• Invest in areas where the private sector would not invest, such as in roads, transport and so on.
3.2 Performance
Since planning began in 1951, the public sector has been the main engine of inclusive growth.
The Public Enterprises Survey is a consolidated annual report of the performance of all Central Public
Sector Enterprises (CPSEs) and their subsidiaries for a given financial year. It is laid in both Houses of
Parliament every year during the Budget Session. For the financial year 2015–16, the overall net profit
of the 244 operating CPSEs was at Rs 1,15,767 crore. The CPSEs have been making a substantial
contribution to the central government through the payment of dividend, interest, corporate taxes,
excise duties and so on. The contribution by the CPSEs through these avenues was Rs 2,78,075 crore in
2015–16. The survey excludes insurance, finance and other companies.
PSEs are important since:
• The record of the PSUs in supplying many goods and services, such as coal, transport, power,
irrigation and so on, is commendable.
• The PSUs are a model employer, providing various facilities such as education, housing and so on.
• On establishing industries in MP, Rajasthan, Bihar and so on, the efforts of the PSUs to reduce regional
economic imbalances are not insignificant.
• Non-inflationary growth process is facilitated because of the PSEs, as the prices of their goods and
services can be administered.
While there were only five CPSEs at the time of the First Five Year Plan, there are as many 244 CPSEs today
(2019).
A large number of CPSEs have been set up as greenfield (new) projects consequent to the initiatives
taken during the Five-Year Plans. CPSEs such as the National Textile Corporation, Coal India Ltd. (and its
subsidiaries) have, however, been taken over from the private sector following their nationalization.
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Industrial companies such as the Indian Petrochemicals Corporation Ltd., Modern Food Industries Ltd.,
Hindustan Zinc Ltd., Bharat Aluminum Company and Maruti Udyog Ltd., on the other hand, which had
been CPSEs earlier, ceased to be CPSEs after privatization.
Along with other public sector majors such as the Indian Railways in transportation, CPSEs are the leading
companies of India, with significant market shares in sectors such as petroleum (e.g., Coal India Ltd. and
NMDC), power generation (e.g., NTPC and NHPC), power transmission (e.g., Power Grid Corporation of
India Ltd.), heavy engineering (e.g., BHEL), aviation industry (e.g., Hindustan Aeronautics Ltd. and Air
India Ltd.), storage and public distribution system (e.g., Food Corporation of India and Central
Warehousing Corporation), shipping and trading (e.g., Shipping Corporation of India Ltd. and State
Trading Corporation Ltd.) and telecommunications (e.g., BSNL and MTNL).
With economic liberalization post 1991, sectors that had been the exclusive preserve of the public sector
enterprises were opened to the private sector with extensive LPG reforms. The CPSEs, therefore, are
faced with competition from both domestic private sector companies (some of which have grown very
fast) and large multinational corporations (MNCs).
While considering the performance of PSUs, it must be recognized that most of them had locational
disadvantage, sold the product at administered prices (government-fixed prices), did not have access
to the best of technology, had an excess of manpower, operated in areas not meant for profit making,
such as the railways, were subject to multiple controls and excess of accountability and so on. Even
though sick PSEs are reducing in number, the problems are compounded by resource crunch, erosion of
net worth due to continuous losses incurred by the PSUs, reluctance of financial institutions to provide
funds for the revival of PSUs, heavy interest burden, old and obsolete plants and machineries, outdated
technology, low capacity utilization, excess manpower, weak marketing strategy, and so on.
Inadequate autonomy is another reason. Populism and the absence of rational pricing of goods and
services is yet another reason for the low efficiency levels in PSUs.
3.3 Public Sector & Economic Reforms

Economic reforms were made necessary to make the economy competitive through market forces. It
was expected to post higher growth rates and make industries yield higher productivity, where profits
and taxes could contribute to poverty alleviation. Public sector was in need of competition to unlock its
value. Therefore, domestic and foreign capital was invited to force the PSEs to compete and perform.
The government recognized the need for PSE reforms during the 7th FYP (1985–1990).
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The New Industrial Policy 1991 made significant changes like the de-reserving of many areas, with only
3 areas being reserved today; equity disinvestment; managerial revamp with greater autonomy; and so
on. The reforms made to the PSUs are the following:
• The list of industries reserved for the public sector has been pruned down, and today there are only
three of them, which are as follows: 1. Atomic Energy 2. Minerals specified in the Schedule to the
Atomic Energy (Control of Production and Use) Order, 1953. 3. Railway passenger transport.
• The period since 1991, when reforms were launched, saw many reforms in the way PSEs should
function: The government must withdraw from commercial and other areas like hotels, bakeries,
cycles and so on.
• Disinvest a portion of the PSU equity in favour of retail public, employees, domestic and foreign
financial institutions, for a variety of purposes.
• Strategic sale, where a PSE is sold to a strategic partner who buys majority equity and takes over the
management and which may extend to complete ownership in due course.
• Increasingly, they are being subjected to market discipline, primarily by listing on the stock
exchanges, which is the direct outcome of divestment.
• Globalization—liberal FDI norms and import of capital goods are compelling PSUs to perform.
• The MoU system is being improved with greater weightage given to the criterion of financial
performance.
• Navaratnas (1997) are granted financial and managerial autonomy for global competitiveness
• Mini-ratnas were taken up for similar reforms.
• Maharatnas have been recognized since 2011.
• Professionalization of boards
• ETF (Bharat-22), 2017
3.4 Disinvestment and Privatisation

The New Industrial Policy, 1991, as mentioned above, spoke of disinvestment, and the Finance Minister’s
Budget Speech in 1999–2000 talked of privatization for the first time.
Disinvestment is the sale of shares of the government to the retail public or employees or mutual funds
or the domestic financial institutions or FPIs. In other words, Government continues to own more than
50% of equity and thus the unit remains in government hands. Shares are sold to various individuals and
institutions in limited quantities only for raising capital. None of the buyers of shares holds enough to
have a substantial say in the management. It is essentially a money-raising exercise with some
accompanying benefits.
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If the Government sells a chunk of equity to a single buyer—26 per cent or 51 per cent or more—to
whom the management is also handed over, it is termed a strategic sale, and the buyer is called a
strategic partner. It is usually in the case of privatization. The buyer is one who has presence in the sector
and can add value to the unit. For example, IPCL was sold to Reliance Industries Ltd (RIL) and BALCO was
sold to Sterlite. The government may also sell off a unit to a strategic buyer—the entire equity.
A strategic buyer is one who not only buys the chunk of entire equity—in one tranche or more—but also
takes over the management, that is, the strategic part of the sale. It is unlike usual disinvestment, where
the sale of shares is unaccompanied by the transfer of management control. The strategic partner gives
a higher price for the shares as he gets management control along with it (management premium). Also,
the running of the unit improves.
Privatization and strategic sale are the same if the sale of equity and transfer of management takes place
in favour of a private owner. Take the following examples: sale of Hindustan Petroleum Corporation
(HPCL) to Oil and Natural Gas Corporation Limited (ONGC); Power Finance Corporation (PFC) to Rural
Electrification Corporation (REC); and IDBI Bank to Life Insurance Corporation of India (LIC). They are
strategically sold to another PSU. But it is not privatization as the strategic partner is not a private entity.
The advantages of a strategic sale (privatization) are that it receives investment; the strategic partner
with management control will invest further for diversification and technological improvement; market
perception will improve as it is no longer a government company; and shareholder value will increase.
With the improvement of the functioning of the company, workers’ protection will also be guaranteed.
Corporatization is a related term. It means that government units are reorganized along business lines.
Typically, they are required to pay taxes, raise capital from the market (with no government backing,
explicit or implicit), and operate according to commercial principles. Even government corporations
should focus on maximizing profits and achieving a favourable return on investment. They have to
operate on a level playing field along with the private sector without any special advantages, more or
less.
3.4.1 Advantages of Disinvestment / Privatisation

• Raises finances for the government that can be spent on restructuring the PSEs.
• Makes additional finances available for social sector priorities.
• Exposes the enterprises to market discipline, thereby forcing them to become more efficient and
survive on their own financial and economic strength.
• When units become more professionalized and profitable, budgetary support for them can be
minimized, freeing resources for social and infrastructural needs.
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• Results in wider distribution of wealth through the offering of shares to small investors and
employees.
• Beneficial effects are seen in the capital market; the increase in floating stock gives the market more
depth and liquidity and facilitates the raising of funds by the PSEs for their future projects or
expansion.
• Opening up the public sector to appropriate private investment increases economic activity and
benefits the economy, employment and tax revenues in the medium to long term.
• Reduces the public debt that threatens to assume unmanageable proportions.
• In many areas, e.g., the telecom sector, the end of public sector monopoly brought relief to
consumers by way of more choices and cheaper and better quality of products and services.
Competition made PSEs perform better, as outlined above.
3.4.2 Criticism of Disinvestment

While the advantages are convincing, the criticism is not to be dismissed either:
• PSEs constitute family silver and should not be liquidated.

• PSEs check the private sector in the wider marketplace and so are crucial to economy. For example,
if PSEs are absent, private enterprises may cartelize and so on.
• PSEs contribute by way of dividends and profits and thus are important sources of public finance.
• The exercise is essentially meant to garner resources for filling the revenue deficit. A prudent middle
path needs to be adopted by way of extent of divestment, units chosen, pace of the process, method
adopted (IPO, strategic sale, etc.), valuation debate and so on.
Disinvestments worth about Rs 4.5 lakh crore have taken place since 1991 till 2019, and the government
has set a target of Rs 1.05 lakh crore of disinvestments for 2019–20.
4 Special Economic Zones

4.1 What is SEZ?
The need of geographically defined zones has been recognized world over to promote trade. The main
reason behind the development of such enclaves is export promotion by concentration of resources in
specific areas for the purpose. In this category, the setting up of Export Processing Zones (EPZs) has been
a famous model across the world. SEZ’s represent these geographical areas wherein special privileges are
provided for exports by a country. An SEZ is broadly defined as a geographically outlined area having a
uniform management with firms located physically in the zone being liable to specific encouraging trade.
This is carried out in the form of incentives of various forms. The first SEZ in the world has been
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highlighted as that of an industrial park of in Puerto Rico in 1947. Some criterion can be identified for
highlighting SEZs. These are: the geographical area, objectives, incentives and activities for which these
zones are created. In general, SEZs have a larger area with more integrated and liberal development
policies. There is a thin dividing line between the categorization of these zones. The SEZ concept has been
criticized as well with reference to specific privileges assigned to these zones and more importantly have
been questioned on the need of creating such exclusive enclaves.
4.2 Benefits of SEZ

▪ The creation of specialized zones is considered as a step forward in overcoming the bureaucratic
setup of license and permissions which has been held responsible for the slow progress of India’s
international trade.
▪ The establishments of such specialized arenas facilitates the faster movement of goods and also
supports assembling and re-export of goods which earlier lacked efficacy.
▪ Tax exemptions and reimbursements have also been initiated swiftly through these zones.
▪ Large scale industries have always found it difficult to deal with labour issues and laws concerning
hiring and removal of labour which has resulted into low-level large-scale industrialization in India.
SEZs provide flexibility to employers in terms of labour laws and regulations.
▪ SEZs provide world class infrastructure and initiate a newer form of global competition based
industrialization.
▪ Autonomy over taxes, labor laws, regulations, tariffs, single window clearance, investment
exemptions, integrated rural urban development, large scale employment generation and
involvement of public-private players create a conducive environment for global trade and business
opportunity which cannot be provided for an industry alone.
4.3 Criticism of SEZ

One cannot find SEZs so simplistically marvellous without any drawbacks or shortcomings.
▪ The foremost critique of these economic establishments involves the issue of massive annexation and
acquisition of agricultural land for industrial purpose. Instances have been reported where land was
forcibly taken away from farmers without proper compensation on false promises of employment.
The allied problem is of the displacement which if unaddressed causes unrest amongst the habitant
of that land.
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▪ The next allied concern arsis is of food security and long term independence of nation in achieving
food demand if such projects are carried out at massive pace. Faster conversion of agricultural tracts
into industrial hubs subjugates the food emergency India faces.
▪ Institutions like International Monetary Fund (IMF) and National Institute of Public Finance and
Policy (NIPFP) in their studies have pointed about the loss to the exchequer due to tax concessions
and rebates at length which could be to the tune of Rs. 97000 crore from 2005-2010. Revenue losses
like this pose questions over the future benefits yet to be accrued.
▪ Another criticism is regarding the narrow outlook of SEZs in terms of operation and location. Analysts
argue that focus of new SEZs is limited to states which already have substantial infrastructure and
that the area of operation is limited to IT/ITES/Electronics and hardware.
▪ Foremost refrains against the SEZs has been their inability towards encouraging manufacturing
exports from India and instead becoming host to information technology firms to avail of tax
incentives by shifting to the zones from domestic tariff areas.
▪ Free Trade Agreements (FTA) are next hurdle as they act parallel to the objective of export
promotion through opening up of trade.
▪ Many SEZs have surrendered due to economic slowdown and lack of demand. Minimum Alternate
Tax and Dividend Distribution Tax have further added to the misery.
The success story thus turned flop due to mere imitation of Chinese development process.
4.4 SEZ Policy Review Committee Report

Government of India had constituted a Group of eminent persons under the Chairmanship of Baba Kalyani
in 2018. The key recommendations of the Group are as under:
• Framework shift from export growth to broad-based Employment and Economic Growth
(Employment and Economic Enclaves-3Es).
• Formulation of separate rules and procedures for manufacturing and service SEZs.
• Shift from supply driven to demand driven approach for 3Es development to improve efficiency of
investment-based on certain industries, current level of existing inventory in the region.
• Enabling framework for Ease of Doing Business (EoDB) in 3Es in sync with State EoDB initiatives. One
integrated online portal for new investments, operational requirements and exits related matters.
• Enhance competitiveness by enabling ecosystem development by funding high speed multi modal
connectivity, business services and utility infrastructure. Critical to provide support to create high
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quality infrastructure either within or linked to the zones eg. High Speed Rail, Express roadways,
Passenger/Cargo airports, shipping ports, warehouses etc.
• Promote integrated industrial and urban development- walk to work zones, States and center to
coordinate on the frame work development to bring linkages between all initiatives.
• Procedural relaxations for developers and tenants to improve operational and exit issues.
• Extension of Sunset Clause and retaining tax or duty benefits.
• Broad-banding definition of services/allowing multiple services to come together.
• Additional enablers and procedural relaxations.
• Unified regulator for IFSC.
• Utilizing Multi Services SEZ IFSC for all the inbound and out bound investment of the country.
• Incentives for availing services from IFSC SEZ by domestic institutions.
• Extension of benefit under services Export incentives scheme.
• Allowing alternate sectors to invest in sector specific SEZs/ 3Es.
• Flexibility of long term lease for developers and tenants.
• Facility of sub-contracting for customers outside 3Es/SEZs without any restriction or cap at any level.
• Specified domestic supplies supporting ‘Make in India’ to be considered in NFE computation.
• Export duty should not be levied on goods supplied to developers and used in manufacture of goods
exported.
• Flexibility in usage of NPA by developers and sale space to investors/ units.
• Infrastructure status to improve access to finance and enable long term borrowing.
• Promote MSME participation in 3Es and enable manufacturing enabling service players to locate in
3E.
• Dispute resolution through arbitration and commercial courts.
5 Micro, Small and Medium Enterprises

5.1 Introduction
• Worldwide, MSMEs have been accepted as the engine of economic growth and for promoting
equitable development.
• They constitute over 90% of total enterprises in most of the economies and are credited with
generating the highest rates of employment growth.
• With low investment requirements, operational flexibility and the capacity to develop appropriate
indigenous technology, SMEs have the power to propel India to new heights.
• Hence, it seems like there is a silent revolution happening in India powered by MSMEs.
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5.2 Importance of MSMEs for Indian Economy
• Employment: It is the second largest employment generating sector after agriculture. It provides
employment to around 120 million persons in India.
• Contribution to GDP: With around 36.1 million units throughout the geographical expanse of the
country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from
service activities.
o MSME ministry has set a target to up its contribution to GDP to 50% by 2025 as India becomes
a $5 trillion economy.
• Exports: It contributes around 45% of the overall exports from India.
• Inclusive growth: MSMEs promote inclusive growth by providing employment opportunities in rural
areas especially to people belonging to weaker sections of the society.
o For example: Khadi and Village industries require low per capita investment and employs a
large number of women in rural areas.
• Financial inclusion: Small industries and retail businesses in tier-II and tier-III cities create
opportunities for people to use banking services and products.
• Promote innovation: It provides opportunity for budding entrepreneurs to build creative products
boosting business competition and fuels growth.
5.3 MSME Redefined

As per the latest classification:
• Micro enterprises would be those with investments not exceeding Rs 1 crore and turnover of Rs 5
crore.
• Small enterprises would be those with investment up to Rs 10 crore and turnover of up to Rs 50
crore.
• Medium enterprises – as those with investments not exceeding Rs 50 crore and turnover of Rs 250
crore.
5.4 Factors which led to growth of MSMEs

• Campaigns like Skill India, Startup India, Digital India and Make in India aim to provide MSME players
with a level playing field and a definitive push towards enhanced productivity.
• Digitization: Increasing internet penetration, customer’s familiarization with digital payments fuelled
by B2C ecommerce players facilitate MSME sector growth.
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• Tie-ups with new-age non-banking finance (FinTech) companies allowed access to timely collateral
free finance to MSMEs.
• Changing employment patterns: Younger generation shifting from agriculture towards
entrepreneurial activities creating job prospects for others.
5.5 Issues, Challenges and Steps Taken
Issues & Challenges Steps Taken

Access to credit • Launch of the 59 minute loan portal to enable easy
• 90% of the MSMEs are dependent on access to credit for MSMEs.
informal sources for funding • 2 percent interest subvention for all GST registered
• Lack of sufficient collateral and high MSMEs, on fresh or incremental loans.
working capital needs • Trade Receivables e-Discounting System (TReDS) to
• The formal credit available to this enable access to credit from banks, based on their
sector is ₹16 trillion. The viable credit upcoming trade receivables from corporate and other
gap is ₹20 trillion against a total buyers.
demand of ₹36 trillion.
Access to Markets • Union government announced to launch an e-
• Low outreach and non availability of commerce platform on the lines of “Amazon and
new markets. Alibaba" to sell products from MSMEs and the Khadi
• Lack of skilled manpower and and Village Industries Commission.
ineffective marketing strategy. • Public sector companies now compulsorily procure
• Difficult for MSMEs to sell products to 25%, instead of 20% of their total purchases, from
government agencies. MSMEs.
• Competition from MNCs and other big • More than 40,000 MSMEs registered on Government
industries. e-Marketplace (GeM) portal. It provides transparency
in procurement and facilitates MSMEs to directly
reach out to the buyers.
Technology Access • 20 hubs and 100 spokes in the form of tool rooms will
be established across the country. This will facilitate
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• Limited human resources and weak product design and easy access to latest technology to
financial standing. MSMEs.
• MSMEs, particularly in the unorganised • Financial assistance is provided for implementation of
sector, show lower adaptability of new lean manufacturing techniques to enhance the
technology and innovation. manufacturing competitiveness of MSMEs.
Quality and Export Issues • Financial support to MSMEs in ZED(Zero Defect Zero
• Low quality products impact export Effect) certification to improve quality of products.
competitiveness. • Government provides subsidy towards the
• Inadequate access to quality raw expenditure incurred by enterprises to obtain the
materials. product certification licenses from national and
• Use of traditional machines causes low international bodies.
productivity.
Ease of Doing Business • The return under 8 labour laws and 10 Union
• Cumbersome government procedures regulations must now be filed only once a year.
and rules for establishing new units. • Computerised random allotment for inspector visits
• Bureaucratic delays in getting to the establishment.
clearances. • Environmental Clearance under air pollution and
• Poor litigation system in the country. water pollution laws, have been merged into one.
Also, the return will be accepted through self-
certification.
• For minor violations under the Companies Act, the
entrepreneur will no longer have to approach the
courts, but can correct them through simple
procedures. This signifies simplification of
government procedures and instilling confidence
among entrepreneurs.
Other Issues Faced by MSMEs
• Lack of Formalisation Amongst MSMEs:

o The main reason for the credit gap is the lack of formalisation amongst MSMEs.
o Almost 86% of the manufacturing MSMEs operating in the country are unregistered.
o Even today, out of the 6.3 crore MSMEs only about 1.1 crores are registered with Goods and
Services Tax regime.
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o The number of income tax filers are even less. As a result, Indian MSMEs’ credit requirement
has been largely unmet due to limited availability and access to data and legacy underwriting
methods.
• Technological Disruption: India‘s MSME sector is based on obsolete technology, which hampers its
production efficiency.
o With the emergence of new technologies like Artificial Intelligence, Data Analytics, Robotics
and related technologies (collectively called as Industry Revolution 4.0) is a bigger challenge
for MSMEs than for organized large-scale manufacturing.
• Regulatory Cholesterol: MSMEs require a lot of government services and approvals, for which the
entrepreneur has to run around various government departments.
o Getting construction permits, enforcing contracts, paying taxes, starting a business and trading
across borders continue to constrain doing business.
o Regulatory risks and policy uncertainty in the past have dented investor confidence.
• Problem of Scale: Majority of the firms in MSMEs are micro-enterprises.
o The MSME space is virtually a micro space formed by a plethora of small and local shops and
hence, scaling them up is a problem, especially when fund access is challenging.
Due to these issues, the productivity of small firms in Indian manufacturing is abysmally low relative to
larger firms. This has created a conspicuous ‘missing middle’ in the size structure of firms, which deters
employment generation and dynamism in Indian manufacturing.
5.6 Initiatives to Promote MSMEs

• Udyami Mitra Portal: launched by SIDBI to improve accessibility of credit and handholding services to
MSMEs.
• MSME Sambandh: To monitor the implementation of the public procurement from MSMEs by Central
Public Sector Enterprises.
• MSME Samadhaan -MSME Delayed Payment Portal –– will empower Micro and Small entrepreneurs
across the country to directly register their cases relating to delayed payments by Central
Ministries/Departments/CPSEs/State Governments.
• Digital MSME Scheme: It involves usage of Cloud Computing where MSMEs use the internet to access
common as well as tailor-made IT infrastructure
• Prime Minister Employment Generation Programme: It is a credit linked subsidy program under
Ministry of MSME.
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• Revamped Scheme of Fund for Regeneration Of Traditional Industries (SFURTI): organizes traditional
industries and artisans into clusters and make them competitive by enhancing their marketability &
equipping them with improved skills.
• A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE): creates new jobs
& reduce unemployment, promotes entrepreneurship culture, facilitates innovative business solution
etc.
• National Manufacturing Competitiveness Programme (NMCP): to develop global competitiveness
among Indian MSMEs by improving their processes, designs, technology and market access.
• Micro & Small Enterprises Cluster Development Programme (MSE-CDP) - adopts cluster development
approach for enhancing the productivity and competitiveness as well as capacity building of MSEs.
• Credit Linked Capital Subsidy Scheme (CLCSS) is operational for upgradation of technology for
MSMEs.
• In June 2019, RBI committee headed by former SEBI Chairman UK Sinha suggested a Rs 5,000 crore
stressed asset fund for the MSME sector to provide relief to small businesses hurt by demonetisation,
GST, and an ongoing liquidity crisis. It has also recommended doubling the cap on collateral-free loans
to Rs 20 lakh from the current Rs 10 lakh extended to borrowers falling under the Mudra scheme, self-
help groups, and MSMEs.
• MSME Ministry announced in June 2019 to lift the ban on entry of corporates and private players in
the MSME sector to pave way for the formation of 700 clusters to reduce dependence on imports as
well as for job creation.
• MSME Ministry is also planning to set up enterprise facilitation centres across the country to make
smaller businesses more competitive and help them integrate with big enterprises.
Therefore, the government should continue to put concerted efforts for holistic development of MSMEs
in key areas like human capacity development, knowledge services, access to finance, technology,
infrastructure, market access, and ease of doing business.
5.7 Way Forward

• Developing Bond Market: With India’s bond markets starting to take shape, promotion of SME bond
issuances can provide a fillip to debt capital markets participation of MSMEs.
• Creation of Independent Regulator: Given the growing importance of the data economy, it is
paramount that the government creates an independent body which can advise and provide
consultancy to MSMEs and enable them to win in this new, digital world.
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• Reforming Labour Laws: Labour laws are not very conducive to MSME growth. They must strike the
right balance between providing a growth-oriented framework for MSMEs to run in and providing
sufficient protection for the rights of workers.
• Improving Regulation: While Ease of Doing Business has been a focus area, the reporting, approval
and compliance requirements for small businesses continue to border on the higher side.
• Cluster Manufacturing: Efforts should be made to develop self-sufficient clusters of manufacturing
competence, with Cluster Administrative Authorities, empowered to provide single window
clearances to entrepreneurs and investors.
• Leveraging Industrial Revolution 4.0: Disruptive technology, while leading to job losses in traditional
areas, also presents new job opportunities. A greater connect between government-industry-
academia is required to identify the changing requirements in manufacturing and prepare an
employable workforce. Also, the Industrial Revolution 4.0 will boost the Industrial supply chains in
India.
• Need to improve Ease of Doing business: Reforms: India has already taken several steps, due to which
ease of doing business in India has improved significantly (India’s ranking in ease of doing business
report has improved from 142 in 2014 to 63 in 2020).
• Today enterprises need to adopt best practises and follow international standards to go forward for
offering innovative solutions.
o Making Indian Products to Match Global Standards: There is a need for harmonizing Indian
quality standards with global standards in many sectors.
o Lack of harmonization has affected Indian exports and prevented the leveraging of trade
agreements adequately.
o There is a need to promote ZED manufacturing (Zero effect- Zero Defect) as envisaged by Make
in India.
• Focus should be on transfer of information and skill development to effectively use the transferred
technology.
• There is an urgent need to upgrade infrastructure utilities (like water, power supply, road/rail) for
any enterprise to run its operations successfully.
• Entrepreneurs need to develop quality conscious mindsets embedded in the organisational culture.
• Sensitisation and handholding of MSMEs at different and upgraded level of certification is the need
of the hour.
Finally, as recommended by India MSME Report 2018, we need an entitlement approach that can have
the potential of compelling all related stakeholders to work on a common national agenda and solutions
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under a scientifically structured framework. This approach demands the identification and analysis of
major security threats to the MSMEs, and entrepreneurship at the grass root level.
6 Changes in Labour Policy in India

6.1 Introduction
Labour is one of the factors of production along with land, capital and enterprise and labour market is
the market where workers compete for jobs and employees compete for workers. In the neoclassical
framework, it is assumed that capital and labour are directly and smoothly substitutable for one another.
However it must be understood that labour as an input to the production is way different from the capital
in the production process. Labour power is what a poor has and it is through a productive employment,
he sells his labour power to meet his basic minimum needs. But when this labour power is substituted
with capital, it results in unemployment or a change in the nature of employment (say a change from
wage employment to self-employment). Hence it can be said that even if economy is on a higher growth
trajectory (say due to more deployment of capital), the higher economic growth would not serve any
purpose if the labour force of that nation are not provided with any ‘meaningful’ and productive
employment opportunities. Given the fact that labour power affects the lives of workers directly, issue
of labour market reforms is altogether a very sensitive issue which would in a way affect the entire
economy.
Labour market reforms attempts at changing the institutions and production relations in the labour
markets which are characterized by various laws, rules and regulations which has both direct and indirect
impact on labour demand, labour supply, wages, etc. These laws and regulations are basically meant for
protection of labour rights and his social security and also to prevent the exploitation of labour at the
hands of the employers. In the recent years, the issue of labour market reforms has taken a centre-stage
of policy debate in India with arguments pouring in from both the quarters.
6.2 Arguments against Labour market regulation
In the contemporary economic policy debates concerning labour market, labour market reforms are
directed against labour market regulation so as to have labour market flexibility which in turn is
prescribed as the key to enhance productivity of the labour force, to make the economy more
competitive and also to accelerate employment generation which in together will step up the economic
growth. At the core of this argument lies the “Washington Consensus” developed in 1980s which
provided the economic critique of labour law against regulation and saw state interference as the source
of distortions and inefficiencies in the operation of markets. This argument depended on the premise
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that markets, if unregulated, will move naturally or spontaneously to an equilibrium state and hence it
is necessary to deregulate the labour market and remove or cut protective provisions for labour so as to
improve the overall economic performance. In this regard some of the arguments put forward against
labour market regulation are as follows:
• Regulations in the labour market prevent wages to equal their marginal product in equilibrium and
thus it leads to misallocation of resources and allocative inefficiency.
• Given the fact that an economy is often in a dynamic state, regulations may create major obstacles
to the adjustment of labour markets to dynamic changes in the economy.
• It tends to redistribute income from capital to labour and may reduce profitability of investors.
Consequently, this may discourage investment and, hence, dampen the prospects of economic
growth.
6.3 Arguments in favour of Labour market regulation and institution

On the other hand, those in favour of labour market regulation argue that interventions in the labour
market play an important role in the protection of labour rights and welfare, particularly in the adverse
market conditions. Some of the arguments put forward in this regard are as follows:
• Absence of regulation may lead to unfair outcomes in the labour market, such as underpayment to
the workers, hazardous working conditions, etc., because of the fact that there is huge asymmetries
in economic power of the workers and employers.
• The enforcement of legally mandated labour standards through legislations “force” employers to shift
attention from cost-cutting issues to productivity enhancement measures through training and
technical innovation.
• The faith in laissez-faire or free market economy is premised on the concept of perfect competition
and Pareto optimality. However, labour markets, like every other market, consists of various
‘imperfections’ and is subject to ‘market failure’. Hence it becomes necessary for government
interventions in the labour market through rules and regulations so as to get rid of market failure.
Labour regulations may fulfill important distributive roles in an economy, particularly from the point of
view of vulnerable categories of workers.
6.4 Regulatory Legislation in India: A brief historical account

Labour laws define various categories of labour which enjoy different degrees of protection and
differentiate between establishments to which they apply or do not apply. The basic purpose of most
measures of labour regulation in India, in general, has been to protect labour from exploitation by
employers, to protect the rights of labour and his social security, especially in unfavourable market
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conditions as it was recognized that the balance of power between labour and capital is unequal and is
skewed in favour of capital where in the bargaining power of labour is relatively very low.
Yet, most labour laws in India protects only a small proportion of the workforce and ironically, they
consist of workers who have better bargaining position and have already got a relatively better deal.
The most exploited and disadvantaged are generally left out of protective provisions of labour laws.
With respect to the legislation rights on the labour subject, the Constitution of India puts labour on the
concurrent list which means that both the Centre and the States can legislate in this respect.
Consequently, there have been a huge multiplicity of laws, most of them applying to the larger
enterprises comprising the organized sector employing only a small fraction of all workers. There have
been about 170 labour laws enacted by the various State governments and about 50 central laws enacted
by the parliament of India.
The major labour laws in India can broadly be divided into the following groups on the basis of the broad
subject area covered by them:
• conditions of work
• industrial relations
• wages and remunerations, social security, insurance and labour welfare
• gender equity and disadvantage groups.
6.4.1 Major Acts governing conditions of work

• The Factories Act, 1948: The original version of the act was passed by the colonial government in 1884
and the revised version of the act was passed in 1948. The Act applies to all establishments carrying
out manufacturing process and employing 10 or more workers with use of power and 20 or more
workers without use of power. It attempts to deal with issues relating to health, safety and welfare of
the workers and stipulates standards on various aspects like working space, sanitation, drinking water,
toilets, and recess during work, etc. Regular periodical inspection of factory premises is to be made to
ensure compliance.
• Shops and Commercial Establishment Act: The act supplements the Factories act which in fact is
legislated by the state government on the lines of a Central model. It applies to establishments other
than factories and government offices, such as shops, restaurants, and hotels, places of entertainment
like cinemas, and smaller electrical, mechanical, repair and manufacturing enterprises.
• The Industrial Employment (Standing Orders) Act, 1946: is applicable to the industrial units with 100
or more workers (excluding management) which are required to frame standing orders i.e. a
statement defining the conditions of employment in an establishment like shift working, attendance,
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work time, termination of employment, suspension and dismissal for misconduct and grievance
redress procedure etc.It aimed at ensuring orderly conduct of business at workplace and protecting
the workers against exploitation and unfair treatment by the employers.
6.4.2 Major Acts relating to wages and remuneration

• The Payment of Wages Act, 1937: It is a central act but the responsibility of its enforcement lies on
the States. The Act specifies the standard wage period, payment day, mode of payment, inspection
and prohibits arbitrary and unfair deductions from wages.
• The Minimum Wages Act, 1948: Given the fact that a large part of Indian workers were in the
unorganized sector with almost no bargaining power, the workers were likely to be exploited by
employers and paid below subsistence wages and hence the Act was passed in 1948 soon after the
Independence. The Act provides for fixation and implementation of minimum wages with the
enforcement responsibility vested in the States and therefore we have vast differences in the
minimum wages fixed in different states and for different activities and occupations.
• Payment of Bonus Act 1965: It provides for compulsory payment of an annual bonus to persons
employed in certain establishment on the basis of profits or on the basis of production or productivity
and for matter connected therewith.
• Equal Remuneration Act, 1976: The Act provides for the payment of equal remuneration to men and
women workers and for prevention of discrimination, on the ground of sex, against women in the
matter of employment opportunities.
Taken together, these wage related laws are alleged to contribute to the problem of rigidity in the Indian
labour market.
6.4.3 Major Acts on social security and Insurance

• The Workmen’s Compensation Act,1923: Enacted by the Colonial government, it aimed at providing
relief to workers against disability and death resulting from injury and accidents at work. It provides
for compensation that the employers need to pay to the workers for the injury caused to them by
accident at work site or occupational diseases resulting in death or in total or partial disablement.
• Employee’s States Insurance Act, 1948: The ESI Act is by far the most comprehensive social security
legislation covering the risks of sickness, maternity, employment related injuries and disabilities. It
extends to all factories under the Factories Act, and other commercial establishments employing 20
or more persons and to workers earning less than a certain salary limit within these. The Employees
State Insurance Scheme is funded through an insurance mode and it requires contributions from both
employers and employees to be paid for insurance against sickness, maternity, funeral, and
disablement.
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• The Employee Provident Fund Act, 1952: The act supplements ESI as it provides for the old age
benefits as well. It provides for the institution of a provident fund in all factories and establishments
with 20 or more workers and specifies deposit-linked provident fund or pension scheme. The fund is
created out of the contribution of workers and the employers.
The two Acts, ESI Act and EPF Act together provide for all the major risks for which security is ordinarily
provided to the workers, namely sickness, accident, maternity, and old age.
• Maternity Benefit Act, 1961: It provides cover to the workers working in establishments not covered
by ESI Act.
• Payment of Gratuity Act, 1971: It is applicable to all establishments employing 10 or more workers
under which gratuity as a superannuation benefit is provided to regular and permanent.
Overall, the social security legislations providing cover against contingencies are generally applicable to
establishments employing 10 or more workers and the selfemployed and employees of the small
establishments are left out of the social security cover provided by the above legislations. Efforts are being
made to extend their coverage to the workers in the unorganized sector and initiatives like Social Security
for Unorganized Sector Workers Act, 2008 is a step forward to evolve social security schemes for the
unorganized workers on a statutory basis.
6.4.4 Major Acts relating to employment security and industrial relation

• The Trade Unions Act, 1926: It specifies the conditions that trade union needs to satisfy so as to have
recognition under the act and it also confers legal status to trade unions with the right to raise
demands on behalf of the workers and lead them to take industrial action.
• Industrial Disputes Act, 1947: It provides for institutions and procedures for adjudication of industrial
disputes. The specific provisions that have been under intense debate and discussion and which also
divide establishments into segments in terms of the application of different conditions for action,
relate to employment security or employment protection. An establishment has to fulfill certain
conditions before it can lay-off or retrench workers or close down the enterprise. While it is often said
that the “restrictive” provisions of ID Act makes it difficult for employers to adjust their workforce
through lay-off and retrenchment or by closing down enterprises, the provisions of the act in essence
were motivated by the government’s concern about unemployment.
• The Contract Labour (Regulation and Abolition) Act, 1970: The main objectives of the act is the gradual
abolition of casual labour hiring, prohibiting use of contract labour in ‘core’ activities of an enterprise
carried out on a perennial basis and regulating the working conditions of casual labour.
The preceding description of a few important labour laws which coexist with a large number of several
other laws relating specifically to different aspects of employment and different segments of workforce
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suggest that India has a comprehensive regulatory framework covering all aspects and all sections of
workers. As a result, a view has emerged that the Indian labour market is highly overregulated, stifling
industrial growth and restricting growth of employment. The reality, however, turns out to be different,
if not the opposite, if we look at the coverage and effectiveness of the laws. For example, most of the
labour laws are applicable to a very small proportion of the workforce who are mainly working in the
organized sector and more than 90% of the workforce engaged in informal employment are hardly
affected by these legislations.
6.5 Labour market reforms: The way forward

• Given that there are too many laws governing the labour market, often covering the same aspects,
such as conditions of work, wages, employment protection industrial relations and social security,
there is an urgent need for rationalization, simplification and consolidation of labour laws in India.
• Ambiguities in the interpretation of most of the labour laws must be removed at the earliest.
• The operational issues of the labour laws relating to transparency, simplicity, effective
implementability must be addressed.
• It must be ensured that there is adequate coordination between the state and central laws
concerning labour welfare so as to remove ambiguity with respect to jurisdiction and issues relating
to implementation of labour laws.
• Given that the use of contract labour has become a large scale phenomenon in Indian industry, it
seems necessary to allow use of contract labour where production requirements justify it, but
discourage its use just for denying worker the benefits they would have been entitled to. What is
important in this connection is to ensure that the contract labour is paid the same wages as the
regular workers for similar work and that a minimum measure of social security must be provided
to contract workers like the regular workers.
• Most importantly it is necessary to ensure human conditions of work, minimum wages and a ‘floor’
of social security to all workers in the unorganized sector given that an overwhelming majority of
Indian workers work in highly competitive, exploitative and unregulated labour market with very
poor condition of work, low earnings, no employment security and no social protection.
6.6 Recent Legislative Measures

As per the recommendations of the 2nd National Commission on Labour, Government of India has taken
steps for codification of existing Central labour laws into 4 Codes by simplifying, amalgamating and
rationalizing the relevant provisions of the Central Labour laws. 29 labour laws are being subsumed in
the simplified, easy to understand transparent 4 labour codes.
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Name of the Code Number & name of amalgamated laws
Labour Code on Wages 4 laws:
1. The Payment of Wages Act, 1936

2. The Minimum Wages Act, 1948
3. The Payment of Bonus Act, 1965
4. The Equal Remuneration Act, 1976
Labour Code on Industrial Relations 3 laws:
1. The Trade Unions Act, 1926

2. The Industrial Employment (Standing orders)
Act, 1946
3. The Industrial Disputes Act, 1947
Labour Code on Social Security & Welfare 9 laws:
1. The Employees’ Compensation Act, 1923

2. The Employees’ State Insurance Act, 1948
3. The Employees Provident Fund and
Miscellaneous Provisions Act, 1952
4. The Employment Exchanges (Compulsory
Notification of Vacancies) Act, 1959
5. The Maternity Benefit Act, 1961
6. The Payment of Gratuity Act, 1972
7. The Cine Workers Welfare Fund Act, 1981
8. The Building and Other Construction Workers
Welfare Cess Act, 1996
9. The Unorganised Workers’ Social Security Act,
2008
Labour Code on Occupational Safety, Health & 13 laws:
Working Conditions
1. The Factories Act, 1948
2. The Plantations Labour Act, 1951
3. The Mines Act, 1952
4. The Working Journalists and other Newspaper
Employees (Conditions of Service) and
Miscellaneous Provisions Act, 1955
5. The Working Journalists (Fixation of Rates of
Wages) Act, 1958
6. The Motor Transport Workers Act, 1961
7. The Beedi and Cigar Workers (Conditions of
Employment) Act, 1966
8. The Contract Labour (Regulation and
Abolition) Act, 1970
9. The Sales Promotion Employees (Conditions of
Service) Act, 1976
10. The Inter-State Migrant Workmen (Regulation
of Employment and Conditions of Service) Act,
1979
11. The Cine-Workers and Cinema Theatre
Workers (Regulation of Employment) Act,
1981
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12. The Dock Workers (Safety, Health and
Welfare) Act, 1986
13. The Building and Other Construction Workers
(Regulation of Employment and Conditions of
Service) Act, 1996
6.6.1 Code on Wages. 2019
• It seeks to regulate wage and bonus payments in all employments where any industry, trade,
business, or manufacture is carried out. The Code replaces the following four laws: (i) the Payment
of Wages Act, 1936, (ii) the Minimum Wages Act, 1948, (iii) the Payment of Bonus Act, 1965, and (iv)
the Equal Remuneration Act, 1976.
• Coverage: The Code will apply to all employees. The central government will make wage-related
decisions for employments such as railways, mines, and oil fields, among others. State governments
will make decisions for all other employments.
• Wages include salary, allowance, or any other component expressed in monetary terms. This does
not include bonus payable to employees or any travelling allowance, among others.
• Floor wage: According to the Code, the central government will fix a floor wage, taking into account
living standards of workers. Further, it may set different floor wages for different geographical
areas. Before fixing the floor wage, the central government may obtain the advice of the Central
Advisory Board and may consult with state governments.
• The minimum wages decided by the central or state governments must be higher than the floor
wage. In case the existing minimum wages fixed by the central or state governments are higher than
the floor wage, they cannot reduce the minimum wages.
• Fixing the minimum wage: The Code prohibits employers from paying wages less than the minimum
wages. Minimum wages will be notified by the central or state governments. This will be based on
time, or number of pieces produced. The minimum wages will be revised and reviewed by the central
or state governments at an interval of not more than five years. While fixing minimum wages, the
central or state governments may take into account factors such as: (i) skill of workers, and (ii)
difficulty of work.
• Overtime: The central or state government may fix the number of hours that constitute a normal
working day. In case employees work in excess of a normal working day, they will be entitled to
overtime wage, which must be at least twice the normal rate of wages.
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• Payment of wages: Wages will be paid in (i) coins, (ii) currency notes, (iii) by cheque, (iv) by crediting
to the bank account, or (v) through electronic mode. The wage period will be fixed by the employer
as either: (i) daily, (ii) weekly, (iii) fortnightly, or (iv) monthly.
• Deductions: Under the Code, an employee’s wages may be deducted on certain grounds including: (i)
fines, (ii) absence from duty, (iii) accommodation given by the employer, or (iv) recovery of advances
given to the employee, among others. These deductions should not exceed 50% of the employee’s
total wage.
• Determination of bonus: All employees whose wages do not exceed a specific monthly amount,
notified by the central or state government, will be entitled to an annual bonus. The bonus will be at
least: (i) 8.33% of his wages, or (ii) Rs 100, whichever is higher. In addition, the employer will
distribute a part of the gross profits amongst the employees. This will be distributed in proportion
to the annual wages of an employee. An employee can receive a maximum bonus of 20% of his
annual wages.
• Gender discrimination: The Code prohibits gender discrimination in matters related to wages and
recruitment of employees for the same work or work of similar nature. Work of similar nature is
defined as work for which the skill, effort, experience, and responsibility required are the same.
• Advisory boards: The central and state governments will constitute advisory boards. The Central
Advisory Board will consist of: (i) employers, (ii) employees (in equal number as employers), (iii)
independent persons, and (iv) five representatives of state governments. State Advisory Boards will
consist of employers, employees, and independent persons. Further, one-third of the total members
on both the central and state Boards will be women. The Boards will advise the respective
governments on various issues including: (i) fixation of minimum wages, and (ii) increasing
employment opportunities for women.
• Offences: The Code specifies penalties for offences committed by an employer, such as (i) paying less
than the due wages, or (ii) for contravening any provision of the Code. Penalties vary depending on
the nature of offence, with the maximum penalty being imprisonment for three months along with a
fine of up to one lakh rupees.
6.6.2 Industrial Relations Code, 2020

• It seeks to replace three labour laws: (i) the Industrial Disputes Act, 1947, (ii) the Trade Unions Act,
1926, and (iii) the Industrial Employment (Standing Orders) Act, 1946.
• Trade unions: Under the Code, seven or more members of a trade union can apply to register it.
Trade unions that have a membership of at least 10% of the workers or 100 workers, whichever is
less, will be registered. The central or state government may recognise a trade union or a federation
of trade unions as Central or State Trade Unions, respectively.
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• Negotiating unions: The Code provides for a negotiation union in an industrial establishment, having
registered trade unions, for negotiating with the employer. If there is only one trade union in an
industrial establishment, the employer is required to recognise such trade union as the sole
negotiating union of the workers. In case of multiple trade unions, the trade union with support of
at least 51% of workers on the muster roll of that establishment will be recognised as the sole
negotiating union by the employer.
• Unfair labour practices: The Code prohibits employers, workers, and trade unions from committing
any unfair labour practices listed in a Schedule to the Code. These include: (i) restricting workers
from forming trade unions, (ii) establishing employer sponsored trade union of workers, (iii) coercing
workers to join trade unions, (iv) damage to employer’s property, and (v) preventing any worker from
attending work. Any person who commits unfair labour practices is punishable with a fine between
ten thousand rupees and two lakh rupees.
• Standing orders: All industrial establishments with at least 300 workers must prepare standing
orders on certain matters. These include: (i) classification of workers, (ii) manner of informing workers
about hours of work, holidays, paydays, and wage rates, (iii) termination of employment, (iv)
suspension for misconduct, and (v) grievance redressal mechanisms for workers. The central
government will prepare model standing orders, based on which the industrial establishments will
prepare their standing orders.
• Notice of change: Employers must not change the conditions of service in certain matters without
giving notice of the proposed changes to the workers being affected, or within 21 days of giving such
notice. These matters include wages, contribution, allowances, working hours, and leave.
• Lay-off and retrenchment: Employers of non-seasonal industrial establishments such as mines,
factories, and plantations with 50 to 300 workers must (i) pay 50% of basic wages and dearness
allowance to a worker who has been laid off, and (ii) give one month’s notice or wages for the notice
period to the retrenched worker. Lay-off is the inability of an employer from giving employment to a
worker due to reasons such as shortage of coal, power, or breakdown of machinery. Retrenchment
means termination of services of a worker for reasons other than disciplinary action. Any person
who contravenes these provisions is punishable with a fine between fifty thousand rupees and two
lakh rupees.
• Non-seasonal industrial establishments with at least 300 workers must take prior permission of the
central or state government before lay-off, retrenchment or closure. The central or state government
may increase this threshold by notification. Such establishments must pay 50% of basic wages and
dearness allowance to a worker who has been laid off. In case of retrenchment, the employer must
either give three months’ notice or pay the retrenched worker for the notice period. Any employer
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who violates these provisions will be punishable with a fine between one lakh rupees and ten lakh
rupees.
• Within one year of retrenchment of workers, if an employer seeks to re-employ a person, he must
prefer retrenched workers over other persons.
• Voluntary arbitration: The Code allows for industrial disputes to be voluntarily referred to arbitration
by the employer and workers through a written agreement. After investigating the dispute, the
arbitrator will submit the arbitration award to the government. Industrial disputes include disputes
related to terms of employment, non-employment and dismissal, retrenchment, or termination of
workers.
• Resolution of industrial disputes: The central or state governments may appoint conciliation officers
to mediate and promote settlement of industrial disputes. These officers will investigate the dispute
and hold conciliation proceedings to arrive at a fair and amicable settlement of the dispute. If no
settlement is arrived at, either party to the dispute can make an application to the Industrial Tribunal,
constituted under the Code. The central government may also constitute National Industrial
Tribunals for settlement of industrial disputes which: (i) involve questions of national importance, or
(ii) could impact industrial establishments situated in more than one state. The tribunals will have
two members each, one judicial member and one administrative member with the specified
qualifications.
• Exemptions from the Code: The 2020 Bill provides that the central or state government may exempt
any new establishment or a class of new establishment from all or any provisions of the Code in public
interest.
6.6.3 Code on Social Security, 2020

• It replaces nine laws related to social security, including the Employees’ Provident Fund Act, 1952,
the Maternity Benefit Act, 1961, and the Unorganised Workers’ Social Security Act, 2008. Social
security refers to measures to ensure access to health care and provision of income security to
workers.
• Social security schemes: Under the Code, the central government may notify various social security
schemes for the benefit of workers. These include an Employees’ Provident Fund (EPF) Scheme, an
Employees’ Pension Scheme (EPS), and an Employees’ Deposit Linked Insurance (EDLI) Scheme.
These may provide for a provident fund, a pension fund, and an insurance scheme, respectively. The
government may also notify: (i) an Employees’ State Insurance (ESI) Scheme to provide sickness,
maternity, and other benefits, (ii) gratuity to workers on completing five years of employment (or less
than five years in certain cases such as for journalists and fixed term workers), (iii) maternity benefits
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to women employees, (iv) cess for welfare of building and construction workers, and (v)
compensation to employees and their dependents in the case of occupational injury or disease.
• In addition, the central or state government may notify specific schemes for gig workers, platform
workers, and unorganised workers to provide various benefits, such as life and disability cover. Gig
workers refer to workers outside of the traditional employer-employee relationship (e.g.,
freelancers). Platform workers are workers who access other organisations or individuals using online
platforms and earn money by providing them with specific services. Unorganised workers include
home-based and self-employed workers. It also provides for social security funds for unorganised
workers, and gig and platform workers.
• Coverage and registration: The Code specifies different applicability thresholds for the schemes. For
example, the EPF Scheme will apply to establishments with 20 or more employees. The ESI Scheme
will apply to certain establishments with 10 or more employees, and to all establishments which
carry out hazardous or life-threatening work notified by the central government. These thresholds
may be amended by the central government. All eligible establishments are required to register under
the Code, unless they are already registered under any other labour law.
• Contributions: The EPF, EPS, EDLI, and ESI Schemes will be financed through a combination of
contributions from the employer and employee. For example, in the case of the EPF Scheme, the
employer and employee will each make matching contributions of 10% of wages, or such other rate
as notified by the government. All contributions towards payment of gratuity, maternity benefit, cess
for building workers, and employee compensation will be borne by the employer. Schemes for gig
workers, platform workers, and unorganised workers may be financed through a combination of
contributions from the employer, employee (or aggregators for gig workers and platform workers),
and the appropriate government.
• For the purpose of schemes for gig and platform workers, the Bill specifies a list of aggregators
including ride sharing services and food delivery services. Any contribution from an aggregator may
be at a rate notified by the government falling between 1-2% of the annual turnover of the aggregator,
subject to a cap of 5% of the amount paid or payable by an aggregator to the gig and platform workers.
• Social security organisations: The Code provides for the establishment of several bodies to administer
the social security schemes. These include: (i) a Central Board of Trustees, headed by the Central
Provident Fund Commissioner, to administer the EPF, EPS and EDLI Schemes, (ii) an Employees State
Insurance Corporation, headed by a Chairperson appointed by the central government, to administer
the ESI Scheme, (iii) National and State Social Security Boards, headed by the central and state
Ministers for Labour and Employment, respectively, to administer schemes for unorganised workers
(with the National Board also responsible for gig and platform workers), and (iv) state-level Building
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Workers’ Welfare Boards, headed by a Chairperson nominated by the state government, to
administer schemes for building workers.
• Inspections and appeals: The appropriate government may appoint Inspector-cum-facilitators to
inspect establishments covered by the Code, and advise employers and employees on compliance
with the Code. Administrative authorities may be appointed under the various schemes to hear
appeals under the Code. For instance, the appropriate government may notify an appellate authority
to hear appeals against the order of the Inspector-cum-facilitator for non-payment of maternity
benefits. The Code also specifies judicial bodies which may hear appeals from the orders of the
administrative authorities. For example, industrial tribunals (constituted under the Industrial Disputes
Act, 1947) will hear disputes under the EPF Scheme.
• Offences and penalties: The Code specifies penalties for various offences, such as the failure to pay
gratuity, which may be punished with imprisonment of one year. Some offences may also be
compounded (settled).
6.6.4 Occupational Safety, Health and Working Conditions Code, 2020

• The Code consolidates 13 existing Acts regulating health, safety, and working conditions. These
include the Factories Act, 1948, the Mines Act, 1952, and the Contract Labour (Regulation and
Abolition) Act, 1970.
• Coverage: The Code will apply to establishments employing at least 10 workers. It will apply to all
mines, docks, and establishments carrying out any hazardous or life-threatening activity (may be
notified by the central government). Certain provisions of the Code, such as health and working
conditions, apply to all employees. Employees include workers and all other persons earning wages
for any work, including managerial, administrative, or supervisory work.
• Exemptions: The appropriate government can exempt any workplace or activity from the Code in
case of a public emergency, disaster, or pandemic for up to a year. Further, the state government can
exempt new factories from the Code for the specified period for creating more economic activity and
employment.
• Registration and license: Establishments covered by the Code are required to register within 60 days
(of the commencement of the Code) with registering officers, appointed by the central or state
government. Factories may be required to obtain a license to operate. The Code requires those hiring
workers such as beedi and cigar workers and contract labourers to obtain licenses.
• Duties of employers: Duties of employers include: (i) providing a workplace that is free from hazards,
(ii) providing free annual health examinations in notified establishments, and (iii) informing relevant
authorities in case any accident at the workplace leads to death or serious bodily injury to any
employee. Additional duties are prescribed for employers in factories, mines, docks, plantations,
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and building and construction work, including provision of a risk-free work environment, and
instructing employees on safety protocols.
• Rights and duties of employees: Duties include taking care of their own health and safety, complying
with safety and health standards, and reporting unsafe work incidents to the Inspector. Employees
also have certain rights including the right to obtain information on safety and health standards from
the employer.
• Work hours: No worker will be required or allowed to work in any establishment for more than
eight hours in a day. For overtime work, workers must be paid at twice the rate of daily wages. Prior
consent of workers is required for overtime work. Women can work past 7 pm and before 6 am,
subject to any safety-related or other conditions prescribed by the government.
• Leave: Workers cannot be required to work for more than six days a week. Further, they must
receive one day of leave for every 20 days of work per year.
• Working conditions: Working conditions will be notified by the central government. Conditions may
include hygienic work environment, clean drinking water, toilets, ventilation, and adequate lighting.
• Welfare facilities: Welfare facilities such as canteens, first aid boxes, and crèches, may be provided
as per standards notified by the central government. Additional facilities may be specified for
factories, mines, docks, and building and construction works, such as welfare officers and temporary
housing.
• The Code includes three schedules containing lists of: (i) 29 diseases that the employer is required to
notify the authorities of, in case a worker contracts them, (ii) 73 safety matters that the government
may regulate, and (iii) 40 industries involving hazardous processes. The lists may be amended by the
central government.
• Inspectors: The government can appoint inspector-cum-facilitators to conduct inspections and
inquire into accidents. They have certain additional powers in case of factories, mines, docks, and
building and construction works, including: (i) reducing the number of employees working in sections
of the establishment, and (ii) prohibiting work in dangerous situations.
• Advisory boards: The central and state governments will set up Occupational Safety and Health
Advisory Boards at the national and state level. These Boards will advise the respective government
on the standards, rules, and regulations to be framed under the Code.
• Safety committees: The government may require certain establishments to constitute safety
committees in case of a certain class of workers. The committees will be composed of representatives
of the employer and workers and will function as a liaison between them. The number of
representatives of workers in the committee must not be less than that of the employer.
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7 Employment Scenario in India
7.1 Sectoral Distribution

Any assessment of the employment performance of the Indian Economy is not meaningful without an
analysis of the structural dimensions of employment. These dimensions define and determine the
substantive meaning of employment in terms of its nature and quality. Only a small segment of the
workforce is employed on a regular basis at reasonable levels of wages and salaries. A large part is self-
employed in agriculture which continues to be the major source of employment and livelihood for
majority of the Indian workers. And an overwhelming majority works in what is called the unorganised
or the informal sector. These qualitative dimensions are, of course, interrelated and reinforce each other
in the direction of keeping the quality of employment low. We look at these aspects of employment
particularly focusing on the nature and extent of structural changes that have taken place in the recent
decades, in this section.
7.1.1 Why have we not been able to pull labour out of agriculture?
As is well known, majority of Indian workers are engaged in agriculture and allied activities. With
economic development, agriculture is expected to decline in importance in terms of its share in
employment and output. Proportion of agriculture in total employment has declined over the years:
from 74 per cent in 1972-73 to 68 per cent in 1983, 60 per cent in 1993-94 and to 57 per cent in 2004- 05.
It has declined further to 51 per cent in 2009-11.
It is particularly important to note that the decline in the employment share of agriculture has been
much slower than the share of gross domestic product (GDP) from agriculture. Thus, while share of
agriculture in GDP declined from 41 per cent in 1972-73 to 15 per cent in 2009-10, that in employment
declined from 74 per cent to 51 per cent. And rate of decline in GDP share has been faster during 1993-
94 to 2009-10, from 30 to 15 per cent; while the rate of decline in employment share has been relatively
slow, from 64 per cent to 51per cent.
The decline in employment share of agriculture was mostly being compensated by an increase in the
share of secondary sector in the pre-reform period, but since the economic reforms the tertiary sector
has been the main gainer of the shift in employment. Yet increase in its employment share has not been
commensurate with the increase in its share of GDP during 1993-4/2009-10.
7.1.2 What are the ramifications of not being able to pull labour out of agriculture?
The asymmetry in the rate of change in employment and GDP shares of different sectors and divisions,
particularly between decline in GDP and employment shares of agriculture and correspondingly between
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rate of increase in GDP and employment in non-agricultural part of the economy, has serious implications
in terms of differences in earnings and income between different sectors.
The ratio between agricultural and non-agricultural productivity in that year works out to 1:5.9. In 2009-
10 the ratio has gone up to 1:6. Thus there has been a large decline in the relative earnings of agricultural
workers. That is partly because agricultural growth has been consistently much lower than that in the
non-agricultural sectors, but, mainly, because a shift of workers from agricultural to non-agricultural
activities as expected in the process of economic development has not taken place.
7.1.3 How to pull labour out of agriculture?

Agriculture has grown at an average rate of 2 to 3 per cent per annum as against 5 to 6.5 per cent growth
in the non-agricultural sector during the period under consideration. It is not generally realistic to expect
a much higher growth rate in agriculture. But even if it grew at a rate of about 4 per cent per annum, it
cannot employ many more persons productively. In fact, productivity per worker in agriculture is so low
that even with a higher growth rate, it would need to reduce its workforce so as to provide a reasonable
level of income to those engaged in it. It is precisely for this reason that the Planning Commission had
projected no increase in the number of workers in agriculture during the Eleventh Plan (2007-12) and a
decline of 4 million during the Twelfth Plan period (2012-17). (Planning Commission, 2008, Vol. I, pp. 76-
77).
In other words, new jobs that are required to be created are not likely to be in agriculture, they have to
come from the non-agricultural sectors. In a 25 to 30 years perspective, employment structure must be
envisioned as consisting of about 30-35 per cent in agriculture and 70-75 per cent in non-agricultural
activities as against of 51 per cent in agriculture and 49 per cent in non-agriculture in 2004-05. It would
imply that all the new employment opportunities will be located in non-agricultural activities in the
coming years.
7.1.3.1 Relevance of Make in India

An assessment of employment potential of different divisions of economic activity places manufacturing
among the activities with the high potential for productive employment generation, for the following
reasons.
One, after agriculture, it accounts for the largest share of employment at 11.5 per cent among different
divisions of economic activity; and a faster growth of employment in it, therefore, means addition of a
large number of jobs. A one per cent growth in employment in manufacturing sector would mean over
6.85 lakh new jobs.
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Second, employment elasticity of this sector has not only been much higher than average (0.40) as
against 0.32 during 1983/2009-10), it also showed an increase for most of the post reform period (1994-
2004-05) as compared to earlier decade, though it declined like in most other activities during 2005-10.
Third, it has a reasonably high labour productivity, about 34 per cent higher than the average and has
shown a significant increase, in productivity during the post-reform period, 1993- 94/2009-10. Thus,
employment growth in this sector is creating jobs with increasing levels of productivity.
Employment generation could be higher if the aggregate growth in manufacturing is based on a faster
growth of products groups like textile products, food products, beverages, and leather products. Faster
growth of even industry groups like metal products, machinery and chemicals, which are commonly
considered to be less labour intensive, is likely to contribute significantly to employment growth due to
their relatively high employment elasticity.
7.2 Informal versus Formal
7.2.1 Why have we not been able to create as many formal jobs as we would like?
Organised or formal sector is defined to consist of the entire public sector and the private sector
enterprises employing 10 or more workers. It accounted for only about 14 per cent of total employment
in 1999-2000 as also in 2004-05. The proportion is found to have slightly increased to 16 per cent in 2009-
10. Still that leaves 84 per cent of workers in the ‘unorganised’ or ‘informal’ sector, with no job security
or social security. Even in the formal sector, over half the workers are in ‘informal’ category, with no
secured tenure of employment, nor any protection against the contingent risks during or after
employment. What is further distressing to note is that their proportion has been rising: ‘informally’
employed workers constituted 42 per cent of those employed in the formal sector in 1999-2000, the
figure increased to 47 per cent in 2004-05 and stood at 51 per cent in 2009-10. A small proportion (about
half a per cent) of those employed in the informal sector enjoyed a measure of job security and social
security. Thus of all the workers in the formal and informal sectors together, 92 per cent were in
‘informal’ employment. Only 8 per cent were in employment with secured job tenure and with social
security against contingent risks of work and life. Their proportion has remained more or less constant
during the decade 1999-2000/2009-10.
A near constant share of the informal/unorganised sector in total employment is obviously due to the lack
of a faster growth of employment in the informal than in the formal sector.
In fact, the organised sector employment saw a continuous decline for a number of years since mid-1990s.
After continuously increasing and reaching the highest figure of 283 lakhs in 1997, it recorded a
continuous decline since then till 2005, but has shown some increase since 2005. It stood at 275 lakhs.
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It should be noted that the earlier decline has been mainly in public sector employment which has
continued to decline even in post-2004 period. And decline in public sector employment has been in all
division of activity namely, manufacturing, construction, transport as well as community, social and
personal services (Table 21), as a part of the policy to downsize the government, reduction in
overstaffing of public enterprises and withdrawal from commercial activities.
Employment in organised private sector saw an increase till 1997 and after hovering around the figure
of 87 lakhs for some years, saw a decline during 2000- 2004. It has registered a significant increase since
then reaching a figure of 98 lakhs in 2008, about 13 per cent higher than in 1997.
The next most important activity, namely, community, social and personal services, has registered a
continuous increase in employment. Financial services have shown a much faster increase, of about
three and half times in its employment during 1997-2008. All other activities have also shown an increase
in employment during this period.
Not much is gained by questioning declining aggregate employment in the organised sector: a decline in
public sector employment is a policy-induced phenomenon propelled by the reforms towards economic
liberalisation. Private sector has been a minor contributor to the decline in aggregate employment.
Employment in all activity segments of the private sector except manufacturing has continuously risen
since 1991, and even in manufacturing the trend appears to have reversed with an increase since 2004.
Looked from this perspective, it is not unrealistic to expect better employment performance of the
organised private sector in future and not to expect the public sector to generate new jobs to any
significant extent.
7.2.2 What are the ramifications of not being able to create as many formal jobs as we need?
Qualitative dimension of the employment challenge is as much if not more, serious as the need to create
new jobs.
One reason for poverty among the employed workers could be that they do not have full time work. Those
severely underemployed may need alternative employment.
But others may have the potential of raising their income by working full time in their present activity or
in supplementary work in other activities.
Most often the reason for poverty amongst the employed lies in low earning out of their work-either on
a self-employed, or wage/salary basis.
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Average daily earnings of casual workers in agriculture were only about 65 per cent of those in non-
agriculture. And among the non-agricultural sectors, workers in transport and communications, utilities,
and financial and social services earned much better than those in construction, trade and manufacturing.
Levels of earnings in different sectors and activities are, of course, primarily a function of differences in
productivity.
Workers in agriculture with only about one-third of the average productivity level earn the lowest. Ratio
between the agriculture and non-agricultural productivity stood at 1:6 in 2009-10.
In the unorganized segment of the manufacturing sector productivity per worker was estimated to be
as low as almost one-twentieth of that in the organized sector.
Thus it appears that while a part of the quality deficit in employment in India is found in the lack of full
time employment among the employed persons, low earnings and low productivity, all pervasive
characteristics of work in agriculture and the unorganized sector of the non-agricultural economy,
constitute the major features of poor quality of employment. By these criteria, a large proportion of the
Indian workers could be regarded as suffering from the quality deficit in their employment, though exact
estimates are not possible due to lack of data and also the clarity regarding the norm.
If the criterion of social protection is added to the characteristics of good jobs, the quality deficit in
employment becomes much larger. Only a small fraction of all workers enjoy any statutory protection
against such risks as sickness, maternity, disability and old age, through various central and state level
legislations on conventional social security.
Practically all the workers in the unorganized sector, which employs about 86 per cent of the total
workers, are without any statutory social security benefit. But almost one-half of workers in the
organized sector, also do not enjoy such benefits.
7.2.3 How to create more jobs in the formal sector?

▪ No single policy initiative can achieve all the structural changes instead multiple interventions at
different levels are required.
▪ Rapid growth has to be central to any employment strategy for the simple reason that a faster
growing economy will generate more jobs.
▪ The biggest opportunity for generating more employment in manufacturing lies in exporting simpler
consumer goods to the world market.
▪ Small and medium enterprises generate much more employment than large capital-intensive
enterprises but it still remains less focused.
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▪ Middle-sized firms are the ones that can upgrade technology, increase productivity, and
demonstrate competitiveness in world markets.
▪ Policies needed to develop this middle group include lowering of corporate tax rates and abolition of
incentives that favor more capital-intensive units, better public infrastructure.
▪ Development of skills through a combination of apprenticeships and training institutes run by the
private sector, with an eye to the demand for skills in the market, is critical.
▪ Credit support to help small scale industries stand on their own is crucial step in bringing them to the
organized sector.
▪ Need for Labour law reforms to reduce the regulatory cost of employment.
▪ Tax Incentives should be given to the groups who have contributed for formalisation of laborers.
▪ Complying with law must become easier and in parallel law enforcement should become more
effective.
▪ Labour intensive growth: It requires creating more formal jobs through labour-intensive growth so
that informal workers can move to these jobs.
▪ There is a need for increasing productivity of informal enterprises and incomes of the informal
workforce by providing them with technical and business skills, infrastructure services, financial
services, enterprise support and training to better compete in the markets.
▪ Reducing decent work deficit: This requires protecting informal workers by providing them a social
protection floor, ensuring a set of basic working conditions (adequate living wages, limits on hours of
work and safe and healthy workplaces).
7.2.3.1 Relevance of Skill India

Skill India Mission is a government scheme launched in 2015. It is an umbrella scheme that has many
skilling schemes and programmes under it. The chief objective is to empower the youth of the country
with adequate skill sets that will enable their employment in relevant sectors and also improve
productivity.
Skill India Objectives
The chief objective of the Skill India Mission is to provide market-relevant skills training to more than 40
crore young people in the country by the year 2022.
▪ The mission intends to create opportunities and space for the development of talents in Indian youth.
▪ It aims to develop those sectors which have been put under skill development for the last many years,
and also to recognize new sectors for skill development.
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▪ Closing the gap between skill required by the industry and skills people possess for employment
generation.
▪ Reducing poverty in the country.
▪ Increasing the competitiveness of Indian businesses.
▪ Ensuring that skill training imparted is relevant and of quality.
▪ Preparing Indians to take on the world manpower/resources market.
▪ Diversifying the existing skill development programmes to meet today’s challenges.
▪ Building actual competencies rather than giving people mere qualifications.
▪ Offering opportunities for lifelong learning for developing skills.
▪ Augmenting better and active engagement of social partners and building a strong public-private
partnership in skill development.
▪ Mobilising adequate investments for financing skills development sustainable.
Skill India – Why is it needed?
As of a 2014 report, India’s formally skilled workforce is just 2%. Additionally, there is a huge problem
of employability among the educated workforce of the country. Lack of vocational or professional skills
makes it difficult for the youth to adapt to changing demands and technologies of the marketplace. The
high level of unemployment is due to the failure to get jobs and also due to a lack of competency and
training.
▪ A study by the Skill Development Council (NSDC) indicates that there will be a need for around 12
crores of skilled manpower by 2022 across 24 key sectors.
▪ Casual workers, who constitute about 90% of the labour force, are poorly skilled as they do not get
adequate training. Current vocational training programmes do not meet their demands.
▪ There is a problem of social acceptability when it comes to vocational education. Vocational courses
are looked down upon and this needs to change.
▪ Another factor that acts as an obstacle to skill development in India is the myriad labour laws.
However, the government has started simplifying and codifying the labour laws. With simpler laws,
practising skill development should be easier.
▪ Changing technology is a big challenge and opportunity for the labour force. Employees will have to
constantly upgrade their skills if they are to remain relevant in the job market.
▪ There is a problem with the lack of infrastructure in the current training institutes.
▪ Another problem is the poor quality of trainers available. Students trained by such trainers are not
employable in the industry.
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▪ There is a big issue with the standardisation of skills in the country. New schemes are designed to
resolve this issue by having nationwide standards that also stand up to international benchmarks.
▪ Demographic dividend: Most major economies of the world have an aging population. India, with a
favourable demographic dividend, can grab this opportunity and serve the manpower market. But, for
this adequate skilling is to be provided to up the employability. To capitalise on this, there is only a
narrow demographic window, that of a few decades.
▪ The percentage of the workforce receiving skill training is only 10% in India which is very small
compared to other countries – Germany (75%), Japan (80%), South Korea (96%).
▪ Sectoral mobilisation: As productivity improves in agriculture due to increased mechanisation, there
will be fewer people required in the farming sector. There will thus be a shift from this sector to other
secondary and tertiary activities.
7.2.4 How to Ameliorate the Working Conditions of Labourers in the Informal Sector
7.2.4.1 Revised Integrated Housing Scheme for workers

▪ The workers engaged in Beedi/Iron Ore Mines, Manganese Ore & Chrome Ore Mines
(IOMC)/Limestone Ore Mines, Dolomite Ore Mines (LSDM) /Mica Mines and Cine Industries,
registered with the Labour Welfare Organisation (LWO) for atleast one year.
▪ Before or after the application, there should not be any other pucca house either in the name of the
applicant or the name of his/her spouse or any of the dependents within territory of India.
▪ The scheme provides housing subsidy of Rs. 1,50,000/- per worker for construction of house to be
paid in three installments directly into the bank account of the beneficiaries. The installments shall be
released in the slab of 25% (advance), 60% (After lintel level) and 15% (after completion).
7.2.4.2 Rashtriya Swasthya Bima Yojana

▪ The workers in the unorganized sector constitute about 93% of the total work force in the country.
The Government has been implementing some social security measures for certain occupational
groups but the coverage is miniscule. Majority of the workers are still without any social security
coverage.
▪ One of the major insecurities for workers in the unorganized sector is the frequent incidences of illness
and need for medical care and hospitalization of such workers and their family members. Despite the
expansion in the health facilities, illness remains one of the most prevalent causes of human
deprivation in India. It has been clearly recognized that health insurance is one way of providing
protection to poor households against the risk of health spending leading to poverty. However, most
efforts to provide health insurance in the past have faced difficulties in both design and
implementation. The poor are unable or unwilling to take up health insurance because of its cost, or
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lack of perceived benefits. Organizing and administering health insurance, especially in rural areas, is
also difficult.
▪ Recognizing the diversity with regard to public health infrastructure, socio -economic conditions and
the administrative network, the health insurance scheme aims to facilitate launching of health
insurance projects in all the districts of the States in a phased manner for BPL workers.
7.2.4.3 Pradhan Mantri Shram Yogi Maan-Dhan

▪ Pradhan Mantri Shram Yogi Maan-dhan is a central government scheme meant for old age protection
and social security of Unorganised Workers (UW).
▪ Unorganised Workers (UW) are mostly engaged as rickshaw pullers, street vendors, mid-day meal
workers, head loaders, brick kiln workers, cobblers, rag pickers, domestic workers, washer men,
home-based workers, own account workers, agricultural workers, construction workers, beedi
workers, handloom workers, leather workers, audio- visual workers or in similar other occupations.
There are estimated 42 crore such unorganised workers in the country.
▪ It is a voluntary and contributory pension scheme, under which the subscriber would receive a
minimum assured pension of Rs 3000/- per month after attaining the age of 60 years and if the
subscriber dies, the spouse of the beneficiary shall be entitled to receive 50% of the pension as family
pension. Family pension is applicable only to spouse.
7.2.4.4 Central Sector Scheme for Rehabilitation of Bonded Labourer – 2016

▪ The Constitution of India which was adopted by the Constituent Assembly on 26th November 1949 as
the Magna Carta of Civil liberties, enshrines under dedicated Article 23, a specific provision declaring
traffic in human beings, beggar and similar forms of forced labour to be punishable offence. The
Government of lndia has ratified the ILO Convention C029 on 30tn November 1954 which inter alia
defines forced labour as "all work or service which is exacted from any person under the menace of
penalty and for which the said person has not offered himself voluntarily" .
▪ The traditional form of bondage or forced labour in India are known as Adiyamar, Baramasia, Basahya,
Bethu, Bhagela, Cherumar, Garru-Galu, Hali, Hari, Harwai, Holya, Jana, Jeetha, Kamiya,
KhundifMundit, Kuthia, Lakhari, Munjhi, Mat, Munish system, Nit-Majoor, Paleru, Padiyal, Pannayilal,
Sagri, Sanji, Sanjawat, Sewak, Sewakia, Seri, Vetti. However, with the passage of time, new dimensions
of bondage have crept in under different names. The system is much more intricate than mere
economic or labour relations; it reflects the stratified social structure where one or more social groups
work without consideration of minimum wages or other righlbased labour standards just for the sake
of honouring social custom or for fear of possible reprisal in case of non-conformity, which more often
than not are characterised by physical violence, ostracisation, etc.
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▪ The revised Scheme is a Central Sector Scheme and came into effect from 17th May, 2016.
7.2.4.5 National Pension Scheme for Traders and Self-Employed Persons

The NPS-Traders scheme is meant for old age protection and social security of Vyapaaris (retail
traders/ shopkeepers and self-employed persons) whose annual turnover is not exceeding Rs.1.5
Crore. These retail traders / petty shopkeepers and self-employed persons are mostly working as shop
owners, retail traders, rice mill owners, oil mill owners, workshop owners, commission agents,
brokers of real estate, owners of small hotels, restaurants and other Vyapaaris. The entry age for the
scheme is 18-40 years and the Vyapaari should not be a member of ESIC/EPFO/PM-SYM or an income
tax payer.
7.2.4.6 Pradhan Mantri Rojgar Protsahan Yojana

The Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) is a scheme to incentivise employers registered
with the Employees' Provident Fund Organisation (EPFO) for job creation by the Government paying the
full contribution of employers to the Employee Pension Scheme (EPS) and Employees’ Provident Fund
(EPF) in respect of new employees having a new Universal Account Number (UAN).
The PMRPY Scheme aims to incentivise employers for employment generation by the Government paying
the full employers' EPS contribution of 12% , for the new employees, for the first three years of their
employment and is proposed to be made applicable for unemployed persons that are semi-skilled and
unskilled. The scheme is implemented by the Ministry of Labour and Employment and is operational since
August, 2016.
7.3 Relevance of MGNREGA

The virtual shutdown of all economic activities due to Covid-19 pandemic has resulted in a massive loss
of livelihoods. Nearly 400-million workforce in the unorganised sector has been one of the worst
affected sections of society.
Further, a significant part of this workforce has reverse migrated from cities to rural areas. In order to
address this migrant crisis, the government has allocated an additional fund of Rs 40,000 crore for
MGNREGA, as part of the stimulus package under Atma Nirbhar Bharat Abhiyan.
With nearly eight crore migrant workers returning to their villages and an additional allocation of funds
could be a moment for the true revival of MGNREGA. However, in order to utilise the true potential of
this scheme, there is a need to address the underlying challenges of MGNREGA.
7.3.1 Key Features of MGNREGA

▪ MGNREGA is one of the largest work guarantee programmes in the world.
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▪ Objective: The primary objective of the scheme is to guarantee 100 days of employment in every
financial year to adult members of any rural household willing to do public work-related unskilled
manual work.
▪ Legal Right to Work: Unlike earlier employment guarantee schemes, the act aims at addressing the
causes of chronic poverty through a rights-based framework.
o At least one-third of beneficiaries have to be women.
o Wages must be paid according to the statutory minimum wages specified for agricultural
labourers in the state under the Minimum Wages Act, 1948.
▪ Demand-Driven Scheme: The most important part of MGNREGA’s design is its legally-backed
guarantee for any rural adult to get work within 15 days of demanding it, failing which an
‘unemployment allowance’ must be given.
o This demand-driven scheme enables the self-selection of workers.
▪ Decentralised planning: There is an emphasis on strengthening the process of decentralisation by
giving a significant role in Panchayati Raj Institutions (PRIs) in planning and implementing these
works.
o The act mandates Gram sabhas to recommend the works that are to be undertaken and at
least 50% of the works must be executed by them.
7.3.2 Underlying Challenges
7.3.2.1 Inadequate Financing

FY2020-21 allocation is the highest allocation for MGNREGA in any year since the passage of the law.
However, the allocation amounts to 0.47% of the GDP continues to be much lower than the World Bank
recommendations of 1.7% of GDP for the optimal functioning of the programme.
Due to lack of funds, state governments find it difficult to meet the demand for employment under
MGNREGA.
7.3.2.2 Delay in Payment of Wages

Most states have failed to disburse wages within 15 days as mandated by MGNREGA. In addition, workers
are not compensated for a delay in payment of wages.
This has turned the scheme into a supply-based programme and subsequently, workers had begun to lose
interest in working under it.
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7.3.2.3 Ineffective Role of PRI
With very little autonomy, gram panchayats are not able to implement this act in an effective and efficient
manner.
7.3.2.4 Large Number of Incomplete Works

There has been a delay in the completion of works under MGNREGA and inspection of projects has been
irregular. Also, there is an issue of quality of work and asset creation under MGNREGA.
7.3.2.5 Fabrication of Job Cards

There are several issues related to the existence of fake job cards, the inclusion of fictitious names, missing
entries and delays in making entries in job cards.
7.3.3 Way Forward
7.3.3.1 Short Term Measures

▪ State governments must ensure that public work gets started in every village. Workers turning up at
the worksite should be provided work immediately, without much delay.
▪ Local bodies must proactively reach out to returned and quarantined migrant workers and help those
in need to get job cards.
▪ Adequate facilities such as soap, water, and masks for workers must be provided free of cost, at the
worksite.
▪ At this time, there is a need to speed up the payments to MGNREGA workers. Preferably, cash needs
to reach the workers easily and efficiently.
7.3.3.2 Long Term Measures

▪ The pandemic has demonstrated the importance of decentralised governance.
▪ Gram panchayats need to be provided with adequate resources, powers, and responsibilities to
sanction works, provide work on demand, and authorise wage payments to ensure there are no
delays in payments.
▪ MGNREGA should be converged with other schemes of the government. For example, Green India
initiative, Swachh Bharat Abhiyan etc.
▪ Social Auditing creates accountability of performance, especially towards immediate stakeholders.
Hence, there is a need to create awareness regarding government policies and measures in rural
areas.
▪ MGNREGA is a bottom-up, people-centred, demand-driven, self-selecting and rights-based
programme. Thus, MGNREGA remains crucial for integrated resource management and livelihoods
generation perspective.
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Demographic Trend
FODDER MATERIAL

Contents
1 Population in India .................................................................................................................................2
1.1 Rural – Urban Composition .............................................................................................................3
1.2 Linguistic Composition ....................................................................................................................4
1.3 Religious Composition.....................................................................................................................5
1.4 Age Structure ..................................................................................................................................6
1.5 Sex Composition..............................................................................................................................7
1.6 Literacy Rates ..................................................................................................................................8
1.7 Composition of Working Population...............................................................................................8
2 Important Issues ...................................................................................................................................10
2.1 India’s Demographic Dividend ......................................................................................................10
2.1.1 Demographic Dividend: Definition ........................................................................................10
2.1.2 Demographic Dividend in India .............................................................................................11
2.1.3 Advantages Associated with Demographic Dividend ............................................................11
2.1.4 Challenges Associated with Demographic Dividend .............................................................12
2.1.5 What needs to be done? .......................................................................................................12
2.1.6 Way Forward..........................................................................................................................13
2.2 Is there a need for India to take urgent & coercive measures to curb population growth? .......14
2.3 Skewed Gender Ratio ....................................................................................................................15
2.3.1 Reasons For Skewed Sex Ratio ..............................................................................................15
2.3.2 Issues Related to Lower Sex Ratio at Birth ............................................................................16
2.3.3 Challenges Involved ...............................................................................................................16
2.3.4 Way Forward..........................................................................................................................17
1 Population in India
(Based on Census 2011)
▪ India is the second most populous country after China in the world with its total population of 1,210
million (Census 2011).
▪ India’s population is larger than the total population of North America, South America and Australia
put together.
▪ Decadal Growth rate of Population in India between 2001-2011 was 17.64%. It decreased from
21.54% during 1991-2001.

▪ 2001-2011 decade for the first time (except 1911-1921) has added lesser number of people than the
previous decade.
▪ The annual growth rate of India’s population is 1.64 per cent (2011).
1.1 Rural – Urban Composition

▪ As per Census 2011, 68.8% population resided in rural areas.
▪ The states like Bihar and Sikkim have very high percentage of rural population.
▪ The states of Goa and Maharashtra have only little over half of their total population residing in
villages.
▪ The Union Territories, on the other hand, have smaller proportion of rural population, except Dadra
and Nagar Haveli (53.38 per cent)
▪ Urban population in India is less (31.16 percent) but growing very fast due to increasing economic
development and rural – urban migration.
▪ The rural-urban migration is conspicuous in the case of urban areas along the main road links and
railroads in the North Indian Plains, the industrial areas around Kolkata, Mumbai, Bengaluru –
Mysuru, Madurai – Coimbatore, Ahmedabad – Surat, Delhi – Kanpur and Ludhiana – Jalandhar.
▪ In the agriculturally stagnant parts of the middle and lower Ganga Plains, Telangana, non-irrigated
Western Rajasthan, remote hilly, tribal areas of northeast, along the flood prone areas of Peninsular
India and along eastern part of Madhya Pradesh, the degree of urbanisation has remained low.
1.2 Linguistic Composition

▪ India has over 150 spoken languages with more than 500 dialects. There are 22 scheduled languages
identified by the government.

▪ The speakers of major Indian languages belong to four language families, which have their sub-
families and branches or groups.
▪ Among the scheduled languages, the speakers of Hindi have the highest percentage.
▪ The smallest language groups are Sanskrit, Bodo and Manipuri speakers (2011). However, it is
noticed that the linguistic regions in the country do not have a sharp and distinct boundary, rather
they gradually merge and overlap in their respective frontier zones.
1.3 Religious Composition

▪ The spatial distribution of religious communities in the country shows that there are certain states
and districts having large numerical strength of one religion, while the same may be very negligibly
represented in other states.
▪ Hindus are distributed as a major group in many states (ranging from 70 - 90 per cent and above)
except the districts of states along Indo- Bangladesh border, Indo-Pak border, Jammu & Kashmir,
Hill States of North-East and in scattered areas of Deccan Plateau and Ganga Plain.
▪ Muslims, the largest religious minority, are concentrated in Jammu & Kashmir, certain districts of
West Bengal and Kerala, many districts of Uttar Pradesh, in and around Delhi and in Lakshadweep.
They form majority in Kashmir valley and Lakshadweep.
▪ The Christian population is distributed mostly in rural areas along the Western coast around Goa,
Kerala and also in the hill states of Meghalaya, Mizoram, Nagaland, Chotanagpur area and Hills of
Manipur.
▪ Sikhs are mostly concentrated in relatively small area of the country, particularly in Punjab, Haryana
and Delhi.

▪ Jains have major concentration in the urban areas of Rajasthan, Gujarat and Maharashtra, while the
Buddhists are concentrated mostly in Maharashtra. The other areas of Buddhist majority are Sikkim,
Arunachal Pradesh, Ladakh, Tripura, and Lahaul and Spiti in Himachal Pradesh.
▪ The other religions of India include Zoroastrians, tribal and other indigenous faiths and beliefs. These
groups are concentrated in small pockets scattered throughout the country.
1.4 Age Structure

▪ According to Census 2011, the share of adolescents i.e., up to the age group of 10-19 years is about
20.9 per cent (2011), among which male adolescents constitute 52.7 per cent and female adolescents
constitute 47.3 per cent.
▪ Moreover, share of people in the working age (between 15 and 59 years) is more than 60%.
▪ This large share of young and economically productive people in the population can be very helpful
for the economy. This is known as Demographic Dividend.
▪ The adolescent population is regarded as the youthful population having high economic and social
potentials, but at the same time they are quite vulnerable if not guided properly.
▪ There are many challenges for the society as far as these adolescents are concerned, some of which
are
✓ lower age at marriage,
✓ illiteracy – particularly female illiteracy,
✓ school dropouts,
✓ low intake of nutrients,
✓ high rate of maternal mortality of adolescent mothers,
✓ high rate of HIV and AIDS infections,
✓ physical and mental disability or retardedness,
✓ drug abuse and alcoholism,
✓ juvenile delinquency and commitence of crimes, etc.
National Youth Policy, 2014

▪ The National Youth Policy (NYP–2014) was launched in February 2014.
▪ The NYP–2014 has defined ‘youth’ as persons in the age group of 15–29 years.
▪ It proposes a holistic ‘vision’ for the youth of India: “To empower the youth of the country to achieve
their full potential, and through them enable India to find its rightful place in the community of
nations”.
▪ In order to achieve this Vision, all stakeholders must work towards meeting 5 key objectives:
1. Create a productive workforce.

o Education
o Entrepreneurship
o Employment & Skill Development
2. Develop a strong and healthy generation.
o Adolescent and reproductive health.
o Promotion of sports.
o Control on drug abuse.
3. Instill social values & promote community service.
o Promotion of social values.
o Community Engagement.
4. Facilitate participation and civic engagement.
o Youth Engagement.
o Participation in governance.
5. Support youth at risk & create equitable opportunity for all.
o Inclusion
o Social Justice
1.5 Sex Composition

▪ National Ratio in Census 2011 = 940 (improved from 933 in 2001 census).

▪ States/UTs having highest Sex Ratios: Kerela – 1084, Puducherry – 1038 [* UT having highest sex
ratio], Tamil Nadu – 995.
▪ States/UTs having Lowest Sex Ratios: Daman and Diu – 618, Dadra and Nagar Haveli – 775,
Chandigarh-818, Haryana – 877 [* State having lowest sex ratio].
▪ Child Sex Ratio (sex ratio in age group 0-6 years): 914 (declined from 927 in 2001).
▪ Declining child sex ratio in India indicates that the sex ratio of India may further decline in future.
1.6 Literacy Rates

▪ Literacy Rate of India: 74.04%
▪ Male Literacy Rate of India: 82.14%
▪ Female Literacy Rate of India: 65.4%
▪ States/UTs having Highest Literacy Rates in India: Kerala – 93.91%, Lakshadweep -92.28 %, Mizoram –
91.58%
▪ States/UTs having Lowest Literacy Rates in India: Bihar – 63.82%, Arunachal Pradesh – 66.9 %,
Rajasthan – 67%.
▪ Kerela has the highest Female Literacy rate (91.98%). Mizoram ranks second.
▪ Rajasthan has the lowest Female Literacy rate (52.66%). Bihar ranks second.
▪ Lakshadweep has the highest Male Literacy rate (around 96%). Kerala ranks second.
▪ Bihar has the lowest male Literacy rate (73.39%). Arunachal ranks second.
1.7 Composition of Working Population

▪ The population of India according to their economic status is divided into three groups, namely; main
workers, marginal workers and non-workers.

▪ The main and marginal workers and non workers who are seeking employment are included in the
labour force of the country.
▪ It is observed that in India, the proportion of workers (both main and marginal) is only 37.5 per cent
(Periodic Labour Force Survey 2018-19) leaving a vast majority of about 60 per cent as non-workers.
▪ This indicates an economic status in which there is a larger proportion of dependent population,
further indicating possible existence of large number of unemployed or under employed people.
▪ The proportion of working population, of the states and Union Territories show a moderate variation
from about 39.6 per cent in Goa to about 49.9 per cent in Daman and Diu.
▪ The states with larger percentages of workers are Himachal Pradesh, Sikkim, Chhattisgarh, Andhra
Pradesh, Karnataka, Arunachal Pradesh, Nagaland, Manip ur and Meghalaya.
▪ Among the Union Territories, Dadra and Nagar Haveli and Daman and Diu have higher participation
rate.
▪ It is understood that, in the context of a country like India, the work participation rate tends to be
higher in the areas of lower levels of economic development since number of manual workers are
needed to perform the subsistence or near subsistence economic activities.
▪ The occupational composition of India’s population (which actually means engagement of an
individual in farming, manufacturing, trade, services or any kind of professional activities) show a
large proportion of primary sector workers compared to secondary and tertiary sectors.
▪ About 54.6 per cent of total working population are cultivators and agricultural labourers, whereas
only 3.8% of workers are engaged in household industries and 41.6 % are other workers including
non-household industries, trade, commerce, construction and repair and other services.
▪ As far as the occupation of country’s male and female population is concerned, male workers out-
number female workers in all the three sectors.
▪ The number of female workers is relatively high in primary sector, though in recent years there has
been some improvement in work participation of women in secondary and tertiary sectors.
▪ It is important to note that the proportion of workers in agricultural sector in India has shown a decline
over the last few decades (58.2% in 2001 to 54.6% in 2011). Consequently, the participation rate in
secondary and tertiary sector has registered an increase.
▪ This indicates a shift of dependence of workers from farm-based occupations to non-farm-based
ones, indicating a sectoral shift in the economy of the country.
▪ The states like Himachal Pradesh and Nagaland have very large shares of cultivators.
▪ On the other hand, states like Bihar, Andhra Pradesh, Chhattisgarh, Odisha, Jharkhand, West Bengal
and Madhya Pradesh have higher proportion of agricultural labourers.

▪ The highly urbanized areas like Delhi, Chandigarh and Puducherry have a very large proportion of
workers being engaged in other services.
▪ This indicates not only availability of limited farming land, but also large scale urbanisation and
industrialization requiring more workers in non-farm sectors.
2 Important Issues
2.1 India’s Demographic Dividend

• India has 62.5% of its population in the age group of 15-59 years which is ever increasing and will be
at the peak around 2036 when it will reach approximately 65%.
• These population parameters indicate an availability of demographic dividend in India, which started
in 2005-06 and will last till 2055-56.
• According to Economic Survey 2018-19, India’s Demographic Dividend will peak around 2041, when
the share of working-age,i.e. 20-59 years, population is expected to hit 59%.
2.1.1 Demographic Dividend: Definition

• According to United Nations Population Fund (UNFPA), demographic dividend means, "the economic
growth potential that can result from shifts in a population’s age structure, mainly when the share of
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the working-age population (15 to 64) is larger than the non-working-age share of the population (14
and younger, and 65 and older)".
• With fewer births each year, a country’s working-age population grows larger relative to the young
dependent population. With more people in the labor force and fewer children to support, a country
has a window of opportunity for economic growth if the right social and economic investments and
policies are made in health, education, governance, and the economy.
2.1.2 Demographic Dividend in India

• India has one of the youngest populations in an aging world. By 2020, the median age in India will be
just 28, compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan.
• Since 2018, India’s working-age population (people between 15 and 64 years of age) has grown larger
than the dependant population — children aged 14 or below as well as people above 65 years of age.
This bulge in the working-age population is going to last till 2055, or 37 years from its beginning.
• This transition happens largely because of a decrease in the total fertility rate (TFR, which is the
number of births per woman) after the increase in life expectancy gets stabilised.
• A study on demographic dividend in India by United Nations Population Fund (UNFPA) throws up two
interesting facts.
o The window of demographic dividend opportunity in India is available for five decades from
2005-06 to 2055-56, longer than any other country in the world.
o This demographic dividend window is available at different times in different states because
of differential behaviour of the population parameters.
2.1.3 Advantages Associated with Demographic Dividend

• Better economic growth brought about by increased economic activities due to higher working age
population and lower dependent population. It will be channelised in following ways:
o Increased Labour Force that enhances the productivity of the economy.
o Increased fiscal space created by the demographic dividend to divert resources from spending
on children to investing in physical and human infrastructure.
o Rise in women’s workforce that naturally accompanies a decline in fertility, and which can be
a new source of growth.
o Increase in savings rate, as the working age also happens to be the prime period for saving.
o A massive shift towards a middle-class society, that is, the rise of aspirational class.
• Demographic dividend has historically contributed up to 15 % of the overall growth in advanced
economies.
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o Japan was among the first major economies to experience rapid growth because of changing
population structure.
o The country’s demographic-dividend phase lasted from 1964 to 2004.
• Rapid industrialisation and urbanisation because of higher number of employment seeking population
that would force higher economic activities.
• Rise in workforce: With more than 65% of working age population, India will rise as an economic
superpower, supplying more than half of Asia’s potential workforce over the coming decades.
• Effective policy making: Fine-tuning the planning and implementation of schemes and programmes
by factoring in population dynamics is likely to yield greater socio-economic impact and larger benefits
for people.
2.1.4 Challenges Associated with Demographic Dividend

• Asymmetric demography: The growth in the working-age ratio is likely to be concentrated in some of
India’s poorest states and the demographic dividend will be fully realized only if India is able to create
gainful employment opportunities for this working-age population.
• Lack of skills: Most of the new jobs that will be created in the future will be highly skilled and lack of
skill in Indian workforce is a major challenge. India may not be able to take advantage of the
opportunities, due to a low human capital base and lack of skills.
• Low human development parameters: India ranks 130 out of 189 countries in UNDP’s Human
Development Index, which is alarming. Therefore, health and education parameters need to be
improved substantially to make the Indian workforce efficient and skilled.
• Informal nature of economy in India is another hurdle in reaping the benefits of demographic
transition in India.
• Jobless growth- There is mounting concern that future growth could turn out to be jobless due to de-
industrialization, de-globalization, the fourth industrial revolution and technological progress. As per
the NSSO Periodic Labour Force Survey 2017-18, India’s labour force participation rate for the age-
group 15-59 years is around 53%, that is, around half of the working age population is jobless.
2.1.5 What needs to be done?

• Building human capital: Investing in people through healthcare, quality education, jobs and skills
helps build human capital, which is key to supporting economic growth, ending extreme poverty, and
creating a more inclusive society.
o Skill development to increase employability of young population. India’s labour force needs
to be empowered with the right skills for the modern economy. Government has established
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the National Skill Development Corporation (NSDC) with the overall target of skilling/ up
skilling 500 million people in India by 2022..
o Education: Enhancing educational levels by properly investing in primary, secondary and
higher education. India, which has almost 41% of population below the age of 20 years, can
reap the demographic dividend only if with a better education system. Also, academic-industry
collaboration is necessary to synchronise modern industry demands and learning levels in
academics.
▪ Establishment of Higher Education Finance Agency (HEFA) is a welcome step in this
direction.
o Health: Improvement in healthcare infrastructure would ensure higher number of productive
days for young labour force, thus increasing the productivity of the economy.
▪ Success of schemes like Ayushman Bharat and National Health Protection scheme
(NHPS) is necessary. Also nutrition level in women and children needs special care with
effective implementation of Integrated Child Development (ICDS) programme.
o Job Creation: The nation needs to create ten million jobs per year to absorb the addition of
young people into the workforce. Promoting businesses’ interests and entrepreneurship would
help in job creation to provide employment to the large labour force.
▪ India’s improved ranking in the World Bank’s Ease of Doing Business Index is a good
sign.
▪ Schemes like Start-up India and Make in India , if implemented properly, would bring
the desired result in the near future.
• Urbanisation: The large young and working population in the years to come will migrate to urban
areas within their own and other States, leading to rapid and large-scale increase in urban population.
How these migrating people can have access to basic amenities, health and social services in urban
areas need to be the focus of urban policy planning.
o Schemes such as Smart City Mission and AMRUT needs to be effectively and carefully
implemented.
2.1.6 Way Forward

• India is on the right side of demographic transition that provides golden opportunity for its rapid socio-
economic development, if policymakers align the developmental policies with this demographic shift.
• To reap the demographic dividend, proper investment in human capital is needed by focussing on
education, skill development and healthcare facilities.
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• This demographic transition also brings complex challenges with it. If the increased workforce is not
sufficiently skilled, educated and provided gainful employment, we would be facing demographic
disaster instead.
• By learning from global approaches from countries such as Japan and Korea and designing solutions
considering the domestic complexities, we would be able to reap the benefits of demographic
dividend.
2.2 Is there a need for India to take urgent & coercive measures to curb population growth?
There is no urgency for India to take population control measures. The country is already witnessing a
decline in its population growth rate. Couples not only desire, but also have fewer children than earlier.
The overall growth appears high because of the population momentum in the presence of a large base of
the young population. Thirty per cent of the country’s population comprises young — adolescents (10-19
years) and youth (15-24 years) — who are or will soon be in reproductive age.
Even if this group produces fewer children per couple, there would still be a quantum increase because
the number of reproductive couples is high. Thus, India, with its large proportion of young people, will
take time to stabilise its population.
However, the country’s demographic changes are along the expected lines. With increased access to
education, economic and other development opportunities, India will ensure fertility decline in all the
states. Regressive social norms continue to undermine the value of women in many parts of India.
According to the National Family Health Survey-4, as many as 14.43 million women (20-24 years) married
before the age of 18 and 4.5 million become mothers during adolescence. Also, 10 million girls (15-24
years) who wish to delay pregnancy do not have access to contraceptives.
Early marriage, teenage pregnancy, preference for sons, lack of women’s agencies, taboos attached to
abortion and poor commitment from men towards family planning are some critical socioeconomic
factors resulting in high fertility.
India is among the countries with the highest number of girls married before they are 18. As women’s
reproductive health is largely affected by decisions made mostly by men and their families, it is important
for men to not merely be sexual partners, husbands and heads of families. They should help change
women’s lives by increasing the use of contraceptives and seeking reproductive healthcare services. This
can change the country’s family planning narrative.
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In the early 1970s, coercive population control strategies gained momentum in India, which saw the rise
of mass sterilisation camps. It compelled states to employ extreme incentive policies with target-based
approach to attain numbers.
But in 2000, the Union government brought out the second National Population Policy (NPP) which
reflects the commitments made at the International Conference on Population and Development in 1994.
NPP emphasised that people must be free and enabled to access quality healthcare, make informed
choices and adopt measures for fertility regulation best suited to them.
It hoped to bring the national Total Fertility Rate (TFR) to 2.1 by 2010 and work towards filling the unmet
need for contraceptives and services by advocating “small family norm”without prescribing numbers and
running state-specific programmes. Nowhere did the policy advocate “two-child norm”.
It is disturbing that “small-family norm“ was misinterpreted as “two-child norm”, which clearly has
coercive implications. India has to stabilise population without coercive policies. To ensure that high
fertility regions lower their TFR to replacement levels, the government needs to raise budgetary
allocations, address the large unmet need for family planning services and provide more contraceptive
choices in public health systems. Simultaneous investments to enhance women’s education, health status
and greater participation in the workforce can contribute to reducing fertility rates.
2.3 Skewed Gender Ratio

Sample Registration System (SRS) Statistical report (2018) which measures the global population
projection, highlighted that fertility rate has been declining in India for some time now.
The report estimated that India’s Total Fertility Rate (TFR) was around 2.2 in the year 2018, which is
close to the replacement rate of 2.1. This clearly marks the success of government measures to bring
population control.
However, on flip side the SRS report highlights the declining sex ratio at birth in India that has further got
reduced from 906 in 2011 to 899 in 2018. The United Nations Population Fund (UNFPA) State of World
Population 2020 held that sex ratio at birth in India is lower than all the countries in the world except
China.
Therefore, along with stabling of population , government and society needs to address the declining sex
ratio and subsequently gender discrimination.
2.3.1 Reasons For Skewed Sex Ratio

• Gender Bias: According to information from the UNPFA, reasons for female infanticide include anti-
female bias, as women are often seen as subservient to men, who often employ positions of power.
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• Son-Preference: In addition, parents believe they will be better taken care of in their old age by men,
as men are perceived as the principal wage earners of the family.
• Social Practices: Parents of girls are usually expected to pay a dowry, which could be a massive
expense, avoided by raising males.
• Counter Effect of Rise in Income: Contrary to popular perception, in India’s sex ratio at birth declined
even as per capita income increased nearly 10 times over the last 65 years, according to an IndiaSpend
analysis of government data.
o This could be because rising income, which results in increased literacy, makes it easier for
families to access sex-selective procedures.
2.3.2 Issues Related to Lower Sex Ratio at Birth

• Gender-imbalance: Prof. Amartya Kumar Sen, in his world famous article “Missing Women‟ has
statistically proved that during the last century, 100 million women have been missing in south Asia.
o This is due to discrimination leading to death, experienced by them from womb to tomb in
their life cycles.
o An adverse child sex ratio is also reflected in the distorted gender makeup of the entire
population.
o Acording to World Bank, in 2031, India will have 936 females per 1,000 males, lower than the
sex ratio in 1951 of 946 females per 1,000 males.
• Distortion in the Marriage System: Adverse ratio results in a gross imbalance in the number of men
and women and its inevitable impact on marriage systems as well as other harms to women.
o In India, some villages in Haryana and Punjab have such poor sex ratios that men “import”
brides from other States. This is often accompanied by the exploitation of these brides.
o There are concerns that skewed sex ratios lead to more violence against both men and women,
as well as human-trafficking.
2.3.3 Challenges Involved

• Regressive Mindset: There is considerable son preference in all states, except possibly in Kerala and
Chhattisgarh. This son’s preference is derived from a regressive mindset. E.g.: People associate girls
with dowry.
• Misuse of Technology: Cheaper technology like ultrasound helps in sex selection.
• Failure in Implementation of Law: The Prenatal Conception and Prenatal Determination Act (PC-
PNDT), 1994 which punishes healthcare professionals for telling expectant parents the sex of a child
with imprisonment and hefty fines, has failed to control the sex selection.
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o Reports found major gaps in the training of personnel implementing PC-PNDT. Poor training
meant that they were unable to prepare strong cases against violators to secure convictions.
• Illiteracy: Illiterate women in the reproductive age group of 15-49 years have higher fertility than
literate women.
2.3.4 Way Forward

• Bringing Behavioural Change: Increasing female education and economic prosperity help to improve
the ratio. In this pursuit, The government’s Beti-Bachao Beti Padhao Campaign has achieved
remarkable success in bringing behavioural change in the society.
• Sensitizing Youth: There is an urgent need to reach young people for reproductive health education
and services as well as to cultivate gender equity norms.
o Regarding the services of Accredited Social Health Activist (ASHA) can be leveraged,
especially in rural areas.
• Stringent Enforcement of Law: India must implement the Pre-Conception and Pre-Natal Diagnostic
Techniques (PCPNDT) Act, 1994 more stringently and dedicate more resources to fighting the
preference for boys.
o In this context, the Drugs Technical Advisory Board decision to include ultrasound machines
in the Drugs and Cosmetics Act, is a step in the right direction.
Although India has created several impressive goals to reduce its population growth rates, India and the
rest of the world has a long way to go to achieve meaningful population policy which are not only based
on quantitative control but qualitative control as well.
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ECONOMIC HISTORY OF INDIA
FODDER MATERIAL

Contents
1 Indian Economy on the Eve of Independence .......................................................................................4
1.1 Low Level of Economic Development Under the Colonial Rule .....................................................4
1.2 Agriculture Sector ...........................................................................................................................5
1.3 Industrial Sector ..............................................................................................................................6
1.4 Foreign Trade ..................................................................................................................................7
1.5 Demographic Conditions.................................................................................................................7
1.6 Occupational Structure ...................................................................................................................8
1.7 Infrastructure ..................................................................................................................................8
1.8 Conclusion .......................................................................................................................................9
2 Indian Economy 1950 – 1990 .................................................................................................................9
2.1 Goals of Five-Year Plans ................................................................................................................10
2.1.1 Growth ...................................................................................................................................10
2.1.2 Modernisation .......................................................................................................................11
2.1.3 Self-reliance ...........................................................................................................................11
2.1.4 Equity .....................................................................................................................................12
2.2 Agriculture.....................................................................................................................................12
2.2.1 Land Reforms .........................................................................................................................12
2.2.2 Green Revolution ...................................................................................................................14
2.2.3 Debate Over Subsidies ...........................................................................................................15
2.3 Industry & Trade ...........................................................................................................................16
2.3.1 Public and Private Sectors in Indian Industrial Development ...............................................16
2.3.2 Industrial Policy Resolution 1956 (IPR 1956): ........................................................................17
2.3.3 Small Scale Industry ...............................................................................................................18
2.4 Trade Policy: Import Substitution .................................................................................................18
2.5 Effect of Policies on Industrial Development................................................................................19
2.6 Conclusion .....................................................................................................................................20
3 Liberalisation, Privatisation & Globalisation: An Appraisal ..................................................................20
3.1 Background ...................................................................................................................................21
3.2 Liberalisation .................................................................................................................................22
3.2.1 Deregulation of Industrial Sector ..........................................................................................22
3.2.2 Financial Sector Reforms .......................................................................................................23
3.2.3 Tax Reforms ...........................................................................................................................23
3.2.4 Foreign Exchange Reforms ....................................................................................................24

3.2.5 Trade and Investment Policy Reforms ...................................................................................24
3.3 Privatisation ..................................................................................................................................24
3.4 Globalisation .................................................................................................................................25
3.4.1 Outsourcing ...........................................................................................................................26
3.4.2 World Trade Organisation (WTO) ..........................................................................................26
3.5 Indian Economy During Reforms: An Assessment ........................................................................27
3.5.1 Growth and Employment ......................................................................................................28
3.5.2 Reforms in Agriculture ...........................................................................................................28
3.5.3 Reforms in Industry ...............................................................................................................28
3.5.4 Disinvestment ........................................................................................................................29
3.5.5 Reforms and Fiscal Policies ....................................................................................................29
3.6 Conclusion .....................................................................................................................................29
4 A short history of Indian economy 1947-2019: Tryst with destiny & other stories ............................30
4.1 An ancient land has a new beginning as a country facing monumental tasks .............................30
4.2 India’s economic model: the state’s primacy over individual enterprise.....................................30
4.3 The very first budget, and the defence of fiscal federalism .........................................................30
4.4 Planning, commissioning, executing the programme to hasten growth......................................31
4.5 The free-market proponent who cried wolf on policy—but was proved right ..............................31
4.6 The man who gave India modern statistics and the swadeshi spirit ............................................31
4.7 After throwing off the yoke of the British Raj, the licence Raj begins..........................................31
4.8 Bad stock and the story of India’s first big financial scam ............................................................32
4.9 From Bhakra-Nangal to Bhilai, the temples of a modern India ....................................................32
4.10 The onset of economic troubles and the death of a nation builder .............................................32
4.11 It took a war hero to rethink the direction of India’s policymaking .............................................32
4.12 After the Green Revolution, the shift towards an Evergreen Revolution ....................................33
4.13 Getting the bread and butter of the dairy business right .............................................................33
4.14 A shaky economy forces annual plans in place of the five-year plan ...........................................33
4.15 The state’s takeover of banks opens a new account ....................................................................33
4.16 The effect of making political gains from economic moves .........................................................34
4.17 Indira Gandhi’s move on the rupee and the effect it had on Gulf nations ..................................34
4.18 The Janata years: Demonetization 1.0 and the exit of Coca-Cola ................................................34
4.19 Indira Gandhi returns, this time with a reformist bent of mind ...................................................34
4.20 A small car that drove the rise of a new middle class and consumption .....................................35
4.21 Hostile takeovers meet their match in connected families ..........................................................35

4.22 In son rise, Rajiv Gandhi takes the mantle, and raises hopes.......................................................35
4.23 Bhopal: the danger and reality of large industrial accidents ........................................................35
4.24 The fiscal deficit as a permanent feature on India’s economic map ............................................36
4.25 The economist with policy ideas ahead of their time...................................................................36
4.26 The golden moment that brought down the last pillars of socialist India ...................................36
4.27 A two-step, two-day operation to lower the value of the rupee .................................................36
4.28 Of bulls, bears and market watchdogs: A cautionary tale ............................................................37
4.29 R.H. Patil, the man who tamed the wolves of Dalal Street ..........................................................37
4.30 Clubbing together for a fight that didn’t really happen ...............................................................37
4.31 Amartya Sen: new measures for problems of inequity, welfare ..................................................37
4.32 Sowing the seeds for the nation’s economic growth surge .........................................................38
4.33 Reformist returns as a champion of redistributive economics ....................................................38
4.34 Circumventing the sell-by date of public sector enterprises ........................................................38
4.35 When the world became Indian companies’ corporate oyster ....................................................38
4.36 Going down: the planned demolition of a long-condemned institution ......................................39
4.37 Bringing in a code of conduct to help provide for sick promoters ...............................................39
4.38 The overnight note-ban on an unsuspecting nation ....................................................................39
4.39 The blanket tax regime that made India one country, one market .............................................39
4.40 The bellwether as the weather vane for the state of the economy .............................................39
4.41 A country beginning to consider startups as a new business model............................................40
5 Important Graphs .................................................................................................................................40
1 Indian Economy on the Eve of Independence

The structure of India’s present-day economy is not just of current making; it has its roots steeped in
history, particularly in the period when India was under British rule which lasted for almost two centuries
before India finally won its independence on 15 August 1947. The sole purpose of the British colonial rule
in India was to reduce the country to being a raw material supplier for Great Britain’s own rapidly
expanding modern industrial base. An understanding of the exploitative nature of this relationship is
essential for any assessment of the kind and level of development which the Indian economy has been
able to attain over the last seven decades.
1.1 Low Level of Economic Development Under the Colonial Rule

India had an independent economy before the advent of the British rule. Though agriculture was the
main source of livelihood for most people, yet, the country’s economy was characterised by various kinds
of manufacturing activities. India was particularly well known for its handicraft industries in the fields of
cotton and silk textiles, metal and precious stone works etc. These products enjoyed a worldwide
market based on the reputation of the fine quality of material used and the high standards of
craftsmanship seen in all imports from India.
The economic policies pursued by the colonial government in India were concerned more with the
protection and promotion of the economic interests of their home country than with the development
of the Indian economy. Such policies brought about a fundamental change in the structure of the Indian
economy — transforming the country into supplier of raw materials and consumer of finished industrial
products from Britain.
Obviously, the colonial government never made any sincere attempt to estimate India’s national and
per capita income. Some individual attempts which were made to measure such incomes yielded
conflicting and inconsistent results. Among the notable estimators — Dadabhai Naoroji, William Digby,
Findlay Shirras, V.K.R.V. Rao and R.C. Desai — it was Rao, whose estimates during the colonial period
was considered very significant. However, most studies did find that the country’s growth of aggregate
real output during the first half of the twentieth century was less than two per cent coupled with a
meagre half per cent growth in per capita output per year.
1.2 Agriculture Sector

India’s economy under the British colonial rule remained fundamentally agrarian — about 85 per cent
of the country’s population lived mostly in villages and derived livelihood directly or indirectly from
agriculture. However, despite being the occupation of such a large population, the agricultural sector
continued to experience stagnation and, not infrequently, unusual deterioration. Agricultural
productivity became low though, in absolute terms, the sector experienced some growth due to the
expansion of the aggregate area under cultivation. This stagnation in the agricultural sector was caused
mainly because of the various systems of land settlement that were introduced by the colonial
government. Particularly, under the zamindari system which was implemented in the then Bengal
Presidency comprising parts of India’s present-day eastern states, the profit accruing out of the
agriculture sector went to the zamindars instead of the cultivators. However, a considerable number of
zamindars, and not just the colonial government, did nothing to improve the condition of agriculture.
The main interest of the zamindars was only to collect rent regardless of the economic condition of the
cultivators; this caused immense misery and social tension among the latter. To a very great extent, the
terms of the revenue settlement were also responsible for the zamindars adopting such an attitude;
dates for depositing specified sums of revenue were fixed, failing which the zamindars were to lose
their rights. Besides this, low levels of technology, lack of irrigation facilities and negligible use of

fertilisers, all added up to aggravate the plight of the farmers and contributed to the dismal level of
agricultural productivity. There was, of course, some evidence of a relatively higher yield of cash crops
in certain areas of the country due to commercialisation of agriculture.
But this could hardly help farmers in improving their economic condition as, instead of producing food
crops, now they were producing cash crops which were to be ultimately used by British industries back
home. Despite some progress made in irrigation, India’s agriculture was starved of investment in
terracing, flood-control, drainage and desalinisation of soil. While a small section of farmers changed
their cropping pattern from food crops to commercial crops, a large section of tenants, small farmers
and sharecroppers neither had resources and technology nor had incentive to invest in agriculture.
1.3 Industrial Sector

As in the case of agriculture, so also in manufacturing, India could not develop a sound industrial base
under the colonial rule. Even as the country’s world-famous handicraft industries declined, no
corresponding modern industrial base was allowed to come up to take pride of place so long enjoyed by
the former. The primary motive of the colonial government behind this policy of systematically
deindustrialising India was two-fold. The intention was, first, to reduce India to the status of a mere
exporter of important raw materials for the upcoming modern industries in Britain and, second, to turn
India into a sprawling market for the finished products of those industries so that their continued
expansion could be ensured to the maximum advantage of their home country — Britain. In the unfolding
economic scenario, the decline of the indigenous handicraft industries created not only massive
unemployment in India but also a new demand in the Indian consumer market, which was now deprived
of the supply of locally made goods. This demand was profitably met by the increasing imports of cheap
manufactured goods from Britain.
During the second half of the nineteenth century, modern industry began to take root in India but its
progress remained very slow. Initially, this development was confined to the setting up of cotton and jute
textile mills. The cotton textile mills, mainly dominated by Indians, were located in the western parts of
the country, namely, Maharashtra and Gujarat, while the jute mills dominated by the foreigners were
mainly concentrated in Bengal. Subsequently, the iron and steel industries began coming up in the
beginning of the twentieth century. The Tata Iron and Steel Company (TISCO) was incorporated in 1907.
A few other industries in the fields of sugar, cement, paper etc. came up after the Second World War.
However, there was hardly any capital goods industry to help promote further industrialisation in India.
Capital goods industry means industries which can produce machine tools which are, in turn, used for
producing articles for current consumption. The establishment of a few manufacturing units here and
there was no substitute to the near wholesale displacement of the country’s traditional handicraft
industries. Furthermore, the growth rate of the new industrial sector and its contribution to the Gross
Domestic Product (GDP) remained very small. Another significant drawback of the new industrial sector
was the very limited area of operation of the public sector. This sector remained confined only to the
railways, power generation, communications, ports and some other departmental undertakings.
1.4 Foreign Trade

India has been an important trading nation since ancient times. But the restrictive policies of commodity
production, trade and tariff pursued by the colonial government adversely affected the structure,
composition and volume of India’s foreign trade. Consequently, India became an exporter of primary
products such as raw silk, cotton, wool, sugar, indigo, jute etc. and an importer of finished consumer
goods like cotton, silk and woollen clothes and capital goods like light machinery produced in the factories
of Britain. For all practical purposes, Britain maintained a monopoly control over India’s exports and
imports. As a result, more than half of India’s foreign trade was restricted to Britain while the rest was
allowed with a few other countries like China, Ceylon (Sri Lanka) and Persia (Iran). The opening of the
Suez Canal further intensified British control over India’s foreign trade.
The most important characteristic of India’s foreign trade throughout the colonial period was the
generation of a large export surplus. But this surplus came at a huge cost to the country’s economy.
Several essential commodities—food grains, clothes, kerosene etc. — were scarcely available in the
domestic market. Furthermore, this export surplus did not result in any flow of gold or silver into India.
Rather, this was used to make payments for the expenses incurred by an office set up by the colonial
government in Britain, expenses on war, again fought by the British government, and the import of
invisible items, all of which led to the drain of Indian wealth.
1.5 Demographic Conditions

Various details about the population of British India were first collected through a census in 1881. Though
suffering from certain limitations, it revealed the unevenness in India’s population growth.
Subsequently, every ten years such census operations were carried out. Before 1921, India was in the
first stage of demographic transition. The second stage of transition began after 1921. However, neither
the total population of India nor the rate of population growth at this stage was very high.
The various social development indicators were also not quite encouraging. The overall literacy level
was less than 16 per cent. Out of this, the female literacy level was at a negligible low of about seven per
cent. Public health facilities were either unavailable to large chunks of population or, when available,
were highly inadequate. Consequently, water and air-borne diseases were rampant and took a huge toll
on life. No wonder, the overall mortality rate was very high and in that, particularly, the infant mortality
rate was quite alarming—about 218 per thousand. Life expectancy was also very low—44 years. In the

absence of reliable data, it is difficult to specify the extent of poverty at that time but there is no doubt
that extensive poverty prevailed in India during the colonial period which contributed to the worsening
profile of India’s population of the time.
1.6 Occupational Structure

During the colonial period, the occupational structure of India, i.e., distribution of working persons across
different industries and sectors, showed little sign of change. The agricultural sector accounted for the
largest share of workforce, which usually remained at a high of 70-75 per cent while the manufacturing
and the services sectors accounted for only 10 and 15-20 per cent respectively. Another striking aspect
was the growing regional variation. Parts of the then Madras Presidency (comprising areas of the present-
day states of Tamil Nadu, Andhra Pradesh, Kerala and Karnataka), Bombay and Bengal witnessed a
decline in the dependence of the workforce on the agricultural sector with a commensurate increase in
the manufacturing and the services sectors. However, there had been an increase in the share of
workforce in agriculture during the same time in states such as Orissa, Rajasthan and Punjab.
1.7 Infrastructure
Under the colonial regime, basic infrastructure such as railways, ports, water transport, posts and
telegraphs did develop. However, the real motive behind this development was not to provide basic
amenities to the people but to subserve various colonial interests. Roads constructed in India prior to
the advent of the British rule were not fit for modern transport. The roads that were built primarily
served the purposes of mobilising the army within India and drawing out raw materials from the
countryside to the nearest railway station or the port to send these to far away England or other lucrative
foreign destinations. There always remained an acute shortage of all-weather roads to reach out to the
rural areas during the rainy season. Naturally, therefore, people mostly living in these areas suffered
grievously during natural calamities and famines.
The British introduced the railways in India in 1850 and it is considered as one of their most important
contributions. The railways affected the structure of the Indian economy in two important ways. On the
one hand it enabled people to undertake long distance travel and thereby break geographical and
cultural barriers while, on the other hand, it fostered commercialisation of Indian agriculture which
adversely affected the self-sufficiency of the village economies in India. The volume of India’s exports
undoubtedly expanded but its benefits rarely accrued to the Indian people. The social benefits, which
the Indian people gained owing to the introduction of the railways, were thus outweighed by the
country’s huge economic loss.
Along with the development of roads and railways, the colonial dispensation also took measures for
developing the inland trade and sea lanes. However, these measures were far from satisfactory. The

inland waterways, at times, also proved uneconomical as in the case of the Coast Canal on the Orissa
coast. Though the canal was built at a huge cost to the government exchequer, yet, it failed to compete
with the railways, which soon traversed the region running parallel to the canal, and had to be ultimately
abandoned. The introduction of the expensive system of electric telegraph in India, similarly, served the
purpose of maintaining law and order. The postal services, on the other hand, despite serving a useful
public purpose, remained all through inadequate.
1.8 Conclusion
By the time India won its independence, the impact of the two-century long British colonial rule was
already showing on all aspects of the Indian economy. The agricultural sector was already saddled with
surplus labour and extremely low productivity. The industrial sector was crying for modernisation,
diversification, capacity building and increased public investment. Foreign trade was oriented to feed
the Industrial Revolution in Britain. Infrastructure facilities, including the famed railway network, needed
upgradation, expansion and public orientation. Prevalence of rampant poverty and unemployment
required welfare orientation of public economic policy. In a nutshell, the social and economic challenges
before the country were enormous.
2 Indian Economy 1950 – 1990

On 15 August 1947, India woke to a new dawn of freedom. Finally, we were masters of our own destiny
after some two hundred years of British rule; the job of nation building was now in our own hands. The
leaders of independent India had to decide, among other things, the type of economic system most
suitable for our nation, a system which would promote the welfare of all rather than a few. There are
different types of economic systems and among them, socialism appealed to Jawaharlal Nehru the most.
However, he was not in favour of the kind of socialism established in the former Soviet Union where all
the means of production, i.e. all the factories and farms in the country, were owned by the government.
There was no private property. It is not possible in a democracy like India for the government to change
the ownership pattern of land and other properties of its citizens in the way that it was done in the former
Soviet Union.
Nehru, and many other leaders and thinkers of the newly independent India, sought an alternative to the
extreme versions of capitalism and socialism. Basically, sympathising with the socialist outlook, they
found the answer in an economic system which, in their view, combined the best features of socialism
without its drawbacks. In this view, India would be a socialist society with a strong public sector but also
with private property and democracy; the government would plan for the economy with the private
sector being encouraged to be part of the plan effort. The ‘Industrial Policy Resolution’ of 1948 and the

Directive Principles of the Indian Constitution reflected this outlook. In 1950, the Planning Commission
was set up with the Prime Minister as its Chairperson. The era of five year plans had begun.
What is a Plan?
A plan spells out how the resources of a nation should be put to use. It should have some general goals
as well as specific objectives which are to be achieved within a specified period of time; in India plans
are of five years duration and are called five year plans (we borrowed this from the former Soviet Union,
the pioneer in national planning). Our plan documents not only specify the objectives to be attained in
the five years of a plan but also what is to be achieved over a period of twenty years. This long-term
plan is called ‘perspective plan’. The five year plans are supposed to provide the basis for the
perspective plan.
It will be unrealistic to expect all the goals of a plan to be given equal importance in all the plans. In fact
the goals may actually be in conflict. For example, the goal of introducing modern technology may be
in conflict with the goal of increasing employment if the technology reduces the need for labour. The
planners have to balance the goals, a very difficult job indeed. We find different goals being emphasised
in different plans in India.
Our five year plans do not spell out how much of each and every good and service is to be produced.
This is neither possible nor necessary (the former Soviet Union tried to do this and failed). It is enough
if the plan is specific about the sectors where it plays a commanding role, for instance, power
generation and irrigation, while leaving the rest to the market.
2.1 Goals of Five-Year Plans

A plan should have some clearly specified goals. The goals of the five year plans are: growth,
modernisation, self-reliance and equity. This does not mean that all the plans have given equal
importance to all these goals. Due to limited resources, a choice has to be made in each plan about which
of the goals is to be given primary importance. Nevertheless, the planners have to ensure that, as far as
possible, the policies of the plans do not contradict these four goals. Let us now learn about the goals of
planning in some detail.
2.1.1 Growth
It refers to increase in the country’s capacity to produce the output of goods and services within the
country. It implies either a larger stock of productive capital, or a larger size of supporting services like
transport and banking, or an increase in the efficiency of productive capital and services. A good
indicator of economic growth, in the language of economics, is steady increase in the Gross Domestic
Product (GDP). The GDP is the market value of all the goods and services produced in the country during
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a year. You can think of the GDP as a cake and growth is increase in the size of the cake. If the cake is
larger, more people can enjoy it. It is necessary to produce more goods and services if the people of India
are to enjoy (in the words of the First Five Year Plan) a more rich and varied life.
The GDP of a country is derived from the different sectors of the economy, namely the agricultural sector,
the industrial sector and the service sector. The contribution made by each of these sectors makes up
the structural composition of the economy. In some countries, growth in agriculture contributes more to
the GDP growth, while in some countries the growth in the service sector contributes more to GDP
growth.
The Services Sector

As a country develops, it undergoes ‘structural change’. In the case of India, the structural change is
peculiar. Usually, with development, the share of agriculture declines and the share of industry
becomes dominant. At higher levels of development, the service sector contributes more to the GDP
than the other two sectors. In India, the share of agriculture in the GDP was more than 50 per cent—as
we would expect for a poor country. But by 1990 the share of the service sector was 40.59 per cent,
more than that of agriculture or industry, like what we find in developed nations. This phenomenon of
growing share of the service sector was accelerated in the post 1991 period (this marked the onset of
globalisation in the country which will be discussed in a subsequent section).
2.1.2 Modernisation
To increase the production of goods and services the producers have to adopt new technology. For
example, a farmer can increase the output on the farm by using new seed varieties instead of using the
old ones. Similarly, a factory can increase output by using a new type of machine. Adoption of new
technology is called modernisation.
However, modernisation does not refer only to the use of new technology but also to changes in social
outlook such as the recognition that women should have the same rights as men. In a traditional society,
women are supposed to remain at home while men work. A modern society makes use of the talents of
women in the work place — in banks, factories, schools etc. — and such a society in most occassions is
also prosperous.
2.1.3 Self-reliance
A nation can promote economic growth and modernisation by using its own resources or by using
resources imported from other nations. The first seven five-year plans gave importance to self-reliance
which means avoiding imports of those goods which could be produced in India itself. This policy was
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considered a necessity in order to reduce our dependence on foreign countries, especially for food. It is
understandable that people who were recently freed from foreign domination should give importance to
self-reliance. Further, it was feared that dependence on imported food supplies, foreign technology and
foreign capital may make India’s sovereignty vulnerable to foreign interference in our policies.
2.1.4 Equity
Now growth, modernisation and self-reliance, by themselves, may not improve the kind of life which
people are living. A country can have high growth, the most modern technology developed in the
country itself, and also have most of its people living in poverty. It is important to ensure that the benefits
of economic prosperity reach the poor sections as well instead of being enjoyed only by the rich. So, in
addition to growth, modernisation and self-reliance, equity is also important. Every Indian should be
able to meet his or her basic needs such as food, a decent house, education and health care and
inequality in the distribution of wealth should be reduced.
Let us now see how the first seven five year plans, covering the period 1950-1990, attempted to attain
these four goals and the extent to which they succeeded in doing so, with reference to agriculture,
industry and trade.
2.2 Agriculture
During the colonial rule there was neither growth nor equity in the agricultural sector. The policy makers
of independent India had to address these issues which they did through land reforms and promoting the
use of ‘High Yielding Variety’ (HYV) seeds which ushered in a revolution in Indian agriculture.
2.2.1 Land Reforms

At the time of independence, the land tenure system was characterised by intermediaries (variously
called zamindars, jagirdars etc.) who merely collected rent from the actual tillers of the soil without
contributing towards improvements on the farm. The low productivity of the agricultural sector forced
India to import food from the United States of America (U.S.A.). Equity in agriculture called for land
reforms which primarily refer to change in the ownership of landholdings. Just a year after
independence, steps were taken to abolish intermediaries and to make the tillers the owners of land.
The idea behind this move was that ownership of land would give incentives to the tillers to invest in
making improvements provided sufficient capital was made available to them.
Land ceiling was another policy to promote equity in the agricultural sector. This means fixing the
maximum size of land which could be owned by an individual. The purpose of land ceiling was to reduce
the concentration of land ownership in a few hands.
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The abolition of intermediaries meant that some 200 lakh tenants came into direct contact with the
government — they were thus freed from being exploited by the zamindars. The ownership conferred
on tenants gave them the incentive to increase output and this contributed to growth in agriculture.
However, the goal of equity was not fully served by abolition of intermediaries. In some areas the former
zamindars continued to own large areas of land by making use of some loopholes in the legislation;
there were cases where tenants were evicted and the landowners claimed to be self-cultivators (the
actual tillers), claiming ownership of the land; and even when the tillers got ownership of land, the
poorest of the agricultural labourers (such as sharecroppers and landless labourers) did not benefit from
land reforms.
The land ceiling legislation also faced hurdles. The big landlords challenged the legislation in the courts,
delaying its implementation. They used this delay to register their lands in the name of close relatives,
thereby escaping from the legislation. The legislation also had a lot of loopholes which were exploited by
the big landholders to retain their land. Land reforms were successful in Kerala and West Bengal because
these states had governments committed to the policy of land to the tiller. Unfortunately other states
did not have the same level of commitment and vast inequality in landholding continues to this day.
Ownership and Incentives

The policy of ‘land to the tiller’ is based on the idea that the cultivators will take more interest — they
will have more incentive — in increasing output if they are the owners of the land. This is because
ownership of land enables the tiller to make profit from the increased output. Tenants do not have the
incentive to make improvements on land since it is the landowner who would benefit more from higher
output. The importance of ownership in providing incentives is well illustrated by the carelessness with
which farmers in the former Soviet Union used to pack fruits for sale. It was not uncommon to see
farmers packing rotten fruits along with fresh fruits in the same box. Now, every farmer knows that the
rotten fruits will spoil the fresh fruits if they are packed together. This will be a loss to the farmer since
the fruits cannot be sold. So why did the Soviet farmers do something which would so obviously result
in loss for them? The answer lies in the incentives facing the farmers. Since farmers in the former Soviet
Union did not own any land, they neither enjoyed the profits nor suffered the losses. In the absence of
ownership, there was no incentive on the part of farmers to be efficient, which also explains the poor
performance of the agricultural sector in the Soviet Union despite availability of vast areas of highly
fertile land.
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2.2.2 Green Revolution
At independence, about 75 per cent of the country’s population was dependent on agriculture.
Productivity in the agricultural sector was very low because of the use of old technology and the absence
of required infrastructure for the vast majority of farmers. India’s agriculture vitally depends on the
monsoon and if the monsoon fell short the farmers were in trouble unless they had access to irrigation
facilities which very few had. The stagnation in agriculture during the colonial rule was permanently
broken by the green revolution. This refers to the large increase in production of food grains resulting
from the use of high yielding variety (HYV) seeds especially for wheat and rice. The use of these seeds
required the use of fertiliser and pesticide in the correct quantities as well as regular supply of water;
the application of these inputs in correct proportions is vital. The farmers who could benefit from HYV
seeds required reliable irrigation facilities as well as the financial resources to purchase fertiliser and
pesticide. As a result, in the first phase of the green revolution (approximately mid 1960s upto mid
1970s), the use of HYV seeds was restricted to the more affluent states such as Punjab, Andhra Pradesh
and Tamil Nadu. Further, the use of HYV seeds primarily benefited the wheat growing regions only. In
the second phase of the green revolution (mid-1970s to mid-1980s), the HYV technology spread to a
larger number of states and benefited more variety of crops. The spread of green revolution technology
enabled India to achieve self-sufficiency in food grains; we no longer had to be at the mercy of America,
or any other nation, for meeting our nation’s food requirements.
Growth in agricultural output is important but it is not enough. If a large proportion of this increase is
consumed by the farmers themselves instead of being sold in the market, the higher output will not make
much of a difference to the economy as a whole. If, on the other hand, a substantial amount of agricultural
produce is sold in the market by the farmers, the higher output can make a difference to the economy.
The portion of agricultural produce which is sold in the market by the farmers is called marketed
surplus. A good proportion of the rice and wheat produced during the green revolution period (available
as marketed surplus) was sold by the farmers in the market. As a result, the price of food grains declined
relative to other items of consumption. The low income groups, who spend a large percentage of their
income on food, benefited from this decline in relative prices. The green revolution enabled the
government to procure sufficient amount of food grains to build a stock which could be used in times of
food shortage.
While the nation had immensely benefited from the green revolution, the technology involved was not
free from risks. One such risk was the possibility that it would increase the disparities between small and
big farmers—since only the big farmers could afford the required inputs, thereby reaping most of the
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benefits of the green revolution. Moreover, the HYV crops were also more prone to attack by pests and
the small farmers who adopted this technology could lose everything in a pest attack.
Fortunately, these fears did not come true because of the steps taken by the government. The
government provided loans at a low interest rate to small farmers and subsidised fertilisers so that small
farmers could also have access to the needed inputs. Since the small farmers could obtain the required
inputs, the output on small farms equalled the output on large farms in the course of time. As a result,
the green revolution benefited the small as well as rich farmers. The risk of the small farmers being
ruined when pests attack their crops was considerably reduced by the services rendered by research
institutes established by the government. You should note that the green revolution would have
favoured the rich farmers only if the state did not play an extensive role in ensuring that the small farmer
also gains from the new technology.
2.2.3 Debate Over Subsidies

The economic justification of subsidies in agriculture is, at present, a hotly debated question. It is generally
agreed that it was necessary to use subsidies to provide an incentive for adoption of the new HYV
technology by farmers in general and small farmers in particular. Any new technology will be looked upon
as being risky by farmers. Subsidies were, therefore, needed to encourage farmers to test the new
technology. Some economists believe that once the technology is found profitable and is widely
adopted, subsidies should be phased out since their purpose has been served. Further, subsidies are
meant to benefit the farmers but a substantial amount of fertiliser subsidy also benefits the fertiliser
industry; and among farmers, the subsidy largely benefits the farmers in the more prosperous regions.
Therefore, it is argued that there is no case for continuing with fertiliser subsidies; it does not benefit
the target group and it is a huge burden on the government’s finances.
On the other hand, some believe that the government should continue with agricultural subsidies
because farming in India continues to be a risky business. Most farmers are very poor and they will not
be able to afford the required inputs without subsidies. Eliminating subsidies will increase the inequality
between rich and poor farmers and violate the goal of equity. These experts argue that if subsidies are
largely benefiting the fertiliser industry and big farmers, the correct policy is not to abolish subsidies but
to take steps to ensure that only the poor farmers enjoy the benefits.
Thus, by the late 1960s, Indian agricultural productivity had increased sufficiently to enable the country
to be self-sufficient in food grains. This is an achievement to be proud of. On the negative side, some 65
per cent of the country’s population continued to be employed in agriculture even as late as 1990.
Economists have found that as a nation becomes more prosperous, the proportion of GDP contributed by
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agriculture as well as the proportion of population working in the sector declines considerably. In India,
between 1950 and 1990, the proportion of GDP contributed by agriculture declined significantly but not
the population depending on it (67.5 per cent in 1950 to 64.9 per cent by 1990). Why was such a large
proportion of the population engaged in agriculture although agricultural output could have grown with
much less people working in the sector? The answer is that the industrial sector and the service sector
did not absorb the people working in the agricultural sector. Many economists call this an important
failure of our policies followed during 1950-1990.
2.3 Industry & Trade

Economists have found that poor nations can progress only if they have a good industrial sector. Industry
provides employment which is more stable than the employment in agriculture; it promotes
modernisation and overall prosperity. It is for this reason that the five-year plans place a lot of emphasis
on industrial development. At the time of independence, the variety of industries was very narrow —
largely confined to cotton textiles and jute. There were two well managed iron and steel firms — one in
Jamshedpur and the other in Kolkata — but, obviously, we needed to expand the industrial base with a
variety of industries if the economy was to grow.
2.3.1 Public and Private Sectors in Indian Industrial Development

The big question facing the policy makers was — what should be the role of the government and the
private sector in industrial development? At the time of independence, Indian industrialists did not have
the capital to undertake investment in industrial ventures required for the development of our economy;
nor was the market big enough to encourage industrialists to undertake major projects even if they had
the capital to do so. It is principally for these reasons that the state had to play an extensive role in
promoting the industrial sector. In addition, the decision to develop the Indian economy on socialist
lines led to the policy of the state controlling the commanding heights of the economy, as the Second
Five Year plan put it. This meant that the state would have complete control of those industries that
were vital for the economy. The policies of the private sector would have to be complimentary to those
of the public sector, with the public sector leading the way.
Mahalanobis: the Architect of Indian Planning

Many distinguished thinkers contributed to the formulation of our five year plans. Among them, the
name of the statistician, Prasanta Chandra Mahalanobis, stands out.
Planning, in the real sense of the term, began with the Second Five Year Plan. The Second Plan, a
landmark contribution to development planning in general, laid down the basic ideas regarding goals
of Indian planning; this plan was based on the ideas of Mahalanobis. In that sense, he can be regarded
as the architect of Indian planning.
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Mahalanobis was born in 1893 in Calcutta. He was educated at the Presidency College in Calcutta and
at Cambridge University in England. His contributions to the subject of statistics brought him
international fame. In 1946 he was made a Fellow (member) of Britain’s Royal Society, one of the most
prestigious organisations of scientists; only the most outstanding scientists are made members of this
Society.
Mahalanobis established the Indian Statistical Institute (ISI) in Calcutta and started a journal, Sankhya,
which still serves as a respected forum for statisticians to discuss their ideas. Both, the ISI and Sankhya,
are highly regarded by statisticians and economists all over the world to this day.
During the second plan period, Mahalanobis invited many distinguished economists from India and
abroad to advise him on India’s economic development. Some of these economists became Nobel Prize
winners later, which shows that he could identify individuals with talent. Among the economists invited
by Mahalanobis were those who were very critical of the socialist principles of the second plan. In other
words, he was willing to listen to what his critics had to say, the mark of a great scholar.
Many economists today reject the approach to planning formulated by Mahalanobis but he will always
be remembered for playing a vital role in putting India on the road to economic progress, and
statisticians continue to profit from his contribution to statistical theory.
2.3.2 Industrial Policy Resolution 1956 (IPR 1956):

In accordance with the goal of the state controlling the commanding heights of the economy, the
Industrial Policy Resolution of 1956 was adopted. This resolution formed the basis of the Second Five
Year Plan, the plan which tried to build the basis for a socialist pattern of society. This resolution classified
industries into three categories. The first category comprised industries which would be exclusively
owned by the state; the second category consisted of industries in which the private sector could
supplement the efforts of the state sector, with the state taking the sole responsibility for starting new
units; the third category consisted of the remaining industries which were to be in the private sector.
Although there was a category of industries left to the private sector, the sector was kept under state
control through a system of licenses. No new industry was allowed unless a license was obtained from
the government. This policy was used for promoting industry in backward regions; it was easier to obtain
a license if the industrial unit was established in an economically backward area. In addition, such units
were given certain concessions such as tax benefits and electricity at a lower tariff. The purpose of this
policy was to promote regional equality.
Even an existing industry had to obtain a license for expanding output or for diversifying production
(producing a new variety of goods). This was meant to ensure that the quantity of goods produced was
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not more than what the economy required. License to expand production was given only if the
government was convinced that the economy required a larger quantity of goods.
2.3.3 Small Scale Industry

In 1955, the Village and Small-Scale Industries Committee, also called the Karve Committee, noted the
possibility of using small-scale industries for promoting rural development. A ‘small-scale industry’ is
defined with reference to the maximum investment allowed on the assets of a unit. This limit has changed
over a period of time. In 1950 a small -scale industrial unit was one which invested a maximum of rupees
five lakh.
It is believed that small-scale industries are more ‘labour intensive’ i.e., they use more labour than the
large-scale industries and, therefore, generate more employment. But these industries cannot compete
with the big industrial firms; it is obvious that development of small-scale industry requires them to be
shielded from the large firms. For this purpose, the production of a number of products was reserved
for the small-scale industry; the criterion of reservation being the ability of these units to manufacture
the goods. They were also given concessions such as lower excise duty and bank loans at lower interest
rates.
2.4 Trade Policy: Import Substitution

The industrial policy that we adopted was closely related to the trade policy. In the first seven plans, trade
was characterised by what is commonly called an inward looking trade strategy. Technically, this strategy
is called import substitution. This policy aimed at replacing or substituting imports with domestic
production. For example, instead of importing vehicles made in a foreign country, industries would be
encouraged to produce them in India itself. In this policy the government protected the domestic
industries from foreign competition. Protection from imports took two forms: tariffs and quotas. Tariffs
are a tax on imported goods; they make imported goods more expensive and discourage their use. Quotas
specify the quantity of goods which can be imported. The effect of tariffs and quotas is that they restrict
imports and, therefore, protect the domestic firms from foreign competition.
The policy of protection is based on the notion that industries of developing countries are not in a
position to compete against the goods produced by more developed economies. It is assumed that if
the domestic industries are protected they will learn to compete in the course of time. Our planners also
feared the possibility of foreign exchange being spent on import of luxury goods if no restrictions were
placed on imports. Nor was any serious thought given to promote exports until the mid-1980s.
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2.5 Effect of Policies on Industrial Development
The achievements of India’s industrial sector during the first seven plans are impressive indeed. The
proportion of GDP contributed by the industrial sector increased in the period from 11.8 per cent in 1950-
51 to 24.6 per cent in 1990-91. The rise in the industry’s share of GDP is an important indicator of
development. The six per cent annual growth rate of the industrial sector during the period is
commendable. No longer was Indian industry restricted largely to cotton textiles and jute; in fact, the
industrial sector became well diversified by 1990, largely due to the public sector. The promotion of
small-scale industries gave opportunities to those people who did not have the capital to start large firms
to get into business. Protection from foreign competition enabled the development of indigenous
industries in the areas of electronics and automobile sectors which otherwise could not have developed.
In spite of the contribution made by the public sector to the growth of the Indian economy, some
economists are critical of the performance of many public sector enterprises. It was proposed that
initially public sector was required in a big way. It is now widely held that state enterprises continued to
produce certain goods and services (often monopolising them) although this was no longer required. An
example is the provision of telecommunication service. This industry continued to be reserved for the
Public Sector even after it was realised that private sector firms could also provide it. Due to the absence
of competition, even till the late 1990s, one had to wait for a long time to get a telephone connection.
Another instance could be the establishment of Modern Bread, a bread-manufacturing firm, as if the
private sector could not manufacture bread! In 2001 this firm was sold to the private sector. The point is
that after four decades of Planned development of Indian Economy no distinction was made between
(i) what the public sector alone can do and (ii) what the private sector can also do. For example, until
very recently, only the public sector supplies national defense. And even though the private sector can
manage hotels well, yet, the government also runs hotels. This has led some scholars to argue that the
state should get out of areas which the private sector can manage and the government may concentrate
its resources on important services which the private sector cannot provide.
Many public sector firms incurred huge losses but continued to function because it is difficult to close a
government undertaking even if it is a drain on the nation’s limited resources. This does not mean that
private firms are always profitable (indeed, quite a few of the public sector firms were originally private
firms which were on the verge of closure due to losses; they were then nationalised to protect the jobs of
the workers). However, a loss-making private firm will not waste resources by being kept running despite
the losses.
The need to obtain a license to start an industry was misused by industrial houses; a big industrialist
would get a license not for starting a new firm but to prevent competitors from starting new firms. The
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excessive regulation of what came to be called the permit license raj prevented certain firms from
becoming more efficient. More time was spent by industrialists in trying to obtain a license or lobby with
the concerned ministries rather than on thinking about how to improve their products.
The protection from foreign competition is also being criticised on the ground that it continued even
after it proved to do more harm than good. Due to restrictions on imports, the Indian consumers had to
purchase whatever the Indian producers produced. The producers were aware that they had a captive
market; so they had no incentive to improve the quality of their goods. Why should they think of
improving quality when they could sell low quality items at a high price? Competition from imports forces
our producers to be more efficient.
A few economists also point out that the public sector is not meant for earning profits but to promote the
welfare of the nation. The public sector firms, on this view, should be evaluated on the basis of the extent
to which they contribute to the welfare of people and not on the profits they earn. Regarding protection,
some economists hold that we should protect our producers from foreign competition as long as the rich
nations continue to do so. Owing to all these conflicts, economists called for a change in our policy. This,
alongwith other problems, led the government to introduce a new economic policy in 1991.
2.6 Conclusion
The progress of the Indian economy during the first seven plans was impressive indeed. Our industries
became far more diversified compared to the situation at independence. India became self- sufficient in
food production thanks to the green revolution. Land reforms resulted in abolition of the hated
zamindari system. However, many economists became dissatisfied with the performance of many public
sector enterprises. Excessive government regulation prevented growth of entrepreneurship. In the name
of self-reliance, our producers were protected against foreign competition and this did not give them
the incentive to improve the quality of goods that they produced. Our policies were ‘inward oriented’
and so we failed to develop a strong export sector. The need for reform of economic policy was widely
felt in the context of changing global economic scenario, and the new economic policy was initiated in
1991 to make our economy more efficient. This is the subject of the next section.
3 Liberalisation, Privatisation & Globalisation: An Appraisal

You have studied in the previous section that, since independence, India followed the mixed economy
framework by combining the advantages of the capitalist economic system with those of the socialist
economic system. Some scholars argue that, over the years, this policy resulted in the establishment of
a variety of rules and laws, which were aimed at controlling and regulating the economy, ended up
instead in hampering the process of growth and development. Others state that India, which started its
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developmental path from near stagnation, has since been able to achieve growth in savings, developed
a diversified industrial sector which produces a variety of goods and has experienced sustained
expansion of agricultural output which has ensured food security.
In 1991, India met with an economic crisis relating to its external debt — the government was not able
to make repayments on its borrowings from abroad; foreign exchange reserves, which we generally
maintain to import petrol and other important items, dropped to levels that were not sufficient for even
a fortnight. The crisis was further compounded by rising prices of essential goods. All these led the
government to introduce a new set of policy measures which changed the direction of our
developmental strategies. In this section, we will look at the background of the crisis, measures that the
government has adopted and their impact on various sectors of the economy.
3.1 Background
The origin of the financial crisis can be traced from the inefficient management of the Indian economy
in the 1980s. We know that for implementing various policies and its general administration, the
government generates funds from various sources such as taxation, running of public sector enterprises
etc. When expenditure is more than income, the government borrows to finance the deficit from banks
and also from people within the country and from international financial institutions. When we import
goods like petroleum, we pay in dollars which we earn from our exports.
Development policies required that even though the revenues were very low, the government had to
overshoot its revenue to meet challenges like unemployment, poverty and population explosion. The
continued spending on development programmes of the government did not generate additional
revenue. Moreover, the government was not able to generate sufficiently from internal sources such as
taxation. When the government was spending a large share of its income on areas which do not provide
immediate returns such as the social sector and defence, there was a need to utilise the rest of its
revenue in a highly efficient manner. The income from public sector undertakings was also not very high
to meet the growing expenditure. At times, our foreign exchange, borrowed from other countries and
international financial institutions, was spent on meeting consumption needs. Neither was an attempt
made to reduce such profligate spending nor sufficient attention was given to boost exports to pay for
the growing imports.
In the late 1980s, government expenditure began to exceed its revenue by such large margins that
meeting the expenditure through borrowings became unsustainable. Prices of many essential goods rose
sharply. Imports grew at a very high rate without matching growth of exports. As pointed out earlier,
foreign exchange reserves declined to a level that was not adequate to finance imports for more than
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two weeks. There was also not sufficient foreign exchange to pay the interest that needs to be paid to
international lenders. Also no country or international funder was willing to lend to India.
India approached the International Bank for Reconstruction and Development (IBRD), popularly known
as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the
crisis. For availing the loan, these international agencies expected India to liberalise and open up the
economy by removing restrictions on the private sector, reduce the role of the government in many
areas and remove trade restrictions between India and other countries.
India agreed to the conditionalities of World Bank and IMF and announced the New Economic Policy
(NEP). The NEP consisted of wide ranging economic reforms. The thrust of the policies was towards
creating a more competitive environment in the economy and removing the barriers to entry and growth
of firms. This set of policies can broadly be classified into two groups: the stabilisation measures and the
structural reform measures. Stabilisation measures are short term measures, intended to correct some
of the weaknesses that have developed in the balance of payments and to bring inflation under control.
In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and
keep the rising prices under control. On the other hand, structural reform policies are long-term
measures, aimed at improving the efficiency of the economy and increasing its international
competitiveness by removing the rigidities in various segments of the Indian economy. The government
initiated a variety of policies which fall under three heads viz., liberalisation, privatisation and
globalisation.
3.2 Liberalisation
As pointed out in the beginning, rules and laws which were aimed at regulating the economic activities
became major hindrances in growth and development. Liberalisation was introduced to put an end to
these restrictions and open various sectors of the economy. Though a few liberalisation measures were
introduced in 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal
policy and foreign investment, reform policies initiated in 1991 were more comprehensive. Let us study
some important areas, such as the industrial sector, financial sector, tax reforms, foreign exchange
markets and trade and investment sectors which received greater attention in and after 1991.
3.2.1 Deregulation of Industrial Sector

In India, regulatory mechanisms were enforced in various ways (i) industrial licensing under which every
entrepreneur had to get permission from government officials to start a firm, close a firm or decide the
amount of goods that could be produced (ii) private sector was not allowed in many industries (iii) some
goods could be produced only in small-scale industries, and (iv) controls on price fixation and distribution
of selected industrial products.
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The reform policies introduced in and after 1991 removed many of these restrictions. Industrial licensing
was abolished for almost all but product categories — alcohol, cigarettes, hazardous chemicals, industrial
explosives, electronics, aerospace and drugs and pharmaceuticals. Many goods produced by small-scale
industries have now been dereserved. In many industries, the market has been allowed to determine
the prices.
3.2.2 Financial Sector Reforms

Financial sector includes financial institutions, such as commercial banks, investment banks, stock
exchange operations and foreign exchange market. The financial sector in India is regulated by the
Reserve Bank of India (RBI). You may be aware that all banks and other financial institutions in India are
regulated through various norms and regulations of the RBI. The RBI decides the amount of money that
the banks can keep with themselves, fixes interest rates, nature of lending to various sectors, etc. One of
the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of
financial sector. This means that the financial sector may be allowed to take decisions on many matters
without consulting the RBI.
The reform policies led to the establishment of private sector banks, Indian as well as foreign. Foreign
investment limit in banks was raised to around 50 per cent. Those banks which fulfil certain conditions
have been given freedom to set up new branches without the approval of the RBI and rationalise their
existing branch networks. Though banks have been given permission to generate resources from India
and abroad, certain managerial aspects have been retained with the RBI to safeguard the interests of the
account-holders and the nation. Foreign Institutional Investors (FII), such as merchant bankers, mutual
funds and pension funds, are now allowed to invest in Indian financial markets.
3.2.3 Tax Reforms

Tax reforms are concerned with the reforms in the government’s taxation and public expenditure
policies, which are collectively known as its fiscal policy. There are two types of taxes: direct and indirect.
Direct taxes consist of taxes on incomes of individuals, as well as, profits of business enterprises. Since
1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high
rates of income tax were an important reason for tax evasion. It is now widely accepted that moderate
rates of income tax encourage savings and voluntary disclosure of income. The rate of corporation tax,
which was very high earlier, has been gradually reduced. Efforts have also been made to reform the
indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national
market for goods and commodities. Another component of reforms in this area is simplification. In order
to encourage better compliance on the part of taxpayers many procedures have been simplified and the
rates also substantially lowered. Recently, the Parliament passed a law, Goods and Services Tax Act 2016,
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to simplify and introduce a unified indirect tax system in India. This law came into effect from July 2017.
This is expected to generate additional revenue for the government, reduce tax evasion and create ‘one
nation, one tax and one market’.
3.2.4 Foreign Exchange Reforms

The first important reform in the external sector was made in the foreign exchange market. In 1991, as
an immediate measure to resolve the balance of payments crisis, the rupee was devalued against
foreign currencies. This led to an increase in the inflow of foreign exchange. It also set the tone to free
the determination of rupee value in the foreign exchange market from government control. Now, more
often than not, markets determine exchange rates based on the demand and supply of foreign exchange.
3.2.5 Trade and Investment Policy Reforms

Liberalisation of trade and investment regime was initiated to increase international competitiveness of
industrial production and also foreign investments and technology into the economy. The aim was also
to promote the efficiency of local industries and adoption of modern technologies.
In order to protect domestic industries, India was following a regime of quantitative restrictions on
imports. This was encouraged through tight control over imports and by keeping the tariffs very high.
These policies reduced efficiency and competitiveness which led to slow growth of the manufacturing
sector. The trade policy reforms aimed at (i) dismantling of quantitative restrictions on imports and
exports (ii) reduction of tariff rates and (iii) removal of licensing procedures for imports. Import licensing
was abolished except in case of hazardous and environmentally sensitive industries. Quantitative
restrictions on imports of manufactured consumer goods and agricultural products were also fully
removed from April 2001. Export duties have been removed to increase the competitive position of
Indian goods in the international markets.
3.3 Privatisation
It implies shedding of the ownership or management of a government owned enterprise. Government
companies are converted into private companies in two ways (i) by withdrawal of the government from
ownership and management of public sector companies and or (ii) by outright sale of public sector
companies.
Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the public is known
as disinvestment. The purpose of the sale, according to the government, was mainly to improve financial
discipline and facilitate modernisation. It was also envisaged that private capital and managerial
capabilities could be effectively utilised to improve the performance of the PSUs. The government
envisaged that privatisation could provide strong impetus to the inflow of FDI.
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The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in
taking managerial decisions. For instance, some PSUs have been granted special status as maharatnas,
navratnas and miniratnas.
Navratnas and Public Enterprise Policies

In order to improve efficiency, infuse professionalism and enable them to compete more effectively in
the liberalised global environment, the government identifies PSEs and declare them as maharatnas,
navratnas and miniratnas. They were given greater managerial and operational autonomy, in taking
various decisions to run the company efficiently and thus increase their profits. Greater operational,
financial and managerial autonomy has also been granted to profit-making enterprises referred to as
miniratnas.
The Central Public Sector Enterprises are designated with different status. A few examples of public
enterprises with their status are as follows: (i) Maharatnas – (a) Indian Oil Corporation Limited, and (b)
Steel Authority of India Limited, (ii) Navratnas – (a) Hindustan Aeronautics Limited, (b) Mahanagar
Telephone Nigam Limited; and (iii) Miniratnas – (a) Bharat Sanchar Nigam Limited; (b) Airport Authority
of India and (c) Indian Railway Catering and Tourism Corporation Limited.
Many of these profitable PSEs were originally formed during the 1950s and 1960s when self-reliance
was an important element of public policy. They were set up with the intention of providing
infrastructure and direct employment to the public so that quality end-product reaches the masses at
a nominal cost and the companies themselves were made accountable to all stakeholders.
The granting of status resulted in better performance of these companies. Scholars allege that instead
of facilitating public enterprises in their expansion and enabling them to become global players, the
government partly privatised them through disinvesment. Of late, the government has decided to
retain them in the public sector and enable them to expand themselves in the global markets and raise
resources by themselves from financial markets.
3.4 Globalisation
Although globalisation is generally understood to mean integration of the economy of the country with
the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are
aimed at transforming the world towards greater interdependence and integration. It involves creation
of networks and activities transcending economic, social and geographical boundaries. Globalisation
attempts to establish links in such a way that the happenings in India can be influenced by events
happening miles away. It is turning the world into one whole or creating a borderless world.
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3.4.1 Outsourcing
This is one of the important outcomes of the globalisation process. In outsourcing, a company hires
regular service from external sources, mostly from other countries, which was previously provided
internally or from within the country (like legal advice, computer service, advertisement, security — each
provided by respective departments of the company). As a form of economic activity, outsourcing has
intensified, in recent times, because of the growth of fast modes of communication, particularly the
growth of Information Technology (IT). Many of the services such as voice-based business processes
(popularly known as BPO or call centres), record keeping, accountancy, banking services, music
recording, film editing, book transcription, clinical advice or even teaching are being outsourced by
companies in developed countries to India. With the help of modern telecommunication links including
the Internet, the text, voice and visual data in respect of these services is digitised and transmitted in
real time over continents and national boundaries. Most multinational corporations, and even small
companies, are outsourcing their services to India where they can be availed at a cheaper cost with
reasonable degree of skill and accuracy. The low wage rates and availability of skilled manpower in India
have made it a destination for global outsourcing in the post-reform period.
Global Footprint!
Owing to globalisation, you might find many Indian companies have expanded their wings to many
other countries. For example, ONGC Videsh, a subsidiary of the Indian public sector enterprise, Oil and
Natural Gas Corporation engaged in oil and gas exploration and production has projects in 16 countries.
Tata Steel, a private company established in 1907, is one of the top ten global steel companies in the
world which have operations in 26 countries and sell its products in 50 countries. It employs nearly
50,000 persons in other countries. HCL Technologies, one of the top five IT companies in India has
offices in 31 countries and employs about 15,000 persons abroad. Dr Reddy's Laboratories, initially was
a small company supplying pharmaceutical goods to big Indian companies, today has manufacturing
plants and research centres across the world.
3.4.2 World Trade Organisation (WTO)

The WTO was founded in 1995 as the successor organisation to the General Agreement on Trade and
Tariff (GATT). GATT was established in 1948 with 23 countries as the global trade organisation to
administer all multilateral trade agreements by providing equal opportunities to all countries in the
international market for trading purposes. WTO is expected to establish a rule-based trading regime in
which nations cannot place arbitrary restrictions on trade. In addition, its purpose is also to enlarge
production and trade of services, to ensure optimum utilisation of world resources and to protect the
environment. The WTO agreements cover trade in goods as well as services to facilitate international
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trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers and providing
greater market access to all member countries.
As an important member of WTO, India has been in the forefront of framing fair global rules, regulations
and safeguards and advocating the interests of the developing world. India has kept its commitments
towards liberalisation of trade, made in the WTO, by removing quantitative restrictions on imports and
reducing tariff rates.
3.5 Indian Economy During Reforms: An Assessment

The reform process has completed about two decades since its introduction. Let us now look at the
performance of the Indian economy during this period. In economics, the growth of an economy is
measured by the Gross Domestic Product. Look at the following table:
The post–1991 India witnessed a rapid growth in GDP on a continual basis for two decades. The growth
of GDP increased from 5.6 per cent during 1980–91 to 8.2 per cent during 2007–12. During the reform
period, the growth of agriculture has declined. While the industrial sector reported fluctuation, the
growth of the service sector has gone up. This indicates that this growth is mainly driven by growth in
the service sector. During 2012-15, there has been a setback in the growth rates of different sectors
witnessed post–1991. While agriculture recorded a high growth rate during 2013–14, this sector
witnessed negative growth in the subsequent year. While the service sector continued to witness a high
level of growth — higher than the overall GDP growth in 2014– 15, this sector witnessed the highest ever
growth rate of 10.3 per cent. The industrial sector witnessed a steep decline during 2012–13, it began to
show a continuous positive growth.
The opening of the economy has led to a rapid increase in foreign direct investment and foreign
exchange reserves. The foreign investment, which includes foreign direct investment (FDI) and foreign
institutional investment (FII), has increased from about US $100 million in 1990-91 to US $ 36 billion in
2016-17. There has been an increase in the foreign exchange reserves from about US $ 6 billion in 1990-
91 to about US $ 321 billion in 2014-15. India is one of the largest foreign exchange reserve holders in
the world.
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India is seen as a successful exporter of auto parts, engineering goods, IT software and textiles in the
reform period. Rising prices have also been kept under control.
On the other hand, the reform process has been widely criticised for not being able to address some of
the basic problems facing our economy especially in areas of employment, agriculture, industry,
infrastructure development and fiscal management.
3.5.1 Growth and Employment

Though the GDP growth rate has increased in the reform period, scholars point out that the reform-led
growth has not generated sufficient employment opportunities in the country.
3.5.2 Reforms in Agriculture

Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.
Public investment in agriculture sector especially in infrastructure, which includes irrigation, power,
roads, market linkages and research and extension (which played a crucial role in the Green Revolution),
has fallen in the reform period. Further, the removal of fertiliser subsidy has led to increase in the cost
of production, which has severely affected the small and marginal farmers. This sector has been
experiencing a number of policy changes such as reduction in import duties on agricultural products,
removal of minimum support price and lifting of quantitative restrictions on agricultural products; these
have adversely affected Indian farmers as they now have to face increased international competition.
Moreover, because of export-oriented policy strategies in agriculture, there has been a shift from
production for the domestic market towards production for the export market focusing on cash crops in
lieu of production of food grains. This puts pressure on prices of food grains.
3.5.3 Reforms in Industry

Industrial growth has also recorded a slowdown. This is because of decreasing demand of industrial
products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc.
In a globalised world, developing countries are compelled to open up their economies to greater flow of
goods and capital from developed countries and rendering their industries vulnerable to imported goods.
Cheaper imports have, thus, replaced the demand for domestic goods. Domestic manufacturers are
facing competition from imports. The infrastructure facilities, including power supply, have remained
inadequate due to lack of investment. Globalisation is, thus, often seen as creating conditions for the free
movement of goods and services from foreign countries that adversely affect the local industries and
employment opportunities in developing countries.
Moreover, a developing country like India still does not have the access to developed countries’ markets
because of high non-tariff barriers. For example, although all quota restrictions on exports of textiles and
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clothing have been removed in India, USA has not removed their quota restriction on import of textiles
from India and China.
3.5.4 Disinvestment
Every year, the government fixes a target for disinvestment of PSEs. For instance, in 1991-92, it was
targeted to mobilise Rs 2500 crore through disinvestment. The government was able to mobilise Rs 3,040
crore more than the target. In 2017–18, the target was about Rs 1,00,000 crore, whereas, the
achievement was about Rs 1,00,057 crore. Critics point out that the assets of PSEs have been undervalued
and sold to the private sector. This means that there has been a substantial loss to the government.
Moreover, the proceeds from disinvestment were used to offset the shortage of government revenues
rather than using it for the development of PSEs and building social infrastructure in the country. Do you
think selling a part of the properties of government companies is the best way to improve their efficiency?
3.5.5 Reforms and Fiscal Policies

Economic reforms have placed limits on the growth of public expenditure, especially in social sectors.
The tax reductions in the reform period, aimed at yielding larger revenue and curb tax evasion, have not
resulted in increase in tax revenue for the government. Also, the reform policies, involving tariff
reduction, have curtailed the scope for raising revenue through custom duties. In order to attract foreign
investment, tax incentives were provided to foreign investors which further reduced the scope for
raising tax revenues. This has a negative impact on developmental and welfare expenditures.
3.6 Conclusion
The process of globalisation through liberalisation and privatisation policies has produced positive, as
well as, negative results both for India and other countries. Some scholars argue that globalisation should
be seen as an opportunity in terms of greater access to global markets, high technology and increased
possibility of large industries of developing countries to become important players in the international
arena.
On the contrary, the critics argue that globalisation is a strategy of the developed countries to expand
their markets in other countries. According to them, it has compromised the welfare and identity of
people belonging to poor countries. It has further been pointed out that market-driven globalisation has
widened the economic disparities among nations and people.
Viewed from the Indian context, some studies have stated that the crisis that erupted in the early 1990s
was basically an outcome of the deep-rooted inequalities in Indian society and the economic reform
policies initiated as a response to the crisis by the government, with externally advised policy package,
further aggravated the inequalities. Further, it has increased the income and quality of consumption of
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only high-income groups and the growth has been concentrated only in some select areas in the services
sector such as telecommunication, information technology, finance, entertainment, travel and hospitality
services, real estate and trade, rather than vital sectors such as agriculture and industry which provide
livelihoods to millions of people in the country.
4 A short history of Indian economy 1947-2019: Tryst with destiny & other
stories
4.1 An ancient land has a new beginning as a country facing monumental tasks
India’s independence was in itself a turning point in its economic history. The country was hopelessly poor
as a result of steady deindustrialization by Britain. Less than a sixth of Indians were literate. The abject
poverty and sharp social differences had cast doubts on India’s survival as one nation. Cambridge historian
Angus Maddison’s work shows that India’s share of world income shrank from 22.6% in 1700—almost
equal to Europe’s share of 23.3%—to 3.8% in 1952. As former prime minister Manmohan Singh put it:
“The brightest jewel in the British Crown" was the poorest country in the world in terms of per capita
income at the beginning of the 20th century.
4.2 India’s economic model: the state’s primacy over individual enterprise
Prime minister Jawaharlal Nehru’s development model envisaged a dominant role of the state as an all-
pervasive entrepreneur and financier of private businesses. The Industrial Policy Resolution of 1948
proposed a mixed economy. Earlier, the Bombay Plan, proposed by eight influential industrialists
including J.R.D Tata and G.D. Birla, envisaged a substantial public sector with state interventions and
regulations in order to protect indigenous industries. The political leadership believed that since planning
was not possible in a market economy, the state and public sector would inevitably play a leading role in
economic progress.
4.3 The very first budget, and the defence of fiscal federalism
A lawyer, economist and politician who served as independent India’s first finance minister, R.K.
Shanmukham Chetty tabled the country’s first Union budget in Parliament on 26 November 1947. He
was also India’s delegate to the World Monetary Conference at Bretton Woods in 1944, a consequential
gathering of economists towards the fag end of World War II which set up the global financial architecture
that governs the world to this day. In the Constituent Assembly, Chetty made several interventions in
defence of fiscal federalism, an issue which would prove significant for his home state of Tamil Nadu in
the decades ahead.
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4.4 Planning, commissioning, executing the programme to hasten growth
India set up the Planning Commission in 1950 to oversee the entire range of planning, including resource
allocation, implementation and appraisal of five-year plans. The five-year plans were centralized
economic and social growth programmes modelled after those prevalent in the USSR. India’s first five-
year plan, launched in 1951, focused on agriculture and irrigation to boost farm output as India was
losing precious foreign reserves on foodgrain imports. It was based on the Harrod-Domar model that
sought to boost economic growth through higher savings and investments. The plan was a success, with
the economy growing at an annualized 3.6%, beating the target of 2.1%.
4.5 The free-market proponent who cried wolf on policy—but was proved right

A student of the libertarian economist F.A. Hayek, B.R. Shenoy was an influential early advocate of free
market liberalism. In a celebrated dissent note, he warned that the second five-year plan’s dependence
on deficit financing to promote “heavy industrialization" was a recipe for trouble. Government control
over the economy would undermine a young democracy, he said. Shenoy was proved right when India
faced an external payments crisis a year after the plan period began. He was also critical of the Nehru
government’s penchant for import substitution. Though ignored in his lifetime, his ideas outlived him
and became part of India’s mainstream economic doctrine.
4.6 The man who gave India modern statistics and the swadeshi spirit
The second five-year plan (1956-61) laid the foundation for economic modernization to better serve
India’s long-term growth imperatives. Launched in 1956, it was based on the Mahalanobis model that
advocated rapid industrialization with a focus on heavy industries and capital goods. Prasanta Chandra
Mahalanobis was perhaps the single most important individual in directing Indian development planning.
He was the chief adviser to the commission from 1955, founded the Indian Statistical Institute, and is
considered the father of modern statistics in India. The Mahalanobis plan was, in a way, an invocation of
the spirit of swadeshi or self-reliance.
4.7 After throwing off the yoke of the British Raj, the licence Raj begins
The second five-year Plan and the Industrial Policy Resolution 1956 (long considered the economic
constitution of India) paved the way for the development of the public sector and ushered in the licence
Raj. The resolution set out as national objective the establishment of a socialist pattern of society. It also
categorized industries into three groups. Industries of basic and strategic importance were to be
exclusively in the public sector. The second group comprised industries that were to be incrementally
state-owned. The third, comprising mostly consumer industries, was left for the private sector. The
private sector, however, was kept on a tight leash through a system of licences.
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4.8 Bad stock and the story of India’s first big financial scam
More than 60 years ago, a debate in the Lok Sabha exposed a nexus between the bureaucracy, stock
market speculators, and small businessmen. The subject was the Mundhra scandal, free India’s first big
financial scam, raised by Feroze Gandhi, Nehru’s son-in-law. Gandhi had found evidence that under
governmental pressure, Life Insurance Corporation had bought fraudulent stock worth ₹1.24 crore—the
largest investment the public-sector entity had made in its short history—in six companies owned by
Kolkata-based Haridas Mundhra, without mandatory consultation with its investment committee. It led
to the resignation of then finance minister T. T. Krishnamachari.
4.9 From Bhakra-Nangal to Bhilai, the temples of a modern India

Nehru identified power and steel as the key bases for planning. He described the 680ft Bhakra multi-
purpose project on the Sutlej river in Himachal Pradesh as the new temple of a resurgent India. The
politics of big dams aside, the huge Bhakra-Nangal dams are among several hydel projects India built to
light up homes, run factories, and irrigate crops. The second plan set a target to produce 6 million tonnes
of steel. Germany was contracted to build a steel plant in Rourkela, while Russia and Britain would build
one each in Bhilai and Durgapur, respectively. The Indian Institutes of Technology and the Atomic Energy
Commission were the other “modern temples".
4.10 The onset of economic troubles and the death of a nation builder
The quest to quickly industrialize had caused a large reallocation of funds away from the farm sector.
Agriculture outlay was nearly halved to 14% in the second Plan. Food shortages worsened, and inflation
spiked. Imports of foodgrains depleted precious foreign exchange reserves. Chakravarti “Rajaji"
Rajagopalachari, a one-time-friend-turned-critic of Nehru, was a staunch proponent of economic
freedom. He fell out with Nehru on the question of excessive state involvement in the economy. On 27
May 1964, Nehru died, but, despite criticism then and in later years, he had cemented his legacy as a
modernizer.
4.11 It took a war hero to rethink the direction of India’s policymaking

Lal Bahadur Shastri, a minister without portfolio in Nehru’s cabinet, succeeded him as prime minister on
9 June 1964. The war with China had exposed India’s economic weakness. Chronic food shortages and
price rise convinced him that India needed to move away from centralized planning and price controls.
He renewed focus on agriculture, accepted a larger role for private enterprise and foreign investment,
and trimmed the erstwhile Planning Commission’s role. India’s victory over Pakistan in the 1965 war gave
him the political capital to consider economic reforms of the kind that took place 25 years later, P.N. Dhar
wrote in Indira Gandhi, The ‘Emergency’ And Indian Democracy.
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4.12 After the Green Revolution, the shift towards an Evergreen Revolution
Shastri’s focus on food security arose from the fact that in the 1960s, India was on the verge of a mass
famine. Food aid imports from the US, on which the country was reliant, were beginning to hit India’s
foreign policy autonomy. That was when geneticist M.S. Swaminathan, along with Norman Borlaug and
other scientists, stepped in with high-yield variety seeds of wheat, setting off what came to be known as
the Green Revolution. Swaminathan is now an advocate for moving India towards sustainable
development. He champions environmentally sustainable agriculture, sustainable food security and the
preservation of biodiversity. He calls this an “evergreen revolution".
4.13 Getting the bread and butter of the dairy business right
Following the success of the Green Revolution, Shastri turned his attention to the dairy sector, particularly
the cooperative movement in Gujarat’s Anand, led by Verghese Kurien. He helped Kaira District Co-
operative Milk Producers’ Union Ltd expand its work, ushering in the White Revolution. In the years that
followed, the government’s Operation Flood led to a rapid increase in milk production. Self-sufficiency
in the dairy sector was achieved entirely through the cooperative movement, which has spread to more
than 12 million dairy farmers across the country. Decades later, Amul, the brand started by cooperative
farmers in Anand, remains a market leader.
4.14 A shaky economy forces annual plans in place of the five-year plan
India suspended five-year plans briefly, drawing up annual plans between 1966 and 1969 instead. This
was done as the country was not in a position to commit resources over a longer period. The war with
China, the below-par growth outcomes of the third Plan, and the diversion of capital to finance the war
with Pakistan had left the economy severely weakened. The vital monsoon rains had once again played
truant during the 1966-67 season, worsening food shortages and causing a sharp spike in inflation. The
constant need to import foodgrains or seek foreign aid also posed a serious risk to India’s political
economy.
4.15 The state’s takeover of banks opens a new account

The 1960s was a decade of multiple economic and political challenges for India. Two wars had caused
hardships for the masses. The death of Nehru and Shastri in quick succession had caused political
instability and triggered jockeying for power within the Congress. Indira Gandhi’s rupee devaluation had
led to a general price rise. The result? Congress returned to power with a truncated majority after the
1967 general elections and the party lost power in seven states. In response, Gandhi nationalized 14
private banks on 20 July 1969. The main aim of the move was to accelerate bank lending to agriculture
at a time when big businesses cornered large chunks of the credit flow.
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4.16 The effect of making political gains from economic moves
Gandhi’s draconian move, aimed at aligning the banking sector with the goals of socialism, had made
her the darling of the masses. Bank nationalization helped boost farm credit and lending to other priority
sectors. Financial savings jumped as banks were made to open branches in rural areas. Without
competition, however, the lenders became complacent. Further, politically-influenced lending decisions
led to crony capitalism. These banks competed to please their political bosses, instead of focusing on
project appraisals. Today, state-owned banks are creaking under a nearly ₹10-trillion mountain of bad
loans, which represent about 90% of the total dud loans.
4.17 Indira Gandhi’s move on the rupee and the effect it had on Gulf nations
On 6 June 1966, Indira Gandhi took the drastic step of devaluing the Indian rupee by a sharp 57%. The
rupee fell to 7.50 per US dollar from 4.76. This was done to counter India’s significant balance of
payments crisis. The country’s apathy to foreign investments and neglect of the exports sector meant
that it ran constant trade deficits. The devaluation aimed to boost exports amid limited access to foreign
exchange. Instead, it accelerated inflation and drew wide criticism. India’s move had implications for
other countries as well. Oman, Qatar and the UAE, which used the Reserve Bank of India-issued Gulf
rupee, had to come up with their own currencies.
4.18 The Janata years: Demonetization 1.0 and the exit of Coca-Cola
Angry Indians punished Indira Gandhi for imposing Emergency. The Janata Party came to power after
the 1977 elections. Prime Minister Morarji Desai withdrew the legal-tender status of ₹1,000, ₹5,000 and
₹10,000 banknotes in a crackdown on illicit wealth. The legalization of strikes, outlawed by Gandhi, and
reinstatement of trade unions affected economic activity. George Fernandes, the symbol of resistance
during Emergency, was made industries minister. He insisted IBM and Coca-Cola comply with the
Foreign Exchange Regulation Act that mandated foreign investors cannot own over 40% in Indian
enterprises. The two multinationals shut their India operations.
4.19 Indira Gandhi returns, this time with a reformist bent of mind
Indira Gandhi returned to power in 1980 after the Janata Party government, riddled with inherent
contradictions, unravelled. Gandhi, a left-leaning populist until the 1970s, initiated big-ticket economic
reforms in order to secure an International Monetary Fund loan. The sixth five-year plan (1980-85), in
essence, pledged to undertake a string of measures aimed at boosting the economy’s competitiveness.
This meant the removal of price controls, initiation of fiscal reforms, a revamp of the public sector,
reductions in import duties, and de-licensing of the domestic industry, or in other words ending the
licence Raj.
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4.20 A small car that drove the rise of a new middle class and consumption
In 1983, the first Maruti car rolled off the assembly line in Gurgaon. Prime minister Indira Gandhi handed
over its keys to Delhi’s Harpal Singh that November. It was a project mired in controversy—conceptualized
by Indira’s son Sanjay, but so ridden with flaws that the government finally signed a joint venture with
Suzuki of Japan to produce the vehicle. It was a real people’s car—fuel efficient, affordable and easy to
drive, a far cry from the clunky cars Indians were used to till then. The Maruti 800 and the demand for it
signalled the rise of a new Indian middle class. It would take 20 years for a similar revolution to disrupt
aviation—courtesy Air Deccan.
4.21 Hostile takeovers meet their match in connected families

India has never encouraged hostile takeovers, with its businessmen, regulators and the government
working in tandem to prevent them. As the Indian government relaxed capital markets in 1982-83 to get
more foreign money, particularly from non-resident Indians, London-based Lord Swraj Paul acquired
significant shares from the open market in domestic chemical manufacturing company DCM Shriram and
engineering group Escorts. The families of the promoters had very small holdings, but their influence in
the circles that mattered was large. So, they managed to stave off Paul’s hostile takeover. It’s a pattern
that’s been seen often since.
4.22 In son rise, Rajiv Gandhi takes the mantle, and raises hopes
Rajiv Gandhi, a pilot by training, took over as prime minister after his mother Indira Gandhi was
assassinated in October 1984. He was 40 then, and represented the hopes and aspirations of a young
India. He recognized the need for economic reform if India were to shed its reliance on foreign aid and
loans. He built up a team comprising squeaky-clean politician V.P. Singh, technocrat Sam Pitroda, and
market economist Montek Singh Ahluwalia. The 1985-86 budget lowered direct taxes for companies and
raised exemption limits for income tax. He is widely credited for ushering in the information technology
and telecom revolutions in the country.
4.23 Bhopal: the danger and reality of large industrial accidents

The 1984 Bhopal gas tragedy brought to the fore the real possibility of industrial accidents on a massive
scale and the importance of regulatory oversight. At the centre of this tragedy—the effects of which are
still felt by the local population—was the US-based Union Carbide, now owned by Dow Chemicals. On
the night of 2 December, at least 40 tonnes of poisonous methyl isocyanate gas leaked from the plant,
killing at least 4,000 people and permanently disabling thousands more. The then chairman of Union
Carbide, Warren Anderson, managed to flee India in controversial circumstances. The victims,
meanwhile, were given a pittance in damages.
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4.24 The fiscal deficit as a permanent feature on India’s economic map
A critical feature of the Indian economy has always been its high fiscal deficit—an outcome of the
government spending more than its income. Much of the government spending is on servicing interest
cost of borrowings; defence; pensions; subsidizing food, fertilizer and fuel consumption; and schemes
directed at housing, poverty, health and cleanliness. A large portion of the government’s capital remains
locked up in its own companies and holdings, which it is unable to sell. The Indian economy, thus,
continues to suffer from good capital chasing bad, and a lack of political will to implement bold reforms.
4.25 The economist with policy ideas ahead of their time

The first Asian woman to get a PhD in Economics from Harvard back in 1960, Padma Desai is best known
for a critique of India’s erstwhile planned economy. Her early 1970s book, co-authored with husband
and fellow economist Jagdish Bhagwati, on India’s industrial and trade policies had a profound impact
on professional thinking and policymaking in India in the 1970s. Manmohan Singh, after becoming prime
minister in the 2000s, would go so far as to say: “When in 1991 our government undertook sweeping
reforms in our industrial and trade policies, we were only implementing ideas that Jagdish and Padma
wrote about two decades earlier."
4.26 The golden moment that brought down the last pillars of socialist India
The signs pointing to India’s 1991 economic crisis, its worst ever, were long evident. The country, for the
first time, had to sell 20 tonnes of gold to investment bank UBS on 30 May that year to secure a $240
million loan. It pledged gold three more times after that sale, shipping 46.8 million tonnes of the yellow
metal to secure $400 million in loans from Bank of England and Bank of Japan. All this gold was
repurchased by December that year. The Narasimha Rao-led government with Manmohan Singh as
finance minister took over on 21 June 1991 and launched a raft of economic reforms, including the
dismantling of the licence Raj.
4.27 A two-step, two-day operation to lower the value of the rupee

The rupee was devalued for the first time by 57% on 6 June 1966 to shore up exports. The move was
triggered by the 1965 Indo-Pak war, after which the US withdrew aid to India. The next devaluation,
however, proved to be far more eventful: On 1 July 1991, the Reserve Bank of India lowered the value of
the currency by 9%, and then by 11% just two days later. This was when the economy was facing its worst
crisis, and the country’s foreign exchange reserves could pay for only three weeks of imports.
Devaluation is no longer a real option for governments and policymakers as exchange rates are
determined by markets. Currency value is now calibrated by the central bank.
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4.28 Of bulls, bears and market watchdogs: A cautionary tale
In liberalizing India, investments in the stock market became a means to make a quick buck as well as
compensate for falling savings rates—and with this boom came white-collar crime and strengthened
regulations. In April 1992, Indians were introduced to the term ‘stock market scam’ when stockbroker
‘Big Bull’ Harshad Mehta was caught using the government bond market to fund his purchases. It was a
scam pegged at ₹4,025 crore, and accelerated the rise of the Securities and Exchange Board of India as
it exists today. This and subsequent scandals led regulators to tighten the screws, bring more
transparency, and use technology to eventually reform Indian markets.
4.29 R.H. Patil, the man who tamed the wolves of Dalal Street
In the early 1990s, the Harshad Mehta scam had just rocked the country and the Bombay Stock Exchange,
now BSE, was under the iron grip of a coterie of powerful brokers. Reforming the country’s capital
markets was becoming a dire necessity. Enter Ramachandra H. Patil, who helped set up the National
Stock Exchange of India and other institutions that changed the face of India’s capital markets. In his
words: “Indian capital market around the early 1990s was akin to the Stone Age." The absence of entry
barriers and a tech-driven, computer-based trading exchange, which everyone takes for granted these
days, would not have been possible without Patil’s contributions.
4.30 Clubbing together for a fight that didn’t really happen

After 1991, the Indian state tried to shed its diffidence about foreign capital and attract investments. The
‘Bombay Club’, an informal grouping of politically connected, old-school Indian industrialists who felt
threatened by deep-pocketed multinationals, sought protection from the government and got some
allowances. The club—whose face was Rahul Bajaj—represented a sense of insecurity and a desire for
status quo, the struggle between the entrenched and the innovative. But in time, many of those who
stridently opposed reforms have built themselves into stronger and bigger companies, competing with
global leaders in their segments.
4.31 Amartya Sen: new measures for problems of inequity, welfare

Known and feted internationally for his work on welfare economics, Amartya Sen has been working in
India, the US and the UK since the 1970s. In 1998, he received the Nobel Prize in Economic Sciences. He’s
long been a critic of India’s model of development that tends to ignore the needs of the bottom of the
pyramid. Now a professor at Harvard, his popular books such as The Argumentative Indian made
economics accessible to the ordinary reader. He proved that gross national product was not enough to
assess the standard of living, a finding that led to the creation of the UN Human Development Index,
now the most authoritative source to compare welfare of countries.
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4.32 Sowing the seeds for the nation’s economic growth surge
In the Union budget for 1999-2000, then finance minister Yashwant Sinha took forward an idea he had
seeded in his 1990-91 budget—disinvestment in public sector enterprises and downsizing the
government. “We are making an immediate beginning by abolishing four secretary-level posts through a
process of merger and rationalization of central government departments," he said. Till date, the Atal
Bihari Vajpayee government of which Sinha was a part remains the only one to have carried out
privatization of state-owned companies in an upfront manner. Through the 1999-2000 budget, Sinha
also rationalized interest rates, stoked the housing boom, and triggered India’s growth surge.
4.33 Reformist returns as a champion of redistributive economics

Finance minister in 1991, Manmohan Singh became prime minister in 2004 but he was not quite the
same reformer. His government launched the Mahatma Gandhi National Rural Employment Guarantee
Scheme in February 2006 in 200 most backward districts, which was later expanded to cover all rural
districts. The scheme aimed to enhance livelihood security by providing at least 100 days of guaranteed
wage employment in a fiscal year to every rural household whose adult members volunteer to do unskilled
manual work. The 10 years when Singh was prime minister were also a time of high growth and expansion
of the economy as loan rates softened.
4.34 Circumventing the sell-by date of public sector enterprises

Dependent on the support of the Left parties in the Lok Sabha, Manmohan Singh during the first United
Progressive Alliance government (2004-2009) had no room to privatize public sector companies. With
limited options to raise resources and an ever-expanding social sector budget, Singh resorted to selling
5% to 20% stake in state-run companies through initial public offerings or secondary issues. The
government was able to raise funds without selling a majority stake in its firms, while increasing retail
participation in the stock market. Now answerable to public shareholders, state-run firms are focusing
on improving corporate governance and becoming cost-conscious.
4.35 When the world became Indian companies’ corporate oyster

Ten years of economic liberalization unchained Indians, and the first decade of the 21st century reflected
that. Thus it came to be that a much smaller Tata Steel acquired the UK-based company Corus for an eye-
popping $13.1 billion in 2007. The Aditya Birla Group’s Hindalco Industries Ltd followed this up with a
$6-billion buyout of US-based Novelis in 2007. The next year, Tata Motors bought Jaguar-Land Rover for
$2.3 billion. Bharti Airtel bought out Zain Africa in 2010, coughing up $10.7 billion. It was an era of multi-
billion dollar acquisitions. The frenzy has since ebbed but not the aspirations.
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4.36 Going down: the planned demolition of a long-condemned institution
Within eight months of taking over as Prime Minister on 25 May 2014, Narendra Modi replaced the
Planning Commission with NITI Aayog (NITI stood for National Institute for Transforming India, in line
with Modi’s penchant for acronyms). The Planning Commission was a Soviet-style body that drew up five-
year plans for the country and played an advisory role in formulating allocation of central funds to each
state. NITI Aayog now serves as the government’s think tank, formulating medium- and long-term
strategies and breaking them into year-wise plans after consultation with the states.
4.37 Bringing in a code of conduct to help provide for sick promoters

India is a country with sick companies but no sick promoters—the result of a system that hasn’t held
the influential promoters of large companies to account. To change that, the Modi government
introduced the Insolvency and Bankruptcy Code, 2016 (IBC). The code made it possible for lenders to
oust errant promoters from a company and hand it over to financially sound owners. The success of the
IBC is questionable, but it has created a sense of responsibility among promoters. However, there are
still cases of promoters trying to retain control of their companies through the back door and others like
Nirav Modi fleeing the country after defaulting on large loans.
4.38 The overnight note-ban on an unsuspecting nation

Few announcements by an Indian prime minister have had as long-lasting and wide-ranging an effect as
the one made by Narendra Modi at 8pm on 8 November 2016. In his address to the nation, he said ₹500
and ₹1,000 banknotes, amounting to 85% of the currency in circulation by value, were no longer valid.
“Today, I will be speaking to you about some critical issues and important decisions. Today I want to make
a special request to all of you," Modi said. “To break the grip of corruption and black money, we have
decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer
be legal tender from midnight tonight."
4.39 The blanket tax regime that made India one country, one market
The Narendra Modi government has put improving ease of doing business high on its agenda. As part of
this, in July 2017, it implemented the goods and services tax. India is now one of the few countries to
have an indirect tax law that unifies various central and state tax laws. In spite of a lot of teething
troubles and the increased compliance burden on companies, particularly traders and small and medium
enterprises, the new system has removed tax barriers across states and created a single common market,
ensuring a free flow of goods without trucks being halted at borders for payment of interstate levies.
4.40 The bellwether as the weather vane for the state of the economy
The rise of the Indian economy is best reflected in BSE’s Sensex, the 30-share benchmark index. The 30
component companies represent all sectors of the economy. From 1,955.29 points in 1991, the year India
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ushered in economic reforms, the Sensex touched 40,312.07 points on 4 June 2019 with expectations of
big-ticket reforms from a government with a massive majority driving the optimism. Even as rising
taxation on capital gains continues to dog the markets, India, a country so far obsessed with cash-driven
gold and real estate, is slowly veering towards investing in a formal and organized equity market.
4.41 A country beginning to consider startups as a new business model

Over the past decade, a number of startups have mushroomed across India as young entrepreneurs
experiment with ideas in digital payments, online retail, on-demand delivery, education, software and
more. One of India’s first startups and early unicorns, Flipkart, which was founded by two former Amazon
employees in 2007, was valued at over $21 billion when US-based Walmart acquired a 77% stake in it in
2018. The number of unicorns, or new businesses valued at over $1 billion, has also risen every year. The
rise of startups has created a new ecosystem of angel and venture funding, and incubators and
accelerators—as well as new patterns of consumption in society.
5 Important Graphs
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EXPORT IMPORT POLICY & REGIONAL
ECONOMIC COOPERATION
FODDER MATERIAL

Contents
1 EXIM Policy .............................................................................................................................................3
1.1 Introduction ....................................................................................................................................3
1.2 Pre Reform Period (Before 1991)....................................................................................................4
1.2.1 Import Substitution .................................................................................................................4
1.2.2 Export Promotion Strategy ......................................................................................................5
1.3 Post Reform Period (After 1991) ....................................................................................................7
1.3.1 Post Shipment Export Credit ...................................................................................................7
1.3.2 Export Promotion Capital Goods .............................................................................................7
1.3.3 Duty Drawback Facility ............................................................................................................8
1.3.4 Decanalisation .........................................................................................................................8
1.3.5 Export-Import Pass Book Scheme (1995) ................................................................................8
1.3.6 Convertibility of Rupee on Current Account and Capital Account ..........................................8
2 Foreign Trade Policy ...............................................................................................................................9
2.1 Foreign Trade Policy (2004-09) .......................................................................................................9
2.1.1 Objectives ................................................................................................................................9
2.1.2 Strategies .................................................................................................................................9
2.2 Foreign Trade Policy (2009-14) .....................................................................................................11
2.2.1 Objectives ..............................................................................................................................11
2.2.2 Strategies ...............................................................................................................................11
2.3 Foreign Trade Policy (2015-20) .....................................................................................................13
2.3.1 Highlights of Foreign Trade Policy (2015-20) ........................................................................13
3 Regional Economic Integration ............................................................................................................15
3.1 Regional Trading Agreement ........................................................................................................15
3.2 Features of RTAs ...........................................................................................................................16
3.3 Benefits of RTAs ............................................................................................................................17
3.4 Limitations of RTAs .......................................................................................................................18
3.5 RTAs & WTO ..................................................................................................................................18
3.6 RTAs & Developing Countries .......................................................................................................19
3.6.1 Options for Developing Countries .........................................................................................19
3.7 India’s experience with Free Trade Agreements ..........................................................................21
3.7.1 What are Free Trade Agreements (FTAs)? ............................................................................21
3.7.2 What is the difference between the terms such as PTA, CECA, RTA, CEPA, Customs Union,
Common Market and Economic Union? How are these related to FTAs? ..........................................21

3.7.3 What is an Early Harvest Scheme/Programme (EHS) and how different is it from an FTA? 22
3.7.4 Which are the major FTAs / PTAs/CEPAs of India? ...............................................................22
3.7.5 How is CECA/CEPA different from FTA? ................................................................................23
3.7.6 Why are almost all the countries signing Free Trade Agreements? .....................................23
3.7.7 How is India placed globally in terms of its bilateral PTAs/FTAs/ CECAs/CEPAs? .................24
3.7.8 What are the key macro takeaways from India’s experience with respect to some
comprehensive agreements that it has signed in the past decade? ...................................................24
3.7.9 ASEAN, Japan and Korea FTAs - An assessment ....................................................................25
3.7.10 What are the factors to be considered while negotiating/signing an FTA? ..........................26
3.8 Regional Comprehensive Economic Partnership ..........................................................................27
3.8.1 What is RCEP? ........................................................................................................................27
3.8.2 Why India decided not to join RCEP? ....................................................................................28
3.8.3 Why not joining RCEP is the right decision for India? ...........................................................29
3.8.4 What are the possible downsides of not joining RCEP? ........................................................30
3.8.5 Way Forward..........................................................................................................................31
1 EXIM Policy
1.1 Introduction
EXIM policy is a set of guidelines and instructions related to the import and export of India. Trade policy
is prepared by the Central Government (Ministry of Commerce). In general the EXIM policy aims at
encouraging exports, enhancing export potential, facilitating imports and creating favorable balance of
payment position.
Government of India appointed the Import and Export Policy Committee headed by Mr. Mudaliar in 1962
to review India’s trade policy. The recommendations were accepted and the then Commerce Minister Mr.
V.P. Singh announced the first Export Import Policy on April 12, 1985. Initially the policy was made on a
three year basis with the main aim of facilitating production and strengthening the economic base of
India. Currently the policy is announced for the period of five years on March 31st of every year. It is
reviewed after every one year and updated if some modifications and new schemes are required. This
periodical review implies that the policy successfully incorporates the necessary changes as per domestic
and international environment.
On broader terms the general objectives of the policy are:
1. To accelerate the growth of exports.

2. To provide access to imported essential raw materials and inputs required for augmenting
production.
3. To enhance the technological strength of Indian industries, thereby improving their competitiveness
and generating employment.
4. Finally, to provide consumers with good quality products and services at competitive prices while at
the same time creating a level playing field for the domestic producers.
The discussion on EXIM policy can be best divided into two periods:
1. Pre-Reform Period (before 1991), and

2. Post-Reform Period (after 1991)
1.2 Pre Reform Period (Before 1991)

To analyze the trade policy of India during the pre-reform period can be divided in four phases:
• Phase I (1952-53 to 1956-57)

• Phase II (1956-57 to June 1966)
• Phase III (1966-67 to 1975-76)
• Phase IV (1975-76 to 1990-91).
In the first phase, liberalization measures were announced for both imports and exports. This led to
remarkable increase in imports but exports failed to pace with imports.
In the second phase, trade policy was reformulated to be in line with the planning policies. Imports were
controlled and import substitution measures were incorporated. On the export side, robust export
promotion drive was launched through diversification of exports. Still Government failed to achieve good
results in exports. So in order to control imports and boost exports India resorted to devaluation in 1966.
This marked the beginning of the third phase of trade policy from June 1966. The policy started showing
positive results after the Fourth Five Year Plan but this effect continued till 1975-76.
During the fourth phase Government of India adopted import liberalization again but this time it was
done to promote export. We now give a brief of both the approaches.
1.2.1 Import Substitution

Import Substitution is substituting the imported goods with the locally produced goods in order to meet
the internal demand. After independence, import substitution was a major element of the trade policy.
As a result, India adopted an inward-looking strategy for development. This constituted the primary
objective of the policies till the mid 1970s and it was based on the Imports and Exports (controls) Act of

1947 and the Import Trade Control Order of 1955. Import substitution policy implied that incentives were
given to the firms which produced an imported item that was not produced domestically earlier.
1.2.2 Export Promotion Strategy

Export Promotion Strategy promotes only the industries those has potential for competing with foreign
products. In India a variety of measures were undertaken to promote exports.
A liberal import policy was announced for 59 priority industries which included a number of export
oriented industries.
A new import scheme was launched which enabled the registered exporters to obtain raw materials and
other components against export of specified items.
In the 1970s, several export promotion measures were put in place in the form of export incentives and
export services to generate higher exports on a sustained basis.
In 1980s export competitiveness received large attention and policies were prepared after intense
discussion. By then it became clear that production for exports cannot be separated from production for
the domestic market. Domestic industrialization is necessary to have an integrated trade policy. A major
component of the first EXIM policy was the provision of access to essential raw materials and capital
goods which resulted in technological upgradation and reduced costs. The trade policy in 1980s
continued to emphasize on licensing mechanism and high tariffs in order to isolate Indian economy from
external competition.
The major changes in policies in pre-reform period are as follows:
1.2.2.1 Duty Drawback Scheme (DDS) (1954)

This scheme was introduced in 1954 with the objective to reimburse exporters the tariffs paid on the
imported materials and the excise duties paid on domestically produces inputs which enter into export
production. In this process the application form for the drawback was simplified. In 1980-81 ‘Duty
Drawback Committee’ was formed and the scheme was made more effective through introduction of
quick payment. Under this the sanctions were given within 24 hours and actual payment within 15 days.
However, importance of duty drawback scheme has declined since 1981 due to the initiation of advance
license system which allow exporters to import duty free inputs.
1.2.2.2 Replenishment Licenses (1957)

Government launched the Import Entitlement Scheme (IES) in 1957 which aimed at helping the exporters
in procuring imported raw materials required for export production. In 1965 exporters are allowed
replenishment licenses on the production of bank certificates showing the actual proceeds from exports.

However IES was withdrawn after devaluation of the Indian Rupee in 1966 but was soon reintroduced in
a revised form. The new name of the scheme was Import Replenishment Scheme (IRS). An IRS license
permits the exporters to procure items that are restrictive in the import policy subject to the limits
specified.
1.2.2.3 Policy for Export/Trading Houses (1960)

According to this policy, exporters who fulfill minimum export requirements in a specific period are
granted the status of Export Houses, Trading Houses or Star Trading Houses. Though this concept was
evolved in 1950 but the criterion for this recognition of Export Houses has been changing since 1960. In
1968, the companies and cooperative societies having minimum annual export performance of Rs. 24 lakh
in case of non-traditional products and Rs. 2 crore in case of traditional were recognized as Export Houses.
In 1975, criterion for recognition was that the companies have to show export performance of Rs. 50 lakh
in case of select list of export products and Rs. 2 Crore in case of other products. In 1981- 82, Trading
House (different from Export House) was one which was in the export field for the last 3 years with
average annual exports of the products of at least Rs. 10 crore. The 1988-90 policy fixed the limit for
recognition as Export Houses and Trading Houses at Rs. 2 crore and Rs. 10 crore of net foreign exchange
earnings respectively. This was raised to Rs. 5 crore for Export Houses and Rs. 20 crore for Trading Houses
by the 1990-92. All these policies gave a special position to these Export/ Trading Houses and provided
them with a number of import benefits. The benefits include the increase in the grant of renewals,
licenses been made fully transferable and allowing import of raw materials which have limited permits
or are listed under canalized items.
1.2.2.4 Free Trade Zones (1965)

In order to make Indian products competitive in the global market and give momentum to the exports,
Government set up Free Trade Zones (FTZs). In Free Trade Zones, goods can be imported, manufactured
and exported without the intervention of custom authorities. The first FTZ was set up in Kandla in 1965
and other FTZs were Santacruz (Mumbai), Falta, Noida, Cochin and Madras. Santacruz is mainly for
electronic goods but other FTZs are multi product in character.
1.2.2.5 Devaluation of Rupees (1966)

By 1960s it became quite necessary to conserve scarce foreign exchange reserves and to have sustained
increase in export earnings as India was facing severe balance of payment crisis at that time. Thus, in
order to restore the competitive potential of exports and as a solution to the Balance of Payment
problem, the value of Indian Rupee was reduced by 36.5 percent on June 6, 1966. This led to rise of 57.5
percent in the price of foreign exchange in terms of Indian Rupees.

1.2.2.6 Cash Compensatory Support (C.C.S) (1966)
It was designed to give compensation for un-rebated indirect taxes paid by exporters on inputs and
market development costs. The scope of CCS was gradually extended over the years, the proportion of
total exports eligible for CCS rose from 20 percent in 1970s to 40 percent in 1980s. Multiplicity of rates
was reduced from 17 to 7 under the new provisions of CCS in 1986. By 1991, 283 items were given grants
under CCS. However, after trade liberalization, it was felt that CCS had become expendable and was
abolished in July 1991.
1.3 Post Reform Period (After 1991)

A liberalized trade regime was started in the 1990s. This marked a remarkable turnaround from the
earlier controlled environment. The new trade policy was in line with the wider economic reforms that
were initiated in 1991. It was realized that all the policies (trade, exchange rate and industrial) should be
a part of an integrated policy framework. This will improve the efficiency and productivity of the whole
economic system. Thus, the trade policy enclosed many changes in the export incentives.
Before 1991, the foreign trade of India suffered mainly because of the strict controls also known as
‘License Raj’ regime. Government took a major step in August 1991 and moved towards reducing controls
and simplifying the procedures. It was done to create a conducive environment for trade. The focus of
the policies shifted from regulations to promotion and development of foreign trade. The objective was
to improve the competitiveness and attain a higher growth profile.
The period after 1991 is marked by the elimination of most quotas and sharp tariff cuts. The tariffs were
as high as 350 percent which were lowered in phases and reduced to 20 percent by the end of the century.
This resulted in the opening up of India economy. Duties on capital goods were also reduced to a large
extent. All this led to acceleration in trade and a far more open environment.
Now we list some of the changes to demonstrate the remarkable shift in policies.
1.3.1 Post Shipment Export Credit

EXIM Bank introduced new scheme ‘Post Shipment Export Credit’ which was denominated in foreign
currency to enable exporters to get credit. It provided credit to Indian exporters at internationally
competitive rates of interest. The interest rates were reduced from 11 percent to 9 percent. Later on the
scheme was reformulated to promote the exports and also a major simplification of procedures was
done. In 2004-2009 Policy, the concessional rate of interest on post-shipment that was available up to 90
days was extended for a maximum period up to 365 days.
1.3.2 Export Promotion Capital Goods

In this scheme Government provided a reduced import duty of 15 percent for the import of certain
capital goods subject to certain export obligation. Import of second hand capital goods under the EPCG
scheme was disallowed to provide level playing field to the domestic capital goods industry. In 1994-95
the scheme was extended to service sector. In 1997 duty on capital goods was reduced to 10 percent.
The EPCG scheme allows import of capital goods at 0 percent duty for exports of agriculture and their
allied products. The threshold limit for agriculture is also reduced from Rs. 20 crore to Rs. 5 crore. In 2000-
01 import of second hand capital goods have been permitted. In 2004 additional flexibility was introduced
for the fulfillment of export obligation. This was done to reduce the difficulties of exporters of goods and
services.
1.3.3 Duty Drawback Facility

Government of India decided to continue the Duty Drawback facility in 1992-97 for exporters who had
imported certain inputs under the Duty Exemption Scheme which was described in the earlier Exim policy.
New rates were announced w.e.f. 1 June, 1999. The new rates incorporated changes in customs duty as
well as inclusion of surcharge. The rates were again revised in 2001. Duty drawback rates were
rationalized in line with the changes in customs duties announced in the Union Budget 2001-02. All
industry rates were reduced in respect of 726 items, left unchanged for 26 items and increased for 14
items with 30 obsolete entries deleted. The changes also included introduction of new products.
1.3.4 Decanalisation
Earlier in India a large number of exports and imports were used to be canalized through the public
sector agencies. Government of India announced a trade policy on August 13, 1991 and decanalized 16
export items and 20 import items. The decanalized items included newsprint, non-ferrous metals and
natural rubber. Importantly only eight items including petroleum products, fertilizers and edible oils were
to remain canalized. Recently in 2004-09 policy import of petroleum and petro goods were also
decanalized.
1.3.5 Export-Import Pass Book Scheme (1995)

An alternative route of the Pass Book Scheme for some categories of exporters was opened up on March
31, 1995. Credit on customs duty was given for exports. In 1997, Pass Book Scheme was replaced by a
new scheme ‘Duty Entitlement Pass Book’ (DEPB) scheme. This scheme extended the coverage and also
aimed for more of transparency. In 1999-2000 the credit entitlement increased from 5 to 10 percent of
previous year’s performance. The scheme has been continued in 2004-2009 policy and has removed any
kind of uncertainty for the exporters.
1.3.6 Convertibility of Rupee on Current Account and Capital Account

In 1991, Government of India devalued the rupee by about 18 percent against five currencies.
The Finance Minister announced the liberalized exchange rate mechanism system (LERMS) in the Budget
for 1992-93. It was a dual exchange rate under which 40 percent of foreign earnings were to be given at

official exchange rate and the rest 60 percent were to be exchanged at a market determined rate. The
foreign exchange exchanged at official rate was used to import of essential items (like crude oil,
petroleum product fertilizers etc.) and the foreign exchange converted at the market rate was used to
fund all other type of imports. Thus, LERMS commenced partial convertibility of the rupee on trade
account.
Further, the 1993-94 Budget introduced full convertibility of the rupee. This allowed foreign exchange
earners to convert 100 percent of their earnings at the market rate. Full convertibility on the current
account was announced in the Union Budget 1993-94. The objective of exchange rate system has been to
ensure that the exchange value of the rupee is realistic and can sustain a proper current account balance.
2 Foreign Trade Policy

2.1 Foreign Trade Policy (2004-09)
In 2004, the United Progressive Alliance government adopted National Foreign Trade Policy (NFTP), 2004-
09 as a tool of export promotion replacing the earlier Export Import Policy (EXIM). The policy intended to
encourage exports by enhancing the competitiveness of Indian products in the global market. This was
expected to generate employment and help in poverty alleviation.
2.1.1 Objectives
The ultimate aim of NFTP (2004-09) is to generate employment. With this end in view, it identified two
means- Increase in exports-GDP ratio and a larger emphasis on labor intensive exports. In order to meet
this objective, the NFTP 2004-09 set itself a target of, doubling India’s contribution to global trade from
0.8 percent to 1.5 percent by the end of 2009. Accordingly, this will act as an effective instrument of
growth by giving a push to employment especially in rural as well as semi-urban areas.
2.1.2 Strategies
The key strategies which were followed in NFTP (2004-09) were to unshackle the controls and create an
environment of transparency. It emphasized on simplifying the procedural formalities and lowering
down the transaction costs.
• To meet the objectives it identified the special focus areas which need to be nurtured. This essentially
means that sectors with substantial export prospects and potential for employment growth were
identified in semi urban and rural areas as ‘Thrust Sectors’ and then specific strategies were worked
out for the same which are known as Focus Market Schemes and Focus Product Schemes. This
involves reimbursement of duty payments of up to 2.5 percent of the value of exports (FOB) to
counterbalance the high freight and transportation costs to international markets.

• The threshold limit for the towns which were classified as ‘Towns of Export Excellence’ (TEE) was
brought down from Rs. 1000 crore to Rs. 250 crores. These selected towns basically have potential
for growth in exports. Thus, certain incentives were given to them like financial assistance under the
Market Access Initiative (MAI) scheme and entitlement in Export Promotion Capital Goods (EPCG)
scheme.
• Target Plus: A scheme to speed up growth of exports called Target Plus was introduced. In this
scheme, incentives in terms of duty free credit were given to exporters if the value of their exports
exceeded the general target set for them. For example, if any exporter exports 20% more than the
target then he is eligible to receive duty free credit up to 5% of the value (FOB) of his incremental
exports.
• Vishesh Krishi Upaj Yojana: This new scheme also known as Special Agricultural Produce Scheme was
launched to boost the exports of fruits, vegetables, flowers and minor forest produce. Export of
these products qualified for duty free credit entitlement up to 5 percent of the value (FOB) of
exports. This entitlement can be utilised for import of a variety of agricultural inputs. This means the
exporters can import the inputs at reduced rates.
• Served from India Scheme: This scheme was intended to create a unique and impressive brand
‘Served from India’ that could be recognized all over the world. The earlier schemes with the same
motives were reformulated and revamped into this new scheme. Individual service providers who
earn foreign exchange of at least Rs. 5 lakhs were eligible for duty free credit entitlement of 10% of
the total foreign exchanged earned by them. Hotels and restaurants came under this scheme and
could avail duty free credit up to 20% and 5% respectively. They were allowed to use the entitlement
for import of food items.
On the whole, NFTP (2004-09) was able to address the issue of export promotion and through it
employment generation. As per WTO, our share of world’s merchandise trade went up from 0.83% in
2003 to 1.45 percent in 2008. Similarly, our share of world’s services rose to 2.8 percent in 2008 from
1.4 percent in 2003. On the whole, during the five year period of 2004-2009, exports experienced a robust
growth process to reach a level of US $168 billion in 2008-09 from US $63 billion in 2003-04. With regard
to employment, studies suggest that nearly 14 million jobs were created as a result of augmented exports
in 2004-09.
However, the impact of NFTP (2004-09) was varied across states and products. While products such as
grapes in Nashik and mangoes in Malda seem to have drawn substantial benefits, spices in Orissa seem
to have not benefited at all even when it was included in the Focus Product scheme. One may argue
formulation and implementation of the policy could not carried out to optimal levels.
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Owing to the global crisis of 2009, countries all over the world were affected in different degrees. On the
whole, the economic indicators like consumption, capital flows and trade have taken a hit. IMF estimated
that the global trade to decline by 11 percent in volume terms and WTO forecasted the decline to be near
about 9 percent. Though the adverse impact on India was not of same magnitude, as compared to the
other countries yet exports suffered. This was mainly due to a contraction in demand in the foreign
markets for India’s exports. It was indeed a herculean task to formulate the foreign trade policy in such
a grim economic situation.
Thus, it was needed that strategy and policy instruments to pursue the strategy are set in such a manner
that it will catalyze the growth of exports.
2.2.1 Objectives
The main objectives of Foreign Trade Policy (2009-14) were:
• To arrest and reverse the declining trend of exports.

• To double India’s export of goods and services by 2014.
• To double India’s share in World’s merchandise trade by 2020.
• To simplify the application procedure for availing the benefits.
In general, the policy aimed at enhancing the potential to export, improving export performance,
encouraging foreign trade and earning foreign exchange. As India’s exports were affected by the global
recession, FTP (2009-14) was of great importance. The decline in exports led to the closure of many export
oriented industries which resulted in large unemployment as well.
Targets:
• The target for exports was set at $200 Billion to be achieved by 2010-11 by having an annual export
growth of 15%.
• To come back on the high growth path and for that export growth rate target was 25% for the next
three years, i.e., 2011-14.
In order to achieve these objectives, the Government would follow a mix of policy measures including
fiscal incentives, institutional changes and diversification of export markets.
2.2.2 Strategies
• New markets were introduced under Focus Market Scheme. In total 26 markets were added, 16 are
in Latin America and 10 in Asia-Oceania.
• Incentives under Focus Market Scheme were raised from 2.5 percent to 3 percent.
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• New products were added under Incentives Focus Product Scheme like engineering products, Green
Technology products and Electronic goods.
• Incentives under Focus Product Scheme were raised from 1.25 percent to 2 percent.
• Market Linked Focus Product Scheme was expanded by including a considerable number of products.
These products include pharmaceuticals, textile fabrics, rubber products and certain iron and steel
products. Benefits to these products will be given if they are exported to the specifically selected 13
markets. These are Argentina, Egypt, Kenya, Nigeria, South Africa, Tanzania, Brazil, Mexico, Ukraine,
Vietnam, Cambodia, Australia and New Zealand.
• A common form was introduced to avail benefits under Focus Market Scheme, Focus Product
Scheme, Market Linked Focus Product Scheme and Vishesh Krishi Upaj Yojana.
• Higher financial allocation for Market Development Assistance (MDA) and Market Access Initiative
(MAI) scheme was also provided.
• New areas for Towns of Export Excellence were also recognized. These include Jaipur, Srinagar and
Anantnag for handicrafts, Kanpur, Dewas and Ambur for leather products and Malihabad for
horticultural products.
• Tax Holiday for the export units were extended by one year.
• Duty Entitlement Pass Book scheme was also extended by one year.
• To insulate the small and medium scale exporters a Directorate of Trade Remedy Measures was
announced.
• Export obligation on import of spares under Export Promotion Capital Goods Scheme has been
reduced to 50% of the normal specific export obligation.
It is to be noted that seventeen textile products were included in the Focus Product Scheme and it was
taken as a welcome step by the textile industry but by the end of 2014 it was felt that the benefits were
limited. This was because he benefits of Status Holders and Export Promotion Capital Goods scheme was
given only to those who did not take benefit under Technology Upgradation Fund Scheme but most textile
units were covered under TUFS scheme and they were denied the benefits. This reflects that the Foreign
Trade Policy should be examined in the light of the feedback given by the concerned export units.
Undoubtedly India took a number of measures to withstand the global recession through interest
subvention, reduction in taxes etc. but the neighborhood countries have applied such measures on a
much larger scale. The measures listed above are supplemented by a few more steps which are based on
the feedbacks given by specific industry associations and Federation of Indian Export Organizations (FIEO).
We know that the government cannot generate demand for exports but it can certainly help exporters
so that they grab the orders which they are losing by little margins.
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Government can also emphasize upon banks to be more keyed up for exports. For instance, an Export
Development Fund should be created with a corpus equivalent to 0.5 percent of the preceding year’s
exports. The post shipment credit which is now available up to 180 days can be extended to 365 days to
ease off the financial crunch.
When the growth of exports is steadily improving on a monthly basis and has shifted from negative growth
rate to a positive one, then we may conclude that the stimulus packages from the Government of India
and Reserve Bank should be continued for some more time. Dropping of these practices should be gradual
and in line with the recovery at the global level. Thus, it should be a cautious removal.

The Foreign Trade Policy 2015-20 was announced by Minister of Commerce and Industry, Smt. Nirmala
Sitharaman on April 1, 2015. This policy has been announced at the time when several other measures
were also been undertaken by the Government of India such as ‘Make in India’ and ‘Digital India’. The
policy puts a great focus on improving the ‘Ease if Doing Business’ in India, with an emphasis on both the
manufacturing and service sectors. The policy describes the strategies related to the products and
markets needed to promote trade, develop infrastructure and enhance the overall system of trade. It
also helps to enable India to counter the external challenges and keep up the pace in line with the global
trading architecture.
The target is to double India’s share in world trade by 2020 by rationalizing the provisions given for
imports and exports and also by creating a mechanism to resolve the complaints and dispute related to
trade.
2.3.1 Highlights of Foreign Trade Policy (2015-20)

Two new schemes have been introduced for the merchandise and service sector:
• Merchandise Exports from India Scheme (MEIS) - This is designed for export of specified goods to
specified markets. It subsumes the existing schemes ‘Focus Market Scheme’, ‘Market Linked Focus
Product Scheme, Focus Market scheme, Agri-Infrastructure Incentive Scrip and Vishesh Krishi Gram
Upaj Yojana. It also revised the rates of reward to the specific notified export goods to selected
markets. These rewards are given as a percentage of foreign exchange earned (FOB).
• Services Exports from India Scheme (SEIS): This scheme is available to the service providers who are
located in India as against the scheme of ‘Serve from India’ which give benefits to Indian Service
Providers.
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In both the Schemes the duty credit scrips can be used for payment of Customs or Excise duty as well as
Service tax. There is also a welcome step and imperative boost for the Special Economic Zones as the
benefits of MEIS and SEIS has been extended to the units located in Special Economic Zones.
Export Houses – The nomenclature of Export House, Star Export House, Trading House, Star Trading
House, Premier Trading House certificate has been simplified and changed to One, Two, Three, Four and
Five Star Export House.
In addition to this there is change for the Status Holders also. The method for calculating the export
performance meant for recognition of status holder has been changed from Indian Rupees to US dollar
earnings. The export performance will also now consider only two previous years as against the previous
three years under the earlier Foreign Trade Policy.
For the purpose of Ease of Doing Business and Trade Facilitation the following proposals are made:
• Online procedure to upload digitally signed documents.

• Creation of profiles of importers and exporters so that repeated submissions are eliminated and
permanent records are maintained.
• Online facility for Terminal Excise Duty refunds has also been provided.
In order to encourage the ‘Make in India’ initiative, the export obligation have been reduced from 90
percent to 75 percent for domestic procurement under Export Promotion Capital Goods scheme. There
is higher reward being given under MEIS for the products which have high domestic content and more
value addition done in India. This will promote the domestic manufacturing industry. These flexibilities
will encourage the exporters to enhance their productive capacities. Measures have been taken in
defense and hi-tech items also. Further, e-Commerce exports of products like handloom, books,
footwear, toys and fashion garments through courier or post office would also be able to get the benefits
under MEIS. These measures will provide employment in addition to capitalize India’s strength in these
areas.
The transition to this new policy is quite smooth as the eligibility or usage of scrip and any other condition
of export of goods or rendering of services would be governed by the earlier Foreign Trade Policy. On the
whole we may appreciate new Foreign Trade Policy (2015-2020) as it emphasizes on simplification and
mergers of existing initiatives.
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3 Regional Economic Integration
Efforts at reaching agreements through multilateral trade negotiations and those towards region-centric
initiatives are two major developments in the global trading environment witnessed in the past two
decades. Both these developments are interrelated in a substantive sense. The former aims at integrating
national markets through the process of globalisation. It is intended to improve efficiency by removing
barriers and thus promoting a competitive environment. This thrust has motivated countries to take
greater interest in regional groupings that facilitate larger market access, which in turn, enables them to
enjoy scale economies and thus provide a competitive edge in the global market.
The above developments, would have far-reaching implications on economic ties between countries. The
former would result in a larger world trade while the latter would enhance the role of trading blocks in
it. This implies that prominent trading blocs and their member states would play an increasingly
important role in the emerging global economic order. This would pose many challenges to the
developing countries, particularly those which are outside the major blocs, necessitating changes in their
policies and perceptions.
3.1 Regional Trading Agreement

The global trading system has always been a witness to some form of economic integration between
countries, across continents or within a region. The different forms of such economic integration are
known as regional trading arrangements (RTAs). There are different degrees or levels of economic
integration. Five different levels can be visualised as follows.
It would be seen that at each succeeding stage, members surrender a greater measure of their national
sovereignty.
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With globalisation, regionalism is on the rise. This is in fact ironical and inconsistent with the spirit of
multilateralism. Hence, initially, the DG of WTO was opposed to the proliferation of regional
arrangements, after WTO was launched in 1995. The number of regional trading agreements (RTAs)
notified to the WTO stands at about 200. An estimated 70 percent of the world trade is now covered by
RTAs. For instance, the Americas - North and South, all of Europe, including the transition economies of
the eastern part, most of Africa, Asia, Australia and New Zealand are signatories to free trade areas,
customs unions and partial scope agreements. The new trends in regionalism, however, can be accepted
as a supplement to globalisation.
3.2 Features of RTAs

• Almost all RTAs show an inherent dynamism towards greater liberalisation and open market.
o The best example is the European Union (EU) where a single market and a common
currency have been introduced to strengthen internal competition and external
competitiveness.
o In Asia, members of the Association of South-East Asian Nations (ASEAN) are accelerating
trade liberalisation within the ASEAN Free Trade Area (AFTA). On January 1, 2016, ASEAN,
inaugurated the ASEAN Economic Community ("AEC"). The AEC aims to create a single
market and production base for the free flow of goods, services, investment, capital, and
skilled labor within ASEAN.
• The new regionalism brings with it an increase in the size of regional groupings.
o Once again, the best example of the enlargement dynamics can be seen in the European
Union (EU). EU started off as a coal and steel community in 1952. The European Common
Market (ECM) initially consisted of six countries and European Free Trade Area (EFTA)
consisted of seven countries. Today, European Union is a political and economic union of
27 member states.
• There is emergence of overlapping regionalism. Countries belong to more than one RTA. There is an
inherent scope that these RTAs may turn the world trade system into what Jagdish Bhagwati calls a
‘noodle blow’ of overlapping and potentially inconsistent and unmanageable RTAs.
o For example, India has an RTA with Malaysia and Singapore separately while they are also
a member of India ASEAN CECA. Another interesting example is Sri Lanka wherein an Indian
trader can use either of the four RTAs for trading with Sri Lanka. The multiplicity of RTA’s
may lead to inconsistencies.
• In the current practice, regionalism covers many issues beyond the removal of barriers to trade in
goods and services, such as social policy, environmental policy and competition policy.
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• RTAs thus exist in all regions of the world. They follow a strategy that combines internal liberalisation
with external agreements.
Thus, in general, currently regionalism is a benign and dynamic initiative compatible with the overall aims
of the multilateral trade order.
3.3 Benefits of RTAs

The motivation for forming regional trading blocs differs from region to region, and even from country to
country within a bloc, but a few factors play a key role. These are:
• members see economic benefits from a more efficient production structure by exploiting economies
of scale. In addition to spreading fixed costs over larger regional markets, it enhances economic
growth from foreign direct investment, and research and development.
• members value non-economic benefits such as strengthening political ties and managing migration
blocs.
• smaller countries seek increased security of market access by forming regional trading blocs and
joining with associations of larger countries.
• countries may want to lock-in unilateral domestic policy reforms.
• Members’ bargaining power in multilateral trade negotiations is improved where they can more
effectively express in pursuance of their regional interests.
• Members can promote industries that are not viable without a protected regional market – e.g.
regional infant industries – the idea being that they would be internationally competitive if given
sufficient time and scope to develop.
• open regionalism – i.e. agreements with low external trade barriers, service markets and a dominant
focus on reducing transaction costs at borders, help get around the complexity of the international
trading system.
Benefits of Free Trade Agreement

The Free Trade Agreements (FTAs) signed by India provide tariff concessions thereby giving
opportunities for exports of products including those related to small and medium enterprises (SMEs).
Some of the SME products on which tariff concessions have been provided by trading partners such as
Japan, South Korea and some ASEAN countries fall into the category of readymade garments, leather
goods, processed foods and engineering products like auto components. The specific export
promotion schemes for micro, small and medium enterprises (MSMEs) include those for participation
in international exhibitions and fairs, training programme on packaging for exports, Market
Development Assistance (MDA) Scheme for MSME exporters and National Award for quality
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products. Some of the other measures taken by the Government which would promote trade and
benefit exports from SMEs are specific schemes under the new Foreign Trade Policy (FTP) 2015-20 such
as Interest Equalization Scheme on pre and post shipment rupee export credit, Merchandise Exports
from India Scheme (MEIS), Services Exports from India Scheme (SEIS), double weightage for export
entitlement to SMEs for grant of one star export house, electronic filing and issuance for specified
FTP Schemes, online platform for preferential certificates of origin, etc. While a logistics division has
been created in the Department of Commerce to coordinate integrated development of the logistics
sector with a view to promoting trade, some of the new schemes and policies that have been launched
to facilitate trade are Agriculture Export Policy, Trade Infrastructure for Export Scheme (TIES) and
Transport and Marketing Assistance (TMA).
3.4 Limitations of RTAs

Formation of regional blocs invariably implies that the constituent members are keen on promoting their
economies. However, quite often what is good for individual nations may not be good for the global
economy. Most economists agree that the emergence of regional blocks diverts trade to less efficient
producers, thereby preventing the global economy from growing as fast as it can. Nonetheless, when
seen from a purely national perspective, it would suit a country to create and protect a regional market.
There has thus been a clear movement towards the regionalisation of trade.
3.5 RTAs & WTO

• Increased emphasis on regionalism is a prominent feature of international economics since the mid-
1990s. Currently, there are more than 200 active Regional Trade Agreements in force and majority of
these agreements are north-south RTAs or RTAs between developed and developing countries.
• RTAs represent an important exception to the WTO’s principle of non-discrimination through the
most-favoured nation (MFN) rule.
• According to the MFN rules, WTO members must extend the same market access conditions to all
WTO members.
• However, as an exception to MFN, WTO allows countries with a RTA (i.e. members of a RTA) to trade
among themselves using preferential tariffs and easier market access conditions than what is
applicable to other WTO member countries.
• Such RTAs are, however, permitted under WTO only when they have a clause to move towards global
Free Trade Area without discrimination, in a time bound manner.
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• The advantage to the RTA members thus come from the preference margins i.e. the gap between
MFN rates and preferential tariff rates. As a result, WTO member countries that are not a part of the
RTA lose out in these markets.
• Also, trading within the regional trading blocks does not come under the purview of WTO.
3.6 RTAs & Developing Countries

• The basic principles embodied in the GATT/WTO, viz. open markets, non-discrimination and global
competition are unexceptionable. These are designed to foster a non-discriminatory, competitive
and unified world market.
• Developing countries have, however, attempted to integrate their national economies with the
world economy at a varying pace.
• In the process of integration, developing countries have encountered several adverse consequences.
o For instance, easy market access, liberalised merger and acquisition laws, permitting
majority to full foreign ownership and liberalised foreign exchange regulations, financial
liberalisation etc. that come in the course of integration process have facilitated large
scale entry of global economic players into developing countries. This has led to many
local entrepreneurs surrendering their ventures to the global giants or assuming a
position of joint partnership, if at all, in the re-structured collaborative ventures. In the face
of such threat to their survival, particularly for the small-scale sector, local entrepreneurs
in developing countries have started demanding a level playing field and protection.
o Another adverse consequence of globalisation is that the emerging order would provide
significant growth opportunities to only a few of the developing countries while for others
it could result in several risky exposures. Some studies have brought out that many of the
developing countries would be worse off as a result of WTO agreements. This is expected
to widen inter-country disparities, as visualised by the centre-periphery doctrine of Samir
Amin and Andre Gunder Frank: developing countries, except a few, would be placed in a
disadvantageous position (on periphery) while the system would work well for a few
mighty developed countries and fast growing developing countries.
3.6.1 Options for Developing Countries

Basically, there are two options for the developing countries:
• to join one or the other prominent bloc so as to remain within the mainstream of RTAs, or
• to strengthen economic ties among developing countries themselves on bilateral basis so as to
provide a cushion to export growth.
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The problem with regard to the first option is that membership of regional trading blocs is not easily
available. There are usually too many restrictive qualifying criteria. For instance, India was denied
membership of ASEAN for not being a south-east Asian nation.
These problems have motivated developing countries to come together and form a bloc of their own. In
fact, developing countries from Asia, Africa and Latin America have made several attempts at bloc
formation. In Asia, for instance, five south-east Asian countries established the ASEAN in 1967; to which
five more countries joined subsequently. Likewise, seven south Asian countries formed South Asian
Association of Regional Co-operation (SAARC) in 1985. Again, two of the ASEAN states (viz. Thailand and
Myanmar) and three SAARC states (viz. India, Bangladesh and Sri Lanka) came together in 1997 to
promote economic co-operation under the name of Bangladesh, India, Myanmar, Sri Lanka and Thailand
Co-operation (BIMST-EC).
While the role of a bloc in promoting economic ties is widely recognised, attempts at bloc formation by
developing countries have rarely met with big success. ASEAN is one rare example of a successful
attempt of bloc formation by the developing countries. In contrast, SAARC, of which India is a founding
member, is a classic case to demonstrate how difficult it is to promote effective co-operation even after
more than three decades of its existence.
Following the spirit of regionalism, some of the south and south-east Asian countries introduced schemes
of sub-regional co-operation, primarily to strengthen economic relations based on complimentarities
among the geographically/economically/historically/culturally adjoining nations, but administratively
detached sub-regions. In south-east Asia, they are also viewed as inter-governmental efforts to
accelerate private sector led economic growth in less developed pockets.
In addition, developing countries have also taken interest in acting together for their mutual benefits.
There are many examples of such initiatives. The Non-Aligned movement (1961) and G-77 (1964) aimed
at promoting common interests of developing countries through collective actions. The scheme of global
system of trade preferences (GSTP) of 1987 provided a 10 percent across–the–board tariff concession on
intradeveloping country trade flows.
Also, developing countries took specific initiatives to strengthen bilateral economic ties. India’s Look East
Policy is a good example of such initiatives.
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3.7 India’s experience with Free Trade Agreements
3.7.1 What are Free Trade Agreements (FTAs)?

FTAs are arrangements between two or more countries or trading blocs that primarily agree to reduce
or eliminate customs tariff and non tariff barriers on substantial trade between them. FTAs, normally
cover trade in goods (such as agricultural or industrial products) or trade in services (such as banking,
construction, trading etc.). FTAs can also cover other areas such as intellectual property rights (IPRs),
investment, government procurement and competition policy, etc.
3.7.2 What is the difference between the terms such as PTA, CECA, RTA, CEPA, Customs Union,
Common Market and Economic Union? How are these related to FTAs?
• Preferential Trade Agreement (PTA): In a PTA, two or more partners agree to reduce tariffs on agreed
number of tariff lines. The list of products on which the partners agree to reduce duty is called
positive list. India MERCOSUR PTA is such an example. However, in general PTAs do not cover
substantially all trade.
• Free Trade Agreement (FTA): In FTAs, tariffs on items covering substantial bilateral trade are
eliminated between the partner countries; however each maintains individual tariff structure for non-
members. India Sri Lanka FTA is an example. The key difference between an FTA and a PTA is that
while in a PTA there is a positive list of products on which duty is to be reduced; in an FTA there is a
negative list on which duty is not reduced or eliminated. Thus, compared to a PTA, FTAs are generally
more ambitious in coverage of tariff lines (products) on which duty is to be reduced.
• Comprehensive Economic Cooperation Agreement (CECA) and Comprehensive Economic
Partnership Agreement (CEPA): These terms describe agreements which consist of an integrated
package on goods, services and investment along with other areas including IPR, competition etc.
The India Korea CEPA is one such example and it covers a broad range of other areas like trade
facilitation and customs cooperation, investment, competition, IPR etc.
• Custom Union: In a Customs union, partner countries may decide to trade at zero duty among
themselves, however they maintain common tariffs against rest of the world. An example is
Southern African Customs Union (SACU) amongst South Africa, Lesotho, Namibia, Botswana and
Swaziland. European Union is also an outstanding example.
• Common Market: Integration provided by a Common market is one step deeper than that by a
Customs Union. A common market is a Customs Union with provisions to facilitate free movements
of labour and capital, harmonize technical standards across members etc. European Common
Market is an example.
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• Economic Union: Economic Union is a Common Market extended through further harmonization of
fiscal/monetary policies and shared executive, judicial & legislative institutions. European Union
(EU) is an example.
3.7.3 What is an Early Harvest Scheme/Programme (EHS) and how different is it from an
FTA?
Early harvest scheme is a precursor to a free trade agreement (FTA) between two trading partners. This
is to help the two trading countries to identify certain products for tariff liberalisation pending the
conclusion of FTA negotiation. It is primarily a confidence building measure. A good example of an EHS is
between India and Thailand signed in October 2003, wherein 83 products were identified to be reduced
to zero in a phased manner. The EHS has been used as a mechanism to build greater confidence amongst
trading partners to prepare them for even bigger economic engagement.
3.7.4 Which are the major FTAs / PTAs/CEPAs of India?

The major bilateral and regional agreements of India are:
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3.7.5 How is CECA/CEPA different from FTA?
A Comprehensive Economic Cooperation Agreement (CECA) or a Comprehensive Economic Partnership
Agreement (CEPA) is different from a traditional Free Trade Agreement (FTA) on two counts.
Firstly, CECA/CEPA are more comprehensive and ambitious that an FTA in terms of coverage of areas
and the type of commitments. While a traditional FTA focuses mainly on goods; a CECA/CEPA is more
ambitious in terms of a holistic coverage of many areas like services, investment, competition,
government procurement, disputes etc.
Secondly, CECA/CEPA looks deeper at the regulatory aspects of trade than an FTA. It is on account of
this that it encompasses mutual recognition agreements (MRAs) that covers the regulatory regimes of
the partners. An MRA recognises different regulatory regimes of partners on the presumption that they
achieve the same end objectives.
3.7.6 Why are almost all the countries signing Free Trade Agreements?
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Countries negotiate Free trade Agreements for a number of reasons.
• By eliminating tariffs and some non-tariff barriers FTA partners get easier market access into one
another's markets.
• Exporters prefer FTAs to multilateral trade liberalization because they get preferential treatment
over non-FTA member country competitors. For example in the case of ASEAN, ASEAN has an FTA
with India but not with Canada. ASEAN's custom duty on leather shoes is 20% but under the FTA with
India it reduced duties to zero. Now assuming other costs being equal, an Indian exporter, because of
this duty preference, will be more competitive than a Canadian exporter of shoes. Secondly, FTAs may
also protect local exporters from losing out to foreign companies that might receive preferential
treatment under other FTAs.
• Possibility of increased foreign investment from outside the FTA. Consider 2 countries A and B having
an FTA. Country A has high tariff and large domestic market. The firms based in country C may decide
to invest in country A to cater to A's domestic market. However, once A and B sign an FTA and B offers
better business environment, C may decide to locate its plant in B to supply its products to A.
• Such occurrences are not limited to tariffs alone but it is also true in the case of non-tariff measures.
Especially when a Mutual Recognition Agreement (MRA) is reached between countries A and B. Some
experts are of the view that slow progress in multilateral negotiations due to complexities arising from
large number of countries to reach a consensus on polarising issues, may have provided the impetus
for FTAs.
3.7.7 How is India placed globally in terms of its bilateral PTAs/FTAs/ CECAs/CEPAs?
India has preferential access, economic cooperation and Free Trade Agreements (FTA) with about 54
individual countries. India has signed bilateral trade deals in the form of Comprehensive Economic
Partnership Agreement (CEPA)/ Comprehensive Economic Cooperation Agreement
(CECA)/FTA/Preferential Trade Agreements (PTAs) with some 18 groups/countries. India is a late, and
cautious, starter in concluding comprehensive preferential tariff agreements covering substantially all
trade with some of its trading partners.
3.7.8 What are the key macro takeaways from India’s experience with respect to some
comprehensive agreements that it has signed in the past decade?
• India’s exports to FTA countries has not outperformed overall export growth or exports to rest of
the world.
o Since 2006 (India has signed most of its RTAs after 2006), India’s exports to RTA partners
increased by 13% y-o-y. The trend to non-partner countries was no different with exports
increasing at the same pace (chart below). Thus, export to RTA countries has not outperformed
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overall export growth, in fact, export to RTA countries parallels the trend growth as with other
exports.
o Thus, India’s export surge could be attributed more to diversification of India’s export basket
both in terms of destination and commodities and favourable global conditions and less to
RTAs.
• FTAs have led to increased imports and exports, although the former has been greater
• India’s trade deficit with ASEAN, Korea and Japan has widened post-FTAs
• According to Economic Survey 2016-17, FTAs have had a bigger impact on metals on the importing
side and textiles on the exporting side.
• A 10% percent reduction in FTA tariffs for metals increases imports by 1.4 %
• India’s exports are much more responsive to income changes as compared to price changes and thus
a tariff reduction/elimination does not boost exports significantly
• Utilisation rate of RTAs by exporters in India is very low (between 5 and 25%)
o Lack of information on FTAs, low margins of preference, delays and administrative costs
associated with rules of origin, non-tariff measures, are major reasons for underutilization.
3.7.9 ASEAN, Japan and Korea FTAs - An assessment

We analyze four key FTAs India has signed, with ASEAN, Korea, Sri Lanka and Japan (as they are the most
comprehensive ones). Some stylized facts are:
(a) Bilateral trade increased post signing of all the above FTAs
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(b) Imports from these FTA partners into India increased more than India’s exports to partner countries
post signing of FTAs
(c) As imports from Korea, Japan and ASEAN have shot up after the respective agreements came into
force, India’s trade deficit with these countries has increased since then. Only exports to Sri Lanka have
increased much more than imports into India from Sri Lanka.
(d) Overall trade deficit with ASEAN, Korea and Japan doubled to USD 24bn in FY17 from USD 15bn in
FY’11(signing of the respective FTAs) and USD 5bn in FY’06. Trade deficit with Korea grew from USD 5bn
in FY’10 to USD 8bn currently. With Japan, deficit grew from USD 3bn in FY10 to USD 6bn currently and
with ASEAN deficit doubled to USD 10bn from USD 75bn in FY11.
3.7.10 What are the factors to be considered while negotiating/signing an FTA?

While negotiating/signing an FTA, India needs to take due care of the following factors:
1. ensure that the FTA permits only those items that are wholly manufactured in the concerned
country;
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2. discourage items that are highly subsidised;
3. discourage items that badly hurt the Indian industry and farmers while drawing up ‘the agreed list’
for FTAs;
4. ensure that any such agreement does not violate the WTO guidelines;
5. undertake detailed analysis of the positive effects of FTA on sectors and economy as a whole prior
to signing an agreement;
6. address all trade facilitation concerns, including mutual recognition agreements on standards,
customs collaboration agreements, and expansion of transport links so as to remove all NTBs with
each other;
7. reflect services prominently in all agreements so as to feature India’s dynamic comparative
advantage in services;
8. ensure high-level political attention to induce institutional improvements, such as commitments to
tariff reduction, customs co-operation, etc.
9. negotiating bilateral FTAs with countries where trade complementarities and margin of preference
is high may benefit India in the long run.
10. higher compliance costs nullify the benefits of margin of preference, thus reducing compliance cost
and administrative delays is extremely critical to increase utilization rate of FTAs.
11. proper safety and quality standards should be set to avoid dumping of lower quality hazardous goods
into the Indian market.
12. circumvention of rules of origin should be strictly dealt with by the authorities. In case of India-
SriLanka FTA, Srilanka had started exporting copper to India by under invoicing of imported scrap to
in order to show higher value addition for qualifying for preferential rates under the FTA. Thus, Rules
of Origin (ROO) norms can easily be circumvented by simple accounting manipulation to flood Indian
markets.
3.8 Regional Comprehensive Economic Partnership
3.8.1 What is RCEP?

RCEP is the world’s largest free trade agreement comprising 15 Asia-Pacific nations, viz, Indonesia,
Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, Cambodia, Japan, South
Korea, China, Australia and New Zealand. The new tariff regime will kick in from 2022 and will see duties
go back to 2014 levels.
The RCEP negotiations were launched by leaders from 10 Asean member states (Brunei Darussalam,
Cambodia, Indonesia, Loas, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and
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six Asean FTA partners (Australia, China, India, Japan, Korea and New Zealand) during the 21st ASEAN
summit in Phnom Penh in Cambodia in November 2012.
The agreement allows for common one set of rules of origin to qualify for tariffs reduction with other
RCEP members. This means less procedures and easier movement of goods. That should encourage
multinational firms to invest more in the region, including building supply chains and distribution hubs.
Coverage Areas: RCEP will cover the following areas: Trade in goods and services, investment, economic
and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, small and
medium enterprises (SMEs) and other issues.
3.8.2 Why India decided not to join RCEP?

In November 2019, External Affairs Minister S Jaishankar, delivering the Fourth Ramnath Goenka
Memorial Lecture on November 14, had said,
India’s stance was based on a “clear-eyed calculation” of the gains and costs of entering a new
arrangement, and that no pact was better than a “bad agreement”.
Following are the issues that India faced in signing the RCEP:
▪ Market access to India: RCEP also lacked clear assurance over market access issues in countries such
as China and non-tariff barriers on Indian companies.
▪ Trade Deficit: In financial year 2019, India registered trade deficit with 11 out of the 16 RCEP countries.
▪
▪ India’s trade deficit with these countries has almost doubled in the last five-six years – from
$54 billion in 2013-14 to $105 billion in 2018-19.
▪ India’s trade deficit with RCEP countries stood at $105 billion, out of which China alone
accounted for $52 billion.
▪ Auto-trigger mechanism: India was unable to ensure countermeasures like an auto-trigger
mechanism to raise tariffs on products when their imports crossed a certain threshold.
▪ MFN clause: It also wanted RCEP to exclude most-favored-nation (MFN) obligations from the
investment chapter, as it did not want to hand out, especially to countries with which it has border
disputes, the benefits it was giving to strategic allies or for geopolitical reasons.
▪ Opening up of sensitive sectors: India felt the agreement would force it to extend benefits given to
other countries for sensitive sectors like defense to all RCEP members.
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▪ Country of Origin: Signing of RCEP deal would have meant dumping of unwanted products by routing
them through other countries i.e. possible circumvention of rules of origin criterion set by India to
determine the national source of products.
▪ Tariff reductions: The RCEP deal format required India to abolish tariffs on more than 70% of goods
from China, Australia, and New Zealand, and nearly 90% goods from Japan, South Korea, and ASEAN.
This would have made imports to India, cheaper.
▪ Past Experience: The NITI Aayog, in 2017, had published a report that pointed out that free trade
agreements have not worked well for India.
▪ It analyzed multiple free trade agreements that India signed in the past decade. Among those
were FTA with Sri Lanka, Malaysia, Singapore, and South Korea.
▪ The Niti Aayog analysis showed that imports from FTA countries increased while export to
these destinations did not match up.
▪ The Niti Aayog found that FTA utilization by India has been abysmally low between 5 and 25
percent.
▪ Plantation products like rubber: Vietnam and Indonesia have very cheap rubber to export.
▪ Dairy Sector: New Zealand is the second-largest exporter of milk and milk products. New Zealand’s
milk producers are more efficient than India’s small producers. Both Australia and New Zealand are
waiting for free access to India for their dairy products.
▪ Services trade: India has “long pushed for other countries to allow greater movement of labor and
services” in return for opening up its own market. Any agreement on trade in goods without
simultaneous agreement on services trade and investment will only harm India’s interests.
3.8.3 Why not joining RCEP is the right decision for India?
• China Factor: In the backdrop of rising tensions at India-China borders and the strong presence of
China as a center of RCEP trade deal, it would have been difficult for India to reduce its exposure to
China’s products, at a time when India is striving hard to find alternatives for China-made products.
• Made in India: As India is pursuing its objective to become an Atmanirbhar Bharat, domestic industries
are required to be shielded by the use of Tariffs. By joining RCEP, India could have to compromise on
this front.
• Recession in India: At a time, when India is gripped under ‘Technical Recession’ and unemployment is
on rise, giving a boost to domestic industries becomes of utmost importance.
• Existing FTAs: As per a few experts, RCEP hardly makes a difference as it has FTAs with ASEAN, and
CEPAs (Comprehensive Economic Partnership Agreements) with Japan and South Korea already.
• Clarity of India’s strategic vision: India’s strategic vision seems clear by not joining the China-centric
RCEP, whereas it raises questions regarding the strategic vision of other Indo-Pacific countries whether
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China is seen as a threat or as a partner by them. This step will have implications for the Indo-Pacific
concept and the Quad.
3.8.4 What are the possible downsides of not joining RCEP?

• New Delhi has gambled that by not joining the RCEP and building a self-reliant India, it would be in a
position to craft future FTAs from a position of strength. That is an unlikely scenario. As China’s
accession to the World Trade Organization demonstrated, joining an existing deal requires paying a
higher price in terms of trade concessions.
• Further, not joining RCEP robbed India of the chance to play a role in setting norms in new issue areas
in trade such as e-commerce.
• Building an economically strong India requires reforming New Delhi’s policy and regulatory
environment and revisiting and renegotiating past agreements. Staying out of new ones is not the
answer.
• There have been voices of discontent at home as well on the government’s stand.
o Arvind Panagariya, former vice-chairman of the NITI Aayog, has said that India has a lot to gain
from joining the RCEP if it can negotiate better terms. “Whatever I have read in the press, it
appears that there are a number of things which have not yet been addressed. So, if that is
how it is and we eventually join RCEP it is a good thing because we will join with better terms
but if the eventual outcome is we chose not to join RCEP at all then that is not a good
outcome,” Panagariya said. He added: “I remain firm in my belief that ultimately we have to
join this group as there is a lot for us to gain from it. “From India’s point of view this agreement
can be a very big catalyst to attract a lot of multinationals to its shores because it then gives
them access to markets in India as well as in China.”
• Need For Economic Realism: India should deter seeing RCEP only from the Chinese perspective.
o India should acknowledge that the trade bloc represents 30% of the global economy and world
population, touching over 2.2 billion people, and staying out of RCEP may result in suboptimal
economic growth without leveraging Asia-Pacific demand.
o In this regard, India can draw inspiration from Japan & Australia, as they chose to bury their
geopolitical differences with China to prioritise what they collectively see as a mutually
beneficial trading compact.
• Strategic Need: It is not just because gains from trade are significant, but the RCEP’s membership is a
prerequisite to having a say in shaping RCEP’s rules.
o This is necessary to safeguard India’s interests and the interests of several countries that are
too small to stand up to the largest member, China.
o Moreover, staying out of RCEP may also affect India's Act East policy.
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3.8.5 Way Forward
India, as an original negotiating participant of RCEP, has the option of joining the agreement without
having to wait 18 months as stipulated for new members in the terms of the pact.
• India required to make its domestic industries competitive and strong enough to compete in any
international market. It will make negotiating any international agreement easy and profitable.
• Conclusion of 17th ASEAN-India Virtual Summit and adoption of ASEAN-India Plan of Action for 2021-
2025 proves that despite conclusion of RCEP, ASEAN countries are welcoming towards India. India
must try to find out possibilities of increasing trade with ASEAN countries.
• India currently has agreements with members like the ASEAN bloc, South Korea and Japan and is
negotiating agreements with members like Australia and New Zealand.
• Reviews of its existing bilateral FTAs with some of these RCEP members as well as newer agreements
with other markets with potential for Indian exports.
• India should invest strongly in negotiating bilateral agreements with the US and the EU.
o The Modi government has sought to reset its approach to free trade agreements by shifting its
focus away from Asia to the United States, the European Union, and the United Kingdom. Such
a strategy would counter those who argue that leaving the RCEP will isolate India with respect
to multilateral trade agreements. However, as past experience has shown, crafting a free trade
deal with the United States will not be easy either. Washington usually demands much higher
standards in its trade agreements than what is present in RCEP, a requirement that is
particularly true of issue areas such as investor-state disputes and intellectual property rights.
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GENDER ISSUES
FODDER MATERIAL

Contents
1 Part I: Understanding Gender Inequality ...............................................................................................6
1.1 Gender Equality...............................................................................................................................6
1.2 Gender Inequality ...........................................................................................................................7
1.2.1 Types of Gender Inequality......................................................................................................7
1.2.2 Harmful Effects of Gender Inequality ......................................................................................7
2 Part II: Gender Issues in India .................................................................................................................8
2.1 Joint Family System .........................................................................................................................9
2.2 Domestic Violence ........................................................................................................................11
2.2.1 Forms of Domestic Violence ..................................................................................................11
2.2.2 Effects of Domestic Violence .................................................................................................12
2.2.3 Causes of Domestic Violence .................................................................................................14
2.3 Dowry ............................................................................................................................................15
2.3.1 Dowry Deaths ........................................................................................................................15
2.3.2 Effects of Dowry System ........................................................................................................15
2.4 Migration.......................................................................................................................................16
2.4.1 Reasons for Migration ...........................................................................................................16
2.4.2 Challenges faced by Women Migrants ..................................................................................18
2.5 Securing Urban Spaces for Women ..............................................................................................19
2.5.1 Challenges faced by women in urban spaces ........................................................................19
2.6 Sexual Violence against Women in India ......................................................................................21
2.6.1 Reasons for Increasing Sexual Violence ................................................................................22
2.7 Women at Workplace ...................................................................................................................22
2.7.1 Impact and Cost of Workplace Violence ...............................................................................23
3 Part III: Measures against Gender Inequality in India ..........................................................................24
3.1 Constitutional Safeguards against Gender Inequality ..................................................................24
3.2 Legal Safeguards against Gender Inequality .................................................................................25
3.3 Government Schemes for Women Empowerment ......................................................................27
4 Part IV: Census 2011 Data ....................................................................................................................30
4.1 Population Figures ........................................................................................................................30
4.2 Sex Ratio ........................................................................................................................................30
4.3 Child Sex Ratio...............................................................................................................................31
4.4 Literates.........................................................................................................................................31
4.5 Literacy Rates ................................................................................................................................32

4.6 Workers .........................................................................................................................................32
4.7 Work Participation Rate ................................................................................................................34
5 Part V: Measures of Gender Inequality ................................................................................................34
5.1 Global Gender Gap Index ..............................................................................................................34
5.2 Gender Inequality Index................................................................................................................35
5.3 Gender Parity Index ......................................................................................................................36
5.4 SDG Gender Index .........................................................................................................................37
6 Part VI: Other Contemporary Gender Issues .......................................................................................38
6.1 Termination of Pregnancy (MTP) Amendment Bill, 2020 .............................................................38
6.1.1 Salient Features .....................................................................................................................38
6.1.2 Benefits ..................................................................................................................................38
6.1.3 Flaws ......................................................................................................................................38
6.1.4 Key Issues and Analysis ..........................................................................................................39
6.2 Task Force on Age of Marriage for Women ..................................................................................39
6.2.1 Background ............................................................................................................................39
6.2.2 Minimum Age versus Majority ..............................................................................................39
6.2.3 About the Committee ............................................................................................................40
6.2.4 How common are child marriages in India? ..........................................................................40
6.2.5 Provisions for the minimum age for marriage ......................................................................40
6.2.6 Evolution of the law ...............................................................................................................40
6.2.7 The Sarda Act .........................................................................................................................41
6.2.8 Contention over different legal standards ............................................................................41
6.2.9 Why is the law being relooked at? ........................................................................................41
6.2.10 Upholding the Constitution ...................................................................................................41
6.3 UN Report on Gender Gap in Labour Market ...............................................................................42
6.3.1 About the Report ...................................................................................................................42
6.3.2 Highlights on status of women ..............................................................................................42
6.3.3 Participation in the labour market ........................................................................................42
6.3.4 Working for free ....................................................................................................................42
6.3.5 Family responsibilities ...........................................................................................................42
6.4 Representation of Women in Parliament .....................................................................................43
6.4.1 Status of Women in Indian Politics: .......................................................................................43
6.4.2 Arguments for Women Reservation in Parliament ...............................................................43
6.4.3 Women’s Reservation Bill ......................................................................................................44

6.4.4 Arguments against Women Reservation in Parliament ........................................................44
6.4.5 Other Concerns Against Reservation .....................................................................................45
6.4.6 Way Ahead .............................................................................................................................45
6.5 Hindu Women’s Inheritance Rights ..............................................................................................45
6.5.1 What is the ruling?.................................................................................................................46
6.5.2 What is the 2005 law? ...........................................................................................................46
6.5.3 Background ............................................................................................................................46
6.5.4 What did the law bring in? ....................................................................................................46
6.5.5 How did the case come about? .............................................................................................46
6.5.6 The present case ....................................................................................................................47
6.5.7 What was the government’s stand? ......................................................................................47
6.6 Permanent Commission to Women Officers in the Army ............................................................47
6.6.1 Why such an order? ...............................................................................................................47
6.6.2 Women in Army: Background of the case .............................................................................48
6.6.3 Arguments Rejected by the Supreme Court ..........................................................................48
6.6.4 Arguments by the Government .............................................................................................49
6.6.5 Supreme Court Critical of Government Note ........................................................................49
6.6.6 Implications of the Judgement ..............................................................................................50
6.7 Women in Indian Agriculture ........................................................................................................50
6.7.1 Role ........................................................................................................................................50
6.7.2 Status .....................................................................................................................................50
6.7.3 Reasons for Emerging Trend of Feminization of Agriculture ................................................51
6.7.4 Issues Faced by Women in Indian Agriculture ......................................................................51
6.7.5 Steps Taken by the Government ...........................................................................................52
6.7.6 Way Forward..........................................................................................................................52
6.8 Paternity Leave .............................................................................................................................53
6.8.1 What is Paternity Leave? .......................................................................................................53
6.8.2 Significance of Paternity Leave ..............................................................................................53
6.8.3 Challenges in paternity leave.................................................................................................54
6.8.4 Way Ahead .............................................................................................................................54
6.9 Menstrual Leaves ..........................................................................................................................55
6.9.1 Why talking about menstruation is considered a taboo in India? ........................................55
6.9.2 Menstrual Leave discourse in India .......................................................................................55
6.9.3 What is the need for menstrual leave? .................................................................................56

6.9.4 What are the unintended consequences that the policy may generate? .............................56
6.9.5 Way Forward..........................................................................................................................57
6.10 Gender Dimensions of the Covid-19 Pandemic ............................................................................57
6.10.1 Introduction ...........................................................................................................................57
6.10.2 Indian Women’s vulnerability to COVID-19’s impacts: Livelihood and Job Security ............58
6.10.3 Social Inequities .....................................................................................................................58
6.10.4 Health.....................................................................................................................................58
6.10.5 Other Aspects ........................................................................................................................59
6.10.6 Policy response- Way Forward ..............................................................................................59
Important Note for Students:

This chapter has been divided into 6 parts. Parts I to V parts are exactly the same as the chapter on
‘Gender Issues’ uploaded in the objective set of chapters. Part VI has been newly added and it covers
important contemporary Gender Issues, which are important for the descriptive answer writing part of
RBI Grade B Phase II examination.
According to Mahatma Ganadhi, ‘woman is the companion of man, gifted with equal mental capacity.’
However being discriminated against is the lived reality of millions of women not only in India but across
the globe. This chapter on ‘Gender Issues’ will help us in developing a holisitc understanding of gender
inequality – its meaning, manifestation, prevalance and remedies.
In Part I, we will understand the terms gender equality and gender inequality. In Part II, we will explore
multiple gender issues such as dowry, sexual harassment, domestic violence among other issues that are
relevant for women in the Indian society.
In Part III, we will look at the various measures taken against gender inequality in India. Herein we will
look at Articles from the Consitution of India that are aimed at empowerment of women; we will also see
the laws enacted by the Government of India to protect the rights and interests of women in India; and
finally we will also see some of the most important female-centric schemes and programmes launched in
India.
Data is the life-blood of good policy making. Part IV captures data related to females from Census 2011.
In Part V, we will explore the indices that have been evolved for capturing the developmental status of
females across different countries.

1 Part I: Understanding Gender Inequality
In this part we will look at the meanings of terms gender equality and gender inequality. We all also be
looking at the different types of gender inequalities that exist in a society and their harmful effects.
1.1 Gender Equality

Gender equality refers to the equal rights, responsibilities and opportunities of women and men and
girls and boys.
Gender equality implies that the interests, needs and priorities of both, women and men are taken into
consideration, recognizing the diversity of different groups women and men (for example: women
belonging to ethnic minorities, lesbian women or women with disabilities).
Gender equality is both, a human rights principle and a precondition for sustainable, people-centered
development.

1.2 Gender Inequality
Inequality is when some people or things are privileged over others. So, it follows that gender inequality
is when one gender is privileged over others. It means treating people unequally because of their
gender.
1.2.1 Types of Gender Inequality

• Ideological: the idea that one gender is better than others.
• Economic: paying people of one gender more than others.
• Legal: laws that treat one gender in a more privileged fashion.
• Opportunity related: giving more opportunities to people of one gender.
• Emotional: talking disparagingly about people of a certain gender compared to others.
1.2.2 Harmful Effects of Gender Inequality

• Social effects: gender inequality has, unfortunately, shaped many of our societies and traditions.
• Loss of talent: when we nurture the talents of one gender more than others, our talent pool is
diminished.
• Confidence issues: treating people of a certain gender disparagingly can harm their confidence.
• Emotional: discriminating against people of one gender can cause great sadness and stress.
• Economic: discrimination can cause one gender to be – overall – richer than others.

2 Part II: Gender Issues in India
Joint family system, domestic violence, dowry, migration, urbanisation, sexual violence and workplace
experience are some of the pressing gender issues in India. In this part, we will be discussing each of these
issues in detail.
The status of women in India has been subject to many great changes over the past few millennia. From
equal status with men in ancient times through the low points of the medieval period, to the promotion
of equal rights by many reformers, the history of women in India has been eventful. In modern India,
women have held high offices including that of the President, Prime Minister, Speaker of the Lok Sabha
and Leader of the Opposition. However, women in India continue to face atrocities such as rape, acid
throwing, dowry killings, and the forced prostitution of young girls.
The patriarchal nature of Indian society, which even though gives respect to women as they are our
mothers and sisters, has greatly hampered both the independence as well as the safety of women.
Women in India continue to face violence from womb to the tomb. While in womb they face the ever
looming threat of feticide and after birth, they are subject to various forms of violence and harassment
at different points of their lives, at the hands of different actors, ranging from their parents to their
husbands to the members of general public to their employers.
This state of affairs exists even when the Constitution of India guarantees to all Indian women equality
(Article 14), no discrimination by the State (Article 15(1)), equality of opportunity (Article 16), and equal
pay for equal work (Article 39(d)). In addition, it allows special provisions to be made by the State in favor
of women and children (Article 15(3)), renounces practices derogatory to the dignity of women (Article
51(A) (e)), and also allows for provisions to be made by the State for securing just and humane conditions
of work and for maternity relief (Article 42).
Concept Check
Which part of the Constitution of India explicitly talks about renouncing ‘practices derogatory to the
dignity of women’?
(a) Preamble

(b) Fundamental Rights
(c) Directive Principles of State Policy
(d) Fundamental Duties
(e) All of the above
Answer: D
Let us discuss some of the issues faced by women in India in greater details:
2.1 Joint Family System

The family in India does not consist only of husband, wife and their children but also of uncles, aunts and
cousins and grandsons. This system is called joint family or extended family system.
But to have a clear understanding of the meaning of joint family we must have to analyze some of its
definitions:
According to Smt. Iravati Karve, “A joint family is a group of people who generally live under one roof,
who eat food cooked at one hearth, who hold property in common and who participate in common
worship and are related to each other as some particular type of Kindred.”
According to K.M. Kapadia, “Joint family is a group formed not only of a couple and their children but
also other relations either from father’s side or from mother’s side depending on whether the joint family
is patrilineal or matrilineal.”
Thus, we conclude that the joint family comprises of a large number of members which has greater
generation depth and who are related to one another by property, income, household and mutual rights
and obligations. It is organised on the basis of close blood ties.
Joint family has the following features or characteristics: (1) Large in Size (2) Joint Property (3) Common
Kitchen (4) Common Residence (5) Common Worship (6) Similar rights and obligations (7) Close blood ties
(8) Absolute power of the head (9) Co-operation (10) Socialistic Ideals.
According to Ram Ahuja, important characteristics of joint families are as follows:
• Joint family has an authoritarian structure, that is, the power mostly rests with the patriarch or the
head of the family.
• In a joint family, individual interests are always less important than the family interests, that is to
say that family always comes first whenever required.

• Status of the members in the family is determined by their age and relationship to the rest of family.
This is very much hierarchical in nature.
• In a joint family, the conjugal relationships (relationship between a married couple) are always
subordinate to the filial (relationship between parents and children) and the fraternal relationships
(relations between brothers).
• The family functions on the principle of joint responsibility.
• All the members get equal attention as per their age and positions in the family.
• The authority in the family between men and men, men and women, women and women is
determined by the principle of seniority.
Impact of Joint Family on Women:
A comparison of women in nuclear households with those still living in joint families revealed that the
former enjoy greater decision-making power, greater freedom of movement outside the house
premises and greater participation in jobs. Women in joint households not only had less decision-making
power but they also needed the permission of other family members more often to execute even routine
household activities.
Women’s autonomy in joint families is differentiated by economic status, caste and household location.
Women in richer joint households have more autonomy in intra-household decision-making but less
freedom of movement outside the home. For women in poorer joint households, it is just the opposite:
they have greater freedom of movement outside the home but less autonomy in intra-household
decision-making. Geographic location of the household affects women’s autonomy: women in joint
households in northern India have less autonomy compared to their counterparts in southern India.
Interestingly, in the south, the effects of family structure on women’s autonomy are weaker.
Additionally, it has been seen that for lower caste women, and women in north Indian states, women’s
freedom to seek health benefits and to visit health centres for themselves and their children, is highly
curtailed.
Also, within joint family structures, not all women in the family have the same level of autonomy. The
autonomy enjoyed by daughters-in-law and mothers-in-law may be very different, and further, the level
of autonomy a daughter-in-law has in the home may depend on whether she has a repressive or
supportive mother-in-law.
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Women from upper caste groups are more likely to reside in a joint family system than those from
disadvantaged groups. The higher social status associated with being upper caste acts as an inhibitor for
‘allowing’ women to leave the house for paid work
Domestic duties including childcare might be keeping many Indian women from working but living with
the in-laws does not mean that women are more able to take up jobs, new research indicates. On the
contrary, women who live in joint families are significantly less likely to participate in the labour market.
Non-farm employment rates for women from joint families lag substantially behind those for women
in nuclear households. Such work typically involves leaving the house and working among people other
than one’s family, and the rates of non-farm employment are lower for women from joint families in all
education categories, narrowing only for tertiary education levels.
According to more recent data from the National Family Health Survey and the National Sample Survey
Office, the presence of children aged 0-5 is a strong predictor of dropping out of paid work. The primary
reason that women engaged in “domestic duties" (including childcare) gave to NSSO surveyors in 2011-
12 for not being part of the workforce was that there was no one else to carry out their domestic duties.
2.2 Domestic Violence

Domestic violence, or intimate partner violence (IPV) as it is sometimes called, is a worldwide problem.
Domestic violence in India is endemic. Around 70% of women in India are victims of domestic violence,
according to a former Union minister for Women and Child Development. This all occurs despite the fact
that women in India are legally protected from domestic abuse under the Protection of Women from
Domestic Violence Act.
2.2.1 Forms of Domestic Violence

• Physical violence involves the use of physical force against another. Examples include hitting, shoving,
grabbing, biting, restraining, shaking, choking, burning, forcing drug/alcohol use, and assault with a
weapon, etc. Physical violence may or may not result in an injury that requires medical attention.
• Sexual violence involves the violation of an individual’s bodily integrity (sexual assault), including
coercing sexual contact, rape, and prostitution, as well as any unwelcome sexual behavior (sexual
harassment), including treating someone in a sexually demeaning manner or any other conduct of a
sexual nature, whether physical, verbal, or non-verbal. Sexual abuse also includes behavior which
limits reproductive rights, such as preventing use of contractive methods and forcing abortion.
• Psychological abuse is often characterized as intimidation, threats of harm, and isolation. Examples
include instilling fear in an intimate partner through threatening behavior, such as damaging property
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or abusing pets, constant supervision, or controlling what the victim does and who they talk to.
Spiritual abuse may be included as a type of psychological abuse. It involves the misuse of spiritual or
religious beliefs to manipulate or exert power and control over an intimate partner (i.e., using
scripture to justify abuse or rearing the children in a faith or religious practice the partner has not
agreed to).
• Emotional abuse involves undermining an individual’s sense of self-worth. Examples of emotional
abuse include constant criticism, name-calling, embarrassing, mocking, humiliating, and treating like
a servant.
• Economic abuse involves making or attempting to make the victim financially dependent on the
abuser. Examples of economic abuse include preventing or forbidding an intimate partner from
working or gaining and education, controlling the financial resources, and withholding access to
economic resources.
2.2.2 Effects of Domestic Violence

Effects on the victim
• Death, illness, injury and disability — domestic and family violence is the leading cause of death, illness
and disability for women aged under 45
• Emotional and psychological trauma — the devastating impact on an individual’s physical, mental and
emotional health including depression, shame, anger and suicide
• Homelessness — many homelessness say domestic and family violence is an issue
• Use of alcohol and other drugs to deal with the pain
• Physical health injuries and problems, which may not get medically treated
Effects on the family
• Violence and the threat of violence at home creates fear and can destroy family environments and
lead to the break-up of families
• Frequent moving to avoid the abuser
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• Regular household conflict
• Child protection or police involvement
Effects on the community
• Children growing up without learning about positive and respectful relationships

• Abusers going to prison
• Higher rates of alcohol and other drug use, and mental health problems
Effects on Children
Studies show that living with domestic violence can cause physical and emotional harm to children and
young people in the following ways:
• ongoing anxiety and depression

• emotional distress
• eating and sleeping disturbances
• physical symptoms, such as headaches and stomach aches
• find it hard to manage stress
• low self-esteem
• self-harm
• be aggressive towards friends and school mates
• feel guilt or blame themselves for the violence
• have trouble forming positive relationships
• develop phobias and insomnia
• struggle with going to school and doing school work
• use bullying behaviour or become a target of bullying
• difficulty concentrating
• find it hard to solve problems
• have less empathy and caring for others
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2.2.3 Causes of Domestic Violence
Just as domestic violence is a multifaceted problem in India, the causes are also multifarious. Some of
them discussed below.
• Domestic violence often happens in India as a result of dowry demands. There are strong links
between domestic violence and dowry, a cultural practice deeply rooted in many Indian communities,
which is the money, goods, or property the woman/woman’s family brings to a marriage to now
become under the ownership of the husband.
• There are three main aspects of the patriarchal household structure in India that affect women’s
agency: marriage, active discrimination by means of abuse (marital or extramarital), and diminished
women’s agency through limited economic opportunity through stifled opportunity for
independence. In all these dimensions, there is a clear relationship between strong patriarchal familial
structures and limited capabilities and agency for women, which are strongly correlated with causal
factors for domestic violence such as gender disparities in nutritional deprivation and a lack of
women’s role in reproductive decisions.
• There is widespread hesitation amongst most Indian women who experience domestic violence to
report or prosecute against such crimes. A major reason for this reluctance is the patriarchal structure
that is the framework for the vast majority of households in India and the misconception that it is
almost always the woman’s fault for provoking domestic abuse that such abuse occurs. The results
of this hesitancy to report cases is clear in that reported data overwhelmingly tends to underestimate
actual prevalence of occurrences of domestic violence.
• Domestic violence is often not handled as a legitimate crime or complaint, but more of a private or
family matter. Caste, class, religious bias and race also determine whether action is to be taken or not.
Other factors responsible for domestic violence include socio-economic class, educational level, and
family structure beyond the patriarchal framework.
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Concept Check
Q. What are the characteristics of a patriarchal system?
(a) Women dominance, women identification, women centeredness and obsession with control.
(b) Male dominance, male identification, male centeredness and obsession with control.
(c) Obsession with money, need to control all women, includes only men and includes only military.
(d) Cultural dominance, oppression of women, oppression of the elderly and male identification.
(e) None of the above
Answer: B
2.3 Dowry
In Indian subcontinent, dowry is the payment in cash or some kind of gifts given to a bridegroom's family
along with the bride. The dowry system is thought to put great financial burden on the bride's family.
Historical records suggest that dowry in ancient India was insignificant, and daughters had inheritance
rights, which by custom were exercised at the time of her marriage. However, dowry has become a
prevalent practice in India's modern era.
2.3.1 Dowry Deaths

These are deaths of young women who are murdered or driven to suicide by continuous harassment
and torture by husbands and in-laws in an effort to extort an increased dowry. Dowry deaths are found
in many countries, but India reports the highest total number of dowry deaths. Dowry death is considered
as one of the many categories of violence against women, alongside rape, bride burning, eve teasing, and
acid throwing. Dowry deaths in India are not limited to Hindus or any specific religion. The ratio of dowry
deaths is about the same as the ratio of population in India by religions.
2.3.2 Effects of Dowry System

This social malaise has multifarious effects, some of them discussed below.
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(a) The most prominent effect of dowry system is the prevalence of domestic violence, which is a crime
against humanity. Domestic violence in turn has many other effects which have been discussed above.
(b) The continuously decreasing sex-ratio is also attributed to dowry system, because daughters come to
be seen as financial burden on the families. As a result, the daughters are killed just after they are born
(infanticide) or they are killed even before they come into this world (feticide).
(c) The widespread prevalence of mental disorders, especially among women, has been attributed to the
tortures they have to face from their in-laws and husband. According to a study, more than 60 percent
Indian women are suffering from one or the other forms of mental disorders.
(d) The persistent conflict and squabble between parents over the issue of dowry may be detrimental to
the upbringing and personality development of their children.
2.4 Migration
Human migration is the movement by people from one place to another with the intention of settling
temporarily or permanently in the new location. The movement is typically over long distances and from
one country to another, but internal migration is also possible.
In gender studies, the term “Feminization of Migration” has been proposed for a suggested "gendered
patterns" in migration, meaning that there is a trend of a higher percentage of women among voluntary
migrants. The term is mostly applied to an increase of migrant domestic workers to industrialized
countries, especially those working as nannies.
A more recent time the shift in migration patterns relates to an increase in the migration of single women
and partnered women who migrate without their families. Due to stipulations present within contract-
based employment, worker families are prevented from permanently settling and as a result, women are
migrating alone.
2.4.1 Reasons for Migration

The factors which motivate migration may be called as push and pull factors.
Pull factors: the pull factors those which attract an individual to migrate. Examples: employment
opportunity, education, housing facilities etc.
Push factors: the push factors which motivate migration are poverty, indebtedness, social outcaste,
unemployment, natural calamities etc. Which compete people to move out.
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The others factors: the physical condition of a region which varies according to time and space play vital
role in influencing human migration from one region to another. Physical catastrophes such as
earthquakes, landslides, climate fluctuation etc., have time to time influenced migration. Floods, droughts
force people to desert their place of origin in favour of safer areas.
Economic factors: the important motivating factors are economic in search of better occupation, lack of
cultivable land and growth of population. Prior to industrialization village cottage industries, and
mechanization of agriculture made people to migrate.
Social factors: the number of deserted women is on the increase which leads to an increase in the
migration of these women in search of livelihood. According to All India data a higher percentage of
women migrating from rural - rural destinations compared to rural – urban destinations. The male
migrants are dependent on female earnings till they find work. The social customs, tradition, induce
people to migrate from one place to another. Inter caste marriage is an example. They are either socially
outcastes or disliked the fellow villagers and relatives.
Demographic factors: the growth of population and unbalanced growth of literacy are other important
factors. People with higher education and work experience move to new areas for their better earnings.
The birth rate and the death rates also influence human migration. The increases of population leads to
increase of labour, and the surplus labour from rural areas migrate to urban areas.
Concept Check
Q. Which among the following can be classified as a pull factor for migration of females from one
location to another?
(a) Poverty
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(b) Indebtedness
(c) Social Outcaste
(d) Education
(e) Natural Calamities
Answer: D
2.4.2 Challenges faced by Women Migrants

• Studies of immigrant women argue that women more often than men are denied full incorporation;
that is, the full civil, political, and social rights and responsibilities that normally come with
membership in a society.
• Women may have different experiences than men because they are frequently segregated into
traditional "female" occupations, such as domestic work, childcare, or garment manufacturing. Even
highly skilled immigrant workers may have different experiences based on their gender. The gender
hierarchies that affect all women in general also handicap immigrant women in particular,
influencing job opportunities, work environment, and wages vis-a-vis their male counterparts.
• The existing push and pull factors hand in hand with increasing barriers to migration (which are not
related to labor demand) are only fostering an increase in irregular migration exposing migrant
workers, especially women, to exploitative working conditions and denying them access to legal and
social protection. In such conditions principles of labour and human rights can become easily
subsumed. In other words, from the source country migration is becoming increasingly informalized
as more and more workers are willing to risk irregular avenues to seek work abroad. In the destination
countries the whole area of migration is increasingly criminalized as they deal with more irregular
workers and victims of trafficking (in fact irregular migration and trafficking cannot be divorced from
policies of regular labor migration).
• Working in a country away from their homes, women are subjected to various forms of
discrimination, exploitation and abuse. Sometimes they are not given their due salary, which is
another form of bonded labor and slavery. Forced by domestic economic conditions, women are
sometimes forced to migrate in search of employment avenues. As a result, sometimes they have to
work in highly insecure and disturbed areas, threatening not only their livelihood but their very life.
For example, in a recent instance Indian nurses working in Iraq were abducted for weeks, triggering
national outrage.
• Xenophobia leads many in receiving countries to view migrant women workers as aliens: as inferiors–
culturally and socially; without rights, or an ability to obtain redress; with ignorance– about the
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worker’s culture; as commodities, and therefore, subject to different standards of treatment in
general – there is widespread reporting of migrant workers being ill-treated , starved , locked up and
so on; because of different ways of relating to women arising out of religion and culture– making
female workers more vulnerable to exploitation and sexual abuse.
Concept Check
Q. A dislike of or prejudice against people from other countries is known as
(a) Ethnocentrism
(b) Xenophobia
(c) Xenophilia
(d) Aporophobia
(e) Chauvinism
Answer: B
2.5 Securing Urban Spaces for Women

At present, rapid urbanization is challenging both national and local governments in their role to develop
compact, inclusive, connected and integrated cities able to achieve spatial equality, job creation, human
and community development, strategic infrastructure and environmental sustainability. In this process
of fast urbanization, the failure to fully mainstream gender equality into urban planning, legislation and
economic development is hindering the inclusiveness of cities and preventing the full integration of
women and girls in the economic, social, political and cultural life of cities and therefore the realization of
the just city.
Compared to rural areas, cities offer more diverse employment opportunities to increase financial
independence; greater ease in accessing education at different levels, better access to healthcare; more
opportunities to socialize outside the home; more prospects to take up community or political leadership
roles and, most notably, more possibilities to redefine the traditional roles of men and women.
Nevertheless, gender inequalities persist, therefore, women and girls benefit less from urbanization and
the urban space than men and boys. In fact, women and girls in cities face a range of specific barriers and
vulnerabilities: gender inequality, violence against women, poverty, unpaid care-work, limited control
over assets, unequal participation in public and private decision-making, and barriers to education,
employment, housing and basic services.
2.5.1 Challenges faced by women in urban spaces

• Nowhere are the inequalities facing urban woman more evident than in informal settlements where
women account for over half the population. In these settlements, women face the most serious
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urban challenges: poverty; overcrowding, sexual harassment and assault, and lack of access to
security of tenure, water and sanitation, transport and sexual and reproductive health services.
• Lack of secure tenure over housing and land affects millions of people across the world, but women
face harsher deprivations. This translates into the situation that prevent women from buying land
directly, having a house in their own name, or having control over decision-making regarding land and
housing issues. There are negative consequences as a result of women’s disempowerment over land
and housing; it is women who are worst affected by evictions and by tenure insecurity caused by
natural and human-made disasters, armed conflict, and civil strife. Thus, accessing, owning and
controlling land and housing empowers women to take control of their lives and to drive sustainable
development and disaster resilience in their communities.
• Lack of safety and mobility is a serious obstacle to achieving gender equality in the city, as it limits the
right of people to participate fully and freely as citizens in their communities. Poor urban design
choices, such as poor street lighting and secluded underground walkways can make women more at
risk of violence and sexual attacks in public spaces. Women’s safety involves strategies, practices and
policies which aim to reduce gender-based violence, including women’s vulnerability to crime.
• Making communities safer for all requires a change in community norms, patterns of social
interaction, values, customs and institutions. Thus, gender sensitive policies, planning and
approaches to the prevention of crime and violence against women need to be inclusive of
development and safety strategies.
• In the city, women have more opportunities for gainful employment; however, they continue to earn
less than men for their labour. This is due to their concentration in lower-paid jobs, as well as,
cultural and traditional patterns that result in their labor being valued less than that of men. Women
living in poverty face immense challenges in accessing credit and financing for themselves and their
organizations. Ensuring the integration of women to public life and jobs through the specific location
of economic activities for market and accessible commercial uses, public venues and other services,
in which social and economic dimensions are developed, is shown to lower poverty levels. Finally,
economic empowerment grants women more decision-making power within the family and is linked
to lower levels of domestic violence and femicide.
• Lack of access to clean water, sanitation, and other basic services poses risks to health. Women,
particularly those in poor urban communities, are at greater risk of experiencing health problems,
since they are often prevented from accessing, and benefiting from, quality health services due to a
lack of adequate services, systems, and socio-political will. Women are more likely than men to
experience physical, sexual, and emotional violence, which adversely affects their health.
Communities living in poverty carry the greatest HIV/AIDS burden compared to other urban groups.
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Socio-economic, cultural and political power disparities; stigma and the burden of unpaid care-work
contribute to this imbalance.
2.6 Sexual Violence against Women in India

Urban public space includes all the areas in between built structures and other spaces the public is
attracted to. In addition to streets, roads, public toilets, bus stops, railway stations, modes of transport,
promenades and parks and playgrounds, the new “hang-out” spaces of Indian metropolitan cities, like
shopping malls, coffee shops, movie theatres and restaurants, are also included. The term safety includes
not just the actual physical and psychological impacts of an act of aggression or violence but also the fear
or anxiety associated with the anticipation of violence in an urban public space. In the light of increasing
sexual assault on women in Indian cities, there has been public outrage against the apathy by
government agencies to control the situation.
The violence that often defines women in society has reached endemic proportions, becoming ordinary
instead of extraordinary. Violence, necessarily, is not physical (like rape- which is the most brutal form of
violence), but it may also include- stalking, voyeurism, etc.
Women and children often give up on the right to education or a livelihood as a trade-off for safety. The
safety of women in urban areas is welded to a truly inclusive city that affirms the special needs of all
citizens, especially those who are disabled, poor or belong to different ethnicities and participatory
decision-making that involves strong partnerships between civil society organizations, governments and
urban local authorities, law enforcing agencies is the need of the hour.
Cities should be spaces for opportunities and personal growth rather than sites of exclusion and assault.
However, more often than not, the experiences of women across the world suggest that, they turn out to
be the latter, especially in contemporary Indian cities. Today, there is a growing realization about the need
to create a more secure working, living and commuting environment for women in urban centers.
Studies across the globe have shown that safety in public spaces ranks a close second after domestic or
partner violence and sexual violence with respect to women’s safety concerns. Nonetheless, this is not
a concern generally taken seriously in large-scale planning agendas. Space is not neutral and cities are
designed for the neutral user. In India, the neutral user is usually “the middle- or upper-class young male,
a heterosexual who is able-bodied.”
Cities can be designed to be more inclusive, but only when designs reflect an awareness of how
characteristics such as age, sex, sexuality, caste, religion, economic status and difference in ability lead
individuals to experience the same space quite differently.
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2.6.1 Reasons for Increasing Sexual Violence
• Poorly lit urban spaces coupled with inadequate police patrolling are favorable for increased sexual
violence.
• Lack of stringent laws for punishing sexual assault is compounded by inefficient criminal justice
system. It is evident from the rate of conviction in rape cases, which is continuously declining since
the few decades. Such a situation serves to be an incentive, rather than detrimental, for committing
violence against women.
• Increasing objectification of women by media as an object for sexual satisfaction.
• Inefficient and apathetic attitude of law enforcement agencies.
• Patriarchal structure of Indian society.
2.7 Women at Workplace

Women in the workforce earning wages or a salary are part of a modern phenomenon, one that developed
at the same time as the growth of paid employment for men, but women have been challenged by
inequality in the workforce. Until modern times, legal and cultural practices, combined with the inertia
of longstanding religious and educational conventions, restricted women's entry and participation in the
workforce.
However, over the past three decades, workplace has become a much more diverse environment. With
women representing 24.4 per cent of the total workforce in India, personal security has become central
to their physical, intellectual, emotional, economic and spiritual well-being.
Violence against women in the work place takes place in all countries throughout the world and takes
many forms, including sexual harassment and bullying. It affects all professions and sectors and
particularly women living in poverty as they are more likely to be exposed to exploitation and abuse in
informal labor settings like, for example, women migrant workers.
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Workplace violence against women is understood to include physical assault, threatening behavior,
bullying, verbal abuse, and various forms of harassment. Workplace violence usually occurs in a
workplace setting; however, it may also occur outside of the work setting. Violence may be perpetrated
by a colleague or supervisor, a client or customer. When gender is incorporated in analyses of workplace
violence, important issues emerge. These include:
• Women have difficulty in labeling their experiences as violence and harassment;

• Women are over-represented in low paid, low status and precarious jobs;
• Occupational health and safety research has often viewed women’s work as safe work;
• Men are more likely to be the perpetrators of violence against women in the workplace (although
women also perpetrate violence against other women);
2.7.1 Impact and Cost of Workplace Violence

The negative consequences of workplace violence and harassment for women include leaving their jobs,
developing psychological disorders, experiencing relationship breakdowns and developing substance
abuse problems. Additional costs to industry include costs associated with staff turnover, absenteeism,
reduced efficiency, decline in work quality, early retirement costs, counseling program costs, mediation
or grievance proceedings, and anti-discrimination action.
Despite such widespread occurrence of workplace harassment and violence, women do not report the
matter. As a result, the perpetrators do not face any credible deterrence. There have been allegations of
sexual assault even against the members of higher judiciary in India. Several reasons for why women do
not report workplace violence were identified including:
• Women see violence as a 'normal' part of the workplace, it is unavoidable and there is nothing that
can be done about it;
• They don’t know what to do about it;
• They can be silenced by the experience of workplace violence as it is seen as integrally connected with
the shame associated with other types of men’s violence against women;
• Some women fear they will lose their jobs if they report violence;
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• Some women lack faith in the system, often believing the violence is already known to and condoned
by managers; and
• Some fear that the process of reporting is likely to be traumatic.
• Many a times, workplaces simply do not have effective mechanisms for addressing violence.
3 Part III: Measures against Gender Inequality in India

Right from the inception of the Constitution of India, policymakers in India have been aware of the problem
of gender inequality in India. Accordingly, various legal and developmental measures have been taken
from time to time to ameliorate the situation. In this part, we will look at some the important constitutional
safeguards, legal safeguards and government schemes that have been put in place to reduce gender
inequality by empowering women in India.
3.1 Constitutional Safeguards against Gender Inequality

• Equality before law for women (Article 14)
• The State not to discriminate against any citizen on grounds only of religion, race, caste, sex, place of
birth or any of them (Article 15 (i))
• The State to make any special provision in favour of women and children (Article 15 (3))
• Equality of opportunity for all citizens in matters relating to employment or appointment to any office
under the State (Article 16)
• The State to direct its policy towards securing for men and women equally the right to an adequate
means of livelihood (Article 39(a)); and equal pay for equal work for both men and women (Article
39(d))
• To promote justice, on a basis of equal opportunity and to provide free legal aid by suitable legislation
or scheme or in any other way to ensure that opportunities for securing justice are not denied to any
citizen by reason of economic or other disabilities (Article 39 A)
• The State to make provision for securing just and humane conditions of work and for maternity relief
(Article 42)
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• The State to promote with special care the educational and economic interests of the weaker
sections of the people and to protect them from social injustice and all forms of exploitation (Article
46)
• The State to raise the level of nutrition and the standard of living of its people (Article 47)
• To promote harmony and the spirit of common brotherhood amongst all the people of India and to
renounce practices derogatory to the dignity of women (Article 51(A) (e))
• Not less than one-third (including the number of seats reserved for women belonging to the
Scheduled Castes and the Scheduled Tribes) of the total number of seats to be filled by direct election
in every Panchayat to be reserved for women and such seats to be allotted by rotation to different
constituencies in a Panchayat (Article 243 D(3))
• Not less than one- third of the total number of offices of Chairpersons in the Panchayats at each level
to be reserved for women (Article 243 D (4))
• Not less than one-third (including the number of seats reserved for women belonging to the
Scheduled Castes and the Scheduled Tribes) of the total number of seats to be filled by direct election
in every Municipality to be reserved for women and such seats to be allotted by rotation to different
constituencies in a Municipality (Article 243 T (3))
• Reservation of offices of Chairpersons in Municipalities for the Scheduled Castes, the Scheduled
Tribes and women in such manner as the legislature of a State may by law provide (Article 243 T (4))
Concept Check
Q. Which of the following Articles of the Constitution of India provides for ‘equality of opportunity
for all citizens in matters relating to employment or appointment to any office under the State’?
(a) Article 14
(b) Article 15
(c) Article 16
(d) Article 17
(e) Article 19
Answer: C
3.2 Legal Safeguards against Gender Inequality

Government of India has been administering various special laws relating to women such as:
• ‘The Protection of Women from Domestic Violence Act, 2005’: The Domestic Violence Act of 2005
provides victims of abuse with a means for practical remedy through prosecution. Domestic violence
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is currently defined in India under Section 3 of this Act. This Act prescribes stringent punishment for
domestic violence.
• ‘The Dowry Prohibition Act, 1961’: The payment of a dowry has been prohibited under The Dowry
Prohibition Act, 1961 in Indian civil law and subsequently by Sections 304B and 498A of the Indian
Penal Code (IPC). The Dowry Prohibition Act 1961, prohibits the request, payment or acceptance of
a dowry, "as consideration for the marriage", where "dowry" is defined as a gift demanded or given
as a precondition for a marriage. Gifts given without a precondition are not considered dowry, and
are legal. Asking or giving of dowry can be punished by an imprisonment of up to six months, or a
fine. It replaced several pieces of anti-dowry legislation that had been enacted by various Indian
states. Murder and suicide under compulsion are addressed by India's criminal penal code.
• ‘The Indecent Representation of Women (Prohibition) Act, 1986’: The Indecent Representation of
Women (Prohibition) Act (IRWA), 1986, seeks to “prohibit indecent representation of women through
advertisements or in publications, writings, paintings, figures or in any other manner and for matters
connected therewith or incidental thereto.” The Act penalises persons involved in the publication,
distribution and packaging of such material. It, however, allows the publication of such material for
scientific and learning purposes, and representation of ancient monuments carrying such imagery.
• ‘The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013’:
The Indian Parliament passed a new law with the goal of more effectively protecting women from
sexual violence in India. It came in the form of the Criminal Law (Amendment) Act, 2013, which further
amends the Indian Penal Code, the Code of Criminal Procedure of 1973, the Indian Evidence Act of
1872, and the Protection of Children from Sexual Offences Act, 2012. The law makes stalking,
voyeurism, acid attacks and forcibly disrobing a woman explicit crime for the first time, provides
capital punishment for rapes leading to death, and raises to 20 years from 10 the minimum sentence
for gang rape and rapes committed by a police officer. However, the new law doesn’t address marital
rape, rape committed by the armed forces or rape against men.
• ‘The Prohibition of Child Marriage Act, 2006’: The object of the Act is to prohibit solemnization of
child marriage and connected and incidental matters. To ensure that child marriage is eradicated from
within the society, the Government of India enacted Prevention of Child marriage Act 2006 by
replacing the earlier legislation of Child Marriage Restraint Act 1929. This new Act is armed with
enabling provisions to prohibit for child marriage, protect and provide relief to victim and enhance
punishment for those who abet, promote or solemnize such marriage. This Act also calls appointment
of Child Marriage Prohibition Officer for whole or a part of a State by the State government.
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3.3 Government Schemes for Women Empowerment
The Ministry of Women and Child Development is implementing various schemes for empowerment of
women across the country under the Centrally Sponsored Umbrella scheme ‘Mission for Empowerment
and Protection for Women’. The details of major schemes are:
1. Mahila Shakti Kendra scheme empowers rural women through community participation by
involvement of Student Volunteers. The scheme is envisaged to work at various levels and at the
national and state level technical support to the respective government on issues related to women
is provided.
2. Swadhar Greh scheme targets the women victims of unfortunate circumstances who are in need of
institutional support for rehabilitation so that they could lead their life with dignity.
3. Ujjawala is a comprehensive scheme to combat trafficking with the objective to prevent trafficking of
women and children for commercial sexual exploitation, to facilitate rescue victims and placing them
in safe custody, to provide rehabilitation services by providing basic amenities/needs, to facilitate
reintegration of victims into the family and society, to facilitate repatriation of cross border victims.
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4. Working Women Hostel aims at providing safe and affordable accommodation to working women.
These hostels have Day care facility for the children of inmates too. The Ministry provides financial
support for establishing such hostels by NGOs or State Governments.
5. Beti Bachao Beti Padhao (BBBP) scheme is a tri-ministerial initiative of Ministries of Women and Child
Development, Health & Family Welfare and Human Resource Development with a focus on awareness
and advocacy campaign for changing mindsets, multi-sectoral action in select districts, enabling girls'
education and effective enforcement of Pre-Conception & Pre Natal Diagnostic Techniques
(PC&PNDT) Act. The specific objectives of the scheme include preventing gender biased sex selective
elimination; ensuring survival and protection of the girl child and ensuring education and participation
of the girl child.
6. One Stop Centre (OSC) facilitates access to an integrated range of services including police, medical,
legal, psychological support and temporary shelter to women affected by violence. The Scheme is
funded through Nirbhaya Fund.
7. Women Helpline – The Scheme is being implemented since 1st April, 2015 to provide 24 hours
emergency and non-emergency response to women affected by violence through referral and
information about women related government schemes/programmes across the country through a
single uniform number (181).
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8. Mahila Police Volunteers (MPVs) Scheme is implemented by the Ministry of Women and Child
Development in collaboration with the Ministry of Home Affairs. It envisages engagement of Mahila
Police Volunteers in States/UTs who act as a link between police and community and facilitates
women in distress.
Concept Check
Q. With reference to Government of India’s schemes for empowerment of women, which of the
following options is not correct?
(a) Mahila Shakti Kendra scheme empowers rural women through community participation by
involvement of Student Volunteers
(b) Ujjawala is a comprehensive scheme to combat trafficking with the objective to prevent trafficking
of women and children for commercial sexual exploitation
(c) Swadhar Greh scheme targets the women victims of unfortunate circumstances who are in need of
institutional support for rehabilitation
(d) Mahila Police Volunteers Scheme is implemented by the Ministry of Women and Child Development
in collaboration with the Ministry of Home Affairs
Answer: E
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4 Part IV: Census 2011 Data
Census 2011 is a rich source of information on status of females in the Indian society. In this part, we will
be looking at the highlights related to sex ratio, child sex ratio, number of literates, literacy rates, female
workers and female work participation rate in India.
Note: This data, even though it dates back to Census 2011, is important for the Exam. As and when fresh
Census data is available, it will be updated here as well as covered in the Current Affairs section.
4.1 Population Figures

As per Census 2011, India’s population is 121.06 Cr with 48.5% female population. The average annual
growth rate of population has declined from 1.95 in 2001 to 1.63 in 2011. During this period, similar
pattern is observed for females (1.99 to 1.68) and for males (1.92 to 1.58)
4.2 Sex Ratio

• The Sex Ratio in the country which was 933 in 2001 has increased by 10 points to 943 in 2011. In
rural areas the sex ratio has increased from 946 to 949. The corresponding increase in urban areas
has been of 29 points from 900 to 929.
• Kerala has recorded the highest sex ratio in respect of Total population (1084), Rural population
(1078) and Urban population (1091).
• The lowest sex ratio in rural areas has been recorded in Chandigarh (690). The corresponding value in
urban areas has been returned in Daman & Diu (551).
• Seven States namely Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Bihar, Jharkhand,
Chhattisgarh, Maharashtra, and one Union Territory (UT) Lakshadweep show fall in the sex ratio in
rural areas. Two UTs, namely, Daman & Diu and Dadra & Nagar Haveli have shown a similar trend in
urban areas.
Concept Check
Q. As per Census 2011, which of the following states has recorded the highest sex ratio in respect of
total population, rural population and urban population?
(a) Himachal Pradesh
(b) Maharashtra
(c) Mizoram
(d) Tamil Nadu
(e) Kerala
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Answer: E
4.3 Child Sex Ratio

• Census 2011 marks a considerable fall in child sex ratio (0-6 years) from 927 to 919 (-8 points) during
2001-2011. This is the lowest sex ratio since 1961.
• In rural areas, the fall has been to the tune of 11 points (934 to 923) and in urban areas, the decline
has been to an extent of 1 point (906 to 905) over the last decade.
• Delhi (814) has recorded the lowest and Chhattisgarh (977) the highest child sex ratio in rural areas.
Haryana (832) has recorded the lowest and Puducherry (975) the highest child sex ratio in urban
areas.
Concept Check
Q. As per Census 2011, which of the following statements is not correct with respect to ‘Child Sex
Ratio’ in India?
(a) India has recorded the lowest child sex ratio since 2011.
(b) Child sex ratio is lower in urban areas than rural areas.
(c) Haryana has recorded the lowest child sex ratio in rural areas.
(d) Puducherry has recorded the highest child sex ratio in urban areas.
(e) Chhattisgarh has recorded the highest child sex ratio in rural areas.
Answer: C
4.4 Literates
• Female literates numbered 328.8 million (43.1% of the total literates).
• The highest number of female literates in rural areas are returned in Uttar Pradesh (33.5 million),
while the lowest are returned in Lakshadweep (5,339).
• In urban areas, the lowest number of female literates are returned in Lakshadweep (19,191) and the
highest number in Maharashtra (18.2 million).
Concept Check
Q. As per Census 2011, the highest number of female literates in urban areas have been recorded
from which of the following Indian states?
(a) Kerala
(b) Tamil Nadu
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(c) Karnataka
(d) Maharashtra
(e) Uttar Pradesh
Answer: D
4.5 Literacy Rates

• The female literacy rate works out to 64.6 per cent (Rural - 57.9 percent; Urban - 79.1 percent).
• The highest female literacy rate in rural areas is returned in Kerala (90.8 percent), while the lowest is
returned in Rajasthan (45.8 percent).
• In urban areas, the lowest female literacy rate is returned in Jammu & Kashmir (69.0 percent) and
the highest in Mizoram (97.3 percent).
• The female literacy rate has increased significantly by 10.9 percentage points in the last decade
(Rural - 11.8 percentage points and Urban - 6.2 percentage points). On the other hand, male literacy
rate increased only by 5.6 points (Rural - 6.5 percentage points and Urban - 2.5 percentage points).
• It is significant to note that the gap in literacy rate among males and females has reduced from 21.6
in 2001 to 16.3 in 2011 (Rural - from 24.6 in 2001 to 19.3 in 2011 and Urban from 13.4 in 2011 to 9.7
in 2011).
Concept Check
Q. As per Census 2011, which of the following statements regarding literacy rate in India are correct?
(a) Between the period 2001-2011, female literacy rate increased more than the male literacy rate.
(b) Between the period 2001-2011, female literacy rate in rural areas increased more than that in urban
areas.
(c) Female literacy rate in urban areas is higher than that in rural areas.
(d) All of the above
Answer: D
4.6 Workers
• As per Census 2011, the total number of workers (who have worked for at least one day during the
reference year) in India, is 481.7 million. Of this, 331.9 million workers are males and 149.9 million
are females.
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• The workers have registered a growth of 19.8 per cent, which is marginally higher than the overall
population growth rate of 17.7 percent during the decade. Male workers grew by 20.7 percent and
female workers by 17.8 percent.
• 348.6 million workers are in the rural areas and 133.1 million, are in the urban areas. The female
workers in rural and urban areas are 121.8 and 28.0 million respectively.
Labour Force Participation Rate (LFPR):
Labour Force Participation Rate (LFPR) is defined as the number of persons in the labour force per
1000 persons.
Worker Population Ratio (WPR):
Worker Population Ratio (WPR) is defined as the number of persons employed per 1000 persons.
Unemployment rate:
It is the percent of the labor force that is without work.
Unemployment rate = (Unemployed workers / Total Labour Force) * 100
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4.7 Work Participation Rate
• The Work Participation Rate (WPR) for the country works out to 39.8 per cent. This is marginally higher
than the corresponding WPR of 39.1 percent in Census 2001. The WPR for males has increased to
53.3 percent in 2011 in comparison to 51.7 percent in Census 2001. The female WPR has reduced
marginally to 25.5 per cent in 2011 from 25.6 per cent in Census 2001.
• Himachal Pradesh (51.9 percent) ranks first in WPR for total workers as well as female workers (44.8
per cent). The lowest WPR have been reported from Lakshadweep (29.1 percent).
• The lowest female WPR has been reported from NCT of Delhi (10.6 percent). The highest male WPR
has been reported in Daman & Diu (71.5 percent) and lowest in Lakshadweep (46.2 percent).
• The percentage of main workers among the male workers is 82.3 per cent and female workers 59.6
percent. The percentage of male main workers has reduced from 87.3 percent to 82.3 percent in
Census 2011. On the other hand, the percentage of female main workers has increased from 57.3
percent to 59.6 percent in Census 2011.
Concept Check
Q. As per Census 2011, female work participation rate in India stood at
(a) 24.6 percent
(b) 25.5 percent
(c) 26.5 percent
(d) 25.6 percent
(e) 26.6 percent
Answer: B
5 Part V: Measures of Gender Inequality

Gender Inequality is a global phenomenon. Various international agencies realised this and to further the
fight against gender inequality they came up with indices ranking countries across the world based upon
the status of women in each of these countries. In this part, we will look at key points related to Global
Gender Gap Index, Gender Inequality Index, Gender Parity Index and SDG Gender Index.
5.1 Global Gender Gap Index

• It is published by the World Economic Forum (WEF).
• The WEF published its first gender gap index in 2006.
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• The Global Gender Gap Index benchmarks countries on their progress towards gender parity in four
dimensions:
o Economic Participation and Opportunity,
o Educational Attainment,
o Health and Survival and
o Political Empowerment
• Over the Index, the highest possible score is 1 (equality) and the lowest possible score is 0
(inequality).
Concept Check
Q. Global Gender Gap Index is published by
(a) UNESCO
(b) World Bank
(c) World Economic Forum
(d) UN Women
(e) United Nations Development Programme
Answer: C
5.2 Gender Inequality Index

• It is part of the Human Development Report that is published by the United Nations Development
Programme (UNDP).
• GII presents a composite measure of gender inequality using three dimensions:
o Health
o Empowerment
o Labour market.
• The GII ranges between 0 and 1. Higher GII values indicate higher inequalities between women and
men and thus higher loss to human development. There is no country with perfect gender equality.
All countries suffer some loss in achievements in key aspects of human development when gender
inequality is taken into account.
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Concept Check
Q. Gender Inequality Index published by the United Nations Development Programme (UNDP)
presents a composite measure of gender inequality using which of the following dimensions?
(a) Health
(b) Empowerment
(c) Labour Market
Answer: D
5.3 Gender Parity Index

• GPI is a socioeconomic index usually designed to measure the relative access to education of males
and females. This index is released by UNESCO.
• In its simplest form, it is calculated as the quotient of the number of females by the number of males
enrolled in a given stage of education (primary, secondary, etc.).
• A GPI equal to one signifies equality between males and females. A GPI less than one is an indication
that gender parity favors males while a GPI greater than one indicates gender parity that favors
females.
• GPI is released by the United Nations Educational, Scientific and Cultural Organization (UNESCO) as
a part of its Global Education Monitoring Report.
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Concept Check
Q. With reference to the Gender Parity Index (GPI), which of the following statements is not correct?
(a) It is calculated as the quotient of the number of females by the number of males enrolled in a given
stage of education.
(b) A GPI equal to one signifies equality between males and females.
(c) It is released by UNICEF as a part of its Global Education Monitoring Report.
Answer: C
5.4 SDG Gender Index

• In 2018, in response to the urgent need for tools to support data-driven analysis and to hold
governments accountable for gender equality in the context of the Sustainable Development Goals
(SDGs), Equal Measures 2030 (EM2030) and partners launched the pilot SDG Gender Index.
• The 2019 SDG Gender Index measures the state of gender equality aligned to 14 of the 17 Sustainable
Development Goals (SDGs) in 129 countries and 51 issues ranging from health, gender-based
violence, climate change, decent work and others. The 2019 SDG Gender Index provides a snapshot
of where the world stands, right now, linked to the vision of gender equality set forth by the 2030
Agenda.
• It is a joint effort of regional and global organisations including African Women’s Development and
Communication Network, Asian-Pacific Resource and Research Centre for Women, Bill and Melinda
Gates Foundation, and International Women’s Health Coalition.
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6 Part VI: Other Contemporary Gender Issues
6.1 Termination of Pregnancy (MTP) Amendment Bill, 2020

The MTP Bill was passed in Lok Sabha in March 2020.
6.1.1 Salient Features

• Proposing requirement for the opinion of one provider for termination of pregnancy, up to 20 weeks
of gestation and introducing the requirement of the opinion of two providers for termination of
pregnancy of 20-24 weeks of gestation.
• Enhancing the upper gestation limit from 20 to 24 weeks for special categories of women which will
be defined in the amendments to the MTP Rules and would include ‘vulnerable women including
survivors of rape, victims of incest and other vulnerable women (like differently-abled women,
Minors) etc.
• Upper gestation limit not to apply in cases of substantial foetal abnormalities diagnosed by Medical
Board. The composition, functions and other details of Medical Board to be prescribed subsequently
in Rules under the Act.
• Anonymity of the person: Name and other particulars of a woman whose pregnancy has been
terminated shall not be revealed except to a person authorised in any law for the time being in force.
6.1.2 Benefits
• It is seen as a step towards the safety and well-being of the women and many women will be
benefitted by this.
• Recently several petitions were received by the Courts seeking permission for aborting pregnancies
at a gestational age beyond the present permissible limit on grounds of foetal abnormalities or
pregnancies due to sexual violence faced by women.
• The proposed increase in gestational age will ensure dignity, autonomy, confidentiality and justice
for women who need to terminate the pregnancy.
6.1.3 Flaws
• The Bill allows abortion after 24 weeks only in cases where a Medical Board diagnoses substantial
foetal abnormalities.
• This implies that for a case requiring abortion due to rape, that exceeds 24-weeks, the only recourse
remains through a Writ Petition.
• The Bill does not specify the categories of women who may terminate pregnancies between 20-24
weeks and leaves it to be prescribed through Rules.
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• The Act (and the Bill) require an abortion to be performed only by doctors with specialization in
gynaecology or obstetrics.
• As there is a 75% shortage of such doctors in community health centres in rural areas, pregnant
women may continue to find it difficult to access facilities for safe abortions.
6.1.4 Key Issues and Analysis

• There are differing opinions with regard to allowing abortions. One opinion is that terminating a
pregnancy is the choice of the pregnant woman and a part of her reproductive rights.
• The other is that the state has an obligation to protect life, and hence should provide for the
protection of the foetus.
• Across the world, countries set varying conditions and time limits for allowing abortions, based on
foetal health, and risk to the pregnant woman.
• Several Writ Petitions have been filed by women seeking permission to abort pregnancies beyond 20-
weeks due to foetal abnormalities or rape.
6.2 Task Force on Age of Marriage for Women
The task force set up to take a re-look at the age of marriage for women has submitted its report to the
Prime Minister’s Office and the Ministry of Women and Child Development.
6.2.1 Background
• PM in his I-Day speech last year (2020) spoke about a panel formed to decide on the “right age of
marriage” for women.
• The minimum age of marriage, especially for women, has been a contentious issue.
• The law evolved in the face of much resistance from religious and social conservatives.
• Currently, the law prescribes that the minimum age of marriage is 21 years and 18 years for men and
women respectively.
6.2.2 Minimum Age versus Majority

• The minimum age of marriage is distinct from the age of majority which is gender-neutral.
• An individual attains the age of majority at 18 as per the Indian Majority Act, 1875.
• The law prescribes a minimum age of marriage to essentially outlaw child marriages and prevents
the abuse of minors.
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6.2.3 About the Committee
• The Union Ministry for WCD had set up a task force to examine matters pertaining to the age of
motherhood, imperatives of lowering Maternal Mortality Ratio and the improvement of nutritional
levels among women.
• The task force would examine the correlation of age of marriage and motherhood with health,
medical well-being, and nutritional status of the mother and neonate, infant or child, during
pregnancy, birth and thereafter.
• It will also examine the possibility of increasing the age of marriage for women from the present 18
years to 21 years.
6.2.4 How common are child marriages in India?

• UNICEF estimates suggest that each year, at least 1.5 million girls under the age of 18 are married in
India.
• It makes our country home to the largest number of child brides in the world — accounting for a third
of the global total.
• Nearly 16 per cent adolescent girls aged 15-19 are currently married.
6.2.5 Provisions for the minimum age for marriage

• Personal laws of various religions that deal with marriage have their own standards, often reflecting
custom.
• For Hindus, Section 5(iii) of The Hindu Marriage Act, 1955, sets 18 years as the minimum age for the
bride and 21 years as the minimum age for the groom.
• In Islam, the marriage of a minor who has attained puberty is considered valid.
• The Special Marriage Act, 1954 and the Prohibition of Child Marriage Act, 2006 also prescribe 18 and
21 years as the minimum age of consent for marriage for women and men respectively.
• Additionally, sexual intercourse with a minor is rape, and the ‘consent’ of a minor is regarded as
invalid since she is deemed incapable of giving consent at that age.
6.2.6 Evolution of the law

• The IPC enacted in 1860 criminalised sexual intercourse with a girl below the age of 10.
• The provision of rape was amended in 1927 through The Age of Consent Bill, 1927, which declared
that marriage with a girl under 12 would be invalid.
• The law faced opposition from conservative leaders of the Indian National Movement, who saw the
British intervention as an attack on Hindu customs.
• A legal framework for the age of consent for marriage in India only began in the 1880s.
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6.2.7 The Sarda Act
• In 1929, The Child Marriage Restraint Act set 16 and 18 years as the minimum age of marriage for
girls and boys respectively.
• The law, popularly known as the Sarda Act after its sponsor Harbilas Sarda, a judge and a member of
Arya Samaj, was eventually amended in 1978 to prescribe 18 and 21 years as the age of marriage for
a woman and a man respectively.
6.2.8 Contention over different legal standards

• There is no reasoning in the law for having different legal standards of age for men and women to
marry. The laws are a codification of custom and religious practices.
• The Law Commission consultation paper has argued that having different legal standards
“contributes to the stereotype that wives must be younger than their husbands”.
• Women’s rights activists have argued that the law also perpetuates the stereotype that women are
more mature than men of the same age and, therefore, can be allowed to marry sooner.
• The international treaty Committee on the Elimination of Discrimination against Women (CEDAW),
also calls for the abolition of laws that assume women have a different physical or intellectual rate
of growth than men.
6.2.9 Why is the law being relooked at?

• Despite laws mandating minimum age and criminalizing sexual intercourse with a minor, child
marriages are very prevalent in the country.
• From bringing in gender-neutrality to reduce the risks of early pregnancy among women, there are
many arguments in favour of increasing the minimum age of marriage of women.
• Early pregnancy is associated with increased child mortality rates and affects the health of the
mother.
6.2.10 Upholding the Constitution

• Petitioners, in this case, had challenged the law on the grounds of discrimination.
• It is argued that Articles 14 and 21 of the Constitution, which guarantee the right to equality and the
right to live with dignity, were violated by having different legal ages for men and women to marry.
• Two significant Supreme Court rulings can act as precedents to support the petitioner’s claim.
• In 2014, in the ‘NALSA v Union of India’ case, the Supreme Court, while recognising transgenders as
the third gender, said that justice is delivered with the “assumption that humans have equal value and
should, therefore, be treated as equal, as well as by equal laws”.
• In 2019, in ‘Joseph Shine v Union of India’, the Supreme Court decriminalized adultery, and said that
“a law that treats women differently based on gender stereotypes is an affront to women’s dignity”.
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6.3 UN Report on Gender Gap in Labour Market
6.3.1 About the Report

• The report titled “World’s Women: Trends and Statistics” was released by the UN-DESA.
• The report provided a reality-check on the global status of women 25 years since the world adopted
the Beijing Declaration and Platform for Action.
• It presented the global state of gender equality in six critical areas: Population and families; health;
education; economic empowerment and asset ownership; power and decision-making; and
violence against women and the girl child as well as the impact of COVID-19.
6.3.2 Highlights on status of women

• The gender gap in the labour market, for example, has not budged a bit since 1995.
• While the status of women has improved with regard to education, early marriage, childbearing and
maternal mortality, the progress has stagnated in other areas.
6.3.3 Participation in the labour market

• The gender gap in the labour market has remained as it was since 1995: The gap of 27 percentage
points has barely changed since then, the report showed.
• Only 47 per cent women of working age participated in the labour market, compared to around 74
per cent men, according to the report.
• The largest gender gap in labour force participation was observed in the prime working age (25-54).
• This gap has remained unaddressed since 1995 and was at 32 percentage points as of 2020, according
to the report. It was 31 percentage points in 1995.
• In India, the ratio of female-to-male labour force participation rate was 29.80 in 2019 as against the
desired ratio of 50 per cent.
6.3.4 Working for free

• The data in the interactive UN report showed how women remained under the burden of unpaid
domestic and care work.
• On an average day, women globally spent about three times (4.2 hours) as many hours on unpaid
domestic and care work as men (1.7 hours).
• Unpaid domestic work includes activities related to the maintenance of the household, including food
preparation, upkeep of the home, caring for pets etc.
6.3.5 Family responsibilities

• Family responsibilities and unequal distribution of unpaid domestic and care workers were among
the primary reasons for women not joining the labour force.
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• Their participation depended on their liabilities and responsibilities in their household, noted UN. It
found that women living alone were more likely to be in the labour market.
• On an average, 82 per cent women of prime working-age living alone were in the labour market,
compared to 64 per cent women living with a partner and 48 per cent living with a partner and
children.
• Their participation rates in the economy were found to improve in the latter part of their lives after
their responsibilities reduced — when their children grew older.
6.4 Representation of Women in Parliament
6.4.1 Status of Women in Indian Politics:

• As per the 2017 Women in Politics Map Report released by the Inter-Parliamentary Union (IPU) and
UN Women, India ranks 148 globally in terms of representation of women in executive government
and parliament.
• Women’s representation has steadily increased in the Lok Sabha. In the first-ever election, only 5%
of the House consisted of women. Now, that has increased to 14%.
• Women representation at State level: As on October 2016, out of the 4,118 Members of Legislative
Assemblies (MLAs) across the country, only 9% are women, according to the Economic Survey.
• The highest percentage of women legislators come from Bihar, Haryana and Rajasthan (14%).
• Women reservation at local level: The 73rd and 74th amendments to the Constitution in 1993 made
it mandatory to earmark 33% of all positions in Panchayati Raj Institutions for women. This has shown
positive results as follows:
o According to the Economic Survey, as of December 2017, there are 13.72 lakh elected women
representatives in Panchayati Raj Institutions. This constitutes 44.2% of total elected
representatives at the Panchayat level.
o Women Sarpanchs also accounted for 43% of total Gram Panchayats (GPs) across the country,
exhibiting active leadership of women in local government.
6.4.2 Arguments for Women Reservation in Parliament

• Constitutional rights: Although equality of the sexes is enshrined in the Constitution, it is not the
reality. Therefore, vigorous affirmative action is required to improve the condition of women.
• Redistribution of resources: political reservation has increased redistribution of resources in favour
of the groups which benefit from reservation.
• Previous experience: A study about the effect of reservation for women in panchayats shows that
women elected under the reservation policy invest more in the public goods closely linked to women’s
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concerns. For example, in Rajasthan and West Bengal, for instance, increased female political
representation in local bodies led to more investment in drinking water and roads.
• Gender equality: A 2008 study, reveals that a sizeable proportion of women representatives perceive
an enhancement in their self-esteem, confidence and decision-making ability.
• B.R. Ambedkar said that “political power is the key to all social progress”: For example, women in
villages with a head council position reserved for women are more likely to report crimes to the police.
• Historical injustice: Proportion of women in the Lok Sabha has seen only a meagre increase since
independence from 4.5% in the first Lok Sabha to the current 14% in the 17th Lok Sabha. Therefore,
there is a need to undertake some positive discrimination for increasing the women participation in
Indian politics.
• Recording effect: Increase in the responsiveness of the official towards the pleas of disadvantaged
groups. For example, greater police responsiveness towards crimes against women in constituencies
where women were part of the political leadership.
• To break the Vicious cycle: Socio-economic disadvantages lead to reduced opportunities for women
to participate in the political process, leading to weakened representation which, in turn, retards the
process of addressing socio-economic disadvantages.
6.4.3 Women’s Reservation Bill

• A.k.a Constitution (108th Amendment) Bill, 2008: It is pending in the parliament.
• It aims to reserve one-third of all seats for women in the Lok Sabha and the state legislative
assemblies.
• The bill says that the allocation of reserved seats shall be determined by such authority as prescribed
by Parliament and that the reserved seats may be allotted by rotation to different constituencies in
the state or union territory.
• It also provides for reservation of seats for women to cease to exist 15 years after the
commencement of this Amendment Act.
• This will be a Constitutional Amendment under Article 368 and will need the ratification of half of the
state legislatures before coming into force.
6.4.4 Arguments against Women Reservation in Parliament

• Unequal status: It may perpetuate inequality of women since they would not be perceived to be
competing on merit.
• Restricts choice : Reservation of seats restricts choice of voters to women candidates.
• Rotation of reserved constituencies in every election may reduce the incentive for an MP to work for
his constituency as he may be ineligible to seek re-election from that constituency.
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• A study by Ministry of Panchayati Raj recommended that rotation of constituencies should be
discontinued at the panchayat level because almost 85% women were first timers and only 15%
women could get re-elected because the seats they were elected from were de-reserved.
• Also, the first timer women representatives may not be able to perform the work with high
efficiency.
• It could lead to election of “proxies” or relatives of male candidates.
6.4.5 Other Concerns Against Reservation

• Mandatory reservations will not address deeper imbalances of power: Inexperienced candidates will
struggle to raise funds for their campaigns, defend the interest of their constituencies, and ultimately
stand little chance of being re-elected.
• General quota would favour upper caste and class women: It would compete with claims of other
minority groups and infringe on existing quotas for Other Backward Classes, Scheduled Castes and
Tribes.
• Lack of education and leadership training: A survey found that female panchayat heads to be less
acquainted with the functioning of the Panchayati system than their male counterparts.
• Lacks social capital: Since women are not integrated in any local political process initially, and, unlike
men, are not part of the relevant social and power networks, women leaders are prone to
inefficiencies.
6.4.6 Way Ahead

• The rotation of seats can be done over a period of 3-4 election cycles to enable women representatives
of a particular constituency to develop administrative expertise during that period.
• The women reservation may be extended in the first instance for 15 years then reviewed to decide
whether it should be continued.
• While consensus for reservation of women in parliament and State legislature is being built, the
political parties can provide for reservation for candidates within the parties.
• Other options like Dual member constituencies may be considered, where some constituencies shall
have two candidates, one being a woman.
• The advantages of Dual member constituency are it does not decrease the democratic choice for
voters, does not discriminate against male candidates and might make it easier for political
representatives to cater to large constituencies.
6.5 Hindu Women’s Inheritance Rights

The Supreme Court has expanded a Hindu woman’s right to be a joint legal heir and inherit ancestral
property on terms equal to male heirs.
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6.5.1 What is the ruling?
• The SC Bench ruled that a Hindu woman’s right to be a joint heir to the ancestral property is by birth
and does not depend on whether her father was alive or not when the law was enacted in 2005.
• The Hindu Succession (Amendment) Act, 2005 gave Hindu women the right to be coparceners or
joint legal heirs in the same way a male heir does.
• Since the coparcenary (heirship) is by birth, it is not necessary that the father coparcener should be
living as on 9.9.2005, the ruling said.
6.5.2 What is the 2005 law?

• The Mitakshara school of Hindu law codified as the Hindu Succession Act, 1956 governed succession
and inheritance of property but only recognised males as legal heirs.
• The law applied to everyone who is not a Muslim, Christian, Parsi or Jew by religion.
• Buddhists, Sikhs, Jains and followers of Arya Samaj, Brahmo Samaj are also considered Hindus for
the purposes of this law.
• In a Hindu Undivided Family, several legal heirs through generations can exist jointly.
6.5.3 Background
• Traditionally, only male descendants of a common ancestor along with their mothers, wives and
unmarried daughters are considered a joint Hindu family.
• The legal heirs hold the family property jointly.
• Women were recognised as coparceners or joint legal heirs for partition arising from 2005.
• The 174th Law Commission Report had also recommended this reform in Hindu succession law.
• Even before the 2005 amendment, Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu had
made this change in the law, and Kerala had abolished the Hindu Joint Family System in 1975.
6.5.4 What did the law bring in?

• Section 6 of the Act was amended that year to make a daughter of a coparcener also a coparcener
by birth “in her own right in the same manner as the son”.
• The law also gave the daughter the same rights and liabilities “in the coparcenary property as she
would have had if she had been a son”.
• The law applies to ancestral property and to intestate succession in personal property — where
succession happens as per law and not through a will.
6.5.5 How did the case come about?

• While the 2005 law granted equal rights to women, questions were raised whether the law applied
retrospectively and if the rights of women depended on the living status of their father.
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• Different benches of the Supreme Court had taken conflicting views on the issue. Different High
Courts had also followed different views of the top court as binding precedents.
• The Prakash v Phulwati (2015) case held that the benefit of the 2005 amendment could be granted
only to “living daughters of living coparceners” as on September 9, 2005 (the date when the
amendment came to force).
• In February 2018 a bench headed by Justice A K Sikri held that the share of a father who died in 2001
will also pass to his daughters as coparceners during the partition of the property as per the 2005 law.
6.5.6 The present case

• These conflicting views led to a reference to a three-judge Bench in the current case.
• The ruling now overrules the verdicts from 2015 and April 2018.
• It settles the law and expands on the intention of the 2005 legislation to remove the discrimination
as contained in section 6 of the Hindu Succession Act, 1956.
• It gave equal rights to daughters in the Hindu Mitakshara coparcenary property as the sons have.
6.5.7 What was the government’s stand?

• The solicitor argued in favour of an expansive reading of the law to allow equal rights for women.
He referred to the objects and reasons of the 2005 amendment.
• The Mitakshara coparcenary law not only contributed to discrimination on the ground of gender but
was oppressive and negated the fundamental right of equality guaranteed by the Constitution.
6.6 Permanent Commission to Women Officers in the Army

The Ministry of Defence (MoD) has issued the formal Government Sanction Letter for grant of Permanent
Commission (PC) to women officers in the Army.
6.6.1 Why such an order?

• The order follows a Supreme Court verdict that directed the government that women Army officers
be granted PC and command postings in all services other than combat.
• Following this, Army Chief had said it was an enabling one and gives a lot of clarity on how to move
forward.
• He had stated that the same procedure for male SSC officers will be followed for women to give PC.
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6.6.2 Women in Army: Background of the case
• The induction of women officers in the Army started in 1992.

• They were commissioned for a period of five years in certain chosen streams such as Army Education
Corps, Corps of Signals, Intelligence Corps, and Corps of Engineers.
• Recruits under the Women Special Entry Scheme (WSES) had a shorter pre-commission training
period than their male counterparts who were commissioned under the Short Service Commission
(SSC) scheme.
• In 2006, the WSES scheme was replaced with the SSC scheme, which was extended to women
officers. They were commissioned for a period of 10 years, extendable up to 14 years.
• Serving WSES officers were given the option to move to the new SSC scheme or to continue under the
erstwhile WSES.
• They were to be, however, restricted to roles in streams specified earlier — which excluded combat
arms such as infantry and armoured corps.
6.6.3 Arguments Rejected by the Supreme Court

• The Supreme Court rejected arguments against a greater role for women officers, saying this violated
equality under the law.
• They were being kept out of command posts on the reasoning that the largely rural rank and a file
will have problems with women as commanding officers. The biological argument was also rejected
as disturbing.
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• While male SSC officers could opt for permanent commission at the end of 10 years of service, this
option was not available to women officers.
• They were, thus, kept out of any command appointment, and could not qualify for a government
pension, which starts only after 20 years of service as an officer.
• The first batch of women officers under the new scheme entered the Army in 2008.
6.6.4 Arguments by the Government

• The Centre had mentioned several reasons behind the differential treatment of women officers.
• It had proposed that women officers with up to 14 years of service would be granted a permanent
commission, while those above 14 years would be permitted to serve for up to 20 years and retire
with pension without being considered for permanent commission.
• It also stated that those with more than 20 years of service would immediately be released with
pension
• This order did not grant permanent commission to women with over 14 years of service, and hence
discriminatory.
• Furthermore, the 2019 order granted permanent commission only for staff appointments and not
command appointments.
• The centre justified this by stating that that the units in Army are composed entirely of male soldiers,
who are mostly from rural backgrounds and thus, are not mentally prepared to accept women officers
in the command of units.
• It also stated that the lower physical capacity of women officers would be a challenge for them to
command units wherein officers are expected to lead the men from the front and need to be in prime
physical condition to undertake combat tasks.
• The government also stated that the adverse conditions, including two unsettled borders and
internal security situations in the northeast and Jammu and Kashmir, have a major bearing on the
employment of women officers in light of their physiological limitations.
• Also, it had stated that the isolation and hardships would eat into their resolve and that they have to
heed to the call of pregnancy, childbirth and family.
• The government also argued that women ran the risk of capture by the enemy and being taken as
prisoners of war.
6.6.5 Supreme Court Critical of Government Note

• Reflects Poorly on Women: The note had shown women officers in a poor light, saying isolation and
hardships would eat into their resolve and that they would have to heed to the call of pregnancy,
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childbirth and family. The note had mentioned that women ran the risk of capture by enemy and taken
prisoner of war.
• Patriarchal Notion: The court held that the note reflected the age-old patriarchal notion that
domestic obligations rested only with women.
• Sex Stereotype: The court also dismissed the point that women are physiologically weaker than men
as a “sex stereotype”.
• Offence to dignity of Indian Army: The court noted that challenging abilities of women on the ground
of gender is an offence not only to their dignity as women but to the dignity of the members of the
Indian Army – men and women – who serve as equal citizens in a common mission.
6.6.6 Implications of the Judgement

• The SC did away with all discrimination on the basis of years of service for grant of PC in 10 streams
of combat support arms and services, bringing them on a par with male officers.
• It has also removed the restriction of women officers only being allowed to serve in staff
appointments, which is the most significant and far-reaching aspect of the judgment.
• It means that women officers will be eligible to the tenant all the command appointments, at par with
male officers, which would open avenues for further promotions to higher ranks for them.
• It also means that in junior ranks and career courses, women officers would be attending the same
training courses and tenanting critical appointments, which are necessary for higher promotions.
6.7 Women in Indian Agriculture

The recent farmers’ protests have cast a spotlight on a traditionally overlooked group of female farmers.
6.7.1 Role
Women in Indian agriculture perform numerous labour-intensive jobs such as weeding, picking,
separation of seeds from fibre, keeping of livestock and its other associated activities like milking, etc.
Mainly rural women are engaged in agricultural activities in three different ways:
• Paid Labourers.
• Cultivator doing labour on their own land.
• Managers of certain aspects of agricultural production by way of labour supervision and the
participation in post-harvest operations
6.7.2 Status
As per Agriculture Census 2015-16, female operational holdings increased to 14.0 percent in 2015-16
against and 12.8 percent in 2010-11. This indicates rising participation of females in management and/or
operation of agricultural holdings in the country, also termed as feminization of agriculture.
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• The proportion of operated area managed by female operational holders has also increased to 11.8
percent in 2015-16 against 10.4 percent in 2010-11.
• According to the Food and Agriculture Organization, women constitute a third of India’s agricultural
labour force and contribute 55-66% to farm production.
• According to non-profit Oxfam, around 80 percent of farm work in India – including sowing,
winnowing, harvesting, and other labor-intensive processes and non-mechanized farm occupations –
is undertaken by women
6.7.3 Reasons for Emerging Trend of Feminization of Agriculture

• Rural to urban migration of male members: With male out-migration, women have additionally taken
on the role of providing for their households on a daily basis, since remittances are irregular. This
means that they now have to take care of their own farming and also work as agricultural wage
labourers.
• Cheap and easily available agriculture labour: Women are more willing to accept low-paid irregular
work, are easy to hire and fire, are thought to be docile and hardworking, and certain jobs are typified
as women’s work such as picking tea.
• Agrarian distress: It has led to a shift of male members to non-farm activities and pushed female
members to perform agricultural and allied activities.
6.7.4 Issues Faced by Women in Indian Agriculture

• Low land and asset ownership: Women involved in agriculture still lag behind in terms of land and
asset ownership, even when acting as primary cultivators. This is largely due to patriarchal social
norms and limited awareness about their property rights. Women are also not recognized as farmers
in Indian policies.
o Lack of entitlement to land (and other assets such as machinery, livestock etc.) is a severe
impediment to women cultivators. Land titles are often demanded as security for credit, basis
for entitlement of agriculture-related schemes etc.
• Wage gap: Women in general are offered lower wages for agriculture labour, especially in informal
and private sector.
• Lack of supportive infrastructure: Technological interventions and infrastructural facilities in
agriculture, in general, are not designed with women farmers in mind.
• Absence of decision-making power: Enhanced responsibility has not translated into decision-making
powers over important issues such crop selection, division of duties, marketing etc.
• Limited to drudgery work: Mechanization of agriculture has resulted in confinement of women to
labour intensive and menial roles such as winnowing, harvesting, sowing seeds and rearing livestock.
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• Illiteracy: Women workers in agriculture suffer from high illiteracy rate and drop-out of schools and
have little awareness about the existing schemes, benefits, rights, etc. As a result of this female
population engaged in agriculture has poor economic as well social growth.
• Low representation in administrative bodies: Women have no representation in agricultural
marketing committees and other similar bodies.
6.7.5 Steps Taken by the Government

• Mahila Kisan Sashaktikaran Pariyojana (MKSP): The Department of Rural Development, Ministry of
Rural Development is implementing MKSP to empower women in agriculture by making systematic
investments to enhance their participation and productivity, as also to create and sustain their
agriculture-based livelihoods.
• ICAR-Central Institute for Women in Agriculture (ICAR-CIWA): It is a first of its kind institution in India
that is exclusively devoted to gender related research in agriculture.
• Additional support in existing schemes: The Department of Agriculture Cooperation and Farmers
Welfare is also providing additional support and assistance to female farmers, over and above the
male farmers under various Schemes namely Agri-Clinic & Agri-Business Centre (ACABC), Integrated
Schemes of Agricultural Marketing (ISAM), Sub-Mission of Agricultural Mechanization (SMAM) and
National Food Security Mission (NFSM).
6.7.6 Way Forward

• Enhancing representation of women in decisionmaking bodies: Women must be involved in decision-
making bodies that have the potential to introduce structural changes in agricultural sector.
• Agricultural education be made gender sensitive and research, development, extension and services
be engendered to give due recognition to the multiple role played by women agriculturists.
• Technological advancements in designing tools can play an important role in making farm equipment
easy to use for women.
• Promoting women SHGs: Women Self Help Groups can be proactively engaged in value addition of
agri produce at village level.
• In addition, beekeeping, fishery, poultry, animal husbandry have major scope for women farmers
and women centric schemes in these sectors can be promoted in consultation with the
representatives of women farmers.
• Prioritizing women in accessing credit on soft terms from banks and other financial institutions for
acquisition of land, assets and agricultural inputs.
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• Awareness generation among women regarding their inheritance rights coupled with access to
judicial relief and redress, removing discrimination through legal reforms, and providing legal aid,
assistance and counseling.
• Skill development training needs to be delivered to women farmers to train them in areas of field
operations, organic farming etc.
• Policy emphasis must be to recognise the work of female farmers and grant equal pay to them.
6.8 Paternity Leave

Recently the Board of Control for Cricket in India (BCCI) granted paternity leave to the Indian captain.
6.8.1 What is Paternity Leave?

• Paternity leave is a leave period (paid) reserved exclusively for fathers in relation to childbirth and it
is granted to father in addition to the other annual leaves.
• Paternity leave in India
o There is no legal provision for paternity leave in India.
o All India and Central Civil Services Rules allow Central government employees with less than
two surviving children 15 days of paternity leave.
▪ This also extends to cases where a child has been adopted.
▪ This could be availed up to six months from the date of delivery or adoption of the child.
o Private organisations: There isn’t any such law that mandates private sectors to provide the
paternity leaves to its employees.
▪ Certain private establishments also provide paternity leaves. Like Food aggregator
Zomato India provides 26 weeks paid leave for new fathers.
o In Chander Mohan Jain v. N.K Bagrodia Public School, 2009 the Delhi High Court held that "all
male employees of unaided recognized private schools were entitled to paternity leave."
• UNICEF had the provision of four weeks paid paternity leaves to its male employees but now it has
been extended to sixteen weeks across all its offices worldwide.
6.8.2 Significance of Paternity Leave

• Emotional need of the child: According to International Labour Organization, a child requires equal
support from both parents in the first 1,000 days. Quality father–child interactions enhance the
resources of paternal capital available to the child thus contributing to healthy development of the
child.
• Health of the mother: Much of the attention is typically placed on the health and well-being of the
newborn baby. The postpartum depression and anxiety symptoms of the new mothers are generally
ignored. Father’s ability to stay home may play a role in reducing such depressions and anxiety.
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• Nuclearisation of family: As a result of which the level of child-care support to the mother from
extended family members is much less available nowadays. Paternity leave would ease the burden of
the mother who otherwise have to bear the whole responsibility of the child care alone.
• Bridging the gender gap at home for facilitating gender equality at workplace: Women’s equality in
the workplace cannot be achieved without men’s equality in the home. As per All India Survey on
Higher Education (AISHE) 2018-19
o Females constitute 48.6% of the total enrolment in higher education
o The Gross Enrolment Ratio (GER) for females in higher education is 26.4% against 26.3% for
boys.
o The Gender Parity Index (GPI) has increased from 0.92 in 2014-15 to 1 in 2018-19.
o However, these achievements in education could not be translated in women’s participation
of workforce.
6.8.3 Challenges in paternity leave

• Lack of will power among employers: Many organisation do not provide even maternity leave which
is statutorily backed by the Maternity Benefit (amendment) Act 2017.
• Funding: Public exchequer has its own limitations while private organizations may not be willing to
bear any extra cost and if employees are made to fund such leave policy then the idea may not result
in desired outcome.
• Patriarchal society: According to International Labour Organization, Indian Men perform only 10% of
the unpaid care work and more than 80% believe that taking care of the child is the primary
responsibility of the mother.
6.8.4 Way Ahead

• Universalise the Gender Equity Movement in Schools (GEMS) project: It is a gender sensitization
programme for 12-14 year young school kids being implemented in the public schools of Maharashtra
from 2010.
o Its objective is to influence the formation of more gender-equitable norms among adolescents.
o The audit of the program has revealed a positive outcome among students for gender issues.
• Nudging: Various means for attitudinal and behavioural changes needs to be employed ensuring
active role of male partner before, during and after the child birth.
• Legislative reforms: Paternity Benefit Bill, 2018 should be passed with utmost propriety for ensuring
better outcome of all the steps taken for behavioural changes.
o Bill pushes for equal 'parental' benefits for both the mother and the father.
o It aims to cover the organised sector, the unorganized sector and the self-employed.
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o It also creates Parental Benefit Scheme Fund which will be utilized to meet the costs related to
paternity benefits.
6.9 Menstrual Leaves

Recently, Zomato announced a new paid period leave policy for employees.
• The policy allows up to 10 days of period leave a year.

• Company employees can apply for period leave through a human resources portal and a sexual
harassment team will be in place to respond to any employees facing harassment for taking the time
off.
6.9.1 Why talking about menstruation is considered a taboo in India?

• Culturally in many parts of India, menstruation is still considered to be dirty and impure. Further,
women are prohibited from participating in normal life while menstruating. She must be “purified”
before she is allowed to return to her family and day to day chores of her life.
• Superstitious and unscientific notions on menstruation have led to following:
o The cultural shame attached to menstruation and shortage of menstrual products (as many as
88% of women who get periods in India resort to using unsafe sanitary methods) stop
menstruating women from going to school and working.
o Consequently, it is very difficult to have an open discussion about it as people seem to get
extremely uncomfortable and prefer to discuss it behind closed doors.
6.9.2 Menstrual Leave discourse in India

• The State of Bihar has had two extra days of casual leave per month for women government
employees to take time off for periods since 1992.
• In 2017, the digital media company Culture Machine, which has offices in five cities in India, put in
place a menstrual leave policy independent of vacation and sick days.
• Menstruation Benefit Bill 2017(Tabled in Lok Sabha in 2018)
o The Bill seeks to provide women working in the public and private sectors two days of paid
menstrual leave every month as well as better facilities for rest at the workplace during
menstruation.
o The benefits would also be extended to female students of Class VIII and above in government
recognized schools.
o The Bill caters to girls and women across sector/industry/profession/job roles and not just for
women engaged in white collar work.
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6.9.3 What is the need for menstrual leave?
• Age-old taboo: The policy will be instrumental in tackling an age-old taboo in India by generating
awareness and open discussions on the issue.
o According to UNICEF, 71 percent of young women in India remain unaware of menstruation
until their first cycle.
• Addressing the associated shame or stigma: The policy is intentioned at providing women the
freedom to tell people on internal groups, or emails that they are on period leave i.e. normalization
of the issue and across the board acceptance for the issue.
• Spillover to the unorganized sector: Increased debate and conversation on the issue at national level
could lead to recognition of menstrual leave in unorganized sector.
o For example, there is a large section of women who work in the unorganized labor sector as
domestic workers, and almost no houses give them a day off when they have their periods.
This conversation could make a difference here.
• Women’s Right: Workplaces need to accommodate for biological differences between co-workers and
it is women’s right to have provisions in accordance with that.
o This is not a choice that women make every month, so if someone finds it difficult to be at the
work for conditions not under their control then they should have the right to rest without
being penalized in any way.
• Reassertion of reproductive rights: Women and girls are often excluded from decision-making due to
their lower literacy levels and social standing within the family. The policy has the potential to make
all women conscious of their reproductive rights irrespective of direct effect of policy on them.
• Availability of associated infrastructure and menstrual products: Provision of sanitary napkins and
adequate facilities for sanitation and washing could come into limelight as a result of this policy
discussion.
6.9.4 What are the unintended consequences that the policy may generate?
• Justify lower salaries and hiring bias: If we insist that one group or another has an extra set of costs
associated with their employment then we’ll end up seeing the wages of that group fall relative to
groups that don’t have those associated costs or decreased hiring of that altogether.
o For example, a research found that 1.1-1.8 million women lost their jobs in 2018-19 across 10
major sectors owing to the Maternity Benefit (Amendment) Act 2016 which doubled the paid
maternity leave from three to six months.
• Negative affect on the Gender Equality debate: The explicit term “period leave” creates a
demarcation, thereby allowing it to be taken in context where it is used to differentiate between men
and women.
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• Reinforcing the prevalent stereotyping: The policy risks reinforcing the stereotypes of labeling
women as ‘needing extra protection and extra time off’, which in turn might reinforce biases in hiring,
promotion and compensation.
• Negative affect on privacy: Asking women to inform their employers they’re on their periods forces
women to let go of their menstrual privacy. This can be construed as a shade of benevolent patriarchy.
o Similar to any other health-related information, it should be a person’s right to decide how
open they would like to be about their issues.
6.9.5 Way Forward

As a society, it is our job to make sure that we overcome the aforesaid challenges and make room for
one’s biological needs while not lowering the bar for the quality of our work.
The menstrual leave policy could be structured in such a way that overcomes these challenges. For
example, giving all employees enough paid sick leave to account for periods or employers can be
encouraged to institute work-from-home policies that allow employees to work remotely for a fixed
number of days in a month. These two options can be explored alongside provision of comfortable spaces
within the office premises.
If women need to tolerate their pain in silence just to ‘fit’ in and not be outcast, then we surely are
paddling the patriarchy cycle ahead. The idea of menstrual leave may be seen as a starting point for
elimination of structural issues associated with menstruation.
6.10 Gender Dimensions of the Covid-19 Pandemic

COVID 19 Lockdown and social-distancing norms are likely to have an outsized impact on women.
6.10.1 Introduction
• The COVID-19 outbreak is impacting societies around the world in an unprecedented manner.
However, not everyone, in every place, will be affected in the same way.
• Experiences from previous pandemics show that women can be especially active actors for change,
while they can also experience the effects of the crisis in different (and often more negative) ways.
• Gender gaps in outcomes across endowments (health & education), agency and economic opportunity
persist across countries. Impact of the COVID-19 pandemic will be amplified by those pre-existing
gender differences.
• For the most part, the negative impacts can be expected to exacerbate (i.e. more individuals are
affected) and deepen (i.e. the conditions/disadvantages of some individuals worsen).
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6.10.2 Indian Women’s vulnerability to COVID-19’s impacts: Livelihood and Job Security
• Oxfam India estimates the economic loss from women losing their jobs during the pandemic at about
$216 billion, around 8% of the GDP. This clouds women’s already poor economic outlook.
• According to the ILO, 81% of Indian women work in the informal economy. The informal sector is the
worst hit by the coronavirus-imposed economic slowdown. The economic costs of the lockdown may
be disproportionately borne by women in the end.
• The need for social distancing has also temporarily disrupted the functioning of self-help groups
(SHGs) that have been credited with improving women’s well-being and empowerment.
• Feminisation of Poverty: Many women are at risk of a permanent exit from the labour market. The
end result will be the feminization of income poverty. Research from the World Bank suggests the
pandemic will drive more than 12 million Indians into poverty. Women are likely to be over-
represented among the new poor.
6.10.3 Social Inequities

• The impact of the virus is also exacerbating India’s deep-rooted social inequities. An unsafe
environment in many places and the burden of domestic responsibilities have kept many women away
from work.
• Domestic Violence: There has been a more than two-fold rise in complaints of domestic violence since
the lockdown. The UNFPA warns that the pandemic could reduce world progress against gender-based
violence by one-third.
• Migrant Women: Many of the millions of migrant workers forced to flee cities for their rural homes
with little notice were women. They have safety concerns, with travel a risk for many.
• COVID-19 is shifting other household dynamics, too.
o Domestic responsibilities that women bear, like cooking and cleaning, have escalated.
o As women in Indian families tend to eat last and the least, financial strain and food shortages
affect women’s nutrition more than men. Gender inequality in food security will increase
further following the loss of employment income.
6.10.4 Health
• Women may face specific constraints to access health services. According to government data, 55%
of women report not using public health services. Out-of-pocket health expenditures are higher for
women than for men in most developing countries.
• Key services such as maternal health, vaccination, sexual and reproductive health etc. get interrupted
during public health emergencies, with negative consequences for women.
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• Exposure to infection through work and care: In India, women are at higher risk of contracting the
virus because they are overrepresented in the health-care sector including as part of the frontline
health staff (e.g. nurses, community health workers, birth attendants).
• Nutrition: With the schools shut down, children’s education is likely to suffer, along with an increase
in malnourishment due to disruption of mid- day meal. The situation will worsen for girls as they are
more dependent on the mid-day meal programs given the gendered nature of nutrition provision in
households with limited resources.
6.10.5 Other Aspects

• The Additional Burden of Care: One of the primary reasons that women leave the workforce or do not
enter it in the first place is their unpaid caregiving responsibilities at home. Longstanding patriarchal
social norms and cultural expectations have put the burden of caring for children, the elderly, and the
household on Indian women.
• Social Distancing and digital education: Girls’ education will be disadvantaged - as only 29% of Internet
users in India are female, and there’s a tendency for families with limited means to give preference to
boys for schooling.
6.10.6 Policy response- Way Forward

The pandemic calls for greater consultations between the Ministry of Finance and the Women and Child
Ministry to understand the differential impacts of COVID-19 on women and effective policy measures to
address them. Some immediate steps that the government may adopt include:
• Support to women facing domestic violence: To help women file complain and seek help, the National
Commission for Women has launched an emergency WhatsApp number in addition to online
complaint links and emails. But governments must ensure adequate facilities and social distancing in
shelter homes to ensure that women are able to file complaints against abusers fearlessly.
• Extend MGNREGS to urban areas to help the urban poor: Given the large-scale unemployment in
urban areas and the hardships of the large number of migrant workers who are still in urban centres,
MGNREGS should be extended to the urban areas to create jobs for the urban poor.
o This will be especially beneficial for a large number of women, particularly domestic workers,
who will fail to find employment as middle-class women stay at home and focus on unpaid
care work.
• Expand the ambit of MGNREGS to include handicrafts/folk arts: Women play an important role in
preserving handicrafts and art but have been completely left out of the relief package. Without
government support, these crafts may be lost forever.
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o For instance, an artisan can teach her skill to children under MGNREGS. Including crafts and
folk arts under MGNREGS will achieve the twin objectives of providing income support to poor
women and preserving Indian handicrafts and arts.
• Support to Women’s SHGs: To revive women’s SHGs, the government should support industries like
the food processing sector and textiles and garments sector (another sector where women account
for the bulk of the workers) which are the main buyers of SHG products.
o The announcement of expanding the limit of collateral-free lending to Women’s Self Help
Groups (SHGs) from Rs 10 lakhs to Rs 20 lakhs is another welcome step but the main problem
before SHGs is demand shortage.
• Special provisions for pregnant and nursing mothers: Government’s COVID-19 relief package had no
special provisions for pregnant and lactating mothers who are enduring immense hardship under the
lockdown.
o Under the Maternity Benefit Programme, pregnant women and lactating mothers already
receive a cash transfer of Rs 6000 in three instalments. The government could enhance this
amount and provide special rations for pregnant and lactating women.
o Some states like Jharkhand have started a 24/7 maternity/pregnancy helpline to help access
necessary medical assistance during the lockdown. This initiative should be implemented at
the national level.
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HUMAN DEVELOPMENT
FODDER MATERIAL

Contents
1 Meaning of Human Development ..........................................................................................................2
2 Approaches to Human Development .....................................................................................................3
2.1 Equity ..............................................................................................................................................4
2.2 Efficiency and Productivity..............................................................................................................4
2.3 Participation and Empowerment ....................................................................................................4
2.4 Sustainability ...................................................................................................................................5
2.5 Capability Approach to Human Development ................................................................................5
3 Measurement and Indices of Human Development ..............................................................................6
4 The Dimensions of Human Development ..............................................................................................6
4.1 Education: Human Capital and Human Capability ..........................................................................6
4.2 Health and Human Development ...................................................................................................8
4.3 Gender and Human Development ..................................................................................................9
5 Human Development: Policy Perspectives ..........................................................................................12
6 Status of Human Development in India ...............................................................................................13
7 Reasons for Low Human Development in India ...................................................................................15
8 How to Ensure Human Development in India? ....................................................................................16
8.1 Social Protection ...........................................................................................................................17
8.2 School Education ...........................................................................................................................17
8.3 Higher Education ...........................................................................................................................19
8.4 Skill Development .........................................................................................................................20
8.5 Healthcare .....................................................................................................................................20
1 Meaning of Human Development

Human development aims to enrich people’s lives by widening their choices. Through investing in people,
in terms of education, health, safety, and so on, this discipline attempts to build human capability.
Capability is basically what people are actually able to do and to be. Equality, sustainability, productivity,
and empowerment are the four pillars of human development. This approach emphasizes the belief that
though economic growth is essential, its quality and distribution determine the extent to which it
enriches people’s lives in a sustainable manner. The attempt is to create an environment in which people
can enjoy long, healthy, and creative lives. The idea of human development is also linked with the
concepts of rights, liberty and justice.

Seeing humans as ends of development process was not the sole purview of human development
paradigm. The UN Declaration on Human Rights (1948) put forward that all humans should be free and
equal in dignity and rights, such as the right to work, the right to education, the right to health, the right
to vote, the right to non discrimination, the right to decent standard of living etc. It was written in the
hope that the atrocities committed during the Second World War would never be repeated again. There
are significant connections between human rights approach and that of human development and
capability. According to the Human Development Report (2000), “Human Rights and Human
Development share a common vision and a common purpose – to secure freedom, well being and
dignity of all people everywhere”. A human right is claimed to be a fundamental benefit that should be
enjoyed universally by all people everywhere on the basis of equality and non-discrimination.
The evolution of the concept of human development can be traced to the writings of renowned thinkers
and philosophers of ancient times. Aristotle, the great philosopher reflected in his writing that “wealth is
not the good that we are seeking for; it is merely for the sake of something else”. Another great
philosopher, Immanuel Kant argues that human beings are ends in themselves, rather than the means
to other ends. Adam Smith, Robert Malthus, Karl Marx, John Stuart Mill, and many other modern
economists have also come forward with the similar idea of treating human beings as the real end of all
activities. However the undeniable reality is that human beings are the beneficiaries of progress, and, at
the same time, they are directly or indirectly, the primary means of production. Thus, human beings are
the means through which a productive progress is brought about.
Human Development has been accepted in development economics literature as
• An expansion of human capabilities

• A widening of choices
• An enhancement of freedoms
• A fulfillment of human rights
2 Approaches to Human Development

The human development approach is inherently multidimensional. The central goal of human
development is to enable people to become direct agents in their own lives. People are not passive
objects of social welfare provisions but are active subjects with the power to determine how they choose
to live. They should be empowered so that they can define their respective priorities, as well as choose
the best means to achieve them. Thus, agency and expansion of freedom go hand in hand. In order to
be agents of their own lives, people need the freedom to be educated, to speak in public without fear, or
have freedom of expression and association.

The four main pillars of human development are
• equity
• efficiency and productivity
• participation and empowerment
• sustainability
2.1 Equity
The principle of equity encompasses the ideal of equality whereby all human beings should have equal
rights and entitlements to human, social, economic, and cultural development, and an equal voice in
civic and political life. It also recognizes that those who have unequal opportunities due to various
disadvantages may require preferential treatment, or affirmative action. For example, the utility derived
from same levels of income or investment will vary for different individuals, depending upon their
personal attributes, initial endowments or conversion factors, which facilitate transformation of inputs
into outcomes. Since the opportunities available to different sections of society vary, ensuring that the
sections deprived of basic opportunities such as health and education are provided access to these
benefits, is the goal of equality. Thus, equity aims at equality, not only of economic resources, but of
education, health, employment opportunities, democratic participation, etc, too. Realization of the goal
of equal opportunities leads to equity outcomes.
2.2 Efficiency and Productivity

Efficiency is defined as the least costly method of reaching goals through the optimal use of human,
material, and institutional resources to maximize opportunities for individuals and communities,
thereby enhancing productivity. Efficient use of scarce national resources leads, for instance, to the
building of infrastructure like roads and dams, which in turn lead to better outcomes for human beings.
Productivity can be enhanced through efficient use of resources. It also requires investment in people
and enabling macroeconomic environment for them to achieve their maximum potential. For human
development, people must be enabled to increase their productivity and to participate fully in the process
of maximizing opportunities so that they become effective agents of growth.
2.3 Participation and Empowerment

Participation and engagement in social and political life is an important aspect of human development.
People’s participation is crucial in community programmes and government interventions. Mobilization
of grassroots support through decentralization in planning will increase people’s participation in
decision making because it brings government closer to people. Participation also enables people to seek
answers from authorities and can go a long way in improving the quality of social service delivery. It
pressurizes local authorities to take swift remedial action in situations where gaps or shortfalls are

identified in the functioning of institutions. Empowerment can occur through enhanced participation and
involvement. For instance, reservations of women in various elected bodies are made to empower them
through such participation. Involvement of parents, guardians and/or communities in village education
committees is another example.
2.4 Sustainability
Human development questions the long-term sustainability of economic growth and aims to ensure that
resources are utilized in a manner that meets present day human needs while preserving the
environment, so that the needs of future generations can also be met with. Hence, use of resources
without degrading the environment is essential to ensure that the improvements made are not
temporary in nature and have the potential for future growth as well. For instance, if the development
process does not create institutions that are supportive of people’s rights, it cannot be sustainable in the
long run.
2.5 Capability Approach to Human Development

The human development approach has been profoundly inspired by Amartya Sen’s pioneering works in
welfare economics, social choice, poverty, and famine and development economics. While Sen’s works
cover an extremely wide range of topics, his ‘capability approach’ has led to a critical evolution in the
field of economics, and in social sciences in general. The roots of the capability approach go back to
Aristotle, Adam Smith, and Karl Marx. Aristotle made extensive use of his own analysis of human beings
and linked it with his examination of the functions of man. Adam Smith and Karl Marx discussed the
importance of ‘functionings’ and ‘capability’ as determinants of wellbeing.
If life is a set of doings and beings that are valuable, the exercise of assessing the quality of life takes
the form of evaluating these functionings and the capability to function.
But, what actually are ‘capability’ and ‘functioning’?
According to Amartya Sen, “Capability is a vector of functionings, reflecting the person’s freedom to lead
one type of life or another….to choose from possible livings”. In other words, capabilities are the
substantive freedoms he, or she, enjoys to lead the kind of life he, or she, has reason to value. Just as a
person with a pocket full of coins can buy many different things, a person with many capabilities can
enjoy many different activities, and pursue different life paths.
Functionings are valuable activities and states that constitute people’s well being such as healthy body,
being safe, being educated, and so on. Functioning is, thus, an achievement of a person: what he or she
manages to do, or, to be. For example, when people’s basic need for food is met, they enjoy the
functioning of being well nourished.

Apart from capability and functioning, the third core concept of the capability approach is “agency”. It
refers to a person’s ability to pursue and realize goals he, or she, has reason to value.
However, Martha Nussbaum argues that Sen’s ‘Capability Approach’ is incomplete. Since what people
consider to be valuable and relevant can often be the product of structures of inequality and
discrimination, and because not all human freedoms are equally valuable – for example, the freedom to
pollute is not of equal value to the freedom to care for the environment - she argues that one needs to
overcome these limitations, and to go beyond this ambiguity, so that equal freedom for all can be
respected. In this context she has proposed a list of ten central human capabilities which constitute the
evaluative space for public policy.
The capability approach advocates the removal of obstacles in people’s lives, increasing their freedom
to achieve the functioning that they value. It recommends progressive social policies which would foster
the development of human capabilities, such as improved health, knowledge, skills and also ensure
equitable access to human opportunities.
3 Measurement and Indices of Human Development

(This has already been covered in Chapter on MEASUREMENT OF GROWTH: NATIONAL INCOME & PER
CAPITA INCOME)
4 The Dimensions of Human Development

After studying the meaning and measurement of Human Development, it is important now to study
various dimensions of human development. This section covers dimensions of human development.
Broadly, the main dimensions are: (i) education; (ii) health; and (iii) gender.
4.1 Education: Human Capital and Human Capability

Comparing human capital, as given by Gary S. Becker, Theodore Schultz, with the capability approach,
Sen argues that education as a human capital concentrates on the agency of human beings, through skill
and knowledge as well as effort, in augmenting production possibilities.
The capability approach to education focuses on the ability of human beings to lead lives they have
reason to value, and to enhance the substantive choices they have. Both approaches are connected
because they both are concerned with the role of human beings, and in particular, with the actual abilities
that they achieve and acquire. Consider the following example: if education makes a person more
efficient in commodity production, then there is clearly an enhancement of human capital. This can add

to the value of production in the economy, and to the income of the person who has been educated.
But, even with the same level of income, a person may benefit from education in reading, communicating,
arguing, being able to choose in a more informed way, being taken seriously by others, and so on.
The benefits of education, thus, exceed its role as human capital in commodity production. The broader
human capability perspective would add these roles. Thus, the human capital perspective fits into the
broader human capability perspective, which covers the direct, as well as indirect, consequences of
human abilities.
Amartya Sen has identified three distinct ways to link the importance of education to the expansion of
valuable capabilities.
First, education fulfills an instrumental social role. For example, literacy fosters public debate and
dialogue about social and political arrangements.
Second, education also has an instrumental process role in facilitating our capacity to participate in the
decision making process in the household, and at the community, or national level.
Finally, education has an empowering and distributive role in facilitating the ability of disadvantaged,
marginalized, and excluded groups to organize themselves politically, since, without education, these
groups would be unable to gain access to centers of power, and affect redistribution of resources.
Overall, education has an interpersonal impact because people are able to use the benefits of education
to help others as well as themselves, and can contribute to democratic freedoms, and to the overall
good of society as a whole. International declarations such as the Millennium Development Goals,
Education for All, and the Decade of Education for Sustainable Development, attempt to look at education
beyond simple human capital concerns. The human development perspective, thus, considers the
purpose of education to be much wider than simply developing skills that will enhance economic
growth. Education nurtures the processes of critical reflection and connection with others that are
intrinsically ethical.
Education brings empowerment, and it is central to human growth. Not only does it open the minds of
people and further their horizons, it also opens the way for people to acquire other valuable capabilities.
The human development reports take into account the central importance of education by incorporating
an education indicator – literacy rates – into the first Human Development Index, later versions include
education indicators based on enrollment rates.

4.2 Health and Human Development
The conventional approach argues that health, through its contribution to the quality of human capital,
has a strong, and significant effect on economic growth. This approach puts economic growth as an end,
and health as a means to achieving this end. The reverse is also argued, where wealth is seen as a
necessary input for the achievement of health outcomes. However, these approaches lead to the critical
question of whether economic growth is necessary for improving health.
Amartya Sen, by quoting the examples of pre-reform China, Sri Lanka, and Kerala (India), describes that
improvement in health (without economic growth) can be attained by prioritizing social services
especially health care, and basic education. He says that “health is among the most important conditions
of human life, and a critically significant constituent of human capabilities which we have reason to value.
In addition to its intrinsic value, health is instrumental to economic growth, educational achievements
and cognitive development, employment opportunities, income earning potential as well as for dignity,
safety, security and empowerment”.
Considerable empirical evidence supports the capability approach in substantiating the importance of
conversion factors in translating health inputs to valued health outputs. One clear example of a
conversion factor in health is education. Numerous studies have demonstrated that educated individuals
tend to have lower mortality and morbidity than less educated counterparts. In addition, children of
educated mothers fare better in terms of health than those with less education. Yet another conversion
factor is the authority an individual has within their household, or community, to assess or convert, a
particular resource into a value added health outcome. For example, the unequal rights to property,
unequal access to economic assets, restrictions on physical mobility, especially in the case of women,
hamper their health situation. Thus, conversion factors include a number of external conditions, the
natural and manmade environment in which we operate, the formal and informal rules and regulations
to which we subscribe, social and family dynamics that determine our daily lives, and so on.
A basic principle of public health is that all people have a right to health. Differences in the incidence and
prevalence of health conditions and health status between groups are commonly referred to as health
disparities. Most health disparities affect groups that are marginalized because of socioeconomic status,
race or ethnicity, sexual orientation, gender, disability, geographic location, or some combination of
these. People in these groups not only experience worse health, they also tend to have less access to the
‘social determinants’ or conditions (e.g., healthy food, good housing, good education, safe
neighborhoods, freedom from racism, and other forms of discrimination) that support a healthy life.
Health disparities are referred to as health inequities when they are the result of the systematic and
unjust distribution of these critical conditions. According to WHO, health equity, is experienced when

everyone has the opportunity to “attain their full health potential” and no one is “disadvantaged from
achieving this potential because of their social position or other socially determined circumstance.”
Health is, thus, a fundamental capability which is instrumental in the achievement of other capabilities.
The unfair distribution of health capabilities may affect social justice in several ways. For example, high
maternal undernutrition, leads to intra-uterine growth retardation, which leads to a high prevalence of
low birth weight babies. This phenomenon contributes to a high prevalence of child undernutrition and
adult ailments. Thus, women’s deprivation in terms of nutrition and health attainment has serious
repercussions for society as a whole.
Deprivation in health can cause deprivation in a number of other dimensions such as education,
employment, and participation in social spheres. When people are ill or malnourished, their overall
capabilities are greatly reduced. Lack of good health can, therefore, be at the heart of interlocking
deprivations. The 2005 WHO Report finds a close link between chronic diseases and poverty. Poor health
is not just suffering from illness. For those living in poverty, it pushes individuals and households towards
losses in productivity, incomes, assets, and education further entrenching the cycle of poverty. Health
deprivations, thus, reinforce deprivations in other dimensions, which in turn reinforce deprivations in
health.
4.3 Gender and Human Development

In no society do women enjoy the same opportunities as men. A widespread pattern of inequality persists
among men and women in their access to education, health, and nutrition, and even more, in their
participation in the economic and political spheres.
Amartya Sen has identified seven different types of gender inequalities presently existing in this world.
1) Mortality inequality: In some regions in the world, inequality between women and men directly
involves matters of life and death, and takes the brutal form of unusually high mortality rates of
women, and a consequent preponderance of men in the total population, as opposed to the
preponderance of women found in societies with little, or no gender bias in health care and nutrition.
Mortality inequality has been observed extensively in North Africa, and in Asia, including China, and
South Asia.
2) Natality inequality: Given the preference for boys over girls that many male dominated societies have,
gender inequality can manifest itself in the form of the parents wanting the newborn to be a boy
rather than a girl. There was a time when this could be no more than a wish, but with the availability
of modern medical techniques to determine the gender of the foetus, sex-selective abortion has
become common in many countries. It is particularly prevalent in East Asia, in China and South Korea

in particular, but also in Singapore and Taiwan, and it is beginning to emerge as a statistically
significant phenomenon in India and South Asia as well. This is high tech sexism. Sen coined the term,
‘missing women’, to describe the phenomena of sex ratio imbalances. Sex ratios were viewed as a
composite indicator of the status of women in any society by the Committee on the Status of Women
in India (CSWI) in its report, “Towards Equality”, in 1974.
3) Basic facility inequality: Even when demographic characteristics do not show much or any anti-female
bias, there are other ways in which women can have less than a fair deal. Afghanistan may be the only
country in the world where the government is keen on actively excluding girls from schooling (it
combines this with other features of massive gender inequality), but there are many countries in Asia,
Africa, and in Latin America, where girls have far less opportunity for schooling than boys. There are
other deficiencies in basic facilities available to women, varying from encouragement to cultivate
one’s natural talents, to fair participation in the social functions of their communities.
4) Special opportunity inequality: Even when there is relatively little difference in basic facilities,
including schooling, the opportunities for higher education may be far fewer for young women than
for young men. Indeed, gender bias in higher education and professional training is observed even in
some of the richest countries in the world, in Europe, and North America.
5) Professional inequality: In terms of employment, as well as in promotions at work, women often face
greater handicaps than men. A country like Japan may be egalitarian in matters of demography, or
basic facilities, and even, largely, in higher education, and yet, progress to elevated levels of
employment and occupation seems to be much more problematic for women than for men.
6) Ownership inequality: In many societies, the ownership of property can also be very unequal. Even
basic assets, such as homes and land, may be asymmetrically shared. The absence of claims to
property can not only reduce the voice of women, but also make it harder for women to enter and
flourish in commercial, economic, and even some social activities. This type of inequality exists in most
parts of the world, with local variations. For example, even though traditional property rights have
favoured men in most of India, in the state of Kerala, there has been, for a long time, matrilineal
inheritance for an influential part of the community, namely the Nairs.
7) Household inequality: Often enough, there are basic inequalities in gender relations within the family,
or the household, which can take many different forms. Even in cases in which there are no overt signs
of anti-female bias in, say, survival, or son-preference, or education, or even in promotion to higher
executive positions, the family arrangements can be quite unequal in terms of sharing the burden of
housework and child care. For example, it is common in many societies to take it for granted that while
men will work outside the home, their women could work too, if, and only if, they combine work with
various inescapable, and unequally shared household duties.
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This unequal status leaves considerable disparities between how much women contribute to human
development, and how they share its benefits.
The human development approach challenges the development models which measure benefits in purely
economic terms, and which are based on the old trickle down theory. According to the trickle down
theory, the benefits that are fed into the top of social structures, or community organizations, trickle
down to everyone in the community. But, as the relationships within the community and the household
are not egalitarian, but are governed by power and status, we cannot assume community development
will benefit all the people within the community. Within the household, women do not have equal rights
with men, and the benefits at the household level are seldom shared equally between males and females.
However, the lower status of women in many of the countries is linked to women’s inadequate command
over assets, which translates into systematically lower access to community governance, health and
education facilities, as well as less than optimal participation in economic decision-making. The exclusion
of women from the sphere of public decision-making, weak intra-household bargaining power, and a lack
of the kind of kin support that men have within their villages after marriage are also other factors which
contribute to women’s low status in the society. In a household, it is inevitable that both men and women
have to make decisions in the various domains of economic activities within which labour, and resource
allocations are made. A person’s bargaining strength within the family depends on his, or her, ownership
of, and control over assets, access to employment, and other means of earning an income, support from
NGOs, support from the state, social perceptions about needs, contributions, and other determinants of
deservedness, as well as social norms. The dominance of patriarchal relations in the market sphere, which
extend to credit access, can also adversely affect the efforts of women to improve their relative bargaining
strength
The human development approach is sensitive to aspects of discrimination that are particularly important
in women’s lives, but are unrelated to income and economic growth, such as lack of autonomy in decisions
about their lives and the ability to influence decision-making within the family, community, and nation.
The human development approach also has the scope to delve into complex issues, such as the unequal
sharing of unpaid work that constrain women’s life choices. Given the constraints on women’s agency in
almost all societies by political institutions such as male-dominated political parties, social institutions
such as the family, and social norms such as women’s responsibilities for care work, these issues and their
underlying causes clearly must be tackled. Gender analysis has kept the approach vibrant, contributing
particularly to the development of its agency aspects.
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5 Human Development: Policy Perspectives
The human development approach is a ’robust paradigm’ that can be used over time and across
countries as development challenges and priorities shift. In the context of the current challenges that face
most countries today, five elements of a general human development agenda are proposed (Fukuda
Parr, 2003). They constitute what might be called a ‘New York Consensus’, as these points are reflected
in many UN agreements
1) Priority to ‘‘social development’’ with the goals of expanding education and health opportunities.
2) Economic growth that generates resources for human development in its many dimensions.
3) Political and social reforms for democratic governance that secure human rights, so that people can
live in freedom and dignity, with greater collective agency, participation, and autonomy.
4) Equity in the above three elements with a concern for all individuals, with special attention to the
downtrodden and the poor whose interests are often neglected in public policy, as well as the removal
of discrimination against women.
5) Policy and institutional reforms at the global level that create an economic environment more
conducive for poor countries to access global markets, technology, and information.
This five-point agenda contains a mix of old and new priorities.
Social development continues to be important, given that illiteracy is still high, and basic health and
survival is far from guaranteed in most developing countries.
Economic growth also continues to receive attention, since low growth in developing countries is a
major obstacle to human development: over sixty countries ended the decade of 1990 – 2000 poorer
than at its beginning.
At the same time, the human development approach has seen a notable evolution. In the early 1990s,
the HDRs emphasized public expenditure allocations in health and education. Today, priorities in those
areas are on service quality, efficiency, and equity of delivery (for which governance reforms are often a
precondition), as well as on the level of resources. In education, today’s competitive global markets
require higher levels than basic primary schooling. Institutional reforms that enable the poor to monitor
the use of local development funds also play a significant role in ensuring the equitable and efficient
delivery of basic services. Most importantly, the HDRs have placed an increasing focus on social and
political institutions that would empower the poor, and disadvantaged groups (such as women), so that
they have more voice in public policy-making, and can fight for their interests. Another critical question,
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now, is how global institutions can be restructured, or created to function on democratic principles
mandating the inclusion and participation of all countries, and of all people. For example, what the state
could do to expand capabilities in education and health constituted an important pillar of a human
development strategy, for both the intrinsic and the instrumental values of education and health.
The changes in the human development approach over time highlight its openness to accommodating
new concerns, and taking up new policy challenges. The HDRs have reflected these changing
circumstances, and they have shifted emphasis in the policy priorities of the human development agenda
from public investments to incentives, from economic measures to democratic politics, from education
and health to political and civil liberties, and from economic and social policies to participatory political
institutions. They also recognize that people’s capabilities to undertake collective action in today’s era of
rapid globalization will play an increasingly important role in shaping the course of development. It is not
surprising that, in 1990, advocacy for human development focused on shifts in planning priorities, and on
state action.
6 Status of Human Development in India

India’s rank in the Human Development Index (HDI) improved to 129 in 2018 from 130 in 2017, out of a
total of 189 countries. The value of HDI for India reached to 0.647 in 2018.
Sri Lanka (71) and China (85) were higher up the rank scale. Bhutan (134), Bangladesh (135), Myanmar
(145), Nepal (147), Pakistan (152) and Afghanistan (170) were ranked lower on the list.
The Human Development Report published by the United Nations Development Programme
estimates the HDI in terms of three basic parameters: to live a long and healthy life, to be educated
and knowledgeable, and to enjoy a decent economic standard of living.
With 1.34 per cent average annual HDI growth, India is among the fastest improving countries, and
ahead of China (0.95), South Africa (0.78), Russian Fedreation (0.69) and Brazil (0.59).
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Average annual HDI growth rate during 2010-2018 (per cent)
Between 1990 and 2018, India’s HDI value increased from 0.431 to 0.647, an increase of 50.0 percent.
Between 1990 and 2018, India’s life expectancy at birth increased by 11.6 years, mean years of schooling
increased by 3.5 years and expected years of schooling increased by 4.7 years. India’s GNI per capita
increased by about 262.9 percent between 1990 and 2018.
Inequality-adjusted Human Development Index indicates percentage loss in HDI due to inequality.
India’s position worsened by one position to 130 (as compared to the HDI Index 2019- 129) with a score
of 0.477. Although, the IHDI score has improved from 0.468 in 2018.
Gender Development Index measures disparities on the HDI by gender. India is only marginally better
than the South Asian average on the Gender Development Index (0.829 vs 0.828).
Gender Inequality Index presents a composite measure of gender inequality using three dimensions: 1.
Reproductive health 2. Empowerment 3. Labour market. In GII, India is at 122 out of 162 countries.
Neighbours China (39), Sri Lanka (86), Bhutan (99), Myanmar (106) were placed above India.
Multidimensional Poverty Index captures the multiple deprivations that people in developing countries
face in their health, education and standard of living. India accounts for 28% of the 1.3 billion
multidimensional poor.
The Subnational Human Development Index (SHDI) for different States for the period 1990 and 2017,
released by UNDP show that all States have shown significant improvement in levels of human
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development. The minimum SHDI for year 2017 is more than maximum SHDI for year 1990 across all
States
The 2017 HDI scores indicate that the States like Kerala, Goa, Himachal Pradesh and Punjab occupy the
top four positions while the States like Bihar, UP and MP are at the bottom of the rankings. The States
which were the worst-performing ones in HDI during 1990s are presently doing well in the social
parameters. The region-wise trend of HDI scores suggests that most Southern and Northern States have
performed much better as compared to their Eastern counterparts who have registered poor
performance in SHDIs.
7 Reasons for Low Human Development in India

For India, development is a mixed bag of opportunities as well as neglect and deprivations. There are
several socio-political, economic and historical reasons for such a state of affairs.
There are a few areas like the metropolitan centres and other developed enclaves that have all the
modern facilities available to a small section of its population. At the other extreme of it, there are large
rural areas and the slums in the urban areas that do not have basic amenities like potable water,
education and health infrastructure available to majority of this population.
The situation is more alarming if one looks at the distribution of the development opportunities among
different sections of our society. It is a well-established fact that majority of the scheduled castes,
scheduled tribes, landless agricultural labourers, poor farmers and slums dwellers, etc. are the most
marginalised lot.
A large segment of female population is the worst sufferers among all. It is also equally true that the
relative as well as absolute conditions of the majority of these marginalised sections have worsened
with the development happening over the years. Consequently, vast majority of people are compelled to
live under abject poverty and subhuman conditions. In a hugely patriarchal country like India, one cannot
expect India to score high on gender equality. India Gender Development Index is not surprisingly lower
than the average. High maternal mortality ratio, low income per capita for females and low labour force
participation rate are witnessed in India.
Kerala is able to record the highest value in the HDI largely due to its impressive performance in achieving
near hundred per cent literacy. In a different scenario the states like Bihar, Madhya Pradesh, Odisha,
Assam and Uttar Pradesh have very low literacy. States showing higher total literacy rates have less gaps
between the male and female literacy rates.
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Apart from the educational attainment, the levels of economic development too play significant impacts
on HDI. Economically developed states like Maharashtra, Tamil Nadu and Punjab and Haryana have
higher value of HDI as compared to states like Chhattisgarh, Bihar, Madhya Pradesh, etc.
Regional distortions and social disparities which developed during the colonial period continue to play
an important role in the Indian economy, polity and society.
Based on the pre-tax income share of the top 10 per cent, income inequality in India has risen from 31
per cent in 1980 to 55 per cent in 2016. In India the income growth of the bottom 40 per cent between
2000 and 2018 (58 per cent) was significantly below the average income growth for the entire population
(122 per cent). Such income inequalities amplify failings on other HDI indices of human development.
Intergenerational income mobility is lower in countries with high income inequality: it manifests at birth,
and determines access to quality healthcare, education, and opportunities. The cumulative impact of this
spills over across generations. The loss in human development due to regional inequality is expressed by
the difference between the HDI and inequality adjusted HDI or IHDI. As inequality increases, loss to
human development also increases.
India has shown an improvement in overall life expectancy by 10.4 years between 1990 and 2015 and
there has been a modest gain in infant and under 5 mortality rate. But when the public health expenditure
is as low at 1.4 per cent of the GDP, it is difficult to achieve the goal towards universal healthcare.
The Government of India has made concerted efforts to institutionalise the balanced development with
its main focus on social distributive justice through planned development. It has made significant
achievements in most of the fields but, these are still below the desired level.
8 How to Ensure Human Development in India?

To sustain the momentum in growth of human development and to further accelerate it, the role of
public sector in delivery of social services such as education and health is critical.
Some observations from UNDP’s Human Development Report (2016):
• The report does offer kudos to the Indian government’s reservation policy for increasing social
inclusion. It says that though the programme has not remedied caste based exclusion, it has had
positive effects. In 1965, Dalits held fewer than 2 per cent senior service positions but the share went
up to 11 per cent by 2011.
• The report notes that India’s social audits, in which mechanisms and implementation problems of
social programmes are gathered and then presented for discussion in a public meeting, are helping in
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bringing about transparency. These have become popular thanks to the work of the Indian grassroots
group Mazdoor Kisaan Shakti Sangathana.
• The report praises NREG for creating work that can reduce poverty and also build physical assets and
infrastructure to protect the poor against shocks.
• It also praises India’s rights based approach to development since 2005 in which progressive acts for
the right to socio economic entitlement, including information, work, education, forest
conservation, food and public service were introduced. These are designed to introduce innovative
governance mechanisms that seek to enhance transparency, responsiveness and accountability of
the state.
8.1 Social Protection

1. Pradhan Mantri Suraksha Bima Yojana, 2015: Accident insurance scheme, offers a one-year
accidental death and disability cover. Annual premium is Rs 12. Available to people in the age group
18 to 70 years.
2. Pradhan Mantri Jeevan Jyoti Bima Yojana, 2015: Government-backed life insurance scheme. Annual
premium is Rs 330. Available to people between 18 and 50 years of age.
3. Atal Pension Yojana, 2015: Pension scheme targeted at the unorganized sector.
4. Pradhan Mantri Fasal Bima Yojana, 2016: A Crop Insurance Scheme. Replaces the existing two
schemes National Agricultural Insurance Scheme as well as the Modified NAIS.
5. Pradhan Mantri Vaya Vandana Yojana, 2018: Pension Scheme exclusively for the senior citizens aged
60 years and above.
6. Atal Bimit Vyakti Kalyan Yojana, 2018: For Insured Persons (IP) covered under the Employees’ State
Insurance Act, 1948. Relief payable in cash in case of unemployment and while they search for new
engagement.
7. Pradhan Mantri Rojgar Protsahan Yojana: 12 per cent of employer contribution to EPFO of the new
employees’ drawing salary upto Rs 15000 pm is given by government for the initial three years.
8. PM Shram-Yogi Mandhan Yojana, 2019: Offers every individual with a regular pension after they
attain 60 years. Beneficiaries in unorganized sector workers.
9. PM-KISAN, 2019: Offers income support of Rs 6000/- per annum in three equal instalments to all
eligible farmers irrespective of land holdings.
8.2 School Education

1. Samagra Shiksha: A comprehensive programme subsuming Sarva Shiksha Abhiyan (SSA), Rashtriya
Madhyamik Shiksha Abhiyan (RMSA) and Teacher Education (TE). For first time, it also includes
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provisions for support at pre-school level, library grants and grants for sports and physical equipment.
The vision of the Scheme is to ensure inclusive and equitable quality education from pre-school to
senior secondary stage in accordance with the Sustainable Development Goal (SDG) for Education
(SDG-4).
2. Swayam platform offers 10 courses of Diploma in Elementary Education (D.El.Ed) and more than 13
lakh unqualified teachers have enrolled for this diploma.
3. UDISE+, an updated online real time version of UDISE (Unified District Information on School
Education) has been launched with three additional features – GIS mapping, data verification through
third-party mobile application and data analytics.
4. PGI, Ministry of Human Resource Development has launched a 70-point Performance Grading Index
(PGI) to assess areas of deficiency in each state’s school education system so that targeted
interventions can be made at every level from pedagogy to teacher training.
5. ICT driven initiatives: Shaala Sidhi (to enable all schools to self-evaluate their performance), e-
Pathshala (providing digital resources such as textbooks, audio, video, periodicals etc.) and Saransh
(an initiative of CBSE for schools to conduct self-review exercises).
6. To further focus on quality education, the Central RTE Rules have been amended to include reference
on class-wise and subject-wise Learning Outcomes. The Learning Outcomes for each class in
Languages (Hindi, English and Urdu), Mathematics, Environmental Studies, Science and Social Science
up to the elementary stage have, accordingly, been finalized and shared with all States/UTs. These
would serve as a guidelines for States and UTs to ensure that all children acquire appropriate learning
level. The RTE Act, 2009 was amended in 2017 to ensure that all teachers acquire the minimum
qualifications prescribed under the Act by 31st March, 2019 to reinforce the Government’s emphasis
on improvement of quality of elementary education.
7. The Navodaya Vidyalaya Scheme provides for opening of one Jawahar Navodaya Vidyalaya (JNV) in
each district of the country to bring out the best of rural talent. Its significance lies in the selection of
talented rural children as the target group and aims to provide them quality education comparable to
the best in a residential school system.
8. A National Mission called NISHTHA – National Initiative for School Heads’ and Teachers’ Holistic
Advancement under the Centrally Sponsored Scheme of Samagra Shiksha in 2019-20 is being
launched to improve learning outcomes at the elementary level. The Integrated Teacher Training
Programme envisages to build the capacities of around 42 lakh teachers and head of schools, faculty
members of SCERTs, DIETs, Block Resource Coordinators, and Cluster Resource Coordinators. The aim
of this training is to motivate and equip teachers to encourage and foster critical thinking in students,
handle diverse situations and act as first level counsellors.
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9. Promoting joyful learning through cultural activities including art, music, dance and theatre is playing
a very critical role in a student’s life and school activities. The National Curriculum Framework
emphasized the importance of such activities and how they helped to enhance learning.
10. Pradhan Mantri Innovative Learning Program (DHRUV) was launched to identify and encourage
talented students to enrich their skills and knowledge.
11. To broadbase technology aided teaching and learning, States and UTs are being actively involved to
contribute and use the Digital Infrastructure for Knowledge Sharing (DIKSHA) platform. Steps are also
being taken to improve the quality and diversify the nature of e-content on DIKSHA. Other e-content
sites like e-pathsala, National Repository of Open Educational Resources (NROER) are also being
integrated with DIKSHA to ensure easy access.
8.3 Higher Education

1. The government launched Pandit Madan Mohan Malaviya National Mission on Teachers and
Teaching (PMMMNMTT) which aims at building a strong professional cadre of teachers by setting
performance standards and creating top class institutional facilities for innovative teaching and
professional development of teachers in higher education. Teachers of existing Central, State
Universities/Educational Institutions including private institutions can participate in capacity building
programmes as well as induction training.
2. Higher Education Financing Agency (HEFA) was established to provide sustainable financial model for
higher education institutions, Kendriya Vidyalayas, Navodaya Vidyalayas, AIIMS and other educational
institutions of the Ministry of Health with the objective to fund projects to the tune of Rs 1 lakh crore
by 2022.
3. National Educational Alliance for Technology (NEAT) announced a PPP Scheme for using technology
for better learning outcomes in Higher Education. The objective is to use Artificial Intelligence to make
learning more personalised and customised as per the requirements of the learner. This requires
development of technologies in Adaptive Learning to address the diversity of learners. EdTech
companies would be responsible for developing solutions and manage registration of learners through
the NEAT portal.
4. The Department of Higher Education, in the Ministry of Human Resource Development has finalized
and released a five-year vision plan named Education Quality Upgradation and Inclusion Programme
(EQUIP). EQUIP is a vision plan aiming at ushering transformation in India’s higher education system
by implementing strategic interventions in the sector over the next five years (2019-2024).
5. SWAYAM 2.0 was launched to offer online degree programmes with enhanced features and facilities
by top ranking universities. ‘Deeksharambh’ a guide to student induction programme and
‘PARAMARSH’ scheme is to mentor institutions seeking National Assessment and Accreditation
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Council accreditation are some of the other major schemes of Department of Higher Education
launched in 2019.
8.4 Skill Development

1. Pradhan Mantri Kaushal Vikas Yojana (PMKVY) (1.0), 2015: Mobilize youth to take up industry
relevant skill training. Targets to train 1 crore youth by 2020. Recognizes and certifies prior learning.
2. Pradhan Mantri Kaushal Vikas Yojana (2.0), 2016-20: PMKVY version 2 has mandatory provisions for
placement tracking.
3. Pradhan Mantri Kaushal Kendra, 2015: Aspirational Model Training Centers to be opened in every
district.
4. National Apprenticeship Promotion Scheme, 2016: To promote apprenticeship. Consists of Basic
Training and On-the-Job Training/ Practical Training at workplace.
5. SANKALP, 2017: Creating convergence among all skill training activities, improving quality of skill
development programmes, Creating industry led and demand driven skill training capacity.
6. STRIVE, 2017: Creating awareness through industry clusters, integrating and enhancing delivery
quality of ITIs.
8.5 Healthcare
1. The introduction of National Health Policy, 2017 for universal access to good quality health care
services, and subsequent launch of Ayushman Bharat, with its two components: 1) Health & Wellness
Centres to provide comprehensive primary health care, and 2) Pradhan Mantri Jan ArogyaYojana
(PMJAY) to provide health cover to 10.74 crore poor & vulnerable families upto Rs 5 lakh per family
per year for secondary & tertiary hospitalization, speaks about Government’s efforts for a healthy
India.
2. To promote preventive healthcare, one and half lakh Ayushman Bharat- Health & Wellness Centres
(AB-HWCs) are proposed to be set up by 2022.
3. Under Mission Indradhanush, 3.39 crore children and 87.18 lakh pregnant women in 680 districts
across the country (including Gram Swaraj Abhiyan [GSA] & extended GSA) have been vaccinated.
New vaccines such as Measles-Rubella (MR), Pneumococcal Conjugate Vaccine (PCV), Rotavirus
Vaccine (RVV) and Inactivated Polio Vaccine (IPV) have been introduced.
4. Recognizing the need for addressing the social determinants of health, the government has adopted
a multi-sectoral approach and is increasingly synergizing its efforts with other Mission Mode initiatives
of the Government such as Eat Right & Eat Safe, Fit India, Anaemia Mukt Bharat, Poshan Abhiyan
and Swacch Bharat Abhiyaan etc.
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5. Recognising the threat of nicotine addiction among youth and children through gateway products such
as e-cigarettes, the government recently banned all commercial operations in e-cigarettes. Large
pictorial warnings and quitline number on tobacco packs and the resulting increased call volumes
from 20,000 to 2.50 lakh calls per month at the quitline services, indicate that government’s efforts to
reduce tobacco use are starting to bear fruit.
6. Under Free Drugs Service initiative, substantial funds have been given to States for provision of free
drugs. All States/UTs have notified policy to provide essential drugs free in health facilities.
7. Free Diagnostics Service initiative was launched to address the high OoPE on diagnostics and improve
quality of healthcare services.
8. Pradhan Mantri Bharatiya Jan Aushadi Pariyojana (PMBJP) and Pradhan Mantri National Dialysis
Programme (PMNDP) are some of the new initiatives that address the issue of high OoPE on account
of drugs and hospital care.
9. The doctor-population ratio in India is 1:1456 (population estimated to be 1.35 billion) against the
WHO recommendation of 1:1000. To address the shortage of doctors, the government has embarked
on an ambitious programme for upgradation of district hospitals into medical colleges.
10. The norms for graduate and post graduate seats in medical colleges have also been revised. The
maximum intake capacity at MBBS level has been increased from 150 to 250, the norms for setting
up of Medical colleges in terms of requirement of land, faculty, staff bed strength etc have been
rationalized. The Government operates Centrally Sponsored Scheme–establishment of New Medical
Colleges attached with existing District/Referral Hospitals’ with fund sharing between Centre and
States. As a result, the number MBBS and PG seats have increased by 27,235 and 15,000 respectively.
These efforts would go a long way in addressing the shortage of doctors.
11. The Pradhan Mantri Swasthya Suraksha Yojana (PMSSY) was launched to augment the tertiary
healthcare capacity in clinical care, medical education and research in underserved areas of the
country, under which AIIMS like institutions are built and Government Medical Colleges are upgraded
by setting-up Super Speciality Blocks.
12. National Medical Commission Act, 2019 was promulgated to enable constitution of National Medical
Commission.
13. Government of India supports States in Health Systems Strengthening under the umbrella programme
of National Health Mission (NHM). This has resulted in striking improvements in health infrastructure
of public health facilities in States also.
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INDIAN AGRICULTURE
FODDER MATERIAL

Contents
1 Introduction ............................................................................................................................................3
2 Structural transformation and intensification in Indian agriculture ......................................................3
2.1 Land .................................................................................................................................................4
2.1.1 Changing agrarian structure: shrinking landholding size and swelling bottom ......................4
2.1.2 Changing cropping pattern and agricultural diversification ....................................................5
2.2 Irrigation and Fertilizers ..................................................................................................................7
2.2.1 State-wise analysis of cropping intensity, irrigation ratio and fertilizer consumption ...........7
2.3 Labour .............................................................................................................................................9
2.4 Capital ...........................................................................................................................................11
2.5 Farm Mechanisation .....................................................................................................................12
2.6 Knowledge Intensive Agriculture ..................................................................................................13
3 From Deficit to Surplus .........................................................................................................................14
3.1 Staple Crops ..................................................................................................................................14
3.2 Livestock ........................................................................................................................................15
3.3 Horticulture Crops.........................................................................................................................16
3.4 Cotton............................................................................................................................................17
3.5 Conclusion .....................................................................................................................................17
4 Impact of agricultural intensification and mitigation measures ..........................................................19
4.1 Remedial measures for sustainable agricultural intensification ..................................................21
5 The way forward: pathways for profitable, sustainable and resilient agriculture ..............................23
5.1 Innovations....................................................................................................................................24
5.1.1 Climate resilient seeds ...........................................................................................................24
5.1.2 Protected and sustainable agriculture ..................................................................................25
5.2 Incentives ......................................................................................................................................25
5.2.1 Direct income/cash transfer ..................................................................................................25
5.2.2 Incentive for water and energy conservation .......................................................................25
5.3 Institutions ....................................................................................................................................25
6 Managing Climatic Risks in Agriculture ................................................................................................26
6.1 Technological Options...................................................................................................................27
6.1.1 Field and horticultural crops ..................................................................................................27
6.1.2 Livestock ................................................................................................................................28
6.1.3 Fisheries .................................................................................................................................28
6.1.4 Natural resource management .............................................................................................28

6.2 Institutional and policy options for adapting to climate risks ......................................................29
6.2.1 Mainstreaming climate adaptation in development planning ..............................................29
6.2.2 Leveraging watershed programmes and MGNREGA.............................................................30
6.2.3 Contingency crop planning and agro advisory services ........................................................30
6.2.4 Insurance, credit and risk management ................................................................................31
1 Introduction
• Indian agriculture employs the largest share of the workforce – about 42 percent in 2019 – though
its share in overall gross domestic product (GDP) is only 16.5 percent. India is still largely a rural
economy with 66 percent of the country’s population living in rural areas (World Bank, 2019) and
agriculture continues to be the mainstay of a large segment of this section of the population.
• Agriculture is also important for consumers, as an average Indian household spends about 45
percent of its expenditure on food.
• Moreover, given that India is going to be the most populous country, surpassing China, by 2027
(according to United Nations population projections, 2019), it would be a major challenge for Indian
agriculture to feed this large population especially in the wake of the emerging challenges of climate
change and the degradation of natural resources such as air, water and land, etc.
• This challenge becomes more serious with the expected rise in per capita incomes as well as
increasing urbanisation – the urban population is estimated to be 600 million by 2030 – both of which
are likely to increase the demand for food, feed and fibre. Moreover, not only will there be more
mouths to feed, but, as per capita income grows, there will be much higher demand for high value
agriculture products such as meat, fish, dairy, fruits and vegetables (OECD/FAO, 2019). This would
be very much in line with Bennett’s Law of food consumption, which states that with rising incomes
people consume relatively less “starchy staples” and shift to more nutritious food with proteins and
vitamins.
2 Structural transformation and intensification in Indian agriculture

• Following the economic reforms in 1991, India’s overall GDP growth picked up momentum, moving
from 5.2 percent per annum between 1980/81 and 1991/92 to roughly 7.1 percent between 2010/11
and 2019/20.
• This has been accompanied by falling growth rates of population from 2.25 percent per annum during
the 1980s to 1.92 percent during the 1990s, 1.6 percent during the 2000s and 1.15 percent per

annum between 2010/11 and 2019/20, which has consequently led to a gradual decline in the poverty
ratios.
• Furthermore, agriculture has undergone slow and gradual transformation from a subsistence based
and labour-intensive system to a modernised, capital and knowledge intensive one. However, this
development has been accompanied by a sharp decline in its share in overall GDP (from 30 percent
in 1981 to 16.5 percent in 2019).
2.1 Land
• India is the world’s seventh largest country covering an area of 328 million hectares (mha). Nearly
half of this land (156.4 mha) is arable (FAO, 2018), and only 42.6 percent of the total geographical
area (about 140 mha) is actually cultivated (as of 2015-16).
o According to FAO (2018), “Arable land refers to land under temporary crops (double cropped
areas are counted only once), temporary meadows for mowing or pasture, land under market
and kitchen gardens and land temporarily fallow (less than five years). The abandoned land
resulting from shifting cultivation is not included”
• India’s irrigation cover is 48.7 percent of the country’s cultivated area while its agriculture output is
valued at USD 524.7 billion in 2017/18
2.1.1 Changing agrarian structure: shrinking landholding size and swelling bottom
• According to Agriculture Census:2015-16 (DoAC&FW, 2019), small and marginal farmers with less
than 2 ha of land, account for 86.2 percent (126 million) of the total 146.4 million operational land
holdings in India. This is a significant and steady increase in share from 70 percent in 1970/71 to 82
percent in 2000/01.

• Of these 126 million operational land holdings, 68.5 percent belong to only marginal farmers with
less than 1 ha of land, highlighting the fact that Indian agriculture is dominated by smallholders.
Moreover, in terms of area, small and marginal farmers account for nearly 47 percent of the total
operated area in 2015/16, pointing towards significant land inequalities.
• Increasing fragmentation of land is another major concern of Indian agriculture (MoAFW, 2019). The
average size of land holdings has come down continuously from 2.28 hectares in 1970-71 to 1.08
hectares in 2015-16 – unviable levels that cause farmers to leave land and look for better
opportunities elsewhere.
• As a result, large tracts of productive land are left either uncultivated or used at very low productivity
levels due to lack of capital, both physical and human (NITI Aayog, 2016). This makes the adoption of
new technologies difficult, and this has adverse impacts on both farm productivity as well as farmers’
incomes.
• Therefore, the viability of marginal and small farmers is a major challenge for Indian agriculture,
begging for substantive reform in the land lease markets with the objective of creating economically
viable size of holdings.
2.1.2 Changing cropping pattern and agricultural diversification

• With rising incomes, consumption patterns of people shift towards high value products, as
mentioned earlier.
• NSSO (2014) shows that an average Indian household spends about 45 percent of the total monthly
expenditure on food. It needs to be noted that even within the food basket, there is a shift in the
consumption pattern.

• There is a sharp decline in the share of monthly expenditure on staples in both rural and urban areas
– from 41.1 percent to 10.8 percent in the former and from 23.4 percent to 6.6 percent in the latter
between 1972/73 and 2011/12. Given this, the agricultural system has to respond by diversifying
towards production of higher value and more nutritious agricultural products.
• India has a multiplicity of cropping systems across agro-climatic zones, mainly on the basis of soil
type, rainfall, climate, technology, policies and existing socio-economic situation of the farming
community.
• Though the gross cropped area has increased from 172.6 mha in 1981/82 to 198.4 mha in 2015/16
and the net sown area (an indicator of effective utilisation of land) has remained same at around 140
mha over the same period, farmers are gradually shifting from traditional, subsistence farming of
non-commercial crops to commercial/cash crops to be able to respond to changing demand patterns
and tap opportunities for higher returns.
• As shown above, food grains (cereals, millets, and pulses) used to occupy 73 percent of the gross
cropped area in the triennium ending (TE) 1982/83, but this gradually reduced to 68 percent in TE
1992/93 and further to 62 percent in TE 2015/16, even as the share of oilseeds and fruits and
vegetables has increased over the same period.

• This indicates that farmers are increasingly moving towards more commercial crops such as oilseeds,
fruits and vegetables, spices, etc. compared to staples.
• Though food grain production still dominates in terms of area cultivated, the change in the value of
different segments of agriculture, including livestock and fishery, is the real indicator of agricultural
diversification.
• Above figure presents these changing shares over the period TE 1982/83 to TE 2016/17 and clearly
shows the move away from staple crops to cash crops, horticulture and livestock products. The
increase is particularly sharp in the case of livestock and horticulture crops. In fact, the value of
livestock today is much higher than the value of food grains, and that of horticulture crops now equal
the value of grains.
2.2 Irrigation and Fertilizers
2.2.1 State-wise analysis of cropping intensity, irrigation ratio and fertilizer consumption
• Cropping intensity, simply put, represents the number of crops grown on the same field during an
agricultural year. It is measured as a percentage of gross cropped area to net sown area. Higher
cropping intensity implies intensive use of land for agriculture.

• The availability of water for irrigating the crops (either through rainfall or other irrigation sources) is
one of the most crucial factors affecting cropping intensity. In India, cropping intensity has improved
gradually from 123.1 percent in 1980/81 to 141.5 percent in 2015/16 (DES, 2017).
• The state-wise analysis of cropping intensity shows large spatial variation. The highest intensity is in
Punjab (190.8 percent), followed by Haryana (185.6 percent), West Bengal (185 percent) and Uttar
Pradesh (157.5 percent). Medium cropping intensity can be seen in Madhya Pradesh (155.1 percent),
Bihar (145.4 percent), Rajasthan (138.3 percent) and Maharashtra (135.3 percent).
• States like Gujarat, Andhra Pradesh, Chhattisgarh, Karnataka, Telangana, Odisha and Jharkhand
suffer from lower cropping intensity, much below the country average, as they have low irrigation
cover and low rainfall. This shows that there is a positive correlation between irrigation
developments and cropping intensity, with some exceptions like Kerala, which has high rainfall.
• At an all-India level, fertilizer consumption (in terms of N, P and K) has increased significantly from
2.17 kg per hectare in 1961/62 to 134 kg per hectare in 2018/19. However, there are significant inter-
state variations.

• Among the major states, the per hectare consumption is the highest in Telangana (261 kg), followed
by Bihar (216 kg), Punjab (213 kg), Haryana (210 kg), Andhra Pradesh (203 kg), Uttar Pradesh (178 kg),
West Bengal (160 kg) and Tamil Nadu (153.5 kg). In the remaining states, the consumption per
hectare is lower than the all India average.
2.3 Labour
• In a developing economy like India, with a large and young population, a shift in the pattern of
employment away from the agricultural sector to higher productivity jobs in urban areas is generally
a positive indicator of structural transformation. This is the moral “pull factor” that is displayed in
most developing countries over a period of time. But sometimes, there could be a “push factor” too;
since agriculture cannot sustain the workforce, job-seekers are pushed to urban areas to take up any
work that can give them some sustenance.
• Over the last four decades, the absolute number of workers in India has increased from 180.7 million
in 1971 to 481.7 million in 2011, indicating an addition of close to 6 million workers to the workforce
every year (Census of India, various issues). Moreover, the absolute number of workforce employed
in the agriculture sector has increased from 125.7 million to 263.1 million during the same period,
though in terms of percentage, this share has declined from 66.5 percent in 1981 to 42.3 per cent in
2019, which points towards the structural transformation in Indian agriculture.
• This has been accompanied by rather a steep decline in the share of agriculture in total GDP from
31.7 percent in 1981 to 16.5 percent in 2019, a decline of about 48 percent of its former value.

• What is striking is that rather than converging, the two shares are still on a diverging path; this is a
matter of concern because it keeps the labour productivity in agriculture low, severely affecting value
addition.
• Raising labour productivity will require raising land productivity by (a) pumping in more capital; (b)
creating employment opportunities in off-farm jobs such as food processing, cold storages,
construction sector; (c) skill formation; and (d) ‘diversification’ towards high value agricultural
activities such as dairy farming, poultry rearing, horticulture and fisheries.
• Surprisingly, within the agriculture workforce, between 1971 and 2001, the composition of cultivators
and labourers has always been skewed in favour of cultivators. In 1971, 62.2 percent of the total
workforce employed in agriculture were cultivators and only 37.8 percent were agricultural labourers.
This ratio kept changing gradually over the years and by 2011, for the first time, the share of
cultivators in the total agriculture workforce reduced to 45.2 percent, while those of agricultural
labourers increased to 54.8 percent.
o One of the possible reasons for the declining share of cultivators could be the increasing
fragmentation and continuous shrinking size of land holdings, which has reduced profitability
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in cultivating smaller farms due to lack of economies of scale. As a result, these cultivators
either shift to non-farm activities and leave their land fallow or lease it to agri-labourers.
o Another factor could be the relatively slow migration of labour out of agriculture due to lack
of skills or slower growth of non-agriculture sectors.
o Yet another factor could be high growth rates of population in rural areas, especially amongst
the agri-labour.
2.4 Capital
• Capital, and its efficient utilisation, is one of the key variables that determines the growth and
performance of a sector.
• Gross capital formation in agriculture (GCFA) from both the public and private sectors as a percentage
of agricultural GDP or GDPA (in current prices) increased from 7.8 percent in 1980/81 to 13.7 percent
in 2017/18. It peaked in 2011/12 at 18.2 percent, but has been falling since then, which is a cause of
concern.
• The moot point that arises in this context is whether this is sufficient to provide 4 percent growth in
agriculture GDP on a sustainable basis, especially when the capital-output ratio in agriculture hovers
around 4:1. The obvious answer is “no”, and that points to the need for propelling investments in
agriculture either through government expenditure or by incentivising the private sector.
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• It is worth noting that in the early 1980s, the shares of public and private investment in agriculture
was almost equal. However, in the following years, the share of public investment fell drastically and
came down to 21.6 percent in 2017/18.
• What this indicates is that it was largely private investment that enabled and drove agricultural
growth over these years. If the private sector is expected to further propel agriculture growth, farmers
need to be given the right incentives. This may include higher expenditure on research and
development (R&D), better infrastructure, agri-marketing reforms, innovations, switch in policy from
input subsidies to direct income support on per hectare basis and opening up of the land lease
market.
• One way to measure the incentive structure for farmers is the producer support estimate (PSE),
which, in India, has been found to be negative 14.4 percent of the of gross farm receipts during the
2000/01 to 2016/17 period. This suggests that Indian farmers have been taxed much more than they
have been subsidised. The negative PSE (support) is basically the fallout of restrictive marketing and
trade policies that do not allow Indian farmers to get remunerative prices for their output. This needs
the immediate attention of policymakers.
2.5 Farm Mechanisation

• Another dimension of agricultural transformation is how machine power substitutes human and
draught animal power in farming.
• India has also witnessed a clear shift from traditional agriculture processes to more mechanised
processes over the years. The use of animal and human power in agriculture and related activities
has reduced drastically from 97.4 percent in 1951 to about 66 percent in 1971 and about 12 percent
in 2013/14.
• The contribution of mechanical and electrical sources has increased from 2.6 percent in 1951 to about
34 percent in 1971 and about 88 percent in 2013/14. Out of the total farm power available, tractors
contribute about 48 percent in 2013/14.
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2.6 Knowledge Intensive Agriculture
• Increase in the expenditure on agriculture knowledge and innovation systems is another important
indicator of structural transformation in the agricultural sector, as it shows the sectoral shift towards
knowledge-based agricultural systems.
• In a study on the impact of investment and subsidies on agricultural GDP growth and poverty
reduction, it was estimated that for every rupee invested in agricultural research and education
(R&E), agriculture GDP increases by INR 11.2. Moreover, for every million rupees spent on
agricultural R&E, 328 people are brought out of poverty.
• In India, over the years, the ratio of expenditure on agricultural knowledge and innovation systems
as a percentage of agricultural gross value added (GVA) improved from 0.38 percent in 2000/01,
touched 0.64 percent in 2010/11 but fell back to 0.35 percent in 2018/19.
• When compared with other countries like China, that spends about 0.8 percent of its agricultural
GDP, India’s share is quite low.
• Therefore, in order to improve the sector’s total factor productivity, India needs to invest more in
agricultural R&E.
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3 From Deficit to Surplus
While we have observed long term trends in the structural transformation of agriculture, with respect to
land, labour, irrigation, fertilizers, capital and farm mechanisation, the big question is: were they able to
provide enough food, feed and fibre to Indians as the population grew from 330 million at the time of
independence in 1947 to 1.38 billion in 2020? In this context, this section describes how Indian
agriculture made significant strides in the production of staples, milk, poultry, fisheries, fruits and
vegetables and, lately, in cotton. All this was made possible with the infusion of innovative technologies,
along with supportive policies and institutions.
3.1 Staple Crops

• In 1943, India, then under British rule, faced one of the most severe famines, the Bengal Famine,
which is said to have claimed 1.5 to 3 million lives due to starvation. In 1947, when India became
independent, its staple supplies were in a precarious state. The First Five Year Plan (1951-56) was
mainly devoted to agriculture, with then Prime Minister Jawaharlal Nehru declaring “everything else
can wait, but not agriculture”.
• Yet, in the Second Five Year Plan (1956-61), the focus of development shifted towards heavy
industrialisation, and India signed a Public Law (PL) 480 with the United States of America for food
aid against rupee payments.
• Unfortunately, during the mid-1960s, India was again hit by consecutive droughts and food grain
production fell by 17 million metric tonnes (MMT) from 89.4 MMT in 1964/1965 to 72.4 MMT in
1965/1966. This plunged the country into an unprecedented ‘ship to mouth’ crisis as it leaned heavily
on food aid of about 11 MMT per year of wheat under PL-480 for survival.
• This backdrop sowed the seeds of the famous Green Revolution. Imports of high yielding miracle
seeds of wheat from Mexico (Lerma Rojo 64-A and Sonora 64) developed by Norman E. Borlaug, and
of rice (IR 8) from the Philippines, developed by Peter Jennings and Henry M. Beachell, formed the
backbone of the Green Revolution.
• Commercialisation of these high yielding variety seeds, together with the institutionalisation of the
Food Corporation of India (FCI) and the Agricultural Prices Commission (APC), extensive irrigation,
fertilizers and farm mechanisation played a key role in ensuring food security for the country.
• As a result of all these interventions, India today is the second largest producer of wheat and rice in
the world, with 106.2 MMT and 117.5 MMT production respectively in 2019/20, and is also the largest
exporter of rice with about 12.7 MMT exported at USD 7.7 billion in 2017/18.
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3.2 Livestock
• After the Green Revolution, Indian agriculture witnessed significant transformation in the dairy
sector during the 1970s through the mid-1990s. It was essentially driven by institutional engineering
through ‘Operation Flood’ and expansion in herd numbers.
• Verghese Kurien, who spearheaded Òperation Flood’, transformed the system of milk collection
from smallholders under a co-operative structure, homogenising, pasteurising, and distributing it to
mega cities as far as 1,200 miles away in bulk coolers designed to keep the temperature controlled at
39 degrees Fahrenheit (3.9 degrees Celsius), through an organised retail network.
• Subsequently, de-licensing of the dairy sector in 2002 encouraged private participants to enter the
sector and further increase the production. As a result of this, India emerged as the largest milk
producer in the world with 187.7 MMT in 2018/19, up from 17 MMT in 1950/51, leaving the United
States of America (97.7 MMT) and China (45 MMT) way behind.
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• Another transformational change in the agricultural sector came during 2000/2001 in the poultry
sector through policy innovations such as liberalisation of imports of grandparent poultry stock,
vertical integration of operations and contract farming between large integrators and small farmers,
driven by the private sector that ushered in the Poultry Revolution.
• As a result, the sector was transformed from a mere backyard activity into a major organised
commercial one. As a result, India today is the third largest producer of layers (eggs) in the world,
producing around 88 billion eggs as of 2017 and accounting for about 5 percent share in world
production. It is also the fifth largest producer of broilers (poultry meat), producing 3.4 MMT in 2017
and accounting for 3 percent share in world production (DoAHD&F, 2017).
• It is further worth noting that almost 80 percent of eggs and poultry meat production come from
organised commercial farms, mainly owned and managed by private entities.
3.3 Horticulture Crops

• Over the last decade, the horticulture sector comprising of fruits and vegetables, spices and
floriculture has contributed significantly to agricultural growth.
• Horticultural production has now overtaken food grains output.
• According to many experts, it has been made possible largely because of the National Horticulture
Mission (2004/05), which ushered in the Golden Revolution, making India the second largest
producer of fruits and vegetables in the world, next only to China.
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• According to the 2018/19 estimates, fruit production has reached 97.97 MMT, up from 28.6 MMT in
1991/92, while vegetable production has increased from 58.5 MMT to 183.17 MMT over the same
period.
3.4 Cotton
• In the case of fibre, cotton is an important commercial crop globally.
• The introduction and widespread commercialisation of Bt cotton in 2002 (the only genetically
modified crop in India so far) along with huge investments in R&D by private seed companies, paved
the way for the Gene Revolution in the agricultural sector.
• This led to a remarkable breakthrough in cotton production, doubling output from 13.6 million bales
in 2002/03 to 37.5 million bales in 2019/20, surpassing China in 2014/15 to become the largest
cotton-producing country in the world (DCD, 2017).
• It is also worth noting that Bt cotton cultivation covers more than 90 percent of the total area under
cotton in the country.
• Moreover, it was estimated that after the release of Bt cotton in 2002/03, India cumulatively gained
USD 84.7 billion in savings on import of cotton as well as extra exports of raw cotton and yarn
compared to the business-as-usual scenario
3.5 Conclusion
• India has thus showcased an impressive growth trajectory from a food scarce country to a food
sufficient and to a food surplus one now. All these revolutions in agricultural production, triggered
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by innovations, incentives and institutions, have successfully made India a net exporter of
agricultural produce.
• As a result, agricultural exports, in nominal US dollar terms, increased significantly from USD 6.1 billion
in 2001/02 to USD 43.6 billion in 2013/14 (Figure 12). However, after achieving this peak, exports
declined slightly due to falling global prices. On the other hand, agricultural imports also increased
sharply, from USD 4 billion in 2001/02 to USD 18.7 billion in 2016/17, and came down slightly
thereafter.
• Overall, however, agricultural trade as a percentage of agricultural GDP showed an increase from 4.7
percent in 1990/91 to 20.9 percent in 2012/13. Thereafter, it slipped from this peak and stood at 15.1
percent in 2018/19.
• One of the questions for the future decade is whether India will maintain this surplus in food, feed
and fibre? A report of a working group set up by NITI Aayog, Demand and supply projections towards
2033, assessed the demand requirements of various agricultural commodities and made supply
projections for the years 2021/22, 2028/29 and 2032/33 (NITI Aayog, 2018). The findings of the report
are summarized below:
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• According to the working group report, India will have sufficient supply of food grains towards
2032/33 and beyond. However, there will be a marginal deficit of around 5-7 million tonnes of pulses
and coarse cereals. In addition, given that the indirect demand of coarse grains as feed for the
growing livestock and poultry sector is likely to increase at a rapid pace, chronic shortage of feed
and fodder is also expected. Moreover, in the case of oilseeds, the situation looks grim as the country
is going to face a massive deficit of around 40 million tonnes.
• In other commodities such as milk, meat, fruits and vegetables, there appears to be a reasonable
balance between demand and supply in the years to come.
4 Impact of agricultural intensification and mitigation measures

• As the previous sections set out, agricultural intensification led to the replacement of human labour
with machine labour, rainfed lands received higher irrigation cover resulting in increased cropping
intensity, fertilizer consumption increased on per hectare basis and, above all, more knowledge
flowed into the agriculture sector.
• However, the process of resource intensification, which gave India the much needed food, feed and
fibre security, also caused some unintended negative consequences.
• In particular, it adversely affected the natural resources and environment, leading to degradation of
soil at places, depletion of groundwater, salinisation in irrigated areas, increased resistance to pests
and weeds, pollution of soil, air and water and greenhouse gas (GHG) emissions.
• Many experts hold that these negative externalities were caused primarily by high subsidies on inputs
such as fertilizers, free power for irrigation, etc. Another reason was the open-ended procurement
at MSP, as in the case of paddy in the Punjab-Haryana belt and sugarcane in Maharashtra.
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• Above figure presents a recent assessment of the groundwater table in 6 584 units (blocks), across
states in India by the Central Ground Water Board (CGWB) in 2017. It revealed that 1034 units are
‘over-exploited’, 253 are ‘critical’ and 681 are ‘semi-critical’ (CGWB, 2017).
• The over-exploited areas are mostly in three parts of the country, namely, north-western India,
western India and southern peninsular India.
• The report also pointed out that the north-western region, which includes parts of Punjab, Haryana,
Delhi and western Uttar Pradesh, has abundant replenishable sources, but witnesses indiscriminate
withdrawals of groundwater. On the other hand, in the western region, particularly in parts of
Rajasthan and Gujarat, the arid climate limits groundwater replenishment. In the southern
peninsular region, including parts of Karnataka, Andhra Pradesh, Telangana and Tamil Nadu, water
replenishment is restricted by poor aquifer properties.
• Further, the increasing use of fertilizers and pesticides has caused rapid accumulation of harmful
chemicals in the soil and water, increased land degradation and soil erosion. It is worth mentioning
that the imbalanced use of fertilizers has created widespread deficiency of secondary and micro
nutrients such as sulphur (41 percent), zinc (48 percent), iron (12 percent) and manganese (5 percent)
in the soil.
• This is a serious matter of concern because deficiency of zinc in food, in particular, results in the
stunted growth and impaired development of infants, which could lead to poor productivity of
future generations.
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• India also faces increasing levels of GHG emissions and is the world’s third largest emitter. The
agricultural sector’s share in these emissions is 18 percent, the second highest after the energy sector
which accounts for 71 percent.
• Of the total GHG emissions caused by agriculture, about 59 percent is generated through livestock
rearing, followed by 21 percent from the excessive use of chemical fertilizers and their associated
impact on soils. Some 18.3 percent GHG emission is generated from paddy cultivation and 1.7 percent
from residue management practices.
• It has been estimated that in the years to come, India is likely to suffer significant impact of climate
change, raising serious concerns that the toxic impact on the environment of the increase in emissions
will only multiply.
• In addition, India also suffers from increasing land degradation. According to the estimates, 37
percent of the land area in the country (that is, about 120.4 million hectares) is affected by various
types of degradation. Deforestation, poor irrigation and water management techniques, excessive
and unbalanced use of fertilizers and pesticides, overgrazing and improper management of
industrial wastes are some of the main reasons behind land degradation in the country.
• The states of Madhya Pradesh (west-central region), Kerala (south), Himachal Pradesh (north),
Nagaland, Mizoram and Tripura (east) are the most affected, with 60 percent of their land
experiencing degradation. This shows that the existing policy framework lacks a clear incentive
structure for efficient and sustainable use of resources.
4.1 Remedial measures for sustainable agricultural intensification

• With the demand for food expected to double and the issue of climate change projected to become
severe in the years to come, it is imperative to maintain biologically diverse landscapes for
sustainable intensification of agriculture.
• In order to do so, the government needs to intervene and provide policy incentives that promote
efficiency not only in agricultural production but also in input usage for sustainable growth of the
sector, with the ultimate goal of achieving overall food-feed-fibre security.
• Given that livestock is the biggest contributor of GHGs within the agriculture sector, improving the
productivity per animal and reducing their population size is one of the important mitigation
measures.
• At present, India has the world’s largest livestock population and, consequent to the ban on cattle
slaughter, unproductive male and female cattle compete with productive ones for feed and fodder.
An innovative solution to tackle this problem is ‘selective sex semen’ technology, which facilitates
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the production of genetically improved high-milk-producing females at a faster rate, and eliminates
the redundant male cattle population.
• After livestock rearing, rice cultivation is the next biggest source of GHG emissions, due to the
metabolic activities of methanogen bacteria, which is quite effective in flooded conditions.
• In order to mitigate emissions from rice cultivation, it is imperative to improve productivity and to
plan cultivation in keeping with the climatic and biodiversity scenario across the country. Experts
have recommended some specific mitigation measures:
o The area under rice cultivation should be reduced by at least one million hectares in states
like Punjab and Haryana, where 99 percent of rice fields are irrigated through flood irrigation
methods, and that cultivation should be shifted to eastern India. This will also help to address
the issue of groundwater depletion due to over-mining of water in these states.
o Changing rice cultivation and irrigation practices, including the adoption of ‘alternate wetting
drying (AWD)’ to reduce irrigation water consumption in rice fields without impacting the
productivity, can also cut emissions. One analysis undertaken to estimate the economics of
this method found that the AWD technique can save up to 20 to 50 percent of water and can
reduce GHG emissions by 30 to 50 percent.
o Besides this, ‘direct seeded rice (DSR)’ is a much better practice than the conventional puddle
rice cultivation because of its low-input demand. The technique has the potential to save 75
percent of water, mitigate GHG emissions and also reduce the requirement of labour.
o Other water saving irrigation technologies like micro irrigation should be also looked at as the
stepping stone for developing sustainable agricultural intensification. According to some
studies, micro irrigation technology (drip and sprinkler) has an irrigation application efficiency
of about 85 percent to 90 percent and can solve the issue of groundwater exploitation and
GHG emissions to a large extent. However, a study found that while drip irrigation in Rajasthan
did improve crop productivity, it did not really save water. This is because farmers take the
water savings through this method as a resource that can be reallocated by bringing more land
under cultivation. The study concludes that drip irrigation is a technically efficient innovation
in terms of physical productivity but it poses a serious challenge of groundwater overdraft, in
the absence of groundwater abstraction regulations.
• Imbalance in the use of chemical fertilizers is another daunting challenge for agricultural
intensification in India. During the 1980–2017 period, emissions from the use of chemical fertilizers
have increased manifold.
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• Absorption of all nitrogenous fertilizers applied to the soil or foliage of crops is quite difficult and
hence the surplus or unused amount of nitrogen pollutes water bodies or evaporates in the
atmosphere in the form of nitrogen oxide, causing high levels of GHG emission. Possible solutions:
o One of the commonly known practices is judicious use of chemical fertilizers based on soil
health (after testing the soil) and the requirements of the crop/variety. Therefore, it makes
sense for India to implement the soil health card scheme more seriously.
o Subsidisation of soluble fertilizers instead of granules will be another step in the right
direction.
o Optimally, the amount of fertilizer subsidy should be given directly to farmers in their bank
accounts and the prices of N, P and K fertilizers freed up.
o Short of this direct cash transfer, in lieu of fertilizer subsidy, the nutrient-based subsidy
scheme needs to be extended to urea as well so that the unduly high subsidy on nitrogenous
fertilizers is brought in line with the subsidy on P and K fertilizers.
• Burning of crop residue also contributes to GHG emissions and climate change.
o This can be mitigated if farmers adopt other efficient ways to deal with crop residue, such as
using it for biogas production. However, incentives should be provided for them to do that,
especially in the Punjab-Haryana belt, where stubble burning of paddy has become an
environmental menace.
• In order to tackle the issue of rapid groundwater depletion below subsistence levels, Gujarat presents
a success model of decentralised rain water harvesting that could be scaled up at the national level or
at least be implemented in those states that are at risk. The technique includes building of check dams,
village tanks, and bori-bunds (built with gunny sacks stuffed with mud) for storing water. Government
authorities in Gujarat, along with grass-roots organisations, built more than 100,000 check dams
during the 1990s.
5 The way forward: pathways for profitable, sustainable and resilient

agriculture
• Agriculture in India has witnessed an impressive growth trajectory, taking the country from a food
deficit one during the 1960s to a marginally food surplus one. With food grain production at 292 MMT
in 2019/20, India has not only emerged as the largest exporter of rice, but also a net exporter of
agriculture produce.
• This breakthrough transformation has been the result of rapid development and adoption of modern
technologies, investment, infrastructure (including irrigation, markets and roads) and institutions
(land, water, mechanisation, extension services and agricultural credit).
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• Notwithstanding the economic success, the sector today is at a crossroads with numerous
opportunities as well as concerns.
o On the one hand, the sector has grown and diversified, while, on the other, its contribution to
the overall GDP has declined to 16.5 percent even as it still employs almost 42.3 percent of
the total workforce.
o Moreover, despite India having achieved food sufficiency in agricultural production, there are
still 176 million people living under poverty and over 194.4 million undernourished.
o Furthermore, a growing population and the pressure of urbanisation is squeezing agricultural
land for cultivation and affecting the quality of soil and air as well as quantity of water.
• In order to meet these emerging challenges and mould food and agricultural policies, it is important
to focus on the role of 3 Is - Innovations, Incentives and Institutions that could help to produce more,
diversified and nutritious food economically, and in an environmentally and financially sustainable
way. Some of these potential innovations are already on the table, ready to be scaled up for higher
efficiency, while others are unfolding.
5.1 Innovations
The major innovations in production technologies that can significantly impact overall productivity and
production in India include:
5.1.1 Climate resilient seeds

• Indian agriculture, in particular, faces serious production risks due to climate change, as the country
experiences “prolonged droughts in the Deccan plateau, states of the west, and southern peninsula,
and floods in the Himalayan foothills from melting glaciers in the Himalayas”. Farmers, hence, are
always vulnerable to the risk of crop failure and income volatility.
• Therefore, the key to ensuring food sufficiency for a growing population is raising agricultural
productivity through new strategic investments in climate resilient seeds with tolerance against
droughts and floods as well as sustainable farming practices.
• The Indian Council of Agricultural Research (ICAR) has introduced climate-smart rice varieties – CR
Dhan 801 and 802 which were notified for official release by the Government of India in February
2019. These varieties, which have greater tolerance to submergence as well as drought, are a first for
rice research and are unique globally. They are recommended for states like Andhra Pradesh,
Telangana, Odisha, Uttar Pradesh and West Bengal.
• There is lot of ongoing research on seed varieties that are resistant to drought and submergence. The
farmers just need to be incentivised to use such seeds and adopt climate smart farming practices such
as changing sowing and harvesting timings, cropping patterns and inter-cropping.
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5.1.2 Protected and sustainable agriculture
Intensified agriculture with high input and high output has resulted in huge stresses on limited natural
resources and the rural environment. In India, technologies to address this issue include micro-irrigation,
solar pumps, neem coating of urea and soil health cards. Neem coating of urea, which is said to increase
nutrient efficiency by 10 percent, has reduced the quantity of urea required by crops. In addition,
unfolding innovations in farming practices such as soil-less farming systems – hydroponics, aeroponics,
aquaponics and poly-house farming systems – need to be evaluated before being scaled up.
5.2 Incentives
Policies play key role in shaping the incentive structure for farmers. These incentives not only contribute
to economic development but also encourage farmers to adopt new technology and augment production.
Some innovative incentive policies include:
5.2.1 Direct income/cash transfer

Given the extensive leakages and inefficiencies involved in input subsidies, along with their low impact
on poverty alleviation and growth, it is important to shift the priority from subsidies to investment as
well as supporting farmers in a more predictable and structured manner. This points to income-support
measures, which are less distorting and directly reach the real beneficiaries. The governments of
Jharkhand, Odisha, Telangana and West Bengal, as well as the Central government, have implemented
income support schemes, but the sustainable implementation of these and scaling to a pan India level is
yet to happen.
5.2.2 Incentive for water and energy conservation

Both the Central and state governments have introduced different incentives for farmers to save water
and use solar technology. A crucial step in this direction has been the introduction of the Pradhan Mantri
Krishi Sinchai Yojana in 2015/16 and popularising micro-irrigation to ensure ‘per drop, more crop’. The
Government of Punjab has introduced the paani bachao, paise kamao (save water, earn money) scheme
under which meters are installed on farmers’ pumps to record the amount of water saved by them and
pay farmers a subsidy at the rate of INR 4 per unit for each unit saved, which is directly credited into their
bank accounts. The scheme is a step in the right direction towards promoting efficient water and
electricity use. But whether or not it is scalable is a matter of further research.
5.3 Institutions
Institutions represent the ‘rules of the game’ that enable a given system to function. For innovations in
technologies and incentives to be effective, a sector needs a supportive and enabling institutional
environment. These institutions govern the access of key inputs and help in the development of a
profitable and sustainable agriculture. The government plays an important role in setting up formal
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institutions, including agriculture-related laws and regulations, international trade agreements, food
quality standards, and land and water property rights. Innovation in institutions are required for farmers
to better access and manage agricultural land, water, extension services and mechanisation at different
stages of crop development and in a manner that is efficient, transparent, inclusive and sustainable.
In the case of the land institution, there is an urgent need to reform land laws, free up the lease market
and revoke all restrictions like ceilings on land holdings. This will encourage land consolidation and
achieve viable size of holdings, which will also allow farmers to choose how to make the best possible
use of their land. Liberalisation of this type will encourage long term investments in land and raise
farmers’ productivity and incomes. However, the politico-environment is still opposed to the abolition
of land ceilings, though it may be palatable to freeing up land lease markets.
In order to regulate the unsustainable extraction of water for irrigation, the government needs to create
an institution that regulates spacing of tube wells, identification of aquifers, size of pumps and the
overall rate of exploitation. This should be accompanied by institutional arrangements governing rights
over water, land tenure, users’ relationships and financial incentives.
In the light of the need to produce more from limited cultivable land, the innovative idea of supplying
farm machinery services to small and marginal farmers at an affordable cost through custom hire centres
and ‘Uberisation’ platforms should be encouraged.
Last but not the least, the national network of agricultural extension plays a critical role in enabling a
system of sharing knowledge, information, technology, policy and farm management practices all along
the value chain, in order to enable farmers to realise a remunerative income on a sustainable basis
(MoAFW, 2017). As smallholders already face numerous and widely varying challenges, it is essential that
they have access to timely, reliable, and relevant information and advice. This requires an efficient
agricultural extension system that goes beyond the theoretical scope of technology transfer, into the
space of practical application and impact evaluation. Geo-tagging of farms, digitalisation of agri-value
chains, big data analytics, Internet of Things, artificial intelligence in agriculture are the next frontiers of
knowledge to drive agriculture into a new trajectory. Extension work has to be ready to take all these
technologies from start-ups and pilots to farmers’ fields for scaling up.
6 Managing Climatic Risks in Agriculture

• The immense influence of climatic stressors, particularly the spatial and temporal rainfall variability
continues to keep the seasonal and annual yield from Indian agriculture uncertain. Climate change
is projected to cause significant adverse impacts on the agriculture of tropical regions including India.
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Combined with increased competition for land, water and labour from non-food sectors, climate
change and associated increase in climatic variability will exacerbate seasonal/annual fluctuations in
food yield.
• As all agricultural commodities are climate-sensitive, hence, even the current climate and weather
patterns – droughts, floods, tropical cyclones, heavy precipitation events, hot extremes, heat waves,
cold waves, frost events and hailstorms – are impacting agricultural production and farmers’
livelihoods.
• For instance, loss of farm revenue due to extreme temperatures and rainfall shocks is estimated to
be ~12 per cent for monsoon (kharif) and ~6 per cent for winter (rabi) crops with more impacts on
unirrigated systems.
• Similarly, extreme temperatures caused a farm revenue loss of 4 per cent during kharif and 5 per
cent during rabi (The Economic Survey, 2018).
• Negative anomalies of monsoon seasonal precipitation and number of rainy days during 1966– 2010
are highly correlated with negative anomalies of kharif and rabi food grain yield.
• There are many options to mitigate the negative impacts of climate change, to minimise risks to
agricultural systems, and make the latter resilient to climate change and help reduce emissions.
Options range from change in crop management, such as sowing time, stress resistance varieties,
change in cropping systems and land use, to adjust to new climates
6.1 Technological Options

Several existing technologies can be suitable used to manage climatic risks.
6.1.1 Field and horticultural crops

• Multiple stress tolerant varieties: Developing varieties tolerant to multiple abiotic and biotic stresses
using stress-tolerant QTLs, genes and alleles in elite cultivars, is an efficient way of achieving climate
resilience with easy access to farmers. ICAR developed crop varieties such as CR Dhan 801 and CR
Dhan 802 for rice and several others for other crops, which are tolerant to multiple stresses i.e.,
submergence, salinity, drought, heat, pests and diseases.
• Inter-specific grafting of crops: This strategy was successful for flood-tolerance in tomato, where
grafting of tomato plants (cv. Arka Rakshak) was done onto brinjal rootstocks (Arka Neelkanth, Mattu
Gulla and Arka Keshav). Grafted tomato plants exhibited better survival and improved fruit yield over
self-grafted and un-grafted plants under flooding.
• Diversification to stress-tolerant and new crops: Crop diversification should focus in promoting
climate-smart, hardy crops such as millets; and more remunerative fruit crops such as dragon fruit
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and pomegranate in drought prone areas. New crops such as dragon fruit have high potential for
increasing farmers’ income, particularly in climate stressed areas.
6.1.2 Livestock
• Stress-tolerant breeds: Selection and promotion of stress tolerant breeds is paramount for climate
resilience. In high stressful environments and for less resourceful farmers, indigenous breeds will be
more suitable compared to exotic breeds.
• Feed and housing management: To ensure climate resilient livestock production, providing heat-
stress-resilient housing, sufficient good quality feed with supplements such as vitamin C for poultry,
improving feeding strategy, and extending financial and risk mitigation services will be of immense
use. Establishment of cattle camps to ensure feeding and housing in adverse years was adopted as a
successful strategy for climate resilience in Maharashtra, India.
• Small ruminants in drought-prone areas: Small ruminants, generally not requiring costly housing and
feed, make husbandry easier; adjustment to hardy climatic conditions should be promoted in drought-
prone areas. This effort can help millions of farmers with minimal incentives from the government.
• Livestock healthcare for emerging pests and diseases: Climate change is causing the emergence and
spread of new pest and diseases. To address this, awareness and number of diagnostic centres should
be increased, and their infrastructure and services strengthened for early and better diagnosis.
6.1.3 Fisheries
• Composite and drought-escaping fish culture: In composite fish culture, more than one type of
compatible fish such as grass carp, common carp, big head carp and amur carp are cultured together.
Amur carp (modified variety of common carp) has more growth and tolerance to varying temperature
regimes compared to common carp.
• Drought-escaping fish culture: In this, fishes are grown in smaller ponds that retain water for 2-4
months, and fish species such as Pangasius sp., Puntius javanicus, Pygocentrus nattereri and
Oreochromis niloticus are cultured.
• Diversification of fish species: Culturing brackish water fish in freshwater and low salinity tolerant
freshwater fish in brackish water is a reality. Several stress tolerant species such as Pangasianodon
hypophthalmus, Anabas testudineus and Channa stiatus were identified for stress conditions to
provide flexibility and resilience in fish culture.
6.1.4 Natural resource management

• Water management: To conserve, store and enhance water use efficiency, pressurised, low cost and
demand-driven irrigation methods are being promoted. Technologies such as alternate wetting and
drying in rice, dry direct-seeded rice, rainwater harvesting, and groundwater recharge have
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substantial adaptation benefits. A successful technology for drought-prone and low rainfall areas is
Jalkund i.e., low cost rainwater harvesting structures, for harvesting rainwater during the rainy
season and its subsequent use during the dry periods.
• Nutrient management: Efficient management of nutrients can help in climate change adaptation by
enhancing root growth and early vigour of plant and improving soil microbial activities that lead to
adequate supply of plant nutrients under climate-stress conditions. Soil test-based, balanced fertiliser
application, use of efficient fertilisers, site-specific real time N application and integrated nutrient
management are some options of efficient nutrient management practices. Use of neem-coated urea,
soil health card and leaf colour chart for enhancing fertiliser use efficiency were successfully utilised
in India. Integrating all these options will further improve the efficiency of applied fertilisers. Microbe-
based technologies for nitrogen fixation, nutrient recycling, bio-residue management and
alleviation of abiotic and biotic stress will be very useful in the changing climate scenario.
• Conservation agriculture: Conservation agriculture helps to reduce the carbon footprint of the
production system, improves productivity and enhances adaptability by modulating soil moisture and
temperature regimes. Such practices are followed by farmers on a large scale in the Indo-Gangetic
Plains. However, refinement and promotion are required to extend the technology in climatic
stressed, dry land areas.
• Mechanisation in agriculture with renewable energy sources: Solar-powered machineries such as
water pumps, sprayers and weeders are better alternatives to diesel powered machines in India. Such
machines are economical, help in timely field operation at low cost, affordable to small farmers, and
do not release greenhouse gases. Individual farmers, panchayats, cooperatives, farmer producer
organisations can install solar power plants for which government is providing incentives.
• Protected cultivation and vertical farming: Protected cultivation and vertical farming practices such
as plastic low tunnel, hydroponics, trench underground greenhouse, fogponics, aeroponics,
vertically stacked layers, vertically inclined surfaces and/or integrated in other structures have
advantages of flexibility of location and are well-adopted in adverse climatic conditions.
6.2 Institutional and policy options for adapting to climate risks
6.2.1 Mainstreaming climate adaptation in development planning

Climate change has largely remained a subject dealt by the national government under eight Missions of the
National Action Plan on Climate Change (NAPCC). However, agriculture being a state subject, more active
involvement of states is needed so that state specific problems can be addressed effectively. Most state
governments have prepared State Action Plans (SAPs) covering different sectors including agriculture but are
weakly formulated around CSA without adequate financial allocations and provisions for adequately trained
climate service providers. Many schemes of the Government of India have strong implications for climate
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change adaptation. A systemic comprehensive effort might help in accelerating strategic actions. Multiple
experimental or small-scale uncoordinated actions in project mode are happening through NABARD and
other agencies but review and strengthening of efforts towards scale up need specific attention.
6.2.2 Leveraging watershed programmes and MGNREGA

India has long experience of implementing watershed development programmes in rainfed areas and
command area development in irrigated regions. A number of institutions like Water Users Associations
(WUA), Watershed Committees (WC), watershed Development Teams (WDT), Project Implementing
Agencies (PIA), etc., are functioning at the village/watershed level for many years. The National Rainfed Area
Authority (NRAA) is currently revising common guidelines of the Watershed Development Programme. It
provides an opportunity to integrate climate change adaptation objectives as many NRM interventions in
watersheds also help in climate resilient agriculture. MGNREGA (Mahatma Gandhi National Rural Employment
Guarantee Act) provides legal status to right to work and social security through enhanced livelihood security
in rural areas. It provides at least 100 days of wage employment in a financial year to every household for
adult members ready to volunteer for unskilled manual work. The list of work covers water conservation and
water harvesting; drought proofing including afforestation; irrigation works; restoration of traditional water
bodies; land development; flood control; rural connectivity and works notified by the government. All these
activities are closely linked to adaptation options for climate change. It is already operating with an
institutional structure, on digital platform and financial allocations. Though it is primarily designed as a rural
job creation programme to provide income security, yet it provides a vehicle to achieve climate change
response objectives as well.
6.2.3 Contingency crop planning and agro advisory services

While climate change will have long term impacts on the farm sector, inter-annual climate variability triggers
no less risks. ICAR prepared district-wise contingency crop plans for all rural districts in India for coping with
monsoon aberrations (www.agricoop. nic. in). However, owing to lack of a systemic approach, no institutional
mechanism exists to implement these plans at the subnational level. The key challenges are– production,
storage and supply of seeds of short duration contingent crops and varieties at short notice. It is
recommended that states develop a special seed production programme of contingent crops and varieties,
build infrastructure and logistics for storage and supply of such seeds at short notice. One or two such hubs
can be built in each state and operated under Private-public-partnership mode or through new innovative
business model solutions. If the monsoon is normal, the seed can be disposed as grain and the cost difference
can be absorbed by participating parties.
Over time, India’s established institutional structure of agromet advisory services of IMD has expanded and
now each district has a District Agro Met unit (DAMUs) involving IMD, Krishi Vigyan Kendras (KVK) and
Agricultural Universities for dissemination of short and medium range forecasts and crop advisories under the
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Grameen Krishi Mausam Seva (GKMS). However, considering large spatial and temporal climatic variability,
weather information with higher spatial resolution of a block or panchayat is required. This needs better
high-resolution forecasting models, international collaboration, investments in infrastructure and large
number of appropriately trained manpower. Considering the importance of this function, serious
consideration needs to be given to whether a separate dedicated organisation can be created through new
legislation in parliament or an existing organisation can be re-mandated.
6.2.4 Insurance, credit and risk management

Insurance can be one of the key instruments for managing short-term climatic risks in agriculture. India has
one of the largest agricultural insurance programs in the world covering more than 30 million farmers in the
form of Pradhan Mantri Fasal Bima Yojana. It is a comprehensive scheme covering many crops, hazard types
and low premium contribution by farmers but bottlenecks in implementation and delay in claim settlements
remain. Another major criticism of the scheme is the time consuming nature of Crop Cutting Experiment
(CCE), which is often contested both by the farmers and insurance companies. Use of new technologies and
tools like remote sensing and drones, simulation modelling, blockchain technology, and artificial intelligence
could possibly make the scheme more efficient and transparent. Considering that almost the entire premium
is paid by the central and state government, it will be useful to examine if the scheme could be modified to
run as a social welfare scheme with insurance principles for management; various possibilities need to be
scientifically weighed. The additional budget could be made available by merging a few disaster management
schemes into this scheme. Moreover, insurance cannot be a stand-alone solution to climate change. In the
farm sector, it shall form part of a comprehensive risk mitigation strategy encompassing investments in
infrastructure and adoption of climate smart practices at the farm level.
The eNAM–a pan-India online trading platform for agricultural commodities by the GOI- was opened to
improve market access and reduce information asymmetry among farmers (MoA, India, 2020). The scope of
this platform maybe expanded to integrate agricultural financial markets to widen and deepen the scope of
agri-financial services. For mainstreaming such innovative mechanisms to weed out information asymmetry,
requirement of hard and soft infrastructure, and capacity are necessary pre-conditions. Agricultural extension
centres need to be overhauled and enabled to provide services to bridge these gaps. Additionally, unless MSP
and eNAM covers non-crop products the efficacy of these interventions is doubtful.
In the face of climate change, it is imperative to ensure adequate income flow security from agriculture and
to introduce a transparent and climate responsive credit policy. While, at present, agricultural credit is a
priority sector lending for institutional lenders, approaches for evaluation of credit worthiness must consider
climate risks going beyond standard approaches. With risks in production and markets due to climate change,
there exists a high volatility of operating cash flow and profit from agricultural activities. As a result, the
farmer faces constraint to scale up agricultural activities. Agricultural credit policies are macro level/
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landscape factors that are outside the control of farmers. Additionally, agricultural credit needs to be
dovetailed with insurance, the latter providing a guarantee to the lender in the event of crop loss due to
climate induced losses and other risks.
The formal financial system must accord attention to decreasing reliance of farmers on informal lenders for
ease of regulatory management. Further, to ensure better price realisation, infrastructure related to
agriculture – both backward and forward linkages in the value chain – are to be developed. The proposed
policies of the central government concerning agricultural infrastructure fund are a welcome step in this
direction.
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INDIAN MONEY AND FINANCIAL
MARKETS - LINKAGES WITH THE
ECONOMY
FODDER MATERIAL

Contents
1 What is a Financial System? ...................................................................................................................3
2 Financial Markets ...................................................................................................................................4
2.1 Role of Financial Markets ................................................................................................................5
2.2 Classification of Financial Markets..................................................................................................6
3 Money Market ........................................................................................................................................6
3.1 Defects of Indian Money Market ....................................................................................................8
3.2 Major Reforms in Indian Money Market ........................................................................................9
3.3 Structure of Money Market in India .............................................................................................11
3.3.1 Government ...........................................................................................................................11
3.3.2 Reserve Bank of India ............................................................................................................12
3.3.3 Primary Dealers .....................................................................................................................12
3.3.4 Non–Bank Financial Institutions ............................................................................................13
3.3.5 Companies .............................................................................................................................13
3.3.6 Individuals ..............................................................................................................................14
3.4 Various Instruments of Money Market in India............................................................................14
3.4.1 Call/Notice Money .................................................................................................................14
3.4.2 Treasury Bills ..........................................................................................................................15
3.4.3 Certificate of Deposit .............................................................................................................15
3.4.4 Commercial Paper .................................................................................................................16
4 Capital Market ......................................................................................................................................20
4.1 Components of Capital Market .....................................................................................................20
4.2 Differences between New Issues Market and Secondary Market ...............................................21
4.3 Similarities between New Issues Market and Secondary Market ................................................21
4.4 Constituents of Capital Market .....................................................................................................22
4.5 Instruments of Capital Market ......................................................................................................22
4.6 Functions of Capital Market ..........................................................................................................23
5 Evolution of Financial Markets in India ................................................................................................24
6 Role of Financial Market in Indian Economy ........................................................................................26
6.1 Role of Money Market in India .....................................................................................................26
6.1.1 Provides Fund ........................................................................................................................26
6.1.2 Use of Surplus Funds .............................................................................................................26
6.1.3 No Need to Borrow From Banks ............................................................................................27
6.1.4 Helps Government .................................................................................................................27

6.1.5 Helps in Monetary Policy .......................................................................................................27
6.1.6 Helps in Financial Mobility .....................................................................................................27
6.1.7 Promotes Liquidity and Safety ...............................................................................................27
6.1.8 Equilibrium Between Demand and Supply of Funds .............................................................27
6.1.9 Economy in Use of Cash.........................................................................................................28
6.2 Role of Capital Market in India .....................................................................................................28
6.2.1 Capital Arrangement..............................................................................................................28
6.2.2 Economic Growth ..................................................................................................................28
6.2.3 Development of backward areas ...........................................................................................28
6.2.4 Generates Employment .........................................................................................................29
6.2.5 Long term capital to industrial sector ...................................................................................29
6.2.6 Generation of foreign capital ................................................................................................29
6.2.7 Developing role of financial institutions ................................................................................29
6.2.8 Investment opportunities ......................................................................................................29
1 What is a Financial System?

In order to appreciate the Indian financial system, it is best to first lay down the nature of financial
systems in general, to delineate the expectations and challenges that the system in India faces. The
financial sector in any country relates to the economy it serves, much like the manner in which the
circulatory system in the human body serves the entire organism. It is the job of the circulatory system—
consisting of the heart, the blood, and the miles of intricate vessel network—to draw nourishment from
the intestines and oxygen from the lungs and relentlessly supply each cell of the body with these.
Similarly, it is the task of the financial system to pick up the tiny specks of surplus that appear throughout
the economy—in households spanning the entire geography, in businesses in various sectors, and
sometimes even in government—and channel it to the best investment opportunity.
The circulatory system cannot be held responsible for death from starvation or asphyxiation, for the
supply of food and oxygen are not its responsibility. And yet, its criticality is manifest in the fact that if
left unattended, a heart attack can kill a person in a few minutes—the immediate cause of death not
being that the blood had stopped flowing, but that the brain had been starved of precious oxygen for
too long. The financial system is equally critical. While, in itself, it neither generates the surplus nor
creates busy opportunities (outside the financial sector), a collapse of the financial sector can bring the
entire economy to a complete halt, push a society to anarchy, and cause severe economic damage that
could take years to mend. The stability of the financial system is therefore no less critical for the health

of the economy than is cardiac health for the longevity of an individual. For an economy to survive and
thrive, it is imperative that the financial system ceaselessly transports capital from the savers to the
investors and brings back the returns of the investment—in the form of dividend and interest—to the
ultimate suppliers of capital.
Carrying the circulatory system analogy a little further, in all countries around the world, two systems
compete with and complement each other in fulfilling this circulatory role—the banking system and the
financial markets. While the two channels are increasingly getting intertwined in the institutions that
form part of the arteries, they differ in a fundamental way—in their style of working and information
dissemination. Banks are, by their very nature, relational in their dealings while markets specialize in
faceless, arm’s length, and contractual transactions. Rarely is the financial flow balanced between the
two channels. Some countries—notably the USA and the UK—are market dominated while others—
including Germany and Japan—see a greater role for banks. The causes of this difference have puzzled
economists for decades and continue to do so, though the accepted explanation today—thanks to the
work of Andrei Shleifer and his co-authors—is that it is the level of investor protection in the legal system
that determines which artery is more throbbing, with greater protection leading to more vibrant markets.
While the primary job of the financial system is to bridge the gap between savers and investors, in doing
so it fulfills several other roles. In making the twain meet, the system must ensure that varying risk
appetites, size needs, information asymmetry, as well as planning horizons and liquidity needs are
reconciled at the two ends, not to speak of geographical distance. Here is where various financial
institutions and products—including the oft-dreaded derivatives—play their role.
Finally, the stability of a financial system is as solid as the public faith in it. Whether it is banks or financial
markets, the fact that the system functions only on the basis of complete consent, indeed eagerness, of
savers to hand over their hard-earned savings to complete strangers, underlines the need for regulatory
practices that are not just prudent but are perceived to be so, in order to sustain the throughput. In the
ultimate analysis, of course, this faith rests of the ability of the country’s legal and judicial system to
enforce and maintain the sanctity of contracts.
It is with this background that we can approach the task of understanding and assessing the Indian
financial system.
2 Financial Markets
A Financial Market is a market where financial assets are traded or exchanged. While the presence of a
financial market is not an essential condition for the creation & exchange of a financial asset, in most

economies financial assets are created and then traded in some type of financial market. Example: A
spot or cash market is one in which a financial asset trades for immediate delivery.
2.1 Role of Financial Markets

Financial markets deliver the following 3 additional economic functions:
• The interaction of buyers & sellers in financial market determine the price of the traded asset or
equivalently, they determine the required return on a financial asset. As the inducement for firms
to obtain funds relies on the required return that investors demand, it is this characteristic of financial
markets that indicates how the funds in the economy should be distributed between various financial
assets. This is termed the price discovery process.
• These markets offer a procedure to an investor to sell a financial asset. Because of this characteristic,
it is believed that a financial market renders liquidity, a striking feature when circumstances either
force or encourage an investor to sell. If there was no liquidity, the owner would be forced to hold a
debt instrument until it matures and equity instrument until the company is either voluntarily or
involuntarily liquidated.
• Financial markets on economic front reduce the cost of transaction. There are 2 costs associated with
transacting: Search cost and Information cost
o Search costs represent explicit cost, such as money spent to advertise ones intention to sell
or purchase a financial asset, and implicit cost, such as the value of time spent in locating a
counter party. The existence of some form of organized financial markets reduces search
costs.
o Information costs are costs linked with assessing the investment merits of a financial asset,
i.e., the amount and the likelihood of cash flow expected to be generated. In an efficient
market, prices reflect the aggregate information collected by all market participants.
In a nutshell, financial markets help solve the issues with pricing of financial assets and risk associated
with the expected cash flow from a financial asset.
The working of the above functions of financial markets can be best understood through several types of
financial markets. There are many ways to categorize financial markets. One of the way is by the type of
financial claim, such as debt markets and equity markets. Another is by the maturity of the claim. For
example, there is a financial market for short term debt instruments, called the money market and one
for longer maturity financial assets, called the capital market.

2.2 Classification of Financial Markets
3 Money Market
Financial market in an economy plays an important role for channelizing savings into investments.
Savings can be converted into investments either directly or indirectly. When savings are directly
converted into investments they are called as real investments and they are not routed through financial
markets. Purchase of capital asset for use in business with own funds is an example of real investment
(i.e. savings converted into investments directly). In such a case there is no need of financial market.
However, when savings are converted into investments indirectly they are called as financial
investments and they are routed through financial market. Purchase of capital assets for use in business
with funds raised from public through shares is an example of financial investment. In this case savings
of people are indirectly used to purchase a capital assets. Therefore, investment in shares shall result in
financial investment and not real investment.

Financial investments are made through various financial instruments such as Shares, Bonds, Fixed
Deposit Receipts, etc. These financial instruments are bought and sold in financial market. Hence the
role of financial market becomes very important in channelizing savings into investments. If financial
market is not effective then savings cannot be channelized into saving which in turn would be
detrimental to country’s economic prospectus.
Financial market deals with financial instruments. These financial instruments on the basis of their
tenure can be broadly divided into two categories i.e. long term and short term.
• Long–term financial instruments have a tenure of more than one year whereas short–term financial
instruments have a tenure of one year or less.
• The segment of financial market that deals with long–term financial instruments is capital market
whereas another segment of financial market that deals with short–term financial instruments is
money market.
Therefore money market is the market for short–term financial instruments that is instruments having
maturities of one year or less than one year. As these financial instruments have short maturities they
are highly liquid in nature and nearly equivalent to money. For this reason the market for these short –
term financial instruments is known as money market.
Diagrammatically the concept of financial market and one of its components that is money market can be
shown as follows:

3.1 Defects of Indian Money Market
A well-built money market signifies the operation of sound monetary policy. But the money market in
India suffers from many weaknesses.
Lack of integration: The Indian Money Market is separated into 2 sectors namely, the organised and
unorganised money market. But both the markets are completely separate from one another. They are
working independently and have little effect on each other. RBI has been fully operative in monitoring the
organised sector. But, in the unorganised sector it has very less control.
Lack of rational interest rates structure: In the Indian Money Market there prevailed several interest
rates e.g. the deposit & lending rates of commercial banks, the borrowing rate of Government etc.
Formerly, these led to creation of excess demand for credit and RBI had to depend on CRR. However, RBI
has made effort to generate rationality in the interest rates but the situation is not effective.
Existence of Unorganised Money Market: Due to the existence of the unorganised sector in the Indian
Money Market the banker makes no difference between short term and long-term finance. They have no

coordination with one another and have no link with other banking sectors. They do not follow any sound
banking regulations. There is no control by RBI on these bankers.
Absence of an organised bill market: There is no sufficient bill market in the Money Market in India. There
is lack of commercial bill market or a discount for short term commercial bills. The factors responsible for
the underdeveloped bill market are (i) relying more on cash transaction, (ii) cash credit of commercial
bank, (iii) seller’s limited use of bills, (iv) imposition of heavy stamp duty, (v) absence of acceptance houses
etc.
Shortage of funds in the Money Market: A shortage of fund is created in the money market due to the
lack of banking habit and banking facility, little saving habit, etc. On the other hand, the growing demand
for loanable funds in the money market results in inadequate supply.
Inadequate banking facility: Now-a-days, many new branches of banking facilities are opened by the
commercial banks. But, a much wider scope is available for further development. In country like India
which is still developing, there are people who live below poverty line and have less saving habit as a
result of which their savings are small and they do not have much exposure to banking facilities till now.
Seasonal Stringency of Money: During some part of the year mainly from October to June, the interest
rate rises due to the rising demand for funds in the money market for the even working of the agricultural
sector.
3.2 Major Reforms in Indian Money Market

Before the financial liberalization that started during mid Eighties in India, the money market in India
was highly unorganized and has narrow base. There was lack of integration among organized and
unorganized sector. Even organized sector was highly regulated. Due to regulations, money market grew
in India but there were inefficiencies in market.
There were regulations both as to volume and rate. Regulations as to volume and rate prevent the
financial market to achieve allocative efficiency. Regulation as to volume impairs the financial market
ability to allocate fund to its most profitable use.
o For example banks were under restrictions to allocate its fund to different segments thereby
impairing the bank ability to place its fund for more profitable use.
Similarly, regulations as to interest rate also affect the ability of financial market to use the fund
efficiently. If there is regulation as to interest rate then interest rate cannot be determined through
market forces.

o If interest rate is pegged at higher side then it would be contractionary in nature and would keep
investors away from the market.
o In contrast if rate of interest is pegged at lower side then it would be though expansionary in
nature but would result in inflation and turns savers away from the market.
Due to regulations and presence of unorganized sector in the money market, lot of inefficiencies was
created in money market.
Up to early nineties, the money market in India had a narrow base and there were limited number of
participants such as nationalized banks, life insurance corporations and the unit trust of India. Secondly,
there were limited number of instruments in the market, such as call/notice money market,
participation certificate, inter bank deposits/loans, commercial bills and 91 day treasury bills. The
Reserve Bank of India (RBI) used to administer and regulate the interest rates. Banking facilities were
insufficient with a restricted bill market, seasonal shortage and surplus of funds, limited foreign funds
as compared to developed money market like London money market, inefficient payment system and
lack of transparency. The reserve requirements such as Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR) were on higher side.
RBI has brought radical changes in the money market so as to make it more efficient and dynamic. Some
of these changes are as follows:
• Many new instruments for instance 182 days treasury bills, 364 days treasury bills, commercial
paper, certificates of deposit were introduced to broaden the base of money markets.
• The regulation regarding interest rate was freed in stages from October 1988. A move from the
regulated rates of interest to market determined interest rates was made. The interest rate ceilings
were completely withdrawn for all operators in call money market and on inter bank term money,
rediscounting of commercial bills and inter bank participation certificates without risk.
• The development of secondary market was attempted by setting up new instruments, which could
increase efficiency and liquidity of money market.
• A system of primary dealers (PDs) was introduced in the government securities market/ money
market. The primary dealers (PDs) plays an important role is strengthening the infrastructure in the
government securities market so as to make it vibrant, liquid and broad based.
• Many new instruments such as repos, reverse repos, Marginal Standing Facility (MSF) Collateralized
Borrowing and Lending Obligations etc. were gradually introduced in the money market.
These measures along with developments in the Government securities market are the basic milestones
of money market reforms. Nevertheless, despite all these efforts, no effective measures were taken to
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integrate the unorganized part of the Indian money market with its organized part. The vacuum existing
between these two important segments was a serious hurdle for the effective implementation of the
monetary policy and credit control measures to the Reserve Bank of India.
3.3 Structure of Money Market in India

Structure of money market depends upon the numbers of participants and the availability of the different
types of money market instruments. An effective and efficient market should allow everyone to
participate and have different instruments for almost all kind of needs of participants. However this
situation is only off theoretical relevance since neither everyone has an access to money market nor there
is availability of instruments for every need.
The structure of Indian Money market is diagrammatically shown as follows:
3.3.1 Government
Government enters into money market for meeting the difference between their spending and receipts.
As government spending surpasses their receipts, government issues treasury bonds and other
securities to finance this deficit. Actually, it is Reserve Bank of India who is involved in initial auction and
final discharge of treasury bonds at maturity on behalf of Government.
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3.3.2 Reserve Bank of India
Reserve Bank of India is one of the dominant participants of the money market in India. The effectiveness
of monetary policies of the RBI depends upon the effectiveness of money market. RBI not only provides
funds to government but also provide funds to banks. RBI has many effective tools for influencing money
market. Treasury bonds though represent debt of government is primarily routed through RBI. RBI
initially auctions these bonds and finally discharges it at maturity. RBI also influences the liquidity in an
economy by buying and selling of the treasury bonds through open market operations thereby affecting
the money supply of an economy.
RBI is regulator authority for banks. It determines the Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR). CRR is the minimum ratio at which bank has to maintain reserves on its total of demand and
time liabilities in form of deposit with RBI. SLR is the minimum ratio at which bank has to maintain reserves
on its total of demand and time liabilities in the form cash, gold and certain specified securities. CRR and
SLR are very effective tools for regulating liquidity and credit creation capacity of bank, which in turn
affect the money supply.
RBI also determines the bank rate and repo rate. The bank rate is the rate at which RBI provide loans to
banks for meeting any shortage in cash reserve requirements for long period (i.e. period above one year).
In contrast Repurchase Agreement rate (Repo rate) is also funding by RBI to banks for meeting any
shortage in reserve requirements but for short period (i.e. one year or less than one year). By controlling
bank rate and repo rate, RBI can also influence the money supply of an economy.
Hence RBI through money market can effectively implement its monetary policies. However, the impact
of monetary policies depends upon the effectiveness of money market. If money market has sufficient
depth then monetary policies of RBI can achieve desired outcome. However, if money market does not
have sufficient depth the RBI’s monetary policies cannot achieve desired outcome.
3.3.3 Primary Dealers

Primary dealers are enlarged wings of the RBI to facilitate or support government borrowing such as
treasury bills. They were set up in 1996. The role of primary dealers is to strengthen the market of
government securities in order to make it dynamic, liquid and broad based. Primary dealers have
improved the secondary market for government securities and they are effective medium in open
market operations of RBI.
Primary dealers have an active role in the Government Securities market, both in primary and secondary
market segments. They play the following important functions:
• Participate in primary auction of Government Securities

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• Making of market in Government Securities.
• Dominate investment in Government Securities.
• Achieve minimum turnover ratio in secondary market in respect of Government Securities.
• Maintain efficient and effective internal control system for fair conduct of operations.
3.3.4 Non–Bank Financial Institutions

The following non–bank financial institutions are actively involved in money market:
• Mutual Fund: Mutual funds besides deepening the capital market have also broadened and
deepened the money market in India. Money market mutual funds were introduced in India in April
1991 and due to this money market instruments, which were previously restricted to large and
corporate houses have come within the reach of individuals. These funds have seen tremendous
growth over the year. Today mutual funds control a significant portion of the markets of certificate
of deposits and commercial paper. Mutual funds are actively involved in market repos and
collateralized borrowing and lending operations so as to place their surplus fund in money market
thereby enhancing the depth of money markets. They are also involved in Government securities
market but their involvement in this market is somewhat sluggish.
• Insurance Funds: Insurance funds whether life or non – life are also active participants in money
market. Insurance funds are strictly regulated as to their investment norms but they can borrow fund
in case of shortage of fund from money market or lend fund in case of surplus to money market. They
just like mutual fund are operating in every segment of money market (except call money market).
Liabilities accrued to insurance company often on unpredictable basis. In such circumstances,
insurance companies for meeting their unexpected liabilities approach money market through repos,
collateralized borrowing and lending operations, Commercial Papers etc. However, insurance funds
cannot issue certificate of deposits. These companies even deploy their surplus fund in money market
by investing in treasury bonds, certificate of deposits, commercial papers, reverse repos, etc.
• Pension Funds: Pension funds are also regulated on their investment norms. However just like
insurance companies they are also free to approach money market during shortage or surplus of
funds. Pension funds can invest in money market instruments such as treasury bonds, certificate of
deposits, commercial paper, collateralized borrowing and lending operations etc. Similarly they can
also borrow from money market in the form of repos, commercial papers, collateralized borrowing
and lending operations, etc. but they are also barred from raising fund through certificate of deposits.
3.3.5 Companies
Companies here imply non–banking companies. Business largely depends upon commercial banks for
their short–term borrowings. These short–term borrowings are in the form of cash– credit, bank–
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overdraft or discounting of bills. Large companies having good credit worthiness can also meet their
short–term requirement of fund by issue of commercial paper. However, businesses are neither allowed
to issue certificate of deposit nor can they enter into repo market. But as business can purchase
government securities so they can also make short–term borrowings from collateralized borrowing and
lending operations, which is substitute for repo market.
As regard as investment of surplus fund for short term, now businesses have various alternatives. They
can invest in treasury bonds; purchase certificate of deposit and commercial papers; lend in collateralized
borrowing and lending operations; investment in money market mutual funds etc.
3.3.6 Individuals
In case of need of funds for short–term purpose, individuals have very limited options. They have to
mainly depend upon commercial banks. Commercial bank provide short – term credit in form of cash–
credit, bank overdraft or discounting of bills.
As far as investment of surplus fund for short–term is concerned, individuals just like companies have
many options such as investment in treasury bonds; purchase of certificate of deposit and commercial
papers; investment in money market mutual funds etc.
3.4 Various Instruments of Money Market in India

The term money market is mirage since money market does not trade in money (currency). However still
the term money market can be justified on the basis that this market deals in instruments, which are off
short–term duration and highly liquid. In this section, some of the major instruments of money market
are discussed.
3.4.1 Call/Notice Money

Schedule Commercial banks (including co-operative banks) and Primary Dealers are only permitted to
participate in call/notice money market both as borrowers and lenders.
o In call money market, funds are transacted (i.e. borrowed and lend) on overnight (i.e. one day)
basis.
o Under notice money market, funds are transacted for the period between 2 days and 14 days.
These markets are of very short–term duration and consequently highly liquid. Banks and Primary dealers
approach in this market so as to fulfill their temporary needs of funds. Lenders in this market are also
banks and primary dealers who have surplus funds. Rate of interest depend upon the demand and supply
conditions. However one of the main drawbacks of call/notice money market that it is restricted only to
schedule commercial banks and primary dealers so not everyone can approach this market.
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3.4.2 Treasury Bills
Treasury bills or treasury bonds are the short–term borrowings of the government. When government
expenditure exceeds its revenues then to finance excess expenditure, Government Issue the treasury
bonds. However RBI auctions these treasury bonds on behalf of government. Schedule Commercial
banks, Primary dealers, Insurance Companies and Provident funds who maintain current account and
security account with RBI are allowed to place their bid in auction. Other persons can also place their
bid through commercial banks and primary dealers.
There are two types of bids that are placed with RBI during these auctions. These are competitive bid
and non–competitive bids. Competitive bid is for well–informed investors such as commercial banks,
financial institutions, primary dealers, mutual funds. Non–Competitive bid is available for individuals,
cooperative banks, firms, companies, provident funds and trusts. Under non–competitive bid, investors
apply for certain number of bonds without bidding any price. These investors are then allotted securities
at the average price of the auction.
Treasury bills are auctioned at a discount to face value. The rate of discount and corresponding issue
price is determined at each auction. Treasury bills are zero – coupon securities and pay no interest. The
return to the investors is the difference between the face value and the issue price of the Treasury bill.
At present Treasury bills are issued in three tenors that is 91 days, 182 days and 364 days. The 91 days
Treasury bills are auctioned on every Wednesday. The Treasury bills of 182 days and 364 days tenure are
auctioned on alternate Wednesdays. Now there also exists effective secondary market for Treasury –
bills where these Treasury – bills can also be purchased and sold. RBI at the maturity of Treasury bills pays
its face value to its final holder.
Open market operations (OMOs) are often associated with Treasury bills and other government
securities. OMOs are the market operations done by RBI to control the money supply conditions in an
economy. When there is excess liquidity in an economy, RBI sells Treasury bills in the market so as to wipe
out excess liquidity from an economy. On the contrary when economy is facing tight liquidity conditions
then RBI buys Treasury bills from the market so as to provide more liquidity to an economy.
3.4.3 Certificate of Deposit

Certificate of deposit is a negotiable money market instrument issued in demateralised form or Usance
Promissory Note in lieu of deposits made with the person issuing certificate of deposit. Schedule
Commercial banks and select All India Financial Institutions (i.e. Exim Bank, NABARD, NHB and SIDBI) can
only issue Certificate of Deposit for deposits made with them. Maturity period of Certificate of Deposit
should be minimum of 7 days and maximum for one year.
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The minimum size of deposit should be Rs. 1 lakhs and in multiples of Rs. 1 lakhs thereafter. There are
restrictions regarding who can issue Certificate of Deposit. However there are no restrictions regarding
persons who could purchase these Certificate of Deposits. It can be issued to anybody (i.e. anybody can
purchase Certificate of Deposit including Non – Resident Indian). There also exist effective secondary
market for Certificate of Deposit where they can be sold and purchased before its maturity. These
deposits can also be used as collateral in repo market. At maturity, issuer of Certificate of Deposit shall
repay the deposit along with interest to the person finally holding Certificate of Deposit.
3.4.4 Commercial Paper

Commercial Papers are unsecured money market instruments issued in the form of a promissory note
that can be held in physical or demat form. Companies, primary dealers and financial institutions are
allowed to borrow for short–term through the Commercial Papers. However anybody (including Non –
Resident Indian and Foreign Institutional Investors) can invest their funds for short tem in Commercial
Papers.
Since Commercial Paper are mostly privately placed funds so issuer of Commercial Paper shall obtain
credit rating for issue of Commercial Paper from any Securities Exchange Board of India (SEBI) approved
Credit Rating Agencies. Maturity period of Commercial Paper should be minimum of 7 days and
maximum for one year. Commercial Paper are issued at discount to the face value. Commercial Paper
must be issued in denomination of Rs. 5 lakhs (face value) and in the multiples of 5 lakhs thereafter. As
it is issued in denomination of Rs. 5 lakhs so minimum investment for the Commercial Paper is Rs. 5 lakhs.
Commercial paper can also be used as collateral in repo market. There also exists effective secondary
market for Commercial Paper where they can be sold and purchased before its maturity. At maturity the
final holder of Commercial Paper get it redeem by its issuer.
3.4.4.1 Repos and Reverse Repos

Repos and Reverse repos are facilities allowed by RBI to only schedule commercial banks and Primary
dealers to borrow fund in case of shortage of fund and lend fund in case of excess of fund on short–term
basis against the collateral of government/state government securities with RBI. As these facilities (i.e.
Repos and Reverse Repos) are used to cover up any shortfall of fund or park excess fund on overnight
basis, these facilities are known as liquidity adjustment facility.
3.4.4.2 Repurchase Agreements (Repos)

Repurchase Agreements (Repos) are used for short–term borrowing. Repo contract is initiated by
borrower to sell the security (i.e. government/state government securities) at a face value to RBI with
an obligation to buy the same security from RBI at some agreed future date at face value along with
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interest to be paid by borrower. As this agreement contains both the features i.e. first sale and then
simultaneous repurchase so it is known as repurchase agreement.
For example X bank is in need of fund. For borrowing funds it approaches to RBI. X bank made an
agreement with RBI agreeing to sale twelve lakhs Treasury bond at its face value of Rs. 100 per bond. X
Bank also stipulate itself to repurchase the same bonds from RBI after one day at it face value along with
interest to be paid @ 12 % p.a. X bank in this case would first receive cash of Rs. 12 crores (i.e. Rs. 100 x
12 lacs Treasury bond) from RBI in lieu of sale of Treasury bond to RBI. After the end of agreement period,
which in this case is one-day, X bank would repurchase Treasury bonds from RBI at its face value along
with interest thereon. Hence X bank would pay Rs. 12 crores along with interest, which in this case is Rs.
40,000 (Rs. 12 crores x 12% x [1 day / 360 days]). Thus in totality X Bank would by paying Rs. 12,00,40,000
to RBI in pursuant of repurchase of Treasury bonds.
3.4.4.3 Reverse Repos

Reverse Repo is just an opposite position of repo. Reverse repos are used to lend excess funds to RBI for
short–term duration. The lender initiates reverse repo contract and not borrower as in case of repo
contract. In reverse repo contract lender agrees to purchase the securities (government/state
government securities) from RBI at face value with a stipulation to sell these securities again to RBI at
face value and an interest thereon to be received by lender.
For example Y Bank have excess fund. For lending funds it excess fund, Y bank approaches to RBI. Y bank
made an agreement with RBI agreeing to purchase eighteen lakhs Treasury bond at its face value (i.e. Rs.
100 per bond) from RBI. Y Bank simultaneously agrees to resell the same bonds to RBI after one day at its
face value along with interest to be received @ of 10 % p.a. Y bank in this case would first give cash of Rs.
18 crores (i.e. Rs.100 x 18 lacs Treasury bond) to RBI in lieu of purchase of Treasury bond from RBI. After
the end of agreement period, which in this case is one day, Y bank would resell Treasury bonds to RBI at
face value along with interest thereon. Hence Y bank would receive Rs. 18 crores along with interest,
which in this case is Rs. 50,000 (Rs. 18 crores x 10% x [1 𝑑𝑎𝑦 / 360 𝑑𝑎𝑦𝑠]). Thus in totality X Bank would
receive Rs. 18,00,50,000 from RBI pursuant to resale of Treasury bonds.
3.4.4.4 Conditions in Respect of Repos/Reverse Repos

RBI determines rate of interest in case of both repos and reverse repos. Reverse repo represents the
borrowing rate of RBI whereas repo represents the lending rate of RBI. As lending rate is higher than
borrowing rate therefore repo rate is higher than reverse repo rate. RBI has the power to conduct
overnight or other longer duration repo/reverse repo at fixed rate or variable rates depending upon the
conditions existing in the market.
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Bids for repos/reverse repos are received in minimum amount of Rs. 5 crores and in multiples of Rs. 5
crores thereafter. Securities are traded at their face value in repos/reverse repos operation.
3.4.4.5 Repos on Corporate Debts Security, Commercial Paper and Certificate of Deposits
Repos hitherto discussed are restricted to schedule commercial banks and Primary dealers only. However
RBI with an objective to broaden the money market has also allowed some other persons to enter into
a different segment of repo market. However this segment of repo market shall differ in the sense that
collateral underlying repo in this market shall not be government securities but Corporate Debt
Security, Commercial Paper and Certificate of Deposit.
Schedule Commercial Bank, Primary dealers, Select All India Financial Institutions (i.e. Exim Bank,
NABARD, NHB and SIDBI), Non Banking Financial Institutions, Mutual Fund, Insurance Fund and Housing
Finance Companies are allowed to borrow from this segment of repo market. The tenure of borrowings
in this segment of repo market shall be minimum of one day and maximum of one year.
Corporate debt securities of more than one year maturity shall be eligible to be used in this market if
they are held in demat form by borrower who want to use these securities as collateral, are listed and
rated ‘AA’ or above by rating agencies. However corporate debt securities of less than one-year
maturity, commercial papers and certificate deposits are not required to be listed and held in demat form.
But they are required to be rated ‘AA’ or above by rating agencies. All these instruments are valued at
market price for determining the value of securities to be used as collateral for borrowing.
3.4.4.6 Collateralised Borrowing and Lending Obligation (CBLO)

Collateralised Borrowing and lending obligation (CBLO) is a window for short–term borrowing and
lending. CBLO is complementary to call/notice money market in the sense that it also gives opportunity
to those participants who have been phased out from call/notice money market. Call/notice money
market is only restricted to schedule commercial banks and Primary dealers. However CBLO has wide
array of participants, which include Financial Institutions, Insurance Companies, Mutual Funds, NBFC,
Corporate and Provident/ Pension Funds besides schedule commercial banks and Primary dealers.
CBLO market operates in completely collateralised environment and only government securities are
used as collateral security in this market. Clearing Corporation of India Ltd. (CCIL) has developed CBLO
market. RBI regulates CCIL under the Payment and Settlement Systems Act, 2007.
The tenure of borrowing and lending in CBLO market shall be minimum of one day and maximum of one
year. CBLO is a discounted money market instrument that is it is redeemable at par at its maturity but
issued initially at discount. The discount rate depends upon market conditions. CCIL act as a counter
party between borrower and lender since there is no direct agreement between borrower and lender
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but there are two agreements, one between borrower and CCIL and second between lender and CCIL.
Borrowing limits of borrower shall depend upon the market value of government securities deposited
by borrower with CCIL. Borrowing through CBLO market implies that a person is selling CBLO and lending
in CBLO implies that a person is buying CBLO. CBLO instruments have an effective secondary market.
3.4.4.7 Money Market Mutual Funds
Monet market mutual fund represents the investment in money market instruments (such as Treasury
– bills, Commercial Papers, Certificate of Deposits, CBLO) by mutual funds. Money market mutual funds
are highly liquid with minimal lock in period and offer returns that are higher than interest on saving
deposits in banks. Other important thing is that anybody can invest in these mutual funds. These funds
are professionally managed and regulated both by Security and Exchange Board of India (SEBI) and RBI
thereby reducing possibility of risk. Most importantly these funds provide opportunity to small and retail
individual investor to deploy their fund for short term in more profitable and secure manner.
3.4.4.8 Other Money Market Instruments

The instruments discussed hitherto are well known instruments of money market. However there are
some other instruments, which are also frequently used in business. These instruments are as follows:
• Bill Receivable and Bill Payable

• Promissory Note
• Debt Securitization
As businesses operated and controlled by individuals can only approach banks for short– term borrowings
so they frequently uses these instruments to cater their need of funds for short–term.
Broad Objectives of Money Market

1. An equilibrating mechanism for evening out short term surpluses and deficiencies.
2. A focal point of RBI (central bank) intervention for influencing liquidity in the economy.
3. Access to the users of short term funds to meet their need at reasonable price and cost.
Features of a developed Money Market
• Presence of central Bank
• Highly organized commercial Banking System
• Presence of sub-markets
• Integrated structure of money market
• Accessibility of proper credit instruments
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• Acceptability & elasticity of funds
• International attraction
• Uniformity of interest rates
• Stability of prices
• Highly developed Industrial system
Importance of Money Market
• Financing Industry
• Financing trade
• Self sufficiency of banks
• Effective implementation of monetary policy
• Encourages economic growth
• Help to government
• Proper distribution of resources
4 Capital Market
The Capital Market is a financial market for securing long term funds and is distinct from money market
which transacts in short-term funds. It brings together the institutional arrangements and facilities for
borrowing and lending funds for medium term and long term. Capital market offers various investment
options to the investors and facilitate channelization of savings pool for optimum distribution of capital
and thereby enhancing the capital formation in the country. It is considered as the indicator of the
inherent strength of the economy.
4.1 Components of Capital Market

The Indian capital market is divided into gilt-edged market and the securities market.
• The gilt-edged market is a market for government and semi-government securities which are backed
by the RBI. The securities which are traded in this market are not volatile in value and are preferred
by banks and other financial institutions.
• The securities market is further divided into primary capital market and secondary capital market.
o The primary market (New Issues Market) is a market where new issues of equity shares,
preference shares, debentures and bonds are offered for sale by public limited companies.
o The secondary market on the other hand is the market for existing and already issued
securities. The secondary capital market comprises the stock exchange in which securities are
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traded (bought and sold) and the gilt- edged market in which the government and semi-
government securities are traded.
The relationship between new issues market and the secondary market would help us to understand
the organization of the capital market. The similarities and differences between these two markets, which
are described below would bring out how these two markets are related.
4.2 Differences between New Issues Market and Secondary Market

• New issues market derives its name from the fact that it makes available a new block of securities for
public subscription. These securities are offered to the investing public for the first time. The Stock
market is a market for old securities, which have already been issued and granted stock exchange
quotation. The stock exchanges therefore provide a ready market place where securities can be
bought and sold.
• The primary market deals with issuance of new securities thereby providing funds to the companies
for initiating a new venture or a brownfield expansion of the existing businesses of the companies.
• Investors who take the risk of investing in the new issues of the company reap the benefits by way of
exiting through the sale of such securities. In this way they transfer the risk undertaken by them to a
new investor as the company/project matures and start delivering expected returns. The secondary
markets provide a platform for the regular purchase and sale of securities and, to that, extent, lend
liquidity and marketability. Thus their role regarding supply of capital is indirect.
• The new issues market is not rooted in any particular spot and no geographical existence. It is
recognized only by the service it renders to the market participants. Even though all the transactions
are executed online, the stock exchanges are characterized by brick and mortar offices.
4.3 Similarities between New Issues Market and Secondary Market

• Securities issued in the new issues market are invariably listed on a recognized stock exchange for
dealings in them. This listing of securities issued in the primary market provides a lot of comfort to
investor as he is certain that he would be able to liquidate his investment as and when he wishes to
do so. In the absence of stock market, the investor might become vary of making the investment. The
liquidity provided by the trading mechanism offered by the stock exchange promotes investment in
new securities.
• The markets for new and old securities are, economically, an integral part of the securities market.
The new issues market moves in tandem with the ‘buoyant’ secondary market, with the number of
new issues/ initial public offers increasing in the bull phase and vice-versa. It is due to the fact that
two parts of the securities market are susceptible to common influences and they act and react upon
each other. Prices of new issues influenced by the price movements on the stock markets. Thus, the
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flow of new savings into new securities is profoundly influenced by the conditions prevailing in the
stock market.
4.4 Constituents of Capital Market

The supply of funds in the capital markets comes largely from institutions like Commercial Banks and
financial institutions, Mutual Funds, Insurance Companies, Provident Fund Societies, Merchant Banking
Agencies, Credit Guarantee Corporations, etc. Individuals who invest directly on their own in securities
are also suppliers of fund to the capital market.
Therefore, as is the case with all markets, capital market also comprises buyers (who require funds,
referred to as borrowers) and sellers (who provide funds, referred to as lenders). An ideal capital market
would strive to make required funds available for any business at a reasonable rate of return.
In addition, there are several intermediaries who operate in the capital market. These participants, such
as, brokers, merchant bankers, debenture trustees, portfolio managers, bankers to issues, registrars to
issues and share transfer agents, etc., play a critical role in the development of capital market by
providing a variety of services.
The backbone of a capital market is formed by the various securities exchanges that provide a forum for
equity (equity market) and debt (debt market) transactions. The stock exchange is one of the most
important constituents of the Capital Market. Presently, there are 20 Stock Exchanges in the country, of
which only 8 have been given permanent recognition; others need to apply every year for recognition.
However, the 2 main stock exchanges in India through which bulk of the trading is carried out are –
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). At present more than 5500 companies
are listed on Bombay Stock Exchange, thus making it world's No. 1 exchange in terms of listed members.
As of March 2015, the total market capitalization of companies listed on BSE was USD 1.68 trillion. BSE's
Benchmark Index - SENSEX - is the country’s most tracked index and is traded internationally on the
EUREX as well as leading exchanges of the BRCS nations. The National Stock Exchange was established in
1992 and its network stretches to more than 1500 locations in the country. As on March 2015, 1733
companies are listed on NSE with a total market capitalization of 99.30,122 crore rupees.
4.5 Instruments of Capital Market

Following are the major instruments through which money can be raised from capital markets:
• Equity Shares and Preference Shares:

o Equity share: They represent ownership securities of a company and have a claim on the
company's assets and earnings. Equity shareholders have a right to vote in the shareholders'
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meetings and receive dividends. The equity shares are easily transferable and highly liquid
investment.
o Preference Shares: Preference shares generally do not have voting rights, but have a
preferential right to receive dividend at a fixed rate before the payment of dividend to the
equity shareholders. They also have a right to repayment of capital at the time of winding up
of the company before any capital is paid to the equity shareholders.
• Debentures/ Bonds: These represent the creditorship securities of the company. These are an
important source of funds to the corporate sector. These are fixed income securities. The holder of
these instruments gets a fixed periodic payment in the form of interest during the tenure of the bond
and repayment of the principal amount on maturity.
• American Depository Receipt (ADRs): These are dollar denominated negotiable receipts representing
shares of non-US Company held by US custodian bank that gives US investors’ rights over a foreign
share. ADR is a convenient and attractive investment option to US investors willing to invest and trade
in overseas securities. These securities are listed on US stock exchanges and traded like any other
listed share.
• Global Depository Receipts (GDRs): A GDR is similar to an ADR as described above, but is listed and
traded outside US and outside the issuer’s country. Most GDRs are generally denominated in US
dollars or Euros and are listed on international stock exchanges such as London or Luxembourg.
• Derivatives: A derivative is a financial instrument, the value of which depends upon the underlying
asset. The underlying asset can be stock indices, interest rates, share prices, foreign currency etc. The
most important derivatives are futures and options. The Bombay Stock Exchange and the National
Stock Exchange offers trading in stock index futures, stock index futures, equity futures, equity
options, currency futures and currency options.
4.6 Functions of Capital Market

Stock exchanges discharge the following functions that aid in the systematic growth of capital formation:
• Nexus between Savings and Investment –The stock exchanges mobilize and channelize the
community savings for investment into the sectors which are preferred on the basis of good return,
appreciation of capital, etc. Stock exchanges assist in distribution of the new issues of capital and
also offers sale of existing securities in an organized and efficient way. Members of stock exchanges
also act as brokers and underwriters. They provide necessary assistance in the floatation of new
issues and obtain subscription from investors all over the country.
• Market place – The stock market integrates private sector and government sector, domestic funds
and external funds, the real and financial sector and long term and short term funds. They provide a
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platform for the buying and selling of securities, thus facilitating transferability from the initial
investor to the never ending stream of buyers. Centralized clearing house and large number of buyers
and sellers enable buying and selling of securities at a competitive price.
• Continuous price formation – Since there are large number of buyers and sellers simultaneously
operating in the market, this has continuing impact on the levels of share prices. The continuous price
formation enables quick valuation of financial instruments. Security exchanges thus act as a
barometer of the state of the health of a nation’s economy. The efficient dissemination of
information enables the participants to take an informed decision pertaining to any financial
investment.
5 Evolution of Financial Markets in India

It is perhaps relevant to note here that the Indian financial system—in the sense of the modern Western
institutions, not dating back to hundies (a form of credit instrument or IOU developed in medieval India)
and other indigenous practices but dating as far back to at least Kautilya—is one of the oldest ones in
the colonial world. The oldest Asian stock exchange, for instance, is the Bombay Stock Exchange which
predates the Tokyo Stock Exchange. At Independence in 1947, India inherited a fairly developed
financial system, complete with legal codes for companies and banks to function.
Though financial markets in India cherish a long history, they were completely revamped during the
liberalization starting in the early 1990s. The dominant equity exchange, NSE, was established in 1994
and the regulator SEBI empowered in 1992. Trading in commodity forwards, which halted in the mid-
1960s, resumed and equity derivatives—that now account for a much greater trading volume than
equities themselves—made their appearance in 2001. Intermediary industries such as mutual funds and
insurance were opened in the late 1990s and early 2000s and both sectors have exhibited
unprecedented growth since. Currency markets have also boomed with India’s share of world currency
transactions—itself a rising amount—growing nine-fold between 2004 and 2011. Currency futures were
introduced in 2008 and more recently, currency options have begun trading on exchanges as well.
As in many other countries, the financial markets, arranged in terms of turnover in India, provide the
following ordering—foreign exchange, money market, equity derivatives, equities, government
securities, and corporate debt. Together with a widening of the range of tradable assets, Indian markets
have also witnessed a revolution of sorts in trading technology and transparency. Standard in India now,
T+2 settlements—that all trading is settled in two working days—are among the best in the world. Online
brokerage accounts and dematerialized trading in equity shares have taken equity trading a long distance
away from the dark days of BSE-dominated trading in the pre-liberalization period.
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The first decade of the new century witnessed explosive growth in the activities of the collective
investment and insurance industries, an important participant in markets. As the mutual funds industry
gradually evolved from a government monopoly to a competitive industry with foreign participation,
the assets under management rose from less than INR 80,000 crore in March 2003 to over INR 592,000
crore in March 2011, a rise of over seven times. Similarly, the insurance industry grew at an annual rate
exceeding 30 per cent for the life sector and close to 16 per cent for the non-life sector between 2000
and 2010. Finally, foreign institutional investment (FII) flows, allowed since 1993, reached a cumulative
figure below INR 40,000 crore in March 2000. By November 2011, the cumulative figure exceeded INR
543,000 crore (more than 13 times) despite significant pull-back during the global crisis as well as the
Euro crisis. Since March 2000, the Sensex value has risen roughly four times—from slightly below 4,000
to close to 17,000 with significant gyrations during the period. On the whole then, the first few years of
the current century have proved to be a period of explosive growth for Indian markets, notwithstanding
global crises.
The exception to this across-the-board growth story has been the corporate bonds sector. Despite close
top-level policy attention to this segment, starting at least with the Patil Committee recommendations in
2005, the number of listings as well as trading volume have remained stubbornly low in this area that is
becoming particularly critical with the growing need of infrastructure financing. In the absence of
corporate bonds, which should have been the natural instrument to finance long-term infrastructure
projects, much of the funding has come from bank lending, which implies significant asset-liability
duration mismatch for banks (since bank liabilities are of much shorter maturity, it leaves the banks more
exposed to interest risks on the asset side compared to the liability side). The reasons commonly cited for
the poor performance of the sector include the charging of stamp duty, market micro-structure issues
as well as restrictions on financial institutions—the primary buyers of corporate bonds—and holding
debt securities of only AAA ratings.
Indian bourses, the BSE and the NSE, now figure in the top 10 of the world’s capital markets in terms of
market capitalization, but in terms of liquidity they still leave a lot to be desired. The NSE has a turnover
velocity (annual turnover value divided by market capitalization) of just over 57 per cent while for BSE,
which boasts of the maximum listed stocks anywhere in the world, the figure is merely 18 per cent. The
NASDAQ, by contrast, has a turnover velocity of 340 per cent. It is fair to say that the lower 50 per cent
of BSE stocks hardly see any movement. In terms of market participants, about half of all trading happens
roughly between 450 participants, almost a third of whom are proprietary traders. Trading has become
more concentrated over the years and participation in equity markets ranges between 2 and 5 per cent
of the population by various estimates, and 5 to 10 per cent if one adds mutual fund investments. Such
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revelations, as were made in response to a question in the parliament, are often picked up by sections of
the media as indicative of price-manipulation through cartelization and cheating the common investor.
Such concerns, however, are likely misplaced since advanced markets also exhibit similar traits.
While NSE is the virtual monopolist in the exchange space in India, SEBI—the market watchdog—has of
late been kept busy with the issue of competition there. MCX-SX, a subsidiary of the leading commodities
exchange MCX, has sought entry into the equities space, which has been denied in the wake of a
controversial committee report and the unprecedented suing of SEBI by MCX, forcing a decision. Recently,
a court order has asked SEBI to re-look into its decision, so the matter is far from settled.
Meanwhile, the Indian bourses have given a healthy return with indices more than doubling in value
during the period. Despite the gushing and ebbing FII flows, Indian markets have attracted overall FII/FPI
investments worth INR 382 thousand crore between March 2012 and March 2018, as compared to INR
463 thousand crore in the previous 12 years. The assets under management (AUM) of the mutual fund
industry stood at over INR 23 lakh crore in January 2018, close to four times the 2011 figure. The
insurance sector in comparison has stagnated in terms of gross premiums written in India.
6 Role of Financial Market in Indian Economy

6.1 Role of Money Market in India
6.1.1 Provides Fund

The money market provides short term funds for borrowing at a lower rate of interest. The private and
the public institutions can borrow money from the money market to finance capital requirements and
fund business growth through the system of finance bills and commercial paper. The government can also
borrow funds from the money market by issuing treasury bills.
Therefore, money market issues money market instruments like commercial papers, treasury bills and so
on and helps in the development of trade, industry and commerce within and outside India. The money
market plays an important role in financing domestic and international trade.
6.1.2 Use of Surplus Funds

The money market provides a platform where the banks and other lending institutions can lend excess
money for a short period of time and earn profits. This fulfils the main objectives of the commercial banks
i.e. to earn income from reserves as well as maintain liquidity to meet the cash required for daily
transactions. The institutions that can lend funds in money market not only include commercial banks and
other financial institutions, but also comprises of non-financial business corporations, central, state and
local governments.
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6.1.3 No Need to Borrow From Banks
A developed money market helps commercial banks become self-sufficient. The existence of an
established money market increases the options of borrowing money at lower interest rates and helps
commercial banks and the central bank. However, if there is a shortage of cash in the commercial banks
and central banks, they can call in some of their loans from the money market. Most of the commercial
banks like SBI, Union Bank, BOI and others prefer to recall their loans.
6.1.4 Helps Government

The money market instruments help the government raise money for financing government projects for
public welfare and infrastructure development. The government can borrow short term funds by issuing
treasury bills at low interest rates. On the other hand, if the government were to issue paper money or
borrow from the central bank, it would lead to inflation in the economy.
6.1.5 Helps in Monetary Policy

A properly functioning money market helps the central bank successfully implement monetary policies.
Though the central bank can function and influence the banking system in the absence of a money market,
the existence of a developed money market helps in the efficient functioning and increases the
effectiveness of the central banks. The money market helps the central banks in the following ways:
1. Short-run interest rates serve as an indicator of the monetary and banking conditions in the country
and, in this way, guide the central bank to adopt an appropriate banking policy.
2. Sensitive and integrated money markets help the central bank secure quick and widespread influence
on the sub-markets, thus facilitating effective policy implementation.
6.1.6 Helps in Financial Mobility

The money market helps in financial mobility by enabling easy transfer of funds from one sector to the
other. Financial mobility is essential for the development of industry and commerce in the economy.
6.1.7 Promotes Liquidity and Safety

This is one of the most important functions of money market, as it provides safety and liquidity of funds.
It also encourages savings and investments. These investment instruments have shorter maturity which
means they can readily be converted to cash. The money market instruments are issued by entities with
good credit score which makes them safe investment options.
6.1.8 Equilibrium Between Demand and Supply of Funds

The money market creates a balance between the demand and supply of loanable funds. The money
market helps in allocating savings into investment channels. A money market helps in mobilizing savings
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and make better use, by allowing them to be invested through the money market. It helps savers
channelize funds, thus leading to productive use of money in the economy.
6.1.9 Economy in Use of Cash

As the money market deals in near-money assets and not proper money, it helps in economizing the use
of cash. It provides a convenient and safe way of transferring funds from one place to another, thereby
immensely helping commerce and industry in India.
6.2 Role of Capital Market in India

Capital market plays an extremely important role in promoting and sustaining the growth of an economy.
It is an important and efficient conduit to channel and mobilize funds to enterprises, and provide an
effective source of investment in the economy. It plays a critical role in mobilizing savings for investment
in productive assets, with a view to enhancing a country’s long-term growth prospects. It thus acts as a
major catalyst in transforming the economy into a more efficient, innovative and competitive marketplace
within the global arena.
Capital markets play a vital role in Indian economy, the growth of capital markets will be helpful in raising
the per capita income of the individuals, decrease the levels of unemployment, and thus reducing the
number of people who lie below the poverty line. With the increasing awareness in the people they start
investing in capital markets with long-term orientations, which would provide capital inflows to the
sectors requiring financial assistance.
6.2.1 Capital Arrangement

The capital market promotes capital formation in the country. Rate of capital formation depends upon
savings in the country. Though the banks mobilize savings, they are not adequate to match the
requirements of the industrial sector. The capital market mobilizes savings of households and of the
industrial concern. Such savings are then invested for productive purposes. Thus savings and investment
leads to capital arrangement in country.
6.2.2 Economic Growth

Capital market smooths the progress of the growth of the industrial sector as well as other sectors of the
economy. The main purpose of the capital market is to transfer resources from masses to the industrial
sector. The capital market makes it possible to lend funds to various projects, both in the private as well
as public sector.
6.2.3 Development of backward areas

The capital markets provide funds for the projects in backward areas. This facilitates the economic
development of backward areas.
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6.2.4 Generates Employment
Capital market generates employment in the country:
a. Direct employment in the capital markets such as stock markets, financial institutions etc.
b. Indirect employment in all sectors of the economy, because of the funds provided for developmental
projects.
6.2.5 Long term capital to industrial sector

The capital market provides a stable long-term capital for the companies. Once, the funds are collected
through issues, the money remains with the company. The company is left free with the funds while
investors exchange securities among themselves.
6.2.6 Generation of foreign capital

The capital market makes possible to generate foreign capital. Indian firms are able to generate capital
from overseas markets by way of bonds and other securities. Such foreign exchange funds are vital for
the economic development of the nation.
6.2.7 Developing role of financial institutions

The various agencies of capital market such as industrial financial corporation of India (IFCI), state finance
corporations (SFC), industrial development bank of India (IDBI), industrial credit and investment
corporation of India (ICICI), unit trust of India (UTI), life insurance corporation of India (LIC), etc. there
have been rendering useful services to the growth of industries. They have been financing, promoting and
underwriting the functions of the capital market.
6.2.8 Investment opportunities

Capital markets provide excellent investment opportunities to the members of the public. The public can
have alternative source of investment i.e. In bonds, shares and debentures etc.
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INDIAN POLITICAL SYSTEM
FODDER MATERIAL

Contents
1 How far do you think cooperation, competition and confrontation have shaped the nature of
federation in India? Cite some recent examples to validate your answer. ..................................................2
2 The frequent promulgation of ordinances is an assault on the democratic structure of the
Constitution. Critically analyse. .....................................................................................................................4
3 The decision to go without "Question Hour" during the Monsson Session of Parliament has evoked
serious concerns about the democratic functioning of the institution and erodes constitutional mandate
of parliamentary oversight over executive action. Discuss. ..........................................................................6
4 Discuss the significance of the right to protest in a democracy. ...........................................................7
5 Despite unique constitutional positioning, the governor is sometimes not seen as willing or able to
discharge his functions as judiciously, impartially and efficiently as envisaged by the constitution
framers. Comment .........................................................................................................................................8
Important Note for Students:

The chapter on ‘Indian Political System’ uploaded in the objective set of chapters already contains
importants aspects of India’s political system. It is our considered belief that the material provided
therein does adequate justice to the demands of descriptive answer writing part of RBI Grade B Phase
II examination. We have deliberatley desisted from adding to much content in this chapter; this chapter
contains five questions based on important contemporary issues and their answers.
1 How far do you think cooperation, competition and confrontation have

shaped the nature of federation in India? Cite some recent examples to
validate your answer.
A federal government is one in which powers are divided between the national government and the
regional governments by the Constitution itself.
The Constitution of India provides for a federal system of government. However, the Indian model of
federalism is significantly different from that of the American model (referred to as the epitome of federal
polity).
Indian federalism has a strong unitary bias, but due to unique socio-economic and political conditions, it
has evolved to assume the various features of cooperative, competitive, and confrontational federalism.

Cooperative Federalism: It envisages that the Centre and states share a horizontal relationship, where
they “cooperate” in the formulation and implementation of national policies. This can be reflected in the
recent steps taken by the Central Government.
▪ With the rollout of the GST and the formation of the GST Council, both the Centre and states
government are having a say in implementing the one country-one tax system.
▪ The union government has abolished the Planning Commission and replaced it with NITI Aayog.
One of the mandates of the NITI Aayog is to develop competitive federalism.
Competitive Federalism: It envisages the competition between the states.
▪ The SDG India Index, Aspirational Districts Programme, Swachh Bharat Ranking, Ease of Doing
Business Ranking incorporates a sense of competition amongst the states for funds from the
central government.
Confrontational Federalism: It is a result of central government transgressing into the powers of the state
government.
▪ The unilateral revocation of the special status conferred on Jammu and Kashmir (J&K) under Article
370 of the Constitution has been criticized by many experts as against the spirit of federalism.
▪ Many constitutional experts have criticized the central government's decision of using a
concurrent List to make laws on state list subjects. For example,
o The union government has passed three farm laws despite agriculture being the state list
subject. This has led to massive farmers’ protests.
o Under the recent NIA amendment Act, the central government may direct the NIA to
investigate such cases as if the offense has been committed in India.
▪ The role of the governor as an agent of the central government (in Maharashtra & Karnataka)
whereby governors act in a partisan way, generally against the state government whose views are
not in concurrence with the party in power at union level.
▪ Also, there are many river-water sharing disputes amongst the states. For example Cauvery river
disputes, Mahadayi river dispute.
▪ Conclusion

In SR Bommai vs Union of India (1994), the Supreme Court held federalism a part of the basic structure of
the Constitution. However, due to the strong unitary bias and particularly the way it has evolved over the
years, many constitutional experts describe Indian federalism as, “federation without federalism”, “a
Union of Unequal States” or “Quasi-Federal In Nature”.
2 The frequent promulgation of ordinances is an assault on the democratic

structure of the Constitution. Critically analyse.
▪ Article 123 of the Constitution grants the President certain law-making powers to promulgate
ordinances during the recess of Parliament. These ordinances have the same force and effect as
an Act of Parliament but are in the nature of temporary laws.
▪ Likewise, the Governor of a state can issue ordinances under Article 213 of the Constitution, when
the state legislative assembly (or either of the two Houses in states with bicameral legislatures) is
not in session.
▪ The ordinance making power is the most important legislative power of the President and the
Governor. It has been vested in them to deal with unforeseen or urgent situations.
Need for the promulgation of ordinances
▪ Immediate action requirement: Temporary law making power has been conferred on the
President and the Governor under the Constitution of India to meet the unforeseen and
extraordinary situations which require immediate action to which the ordinary law prevailing at
that time cannot handle.
▪ Legislature not in session: An ordinance can be issued only when both Houses of Parliament, Lok
Sabha and Rajya Sabha, are not in session. But it is not possible to pass a law immediately to grip
the suddenly arisen circumstances due to procedural formalities, President/Governor may
prorogue the Legislature and issue an ordinance.
Issues with frequent promulgation of ordinances
▪ Deliberate bypassing of the legislature: At times there are instances that legislature is being
deliberately bypassed to avoid debate and deliberations on contentious legislative proposals. This
is against the ethos and spirit of democracy. Repromulgation of ordinances: As observed by the
Supreme Court, re-promulgation of ordinances is a “fraud” on the Constitution and a subversion
of democratic legislative processes, especially when the government persistently avoids placing
the ordinances before the legislature.

o For example, a series of ordinances were issued by the Bihar Governor between 1989 and
1992 regarding the taking over of private Sanskrit schools by the state.
▪ Infringement of principle of separation of powers: The power of the executive to issue ordinances
goes against the principle of separation of powers as lawmaking is the domain of legislature.
▪ The satisfaction of the President: Ordinance can be promulgated only when the President is
satisfied that circumstances exist for the same thus providing the scope of misuse of the power.
▪ When ordinances are frequently issued and re-issued, it violates the spirit of the Constitution and
result in an ‘ordinance raj’. In D.C. Wadhwa vs State of Bihar 1987, the Supreme Court strongly
condemned this practice and called it a constitutional fraud.
▪ Since independence, numerous ordinances have been issued which clearly shows that this power
has been used quite regularly instead of being the last resort.
o For example: The Securities Laws (Amendment) Ordinance, 2014 was repromulgated for
the third time during the term of the 15th Lok Sabha.
o The Indian Medical Council (Amendment) Ordinance, 2010 was re-promulgated four
times. This happened despite the SC verdict in 1986 condemning such action.
o The promulgation of Jammu and Kashmir Reservation (Amendment) Ordinance,

2019 was seen as a politically motivated action.
o More recently the BJP led government has released three ordinances: The Farmers’
Produce Market Commerce (Promotion and Facilitation) Ordinance, 2020, The Farmers
(Empowerment and Protection) Agreement on Price Assurance and Farm Services
Ordinance, 2020 which appear to be an abuse of power.
Our Constitution has provided for the separation of powers among the legislature, executive and judiciary
where enacting laws is the function of the legislature. The executive must show self-restraint and should
use ordinance making power only in unforeseen or urgent matters and not to evade legislative scrutiny
and debates.

3 The decision to go without "Question Hour" during the Monsson Session of
Parliament has evoked serious concerns about the democratic functioning of
the institution and erodes constitutional mandate of parliamentary
oversight over executive action. Discuss.
▪ Generally, the first hour of a parliamentary sitting is devoted to the Questions and this hour is
called the Question Hour.
▪ The zero hour starts immediately after the question hour and lasts until the agenda for the day
(i.e. regular business of the House) is taken up. Under this, MPs can raise matters without any prior
notice.
Significance of the Question and Zero Hour for democracy
▪ These have a special significance in the proceedings of the Parliament. Asking of questions is an
inherent and unfettered parliamentary right of members.
o It is during the Question Hour that the members can ask questions on every aspect of
administration and Governmental activity.
▪ Government policies in national as well as international spheres come into sharp focus as the
members try to elicit pertinent information.
▪ Sometimes questions may lead to the appointment of a Commission, a Court of Enquiry or even
Legislation when matters raised by Members are grave enough to agitate the public mind and are
of wide public importance.
Reason for its cancellation: In view of the Covid-19 pandemic and a truncated Monsoon Session,
Parliament has said no to Question Hour and curtailed Zero Hour. Opposition MPs have criticised the
move, saying they will lose the right to question the government.
Concerns of evoking the ‘Question Hour’ and Zero Hour
▪ Question Hour is a device to criticise government policies and programmes, ventilate public
grievances, expose the government’s lapses, extract promises from ministers, and thereby, ensure
accountability and transparency in governance. The absence of ‘Question hour’ will impinge on
the basic right of democracy i.e. asking the question.
▪ Government is duty bound to respond to questions on different issues such as its failure in
handling the pandemic, the unprecedented decline in GDP and its impact on the economy, the

New Education Policy, tensions at the border, rising unemployment, the miseries of migrant labour
and so forth.
o By doing away with the Question Hour, the government has opted for a face-saving
measure.
▪ Democratic rights are being denied to the elected representatives of Independent India.
▪ The government’s actions erode the constitutional mandate of parliamentary oversight over
executive actions as envisaged under Article 75 (3) of the Indian Constitution.
o Moreover, such actions prevent the members of Parliament from carrying out their
constitutional obligations of questioning, debating, discussing and scrutinising government
policies and actions.
▪ Question and Zero Hour are the manifestation of a representative kind of democracy in
operation, in the sense that representation of the people directly questions the government on
matters of governance. The government is duty bound to answer the questions in the House as
they relate to its people.
If questions are not permitted in the Parliament physically, the same could be started in virtual meets.
MPs could be allowed to ask the question through the digital platform.
Various options for social distancing can be attempted like reserving each day for select ministries to
prevent crowding by officials seeking to help their ministers.
At the same time an orderly conduct can also ensure that the questions are raised with discipline and they
don’t affect the safety protocol too.
The Question hour & Zero hour acts as important tools for enabling the doctrine of checks and balance.
Therefore, Parliaments should not dispense with these even at the time of war.
4 Discuss the significance of the right to protest in a democracy.

All across the world democracy is the most acceptable form of governance because every citizen has a
right to dissent without fear of victimisation. Dissent means a strong difference of opinion on a particular
subject, especially about an action taken by the government..
In this context, Right to dissent or protest forms a cornerstone of India’s constitutional democracy.

▪ The Right to protest peacefully is enshrined in the Indian Constitution—Article 19(1)(a) guarantees
the freedom of speech and expression; Article 19(1)(b) assures citizens the right to assemble
peaceably and without arms.
▪ By virtue of exercising Right to protest, citizens become watchdogs and constantly monitor
governments' acts. It also provides feedback to the governments about their policies and actions
after which the concerned government, through consultation, meetings and discussion, recognises
and rectifies its mistakes.
▪ It strengthens representative democracy by enabling direct participation in public affairs.
▪ Also, it provides a necessary voice for all those who are oppressed and are marginalised for various
reasons.
▪ However, when a protest turns violent, it defeats the very purpose of the protest.As now the
government can use force to suppress a violent protest.
A democracy's ability to preserve its citizen's right to protest is a result of that democracy's political health.
However, resorting to violence during the protest is a violation of a key fundamental duty (enumerated
in Article 51A, the Constitution makes it a fundamental duty of every citizen “to safeguard public property
and to abjure violence) of citizens.
5 Despite unique constitutional positioning, the governor is sometimes not

seen as willing or able to discharge his functions as judiciously, impartially
and efficiently as envisaged by the constitution framers. Comment
o India is a federal constitution, however due to unique conditions of India, constitution makers
decided for post of governor as head of administration to be appointed by President of India,
holding office at his pleasure.
o Governor is not the member of a party; he is the representative of the people as a whole in the
State. It is in the name of the people that he carries on the administration.
Abuse of the post of Governor
o Misuse of Article 356 : Governor has to submit report to advise the President to proclaim
emergency if there is constitutional breakdown. This power has been abused by political parties
in power at centre to dismiss governments in state governed by parties in opposition.

o In S R Bommai case, SC proclaimed that action under Article 356 can be judicially reviewed, it
made clear that material i.e. Governor’s report which forms the basis of imposition of President
rule can be examined and struck down if found not reasonable.
o Power of Reserving bill: Constitution provides that Governor can reserve the bill for consideration
of President. Even though constitution does not provide centre the power to veto state’s
legislation, through power of reservation centre exercises this power by vetoing or delaying any
legislation through President refusal to assent to state’s legislation.
o As an agent of political party in power at center: Governors are not shy of revealing their partisan
preference. For instance, in recent times Governors have exhorted voters to vote for particular
party.
o Partisan role in Hung assemblies: In case of hung assemblies, there is discretion for Governors as
to which party or coalition of parties are in best position to form the government. This discretion
is abused by Governors in partisan manner at the instruction of centre. There are numerous
instance where despite the parties apparently having lesser seats than the parties in opposition
are invited to form government e.g. Recently, Governor invited BJP for forming government in
Karnataka despite opposition coalition claiming majority.
o Arbitrary Removal of Governors: There have been instances of removal of governors in States
with Government change at the centre. Disapproving the practice of replacing Governors after a
new government comes to power at the Centre; the Supreme Court in 2010 had said that the
Governors of states cannot be changed in an arbitrary manner with the change of power.
Conclusion:
o The Sarkaria Commission recommendations that a person to be appointed as a Governor should

be eminent in some walk of life, a person from outside the State, a detached figure and not too
intimately connected with the local politics of the State; and he should be a person who has not
taken too great a part in politics generally and particularly in the recent past still remain relevant.
o Moreover, as development of conventions with respect to role of Governor has not been
successful, there is need to amend the constitution to curtail the abuse of post of Governor.

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INTERNATIONAL ECONOMIC
INSTITUTIONS
FODDER MATERIAL

Contents
1 Introduction ............................................................................................................................................3
2 International Monetary Fund .................................................................................................................3
2.1 Objectives of the IMF ......................................................................................................................4
2.2 Structure of the IMF ........................................................................................................................4
2.3 Member’s Quota in IMF ..................................................................................................................4
2.4 Use of Resources .............................................................................................................................5
2.5 Exchange Rate Policy.......................................................................................................................6
2.6 Special Drawing Rights ....................................................................................................................6
2.7 India and the IMF ............................................................................................................................7
2.8 IMF and the developing countries and its future ...........................................................................8
3 The World Bank ......................................................................................................................................9
3.1 International Bank for Reconstruction & Development .................................................................9
3.1.1 Functions and Resources of the Bank......................................................................................9
3.1.2 India and the Bank .................................................................................................................10
3.2 International Development Association .......................................................................................10
3.2.1 India and the IDA ...................................................................................................................10
3.3 International Finance Corporation ...............................................................................................11
3.3.1 Functions of the IFC ...............................................................................................................11
4 World Trade Organisation ....................................................................................................................11
4.1 Principles of the WTO ...................................................................................................................12
4.2 Functions of WTO..........................................................................................................................12
4.3 Objectives of WTO ........................................................................................................................13
4.4 WTO Agreements ..........................................................................................................................14
4.4.1 GATT 1994..............................................................................................................................14
4.4.2 TRIMS .....................................................................................................................................14
4.4.3 Agreement on Textiles and Clothing .....................................................................................14
4.4.4 Agreement on Services ..........................................................................................................14
4.4.5 TRIPS ......................................................................................................................................15
4.4.6 Agreement on Subsidies and Counter-veiling Measures ......................................................15
4.4.7 Agreement on Agriculture .....................................................................................................16
4.4.8 Agreement on Sanitary and Phyto-Sanitary (SPS) Measures ................................................18
4.4.9 Agreement on Anti-Dumping (ADA) ......................................................................................18
4.4.10 Agreement on Technical Barriers to Trade (TBT) ..................................................................19

4.4.11 Agreement on Government Procurement (GPA) ..................................................................19
4.5 Evaluation of the WTO ..................................................................................................................19
4.6 Achievements of WTO ..................................................................................................................20
4.7 Limitations of WTO .......................................................................................................................20
4.8 Criticism.........................................................................................................................................22
4.9 India and the WTO ........................................................................................................................22
1 Introduction
The International Monetary Fund (IMF), the World Bank and the International Trade Organisation were
conceived at the Brettonwoods Conference in July, 1944 as institutions to strengthen international
economic cooperation and to help create a more stable and prosperous global economy.
While the IMF and the World Bank came into existence and started functioning from 1946, the
International Trade Organisation could not be set up. Instead, the General Agreement on Tariffs and Trade
(GATT) was set up in 1947. Through successive rounds of negotiations, the GATT got transformed into
what has come to be known as the World Trade Organisation (WTO) that started functioning from
January 1, 1995. The various institutions have been set up to govern international economic relations.
While all the institutions work in close coordination with each other, each of these institutions has its own
specific area of responsibilities.
The IMF promotes international monetary cooperation and provides member countries with policy
advice, temporary loans, and technical assistance so they can establish and maintain financial stability
and external viability and build and maintain strong economies.
The World Bank promotes long-term economic development and poverty reduction by providing
technical and financial support.
The WTO seeks to achieve the same objective by providing a trade environment in which goods and
services may move between the nations, unrestrained by any restrictions or barriers.
On a little regional level also international organisations have been set up. Among these, the most
important for us has been the Asian Development Bank.
2 International Monetary Fund

International Monetary Fund (IMF) is one of the two institutions that were established as a result of the
Brettonwoods Conference in 1944, the other institution was the International Bank for Reconstruction

and Development (IBRD), also known as the World Bank. IMF aims at promoting international monetary
cooperation with a view to achieve certain mutually agreed international economic goals. It is also a
lender of short-term funds to member-countries, mainly to adjust balance of payments deficits.
2.1 Objectives of the IMF

The Articles of Agreement of the IMF set out the following as the objectives of the Fund:
• To promote international monetary cooperation through a permanent institution which provides the
machinery for consultation and collaboration on international monetary problems.
• To facilitate the expansion and balanced growth of international trade and to contribute thereby to
the promotion and maintenance of high levels of employment and real income and to the
development of the productive resources of all members as primary objectives of economic policy.
• To promote exchange stability, to maintain orderly exchange arrangements among members, and to
avoid competitive exchange depreciation.
• To assist in the establishment of a multilateral system of payments in respect of current transactions
between members and in the elimination of exchange restrictions which hamper the growth of world
trade.
• To give confidence to members by making the general resources of the Fund temporarily available
to them under adequate safeguards, thus, providing them with an opportunity to correct
maladjustments in their balance of payments without resorting to measures destructive of national
or international prosperity.
• In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the
international balance of payments of members.
2.2 Structure of the IMF

The Central office of the IMF is in Washington DC, USA. It has 190 members (Last Updated: October 21,
2020). It is affiliated to the UNO. The highest authority of the IMF is the Board of Governors in which
each member country is represented by a Governor and alternate Governor. The Board of Governors is
the policy-making body. The day-to-day functions of the IMF are the responsibility of the Managing
Director who is selected by the Board of Executives.
2.3 Member’s Quota in IMF

Quota represents the subscription by a member country to the capital fund of the IMF. Quotas are fixed
for each country, taking into account such factors as the country’s national income, reserves, export
variability and the ratio of exports to national income.

Apart from representing the subscription of a country to the IMF, the quota also forms the basis for
determining its drawing rights from the IMF, its voting power and share in the allocation of Special
Drawing Rights (SDRs).
Twenty five per cent of a country’s quota is to be contributed in the form of SDRs or foreign exchange
and 75 per cent in the country’s own currency. Quotas are reviewed by the IMF at periods of not more
than five years.
Each country’s voting power is the sum of its “basic votes” and its quota-based votes. Each IMF member
has 250 basic votes plus one additional vote for each SDR 1,00,000 of quota.
Each member’s quota is the most fundamental element in its financial relationship with the IMF. It
determines the amount of financing it can receive from the IMF and its share in SDR allocations.
2.4 Use of Resources

IMF provides temporary assistance to member-countries to tide over balance of payments deficits.
When the country requires foreign exchange, it tenders its own currency to the IMF and gets the foreign
exchange. This is known as ‘drawing’ from the Fund. When the BOP situation of the country improves,
it should ‘repurchase’ its currency from the IMF and repay the foreign exchange.
Ordinarily, for a member-country, a first borrowing or drawing is virtually automatic and without strings.
A country simply calls for the return of its original 25 per cent share (called the “reserve tranche”) paid
in hard currency.
After that, it may borrow the “first credit tranche”, another 25 per cent with virtually no strings. Three
further credit tranches may be borrowed in each of three subsequent years, and each amounting to 25
per cent of the original quota. At the end of the 5 years, the upper limit of 125 per cent is reached.
In addition, a member can borrow a further 90 per cent of quota annually for three years under the
“enlarged access” policy. With the enlarged access policy, further loans from 270 to 330 per cent of quota
can be obtained in a three-year period, in addition to the normal lending. But all this is subject to a
cumulative upper limit of 400 to 440 per cent of quota.
While borrowing under earlier credit tranches does not involve any obligation to adopt IMF directed
policy changes, borrowing under higher tranches and extended access facility does involve such
obligations.
Typically, the IMF will require as prerequisites for borrowing cutbacks in budget deficit including subsidies
to various sectors of the economy, reduction in the rate of monetary expansion, measures to restrain

wages and prices, devaluation of an overvalued exchange rate, and some action to make the price
system reflect costs more accurately and some turn towards the encouragement of exports. These are
known as conditionalities that are imposed on the borrowers who want to make use of IMF facilities.
2.5 Exchange Rate Policy

After the second amendment to the Articles of Agreement of IMF which came into effect on April 1, 1978,
every member is free to choose its own exchange rate arrangements. After this amendment, SDR has
become the international reserve asset and unit of account of the IMF. Some of the countries have
pegged their currencies to SDR, some others to currencies of other countries. Many others have
adopted any of the variants of the fixed exchange rate systems.
The members are free to adopt any system. But the IMF is required to exercise surveillance over the
exchange rate policies of members and is free to express its opinion on the policies of the member. Each
member is required to see that its foreign exchange policies:
• endeavour to direct its economic and financial policies toward the objective of fostering orderly
economic growth with reasonable price stability, with due regard to its circumstances;
• seek to promote stability by fostering orderly underlying economic and financial conditions and a
monetary system that does not tend to produce erratic disruptions; and
• avoid manipulation of exchange rates or the international monetary system in order to prevent
effective BOP adjustment or to gain an unfair competitive advantage over the other members.
In order to enable member-countries to frame their respective economic policies within the parameters
defined above, the Fund provides them with “finance” to meet their BOP deficits and pursue adjustment
programmes.
2.6 Special Drawing Rights

The late 1960s witnessed that the growth in world resources did not keep pace with the growth in
international trade. The slackness in the growth of resources was mainly due to the dependence on the
accretion of gold to monetary reserves. It was foreboding that the slow growth of monetary resources
would result in hampering the growth of international trade and in serious BOP difficulties to many
countries. The need to increase the international liquidity, i.e., resources for settlement of international
debts, was felt and after much thought on the subject, it resulted in the introduction of Special Drawing
Rights (SDRs) in 1970.
SDRs are entitlements granted to member-countries enabling them to draw from the IMF apart from
their quota. It is similar to a bank granting a credit limit to the customer. When SDRs are allocated the
country’s Special Drawing Account with the IMF is credited with the amount of the allotment.

Originally, SDRs were to be utilised only for meeting BOP difficulties. But as a consequence of endavours
to make it an international unit of account, the use of SDRs has been liberalised. Now SDRs can be used
directly among the members without the approval of the IMF. A country may swap SDRs with another
country to acquire a currency it desires. SDRs may be utilised to pay charges to IMF. SDR has gained
importance both as a reserve asset and as a unit of settlement of international transactions. Some
international banks accept time deposits designated in SDRs. Some countries have pegged their
currencies to SDRs.
2.7 India and the IMF

As founder member of the IMF, India was initially assigned a quota of $400 million or about 5.2 per cent
of the total. Being the fifth largest quota holder, India was also given a seat on the IMF’s Executive Board.
As a member of the Fund, India has derived following benefits:
• Foreign Exchange for Meeting BOP Deficits: The country has made use of the Fund’s facilities a
number of times to meet her BOP requirements. Such drawings of foreign exchange have enabled the
country to tide over the acute foreign exchange crisis and to maintain the imports of essentials goods.
o While India has not been a frequent user of IMF resources, IMF credit has been
instrumental in helping India respond to emerging balance of payments problems on two
occasions. In 1981-82, the borrowing amount by India was SDR 3.9 billion under an
Extended Fund Facility, the largest collection in IMF history at the time. In 1991-93, the
borrowing amount by India borrowed was a total of SDR 2.2 billion under two standby
arrangements, and in 1991 it borrowed SDR 1.4 billion under the Compensatory Financing
Facility. India has not taken any financial assistance from the IMF from 1993. All the loans
taken from International Monetary Fund have been completed repayed on 31 May, 2000.
• Oil Facility from the IMF: India resorted to drawals from the IMF under the Oil Facility created in June,
1974 to meet larger outlays for the import of petroleum crude.
• Assistance under SDRs: The SDRs provide unconditional liquidity since the participants have access to
foreign exchange resources at will.
• Aid from the World Bank: The country’s membership of the IMF has entitled it to become a member
of the World Bank; as a member of the Bank, India has received large technical and financial assistance
for the various development projects.
• Assistance under the Extended Credit Facility: Loan under this facility is contracted at softer terms
but there is a serious conditionality clause attached to it.

• Preparation of Valuable Reports: The country has availed the services of the specialists in the Fund
for the purpose of assessing the state of the Indian economy and for preparing valuable reports on
various aspects of the economy.
• India has received technical assistance in a number of areas in the last few years from the Fund,
including the development of the government securities market, foreign exchange market reform,
public expenditure management, tax and customs administration, and strengthening statistical
systems. Indian officials have been provided with trainings in national accounts, tax administration,
balance of payments compilation, monetary policy, and other areas by the IMF since 1981.
In short, the membership of the Fund has been instrumental in implementing various schemes under the
developmental plans.
However, India has been highly selective in approaching the Fund. It was in early 1990s that it became
necessary for India to approach the IMF for a massive assistance to restore a sense of viability to her
foreign exchange position. With the aid of concessional loan from the IMF in 1991 and subsequent
adoption of stablisation and adjustment programme, India successfully overcame the BOP crisis. It
prepaid this loan it would be seen that India has all squared up its borrowings from the IMF.
2.8 IMF and the developing countries and its future

If we see IMF in the evolving global financial system from the perspective of developing countries, there
is a consensus on certain issues such as the scope and purposes of its lending operations that IMF should
continue to provide all its members, including the poorest, and that its resources should be available for
solving the financial crises as well as for providing help with macro-level relevant structural reforms.
But on various other issues, there still remain substantial differences between industrial and developing
country views, including on:
• The extension of IMF surveillance to cover the adherence of international principles and codes.
• The modalities of the involvement of private sector in solving the crisis, with special reference to the
development of arrangements in the international sphere are still unsettled to a large extent.
• The opening up of capital account and the choice of exchange rate regimes are two interconnected
areas in which there are conflicting international perspectives.
• The scope and content of IMF conditionality raises the issue of how to reconcile it with the
significance of assuring country ownership.
• Developing country perspectives are budding in all these areas, especially on the issue of private-
sector participation in financial crisis deterrence. However, the preference in general is for a rules-
based framework rather than a case-by-case framework.

• There are four areas of immense significance to developing nations where the international debate
has always been muted or has been largely absent in the recent literature: these relate to the scrutiny
over, and synchronization of, the macroeconomic policies of the three principal international
currency issuers; the relationship of international & regional arrangements; the allocation of voting
power in both IMF and the international system generally, and the future progression of the
international reserve system.
3 The World Bank

The World Bank is another of the ‘Brettonwoods Twin Sisters’. The World Bank, as it obtains presently, is
an umbrella organisation, under which five different institutions operate. These five institutions are as
follows:
• International Bank for Reconstruction and Development (IBRD); founded in 1944, is the single largest
provider of development loans.
• International Development Association (IDA); founded in 1960, assists the poorest countries.
• International Finance Corporation (IFC); supports private enterprise in developing countries.
• Multilateral Investment Guarantee Agency (MIGA); offers investors insurance against non-
commercial risk and help developing country governments attract foreign investment.
• International Centre for the Settlement of Investment Disputes (ICSID); encourages the flow of
foreign investment to developing countries through arbitration and conciliation facilities.
3.1 International Bank for Reconstruction & Development

The main function of the IBRD is of long-term capital assistance to its member-countries for their
reconstruction and development.
3.1.1 Functions and Resources of the Bank

The main functions of the Bank are as follows:
• to assist in reconstruction and development of the territories of its member governments by

facilitating investment of capital for productive purposes;
• to promote foreign private investment by guarantees or through participations in loans and other
investments of capital for productive purposes;
• where private capital is not available on reasonable terms, to make loans for productive purposes out
of its owned resources or out of the funds borrowed by it; and
• to promote the long-range growth of international trade and the maintenance of equilibrium in the
balance of payments of members by encouraging international investment for the productive
resources of members.

3.1.2 India and the Bank
India is the founder-member of the Bank. For India, the Bank means many things. The Bank has not been
merely a lending institution to India but has also served as a worthy counsel whom India has approached
for advice in difficulties.
India has been the single largest borrower of the Bank. The Bank has extended generous assistance to
India in executing a number of development projects in different sectors like manufacturing, industry,
transportation – railways, ports, roads and aircrafts – electrical power, agriculture, etc. The Bank has also
been instrumental in the establishment of the India Development Forum, a consortium of donor nations
to India. The massive financial assistance pledged by the consortium members has been the largest aid
commitment and is a landmark in the history of development aid from developed countries to developing
countries.
But in line with the general changes in the environment, India’s growing preference for equity capital
rather loans has resulted in a marked fall in the inflow of assistance from the Bank to India.
Bank aid to India, however, has been subject to a number of criticisms:
• The Bank has granted loans for specific purposes and projects rather than for general development
purposes.
• The Bank exercises excessive control over the expenditure on the proposed projects.
• The rate of interest charged by the Bank is very high.
• An increasingly large share of the Bank’s assistance is linked to the “conditionality”, i.e., to effect the
changes in the economic policies as desired by the Bank.
3.2 International Development Association

International Development Association (IDA) is an affiliate of the IBRD. It was established in 1960 to
provide “soft loans” to economically sound projects which create ‘social capital’ such as the construction
of roads and bridges, slum clearance and urban development. The IDA provides loans for such projects
interest-free and for longer periods. Therefore, it is often referred to as the ‘soft loan window’ of the
Bank.
Only the poorest of the poor member countries (with per capita income below $895 at 1995 prices) are
eligible for assistance.
3.2.1 India and the IDA

India has immensely benefited from the IDA. It has received a series of loans, almost continuously. Most
of the assistance has gone to the high development priority projects which could not get finance from
other sources.
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IDA assistance has also been criticised for the excessive control exercised by the IDA.
3.3 International Finance Corporation

The IBRD loans are available only to member-country governments or with the guarantee of member-
country governments. Further, IBRD can only make a loan but it cannot participate in the equity of the
financed project.
IFC was established in 1956 with the specific purpose of financing private enterprises. It is an affiliate of
the IBRD. The Board of Governors of the IBRD also constitute the Board of Governors of the IFC. But it is
a separate entity with funds kept separate from those of the IBRD.
3.3.1 Functions of the IFC

The purpose of the IFC is to further economic development by encouraging growth of private enterprise
in member-countries. The IFC, therefore:
• invests in private enterprise in member-countries in association with private investors and without
Government guarantee, in cases where sufficient private capital is not available on reasonable terms;
• seeks to bring together investment opportunities, private capital of both foreign and domestic origin,
and experienced management; and
• stimulates conditions conducive to the flow of private capital – domestic and foreign – into
productive investments in member-countries.
The IFC investment normally does not exceed 40 per cent of the total investment of the enterprise. In
case of its investment by equity participation, it does not exceed 25 per cent of the share capital. The
interest charged on advances varies depending upon the proposal and status of the borrower.
India has also received substantial assistance from the IFC.
4 World Trade Organisation

The International Trade Organisation (ITO), originally, was proposed to be set up along with the World
Bank and the IMF on the recommendations of the Brettonwoods Conference, 1944. But as the ITO could
not be set up, the US, UK and a few other countries set up in 1947 an interim organisation about trade
named GATT (General Agreement on Tariff and Trade). The GATT was biased in favour of the developed
countries and was called informally as the “rich men’s club”.
The developing countries insisted on setting up of the ITO; the move came to be opposed by the US. To
solve the issue – the UN appointed a Committee in 1963. The Committee recommended as a possible
alternative a via media, UNCTAD (United Nations Conference on Trade and Development). The UNCTAD
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was set up in 1964 on the basis of this alternative. The UNCTAD could manage to get some concessions
for the developing countries, more important among which was the GSTP (General Scheme for Trade
Preferences). GATT was also made progressively more liberal.
The Uruguay Round of GATT sought to expand the scope of the organisation by including, services,
investment and intellectual property rights. The Uruguay Round proposals were accepted by all the
members of GATT in December, 1993. The agreements were ratified by the legislatures of 85 member-
countries by year-end 1994. On such rectification, the WTO started functioning from January 1, 1995.
4.1 Principles of the WTO

In its broad perspective, the WTO was to strive at creating a liberal and open trading environment by
which business enterprises could trade under conditions of fair and undistorted competition. Towards the
achievement of this, the four principles that were laid down to guide the trading rules of its members are
as follows:
1. Most Favoured Nation (MFN) Treatment: The principle of MFN treatment laid that tariffs and
regulations must be applied to imports or exports without discrimination among members. In other
words, no member country was to be accorded a treatment of ‘a favoured nation’;
2. National Treatment: It prevents discrimination between imported products and equivalent

domestically produced goods, especially in levying internal taxes and domestic regulations;
3. Protection Through Tariffs: While advocating liberal trade, the WTO recognises that some members
may need to protect their domestic production against foreign competition. The underlying principle was,
however, that such protections through tariffs must be kept at low levels in what was called as ‘bound
tariff framework’;
4. Bound Tariffs: The principle of ‘bound tariff’ advises the member countries to reduce and gradually
eliminate protection to domestic production. By seeking to reduce tariffs and eliminating non-tariff
barriers, the principle requires the member countries to commit in their respective national schedules
against further increase of tariff levels at later points of time. In other words, the reduction and ultimate
phase-outs of tariffs was meant to provide the cushion time required for gaining competitive strength and
the tariffs were to be phased out firmly in a committed time frame.
4.2 Functions of WTO

The WTO performs the following functions:
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• It administers through various councils and committees the 29 agreements contained in the final act
of the Uruguay Round of world trade talks, plus a number of plurilateral agreements, including those
on Government procurement.
• It oversees implementation of the significant tariff cuts and reduction of non-tariff barriers agreed
to in the trade negotiations.
• It is a watchdog of international trade, regularly examining the trade regimes or individual members.
• Members are required to notify in detail various trade measures and statistics, which are maintained
by the WTO in a large database.
• It provides conciliation mechanisms for arriving at an amicable solution to trade conflicts among
members.
• Trade disputes that cannot be solved through bilateral talks are adjudicated under the WTO dispute
settlement “court”.
• Panels of independent experts are established to examine disputes in the light of WTO rules and
provide rulings. The tougher, streamlined procedure ensures equal treatment for all trading partners
and encourages members to abide by their obligations.
• The WTO is a management consultant for world trade. Its economists keep a close watch on the pulse
of the global economy and provide studies on the main issues of the day.
• The WTO secretariat assists developing countries in implementing Uruguay Round results through a
newly established development division and a strengthened technical cooperation and training
division.
• The WTO is a forum where countries continuously negotiate the exchange of trade concessions to
trade restrictions all over the world. The WTO already has a substantial agenda of further negotiations
in many areas, notably certain services sectors.
4.3 Objectives of WTO

The agreement establishing the WTO reiterates the following objectives of the WTO:
• Raising standards of living and incomes, ensuring full employment, expanding production and trade,
optimal use of world’s resources, at the same time extending the objectives to services and making
them more precise.
• Introduces the idea of sustainable development in relation to the optimal use of world’s resources,
and the need to protect and preserve the environment in a manner consistent with the various levels
of national economic development.
• Recognises the need for positive efforts designed to ensure that developing countries, especially the
least developed ones, secure a better share of growth in international trade.
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The WTO continues the decision-making practice followed under the GATT Decisions will be taken by a
majority of votes cast on the basis of one country, one vote.
4.4 WTO Agreements

The WTO administers 29 agreements; these cover different areas like trade in goods and services,
investment measures, intellectual property rights, etc. Some of the important WTO agreements are as
follows:
4.4.1 GATT 1994

The cornerstone of trade relations is the area of goods. Differential and more favourable treatment to
developing countries is permitted under the 1979 Enabling Clause with respect to tariffs in the context of
the Generalised Scheme of Preferences and Non-tariff measures, notwithstanding the Most Favoured
Nation Clause, and with respect to regional or global arrangements concluded by the developing
countries.
4.4.2 TRIMS
Agreements integrating practices otherwise on the margin of GATT rules include TRIMS (Trade Related
Investment Measures): GATT inconsistent TRIMS are required to be notified and eliminated within a
transition period of two years (developed countries), five years (developing countries) or seven years
(least-developed countries). A further extension may be requested by developing and least-developed
countries. The Agreement on Safeguards prohibits the use of “grey-area measures”, such as voluntary
restraints or orderly marketing arrangements; such measures are to be notified and eliminated.
4.4.3 Agreement on Textiles and Clothing

It provides for the eventual elimination of the Multi-Fibre Agreement (MFA) after a ten-year transition
period on 1-1-2005. Under the MFA, the exporters were subjected to bilaterally agreed quantitative
restraints or unilaterally sponsored restraints on imports. These applied typically at the product level but
in some cases to various aggregates as well.
4.4.4 Agreement on Services

The General Agreement on Trade in Services (GATS) is the first multilateral agreement on trade that has
its objective the progressive liberalisation of trade in services. The Agreement covers trade in all services
sectors and the supply of service in all forms.
• Under GATS each member country of WTO opened up its service sectors by way of Mode-I, Mode-
II, Mode-III, Mode-IV. According to Service agreement under which0 each member of WTO has to
provide the list of those services from time to time which will open for other member countries.
The following four type of services which will opened for other member countries are as follows:
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o MODE-I: cross border trade i.e. BPOS, KPOs and other information technology services.
o MODE-II: Consumption abroad i.e. education, tourism etc.
o MODE-III: Commercial presence i.e. FDI and FII
o MODE-IV: Movement of natural persons
• Among developing countries India had offer highest no of services. According to Hong Kong
declaration the member countries has offered the list of service sectors which are opened for
other WTO member countries. India’s interest essentially like in Mode-I and Mode-iv services. The
service agreement continues to remain lopsided as developed countries have been insisting a large
number of domestic restrictions to deny the benefits that could accumulate the development of
service sectors. The restrictions are by way of licensing, registration, duration of stay, extension of
stay, and residency.
4.4.5 TRIPS
(Trade Related Intellectual Property Rights): The main features of the TRIPS agreement are as follows:
i) Minimum standards of protection to be provided by each member.

ii) Domestic procedures and remedies for the enforcement of IPRs.
iii) Dispute settlement between the WTO members.
TRIPs agreements cover the following areas: Copyright and related rights, trademarks including service
marks, geographical indications including appellations of origin, industrial designs, patents including the
protection of new varieties of plants, the lay-out designs of integrated circuits and undisclosed
knowledge including trade secrets and test date.
4.4.6 Agreement on Subsidies and Counter-veiling Measures

Agreement on Subsidies and Counter-veiling Measures (SCM): The SCM applies to non-agricultural
products. It follows the traffic lights approach and classifies subsidies in three categories:
i) Red: Subsidies with high trade-distorting effects, such as export subsidies, and those that
favour the use of domestic over imported goods are prohibited.
ii) Green: Subsidies that are not specific to an enterprise or industry or a group of enterprises or
industries are non-actionable.
iii) Amber: Subsidies that are neither red nor green belong to the amber category. They are
actionable by the trading partners if their interests are adversely hit. The affected country
can seek remedy through the dispute-settlement procedures or go for counter-veiling duties.
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4.4.7 Agreement on Agriculture
Agreement on Agriculture (AOA): The approach adopted here is to encourage gradual reduction of trade
distorting subsidies. The AOA specifically deals with: (i) providing market access, (ii) containing of export
subsidies, and (iii) regulating domestic support.
• Market Access: The AOA requires tariffication of all NTBs, and a reduction of those tariffs by an
average of 36 percent for developed countries and 24 percent for UDCs. Developed countries were
given 6 years to bring about these reductions, while developing countries are given 10 years. The time
counting has begun from 1995.
• Export Subsidies: Export subsidies have to be reduced by 36 percent in budgetary terms and 21
percent in volume over a six-year period. The developing countries have been given lower reduction
targets of 24 and 14 percent respectively over a longer period of 10 years.
• Domestic Support: A distinction has been made between subsidies that did not distort trade and those
that do. Only the trade distorting subsidies have to be reduced, if they are above the permissible level.
The following have been exempted from this provision.
o Green Box: Subsidies with no, or minimally trade distorting, effect have been put in this
box. These are not subject to any reduction commitments. It includes all government
service programmes.
o Blue Box: It contains those subsidies whose continuation is subject to a limitation on
production.
o White Box: It includes such subsidy practices in developing countries like investment
subsidies, agricultural input subsidies available to low-income or resource-poor farmers
and measures to encourage diversification from growing illicit narcotic crops.
4.4.7.1 Implications of AoA for Indian Agriculture

The repercussions of the WTO Agreement and the elimination of Quantitative Restrictions on imports
are quite alarming. The fall in the prices of agricultural goods and dumping of cheap agriculture
commodities from other countries is causing harm to the welfare of Indian farmers. Developed countries
have imposed heavy tariffs to minimize imports, whereas in India tariffs are low. Due to this, various
commodities are being dumped in India. The US is dumping 5 main farm commodities in global markets
in clear violation of WTO Agriculture rules. It is exporting corn, soybean, wheat, rice and cotton at prices
far below their production cost in an effort to wipe out global competition.
The continuation of high domestic support to agriculture in developed countries is a cause of concern
as they encourage overproduction in these countries leading to low levels of international prices of
agricultural goods. Simultaneously, the rich industrialized countries continue to subsidize farmers by
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giving them direct payments which are exempt from any reductions requirement and which essentially
are cash handouts contingent on making adjustments in production. These payments are neither
affordable nor helpful in a developing country. The result is that the industrialized countries continue to
dominate world trade in agriculture.
The AoA’s prerequisite to decrease domestic support will avert the Indian govt from providing the
essential support to farmers to reimburse for shortage or overabundance caused by climatic fluctuations
in market prices or any other factors. In fact subsidies are essential for Indian agriculture as 65% of people
are directly or indirectly dependent upon agriculture. It is no longer the question of mere economics
because the social and political implications of developments in agriculture cannot be ignored.
The domestic support provision also affects India’s food security. The Agreement exempts governmental
expenditures relating to public stockholding for food security purposes from reduction requirement if
the operation of such a programme is transparent and follows officially published objective criteria.
This automatically subjects these programmes to external scrutiny. A developing country may acquire
and release foodstuffs at administered prices; however, the difference between the international market
price and the administered price will be included in the calculation of AMS (Aggregate Measure of
Support). Therefore, the public stockholding system will be subject to reduction requirements if the
AMS exceeds the de minimis level.
In this context, at the Bali conference of December, 2013, India successfully retained its programme of
agricultural subsidy. The export commitment requirements, in turn, prevent India from providing
subsidies to industry that are necessary for it to expand its share of world export market. Curb in the
provision of subsidies will also adversely affect the future of Indian agriculture.
The decrease in custom duties & non-tariff barriers as well as guaranteed minimum market share for
imports will force Indian farmers to contend against big Transnational Corporations which have
excessive financial power resulting from their oligopolistic control over world food markets. Indian
farmers cannot contend on equivalent terms against the enormous financial & technological influence
of the transnational giants of the rich countries, particularly when custom duties and other import barriers
are reduced, and these companies are guaranteed a share of Indian market. To conclude, it is feared that
the Agreement is not favorable to India due to the following reasons:
• The country will be compelled to import minimum 3% of the domestic demand for agricultural
products.
• The government will be forced to reduce subsidies to farmers.
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• The PDS and Public Procurement System will have to be abandoned directly affecting the survival
of people below the poverty line.
4.4.8 Agreement on Sanitary and Phyto-Sanitary (SPS) Measures

SPS measures are those applied to protect human, animal or plant life from certain risks. These risks are
those arising from the entry, establishment or spread of pests, diseases and disease-carrying or diseases
causing organisms. The risks also include risks arising from additives, contaminants or toxins. Disease
causing organisms in food, beverages and foodstuffs and from risks arising from diseases carried by
animals, plants and products are also covered under this agreement.
SPS measures include all relevant laws, decrees, regulations, requirements and procedures, including end-
product criteria, processes and production methods, testing, inspection, certification and approval
procedures, quarantine treatments, provisions on relevant statistical methods, sampling procedures and
methods of risk assessment, packaging and labelling requirements directly related to food safety.
SPS measures must be based on international standards, guidelines or recommendations where they
exist. It is open to a country to adopt a level of SPS protection higher than that of the relevant
international standards, if there is a scientific justification or if it is needed by the appropriate level of
SPS protection in that country.
Members are allowed to provisionally adopt such SPS measures which, on the basis of available pertinent
information and relevant scientific evidence are the best possible measures at the current juncture,
although they fall short of the standards set by the WTO. Such provisional measures need to be reviewed
within ‘a reasonable period of time’.
4.4.9 Agreement on Anti-Dumping (ADA)

The objective of this agreement is to provide the right to the contracting parties to apply anti-dumping
measures. These are measures against imports of a product if such imports cause injury to a domestic
industry in the territory of the contracting party.
The ADA allows member-nations to apply anti-dumping measures on a unilateral basis after elaborate
investigations. If the investigations establish these three factors, the government is allowed to levy anti-
dumping duty on imports. This duty could be levied on imports either from a specific country or a group
of countries.
The ADA provides that all countervailing duties should be terminated within five years of their imposition
unless a review determines otherwise.
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4.4.10 Agreement on Technical Barriers to Trade (TBT)
The objective of this agreement is to ensure that mandatory product standards should not be so applied
to countries as to cause ‘unnecessary obstacles to international trade’. It visualises that mandatory
product standards do not create such barriers if based on internationally agreed standards. It also
recognises that countries have a right to establish protection, at levels they consider appropriate
(concerning the human, animal or plant life or health of the environment), and that countries should not
be prevented from taking such measures as are necessary to ensure that those levels of protection are
met.
Technical regulations and standards cover product characteristics, process and production characteristics,
terminology and symbols and packaging and labelling requirements as they apply to the products.
The TBT encourages countries to use international standards where appropriate, but does not require
change in the level of protection as a result of standardisation.
It recognises right of member countries to adopt technical regulations and standards as well as conformity
assessment procedures for the purpose of: (i) national security requirements, (ii) prevention of deceptive
practices, (iii) protection of human health or safety, animal or plant life or health of the environment.
4.4.11 Agreement on Government Procurement (GPA)

The GPA provides a vehicle for the progressive opening of markets to international competition through
legally enforceable provisions of nondiscrimination which apply to procurements ‘covered’ by the
agreement. In addition, various provisions of the agreement relating to the provision of information to
potential suppliers, contract awards, qualification of suppliers and other elements of the procurement
process aim at ensuring transparency and non-discriminatory conditions of competition among suppliers.
India, as yet is not a signatory to GPA, although other major developing countries such as China and Saudi
Arabia have made commitments to eventually seek accession to it.
4.5 Evaluation of the WTO

The WTO is different from and an improvement over the GATT in the following respects:
• The WTO is more global in its membership.

• The WTO has introduced commercial activities into the multilateral trading system.
• For enforcing trade liberalisation, WTO has brought into its framework, many new areas, such as
agriculture, textiles, technology and investment;
• While the GATT had ‘contracting parties’. WTO has ‘members’ and is a legal organisation.
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• GATT provisions in case of disputes were time-consuming. GATT could levy penalties only through
unanimous decisions, which were virtually impossible. Under WTO, unanimous are no longer
desired; all disputes are to be settled within 18 months.
• WTO has one-country one-vote principle, unlike in the World Bank and IMF where the economic
strength of rich countries translates into a voting majority.
• Even if developing countries differ on specific issues, they can make a difference if even a few of
them stand firm.
• Both big and small developing countries no longer accept decisions taken behind closed door by a
group of select countries.
4.6 Achievements of WTO

In the short period the WTO has been in existence it is being credited with the following achievements:
i) Greater market orientation has become the general rule;

ii) Tariff-based protection has become the norm rather than the exception;
iii) Use of restrictive measures for BOP problems has declined markedly;
iv) Services trade has been brought into the multilateral system and many countries, as in goods,
are opening their markets for trade and investment either unilaterally or through regional or
multilateral negotiations;
v) Many UDCs have undertaken radical trade, exchange and domestic reforms which have
improved the efficiency of resource use, opened up new investment opportunities, and, thus,
promoted economic growth;
vi) Bilateralism has been, to a great extent, placed under control by the extension of WTO
provisions to services, TRIPs and TRIMs. Further, under the unified DSM, the possibility of any
country unilaterally blocking the adoption of panel decisions no longer exists;
vii) The trade policy review mechanism has created a process of continuous monitoring of trade
policy developments. Also, by promoting greater transparency, it has assisted the process of
liberalisation and reform;
viii) It has been agreed to reduce import tariffs on industrial goods, based on Swiss Formula. A
Swiss formula is a non-linear formula where tariff-cuts are proportionally higher for tariff which
are initially higher. For instance, a country which has an initial tariff of 30% on a product will
have to undertake proportionally higher cuts than a country which has an initial tariff of 20%
on the same product.
4.7 Limitations of WTO

The WTO, however, has still to make any progress or become more sensitive on the following issues:
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i) The trade reform process is incomplete in many countries. For instance, some high tariffs still
remain on which negotiations are still proceeding at various levels, notably in the areas of
basic telecommunications and financial services;
ii) There appears to have been at least some reversals in the overall liberalisation process in
some developing countries. Examples are of increasing anti-dumping measures, selective
tariff increases and investment related measures. The developed countries are also blocking
the process of liberalisation by adopting many neo-protectionist measure
iii) Concerns have been raised that the combination of globalization and technological change
creates a premium on high-skill as against low-skill with growing social divisions;
iv) The major share of the benefits of the WTO has gone to the countries of the North. The WTO
has opened up the world economy more rapidly in areas that benefit the developed world.
Where the benefits of free trade accrue primarily to the UDCs, progress has been much
slower;
v) The WTO has also not been sensitive enough to the development of non-tariff barriers to
imports from the UDCs, such as anti-dumping duties;
vi) The multilateral trade rules are increasingly becoming a codification of the policies,
perceptions, laws and regulations of the industrialised countries. The policies and rules
appropriate or advantageous to the industrialised world are getting established as common
rules to be obeyed by the developing world as well. As a result a ‘one size fits all’ approach is
increasingly getting embedded in the WTO rules and disciplines;
vii) The interests of international trade, which are primarily the interests of transnational
corporations, take precedence over local concerns and policies even if such a course exposes
the local population to serious health and security risks;
viii) The implementation-related issues are becoming a source of serious concern. These issues
cover a whole range of demand to correct while asymmetries in TRIPS, TRIMS, anti-dumping,
movement of people, etc. remain. Other issues requiring WTO attention relate to agriculture,
textiles, industrial tariffs including peak tariffs, and services. In addition, there are what are
described as Singapore issues. These relate to: (i) rules to protect investments, (ii)
competition policy, (iii) transparency in government procurement, and (iv) trade facilitation.
WTO has now become a forum for perpetual negotiations on newer and newer subjects and for using
trade rules to establish standards and enforce compliance even in non-trade areas. Everything now seems
to require the hand of WTO, be it foreign investment, environmental or labour standards, child labour,
good governance, or human rights.
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However, a word of caution need to be sounded. WTO should not be expanded into a sort of world
government, covering every economic subject under the sun, and then using the threat of trade sanctions
to bring about a new world order.
4.8 Criticism
There are critics too of the WTO. It is believed that the WTO will emerge out destructive of biodiversity
and people’s livelihoods by encouraging over-exploitation of natural resources, creating pollution
through increasing transportation, habitat loss by infrastructure development, and so on by forcing
countries to:
i) relax export rules that prohibit or restrict the exploitation of forests, fisheries and minerals;
ii) encourage export policies that spread monoculture;
iii) relax import rules that control the unhindered dumping of all kinds of products, including
polluting and hazardous wastes;
iv) adapt intellectual property rights regimes; and
v) accept with few conditionalities, investment in several sectors by foreign firms and
industrialists with little regard for its ecological and social impacts.
To sum up, WTO has been in action for two and half decade now. During this time, the WTO has proved
that it is very different from its predecessor, GATT. GATT was toothless whereas WTO has teeth – its
disputes settlement mechanism has been an outstanding success and has brought to book even mighty
US in several cases.
4.9 India and the WTO

India is a founder-member of the WTO. India has contributed significantly to the evolution of the concept
of the WTO. In turn, India is already reaping in a big way various benefits that can be directly or indirectly
associated with the WTO.
• India experienced an unprecedented boom in exports, as did the world exports in the first decade of
the 21st century. This can be attributed, in a large measure to the WTO-induced lowering of the trade
barriers.
• India has immensely benefited from the multilateral dispute settlement system that has been set up
under the WTO. Action has been initiated against such powerful economies as the USA on disputes
involving India.
• Adoption of international standards in Intellectual Property Rights protection would enhance flow
of foreign investment and technology.
• Indian laboratories engaged in research in plant varieties and seeds for tropical regions would benefit.
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• Trade in textiles and agricultural products, in particular, would get a boost.
In short, the WTO has opened up new vistas in international economic relations for all the countries of
the world. In the opened up world, the stakes of all the countries have multiplied, and so has the degree
of rivalry and competitiveness. India, like any other country, would be on guard to save its interests and
promote them in a world which is swamped with multifold opportunities.
It is also argued that sovereignty has to be trimmed if one wants advantages from international
organizations. It is true that all international agreements set limits to the exercise of sovereignty of a
country. But this limit must be voluntary and beneficial and not forced (explicitly or implicitly). Further,
differences or discrepancies in the sovereignty to be enjoyed by members of the same organization
should not be accepted as unavoidable.
The US undoubtedly enjoys unrestricted sovereignty under the WTO as against the plight of many
developing countries. This was very clear when the panels on dispute settlement under the WTO gave
certain verdicts. When Super 301 of the US was subject to dispute under the WTO, the panel accepted
the explanation of the US that it will place administrative measures to ensure 'trade security' or 'legal
security'. While in the case of India when it pleaded for a similar approach in the case of dispute on TRIPS,
the panel argued that only amending the laws can satisfy the WTO's requirements.
The concern shown in India by various segments about the WTO are quite relevant and, in fact,
necessary. One of the major reasons for this state of affairs is the way in which the treaty
making/accepting provisions are stated in the Indian Constitution. While, there is confusion on this
score, by virtue of Article 253 of the Indian Constitution, the executive power of the union extends to
ratifying international treaties and agreements. No law has been made in India regarding the manner in
which the government shall sign or ratify international treaties, covenants, etc. Thus the executive of the
central government in India has the power to ratify the treaties.
This practice is in contrast to the one prevailing in a large number of developed and developing countries
where the treaties have to be ratified by the legislatures and in some cases by a two-thirds majority.
Further, in some countries a referendum is required to ratify international agreements that their
governments enter into. The latter approach of ratification by the legislature indeed is superior to the one
we have at present in India. This provision will provide parliament and the public an opportunity to debate
on various aspects of the agreements and their implications. Thus they become willing parties to any
decision that is to be taken. The confusions, apprehensions and fears about the WTO stems from lack of
this required consensus. This situation is made worse by the extraordinary secrecy under which the
government keeps all information. There is no transparency.
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INTERNATIONAL ECONOMIC ISSUES
FODDER MATERIAL

Contents
1 BREXIT: UK leaves the European Union .................................................................................................2
2 Multiparty Interim Appeal Arbitration Arrangement at WTO ...............................................................4
3 Taxing Global Technology Companies....................................................................................................5
4 Negative Oil Prices ..................................................................................................................................7
5 WTO Peace Clause ..................................................................................................................................8
6 Special Drawing Rights .........................................................................................................................11
7 TRIPS Flexibilities ..................................................................................................................................12
8 Bilateral Investment Treaty ..................................................................................................................14
9 Supply Chain Resilience Initiative (SCRI) ..............................................................................................17
10 Rules of Origin...................................................................................................................................18
11 Liquidity Trap ....................................................................................................................................22
12 Bitcoins..............................................................................................................................................23
1 BREXIT: UK leaves the European Union

The United Kingdom has officially left the European Union (EU) after 47 years of membership.
Background
• In 2016, a referendum took place to decide whether UK should stay in European Union. In the
referendum people decided that UK should leave EU.
• In 2017, UK formally triggered Article 50 of Lisbon treaty and began the two-year countdown of
BREXIT.
• However, due to lack of support for the BREXIT deal in the UK's parliament, multiple extensions were
sought by it.
• On 31st January 2020 UK became the first state to leave the EU and an 11-month transition period
has kicked in.
Consequences of BREXIT for the EU
• Trade distortion- Disintegration of largest single market and labor market will hugely impact trade
patterns and global value chains.
• Geopolitical standing -EU will become smaller and weaker both in economic and geopolitical terms.
It will become less united and may lead to further exit referendums e.g. GREXIT. Further it may be

less vocal and influential in dealing with global issues and loose the bargaining power. Economic crisis
may get deep with far reaching effects on EU as a regional organization.
• De-globalization- Restricting the free movement of people, goods and services may lead to increased
xenophobia and de-globalization.
• EU’s Reputation: Brexit would seriously threaten the EU’s global standing and soft power status and
its ability to play a greater role in contemporary world order.
Impact on India
Key Opportunities:
• Free Trade Agreement (FTA): India may start talks on free trade deals with Britain, EU after Brexit.
o EU and India have been negotiating a FTA since 2007. Despite growing trade between the EU
and India, talks stalled in 2013, only resuming in 2018.
o UK would be looking to develop trade relations with emerging markets from around the world
as an alternative to loss of EU's market.
o Potential sectors to benefit from an FTA between the UK and Indian include textile, machinery,
engineering goods, information technology and banking.
• Demand for Indian Labour: India’s high proportion of skilled working-age population and high growth
rate will be of particular interest for the UK.
• Service sector: India which is laying greater emphasis on innovation and high-end works could emerge
as a major source of high tech exports for the UK.
• Easy market access: India is the major Foreign Direct Investment (FDI) source for the UK because many
Indian firms have used it as a gateway to Europe.
o With the UK moving out of EU, it might offer more incentives such as tax breaks, easy
regulations and opening up markets to Indian firms to keep them attracted.
• Cheaper imports: The UK’s currency is expected to remain weaker, so it would be less expensive for
Indian firms to import from their subsidiaries in the UK.
Key Challenges
• Political Risk: It can cause regional uncertainty and the changing dynamics can potentially reverberate
to reach Asia and thus India.
• Impact of Global growth on Indian economy: India cannot be isolated from the impact from global
and regional subdued growth. Any global slowdown brought forth by Brexit could adversely affect
India’s growth in exports and manufacturing sector.

• Dual Negotiation: India’s FTA negotiation with EU, which saw an impasse on the issue of bilateral
investments, might now need a renegotiation of FTA with the union. Additionally, a separate trade
agreement with the UK might also need to be worked on.
• Currency weakness and unhedged exposure: While The Indian Rupee is primarily anchored to the
Dollar, the currency is not completely devoid of volatility, necessitating RBI’s intervention when
applicable.
Way forward
• India should fast track its negotiations on FTA with both EU and UK.
• India should look towards other countries for better access to EU market such as Germany, France,
and Italy etc.
• Indian policy toward the region should be shaped keeping in mind the new De hyphenated dynamics
of the region.
2 Multiparty Interim Appeal Arbitration Arrangement at WTO

Some members of World Trade Organization established Multi-party Interim Appeal Arbitration
Arrangement as contingency appeal arrangement for trade disputes.
About Multi-party Interim Appeal Arbitration Arrangement (MPIA)
• MPIA has been set up under Article 25 of Dispute Settlement Undertaking of WTO.
• It has been setup as WTO’s dispute settlement body has become dysfunctional, after US decided
block the appointment of judges.
• It offers arbitration outside the Appellate Body upon mutual agreement of the parties.
• Final arbitration rulings will be binding and notified to the Dispute Settlement Body (DSB), though they
will not be adopted as Appellate Body reports.
• MPIA can be used between any WTO members when WTO Appellate Body is not functional.
• The agreement has been made by the EU, Australia, Brazil, Canada, China, Chile, etc.
• India, USA are not part of the agreement of MPIA.
Dispute Settlement System of WTO
• Dispute Settlement System (DSS) is a mechanism to resolve trade disputes between member states.
It utilises both political negotiation and adjudication for dispute resolution.
• The Uruguay Round negotiations (1986-1994) culminated in the creation of the DSS and the adoption
of the Dispute Settlement Understanding (DSU) to govern trade disputes between member states.
• The DSU embodies important principles for the functioning of the DSS
o To provide stability and predictability to the multilateral trading system.
o To establish a fast, efficient, dependable and rule-oriented system to resolve disputes
• Dispute Settlement Body
o The General Council is WTO’s highest decision-making body meets as the DSB.
o It is essentially a political body and it administers rules and procedure of the DSU.
o Decisions are taken here by the reverse consensus method, that is unless there is consensus
against it.
• Appellate Body (AB)
o AB is a seven-member permanent organ that adjudicates appeals within the DSS.
o Members are appointed by the DSB for four-year terms.
o It follows the positive consensus mechanism.
• US wants a complete overhaul of the dispute resolution system and blocking appointments to AB
for two years. It considers that the body constrains its ability to counter unfair trading practices by
China and other countries.
3 Taxing Global Technology Companies

The government has expanded the scope of equalization levy to all overseas e-commerce transactions
originating from India in the amended Finance Bill 2020.
More about news
• India will levy an equalisation levy of 2% on sales made by foreign e-commerce companies in the
country. This will impact those companies that don’t have a base in India, but sell their goods here.
o Equalisation Levy is a direct tax, which is withheld at the time of payment by the service
recipient
• The levy would be imposed on those companies that have a turnover or sales of over Rs 2 crore in
the previous year.
o Also, the compliance of the levy has been shifted to the non-resident service provider.
• Now, expanded scope stretches beyond goods and services supplied to Indian residents and includes
supplies to any person using an Indian Internet Protocol (IP) address.
o For example, a foreign citizen availing services, whilst visiting India and using the Indian IP
address is also covered.
Taxing technology companies: A background
• In Finance Act, 2016, Government introduced an “equalization levy” on certain non-resident

businesses.
o It was applied at a rate of 6% on certain “specified services”—such as online advertisement
etc.
• In budget 2018, the government had proposed to get its fair share of tax from business-to-consumer
transactions by introducing the concept of Significant Economic Presence.
o The idea was to tax profits of those digital businesses that don’t have a physical presence in
India but derive significant economic value from the country.
o It was announced that SEP provisions have been deferred to April 1, 2021.
Global Scenario
• Australia—Turnover tax called digital services tax is proposed to be introduced which may be levied
on income of large multinationals providing advertising space, trading platforms, and the
transmission of data collected about users.
• New Zealand—Amazon tax is proposed to tax books and goods bought online.
• Uganda—Tax on social media wherein users of WhatsApp, Twitter, Facebook will pay a fee.
• OECD has considered the Action Plan 1 called “Addressing the tax challenges of the Digital Economy"
as part of its Base Erosion and Profit Shifting Project (BEPS).
• France has implemented tax on large technology companies with large annual global revenue called
GAFA (Google Apple Facebook Amazon) Tax.
Need for such rules
• Uniqueness of digital e-commerce model

o Under the traditional model, an MNC is liable to pay tax in the jurisdiction of its’ Permanent
Establishment or the jurisdiction where the source of income exists.
o However, digital service sectors derive the income from users located in different
jurisdictions, and in most cases, these lack a physical presence in countries where customers
are located.
• Large User Base: Foreign tech companies have a large number of users, and so a significant economic
presence (SEP) in India. This in turn leads to revenue generation through data but these companies
don’t pay appropriate taxes on this revenue.
• Revenue generation: It is being hoped that this equalization levy will generate almost $ 100 billion
worth of global taxes.
Challenges in implementation
• Nexus: Prevalence of nexus between the global tech giants and the lower tax jurisdictions.

• Data: The challenge is how to estimate the value created from the generation of data through digital
products and services.
o There seems to be no global consensus on how the global technology firms should be taxed.
• Characterisation of profits: As to how to determine and attribute profit to India operations of these
technology firms, i.e. the profit that is earned from activities in India.
• Compliances: Unlike the earlier levy (on advertising), now the foreign e-commerce operator will be
required to make compliances in India which could also raise potential challenges.
• Possible legal challenges: There are chances of legal challenges on extra-territoriality as the
provisions seeks to cover non-resident to non-resident transactions which use India data. Also, the
regulation may come in conflict with some bilateral and multilateral treaties.
o The current Double tax avoidance treaties (DTAAs) override the amended definition of
Business Connection that includes the concept of Significant Economic Presence (SEP).
Way Forward
Experts tracking the digital ecosystem have agreed that a comprehensive digital tax code which is
consistent internationally has to be the solution in the long-term. Till such an ecosystem takes shape,
continuous multi-stakeholder engagement encompassing governments as well as companies could be
adopted.
4 Negative Oil Prices

US oil markets created history on 22nd April 2020 when prices of West Texas Intermediate (WTI) crude
fell to “minus” $40.32 a barrel in New York which is lowest crude oil price ever known.
How global oil prices are determined?
• Crude oil prices like any other commodity are determined by global supply and demand.
• Growing economies are engines which generate demand for oil in general and especially for
transporting goods and materials from producers to consumers.
• On the other hand, supply of crude oil in majorly controlled by a selected countries or groupings such
as OPEC (Organization of the Petroleum Exporting Countries).
• Historically, the OPEC (led by Saudi Arabia) used to work as a cartel and fix prices in a favourable band.
It could bring down prices by increasing oil production and raise prices by cutting production.
• In the recent past, the OPEC has been working with 10 other countries (including Russia), as OPEC+,
to fix the global prices and supply.
• Thus, the stability of oil prices and its seamless operations depends on
o Predictability of the global demand of oil.
o The ability of the oil-producing countries to act in consort for maintenance of supplies.
How did oil price go in negative territory?
• The plunge in the negative territory can be attributed to both supply and demand factors:
o Supply factor: The breakdown of the OPEC+ agreement between Russia and Saudi Arabia
meant the production of oil kept increasing unchecked and subsequently lowering prices.
o Demand factor: Shutting down of travel routes and global lockdown due to Covid-19 has
drastically decreased the demand for oil which has compounded the problem.
• The continuous supply of oil accompanied with the huge demand slump has created a situation where
there is a worldwide shortage of storage space for oil. Trains and ships, which were typically used to
transport oil, are being used up just for storing oil.
• In the above background, the historic event unfolded in following manner:
o The fall in prices was triggered by the expiry of May futures contracts for US West Texas
Intermediate (WTI) crude.
▪ A futures contract is a standard contract to buy or sell a specific commodity of
standardized quality at a certain date in the future. For example, if oil producers want
to sell oil in the future, they can lock in their desired price by selling a futures contract
today. Alternatively, if consumers need to buy crude oil in the future, they can
guarantee the price they will pay at a future date by buying a futures contract.
o Each contract trades for a month and May contract was due to expire on 23rd April 2020.
o Investors holding May contracts didn’t want to take delivery of the oil and incur storage
costs.
o Oil producers on the other hand wanted to get rid of their oil even at unbelievably low prices
instead of choosing the other option — shutting production, which would have been costlier
to restart when compared to the marginal loss on May sales.
o Ultimately, for both — the holders of the delivery contract and the oil producers — it was less
costly to pay $40 a barrel and get rid of the oil instead of storing it (buyers) or stopping
production (producers).
5 WTO Peace Clause

India has invoked the peace clause of WTO for exceeding the ceiling on support it can offer farmers for
rice, marking the first time any country that has used this clause.
• India informed WTO that the value of its rice production was $43.67 billion in 2018-19 and it gave
subsidies worth $5 billion which is 11.46% of the value of production.

• However, the Agreement on Agriculture (AoA) under WTO has a limit pegged at 10% for developing
countries, which is a de-minimis level.
o De minimis level is minimal amount of domestic support that is allowed even though they
distort trade.
• Hence, India used peace clause and reasoned that:
o The government does not undertake exports on a commercial basis from public
stockholdings.
o Further, the stocks under the programme are acquired and released in order to meet the
domestic food security needs of India's poor and vulnerable population, and not to impede
commercial trade or food security of others.
Background
• After Uruguay Rounds of WTO in 1994, the Agreement on Agriculture came into existence which
provided guidance on domestic support commitments and general disciplines on domestic support.
o Under the agreement, to limit trade distorting support measures, members agreed to curb
their policies by quantifying and gradually reducing all domestic support measures through
the Aggregate Measurement of Support (AMS) or Amber box.
▪ Further, this subsidy should not exceed 10% de minimis level for developing countries
and 5% for developed countries.
o Also, an important provision of the AoA was the Due Restraint or ‘Peace Clause’ under Article
13, which temporarily shielded countries providing domestic support measures in
accordance with the AoA provisions from being challenged at the WTO.
• Peace clause was to remain in effect for a period of nine years and it lasted till 2003.
• However, G33 containing developing countries led by India found it hard to fulfill food security
commitments and hence revived the Peace Clause temporarily (interim Peace Clause) for 4 years in
Bali Ministerial Conference in 2013.
• The Nairobi Ministerial Conference of the WTO held in December 2015 reaffirmed, with consensus,
the Interim Peace Clause would remain in force until a permanent solution is agreed and adopted.
Peace Clause
• The peace clause protects a developing country’s food procurement programmes against action from
WTO members in case subsidy ceilings are breached.

• It also provides that Green Box domestic support measures cannot be the subject of countervailing
duty action or other subsidy action under the WTO Agreement on Subsidies and Countervailing
Measures.
o However, other domestic support measures which are in conformity with the provisions of the
Agreement on Agriculture may be the subject of countervailing duty actions.
• Hence, under the present ‘Peace Clause’, developing countries can provide WTO-prohibited
subsidies to farmers without inviting any dispute under the Agreement on Agriculture.
Types of Subsidies under WTO
• Green Box: It is domestic support measures that doesn’t cause trade distortion or at most causes
minimal distortion.
o Hence they don’t have any reduction commitments under Agreement on Agriculture (AoA)
o They are implemented as programmes aimed at income support to farmers without
influencing the current level of production and prices.
o They comprise of two support groups:
▪ Public services programmes: for example, research, training, marketing, promotion,
infrastructure, domestic food aid or public food security stocks etc.
▪ Direct payments to producers: which are fully decoupled from production such as
income guarantee and security programmes, regional development programmes etc.
• Blue box: These are subsidies that are tied to programmes that limit production.
o The Blue box subsidies aim to limit production by imposing production quotas or requiring
farmers to set aside part of their land.
o It covers payments directly linked to acreage or animal numbers.
o The blue box measures are exempt from reduction commitments.
• Aggregate Measurement of Support (AMS) or Amber box: It represents trade distorting domestic
support measures.
o These supports are subject to limits: “de minimis” minimal supports are allowed.
o It consists of two parts:
▪ Product-specific subsidy: total level of support provided for each individual agricultural
commodity such as MSP.
▪ Non-product specific subsidy: total level of support to the agricultural sector as a
whole, i.e., subsidies on inputs such as fertilizers, electricity, irrigation, seeds, credit
etc.
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6 Special Drawing Rights
Recently, a proposal for the International Monetary Fund (IMF) to issue additional 500 billion Special
Drawing Rights (SDR) was blocked by India and USA.
• New SDR allocation would have provided IMF members with new foreign exchange reserves with no
conditions. o The goal is to help low-income countries boost health and other fiscal spending as
coronavirus spreads. SDR allocation would have led to increase in spending power of countries.
• However, US and India blocked this proposal as:
o According to US, as SDRs are distributed in proportion to members’ quotas (shares) in the
Fund, 70% of the funds created through an SDR allocation would go to G20 countries that did
not need it, while only 3% would go to low-income countries.
o According to India, in the current context of illiquidity and flights to cash, the efficacy of an SDR
allocation is not certain.
▪ Such a major liquidity injection could produce potentially costly sideeffects if countries
used the funds for “extraneous” purposes.
About Special Drawing Right (SDR)
• SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’
official reserves.
o So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members.
• The value of the SDR is calculated from a weighted basket of 5 major currencies, including the U.S.
dollar, the Euro, Japanese yen, Chinese Renminbi, and British pound.
o SDR basket is reviewed every five years, or earlier if warranted, to ensure that the basket
reflects the relative importance of currencies in the world’s trading and financial systems.
• Technically, the SDR is neither a currency nor a claim on the IMF itself. Instead, it is a potential claim
against the currencies of IMF members.
• SDR augments international liquidity by supplementing the standard reserve currencies.
• SDR serves as the unit of account of the IMF and some other international organizations like African
Development Bank (AfDB), Bank for International Settlements (BIS) etc.
• SDRs can only be held by IMF member countries and not by individuals, investment companies, or
corporations.
• An SDR allocation is a low-cost method of adding to member nations' international reserves, allowing
members to reduce their reliance on more expensive domestic or external debt.
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• SDRs are used by the IMF to make emergency loans and are used by developing nations to shore up
their currency reserves without the need to borrow at high-interest rates or run current account
surpluses at the detriment of economic growth.
How are SDRs used?
• Under the Articles of Agreement, when certain conditions are met, the IMF may allocate SDRs to
members in proportion to their quotas (known as a general allocation).
• Once allocated, members can hold their SDRs as part of their international reserves or sell part or all
of their SDR allocations.
• Members can exchange SDRs for freely usable currencies among themselves and with prescribed
holders; such exchange can take place under a voluntary arrangement or under designation by the
Fund.
• IMF members can also use SDRs in operations and transactions involving the IMF, such as the payment
of interest on and repayment of loans, or payment for future quota increases.
Other Financing methods used by IMF apart from SDR
• Rapid Credit Facility (RCF) provides rapid concessional financial assistance with limited conditionality
to low-income countries (LICs) facing an urgent balance of payments need.
o It was created under the Poverty Reduction and Growth Trust (PRGT).
o It places emphasis on the country’s poverty reduction and growth objectives.
• Rapid Financing Instrument (RFI) provides support to meet a broad range of urgent needs, including
those arising from commodity price shocks, natural disasters, conflict and post-conflict situations, and
emergencies resulting from fragility.
• Catastrophe Containment and Relief Trust (CCRT) allows the IMF to provide grants for debt relief for
the poorest and most vulnerable countries hit by catastrophic natural disasters or public health
disasters.
o It was established in February 2015 during the Ebola outbreak and modified in March 2020 in
response to the COVID-19 pandemic.
7 TRIPS Flexibilities
India has asked the G20 members to work on an agreement that would enable countries to use the
flexibilities under TRIPs.
• India called for an agreement to enable the use of TRIPS (Trade Related Intellectual Property Rights)
flexibilities to ensure access to essential medicines, treatments and vaccines at affordable prices.
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o India uses these flexibilities under Patent Act, 1970 for the public health and emergency
purposes.
• The reason for which India is asking for such an agreement is will make possible for nations to issue
compulsory licenses to make generic copies of essential patented medicines that could be made
available to people at prices much lower than the patented versions.
About TRIPS Flexibilities
• TRIPS flexibilities are ‘policy spaces’ for countries to mitigate the impact of patents (i.e., the
excessively high price of patented medicines due to lack of competition).
• TRIPs agreement and subsequent Doha Declaration on TRIPS and Public Health of 2001 provide some
flexibilities in this regard.
• Flexibilities aim to permit developing and least-developed countries to use TRIPS-compatible norms
in a manner that enables them to pursue
o their own public policies, either in specific fields like access to pharmaceutical products or
protection of their biodiversity,
o in establishing macroeconomic, institutional conditions that support economic development.
• Some major flexibilities under TRIPs are:
o Compulsory Licensing: Compulsory licensing enables a competent government authority to
license the use of a patented invention to a third party or government agency without the
consent of the patent-holder
o Parallel importation: It is importation without the consent of the patent-holder of a patented
product marketed in another country either by the patent holder or with the patent-holder’s
consent.
▪ It enables access to affordable medicines because there are substantial price
differences between the same pharmaceutical product sold in different markets.
o Exemptions from patentability: The agreement does not require the patenting of new uses of
known products including pharmaceuticals and permits countries to deny protection for such
uses of lack of novelty, inventive step or industrial applicability.
o Limits on Data Protection: As a condition for permitting the sale or marketing of a
pharmaceutical product, drug regulatory authorities require pharmaceutical companies to
submit data demonstrating the safety, quality and efficacy of the product.
▪ The TRIPS Agreement requires that WTO Members protect undisclosed test data,
submitted to drug regulatory authorities for the purposes of obtaining marketing
approval, against unfair commercial use.
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▪ However, some limits are allowed to use the data for the generation of generic drugs
for public health.
o Extension of transition period for Least-Developed Countries (LDCs): The amendment to
Doha Declaration extended the transition period for LDCs for implementation of the TRIPS
obligations to 2021.
About TRIPS Agreement
• The TRIPS Agreement, which came into effect in 1995, is the most comprehensive multilateral
agreement on intellectual property.
• It was negotiated between 1986 and 1994 during the Uruguay Round of the General Agreement on
Tariffs and Trade (GATT), which led to the establishment of the World Trade Organization (WTO).
• It sets out the minimum standards of protection to be provided by each Member.
o Agreement is in line with the main conventions of the WIPO, the Paris Convention for the
Protection of Industrial Property (Paris Convention) and the Berne Convention for the
Protection of Literary and Artistic Works (Berne Convention).
• It contains provisions on civil and administrative procedures and remedies, provisional measures,
special requirements related to border measures and criminal procedures.
• The Agreement makes disputes between WTO Members about the respect of the TRIPS obligations
subject to the WTO's dispute settlement procedures.
• The areas of intellectual property that it covers are:
o copyright and related rights,
o trademarks,
o geographical indications,
o industrial designs,
o new varieties of plants;
o layout-designs of integrated circuit,
o trade secrets and test data.
• Membership in the WTO includes an obligation to comply with the TRIPS Agreement.
8 Bilateral Investment Treaty

As India attempts to attract investments, there have been calls to review India’s model Bilateral
Investment Treaty (BIT) 2016.
About Bilateral Investment Treaty (BIT)
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• Bilateral investment treaties (BITs) are treaties between two countries aimed at protecting
investments made by investors of both countries.
• These treaties impose conditions on the regulatory behaviour of the host state and limit interference
with the rights of the foreign investor.
• Some of these conditions include,
o Restricting host state from expropriating (take property from owner) investments, barring for
public interest with adequate compensation;
o Imposing obligations on host states to accord Fair and Equitable Treatment (FET) to foreign
investment.
o Allowing for transfer of funds subject to conditions given in the treaty.
o Allowing individual investors to bring cases against host states if the latter’s sovereign
regulatory measures are not consistent with the BIT.
• There is International Centre for Settlement of Disputes (ICSID) under investor-state dispute
settlement (ISDS) mechanism for dispute redressal between international investors.
India and BIT
• India started signing BITs in early 1990s and signed the first BIT with the United Kingdom (UK) in
1994, since then India has signed BITs with 84 countries.
• BITs have been one the major drivers of FDI inflows into India. Total FDI to India has increased from
$4,029 million in 2000-2001 to $43,478 in 2016-17.
• However, a penalty awarded by an Investor-State Dispute Settlement (ISDS) tribunal in the White
Industries case in 2011, and subsequent ISDS notices served against India in a wide variety of cases
involving regulatory measures led to a review of the BITs.
• Thus, India adopted new model BIT in 2016, moving somewhat to a protectionist approach
concerning foreign investments. This model BIT is to serve as a framework for the renegotiation of
India's BITs worldwide.
• Since its adoption, India has unilaterally terminated 66-odd BITs between 2016 and 2019. Since then,
India has signed just three treaties, none of which is in force yet.
Key features and concerns in India model BIT 2016
• Definition of Investment in the Model BIT has moved away from a broad asset-based definition of
investment to an enterprise-based definition where an enterprise is taken together with its assets.
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o Concerns: Definition contains vague criteria such as the requirement of enterprises to satisfy
‘certain duration’ of existence without specifying how much, or, investments having
‘significance for development’ without specifying what amounts to ‘significant’ contribution.
o It heavily narrows down the definition of “investment” needed to qualify for BIT protection.
• Most Favoured Nation (MFN): MFN provision in BIT aims to create a level-playing field for all foreign
investors by prohibiting the host state from discriminating against investors from different
countries.
o India’s model BIT completely excludes the MFN clause to prevent foreign investors from
taking advantage of provisions in other BITs by ‘borrowing’ them through the MFN clause.
o Concern: Not having an MFN provision in the BIT means exposing foreign investment to the
risk of discriminatory treatment, which could offer preferential treatment to one foreign
investor over other.
• Fair and Equitable Treatment (FET): It means that the foreign investor is protected against
unacceptable measures of the host state by rules of international law which are independent of those
of the host state.
o The 2016 Model BIT does not contain an FET provision because ISDS tribunals often interpret
this provision too broadly. Instead, it contains a provision entitled ‘Treatment of Investments’
that prohibits country from subjecting foreign investments to measures that constitute a
violation of customary international law.
o Concern: It narrows down the scope of protection available to foreign investors because of
ambiguity in regarding how such breach will it be determined.
• ISDS Mechanism: In 2016 Model BIT, India has qualified its consent to ISDS by requiring that a foreign
investor should first exhaust local remedies at least for a period of five years before commencing
international arbitration.
o Concern: According to the ‘Ease of Doing Business 2020’ report, India currently ranks 163 out
of 190 countries in ease of enforcing contracts, and it takes 1,445 days and 31% of the claim
value for dispute resolution. This reduces confidence in foreign investors.
Way Forward
• As per studies, there is evidence that BIT regime in India has played an important role in attracting
foreign investment. Thus, having a balanced BIT regime would help foreign investors to do business
easier in India without due regulatory interventions to safeguard their investment.
• India is not just an importer but also an exporter of capital, hence protectionist provisions under BIT
may be reciprocated in host state and reduce protection for Indian companies abroad.
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• Significance of BITs for foreign investors in India also assumes importance due to larger goals of India
for good governance and strengthening of rule of law.
• India’s desire to increase foreign investment inflows, especially under projects like Make in India and
liberalisation policies needs to adopt a more balanced approach in the BIT model.
• Also, to meet objective of making domestic firms competitive and mobile in the value chain, as
envisaged in the Atmanirbhar Bharat package, there is need for favourable decisions on FDIs.
• Now, global companies are moving their investments away from China, thus, there is an opportunity
to review the BIT model from protectionist approach to a more pragmatic one.
9 Supply Chain Resilience Initiative (SCRI)

Global supply chains are networks that can span across multiple continents and countries for the purpose
of sourcing and supplying goods and services.
Global supply chains involve the flow of information, processes and resources across the globe.
Recently, Trade ministers of India, Australia, and Japan decided to launch an initiative on supply chain
resilience (it was first proposed by Japan) and invited like-minded countries in the Indo-Pacific region to
join the initiative.
About SCRI
• It is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of
supplying nations instead of being dependent on just one or a few.
• Unanticipated events — whether natural, such as tsunamis, earthquakes or even a pandemic; or
manmade, such as an armed conflict in a region — that disrupt supplies from a particular country or
even intentional halts to trade, could adversely impact economic activity in the destination country.
• Objective is to-
o Attract foreign direct investment to turn the Indo-Pacific into an economic powerhouse.
o Build a mutually complementary relationship among partner countries.
Why focus on SCRI?
• COVID-19 Impact: If supply chains are heavily dependent on supplies from one country, the impact on
importing nations could be crippling if that source stops production for involuntary reasons, or even
as a conscious measure of economic coercion.
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• U.S.-China trade tensions: It could threaten globalization as a whole and have a major impact on
countries like India, Japan and Australia which are heavily reliant on international trade both for
markets for its exports and for supplies of a range of primary goods.
• Managing supply of inputs: Diversification of supply chain is critical for managing the risks associated
with supply of inputs and will help to cohesively react to adverse events faster and also to disciplining
price volatility.
• Fraying trade and diplomatic relations with China: India restricted some Chinese imports and banned
several Chinese apps after a deadly border clash. In Australia, exports like beef, barley and now wine
has been targeted by China amid deteriorating ties between the two nations.
• Enhanced cooperation among partner countries: In 2019, cumulative GDP of 3 countries was $9.3
trillion, and their merchandise goods and services trade was $2.7 trillion and $0.9 trillion, respectively.
• Initiate rechurning of supply chains in Indo-Pacific region: SCRI can work with Association of South
East Asian Nations (ASEAN) to build stronger supply and manufacturing chains that are protected from
external shocks and influences.
10 Rules of Origin
The Department of Revenue has recently notified the 'Customs (Administration of Rules of Origin under
Trade Agreements) Rules, 2020' which would come into force on September 21, 2020.
What are Rules of Origin?
• These are the criteria prescribed to determine the national origin of an imported product in a country.
• These are mainly used:
o to implement measures and instruments of commercial policy such as anti-dumping duties and
safeguard measures;
o to determine whether imported products shall receive most-favoured-nation (MFN) treatment
or preferential treatment;
o for the purpose of trade statistics;
o for the application of labelling and marking requirements; and
o for government procurement.
• Rules of Origin are primarily of two types:
o Non-preferential rules of origin: These apply in the absence of any trade preference, where
certain trade policy measures such as quotas, anti-dumping or “made in” labels may require a
determination of origin.
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o Preferential rules or origin: These apply in reciprocal trade preferences (i.e. regional trade
agreements or customs unions) or in non-reciprocal trade preferences (i.e. preferences in
favour of developing countries or least-developed countries (LDCs)).
▪ Each trade agreement has its own set of Rules of Origin that is agreed upon by involved
nations, which includes guidelines for issuing a legitimate Certificate of Origin (CO).
▪ Preferential rules of origin are more restrictive than nonpreferential ones.
• Criteria commonly used to determine the country of origin of goods:
o Wholly obtained criterion: These include goods produced or obtained in a given country
without incorporation of any input material from other country.
o Substantial/sufficient transformation criterion: Under it goods are required to undergo
substantial transformation in a country for the good to be qualified as originating. Some
methods used, in combination or standalone, to meet this criteria are-
▪ Value Content Method: A good is considered substantially transformed when the value
added of a good in a country increases up to a specified level.
▪ Change in Tariff Classification (CTC) Method: A good is considered substantially
transformed when the good is classified in a heading or subheading different from all
non originating materials used.
▪ Process Rule Method: A good is considered substantially transformed when the good
has undergone specified manufacturing or processing operations.
o De minimis or tolerance rule: It permits a specific share of the value or volume of the final
product to be non-originating without the final product loosing its originating status.
Significance of ROO
• Addressing trade distorting practices: Determination of product origin is essential to implement trade
policy measures in a country for purposes like
o correcting “unfair trade” (e.g. imposition of anti-dumping or countervailing duties against
imported products causing material injury to domestic industry)
o protecting local industry (e.g. safeguard measures to protect against an unforeseen increase
of imported products causing serious injury to a specific domestic industry).
• Ensuring effectiveness of Trade Agreements: Stringent rules of origin can check the wrongful practice
of availing concessional customs duty by routing exports to India through preferential trade countries.
• Transparency in customs procedures: Rules of origin make it clear for the businesses in India and
abroad to know the exact procedures that would be adopted for custom clearance.
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• Implementing environmental or sanitary measures: For e.g. preventing the import of contaminated
foodstuff or plants from a specific country or import of nuclear and hazardous material and their
waste.
• Administering “buy national” policies: for adjusting balance of payment with specific countries.
• Ensuring national security or political policy: by controlling trade in strategic weapons or specific
products to which sanctions are applied.
About Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020 (CAROTAR,
2020)
• These rules will be applicable on import of goods into India where the importer makes claim of
preferential rate of duty in terms of a trade agreement (TA).
• CAROTAR, 2020 aims to supplement the operational certification procedures related to
implementation of the Rules of Origin, as prescribed under the respective TAs of India viz. Free Trade
Agreement (FTA), Preferential Trade Agreement (PTA), Comprehensive Economic Cooperation
Agreement (CECA), Comprehensive Economic Partnership Agreement (CEPA) etc.
• Key Provisions:
o To claim preferential rate of duty under a TA, the importer, at the time of filing bill of entry,
has to-
▪ make a declaration in the bill that the imported products qualify as originating goods
for preferential rate of duty under that agreement.
▪ produce certificate of origin (CO).
o The claim of preferential rate of duty may be denied by the proper officer without verification
if the CO-
▪ Is incomplete or
▪ has any alteration not authenticated by the issuing authority or
▪ has expired.
o The importer also has to submit all relevant information related to country of origin criteria,
including the regional value content.
o An officer may, during the course of customs clearance or thereafter, request for verification
of CO from verification authority where there is a doubt regarding genuineness or authenticity
of the certificate.
World Trade Organization’s Agreement on Rules of Origin
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• The agreement aims at long-term harmonization of non preferential rules of origin and to ensure that
such rules do not themselves create unnecessary obstacles to trade.
• It sets out a work programme for the harmonization of rules of origin, negotiations for which are still
ongoing. For this process two institutions were established:
o A Committee on Rules of Origin within the framework of the WTO, open to all WTO Members.
o A Technical Committee on Rules of Origin, created under the auspices of the World Customs
Organization.
• The agreement also provides general principles for prescribing rules of origins, such as transparency,
positive standards, administrative assessments, judicial review etc., which shall also apply to
preferential rules of origin.
Concerns related to Rules of Origin
• Effect on international trade flows: Rules of origins and related procedures be used as instruments to
reinforce protectionist tendencies.
• Restrictive origin regulations can affect investment flows: since they might lead to excessive
investments in the territories of major importers to satisfy local content requirements to meet the
origin criteria.
• Increased administrative burdens: Strict regulations can make it difficult for genuine importers to avail
the benefits of trade agreements.
• High cost of trade: Studies have revealed that origin certificates cost about 5% of the goods’ value.
• Lack of Uniformity: WTO’s General Agreement on Tariffs and Trade (GATT) has no specific rules
governing the determination of the country of origin of goods in international commerce. Each
contracting party of a trade agreement is free to determine its own origin rules.
Conclusion
• The rules of origin enable the preferential agreements to be correctly implemented, which promotes
the development of trade and encourages investment. Measures that can ensure their productive use
include:
• Clearly defined terms and procedures, where any changes are published promptly
• Ensuring that they do not create restrictive, distorting or disruptive effects on international trade and
do not require the fulfilment of conditions not related to manufacturing or processing of the product
in question
• Administering the rules in a consistent, uniform, impartial and reasonable manner
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• Facilitating review of any administrative action in relation to the determination of origin by judicial,
arbitral or administrative tribunals.
• Non-disclosure of confidential information without the specific permission of the person providing
such information.
11 Liquidity Trap
Recently, the IMF economist Gita Gopinath stated that the global economy may be heading towards a
liquidity trap.
What is a Liquidity Trap?
A liquidity trap is a contradictory economic situation in which interest rates are very low and savings rates
are high, rendering monetary policy ineffective. It leads to a scenario where any additional money supply
that is generated in the economy get channeled towards savings rather than investment thus rendering
the economy to remain at same liquidity level.
Is the global economy stuck in a liquidity trap?
The economic situation created by the pandemic has led to following developments which indicate
towards a liquidity trap:
• Very low interest rates: 60 per cent of the global economy -- including 97 per cent of advanced
economies -- central banks have pushed policy interest rates below 1 percent. In one-fifth of the
world, they are negative. As a result, central banks have little room to further cut interest rates if
another shock strikes.
• Global demand still sluggish: Despite the extremely low interest rates, the global demand is still
sluggish due to the impact of the COVID-19 pandemic.
• Threat of a potential currency war: Due to decrease in interest rates, money supply around the world
would increase which can potentially trigger a currency war due sliding exchange rates in the trading
arena.
• Effects reaching the developing world: Generally, the developing countries are unlikely to develop this
problem due to high average interest rates. But recently, developing countries like Peru and Chile have
almost brought the borrowing costs to zero due to their crashing economies, thus signaling a liquidity
trap.
Should India worry?
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The second-order effects of lockdown in India could later see demand slump again to drag India’s
economy down. In this context, we risk slipping into a liquidity trap if inflation fails to fall below 6% within
a quarter or so, as projected by the RBI. (As the policy rates have been brought close to 4%) This calls for
a circumspect approach on part of India with regard to its fiscal as well as monetary policy.
What could be done as remedial measures?
• Global synchronized fiscal push: Fiscal authorities can actively support demand through cash transfers
to support consumption and large-scale investment in medical facilities, digital infrastructure and
environment protection.
• Coordination and collective easing of the monetary policy: Increased global coordination can
potentially deter a global deflationary path which may lead to prolonged recession. This would be akin
to the Quantitative Easing (QE) measures which were initiated by US.
• Revisiting global economic arrangements: Reevaluating the global arrangements like trade
agreements and global supply changes could help better invest the calibrate the available liquidity.
12 Bitcoins
Recently, Bitcoin, the cryptocurrency, has crossed 20,000 US dollars in value.
• Bitcoin's price has always been volatile, and there is no clear explanation for its current rise.
• Cryptocurrency is a specific type of virtual currency, which is decentralised and protected by
cryptographic encryption techniques.
o Bitcoin, Ethereum, Ripple are a few notable examples of cryptocurrencies.
• Bitcoin is a type of digital currency that enables instant payments to anyone. Bitcoin was introduced
in 2009. Bitcoin is based on an open-source protocol and is not issued by any central authority.
• The origin of Bitcoin is unclear, as is who founded it. A person, or a group of people, who went by the
identity of Satoshi Nakamoto are said to have conceptualised an accounting system in the aftermath
of the 2008 financial crisis.
• Originally, Bitcoin was intended to provide an alternative to fiat money and become a universally
accepted medium of exchange directly between two involved parties.
• Record of Bitcoin
o All the transactions ever made are contained in a publicly available, open ledger, although in
an anonymous and an encrypted form called a blockchain.
▪ Transactions can be denominated in sub-units of a Bitcoin.
▪ Satoshi is the smallest fraction of a Bitcoin.
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o Blockchain is a shared, immutable ledger that facilitates the process of recording transactions
and tracking assets in a business network.
▪ An asset can be tangible (a house, car, cash, land) or intangible (intellectual property,
patents, copyrights, branding).
o Virtually anything of value can be tracked and traded on a blockchain network, reducing risk
and cutting costs for all involved.
▪A simple analogy for understanding blockchain technology is a Google Doc.
▪When one creates a document and shares it with a group of people, the document is
distributed instead of copied or transferred.
▪ This creates a decentralized distribution chain that gives everyone access to the
document at the same time.
o It needs to be noted that other usage and applications of Blockchain technology have emerged
in the last few years.
▪ The government of Andhra Pradesh and Telangana have put the land records on the
blockchain technology owing to its easy traceability feature.
▪ Election Commission (EC) officials are exploring the potential of using blockchain
technology to enable remote voting.
• Acquiring Bitcoins:
o One can either mine a new Bitcoin if they have the computing capacity, purchase them via
exchanges, or acquire them in over-the-counter, person-to-person transactions.
o Miners are the people who validate a Bitcoin transaction and secure the network with their
hardware.
▪ The Bitcoin protocol is designed in such a way that new Bitcoins are created at a fixed
rate.
▪ No developer has the power to manipulate the system to increase their profits.
▪ One unique aspect of Bitcoin is that only 21 million units will ever be created.
o A Bitcoin exchange functions like a bank where a person buys and sells Bitcoins with
traditional currency. Depending on the demand and supply, the price of a Bitcoin keeps
fluctuating.
• Bitcoin Regulation:
o The supply of bitcoins is regulated by software and the agreement of users of the system and
cannot be manipulated by any government, bank, organisation or individual.
o Bitcoin was intended to come across as a global decentralised currency, any central authority
regulating it would effectively defeat that purpose.
o It needs to be noted that multiple governments across the world are investing in developing
Central Bank Digital Currencies (CBDCs), which are digital versions of national currencies.
• Legitimacy of Bitcoins (or cryptocurrencies) in India:
o In the 2018-19 budget speech, the Finance Minister announced that the government does not
consider cryptocurrencies as legal tender and will take all measures to eliminate their use in
financing illegitimate activities or as a part of the payment system.
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o In April 2018, Reserve Bank of India (RBI) notified that entities regulated by it should not deal
in virtual currencies or provide services for facilitating any person or entity in dealing with or
settling virtual currencies.
▪ However, the Supreme Court struck down the ban on trading of virtual currencies
(VC) in India, which was imposed by the RBI.
o The Supreme Court has held that cryptocurrencies are in the nature of commodities and
hence they can not be banned.
• Possible Reasons for the Rise in the Value of the Bitcoin:
o Increased acceptance during the pandemic.
o Global legitimacy from large players like payments firm PayPal, and Indian lenders like State
Bank of India, ICICI Bank, HDFC Bank and Yes Bank.
o Some pension funds and insurance funds are investing in Bitcoins.
• Cons of Cryptocurrency
o IT CAN BE DIFFICULT TO COMPREHEND: Perhaps the most challenging obstacle in terms of
large-scale adoption of the various cryptocurrency options, is that it can be a difficult subject
to comprehend. The very idea of a decentralized financial system that is stored via blockchain
can be challenging, especially if you’re not tech-savvy. Due to the fact that it seems
occasionally incomprehensible, people are proving to be very wary taking advantage of the
benefits that it can offer, and that appears to be the last hurdle that digital currency advocates
will need to tackle if they want to see wider use.
o CHALLENGES OF MARKET FLUCTUATIONS: There are a variety ways that you can use
cryptocurrencies, but the majority of people using them at the moment are simply using them
as an investment. While the more eager users are using their digital currency to buy tickets to
sporting events, gamble online, or even buy a house with bitcoin, most are simply waiting for
the dramatic market fluctuations to work in their favor. Treating your bitcoins as you would
any other commodity may be the way to initiate a more widespread understanding and trust
in the new currencies.
o NO SECURITY IN CASE OF LOSS: As with every emerging technology, there are those that use
naivety and inexperience to scam, cheat and steal your hard-earned money. This has certainly
proven to be the case with digital currencies, so it’s important to be aware of the safety risks.
Treating your bitcoins as real money will get you in the right frame of mind, as you simply have
to follow standard security protocol as you would with hard currency. For those using
cryptocurrency to buy, sell or gamble online, simply be as careful as you would with any
investment. For online casinos, look out for the old tricks updated to the digital age, and don’t
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trust companies that offer unrealistic bonuses, odds, and offers. With a little basic security,
you can minimize your chances of making a loss that can never be returned.
• Pros of Cryptocurrency
o UNPARALLELED TRANSPARENCY: This is one of the major reasons why digital currency offers
much more potential for societal change and accountability. While the use of cryptocurrency
is anonymous, the transactions themselves are all stored on an open ledger (the blockchain).
This means that the data is available to view by anyone at any time, and that’s a major boon
for those wishing for a more transparent banking system. It is because of this transparency
that bitcoin is considered one of the hottest topics in world currency.
o INSTANT AND 24-HOUR ACCESSIBILITY: It is possible to spend or buy wherever you are, and
you don’t even need a computer to use it. Everything can be managed on your mobile device,
meaning that even for those with little in the way of technology, they are still able to access
their finances and make decisions in real time. This accessibility is a key feature for the
adoption of bitcoin, and is being used across the world to provide opportunities for those who
would previously have struggled to become online consumers.
o ABSOLUTE ANONYMITY (this can also be a con): Having an unregulated currency that is not
bound by customs adjustments and fluctuating political changes is a positive and a negative.
Cryptocurrency is completely anonymous, which is great for those that value their online
privacy and are wary of handing over too much of their digital data. While the additional layer
of security that anonymity provides is an excellent benefit, it has also led to the inevitable
adoption of the technology by the criminal fraternity. The black market and the dark web are
big users of cryptocurrency, and criminals obviously value their anonymity as much as they
value the ability to send vast sums of money anywhere in the world with a few taps of their
phone. For more law-abiding citizens, the benefits of anonymity are many, but perhaps the
most enticing is the fact that there is no chance of identity theft, and that’s of major interest
to anyone looking for more secure ways to remain online safely.
Every budding technology will have a degree of uncertainty about the future, and cryptocurrency is no
different. While the popularity is growing, and businesses race to keep up with growing demand for its
use, it may be too early to know just how big of an impact cryptocurrency will have. As a potential financial
revolution, it’s worth keeping an eye on, and maybe investing in now before interest spreads worldwide.
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MEASUREMENT OF GROWTH: NATIONAL
INCOME & PER CAPITA INCOME
FODDER MATERIAL

Contents
1 Economic Growth and Economic Development ....................................................................................3
1.1 Meaning of Economic Growth ........................................................................................................3
1.2 Meaning of Economic Development ..............................................................................................7
1.3 Distinction between Growth & Development ................................................................................8
2 Factors Affecting Economic Growth .....................................................................................................12
2.1 Natural Resources .........................................................................................................................12
2.2 Capital Accumulation ....................................................................................................................13
2.3 Technological Progress .................................................................................................................14
2.4 Population .....................................................................................................................................14
2.5 Other Factors ................................................................................................................................14
3 Indicators and Measures of Development ...........................................................................................15
3.1 Gross National Product & Gross Domestic Product .....................................................................15
3.2 Gross Domestic Product (Purchasing Power Parity) .....................................................................15
3.3 Human Development Index ..........................................................................................................16
3.4 HDI & Its Relevance .......................................................................................................................16
3.4.1 Critical Comments on the HDI ...............................................................................................17
4 Alternate Measures of Economic Development ..................................................................................20
4.1 Need for Alternate Measures .......................................................................................................20
4.2 Human Poverty Index....................................................................................................................20
4.3 Inequality-adjusted HDI ................................................................................................................21
4.4 Gender Related Indices .................................................................................................................21
4.4.1 Gender Related Development Index (GDI) ............................................................................22
4.4.2 Gender Inequality Index ........................................................................................................22
4.4.3 Separate Male and Female HDI .............................................................................................22
4.4.4 Gender Gap Measure ............................................................................................................22
4.4.5 Gender Empowerment Measure ...........................................................................................22
5 Inclusive Growth ...................................................................................................................................25
5.1 Concept of Inclusive Growth .........................................................................................................25
5.2 Elements of Inclusive Growth .......................................................................................................26
5.2.1 Skill Development ..................................................................................................................26
5.2.2 Financial Inclusion..................................................................................................................26
5.2.3 Technological Advancement..................................................................................................26
5.2.4 Economic Growth ..................................................................................................................27
5.2.5 Social Development ...............................................................................................................27
5.3 Sustainable Economic Growth and Inclusive Growth ...................................................................27
5.4 Human Development and Inclusive Growth .................................................................................27
5.5 Dimensions of Inclusive Growth ...................................................................................................28
5.6 Challenges in Achieving Inclusive Growth ....................................................................................28
5.6.1 Poverty ...................................................................................................................................28
5.6.2 Unemployment ......................................................................................................................29
5.6.3 Agriculture Backwardness .....................................................................................................29
5.6.4 Issues with Social Development ............................................................................................29
5.6.5 Regional Disparities ...............................................................................................................30
5.7 Measuring Inclusive Growth .........................................................................................................30
5.8 Strategies for Inclusive Growth.....................................................................................................32
5.9 Measures Taken India to Achieve Inclusive Growth .....................................................................33
1 Economic Growth and Economic Development
1.1 Meaning of Economic Growth

Economic growth is quite modern phenomenon. For instance, consider the growth rate of world leading
industrial countries over the past four centuries. During the period 1580-1820, the Netherlands was the
leading industrial nation it experienced an average annual growth in real GDP per worker hour of roughly
0.2 percent. The United Kingdom (UK), the other leading country experienced an annual growth of 1.2
percent during the period approximately 1820-1890. Since 1890, the United States of America (USA) is
considered to have usurped the leaders’ seat, and its average growth rate during the period 1890-1989
was a relatively dramatic 2.2 percent a year. Clearly, by today’s standard even the fastest growing
economy two centuries ago would be considered practically stagnant. According to one estimate, even
the modest 2 percent growth, a nation’s per capita Gross domestic product (GDP) doubles in 35 years.
It shows the enormous potential that economic growth carries if sustained.
Economic growth is the increase in the market value of goods and services produced by an economy
over time. It is conventionally calculated as the percent rate of increase in real GDP. In economics,
economic growth theory typically refers to growth of potential output i.e. production at full
employment. As an area of study, economic growth generally distinguished from economic
development, the former generally refers to the increase in per capita income while latter tries to focus
on quantitative as well as qualitative changes in nation’s life during the economic advancement.
According to Kindleberger, “economic growth means more output, while economic development implies

both more output and changes in the technical and institutional arrangement by which it is produced
and distributed. Growth not only involves more output derived from higher amounts of input but also
refers greater efficiency i.e. an increase in output per unit of input. Development goes beyond this to
imply changes in the composition of output and in the allocation of inputs by sectors.”
OECD Economic Outlook (December 2020)

Released by- Organisation for Economic Co-operation and Development (OECD)
About the report-
• It is the OECD’s twice-yearly analysis of the major economic trends and prospects for the next
two years.
• It puts forward a consistent set of projections for output, employment, government spending,
prices and current balances based on a review of each member country.
Key findings-
Global-
• The world economy will bounce back to its pre-pandemic levels by the end of year 2021.
• It predicts the global economy will shrink about 4.2% in year 2020 and rebound by 4.2% in 2021
before growing 3.7% in year 2022.
• China is likely to be the only major economy to escape a contraction this year, with its economy
growing by 1.8% and then surging by 8.0% in 2021.
• US economy will contract by 3.7% in 2020, but is only likely to manage 3.2% growth in 2021.
• The eurozone will contract by 7.5% in 2020, and is expected to grow by 3.6% in 2021.
• Japan is expected to contract by 5.3% in 2020 followed by a 2.3% rise in 2021.
India-
• OECD marginally revised upward its GDP forecast for India to a contraction of 9.9% for FY21
from a 10.2% dip projected in September.
• Indian economy is expected to experience a rebound of 7.9% and 4.8% in FY 2021-22 and FY
2022-23.
• Indian economy recorded the deepest GDP contraction among G20 economies in the June
quarter at 23.9%.
World Economic Outlook (WEO), October 2020: A Long and Difficult Ascent
Released by- International Monetary Fund (IMF). This is the bi-annual report.
About the report-
• It presents the analyses of global economic developments during the near and medium term.

Key findings-Global-
• Gross domestic product (GDP) projections-
o World economy is projected to contract by 4.4% in fiscal year 2020, a less severe
contraction than forecast in the June 2020 WEO Update which was 4.9%.
o World economy is projected to expand by 5.2% in fiscal year 2021 (lower than the June
2020 projections).
o After 2021, global growth is expected to gradually slow to about 3.5% in the medium
term.
o Global growth is assumed to progressively decline from 3.7% in 2021 to 2.1% in 2050.
• Along with depressed growth for the medium term, the stock of sovereign debt is expected to
increase.
• China is the only country, among the major economies, to show a positive growth rate of 1.9%
in 2020.
• Here is the latest WEO growth projections-
• The cumulative loss in output relative to the pre-pandemic projected path is projected to grow
from 11 trillion in 2020-21 to 28 trillion during the period of 2020-25.

• Close to 90 million people could fall below the $1.90 a day income threshold of extreme
deprivation in fiscal year 2020.
• Global fiscal support of around $12 trillion and measures such as rate cuts, asset purchases
and liquidity injections by central banks protected lives and livelihoods and “prevented a
financial catastrophe”.
• Actions required-
o There is a need for greater international collaboration on tests, treatments and vaccines.
✓ If these are made available faster than accounted for in the IMF mode’s baseline
scenario, it could mean an increase in global cumulative income by $ 9 trillion
by the end of 2025.
o Policies should aid workers’ transition to growing sectors (e.g. e-commerce) and away
from sectors like travel which are likely to shrink.
• Carbon emissions-
o China and India were significant emitters and were expected to continue to account for
growing shares of carbon emissions.
o China remains a key driver of emission growth.
India-
• Gross domestic product (GDP) projections-
o Indian economy is projected to contract by 10.3% in fiscal year 2020-21, a downgrade
of -5.8% from contraction of 4.5%, as projected by IMF in June 2020.
o Indian economy is projected to expand by 8.8% in fiscal year 2021-22, an upgrade of
2.8% from 6% forecasted in the June 2020 projections.
o The 2nd-quarter GDP (the first quarter in terms of the fiscal year 2020-21) was weaker
than projected as domestic demand plunged following a very sharp compression in
consumption and a collapse in investment.
✓ India’s GDP contracted 23.9% in June quarter, making it the worst performer
among the G20 economies.
• Consumer prices are expected to grow at 4.9% in year 2020 and 3.7% in 2021.
• Current account balance is projected to grow by 0.3% in 2020 and -0.9% (i.e., a contraction) in
2021.
• India’s retail inflation rose to an eight-month high of 7.34% in September, pushed up by the
double-digit food inflation.
• India is among those likely to suffer the greatest damage from global warming, reflecting its
initially high temperatures.

• For India, the net gains from climate change mitigation-relative to inaction-would be up to 60-
80% of GDP by year 2100.
1.2 Meaning of Economic Development

Economic Development refers to a country’s concerted use of its natural and human resources so as to
attain a high level of National and Per Capita Income and reduce, if not remove, hunger, malnutrition,
inequality, poverty, unemployment and other such economic maladies. It comes from the French word
developer (to unfold) and means the general unfolding or blossoming of a country’s prospects towards
tangible material welfare.
Economic development is not a matter of the level of achievement but rather the progress or movement
towards it.
It is an ongoing process rather than a final state. No country, however rich or advanced can ever be said
to have reached a perfect or ultimate level. It can always aspire higher. Even when a substantial material
welfare has been achieved in the country, it can achieve more in terms of non-material but economically
important values such as self-esteem and sovereignty. The world consists of countries or èconomies’
with varying degrees of economic development.
Whenever we think of a country, one of the main questions that we ask is: Is it an economically developed
country (DC) or an under-developed country (UDC) or a less developed country (LDC)?
Sweden, USA, Canada, Britain, Germany, Japan and Singapore are some instances of Developed or
Advanced economies. India, China, Pakistan, Bangladesh, Tanzania, Uganda or Zambia used to be called
under-developed or less developed countries, though now the term used to describe them is ‘developing
economies’.
Countries with economic development are also referred to as advanced or, simply, rich. Countries yet to
achieve economic development are called backward or poor.
Developed or advanced countries are characterized by a high level of National Income and Per Capita
Income along with a high standard of living, access to education, employment and other meaningful
pursuits of life. A country with a highly advanced industrial and infrastructural position relative to other
countries with lesser industrial and infrastructural achievements is called developed country,
industrialized country, or a “more economically developed country" (MEDC).
A developing country, also called a less-developed country (LDC) or underdeveloped country (UDC), is
one with a less advanced industrial and infrastructural level, as well as a lower level of living standards
and associated facilities. While the term `less developed country’ implies a static condition of
backwardness, the term `developing country’ implies that such countries are in a transitional stage and
may eventually join the ranks of developed countries. India, Pakistan, Bangladesh, Sri Lanka and China
are examples from Asia while Mozambique and Ethiopia are examples from Africa.
The poorest nations — which cannot be regarded as developing and belong to the poorest subset of LDCs
are called less economically developed countries (LEDC), e.g., countries of Sub-Saharan Africa.
World Development Report 2020

• The name of the report is “World Development Report 2020: Trading for Development in the Age
of Global Value Chains”.
Published By: World Bank
Key Points:
• As per the report published by World Bank, Global Value Chains (GVCs) can help the developing
economies to enhance growth.
• The global value chains today account for nearly 50 per cent of trade worldwide.
• Developing countries can achieve better outcomes for its people through reforms to boost their
participation in global value chains.
• The reforms in GVCs can help developing countries expand from commodity exports to basic
manufacturing, while ensuring that economic benefits are shared more widely across society.
• Creation of the European single market along with the integration of China, India and Soviet Union
into the global economy created a huge new product and labour markets, which will further
increase the scope of GVCs.
1.3 Distinction between Growth & Development

Economic development can be referred as the quantitative and qualitative changes in the economy.
Arthur Lewis defined economic development as the enlargement of the range of people choices.
Economic development focuses on the spectrum of spheres ranging from health, education,
employment, safety, environmental sustainability, social exclusion, gender empowerment,
infrastructure, and other activities whereas economic growth measured in terms of rise in GDP or market
productivity. Consequently, Amartya Sen refers economic growth as a one of the part of economic
development.
The study of economic development was borne out of an extension to traditional economics that focused
entirely on national product, or the aggregate output of goods and services, the latter known as

economic growth. Economic development mainly concerned in expansion of people’s entitlements and
their corresponding capabilities, morbidity, nourishment, literacy, education, and other socio-economic
indicators.
Economic growth, that is, more income is only one of the things desired by poor people. Adequate
nutrition, safe water, better medical services, more and better schooling for their children, cheap
transport, adequate shelter, continuing employment and secure livelihood, and productive
remunerative satisfying job do not show up in higher income per head. There are even other non-
material benefits that are often more highly valued by poor people than material benefits but they do
not reflect in higher income figure. For instances, freedom to choose, movement, speech, safe working
condition, expressing cultural, regional, linguistic and religious identity, empowerment are some factors
often more important than income.
It is quite often observed in the many parts of world that economic growth can be rapid without the
improvement in the quality of life. In other words, per capita increase in GDP only benefits a small
section of minority population and rest of the vast majority of population deprived from the fruits of
increased GDP. It led to concentration of wealth in few hands, stark inequality, existence of dual
economy where one sect enjoyed the increased production of goods and services and remaining large
section of population starving and yet to receive any benefits of higher GDP.
Economic growth set the prerequisite condition for economic development. The economic growth
accompanied by proper distribution of resources across the population, building institutional
mechanisms which ensure qualitative change in the lives of people, and environmental sustainability
guaranteed the economic development.
It has been observed that there is positive correlation between incomes per head and indicators of
human development. It does not refer that higher income led higher development since many countries
have achieved high human development at low level of income. This correlation depends on how
additional income from growth being used for public education, health, and employment opportunities.
Economic growth is indeed important, not for itself, but for what it allows a country to do with the
resources that generated, expanding both individual incomes and the public revenue that can be used to
meet the social commitments. Initial endowments like distribution of assets are also important factor in
determining economic development. If land is fairly distributed among the population and education is
accessible for masses, then the benefits of economic growth can easily percolate down to the end of the
population.

Economic growth is quite often considered to be an essential part of development. But growth (known
as continuing increase of the quantity of goods and services produced and consumed over time) is simply
the inter-temporal dimension of any policy objective, although it has been wrongly monopolized by
production and consumption: it should apply to poverty reduction, employment, investment, a more
equitable income distribution, environment protection, leisure and, of course, also to income. But once
you specify for income, consumption and production, the ‘What?’ ‘To whom?’ ‘By whom?’ ‘For what?’
and ‘When?’ growth becomes the incidental result, not the objective, of a sensible economic policy.
Growth is too unspecified, abstract, aggregate and unbounded to be a sensible objective of policy. It also
implies an infinite horizon, without the limits to increases in income. What matters is the composition of
national income, to what uses it is put, its distribution among beneficiaries, now and for future
generations; and with how much efforts and in what conditions it is produced. If and only if the extra
resources resulting from growth go largely to the poor, and if they are spent on public health and
education, will a contribution to human development result.
In measuring economic growth, the national income is a quite inadequate measure of human
development for several reasons. It counts only goods and services that are exchanged for money,
leaving out of account the large amount of work done inside family, mainly by women, and work done
voluntarily for children or older people or in communities. Public services are counted at their cost, so
that doubling the wages of all public services appears to double their contribution to welfare or
development. National income accounting does not distinguish between goods and regrettable
necessities, like military expenditure or anti-crime expenditure, products needed to combat ‘bads’.
Addictive eating and drinking is counted twice: when the food and the alcohol are consumed, and when
large sums are spent on diet industry and on cures for alcoholism. Much of what is now counted as
economic growth is really either combating evils, and fixing the blunders and social decay from the past,
or borrowing resources from the future, or shifting functions from community and household to the
market.
One more dimension that is untouched in discussion of economic growth is related to gender issues. In
events where women are provided opportunity to choose the size of their family it has been found that
without adverse economic and social consequences, smaller families are indeed chosen. With human
development through expanding education, especially for women and girls, the reduction in infant
mortality, improved medical facilities led to significant fall in fertility rate among women. There are
strong evidences which show that more surviving children also led to reduction in population growth by
evading uncertainties in family. Human development is a powerful tool to curb the population growth,
and reduced population growth open up the news ways of economic advancement.
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Sudhir Anand and Amartya Sen have suggested the division of all countries into three groups: low,
medium, and high level of human development. For countries with low level of human development the
basic human development Index can be used to rank their performance. For countries with medium value
of human development Anand and Sen add one supplementary indicator to each of the three basic
variables, life expectancy, literacy, and log of GDP per head. In the longevity category they add infant and
child mortality (under five); in the education category they add the secondary school enrollment; and
income category they add the incidence of income poverty in the country.
To sum up the difference between Development and Growth,
Concept
• Development: Economic development is a much broader concept than economic growth. Economic
development = Economic Growth + Standard of Living
• Growth: Economic Growth is a narrower concept than economic development.
Scope
• Development: Economic Development is considered as a Multidimensional phenomenon because it
focuses on the income of the people and on the improvement of the living standards of the people of
the country.
• Growth: Economic Growth is considered as a single dimensional in nature as it only focuses on the
income of the people of the country.
Time-frame
• Development: Long term process
• Growth: Short term process
Measurement
• Development: Both Qualitative & Quantitative Terms: HDI (Human Development Index), gender-
related index, Human poverty index, infant mortality, literacy rate etc.
• Growth: Quantitative Terms: Increases in real GDP.
Relevance
• Development: Economic Development is related to Underdeveloped and developing countries of the
world.
• Growth: Economic Growth is related to developed countries of the world.
Effect
• Development: Qualitative and Quantitative Impact on the economy. Improvement in life expectancy
rate, infant, literacy rate, poverty rates, and mortality rate.
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• Growth: Brings a quantitative impact on the economy. Increase in the indicators like per capita income
and GDP, etc.
Global Economic Prospects (GEP) June 2020 Report

Released By: World Bank
Key Findings of the report
• The scope and speed with which the COVID-19 pandemic and economic shutdowns have
devastated the poor around the world are unprecedented in modern times.
• Current estimates show that 60 million people could be pushed into extreme poverty in 2020.
• The COVID-19 pandemic will shrink the global economy by 5.2% in 2020-21 representing the
deepest recession since World War Two and a dramatic rise in extreme poverty.
• Indian Economy is expected to contract by 3.2% (so growth is -3.2%) in FY 2020-21 due to
impact of Coronavirus pandemic and restrictions on activity. However, it will make a modest
recovery to 3.1% growth in the next fiscal year.
• The financing and building of productive infrastructure are among the hardest-to-solve
development challenges in the post-pandemic recovery.
• EMDEs face health crises, restrictions and external shocks like falling trade, tourism and
commodity prices, as well as capital outflows.
• EMDE countries are expected to have a 3-8% output loss in the short term, based on studies
of previous pandemics, as per the analysis.
• Growth is likely to slow more in commodity-exporting EMDEs than in commodity-importing
ones.
2 Factors Affecting Economic Growth
2.1 Natural Resources

The principal factor determining economic growth of a country is the natural resources. A country
suffering from non-availability of natural resources would not be able develop rapidly. Having said this,
it is also a recognized fact that presence of abundant resources does not guarantee the economic
growth; it must be accompanied by proper exploitation of these resources. If the existing resources are
not properly utilized or exploited, the country would not be able to develop. One of the main factors
which ensure the utilization of resources is technological advancement. Therefore, natural resources can
be put in right place to augment economic growth through introducing improved technology. As pointed
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out by economist that the value of resource depend upon its usefulness, and the usefulness of resource
mainly depend on accommodating and updating the technology which can be used a means to define its
usefulness.
It is often said that economic growth could be achieved even when an economy is inadequate in natural
resources. On such country is Japan which even deficient in natural resource but one of the developed
countries of the world because it has been succeeded in forming human capital and discover new uses
of its limited resources. A country which considered poor in resources in one point of time may
considered rich in resources after passage of time, not because of new avenues of resources are
discovered but equally because creating new resources and using limited resources most efficient way.
Moreover, by importing those resources from other countries, it has been able to overcome the
inadequacy of natural resources through using the superior technology, efficient management skills.
Thus, for economic growth mere presence of abundant resources are not enough. What is essential is
their proper exploitation through improved technology and efficient management skills so there would
be little wastage of scarce resources.
2.2 Capital Accumulation

The second most important factor in economic growth is capital accumulation. Capital means stock of
physical reproducible factor of production. When the capital stock grows over period of time, this is
defined as capital accumulation. The process of capital accumulation is cumulative and self-sustaining
provided three inter-related stages preceded: (a) the existence of continuous rise in saving; (b) to use
these saving for investment in capital goods; (c) intermediaries to mobilize saving and divert them for
investment.
One of the prominent reasons of lower growth in underdeveloped countries is lower saving, equally
opposite in developed countries higher saving ensure the capital formation and sustain continuous
growth. Due to low propensity to save in least developed countries, voluntary saving is not sufficient to
ensure desired growth. Due to low level of income poor, countries are close to subsistence level of
consumption which led to low level of saving. In such circumstances possibility to raise saving are dismal,
and economic growth would rely on other sources of capital accumulation, like external loans, grants or
aid.
Capital formation is the key component of economic growth. On the one hand it ensures effective
demand, and other hand, it creates productive efficiency for future production. Higher investment in
capital goods and consumer goods industries creates employment opportunities which led to higher
consumption reflects in effective demand. On the other hand new avenues for capital goods open up the
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ways for productive efficiency in production. The processes of capital accumulation reflect in higher
national output, essential to meet the demand of increasing population.
2.3 Technological Progress

Technological changes are counted as the most important factor in the process of economic growth. They
are mostly referring as the change in mode of production through new technique emerges out from
research or innovation. Changes in technology lead to increase in productivity of labour, capital and
other factors used in production. Schumpeter regards innovation as most important technological
factor in economic growth.
Modern economic growth theories even assume that without technical progress, a country cannot
sustain the growth in per capita income indefinitely. Due to low technological progress in least developed
countries they are not able to break the vicious circle of under-development. Developed countries are
succeeded in continuous adaptation of new technology due to higher spending in research and
development activities.
2.4 Population
Population growth is also another important factor which affects the economic growth. There are
evidences which shows that population growth systematically changes with the overall development of
a society. The changes in population growth along with development process normally are known as
demographic transition. The idea is very simple, when the population growth is high, economy has to
put more effort for achieving higher growth since higher population pull down the per capita income
growth and vice versa. A strong family planning targets or the provision of incentive to have less children,
spread of education can pull down the population growth and permit long-run growth.
2.5 Other Factors

One of the important factors determining modern economic growth is infrastructural development such
as means of transport and communication, facilitating services. Structural change is also an important
factor determining shape of economic growth. It implies the transition from a traditional primary sector
to modern manufacturing sector and service sector. Such structural changes should accompanied by
increasing employment opportunities, higher labour productivity and ever increasing stock of capital,
and institution promotes new ideas, innovation or research. Sign of structural changes begin with the
transfer of population from primary sector to secondary and then tertiary sector.
Creation of human capital is another important factor determines the path of economic growth. The
skilled labour force of various kinds such as scientist, engineers, managers, administrator, expert on
various fields of social science, etc. are crucial to form such institutions which create enough ground for
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economic growth. The shortage of such skilled labour force poses a serious problem in least developed
countries. To overcome such deficiency in human capital, it requires setting up scientific, technological,
and various institutions which fill such gaps in human assets.
Human endowments, social attitudes, political conditions, and historical factors greatly influence the
process of growth. Therefore, social, cultural, political, and administrative factor have its own
importance in economic development. For instance, social attitudes, culture and values determine the
spirit of adventure, discoveries, invention which consequently led to new opportunity conducive for
economic growth.
3 Indicators and Measures of Development
3.1 Gross National Product & Gross Domestic Product

One indicator of Economic Development is the Gross National Product (GNP), the market value of all the
final products and services produced in one year by the citizens of a country (including income of those
abroad). A higher GNP is generally indicative of a higher level of Economic Development.
Another indicator of Economic Development is the Gross Domestic Product (GDP). GDP, as distinct from
GNP, is a measure of the market value of all final goods and services produced within the domestic
boundaries of a country within a year. As a money measure, it is called nominal GDP. Adjusted for the
price level, it is called the real GDP.
In 1934, working on a US Congress report, Professor Simon Kuznets built up the Gross Domestic Product
(GDP) as a measure of Economic Development, although he was careful to point out its various
limitations. He helped the U.S. Dept of Commerce standardize GDP measurement, although unpaid
household work was still left out.
After World War II, GDP and GDP per capita became accepted measures of “the standard of living” of a
country, although the GNP too was estimated and considered important. A higher GDP indicated a higher
standard of living.
From the 1990s (which ushered the Liberalization process into India), virtually all countries in the world
have been using GDP as the basic or primary indicator of Economic Development.
3.2 Gross Domestic Product (Purchasing Power Parity)

But by the late 1970s, people become critical of per capita income or GNP as a measure of economic
development.
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First, being expressed in terms of money, if there is inflation, the nominal GNP becomes an overestimate.
Secondly, it does not reveal how unequally the total national product or income may be spread over the
various income groups.
Thirdly, it is a money measure and ignores all non-market activities even if they enhance standard of
living or even household income.
Finally, there are differences in the costs of living among countries that are not fully reflected in the
exchange rates.
A solution to this has been found in adjusting per capita income figures for such differences, resulting in
what is called Purchasing Power Parity (PPP).
GDP (PPP) per capita is the value of all final goods and services produced within a nation in a given year,
converted at market exchange rates to current U.S. dollars, divided by the average (or mid-year)
population for the same year.
3.3 Human Development Index

The Human Development Index (HDI) is a summary composite index that measures a country's average
achievements in three basic aspects of human development: longevity, knowledge, and a decent
standard of living. Longevity is measured by life expectancy at birth; knowledge is measured by a
combination of the adult literacy rate and the combined primary, secondary, and tertiary gross
enrolment ratio; and standard of living by GDP per capita (PPP US$).
Since 1992, the United Nations Development Programme (UNDP) regularly brings out annual
Development Reports. In course of working on it, eminent economists Mahbub ul Haq, Amartya Sen,
Paul Streeten, Frances Stewart, Gustav Ranis, Keith Griffin, Sudhir Anand and Meghnad Desai,
developed a new measure of economic development. It focused on people rather than their incomes,
human well-being rather than mere economic status. It provided more than the national accounting
method that GDP or per capita income provided.
Called the Human Development Index (HDI), this statistic was a composite of life expectancy, education,
and income indices used to rank countries into four tiers of human development.
3.4 HDI & Its Relevance

The HDI is most relevant in assessing the Economic Development of various countries. Theses indices
provide in a nutshell information about a country’s material welfare as well as its health, education and
other aspects. A high HDI indicates that the country has a substantial GDP, its people enjoy a high
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standard of living, good hygienic conditions and ample medical facilities, and general access to
education. A low HDI indicates the lack of all this.
3.4.1 Critical Comments on the HDI

1. It is built on incomplete and inexact data. Economists Hendrik Wolff, Howard Chong and Maximilian
Auffhammer discuss the HDI from the perspective of data error in the underlying health, education and
income statistics used to construct the HDI. They identify three sources of data error which can be traced
to (i) data updating, (ii) formula revisions and (iii) thresholds to classify a country’s development status
and find that 11%, 21% and 34% of all countries can be interpreted as currently misclassified in the
development bins due to the three sources of data error, respectively. They suggested that the United
Nations should discontinue the practice of classifying countries into development bins because the cut-
off values seem arbitrary, can provide incentives for strategic behavior in reporting official statistics, and
have the potential to misguide politicians, investors, charity donors and the public who use the HDI at
large. In 2010 the UNDP reacted to the criticism and updated the thresholds to classify nations as low,
medium, and high human development countries. The Human Development Report Office undertook a
systematic revision of the methods used for the calculation of the HDI and adopted a new methodology
directly addresses the critique by Wolff et al. in that it generates a system for continuous updating of the
human development categories whenever formula or data revisions take place.
2. It excludes countries that are not members of the UN and is, to that extent, incomplete and inaccurate.
3 Any changes in its formula, however appropriate, breaks the continuity of the series.
4. It assesses development differently in different groups of countries.
5. It has an ideological bias towards egalitarianism and 'Western' model of development and ignoring
moral and spiritual aspects of human development that may be found in less the East, As Ratan Lal Basu
says, "So human development effort should not end up in amelioration of material deprivations alone:
it must undertake to bring about spiritual and moral development to assist the biped to become truly
human.” (Basu, Ratan Lal (2005): "Why the Human Development Index Does not Measure up to Ancient
Indian Standards" in The Culture Mandala, Vol. 6, No. 2, January, Bond University, Australia, p. 57)
6. It does not include any ecological considerations. However, the UNDP is incorporating such
considerations, as evidenced by the Human Development Report 2011 with its focus on “Sustainability
and Equity”.
7. It does not consider technological development or contributions to science and civilization,
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8. It measures aspects of development that have already been exhaustively studied and so is redundant.
9.It focuses exclusively on national performance and ranking and does not look at development from a
global perspective. It encourages competitiveness among countries rather than world peace. Each year,
UN member states are listed and ranked according to the computed HDI. If high, the rank in the list can
be easily used as a means of national aggrandizement; alternatively, if low, it can be used to highlight
national insufficiencies.
Alternative measures have been suggested to take care of some of the shortcomings of the HDI, But few
have produced alternatives covering so many countries, and that other than, perhaps, Gross Domestic
Product per capita, no development index has, in theory or practice, been used so extensively—or
effectively, as the HDI.
As the HDR 2011 (p 1) put it: “The human development approach has enduring relevance in making sense
of our world and addressing the challenges now and in the future.”
Human Development Report for 2020

About the report- United Nations Development Program (UNDP) has released the report.
• It measures average achievement on three basic aspects of human development:-
o Life expectancy
o Education
o Per capita income
o It has introduced a new metric “Planetary Pressures-adjusted HDI or PHDI” to reflect the
impact caused by each country’s per-capita carbon emissions and its material footprint,
which measures the amount of fossil fuels, metals and other resources used to make the
goods and services it consumes.
Key Findings-
Global-
• Top 5 Countries - Norway followed by Ireland, Switzerland, Hong Kong and Iceland.
• Bottom 5 Countries – Niger, Central Africa, Chad, South Sudan and Burundi.
• India has been ranked 131st.
• United Nations has called for urgent shift to planet-friendly development.
• Asia Specific Finding-
o Very high human development – Singapore followed by Saudi Arabia and Malaysia.
o High Human Development - Sri Lanka, Thailand, China and Indonesia and Philippines and
Vietnam.
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o Medium human development - India, Bhutan, Bangladesh, Myanmar, Nepal, Cambodia,
Kenya and Pakistan
• Indigenous children in Cambodia, India and Thailand show more malnutrition-related issues
such as stunting and wasting.
• Planetary Pressures-adjusted HDI or PHDI-
o Ireland tops the PHDI.
India Specific Findings-
• India has been ranked at 131st place in 2019 and was at 129th place in 2018.
Index Value for 2019 Rank
Human Development Index (HDI) 0.645 131
Inequality Adjusted HDI 0.537 123
Gender Development Index 0.820 Group 5
Gender Inequality Index 0.488 123
Multidimension Poverty Index 0.123
(2008-19)
India’s Performance in Various Indicators
Indicator Value in 2019 Value in 2018
Life Expectancy at birth 69.7 years
Gross National Income Per Capita USD 6681 USD 6829
Expected Years of Schooling 12.2 years
• India’s HDI value increased from 0.429 to 0.645 between 1990 and 2019 witnessing an increase
of 50.3%.
• Changes Between 1990 and 2019-
o India’s life expectancy at birth increased by 11.8 years.
o Mean years of schooling increased by 3.5 years.
o Expected years of schooling increased by 4.5 years.
o GNI per capita increased by about 273.9%.
• The report has informed that evidence from Colombia to India indicates that financial
security and ownership of land improve women’s security and reduce the risk of gender-
based violence.
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4 Alternate Measures of Economic Development
4.1 Need for Alternate Measures
The standard measures or indicators of Economic Development are nominal GDP per capita, PPP-
adjusted GDP per capita and HDI. The first two do not take account of aspects of economic development
that cannot be quantified in money. The HDI is regularly calculated by the very respectable organization
United Nations Development Programme (UNDP). But there are aspects which even the HDI does not
cover, such as poverty, gender inequalities, and diversities among different countries. Because of this,
supplementary & alternate measures of Economic Development have been evolving. Some of them are:
But the three most important of such new indices are recognized to be: Human Poverty Index, Gender-
related Measures & Inequality-adjusted Indices.
4.2 Human Poverty Index

Human Development is seen as enlarging choices and expanding freedoms to enjoy a decent standard
of living, freedom, dignity, self-respect & the respect of others. Human Poverty is the deprivation or
lack of these freedoms.
Therefore, the HPI looks at deficiencies in the 3 basic dimensions captured in the Human Poverty Index:
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• lack of a long & healthy life, as measured by the probability of not enduring past the age of 40
• Exclusion from knowledge, as measured by the adult literacy rate
• Lack of a decent standard of living, or lack of essential services, as measured by the % of the
population not using an improved water source & the % of children underweight for their age.
Developed and less developed countries differ sociologically in their ways of deprivation. To reflect this,
in 1997, the UN complemented the HDI by the HPI calculating it separately for developing countries and
some select high-income OECD countries. It was replaced in 2010 by the Multidimensional Poverty Index.
HPI is derived independently for developing countries (HPI-1) & a group of select high income OECD
countries (HPI-2) to better imitate socio-economic differences & also the widely different measures of
deprivation in the 2 groups.
HPI is thus quite similar to the HDI. The difference is the variables used, which again reflects the
orientation of the two measures.
HDI looks at the positive signs of development, the HPI at the negative ones. A higher HDI indicates that
the country has more of GOOD things – an achievement, a lower HPI decreases indicates that the country
has less of BAD things – a failure.
While the HDI measures average achievement, the HPI measures shortfalls in the three basic dimensions
of human development captured in the HDI.”
4.3 Inequality-adjusted HDI

The 2010 UNDP Global HDR, The Real Wealth of Nations: Pathways to human Development introduced
a new index, the Inequality-adjusted HDI (IHDI) aimed at understanding the distributional magnitudes
of human development.
IHDI is a measure of the average level of human development of people in a society once inequality is
taken into account. 3 dimensions of HDI i.e. income, education & health are adjusted for inequalities in
attainments across people.
According to the 2010 Report, "the IHDI is the actual level of human development (accounting for
inequality)" and the HDI (unadjusted) can be viewed as an index of “potential” human development (or
the maximum IHDI that could be achieved if there were no inequality).
4.4 Gender Related Indices

The GDI and the GEM are measures to correct the HDI for its insensitivity to gender-gaps. They were
introduced in the Human Development Report, UNDP, as early as 1995.
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4.4.1 Gender Related Development Index (GDI)
The GDI is a compound indicator that measures the average accomplishment of a population in the same
dimensions as the HDI while adjusting for gender inequalities in the level of achievement in the 3 basic
aspects of human development. It uses the same variables as the HDI, disaggregated by gender. The GDI
assumes women to live five years longer than women on an average.
The data that is needed in order to calculate the GDI is not always readily available in many countries,
making the measure very hard to calculate uniformly and internationally.
4.4.2 Gender Inequality Index

The GII is another measure that has been proposed in the Human Development Report 2010. It contains
reference to other variables, viz., Reproductive Health, Empowerment, and Labor Market Participation.
4.4.3 Separate Male and Female HDI

Economist Halis Akder proposed in 1994 the calculation of separate male and female HDI.
4.4.4 Gender Gap Measure

This is a measure of gender inequality which, instead of having to be compared to the Human
Development Index (HDI) as the GDI is, would average the female-male gaps in human development and
use a gender-gap in labor force participation instead of earned income.
4.4.5 Gender Empowerment Measure

The GEM is a composite indicator that captures gender inequality in three key areas:
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It was designed to measure "whether women and men are able to actively participate in economic and
political life and take part in decision-making" (UNDP, 1995, p. 73)
It is more agency focused (what people are actually able to do) than well-being focused (how people feel
or fare in the grand scheme of things).
The GEM is valuable because it allows to compare internationally certain dimensions that were
previously difficult to compare between countries.
But it is highly specialized and difficult to interpret, often misinterpreted, suffer from large data gaps,
may not provide accurate comparisons across countries, and bring into one measure too many
development factors.
The GEM also has an elite bias, measuring inequality only among the most educated and economically
advantaged women and to focus mainly on the higher echelons of society, neglecting women in grassroots
levels. or in the informal sector.
As a result, the GEM is reliable only for very highly developed countries which do collect those statistics.
The number of women in parliament may not a very appropriate indication of real empowerment. The
GEM is also felt to be too dependent on the income component of the measure.
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Many suggestions have been made to alter the GEM, e.g., by including female representation in local
government instead of only national government, by revising it to reflect female participation in political
activities such as voting, to include a component regarding women’s control over their own bodies and
sexuality,, or regarding include female levels of unemployment. Different ways to deal with the earned
income part have also been suggested to make the measure more straightforward.
Human Development Report for 2020

India ranked 131 among 189 countries on the Human Development Index (HDI) for 2019, slipping two
places from the previous year, according to the Human Development Report (HDR) 2020 released by
the United Nations Development Program (UNDP). The other indices that form the part of the Report
are:
• Inequality-adjusted Human Development Index (IHDI)
o The IHDI indicates percentage loss in HDI due to inequality.
o For India, IHDI value for 2019 is 0.537 (16.8% overall loss).
• Gender Development Index (GDI)
o GDI measures disparities on the HDI by gender.
o For India, GDI value for 2019 is 0.820 (World: 0.943).
• Gender Inequality Index (GII)
o GII presents a composite measure of gender inequality using three dimensions:
▪ Reproductive health,
▪ Empowerment and
▪ The labour market.
o In GII, India is at 123rd rank. Last year, it was ranked 122nd out of 162 countries.
• Multidimensional Poverty Index (MPI).
o MPI captures the multiple deprivations that people in developing countries face in their
health, education and standard of living.
o The most recent survey data publicly available for India’s MPI estimation refer to 2015-
2016. In India, 27.9% of the population (3,77,492 thousand people) are
multidimensionally poor, while an additional 19.3% are classified under vulnerable to
multidimensional poverty (2,60,596 thousand people).
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5 Inclusive Growth
Economic growth was earlier seen as an inclusive concept, automatically supposed to be for all. But
growth experience the world over has shown otherwise. The poor, history has revealed, need to have a
special mention lest the rest of the country forgets them as it forges ahead on the growth path.
Growth, though fundamental for reducing the level of poverty and improving living standards of our
people, is not enough by itself. It needs to be more inclusive, more pervasive & accompanied by
moderate inflation.
'Inclusive Growth’ has thus emerged as a concept in Economics. This is reflected in India’s 11th Five-Year
Plan (2007 – 2012) had the theme 'towards faster and more inclusive growth'. The Approach to the 12th
Five Year Plan (GOI, Planning Commission, Oct 2011) was titled: "Faster, Sustainable and More Inclusive
Growth”.
5.1 Concept of Inclusive Growth

The concept of Inclusive growth emphasizes that equitable opportunities for economic participants
should be provided during the very process of economic growth with benefits being incurred by every
section of society.
It is distinct from the concept of Equity, Social Justice or Redistribution taking place in terms of policy
measures taken after the Growth process.
In this sense it is a radical concept. In Economics, the three activities of Production, Consumption and
Distribution have traditionally been treated as distinct activities or processes. Growth and Development
are related with Production whereas Equity and Social Justice are associated with Distribution. But the
Inclusive Growth concept puts these two together. It refers to productive activity bound up with
distributive activity.
Inclusive growth can be defined in terms of improving the delivery of core public services, & maintaining
rapid growth while spreading the benefits of this growth more widely.
Encouraging inclusive growth includes revamping labor regulations, improving agricultural technology
& infrastructure, helping lagging sections & regions catch up, & empowering the poor through proactive
policies that help them to take part in the market on fair and equitable terms.
Thus, inclusive growth implies the links between the macroeconomic & microeconomic determinants of
the economy to have changes in economic aggregates as well as structural transformation.
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5.2 Elements of Inclusive Growth
5.2.1 Skill Development

• Harnessing the demographic dividend will depend upon the employability of the working age
population, their health, education, vocational training and skills. Skill development plays a key role
here.
• India is facing a dual challenge in skill development:
o First, there is a paucity of highly trained workforce
o Second, there is non-employment of conventionally trained youths
• According to the Economic Survey 2017, over 30% of youth in India are NEET (Not in education,
employment or training).
• Similarly, UNICEF 2019 reports stats that at least 47% of Indian youth are not on track to have the
education and skills necessary for employment in 2030.
5.2.2 Financial Inclusion

• Financial Inclusion is the process of ensuring access to financial services to vulnerable groups at
affordable costs.
• Financial inclusion is necessary for inclusive growth as it leads to the culture of saving, which initiates
a virtuous cycle of economic development.
5.2.3 Technological Advancement

• The world is moving towards an era of Industrial Revolution 4.0. These technological advancements
have capabilities to both decrease or increase the inequality depending on the way these are being
used.
• Several initiatives have been taken by the government, eg. Digital India Mission, so that a digitally
literate population can leverage technology for endless possibilities.
• Technology can help to combat other challenges too, eg:
o Agriculture- Modern technology can help in making an agro-value chain from farmer to
consumer more efficient and competitive.
o Manufacturing- Technology can resolve the problems of finance, procuring raw materials, land,
and linkages with the user market. GST was made possible only with the help of sound
technology.
o Education- Innovative digital technologies can create new forms of adaptive and peer learning,
increasing access to trainers and mentors, providing useful data in real-time.
o Health- Technologies could transform the delivery of public health services - extend care
through remote health services
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o Governance- Technology can cut down delays, corruption, and inefficiency in the delivery of a
public service
5.2.4 Economic Growth

• India is among the fastest-growing major economies in the world. However, currently Indian economy
is facing slowdown due to both cyclic and structural challenges.
• However, the target of becoming a $ 5 trillion economy by 2024-25 can allow India to reduce
inequality, increase social expenditure and provide employment to all.
5.2.5 Social Development

• It means the empowerment of all marginalised sections of the population like SC/ST/OBC/Minorities,
women and transgenders.
• Empowerment can be done by improving institutions of the social structure i.e. hospitals especially
primary care in the rural areas, schools, universities, etc.
• Investment in social structures will not only boost growth (by fiscal stimulus) but will also create a
healthy and capable generation to handle future work.
5.3 Sustainable Economic Growth and Inclusive Growth

Sustainable Development & Inclusive Growth are dependent on each other. To be Sustainable, growth
needs to be Inclusive.
Economic growth may give rise to inequalities & corruption. Certain sections of the population may
benefit to the exclusion of others. There may not be parity of opportunity in terms of access to markets,
resources, & impartial regulatory environment for businesses and individuals. Especially in the short run,
growth may seem to make the rich richer & the poor poorer.
But the inclusive growth approach takes a longer-term perspective, emphasizing productive employment
to as a means of increasing the incomes and therefore the living standards of poor and excluded groups.
5.4 Human Development and Inclusive Growth

Human Development & Inclusive Growth are closely related. Growth which is not Inclusive cannot in fact
achieve the literacy and life expectancy levels required for satisfactory Human Development. Simply a
high rate of GDP (even if at PPP US$) whose benefits do not percolate to all economic classes is neither
inclusive nor human. Only by reaching literacy, and good health to all, and only by ensuring better public
distribution system can a higher HDI be reached. Human development, which is about expanding
people’s choices, builds on shared natural resources. Promoting human development requires addressing
sustainability- locally, nationally and globally –and this can & should be done in ways that are equitable
and empowering
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5.5 Dimensions of Inclusive Growth
'Inclusive growth' is a process, in which, economic growth, measured by a sustained expansion in GDP,
contributes to an enlargement of the scale & scope of all four of the following considerations.
5.6 Challenges in Achieving Inclusive Growth
5.6.1 Poverty
• As per the Multidimensional Poverty Index (MPI) 2018, India lifted 271 million people between 2005-
06 and 2015-16, with the poorest regions, groups, and children, reducing poverty fastest. India
demonstrates the clearest pro-poor pattern at the sub-national level.
• Still, despite the massive gains, 373 million Indians continue to experience acute deprivations.
Additionally, 8.8% of the population lives in severe multidimensional poverty and 19.3% of the
population are vulnerable to multidimensional poverty.
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5.6.2 Unemployment
• As per the Periodic Labour Force Survey (PLFS) of NSSO, the unemployment rate among the urban
workforce was 7.8%, while the unemployment rate for the rural workforce was 5.3% totaling the total
unemployment rate at 6.1%.
• The quality and quantity of employment in India are low due to illiteracy and due to over-dependence
on agriculture.
• The quality of employment is a problem as more than 80% of people work in the informal sector
without any social security.
• Low job growth is due to the following factors:
o Low investment
o Low capital utilization in industry
o Low agriculture growth
5.6.3 Agriculture Backwardness

• Around 44% of people in India have agriculture-related employment but its contribution to the Indian
GDP is only 16.5% which lead to widespread poverty
• Issues in agriculture are as follows:
o Declining per capita land availability
o A slow reduction in the share of employment
o Low labour productivity
o Decline in agriculture yield due to climate change, land degradation and unavailability of water
o Disparities in growth across regions and crops
5.6.4 Issues with Social Development

• Social development is one of the key concerns for inclusive growth. But it is facing some problems
such as:
o Significant regional, social and gender disparities
o Low level and slow growth in public expenditure particularly in health and education
o The poor quality delivery system
o Social indicators are much lower for OBC, SC, ST, and Muslims
o Malnutrition among the children
In the 2020 Global Hunger Index, India ranks 94th out of the 107 countries with sufficient data to
calculate 2020 GHI scores. With a score of 27.2, India has a level of hunger that is serious
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5.6.5 Regional Disparities
• Regional disparities are a major concern for India. Factors like the caste system, gap between rich and
poor etc. contribute to the regional disparities which create a system where some specific groups hold
more privileges over others.
• Some of the regional disparities problems are as follow:
o In terms of literacy rate, Kerala is the most literate state with 93.1% literacy, on the other hand,
literacy rate of Bihar is only 63.82%
o In terms of per capita income, Goa's per capita income is Rs 4,67,998 in 2018 while per capita
income of Bihar is just one-tenth of that ie Rs 43,822.
5.7 Measuring Inclusive Growth
Inclusive Development Index 2018

• In the Inclusive Development Index (IDI) compiled by the World Economic Forum (WEF), India
ranked 62nd out of 74 emerging countries and was among the least inclusive countries in Group of
20 (G-20) countries.
• The IDI is based on the idea that most people base their country’s growth not on GDP but by their
own standard of living.
• It gives a measure of inequality based on three parameters:
o Growth and development
o Inclusion
o Inter-generational equity and sustainability.
• India also did not make it to the top 10 most inclusive emerging and developing economies, where
its neighbours Nepal, China and Sri Lanka made a mark.
• India performed its best in terms of “intergenerational equity and sustainability”, ranking 44 th, for
which credit can be attributed to its demographic dividend.
Social Progress Index 2020

The Social Progress Index is published by a non-profit entity called Social Progress Imperative, which is
based out of the United States of America (USA). India ranked 117 out of 163 in Social Progress Index
2020.
Social Progress Index ranks the social performance of 149 countries over 51 different indicators. Some
of the most prominent indicators are listed below.
1. Health
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2. Personal Rights
3. Inclusiveness
4. Education
5. Nutrition
6. Shelter
7. Safety
8. Personal freedom
9. Sanitation
In this Index, the social performance of a country is assessed independently of economic factors. The
index is primarily based on social and environmental indicators capturing 3 major dimensions of social
progress. The 3 dimensions are listed below.
1. Opportunity
2. Foundations of Well Being
3. Basic Human Needs
There are four components for each dimension. Also, there are three or four specific outcome
indicators for each component as well. Also, there are two special features of the Social Progress Index
which are- the exclusion of economic variables and the use of outcome measures rather than inputs.
India scored 56.80 out of 100 in Social Progress Index 2020; with a rank of 117 among 163 nations. The
table below list down the performance of India in each dimension:
Social Progress Index Dimension Score
Basic Human Needs 66.24
Foundations of Well Being 50.15
Opportunity 54.01
India performed better in the following components:

• Nutrition and Basic Medical Care
• Personal Rights
• Shelter
• Access to Information and Communications
• Access to Basic Knowledge
The components where India is yet to improve:
• Environmental Quality
• Inclusiveness
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• Health and Wellness
• Personal Freedom and Choice
• Access to Advanced Education
5.8 Strategies for Inclusive Growth

The first need of India is making the growth more inclusive. This would require increasing the growth
rates of the agriculture and allied sectors. With just around 18% share in GDP & more than half of the
population dependent on agriculture, average income in agriculture is less than a quarter compared to
the rest of the economy.
Unless growth in this sector accelerates along with a fall in the number of persons dependent on this
sector, relative deprivation of this sector would persist. Government has adopted the following four ways
of doing this:
• augment the cropped area by raising irrigation and reclaiming wasteland

• Improve input delivery consisting of fertilizers, certified seeds, institutional credit and a restored
training & visit system to improve the yield levels & to reduce spreads across farms & regions in
productivity.
• Improve the income levels. Instruments for that include support prices, agriculture insurance and
encouraging value added agriculture through agro processing, marketing and storage.
• Improve farm plus activities like animal husbandry, horticulture and other related activities.
The second need is improving the share of manufacturing. The growth of transport, storage,
communications, insurance, banking, trade & real estate has to be manufacturing driven. Apart from the
enabling macroeconomic environment, what is critical for the sustained buoyancy in manufacturing
would be the investment in research & technology, removal of the current mismatch in availability & need
of skills, and removal of infrastructural bottlenecks—both of physical & social infrastructure.
The third need is improving our labour participation rate. According to an ILO study, the labour force
participation rate in India is 60.9% (age group 15-64) in 2005 was way behind China's 82%. There is a need
for rapid employment growth for not only absorbing the new entrants but also to meet the rise in labour
force due to a higher participation rate. While a lower growth in labour force participation rate in the
short run may give a lower unemployment figure, we cannot afford to forego the potential output from
such a valuable source.
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The fourth need is maintaining price stability. There does not appear to be any consistent relation
between inflation and growth. While it is difficult to show the level of inflation beyond which it would
start impinging on growth, tolerance to inflation may have declined over time, & a moderate inflation is
necessary for a moderate interest rate regime and stable exchange rate.
The fifth need is fiscal consolidation. This will not only improve the credibility of the government and
reduce the crowding out; but it will also provide the needed fiscal space for allocating larger resources for
capital investment, especially in social and economic infrastructure.
5.9 Measures Taken India to Achieve Inclusive Growth

Several schemes are being implemented by the government for inclusive growth which includes the
following:
• Mahatma Gandhi National Rural Employment Guarantee Act Scheme (MGNREGA)

• Prime Minister’s Employment Generation Programme (PMEGP)
• Mudra Bank scheme
• Pt. Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY)
• Deendayal Antyodaya Yojana- National Urban Livelihoods Mission (DAY-NULM)
• Sarva Siksha Abhiyan (SSA)
• National Rural Health Mission (NRHM)
• Bharat Nirman
• Swachh Bharat Mission
• Mission Ayushman
• Pradhan Mantri Jan Dhan Yojana
NITI Aayog's Strategy for New India @75 has the following objectives for the inclusive growth:
• To have a rapid growth, which reaches 9-10% by 2022-23, which is inclusive, clean, sustained and
formalized.
• To Leverage technology for inclusive, sustainable and participatory development by 2022-23.
• To have an inclusive development in the cities to ensure that urban poor and slum dwellers including
recent migrants can avail city services.
• To make schools more inclusive by addressing the barriers related to the physical environment (e.g.
accessible toilets), admission procedures as well as curriculum design.
• To make higher education more inclusive for the most vulnerable groups.
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• To provide quality ambulatory services for an inclusive package of diagnostic, curative, rehabilitative
and palliative care, close to the people.
• To prepare an inclusive policy framework with citizens at the center
World Economic Forum has suggested 3 practical ways by which countries can boost social inclusion
as well as economic growth:
o First, countries should increase public and private investment in their citizens’ capabilities, which
is the most important way they can durably lift their rate of productivity growth.
o Second, governments, together with employers’ and workers’ organizations, should upgrade
national rules and institutions relating to work. These influence the quantity and distribution of
job opportunities and compensation, and thus the level of purchasing power and aggregate demand
within the economy.
o Third, countries should increase public and private investment in labor-intensive economic
sectors that generate wider benefits for society. These include sustainable water, energy, digital,
and transport infrastructure, care sectors, the rural economy, and education and training.
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MONETARY & FISCAL POLICY SINCE
REFORMS OF 1991
FODDER MATERIAL

Contents
1 Fiscal Policy Since Reforms of 1991 .......................................................................................................3
1.1 Introduction ....................................................................................................................................3
1.2 Fiscal Situation before Reforms ......................................................................................................4
1.3 Fiscal Deficit & Fiscal Reforms ........................................................................................................6
1.4 Central Tax Reforms ........................................................................................................................8
1.4.1 Direct Taxes .............................................................................................................................8
1.4.2 Indirect Taxes ...........................................................................................................................9
1.4.3 MODVAT ................................................................................................................................10
1.4.4 Service Tax .............................................................................................................................10
1.4.5 Fiscal Incentives .....................................................................................................................10
1.5 Public Debt Management .............................................................................................................11
1.6 Central Fiscal Responsibility and Budget Management (FRBM) Act, 2003 ..................................12
1.7 Trends in Direct Taxes in India ......................................................................................................12
1.7.1 Personal Income Tax ..............................................................................................................13
1.7.2 Corporation Tax .....................................................................................................................13
1.8 Trends in Indirect Taxes in India ...................................................................................................14
1.8.1 Excise Duty .............................................................................................................................15
1.8.2 Customs Duty .........................................................................................................................15
1.8.3 Service Tax .............................................................................................................................16
1.9 Trends in Revenue and Capital Expenditures ...............................................................................17
1.9.1 Trends in Components of Revenue Expenditures .................................................................19
1.9.2 Trends in Components of Capital Expenditures ....................................................................21
1.10 Trends of Public Debt ....................................................................................................................22
1.10.1 Burden of Public Debt ............................................................................................................23
1.10.2 Methods to reduce the burden of public debt ......................................................................24
1.11 Other Important Issues .................................................................................................................24
1.11.1 Flexible but Range Bound v/s Fixed Fiscal Deficit Targets.....................................................25
1.11.2 External Sovereign Debt – Pros & Cons .................................................................................26
1.11.3 FRBM Act 2003: Achieving Fiscal Balance .............................................................................29
1.11.4 COVID-19: Measures to Raise Resources to fight Pandemic and Economic Slowdown .......32
1.11.5 Fiscal Federalism: Understanding the Centre-State Discord .................................................34
1.11.6 Tax-GDP Ratio: Why is it Stagnant? .......................................................................................37
1.11.7 Goods & Services Tax .............................................................................................................40
1.11.8 Gender Budgeting ..................................................................................................................43
2 Monetary Policy Since Reforms of 1991 ..............................................................................................45
2.1 Evolution of monetary policy in line with the changing character of the economy ....................46
2.1.1 1935 to 1949: Initial Phase ....................................................................................................46
2.1.2 1949 to 1969: Monetary Policy in sync with the Five-Year Plans .........................................46
2.1.3 1969 to 1985: Credit Planning ...............................................................................................46
2.1.4 1985 to 1998: Monetary Targeting........................................................................................47
2.1.5 1998 to 2015: Multiple Indicators Approach ........................................................................48
2.1.6 2013-2016: Preconditions Set for Inflation Targeting ...........................................................48
2.1.7 2016 onwards: Flexible Inflation Targeting ...........................................................................49
2.2 Evolution of monetary policy in line with the changing Theoretical Developments and
International Best Practices .....................................................................................................................49
2.3 Evolution of monetary policy in line with the financial market developments ...........................50
2.4 Challenges in the Current Context ................................................................................................51
2.5 Conclusion .....................................................................................................................................52
1 Fiscal Policy Since Reforms of 1991

1.1 Introduction
Fiscal policy deals with the taxation and expenditure decisions of the government. Monetary policy, deals
with the supply of money in the economy and the rate of interest. These are the main policy approaches
used by economic managers to steer the broad aspects of the economy. In most modern economies, the
government deals with fiscal policy while the central bank is responsible for monetary policy. Fiscal policy
is composed of several parts. These include, tax policy, expenditure policy, investment or disinvestment
strategies and debt or surplus management. Fiscal policy is an important constituent of the overall
economic framework of a country and is therefore intimately linked with its general economic policy
strategy.
Fiscal policy also feeds into economic trends and influences monetary policy. When the government
receives more than it spends, it has a surplus. If the government spends more than it receives it runs a
deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw
upon its foreign exchange reserves or print an equivalent amount of money. This tends to influence other
economic variables. On a broad generalisation, excessive printing of money leads to inflation. If the
government borrows too much from abroad it leads to a debt crisis. If it draws down on its foreign
exchange reserves, a balance of payments crisis may arise. Excessive domestic borrowing by the
government may lead to higher real interest rates and the domestic private sector being unable to access

funds resulting in the “crowding out” of private investment. Sometimes a combination of these can
occur.
In any case, the impact of a large deficit on long run growth and economic well-being is negative.
Therefore, there is broad agreement that it is not prudent for a government to run an unduly large deficit.
However, in case of developing countries, where the need for infrastructure and social investments may
be substantial, it sometimes argued that running surpluses at the cost of long-term growth might also
not be wise. The challenge then for most developing country governments is to meet infrastructure and
social needs while managing the government’s finances in a way that the deficit or the accumulating debt
burden is not too great.
The initial years of India’s planned development strategy were characterised by a conservative fiscal
policy whereby deficits were kept under control. The tax system was geared to transfer resources from
the private sector to fund the large public sector driven industrialization process and also cover social
welfare schemes. Indirect taxes were a larger source of revenue than direct taxes. However, growth was
anaemic and the system was prone to inefficiencies. In the 1980s some attempts were made to reform
particular sectors and make some changes in the tax system. But the public debt increased, as did the
fiscal deficit. Triggered by higher oil prices and political uncertainties, the balance of payments crisis of
1991 led to economic liberalisation. The reform of the tax system commenced with direct taxes
increasing their share in comparison to indirect taxes. The fiscal deficit was brought under control. When
the deficit and debt situation again threatened to go out of control in the early 2000s, fiscal discipline
legalisations were instituted at the central level and in most states. The deficit was brought under control
and by 2007-08 a benign macro-fiscal situation with high growth and moderate inflation prevailed. The
global financial crisis tested the fiscal policy framework and it responded with counter-cyclical measures
including tax cuts and increases in expenditures. The post-crisis recovery of the Indian economy is
witnessing a correction of the fiscal policy path towards a regime of prudence. In the future, the focus
would probably be on bringing in new tax reforms and better targeting of social expenditures.
1.2 Fiscal Situation before Reforms

The need for tax reform was considered even during the 1950s. From 1950s to 1990s, a number of
Committees and Commissions were set up to suggest tax reforms aimed at reducing tax evasion and
augment government revenues. However, the implementation of these recommendations was adhoc.
Also, until the beginning of 1980s, the overall fiscal situation was under control with low revenue deficits
and marginal overall fiscal deficits.
But during the 1980s, the fiscal situation steadily deteriorated. In 1984-85, the overall fiscal deficit
touched 7.7% of the GDP. It marginally increased to 7.8% in 1989-90 reaching a further high of 8.3% in
1990-91. The rising fiscal deficits and the monetisation (i.e. borrowing from the RBI which leads to
creation of more or additional money) of a substantial part of it, led to inflationary pressures and to
growing deficit in the current account of the balance of payments.
The economic condition in the Indian economy resulting from the growing fiscal deficits on the one hand
and the current account deficit in the balance of payments on the other, led to a serious balance of
payments crisis towards the end of 1980s. Further, increasing revenue deficits (which had touched 3.5%
of GDP by 1990-91) necessitated a substantial amount of borrowing for meeting the revenue
expenditure. This resulted in increasing addition to unproductive debt with the interest burden on the
general budget beginning to increase significantly. Though the central government tried to raise
resources through taxation to meet the situation, it was not enough. The borrowing requirements of the
government continued to increase with 25% of the overall fiscal deficit being met through the RBI route.
A serious implication of fiscal deficits was thus the mounting debt burden, particularly the external debt.
Interest payments constituted about 24% of the total expenditure of the central government in the early
years of 1980s. Total outstanding debt of the central government stood at 59.5% of GDP in 1989-90. The
problem of debt burden had thus assumed a critical proportion by the end of 1980s. The fiscal situation
prevalent at the beginning of 1990s, was thus characterised by sustained high fiscal deficits and
mounting debt accumulation giving rise to inflation, financial repression and overall deterioration of the
macro economic fundamentals of the economy. Plagued by these situations, and in consequence thereof,
the Indian economy in 1990-91 was characterised by the following features:
• High inflation –16.7% in August, 1991.

• High interest rates.
• Large fiscal deficits – 8.3% of GDP.
• Higher trade tariffs – import duties ranging from 75% to 350%.
• Control of capital inflows and outflows.
• High subsidies – (amounting to 2% of GDP or 10.2% of government expenditure with growing non-
plan expenditure).
• Higher Current Account Deficit – 2.6% of GDP.
• Very low foreign exchange reserves, enough only to cover one weeks’ imports.
• Large internal and external debts.
The situation called for immediate correction highlighting the need for economic reforms. This forced the
government to recognise the need for swift and radical changes in the fiscal system, not only to bring

about macroeconomic stability but also to lay the foundation for a long-term Structural Reforms (or
Adjustment) Programme.
1.3 Fiscal Deficit & Fiscal Reforms

The economic crisis described above emphasised the need for adopting economic reforms in general and
fiscal reforms in particular. A broad ranging programme of economic reforms were initiated in June/July
1991 to tide over the crisis. The observation of World Development Report (1988) is relevant in this
regard: ‘a prudent fiscal policy can be defined as one that maintains the fiscal deficit at a level that is
consistent with other macro-economic objectives viz. controlling inflation, promoting private
investments and maintaining external credit worthiness’. A programme of fiscal consolidation to
achieve the desired goals should therefore focus on reducing fiscal deficit to a sustainable level. The
principal challenge was, therefore, to reduce fiscal deficit. In the light of this emphasis laid on reduction
in fiscal deficit, it is timely to know the dangers of high fiscal deficits. These are:
• The need for reducing fiscal deficit rests on the issue of sustainability. This is because fiscal deficits
can be financed by borrowing either from domestic sources or external sources. Each of these
methods, if carried out beyond a point, can lead to a crisis. Printing of money, over and above the
demand for money leads to inflation. Financing fiscal deficits by borrowing becomes unsustainable
if the interest rate exceeds the GDP growth rate. In such a case, the economy may end up in debt
trap.
• Even if high fiscal deficits are sustainable, they may crowd out investment, thereby affecting growth.
Hence high fiscal deficits are not desirable, even though they may be sustainable.
• High fiscal deficits significantly reduce the scope for flexibility in policy. Since deficits have to be
eventually corrected, they may lead to high tax regime, and/or reduction in government
expenditures, affecting incentives.
Thus, fiscal deficits are detrimental to growth as they: i) Crowd out private investment; ii) Set-in
inflationary pressures; iii)Increases foreign indebtedness and iv) Raise externality risk.
The above factors therefore emphasise the need for fiscal prudence. The quality of fiscal adjustment is
equally important in the sense that the deficit should be reduced by raising public savings and not by
reducing public investment. Public savings should be raised gradually and consistently along with
protection of social expenditure and improvement in the efficiency of the tax structure. Fiscal
consolidation thus means stress on domestic resource mobilisation of which taxation is an important
component. Therefore, the policy instruments for fiscal correction and reduction of fiscal deficits are to
focus dually on: i) tax reforms to increase revenues and ii) expenditure reforms to improve the efficiency
of public expenditure.
The initial fiscal reforms were guided by the following factors and motivations:
• Large fiscal deficits and automatic monetization of fiscal deficits leading to high inflation and interest
rates and crowding out private investment.
• High and irrational tax rates and tariff walls leading to industrial inefficiency, lack of
competitiveness, high-cost economy, non-optimal allocation of resources, low compliance rate, and
high degree of tax evasion.
• Large variance and multiplicity of tax rates on the basis of end-uses leading to weak tax
administration and rent seeking.
• Narrow tax base and low buoyancy and elasticity of both direct and indirect taxes.
• Complicated tax structure, laws, rules, and procedures.
• Emphasis on social services and safety nets.
• Need for public-sector enterprises reforms and disinvestments of government equity.
• Integration of fiscal, monetary, exchange rate, and trade policies.
• Demographic transition with an increase in life expectancy requiring old-age social security and
health care and reforms in pensions and provident and insurance funds.
The basic objective of fiscal reforms since 1991 has been to reduce fiscal deficits to sustainable levels by
expenditure management and resource mobilization through rationalization of taxes and duties,
widening of tax base, modernizing of tax administration, focusing attention on contingent liabilities, and
improving centre– states fiscal relations.
Like any other reforms, fiscal policies have perforce to be based on a gradual and step-by-step approach,
rather than a big-bang or shock-therapy approach, and have a strong emphasis on human face and a bias
towards poverty reduction and employment generation. Over the years, government has reduced its
scope and gradually withdrawn from commercial sectors where private initiatives are more productive
and efficient. But the need for enhanced public expenditure remains for the development of social and
physical infrastructure. The government is also encouraging public–private partnership including foreign
investment in crucial sectors. It is restructuring the public pension systems and insurance and provident
funds with private participation so that these contractual savings with long-term maturity can be utilized
for financing infrastructure projects.

1.4 Central Tax Reforms
1.4.1 Direct Taxes

Definition: A direct tax is the one in which the eventual burden falls on the person on whom it is imposed.
The burden cannot be shifted from the original payer to anyone else. Direct Tax is the tax paid to the
government directly by the assesse like the Income Tax or the Corporation Tax.
Direct tax rates were gradually brought down over the years with reduction in the peak rate of personal
income tax from 56 per cent in 1991–2 to 40 per cent in 1995–6, that of corporate tax from 57.5 per cent
to 43 per cent, and that of surcharge from 15 per cent to 7.5 per cent over the same period. The Union
Budget 1997–8 was a landmark in fiscal reform in attempting to align Indian tax rates with those in other
developing countries. The maximum marginal tax rate for personal income was reduced to 30 per cent
and that for corporate income to 35 per cent for domestic companies and 48 per cent for foreign
companies. Since then, till 2004–5, the emphasis on the direct tax front was to continue with moderate
tax rates, widen the tax base, simplify and rationalize tax rules and procedures, continue incentives for
infrastructure and housing, revive the capital market, and strengthen enforcement and tax compliance.
Recent trends in direct tax collections indicate that these policies have paid rich dividends by enhancing
compliance and tax productivity.
Merits of Direct Taxes

• Principal of equity: Direct taxes are based on the principle of capability to pay and are progressive
in nature. They thus reduce income inequalities and bring about adequate social & economic justice.
• Principle of certainty: In case of direct taxes, the payers know how much is due from them and
when. The authorities also know the amount of revenue they can expect. There is certainty on both
sides. Certainty minimizes corruption on the part of the collecting officials. Tax evasion can thus be
minimized.
• Creates civic consciousness: direct taxes make people more responsible as they know that the
public spending is because of the amount paid by them as tax.
• Elastic: With an increase in expenditures or deficits, the government can increase the revenues from
direct taxes by increasing the rates of taxation.
Demerits of Direct Taxes
• Large scale tax evasion: The tax evasion is due to high tax rates, complex documentation and
formalities and poor and corrupt tax administration.
• Narrow Coverage: India has a enormous agricultural sector which is exempt from taxation. Apart
from this, there is also an outsized informal sector which does not maintain account balances.

• Affects Capital Formation: If tax burden is high, people's consumption level gets harmfully
exaggerated & this has an impact on their ability to work and save. High taxes also dishearten people
from working harder in order to earn & save more. Reduction in savings results in low investments.
The small investments thus depress the capital formation in the country.
1.4.2 Indirect Taxes

Definition: Those taxes wherein the ultimate burden of the tax is not borne by the person on whom it is
levied. The impact and the incidence of the tax are borne by different entities. It is levied on goods or
services rather than on persons or organizations.
In respect of indirect taxes, the focus was to reduce the multiplicity of duty rates by abolishing end-use
specifications, move towards ad valorem rates, rationalize the tax structure, and drastically curtail the
scope for discretion by abolishing the power to grant ad hoc duty exemptions except for charitable
purpose or strategic reasons. In the Budget of 1998–9, eleven major ad valorem duty rates were reduced
to three, namely a central rate of 16 per cent, a merit rate of 8 per cent, and a demerit rate of 24 per cent.
Customs duty rates were also rationalized and simplified from seven to five ad valorem rates ranging
from 5 per cent to 40 per cent. These reforms resulted in reduction of peak rate of customs duty in a
phased manner from 150 per cent in 1991–2 to 10 per cent in 2004–5 to make Indian industry globally
competitive.
Merits of Indirect Taxes:

• Convenient to Pay: Indirect taxes are convenient to pay as they are included in prices, hence
taxpayer does not feel the burden directly.
• Less Tax Evasion: Indirect taxes are difficult to escape as they are a part of the cost of production
and hence, included in the prices.
• Less Resentment: Since indirect taxes are hidden in the price of the product, the taxpayer does not
realize how much tax he has paid for his total purchases. These taxes are not felt directly and thus
cause less resentment.
• Social Value: High Indirect taxes on luxuries and prohibitive commodities like alcohol, tobacco, etc.
can discourage the consumption of these goods. They can serve to improve equality and public
health and thereby boost the welfare of the economy.
• Greater Coverage: Only an insignificant share of the population pays direct taxes due to low income
levels. In such economies, most of the tax revenue is collected in the form of indirect taxes as they
have a broader reach

• Forced Saving: Indirect taxes take away the consumer’s surplus & divert the proceeds to the
government. This helps to promote capital formation
• Promotes Economic Development: Indirect taxes can be used to promote the production of
necessities and discourage the production and consumption of luxuries. Exports and imports can
also be regulated. Thus, indirect taxes can help to promote economic development.
Demerits of Indirect Taxes
• Equity Implications: Indirect taxes are unjust and inequitable as they are regressive in nature. They
are not levied according to the principle of ability to pay. Since indirect taxes are charged at a
proportional rate on commodities of general consumption, their burden falls more heavily upon the
poor sections of the society.
• Less Economical: The cost of collection of indirect taxes is high as it is calculated and collected at
various stages of production and consumption.
• Unproductive: Government incurs public expenditures for the functioning of the economy.
Government expenditures form one-fourth of the total spending’s in India. A substantial amount of
indirect taxes is paid by the government to itself as public expenditures and do not lead to any real
revenue generation.
• Inflationary: Indirect taxes are passed onto the consumers through increase in the price of
commodities. This leads to inflationary tendencies in the economy.
• Discourage Savings: when people have to spend more with a rise in the indirect tax rates.
1.4.3 MODVAT
A modified value-added tax called MODVAT was introduced in 1986 for reducing industrial costs and
prices by relieving taxes on inputs, thereby mitigating the cascading effect on final products. Since 1986,
the MODVAT scheme has undergone significant changes with its extension to almost all commodities
and introduction of input tax credit across goods and services.
1.4.4 Service Tax

The tax net was widened by introducing tax on a select number of services in 1994. With the share of
the services sector growing in the GDP, the coverage of the service tax has been widened to ensure
greater equity and diversity in the tax system.
1.4.5 Fiscal Incentives

India provides fiscal incentives for the development of industry, infrastructure, and technology, which
are equally applicable to both domestic and foreign companies. Tax holidays up to fifteen years are
allowed for industries set up in backward regions and for infrastructure projects set up anywhere in
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India. Incentives are given for exporters, R&D activities, and units located in Special Economic Zones
(SEZs), Export Processing Zones (EPZs), and Science and Technology Parks. A number of incentives such
as capital subsidy, tax breaks, exemption from state duties, and concessional land and power are also
provided by the states. Regulatory authorities for telecom, ports, and power determine tariffs, which are
important for enhancing the financial health of the public-sector enterprises within these sectors.
India allows World Trade Organization (WTO)- compatible tax exemption for exports, lower interest
rates for export credits, and duty drawback on inputs used for exports. However, tax exemptions on
exports are being phased out over time. Producers are allowed duty-free imports of capital goods subject
to export obligations. Exporters of foodgrains are given WTO-compatible subsidies. India is a member of
the Multilateral Investment Guarantee Agency and has signed comprehensive treaties for avoidance of
double taxation with many countries.
1.5 Public Debt Management

The outstanding domestic liabilities of the central government increased from 49.8 per cent of GDP at
end March 1991 to 62.3 per cent of GDP at end March 2005, while the book value of outstanding external
debt declined from 5.5 per cent to 1.8 per cent of GDP over the same period. An encouraging feature has
been a decline in interest payments from 53.4 per cent of revenue receipts in 2001–2 to 41.8 per cent
in 2004–5 and in the average interest rate on outstanding domestic liabilities from 10.5 per cent to 7.76
per cent over the same period.
The combined public debt of the general government (centre and states) as a percentage of GDP
increased by 17 percentage points from 64 per cent at end March 1991 to 81 per cent of GDP at end
March 2005. However, outstanding government guarantees of the general government declined from
13.4 per cent at end March 1993 to 10.6 per cent at end March 2004. The government is pursuing an
active debt management policy with emphasis on appropriate maturity and interest rate minimization.
It pre-paid $7.2 billion worth of high-cost external debt during 2002–3 and 2003–4.
Until 1990 India adopted a development strategy based on the predominant role of a public sector.
Unlimited borrowings from the Reserve Bank of India (RBI) at subsidized rates enabled government to
finance large fiscal deficits. The government initiated reforms in 1992 with the auction of government
securities at market determined rates, followed by gradual withdrawal of RBI support and cessation of
automatic monetization of government deficit. The government also strengthened institutional
infrastructure and the legal and regulatory set-up for the government securities market. The active
public debt management strategy comprised minimizing refinancing risk and avoidance of issuing
floating rate and short-term and foreign currency-denominated debt.
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These policies paid dividends and protected India from the contagion effect of the East Asian crisis in
1997– 2000. There was significant improvement in external debt indicators with external debt–GDP
ratio declining from 38.7 per cent at end March 1992 to 17.4 per cent at end March 2005 and debt service
ratio declining from 35.3 per cent in 1990–1 to 6.2 per cent in 2004–5. As per classification in the Global
Development Finance of the World Bank, India was categorized a ‘low indebted’ country by 2004-05.
1.6 Central Fiscal Responsibility and Budget Management (FRBM) Act, 2003
For fiscal consolidation, the central government enacted the Fiscal Responsibility and Budget
Management (FRBM) Act, 2003. The FRBM Act, 2003 and FRBM Rules, 2004 came into force with effect
from 5 July 2004. The Act mandated that the central government to eliminate revenue deficit by March
2009 and to reduce fiscal deficit to 3 per cent of GDP by March 2009. Under the Act, the central
government is required to lay before both Houses of Parliament a Medium-term Fiscal Policy Statement,
a Fiscal Policy Strategy Statement, and a Macroeconomic Framework Statement along with the Annual
Financial Statement and Demand for Grants.
Note: FRBM Act 2003 has been amended several times. We have mentioned about the act here to indicate
its importance in the larger scheme of things.
1.7 Trends in Direct Taxes in India

% of Total
Rupees
Year % of GDP Tax
(Cr.)
Revenue
1980-81 1893 1.27 20.23
1990-91 6903 1.18 16.06
2000-01 49651 2.29 36.33
2010-11 313502 4.09 55.01
In the eighties, the Direct Tax as a percentage to GDP had decreased from 1.27% in 1980-81 to 1.18% in
1990-91. The share of direct taxes in total taxes had reduced from 20.23% in 1980-81 to 16.06% in 1990-
91. The declining share of direct taxes was not consistent with the expansion, modernization and
diversification of the economy.
After the economic reforms of 1991, Direct taxes as a percent of GDP have shown an improvement. It
improved from 1.18% in 1990-91 to 2.29% in 2000-01 and further to 4.07% in 2010-11. Direct taxes as a
percentage of total tax collections rose from 16.06% in 1990-91 to 36.33% in 2000-01 and 54.61% in
2010-11. The improvement in direct tax collections despite scaling back of income tax rates during this
period could be attributed to expansion in the tax base, extension of the base for tax deduction at source
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and improvement in direct tax administration. The high tax compliance due to restructuring of tax
administration and introduction of information technology on a large scale assisted this improved revenue
collection.
This is a healthy development as direct taxes are more progressive than indirect taxes. From below 20%
share in total tax revenues in 1990-91, the share of direct taxes has increased to over 55% in 2010-11.
1.7.1 Personal Income Tax

% of Total
Rupees
Year % of GDP Tax
(Cr.)
Revenue
1980-81 438 0.29 4.68
1990-91 1250 0.21 2.91
2000-01 23766 1.10 17.39
2010-11 102406 1.33 17.97
The tax rates in Personal Income Taxes were exorbitantly high by any standards during the decade of
eighties. The need for rationalization of tax structure was felt long back before the economic reforms
took place during nineties. In 1980-81, personal income tax accounted for 4.68 percent of total tax
collections. However the relative contribution declined over the years it came down to 2.91 percent in
1990-91. As a percentage of GDP the personal income tax shows a decline from 0.29 percent in 1980-81
to 0.21 percent in 1990-91. The reasons were tax evasion and avoidance and due to slow down of the
economy.
The tax structure of Personal Income Tax has been rationalized to a large extent since the initiation of
tax reforms. After the tax reforms initiated in 1991, the percentage share of personal income tax in total
tax collections has increased. It went up to 17.39 percent in 2000-01. Till 2007-08 the share kept
increasing. Thereafter, it fluctuated slightly and was 17.97 percent in 2010-11. The increase in 2000s was
restrained because of the slowdown of the economy post global financial crisis. The percentage of
personal income tax on GDP has increased from 0.21 percent in 1990-91 to 1.10 percent in 2000-01 and
then 1.33 percent in 2010-11.
1.7.2 Corporation Tax

% of Total
Rupees
Year % of GDP Tax
(Cr.)
Revenue
1980-81 1311 0.88 14.01
1990-91 5335 0.91 12.41
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2000-01 25177 1.16 18.42
2010-11 209115 2.72 36.70
Corporation tax has been a major part of direct taxes in India. In 1980-81, corporate tax was 14.01 percent
of the total tax collected while in 1990-91 it was 12.41 percent. As a percent of GDP, corporation tax was
0.88 percent in 1980-81 and it went up to 0.91 percent in 1990-91. The reason for a slow growth in
eighties was slowdown of the economy.
Post 1991 reforms, there was in improvement in the revenues from corporate taxes. The share of
corporation tax in total revenue increased to 18.42 percent in 2000-01 from 12.41 percent in 1990- 91.
Thereafter, it rose to 36.70 percent in 2010-11. The revenue from the corporation tax grew at the fastest
rate during the nineties. As a ratio of GDP, the revenue from the tax increased by three times from 0.91
percent in 1990-91 to 2.72 percent in 2010-11. This happened in spite of reduction in the rates. The
increasing lucrativeness of the Indian corporate sector is mirrored in the growth of the ratio.
1.8 Trends in Indirect Taxes in India

% of Total
Rupees
Year % of GDP Tax
(Cr.)
Revenue
1980-81 7465 4.99 79.77
1990-91 36075 6.15 83.94
2000-01 87007 4.01 63.67
2010-11 259356 3.38 45.39
The tax structure at central level revolved around indirect taxes in the eighties. Almost 80% of the tax
revenue was generated through indirect taxes. As a percentage of GDP, indirect taxes had increased from
4.99% in 1980-81 to 6.15% in 1990-91. The share of indirect taxes in total taxes had increased from
79.77% to 83.94% during the same period.
In the wake of reforms initiated in early 1990’s, the share of indirect taxes in total taxes had declined
from 83.94% in 1990-91 to 63.67% in 2000-01 and then further down to 45.39% in 2010-11. The reforms
were focused on improving the share of direct taxes. The indirect taxes as a percentage of GDP has also
shown a declining trend post reforms. From 6.15% in 1990-91 it fell down to 4.01% in 2000-01. In 2010-
11 it was 3.38 %.
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1.8.1 Excise Duty
% of Total
Rupees
Year % of GDP Tax
(Cr.)
Revenue
1980-81 3723 2.49 39.78
1990-91 14100 2.41 32.81
2000-01 49758 2.29 36.41
2010-11 110222 1.44 19.29
It is one of the most well-known forms of taxation in India. Any manufacturer of excisable products is
accountable to pay this tax.
Since 1980-81, there has been a declining trend in excise duty and this declining trend is truly a matter
of concern. The reforms in union excise duties in 1990-91 rather than improving the revenue productivity
have led to its decline over the years.
As a percentage of GDP, excise duties decreased from 2.49 % to 2.41 % in 1990-91 and then further down
to 2.29 % in 2000-01. In 2010-11 the rate was even lower at 1.44 %. As a percentage of total tax
collections, this component of revenue has shown a major decline. As a percentage of total taxes it was
39.78 % in 1980-81 falling down to 36.41 % in 2000-01, and then it fell down to 19.29 % in 2010-11. The
share of Union excise duties witnessed a sharp decline of over 31 percentage points. The sharp decline in
the share of Union excise duties was largely on account of rate cuts, and in recent years, on account of
the slowdown in the growth of the manufacturing sector.
1.8.2 Customs Duty

% of Total
Rupees
Year % of GDP Tax
(Cr.)
Revenue
1980-81 3409 2.28 36.43
1990-91 20644 3.52 48.03
2000-01 34163 1.58 25.00
2010-11 97598 1.27 17.08
The Constitution has given to the Union a right to legislate and collect duties on goods imported into or
exported from India. The Customs Act, 1962 is the basic Statute, effective from 1st February 1963.
The most important and in many ways far reaching reforms have been in the case of customs tariffs. The
fastest growth of revenues was in respect of customs during the period from 1980-81 to 1990-91, when
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import duties were significantly reduced. In 1980-81, the customs revenue was 36.43 % of the total tax
revenue and went up to 48.03 % in 1990-9. Since 1992-93, i.e. post liberalization, a sharp fall is noticeable
due to drastic reductions in tariff rates. Imports subject to quantitative restrictions constituted 90 % of
total imports, and these restrictions have been virtually done away with. Due to these reforms the
revenue has been falling and it came down to 25.00 % in 2000-01 and further down to 17.08 % in 2010-
11. Customs revenue as a percentage of GDP had increased from 2.28 % in 1980-81 to 3.52 % in 1990-91.
Post reforms this ratio has been falling and had reached 1.58 % in 2000-01. In 201-11 the ratio was 1.27%.
1.8.3 Service Tax

% of Total
Rupees
Year % of GDP Tax
(Cr.)
Revenue
1980-81 - - -
1990-91 - - -
2000-01 2613 0.12 1.91
2010-11 71016 0.93 12.46
Service tax was introduced in India for the first time in 1994. It is levied, collected and appropriated by
the Union Government.
The Service Tax collections have shown a steady rise since its inception in 1994. The tax collections have
grown manifolds since 1994-95 i.e. from Rs. 407 crores in 1994-95 to Rs. 71016 crores in 2011-12. The
total number of taxable services has also increased from 3 in 1994 to 119 as on 1st May, 2011. There is
a substantial increase in number of assessees and taxable services but their growth rates have not
consistently increased so far. In short, the service tax is progressing faster in terms of revenue generation
from taxable services, assessee base and even service tax collection per assessee and per service. The rate
imposed originally was a moderate 5 % of turnover. This was, however, progressively increased to 12 %
and an additional education tax of 2 % on service tax was imposed in 2006–2007. The 2008 crisis, however,
forced a rollback in the service tax rate to 10 % in February 2009. Collections from service tax have shown
a steady rise from 0.04 % of GDP in 1994–95 to 0.93 % in 2011-12.
Service tax is growing very fast in terms of revenue, but its amount of revenue is much lower than the
other major taxes of central government. Although the average contribution of service sector in GDP of
the country has increased from 41 % in 1980-81 to nearly 55 % at present, the average contribution of
service tax in total tax revenue and its average percentage to GDP both are very small i.e. 0.93 % and
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12.77 % respectively in 2011-12. In short, it is to say that the service tax is generating much lower revenue
from the service sector and contributing small percentage to total tax revenue of the country.
1.9 Trends in Revenue and Capital Expenditures
The first major trend in public expenditures which we observe in India is the growing revenue
expenditures of the government from Rs.14,410 crores in 1980-81 to Rs. 10,40,723 crores in 2010-11.
Though, in terms of absolute number, the total expenditure has risen 80-fold, but, it is clear that in terms
of ratio with GDP, it is almost stagnant. On the other hand, composition has changed in favour of
revenue expenditure.
Increased defence commitments, expansion of the administration, the working of democratic institutions
like the parliament, the government’s international commitments, increase in government’s
participation in nation building activities like education and public health, rise in prices, etc., all these are
responsible for increased revenue expenditures of the central government.
Capital expenditures during the same period increased about 20 times, from Rs. 8,358 crores in 1980-81
to Rs. 1,56,605 crores in 2010-11.
In the eighties, the major thrust of the government was improved infrastructure and rural development;
therefore, the capital expenditures were high during this period. Revenue expenditures were, however,
mounting and as a percentage of GDP, increased from about 9.6 percent in 1980-81 to 12.5 percent in
1990-91. With the increasing public debt, the interest payments grew from 1.7 percent of the GDP in
1980-81 to 3.6 percent in 1990-91. Defence expenditures during this period stayed above 2 percent of
GDP throughout. Subsidies increased from 1.36 percent in 1980- 81 to 2 percent in 1990-91. Out of the
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capital expenditures, loans and advances and capital outlay declined, resulting in a fall in capital
expenditures to GDP ratio from 5.5 to 5.4 percent during this period.
The share of total expenditures in GDP started falling in the nineties after the reforms, mainly because
of the macroeconomic stabilization program that followed the 1991 BOP crisis. It fell from 17.96 percent
in 1990-91 to 15 percent in 2000-01.
As a percentage of GDP, capital expenditures fell from 5.4 percent in 1990-91 to 2.2 percent in 2000-01.
Revenue expenditures, on the other hand showed an increase from 12.5 percent in 1990-91 to 12.8
percent in 2000-01, mainly because of the increase in interest expenditures. Defence expenditures and
subsidies both showed a decline during this decade. The fall in capital expenditures could be attributed
to fall in loans and advances from 3.3 percent in 1990-91 to about 1 percent in 2000-01 and fall in capital
outlays from 2 percent to 1 percent during the same period.
The composition of total expenditures was skewed in favour of revenue expenditures and the ratio of
revenue expenditures in total expenditures increased from about 70 percent in 1990-91 to about 85
percent in 2000-01. Capital expenditures as a percentage of total expenditures reduced from 30 percent
to about 14.6 percent.
In 2000s, there was no change in the composition of the total expenditures, with revenue expenditures,
increasing slightly from 85 percent in 2000-01 to 87 percent in 2010-11. Capital expenditure’s share in
total expenditures reduced from 14.6 percent in 2000-01 to 13 percent in 2010-11. Total expenditures as
a percentage of GDP increased to 15.6 percent in 2010-11 from 15 percent in 2000-01. Revenue
expenditures increased to 13.5 percent in 2010-11 from 12.8 percent in 2000-01 and capital expenditures,
on the other hand, declined from 2.2 percent in 2000-01 to 2 percent in 2010-11.
Out of the revenue expenditures, defence expenditures and interest payments as a percentage of GDP,
have shown a decline, whereas, subsidies have increased from 1.2 percent in 2000-01 to 2.2 percent in
2010-11. Out of the capital expenditures, loans and advances have shown a decline whereas, capital
outlays have shown an increase from about 1 percent in 2000-01 to 1.7 percent in 2010-11.
Overall, Capital expenditures as a percentage of GDP declined from 5.5 percent in the 1980-81 to 5.4
percent in 1990-91 to 2.2 percent in 2000-01; and further down to 2.04 percent in 2010-11. By contrast,
revenue expenditures, which were 9.6 percent of GDP during the 1980-81, rose to 12.5 percent in 1990-
91 and further to 12.8 percent in 2000-01. In 2010-11, it went up to 13.5 percent.
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1.9.1 Trends in Components of Revenue Expenditures
Interest Payment
The fiscal deficits of the government of India have increased since the eighties. This has led to the
increased deficit financing through the borrowings to meet these deficits and that has led to the ever-
growing public debt. The interest burden of the central government has thus, increased over the years.
The interest payment is a committed liability and the outgo on this account is determined by the past
stock of public debt and its composition, current level of fiscal deficit and interest prevailing in the
present as well as the interest rates of the past. As a percentage of GDP, the interest burden had increased
from 1.7 percent in 1980-81 to 3.6 percent in 1990-91.
In the nineties, the higher interest rates had resulted in a significant part of revenue receipts being used
for interest payments. The fiscal consolidation process undertaken during the reforms of the nineties did
bring in some control in the debt burden of government in the first half of the nineties. Still the interest
burden was high and continued to increase because the government borrowings were at a market-
determined rate of interest, which was high. The interest burden went up from 3.6 percent in 1990-91
to 4.5 percent in 2000-01.
With a softening of interest rates, the declining trend was witnessed in the 2000s. Reflecting this, as a
proportion of GDP, interest payments came down from 4.5 percent in 2000-01 to 3 percent in 2010-11.
Defence Expenditure
The central government also undertakes revenue and capital expenditures for defence purposes. Defence
expenditure in absolute terms is increasing because of growing tensions in the region and the use of
highly expensive technology in war equipments. Defence expenditure has shown a steady decrease from
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2 percent of GDP in 1980-81 to 1.8 percent in 1990-91. Then it went down to 1.7 percent in 2000-01 and
further down to 1.2 percent in 2010-11.
Subsidies
Expenditure on subsidies is a crucial element of government expenditures, particularly in the light of

targeting poverty alleviation and the growing need to rationalise expenses for fiscal consolidation. In
addition to the explicit subsidies, several implicit subsidies in the form of lower user charges for
economic and social services provided by the government are also incurred, and thus should be taken
into account in the total burden of the subsidies.
Subsidies on food, fertilizers and on export promotion, have become an integral part of central
government expenditure and despite government’s frequent promise to reduce them, they are continuing
to rise, year after year. During the eighties, as a percentage of GDP subsidies increased from 1.3 percent
in 1980-81 to 2 percent in 1990-91.
In the nineties, initiatives were taken to curtail the expenditure on subsidies. The export subsidies were
phased out and fertilizers prices were decontrolled. Accordingly, total explicit subsidies of the central
government were reduced from 2 percent of GDP in 1990-91 to 1.2 percent by 2000-01.
In the decade 2000-10, the subsidy burden went up again. The reason of this rise was the introduction
of petroleum subsidies with the dismantling of the administered price mechanism and also due to the
global financial crisis suffered in 2008-09. The subsidies as a percentage of GDP went up from 1.2 percent
in 2000- 01 to 2.2 percent in 2010-11.
Pay & Allowances
The rising bill in respect of wages, salaries and pensions is considered an important element in the fiscal
health of the government, particularly in the recent years. These components partly represent the
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committed expenditure obligations of the government. An intertemporal analysis of the behaviour of the
expenditure on these components shows periodic spurts corresponding to the implementation of pay
commission recommendations.
Data pertaining to pay and allowances of central government reveals that expenditure on pay and
allowances increased from Rs. 2751 crores to Rs. 97566 crores in 2010-11 showing an increase by 36
times. The total cost to government on account of pay and allowances during the last 30 years, however,
had a considerable decline as a percentage of GDP due to a cut in government staff size during the period
under reference. The pay and allowances expenditure as a percentage of GDP was 1.8 percent in 1980-81
and it went down to 1.7 percent in 1990-91. In 2000-01, the ratio was 1.3 percent it went down further
to 1.2 percent in 2010-11.
1.9.2 Trends in Components of Capital Expenditures
Capital expenditure comprises of expenditure met usually from borrowed funds to increase the concrete
assets of a material and permanent character. It comprises of capital outlays and loans and advances to
state and other bodies. The Central government’s capital expenditure as a proportion of GDP has declined
from 5.5 percent in 1980-81 to 5.4 percent in 1990-91 and then to 2.2 percent in 2000-01. In 2010-11, it
was recorded at 2.04 percent.
Capital Outlays
Capital outlays represent the expenditure undertaken by the government to build its investments. These
investments enhance the productive capacity of the economy through provision of the infrastructure
and capital goods. The impact of resource crunch and the need for fiscal correction has more often been
in form of compression of capital outlays. In 1980-81, the ratio of capital outlays was at 2.05 percent of
GDP. It increased to 2.07 percent in 1990-91. Amidst the fiscal consolidation process in the early nineties,
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the capital outlays of the Centre declined to 1 percent in 2000-01. There was some reversal of trend in
2000s and the center’s capital outlays went up to 1.7 percent in 2010-11.
Loans and Advances
The growth rate of loans and advances as against GDP in 1980-81 was 3.5 percent, reducing slowly initially
and coming down to 3.3 percent in 1990-91. In the next decade, it came down drastically to slightly more
than 1 percent in 2000-01. In 2010-11, the ratio was 0.33 percent. The reason of the fall being the debt
consolidation and debt waiver schemes for the state governments started by the central government in
2005 which comprised consolidation, rescheduling and lowering of interest rates and waiver in certain
cases.
1.10 Trends of Public Debt
Public debt in India has been growing at an alarming rate for past few decades. India faces difficulty in
the financing of economic development because of the under developed nature of the economy and
institutional credit deficiencies. Hence, the government has to play an important role in stimulating the
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rate of capital formation and in promoting the economic development of the economy. Thus, public
debt is used by the govt as a means for mobilising the resources.
The above tables indicate the growth of the public debt of the GOI. The Central govt's debt has increased
by over 51 times between 1980-81 and 2010- 11, from Rs. 56,115 crores to Rs. 28,98,799 crores.
The main reason for increase in internal public debt in India during the above said period was the
requirement of funds for financing various developmental programmes, as both tax and non-tax
revenues were inadequate to finance the govt expenditures. The external public debt in India also
increased significantly, as it was utilised to make import payments and to solve the balance of payment
problems.
Out of the total public debts, the internal liabilities share increased from 79.6 per cent in 1980-81 to
about 90 percent in 1990-91. It went up further to 94.3 percent in 2000- 01, and has floated around that
range in 2010-11, as well. On the other hand, the external debt as a percent of total debt has shown a
decline from 20 per cent in 1980- 81 to 10 percent in 1990-91 and then it fell down to about 5.6 percent
in 2010-11.
In 1980-81, the total outstanding debt of the Central Govt was 38.6 percent of GDP. Out of which, the
Internal debt was 30.8 percent and the External debt was 7.7 per cent. The total debt went up to about
55 percent in the next decade. It remained almost the same, even in the year 2000-01 and then it went
up further to 56.7 percent in 2010-11. The internal debt jumped from about 50 percent in 1990-91 to 52
percent in 2000-01 and further to 54.4 percent in 2010-11. The external debt, on the other hand,
declined from 5.5 per cent to 3.1 percent and then to 2.3 percent of GDP in the respective years.
The tremendous rise in total public debt in India during 1980-81 to 2010-11 provides an alarming signal
to the Indian economy. There is an urgent need to manage public debt in India. However, we cannot
ignore the fact that public debt is essential for the functioning of the government and the economy.
1.10.1 Burden of Public Debt

Public debt puts a burden on the economy on account of repayment of principal amount and interest.
Both internal as well as external debts carry a burden on the economy.
• To repay public debt, the govt may increase taxes or reduce public expenditure. This leads to increase
in tax burden, which adversely affects the growth and development of India. Higher taxes may
demotivate the tax payers to work hard for higher incomes. This may have an adverse effect on
productive activities in the country.
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• The servicing of internal debt involves transfer of income from younger generations to older
generations and from active to inactive enterprises.
• Internal debt may indirectly affect private investment. It involves huge interest payments. Therefore,
lesser funds are available with the govt for development activities such as infrastructure. Lack of
infrastructure development discourages private investment, which affects economic growth.
• Higher interest burden also leads to availability of lower funds towards activities for social
development such as health, education, family welfare, etc.
• Excessive govt borrowings leads to loss of liquidity in the economy. It forces the interest rates to go
up and public investment is crowded out as there is less liquidity in the economy and the interest rates
are too high. The investment suffered and there is deceleration in the growth.
• Though, external debt is initially beneficial for the country as it increases the resources availability of
the country, but its repayment and servicing creates a monetary load on the debtor country. The
degree of load depends upon the rate of interest and loan amount.
• There is also a loss of economic welfare i.e. increased taxation leads to sacrifice of the consumption
of goods and services.
• There is also a problem of Debt Trap as certain countries borrow heavily from external sources. Quite
often, these funds are utilised for non-development and unproductive purposes. Every so often,
countries which are highly indebted borrow funds to repay its earlier debts. These heavy borrowings
to repay earlier debts put already highly indebted countries in an external debt trap.
1.10.2 Methods to reduce the burden of public debt

The steps that can be taken to reduce the public debt are:
• The revenue expenditures, like govt’s wasteful expenditures and subsidies need to be reduced so that
they can be met out of the revenue receipts of the govt. This way the govt's net borrowings are used
only for productive purposes.
• There is a need to encourage more foreign investment.
• Disinvestment of sick public sector units.
• There is a need for the proper monitoring of public expenditures. Moreover, a special department
should be set up for the same.
• There is an urgent need for creating consolidated sinking fund (CSF) to break the vicious cycle of
burden of debt and repayment.
1.11 Other Important Issues
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1.11.1 Flexible but Range Bound v/s Fixed Fiscal Deficit Targets
Fiscal Deficit: Recent Trend
The government’s performance measured by the fiscal deficit yardstick has been mixed in the last 10
years. For instance, on as many as four occasions, the actual fiscal deficit figure turned out to be higher
than the target set just before the start of the year. The target was met in three years and bettered in
three years.
The trajectory of fiscal consolidation over these 10 years, however, was slightly better. Barring an
increase in the fiscal deficit from 4.9 per cent of GDP in 2010-11 to 5.9 per cent in 2011-12, the Union
government’s deficit was steadily brought down in each of the following seven years. This reduction
was largely due to a fall in oil prices and the government mopping up substantial revenues from this
sector. But in the last one year, the trajectory has once again taken a worrying direction, with the fiscal
deficit rising from 3.4 per cent in 2018-19 to 4.6 per cent in 2019-20.
The situation prevailing in 2020-21 is not a secret. Fiscal consolidation will go haywire. The fiscal deficit
target for 2020-21 was originally set at 3.5 per cent of GDP. But the government’s revenues have
collapsed and its expenditure burden will only increase over the Budget estimates. With the government
having already planned for an additional borrowing of over Rs 4 trillion, the fiscal deficit for the current
year would be much higher than the Budget estimate.
Flexible or Fixed?
It is important to note that it is in this context of a sharp fiscal deterioration that the idea of flexible
range-bound deficit targets has been mooted.
Devising a new mechanism for measuring the performance of the government’s fiscal consolidation
efforts should help shift the public debate to a new idea of a range-bound target. The idea of, say, a fiscal
deficit target of 3 per cent of GDP, with the flexibility of a two percentage points deviation either way
would become a bigger event than the sharp fiscal slippage that the government’s finances have
experienced in the last two years.
In the event of a slippage next year, the debate could be easily guided to reflect on how the ceiling of 5
per cent has not been touched. And yet, for the consumption of policy analysts and rating agencies, the 3
per cent target would be presented as what the government wanted to achieve. At the same time, it
would be argued that the deficit was contained within the broad range outlined in the fiscal consolidation
path. There would be no sleepless nights over the task of achieving a fiscal deficit target of 3.3 per cent in
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2021-22 or 3.1 per cent in 2022-23, as projected in the government’s latest Medium Term Fiscal Policy
Cum Fiscal Policy Strategy Statement.
The chairman of the 15th Finance Commission, N K Singh, has argued that there is merit in looking at a
range rather than a number, because it would then be in congruity with monetary policy targets and it
would lead to “less accounting engineering”. Since 2016, the monetary policy reviews have been linked
to achieving a retail inflation target of 4 per cent, with a permissible deviation of two percentage points
either way. The flexible retail inflation targeting has certainly worked in the case of monetary policy.
Ensuring uniformity in the manner in which inflation and fiscal deficit are targeted is also a good idea
in principle.
1.11.2 External Sovereign Debt – Pros & Cons

In her Budget speech for FY 2019-20, India’s Finance Minister announced the government’s intent to
finance a part of the fiscal deficit by issuing sovereign bonds in the international financial markets. This
is a major departure from a 72-year history of Indian economic management when external commercial
debt was consciously avoided by the government. (Up to now, external borrowings by Government of
India have been limited to multilateral agencies and bilateral arrangements with foreign governments.)
Arguments in Favour of External Sovereign Debt
There appear to be three main arguments that have been made in favour of issuing foreign currency-
denominated sovereign bonds in the international market:
(a) Foreign interest rates are much lower than interest rates in India, which would reduce the
government’s future interest payments;
(b) Yields on our sovereign bonds will set a benchmark for Indian companies to raise funds abroad; and
(c) Space will be created in the domestic financial market for the private sector by reducing ‘crowding
out’.
Analysis of Arguments in Favour of External Sovereign Debt
First, it needs to be realised that the interest rate on the sovereign bonds will depend upon the sovereign
rating of the country by rating agencies. At present, India’s rating is already at the bottom of ‘investment
grade’. Since India has never borrowed abroad commercially, these ratings are currently of academic
interest, and are designed mainly to provide guidance to foreign portfolio investors and to influence
policymaking in India (which has worked up to a point). However, if India does decide to float a sovereign
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bond, there will be a re-rating; and these ratings will be real in the sense that they will determine the
actual interest rate that we will have to pay.
As things stand, the rating agencies are aware of the fact that the numbers presented in the Budget are
not entirely reliable. (A recent report by the Comptroller and Auditor General (CAG) estimates that in
2017-18 the fiscal deficit was underestimated by around 2% of GDP (gross domestic product) if off-
Budget items are taken into account.) In the last year alone as well, Government of India’s debt liability
is understated by Rs. 1.6 to 2.4 trillion. This factor will not only be taken into account, but it will also be
presumed that the proceeds from the dollar bonds would be used to pay off a part of this liability rather
than for any productive purpose. It is then almost certain that the re-rating will tip our sovereign rating
to ‘junk bond’ status.
Such an outcome will not only involve serious loss of face for the government and the country, but the
actual interest rate will not be the 2% that is being talked about, but closer to 4%. (The 2% figure comes
from the interest rate paid by the US government on its dollar borrowings. Those who use this number
forget that US sovereign debt is the only risk-free instrument for dollar-denominated borrowings. All other
countries will have to pay a higher rate since they will carry some risk: for the good ones, it may only be
market risk; for the others, there will be default risk as well.) If hedging costs are taken into account,
these will add another 3.5-4% to the rupee value of the interest rate. Thus the total rupee value will be
around 7.5-8%, which is significantly higher than the current yield on 10-year government bonds (6-7%).
Of course, the government can choose not to hedge its interest liability and bear the exchange risk, which
will lower the actual pay-out if the rupee does not depreciate significantly.
Second, as far as external commercial borrowings by Indian companies are concerned, it needs to be
mentioned that such borrowings are already US$30-40 billion annually. Do we really need more,
especially when our balance of payments is not stressed because of foreign direct investment (FDI) and
foreign institutional investment (FII) inflows? More importantly, the presumption that a sovereign bond
yield will help reduce the interest rate paid by our companies may be misplaced. At present, since no
sovereign yield exists, Indian companies are borrowing abroad on the strength of their own balance
sheets and, to a lesser extent, India’s foreign exchange reserve holdings. As a consequence, many
companies are borrowing at rates which are lower than the rate which will be applied to a sovereign
‘junk bond’. However, once a sovereign yield comes into existence, foreign lenders will find it very difficult
to justify lending to Indian companies at interest rates lower than the sovereign yield. As a result, the
better Indian companies may actually experience an increase in their rates and not a reduction, as is
being hoped. On the other hand, weaker companies may find it easier to borrow, but since they cannot
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avoid hedging, it is quite likely that their rupee cost of foreign borrowing may be higher than the rate they
pay on domestic borrowings.
Third, while it is undoubtedly true that a reduction in the government’s domestic borrowings will free
a certain amount of domestic financial resources for private borrowers, it does not in any way increase
the quantum of domestic savings. If the Indian private sector actually borrows more, it will create a gap
between savings and investments in the country. This can only be bridged by an increase in the inflow of
foreign savings. Since, by definition, inflow of foreign savings equals the current account deficit (CAD), it
will require the CAD to rise. The real question is whether this takes place through increased economic
activity in the country leading to an increase in the import bill or through a reduction in exports, which
would depress economic growth.
Arguments Against External Sovereign Debt
The most likely effect will be that shifting a part of government’s borrowing abroad will almost
immediately lead to an upward pressure on the rupee. While this may hold down the rupee cost of
government’s interest payments, it will make the Indian economy less competitive in the international
markets: exports will tend to decline and imports rise. The trade balance will certainly worsen and so
also will the CAD. On the other hand, this may encourage greater FII inflows, since rupee appreciation
will yield capital gains to them. This will no doubt help the balance of payments position, but at the cost
of higher external vulnerability of the Indian economy. This is also an unstable situation since the
government may be tempted to continue to borrow abroad because of the lower cost, thereby
perpetuating a cycle leading to higher and higher external indebtedness of the country.
Finally, and perhaps most importantly, external sovereign borrowing involves serious loss of sovereignty
and of policy independence. This has been the experience of many countries in Latin America and even
in Europe. It should be realised that foreign commercial lenders have interests that are very different
from those of a democratic government, and will push the country’s policies in directions that suit their
interests. Some of this happens even today through the influence that rating agencies have on FIIs.
However, this impact is limited and is becoming less so over the years as FIIs have become more familiar
with the Indian economic system.
It may be argued that the amount of funds that will be raised is so small (US$10 billion) that it will not
materially change the current position. While ‘testing the waters’ may sound reasonable, but once this
door is opened, future governments may find the short-run attractiveness too hard to resist, which can
then lead to serious long-run problems for the country.
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1.11.3 FRBM Act 2003: Achieving Fiscal Balance
Fiscal consolidation entails revenue augmentation and expenditure rationalisation. In the post-Fiscal
Responsibility and Budget Management Act (FRBMA) period from 2004-05 to 2007-08, significant fiscal
consolidation could be achieved largely due to buoyant tax revenues with net tax revenue to the Centre
increasing by 1.9 percentage points of GDP. As part of the strategy to revive growth post the Global
financial crisis, fiscal consolidation was paused, which manifested in tax concessions and higher public
expenditure. However, after 2011-12, there have been gradual, but consistent, efforts towards fiscal
consolidation.
Background of FRBMA
The fiscal policy of an economy has been considered as the building block for enabling macro-
environment by economists, policymakers and the IMF, alike. It does not only provide stability and
predictability to the policy regime, but also ensures that national resources are allocated in terms of their
defined priorities through the tax transfer mechanism.
Unproductive government expenditures, tax distortions and high deficits are considered to have
constrained the Indian economy from realising its full growth potential. At the beginning of the fiscal
reforms in 1991, the fiscal imbalance was identified as the root cause of the twin problems of inflation
and the difficult balance of payments (BoPs) position.
Since then the medium-term fiscal policy stance of the government has been on the following lines:
• reducing the deficits (revenue and fiscal);
• prioritising expenditure and ensuring that these resulted in intended outcomes; and
• augmenting resources by widening tax base and improving tax-compliance while maintaining
moderate rates.
The fiscal consolidation which followed in 1991 failed to give the desired results as there was no defined
mandate for it. Neither was there any statutory obligation to do so. This is why the Fiscal Reforms and
Budget Management Act (FRBMA) was enacted on 26 August, 2003 to provide the support of a strong
institutional/statutory mechanism. Designed for the purpose of medium-term management of the fiscal
deficit, the FRBMA came into effect on 5 July, 2004.
Main Highlights of FRBMA
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The FRBM Bill, 2000 was passed by the Parliament with all political parties voting in favour, and is
considered a watershed in the area of fiscal reforms in the country. Main highlights of the FRBMA, 2003
are as given below:
• GoI to take measures to reduce fiscal and revenue deficit so as to eliminate revenue deficit by 31
March, 2008 (which was revised by the UPA Government to March 31, 2009) and thereafter build up
adequate revenue surplus.
• Rules to be made under the Act to specify annual targets for the reduction of fiscal deficit (FD) and
revenue deficit (RD) contingent liabilities and total liabilities (RD to be cut by 0.5 per cent per
annum and FD by 0.3 per cent per annum).
• FD and RD may exceed the targets only on the grounds such as national security, calamity or on
exceptional grounds.
• GoI not to borrow from RBI except by Ways and Means Advances (WMAs).
• RBI not to subscribe to the primary issue of the GoI securities from 2006–07 (it means that these
government bonds/papers will become market—based instrument to raise long-term funds by the
government).
• Steps to be taken to ensure greater transparency in fiscal operations.
• Along with the Budget and Demands for Grants, the GoI to lay the following three statements before
the Parliament in each financial year: (a) Fiscal Policy Strategy Statement (FPSS); (b) Medium Term
Fiscal Policy Statement (MTFPS); and (c) Macroeconomic Framework Statement (MFS).
• The Finance Minister to make quarterly review of trends in receipts and expenditure in relation to
the Budget and place the review before the Parliament.
Recent Changes in FRBMA
After the enactment of the FRMBA, the states also followed the suit passing their FRAs (fiscal
responsibility acts) in the forthcoming years. Both of the governments have shown better fiscal
disciplines since then. To the extent ‘exact’ follow-up to the FRBMA-linked targets are concerned, the
performance has been mixed. The targets were exceeded many times due to fiscal escalations (either
due to natural calamities or on exceptional ground), while many times they were better than the
mandated targets, too. But this act brought the element of higher fiscal discipline among the
governments, there is no doubt in it.
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In the past few years a view has emerged as per which binding the government expenditures to a fixed
number may be counterproductive to the economy at large. Due to a hard and fast discipline regarding
fiscal targets, some highly desirable expenditures by the government may get blocked, for example—
expenditures on infrastructure, welfare, etc. This is why we find a changed stance of the Government of
India in the Union Budget 2016–17 regarding the follow-up to the FRBMA. Terming it a new school of
thought the Budget suggests two important changes in its fiscal road map:
• It may be better to have a fiscal deficit range as the target in place of a fixed number as target. This
would give necessary policy space to the government to deal with dynamic situations.
• A need is felt to align fiscal expansion or contraction with credit contraction or expansion
respectively, in the economy.
In the opinion of the Budget, the government should remain committed to fiscal prudence and
consolidation but a time has come when the working of the FRBMA needs a review—especially in the
context of the uncertainty and volatility which have become the new norms of global economy. In the
backdrop of this changed stance, the the Government, in 2016 constituted a Committee to review the
implementation of the FRBMA.
FRBM Review Committee
Key recommendations of the Committee and features of the draft Bill are summarised below.
• Debt to GDP ratio: The Committee suggested using debt as the primary target for fiscal policy. A debt
to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20% limit for the states.
It noted that majority of the countries that have adopted fiscal rules have targeted a debt to GDP ratio
of 60%. The targeted debt to GDP ratio should be achieved by 2023.
• To achieve the targeted debt to GDP ratio, it proposed yearly targets to progressively reduce the
fiscal and revenue deficits till 2023.
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• Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson
and two members appointed by the centre. To maintain its independence, it proposed a non-
renewable four-year term for the Chairperson and members. Further, these people should not be
employees in the central or state governments at the time of appointment.
• Role of the Council: The role of the Council would include: (i) preparing multi-year fiscal forecasts, (ii)
recommending changes to the fiscal strategy, (iii) improving quality of fiscal data, (iv) advising the
government if conditions exist to deviate from the fiscal target, and (v) advising the government to
take corrective action for non-compliance with the Bill.
• Deviations: The Committee noted that under the FRBM Act, the government can deviate from the
targets in case of a national calamity, national security or other exceptional circumstances notified by
it. Allowing the government to notify these grounds diluted the 2003 Act. The Committee suggested
that grounds in which the government can deviate from the targets should be clearly specified, and
the government should not be allowed to notify other circumstances.
• Further, the government may be allowed to deviate from the specified targets upon the advice of the
Fiscal Council in the following circumstances: (i) considerations of national security, war, national
calamities and collapse of agriculture affecting output and incomes, (ii) structural reforms in the
economy resulting in fiscal implications, or (iii) decline in real output growth of at least 3% below the
average of the previous four quarters. These deviations cannot be more than 0.5% of GDP in a year.
• Debt trajectory for individual states: The Committee recommended that the 15th Finance
Commission should be asked to recommend the debt trajectory for individual states. This should be
based on their track record of fiscal prudence and health.
• Borrowings from the RBI: The draft Bill restricts the government from borrowing from the Reserve
Bank of India (RBI) except when: (i) the centre has to meet a temporary shortfall in receipts, (ii) RBI
subscribes to government securities to finance any deviations from the specified targets, or (iii) RBI
purchases government securities from the secondary market.
1.11.4 COVID-19: Measures to Raise Resources to fight Pandemic and Economic Slowdown
The public authorities in India have a good amount of shares in public sector undertakings (PSUs), public
land, and foreign exchange reserves. There is scope and anyway a need for reducing public holdings of
these assets.
The market return on investments in PSUs is very low and it is doubtful if even the social returns are
large; there is a rationale for disinvestment or privatisation (Dutta 2010). Indeed, the GOI has been
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engaged in a disinvestment programme for quite some time. And there were targets even for this fiscal
year. However, the GOI has paused it – possibly due to a fall in the stock prices in the aftermath of the
outbreak of Covid-19. However, there is a misunderstanding here. Though the strong overreaction
element was present to begin with, there are reasons to believe that the stock prices are now also
reflecting the deterioration in earnings due to the Covid-19 (the residual earnings of firms are hit much
harder than the aggregate GDP is). But even if the stock prices are currently lower than what is warranted
by the (new) fundamentals, this applies for ‘retail’ trades. If there are bulk deals, private placements, and
dilution of managerial control, the prices can be negotiated at levels higher than those in the stock market.
So, there is scope for disinvestment even at this stage.
Next, consider public land. Public authorities in India hold excess land; 13 major port trusts have 100,000
hectares of land, the International Airports Authority of India has 20,400 hectares of (additional) land, the
Ministry of Defence has 283,280 hectares of land, and the Indian Railways has 43,000 hectares that is
valued roughly at a whopping Rs. 3 trillion, which is significantly more than the true fiscal component of
the big financial package of about Rs. 21 trillion announced in May 2020. So, here again, we have a way
to mobilise funds by selling excess land – more so when the market price of land in India is more than
the fundamental value of land. It is true that land is an illiquid asset. However, all that this implies is that
there is a need to incur some marketing costs. But who can be the buyers? Fortunately, India has some
very large corporations in real estate business, and these corporations are, in fact, on the lookout for
large quantities of contiguous land in good locations. It is also fortuitous that banks in India are sitting
on cash of about Rs. 8.5 trillion and they are in search of good borrowers. Under the circumstances, the
banks can lend some of their money to real estate firms which may be interested in buying land from
the public authorities (though this may require some change in bank regulations; fortunately, the GOI has
been very flexible on such matters of late).
Finally, let us come to the foreign exchange reserves with the RBI. These stand at US$ 487 billion or Rs.
36.95 trillion as on 15 May 2020 (this is about 20 times the size of the initial relief package announced by
the GOI in March 2020). It has been argued that these reserves can be reduced significantly without
endangering macro-financial stability. But who can be the buyers? It is interesting that most households
in India hold assets in India only. They are not well diversified in the sense that they hardly hold assets
abroad. This kind of ‘home bias’ is widely prevalent. However, it is far more serious in a country like India
where the tax laws and practices discourage investment abroad. This needs to change. Under the
proposed policy, the RBI can reduce its foreign exchange reserves, and pay an extraordinary dividend to
the GOI. The foreign exchange can be sold to the public and the latter can buy assets abroad. Observe
that, in the aggregate, India’s holding of foreign assets and its balance of payments account more
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generally are unaffected under this proposed policy; there is, at the end of the day, merely a change from
public holding to private holding of foreign assets, and there is a change in the kind of foreign assets held.
1.11.5 Fiscal Federalism: Understanding the Centre-State Discord

How financial resources are distributed between the Centre and states—or, fiscal federalism—is a
concept as old as independent India. But what’s emerged as critical factor in the last three years is
uncertainty from new revenue sources, which has ratcheted up the tension between the Centre and
states.
One source of that uncertainty is a big tax reform: the goods and services tax (GST). Introduced in July
2017, this nationwide tax subsumed a host of taxes. It was a Centre-led reform that required states to
buy in. States were assured they would be better off. Except they aren’t. Tax collections—which are then
distributed to states in a given formula—have not grown as expected after the GST switchover.
Meanwhile, economic growth has slumped.
A sum of ₹11.87 trillion is projected to be transferred in FY20. From the Centre’s perspective, this is 55%
of taxes collected by it, and thus that much less for its own spending. From the states’ perspective, this
amounts to 38% of the combined revenues of states. The Centre and states jockey for a larger slice of
this pool. As do states among themselves.
Development in India is lopsided, with some states better off (Maharashtra, Karnataka and Tamil Nadu)
than others (Bihar, Jharkhand, Uttar Pradesh). Also, the ability of states to collect taxes varies. Nearly
85% of Delhi’s revenues comprise the taxes collected by it, which gives it a high degree of self-sufficiency.
But for north-eastern states like Mizoram, Nagaland, Arunachal Pradesh and Manipur, taxes don’t even
make up 10% of their overall revenues.
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GST removed most production-oriented taxes. Now, tax is imposed primarily at the point of consumption,
and both states and Centre can levy. Following chart gives details of taxes levied at different levels of
governments. Income tax (from both companies and individuals) and customs duties are the sole
purview of the Centre. Thus, the Centre ends up with a lion’s share of taxes, and its sharing becomes a
thing that many have varied views on.
For FY21, the Centre is projecting a transfer of ₹13.9 trillion to states, or 58% of the tax revenue collected
by it. Since FY91, the year before India opened up its economy, transfers to states have ranged between
50% and 64%, with the highest being 63% in FY17. In FY19, this declined to 55%. This number is important
as these are untied funds. States have been seeking a higher share of Central taxes, accompanied by a
drop in other forms of transfers, after the 14th FC report. But this hasn’t happened.
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Even among grants from the Centre, the share of centrally sponsored schemes—designed by the Centre
but executed by the states—account for a majority of transfers. These are tied funds, and have replaced
transfers to state plans. If the report for FY21 submitted by this FC is an indicator, the trend is unlikely to
reverse.
14th FC, headed by former Reserve Bank of India chairman Y.V. Reddy, concluded that “tax devolution
should be the primary route of transfer of resources to states", and raised it to 42%. This, it hoped, would
reduce the share of tied funds in transfers to states. But this hasn’t happened.
Sluggish tax collections impact the shareable pool, as compared to the previous system where grants
are relatively insulated from vagaries of tax buoyancy. The Centre says it is transferring more. States
argue a slowdown is making it tough to grow tax revenues.
GST is the additional factor currently in play. In order to incentivize states to sign up for GST, the Centre
assured them a revenue growth of 14% in the first five years. With nominal GDP itself expected to grow
only 10% this year, a 14% increase in tax revenues is considered optimistic.
Shortfalls were to be met via the “compensation cess", which is an additional tax levied on five “sin"
products: sport utility vehicles, tobacco, aerated water, coal and cigarettes. Punjab and Kerala have
complained about delays in transferring this compensation. Even as the Centre blames poor tax
collections for the delay, data shows it disbursed ₹27,000 crore less than what it collected in FY18 and
FY19.
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How much the Centre shares with states is one debate. How this money is distributed among the 28 states
and 8 UTs is another. Richer states argue they contribute more to the exchequer, but don’t receive a
commensurate amount. Poorer states argue they need more to improve.
About 18% of taxes collected by the Centre are in the form of cess and surcharge. These are essentially
a tax on a tax, and these collections don’t go into the divisible pool. This has peeved states, who complain
they effectively get 42% of ₹82 and not ₹100.
Meanwhile, the dependency of states on central funds has increased over time. In FY91, of every ₹100
combined revenues of states, ₹40 came from the Centre. This is now ₹50. A higher reliance on the Centre’s
transfers in recent years could be because of the economic slowdown impacting the states’ own tax
collections.
1.11.6 Tax-GDP Ratio: Why is it Stagnant?

Meaning
Tax-to-GDP ratio represents the size of a country's tax kitty relative to its GDP. It is a representation of
the size of the government's tax revenue expressed as a percentage of the GDP. Higher the tax to GDP
ratio the better financial position the country will be in. The ratio represents that the government is able
to finance its expenditure. A higher tax to GDP ratio means that the government is able to cast its fiscal
net wide. It reduces a government's dependence on borrowings.
Trend
13- 14- 15- 16- 17- 18-

Items
14 15 16 17 18 19
CIT 3.51 3.44 3.29 3.16 3.34 3.49
TOI 2.16 2.13 2.09 2.37 2.52 2.49
Customs 1.53 1.51 1.53 1.47 0.75 0.62
UED 1.52 1.51 2.09 2.49 1.51 1.22
ST 1.38 1.35 1.54 1.66 0.48 0.04
GST - - - - 2.59 3.06
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Tax to GDP ratio (in per cent)
The ratio of central taxes-to-GDP slid further in FY20 to a 10-year low of 9.88 per cent, driven by a decline
in collections from customs duties and corporation tax, while excise duty posted marginal growth. Cut
in corporation tax rates (The government had, in 2019, cut the corporation tax rate to 25 per cent to
promote private investment.) compounded the impact of the economic slowdown on overall collections,
while high gold prices shrunk gold demand and dampened Customs duty inflow. This was despite the fact
that only a week was under lockdown in the year. The ratio stood at 10.97 per cent in FY19, and at 11.22
per cent in FY18. It is only estimated to decline further, with revenues falling on account of a slump in
economic activity.
Importance of Attaining a Higher Tax-GDP Ratio
A higher tax to GDP ratio means that an economy's tax buoyancy is strong as the share of tax revenue
rises in sync with the rise in the country's GDP.
India, despite seeing higher growth rates, has struggled to widen the tax base. Lower tax-to-GDP ratio
constrains the government to spend on infrastructure and puts pressure on the government to meet its
fiscal deficit targets.
Global Comparison
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Although India has improved its tax-to-GDP ratio in the last six years, it is still far lower than the average
OECD ratio which is 34 per cent. India's tax-to-GDP ratio is lower than some of its peers in the developing
world. Developed countries tend to have higher tax-to-GDP ratio.
Why is India’s Tax-GDP Ratio Stagnant?
One, structural factors such as low per capita income keeps tax collections low. Low average incomes
and a high poverty rate result in a very small portion of the labour force being eligible to pay personal
income taxes.
Two, a large proportion of economic activity that is generated by small and medium enterprises (SMEs).
The government has not captured their earnings in tax revenues due to a variety of exemptions and
compliance issues. India has relatively large informal/unorganised sector, and tax evasion is more
rampant in informal sector compare to organised sector.
Three, a lack of policy initiatives has also kept the tax take low. This includes certain tax exemptions on
agriculture related activity and until the mid-nineties, on most services as well. Out of 25 crore
households in India, 15 crore belong to agricultural sector which are exempted from taxes.
Given these constraints, general government revenues have relied on manufactured goods
(consumption and trade) and corporate profit taxes. Both taxes are highly sensitive to growth trends.
Indirect taxes also suffer from the slowdown in demand and manufacturing output.
India has one of the highest numbers of disputes between tax administration and taxpayers, with lowest
proportion of recovery of tax arrears.
In FY19-20 & FY 20-21 Budgets, the government has exempted individuals with a taxable income of up
to Rs 5 lakh a year from paying any income tax. Of the 55 million taxpayers as at the end of March 2018,
about 35 million individuals had reported a gross annual income of under Rs 5 lakh. Under the new
dispensation, these 35 million taxpayers will continue to file their returns, but will not pay any taxes. Their
combined gross total income in 2017-18 was about Rs 11 trillion or a third of the total gross income
reported by all individual taxpayers. The erosion of such a large tax base certainly will have an adverse
impact on tax buoyancy and renewed efforts should be made to address such concerns.
Measures to Increase the Tax-GDP Ratio
Better tax administration, widening of TDS carried over the years, anti-tax evasion measures and
increase in effective tax payers base have contributed to direct tax buoyancy. Widening of tax base due
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to increase in the number of indirect tax filers in the GST regime has also led to improved tax buoyancy.
Going forward, sustaining improvement in tax collection will depend on the revenue buoyancy of GST.
The most important measure for improving tax to GDP ratio is ensuring the citizens pay their taxes. The
introduction of Direct Tax Code can help in greater compliance in this regard. Rationalisation of GST and
moving towards a two-rate structure can also help in increasing compliance and putting an end to tax
evasion. While measures to improve tax compliance and widen the tax base will yield higher tax revenue,
the importance of higher economic growth cannot be ignored. The onus to bring back the Indian
economy back on a higher-growth trajectory will be on the upcoming Budget.
1.11.7 Goods & Services Tax

The launch of the GST represents an historic economic and political achievement, unprecedented in
Indian tax and economic reforms.
Taxes subsumed under GST

Central Taxes:
• Central Excise Duty
• Duties of excise (medicinal and toilet preparations)
• Additional Duties of excise (goods of special importance & textile and textile products)
• Additional Duties of customs
• Special Additional Duty of Customs
• Service tax
• Cesses and surcharges related to supply of goods or services
State Taxes:
• State VAT
• Central sales tax
• Purchase tax
• Luxury tax
• Entry tax (all forms)
• Entertainment tax (not levied by the local bodies)
• Taxes on advertisements
• Taxes on lotteries, betting and gambling
• State cesses and surcharges
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While subsuming State level taxes, the Central government has guaranteed all state governments 14 per
cent annual growth in revenues for the next five years, a compensation that will be financed by cesses on
demerit goods (tobacco, luxury cars, aerated beverages, etc).
Key benefits of GST
1. Furthering cooperative federalism

• Nearly all domestic indirect tax decisions to be taken jointly by Centre and states.
2. Reducing corruption and leakage
• Self-policing: invoice matching to claim input tax credit will deter non-compliance and foster
compliance. Previously invoice matching existed only for intra-state VAT transactions and not for
excise and service taxes nor for imports.
3. Simplifying complex tax structure and unifying tax rates across the country
• 8-11 central excise duty rates times 3-5 State VAT rates itself applied differentially across states to
be consolidated into the GST’s rates, applied uniformly across states (one good, one Indian tax).
• Other taxes and cesses of the states and the Centre subsumed in the GST.
4. Creating a common market
• Will eliminate most physical restrictions and taxes on inter-state trade.
5. Furthering ‘Make in India’ by eliminating bias in favour of imports (“negative protection”)
• Will make more effective and less leaky the domestic tax levied on imports (IGST, previously the sum
of the countervailing duty and special additional duty), which will make domestic goods more
competitive.
6. Eliminating tax bias against manufacturing/ reducing consumer tax burden
• By rectifying breaks in the supply chain and allowing easier flow of input tax credits, GST will
substantially eliminate cascading (paying taxes at each stage on value added and taxes at all previous
stages, such as with the Central Sales Tax)
7. Boosting revenues, investment, and medium-term economic growth
• Investment will be stimulated, because scope of input tax credit for capital purchases will increase.
• Tax base will expand through better compliance.
• Embedded taxes in exports will be neutralized.
8. Hidden Benefits
• One important hidden benefit of the GST is that the textile and clothing sector is now fully part of
the tax net. Previously, some parts of the value chain, especially fabrics, were outside the tax net,
leading to informalisation and evasion. Some anomalies favouring imports of fabrics over domestic
production will need to be rectified but overall, the tax base has expanded.
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• Similarly, one segment of land and real estate transactions has been brought into the tax net: “works
contracts”, referring to housing that is being built. This in turn would allow for greater transparency
and formalization of cement, steel, and other sales, which tended to be outside the tax net. The
formalization will occur because builders will need documentation of these input purchases to claim
tax credit.
• There are signs of tax base expansion. This is expected to rise consistently as the incentives for
formalization increase. Preliminary estimates point to potentially large increases in the tax base as a
consequence.
• Another benefit will be the impact of GST and the information it throws up on direct tax collections.
This could be substantial. In the past, the Centre had little data on small manufacturers and
consumption (because the excise was imposed at the manufacturing stage), while states had little
data on the activities of local firms outside their borders. Under the GST, there will be seamless flow
and availability of a common set of data to both the Centre and states, making direct tax collections
more effective.
• The longer-term benefits include the GST’s impact on financial inclusion. Small businesses can build
up a real time track record of tax payments digitally, and this can be used by lending institutions for
credit rating and lending purposes. Currently, small businesses are credit-constrained because they
cannot credibly demonstrate their financial capability.
• With GST’s launch there are reports of elimination of interstate check-posts. If this trend continues,
the reduction in transport costs, fuel use, and corruption could be significant.
• There is ample evidence to suggest that logistical costs within India are high. For example, one study
suggests that trucks in India drive just one-third of the daily distance of trucks in the US (280 km vs
800 km). This raises direct costs (especially in terms of time to delivery), indirect costs (firms keeping
larger inventory), and location choices (locating closer to suppliers/customers instead of the best
place to produce). Further, only about 40 per cent of total travel time is spent driving; while one
quarter is taken up by check points and other official stoppages. Eliminating check point delays could
keep trucks moving almost 6 hours more per day, equivalent to additional 164 kms per day – pulling
India above global average and to the level of Brazil.
Challenges Ahead
• The rate structure and the exclusions from the base have scope for improvement. Alcohol,
petroleum and energy products, electricity, and some of land and real estate transactions are
outside the GST base but are taxed by the Centre and/or states outside the GST. Health, and education
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are outside the tax net altogether, exempted under the GST and not otherwise taxed by the Centre
and states.
• Keeping electricity out undermines the competitiveness of Indian industry because taxes on power
get embedded in manufacturer’s costs, and cannot be claimed back as input tax credits.
• Inclusion of land and real estate and alcohol in GST will improve transparency and reduce corruption;
keeping health and education completely out is inconsistent with equity because these are services
consumed disproportionately by the rich.
1.11.8 Gender Budgeting
In her 2019 Union Budget speech, Finance Minister Nirmala Sitharaman described Naari (woman) as
Narayani (goddess) and said that she will constitute a committee to evaluate 15 years of gender
budgeting.
She reminded us what Swami Vivekananda said in the context of gender equality. Vivekananda said “It is
not possible for a bird to fly on one wing”. Much later, Mao Zedong, the former Chairman of China, who
was a poet and had his way with words, summed it up well when he said “Women hold up half the sky”.
Women are as important as, if not more than, men.
Meaning
“Gender Budgeting is a tool for gender mainstreaming. It uses the Budget as an entry point to apply a
gender lens to the entire policy process (MoWCD, 2015)”.
The Ministry of Women and Child Development (MoWCD) as the Nodal agency has adopted the mission
strategy of 'Budgeting for Gender Equity' to ensure that government budgets are planned according to
the differential needs of women and men and accordingly prioritized.
Gender Budgeting is concerned with gender-sensitive:
• formulation of legislation, policies, plans, programmes and schemes;

• allocation and collection of resources;
• implementation and execution;
• monitoring, review, audit and impact assessment of programmes and schemes; and
• follow-up corrective action to address gender disparities.
Evolution in India
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• It is undertaken through several institutional mechanisms such as Gender Budget Statement, Gender
Budget Cells, as well as various schemes/programmes for women and girls.
• Gender budgeting was referred for the first time by the then Finance Minister of India in his budget
speech in 2001.
• Subsequently, it was recommended to have a separate chapter in annual reports of
Ministries/Departments.
• Department of Expenditure has been issuing a note on Gender Budgeting as a part of budget circular
since 2005-06.
• Further, Chief Secretaries of all States/UTs were instructed to set up gender budget cells on the lines
of the Charter for Gender Budget cells issued by the Ministry of Finance in 2012.
• A guideline was also issued to provide a road map towards institutionalising Gender Budgeting at
State level in 2013.
• In order to implement Gender Budgeting at State level, MoWCD has been conducting number of
trainings, workshops, one to one interactions and development of resource material.
• In the Gender Budget Statement of 2019-20, 30 Ministries/Departments reported having schemes
with women's component, amounting to approximately 5 per cent (Rs 1,31,699.52 Crore) of the total
Union Budget.
• Furthermore, 57 Ministries/Departments have formed Gender Budget Cells to institutionalise and
strengthen gender budgeting processes.
• During the last 3 financial years, over 4500 Government officials have been trained under the GB
Scheme.
Examples of Gender Budgeting
It is extremely important to remember that all budgetary operations and their benefits do not lend
themselves to gender partitioning. Public goods are characterised by non-rivalry and non-exclusiveness.
Defence, for example, is as important for you as for me, irrespective of whether you are a man or a
woman. There is hardly anything to be achieved by trying to apportion the benefits from defence between
men and women.
But, there is likely to be little disagreement that the Mukhyamantri Kanya Utthan Yojana promising
unmarried girls Rs. 10,000 for passing the 12th grade examination, and Rs. 25,000 for completing
graduation benefits women more than men. Men, in their capacity as fathers, brothers, and sons are also
benefitted, but women benefit more.
As some other examples, let us take drinking water and cooking fuel. Whenever available only at a
distance, these are fetched mostly by our women. Thus, Nal se Jal or piped water supply scheme, 2019,
and Ujjwala Yojana, 2016 are likely to benefit women more than men. Cooking is done almost exclusively
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by our women and not by us men. Indoor air pollution due to unclean fuel kills millions of women from
heart disease, stroke, chronic obstructive pulmonary disease, and lung cancer. According to experts,
having an open fire in the kitchen is like burning 400 cigarettes an hour.
Similarly, Swachh Bharat Abhiyan (SBA) provides another example. Women are more sensitive, and
hence more restrained in committing nuisance in public spaces. Thus, this nation-wide campaign through
the construction of household-owned and community-owned toilets will benefit them more than men.
Way Forward
Careful analysis needs to be done both before launching a scheme or including it under gender budgeting
as well as after its implementation. We may call these two ex-ante and ex-post analysis. Mostly, we
launch schemes without adequate preparation and analysis – on the basis of guesses – perhaps
‘informed’ guesses. Furthermore, we often do not follow up with the evaluation of a scheme after it has
been implemented. In the absence of such analyses, we may not only spend our scarce resources on
items that do not deliver the desired results, but also be unaware of this reality and persist with the
mistake for longer than necessary. Let us not forget that a gender budget statement is usually described
as a gender-specific accountability document produced to show what the government’s programmes
and budgets are achieving with respect to gender equality, not how much the government is spending
on the belief that such spending must be helping women. Perhaps, time is opportune for launching a
gender audit of Sarva Siksha Abhiyan, Mahatma Gandhi National Rural Employment Guarantee Act
(MNREGA), and Ayushman Bharat.
2 Monetary Policy Since Reforms of 1991

The Reserve Bank was set up under the Reserve Bank of India Act 1934 with the original Preamble that
describes the broad mandate of the Reserve Bank as follows:
“it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and keeping of
reserves with a view to securing monetary stability in India and generally, to operate the currency and
credit system of the country to its advantage”.
Later, the Reserve Bank of India was nationalised in 1949. While the Reserve Bank continues to perform
its traditional functions such as currency management, bankers’ bank and banker to the Government,
its function of conducting monetary policy has undergone a sea change in various respects from time to
time.
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2.1 Evolution of monetary policy in line with the changing character of the economy
2.1.1 1935 to 1949: Initial Phase

It is interesting to note that the Reserve Bank came into being in the backdrop of the great depression
facing the world economy. Given the unsettled international monetary systems, the Preamble to the RBI
Act, 1934 provided the edifice for the evolution of monetary policy framework. Until independence, the
focus was on maintaining the sterling parity by regulating liquidity through open market operations
(OMOs), with additional monetary tools of bank rate and cash reserve ratio (CRR). In other words,
exchange rate was the nominal anchor for monetary policy. In view of the agrarian nature of the
economy, inflation often emerged as a concern due to frequent supply side shocks. While the price
control measures and rationing of essential commodities was undertaken by the Government, the
Reserve Bank also used selective credit control and moral suasion to restrain banks from extending
credit for speculative purposes.
2.1.2 1949 to 1969: Monetary Policy in sync with the Five-Year Plans
India’s independence in 1947 was a turning point in the economic history of the country. What followed
was a policy of planned economic development. These two decades were characterised not only by a
predominant role of the state but also by a marked shift in the conduct of monetary policy. The broad
objective was to ensure a socialistic pattern of society through economic growth with a focus on self-
reliance. This was intended to be achieved by building up of indigenous capacity, encouraging small as
well as large-scale industries, reducing income inequalities, ensuring balanced regional development,
and preventing concentration of economic power. Accordingly, the government also assumed
entrepreneurial role to develop the industrial sector by establishing public sector undertakings.
As planned expenditure was accorded pivotal role in the process of development, there was emphasis
on credit allocation to productive sectors. The role of monetary policy, therefore, during this phase of
planned economic development revolved around the requirements of five-year plans. Even if there was
no formal framework, monetary policy was relied upon for administering the supply of and demand for
credit in the economy. The policy instruments used in regulating the credit availability were bank rate,
reserve requirements and open market operations (OMOs). With the enactment of the Banking
Regulation Act in 1949, statutory liquidity ratio (SLR) requirement prescribed for banks emerged as a
secured source for government borrowings and also served as an additional instrument of monetary and
liquidity management. Inflation remained moderate in the post-independence period but emerged as a
concern during 1964-68.
2.1.3 1969 to 1985: Credit Planning
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Nationalisation of major banks in 1969 marked another phase in the evolution of monetary policy. The
main objective of nationalisation of banks was to ensure credit availability to a wider range of people
and activities. As banks got power to expand credit, the Reserve Bank faced the challenge of maintaining
a balance between financing economic growth and ensuring price stability in the wake of the sharp rise
in money supply emanating from credit expansion. Besides, Indo-Pak war in 1971, drought in 1973,
global oil price shocks in 1973 and 1979, and collapse of the Bretton-woods system in 1973 also had
inflationary consequences. Therefore, concerns of high inflation caused by deficit financing during 1960s
gathered momentum during the 1970s. Incidentally, the high inflation in the domestic economy coincided
with stagflation – high inflation and slow growth – in advanced economies. In such a milieu, traditional
monetary policy instruments, viz., the Bank Rate and OMOs were found inadequate to address the
implications of money supply for price stability. As banks were flushed with deposits under the impact of
deficit financing, they did not need to approach RBI for funds. This undermined the efficacy of Bank Rate
as a monetary policy instrument. Similarly, due to underdeveloped government securities market, OMOs
had limited scope to be used as monetary policy instrument. During this phase, the average growth rate
hovered around 4.0 per cent, while wholesale price index (WPI) based inflation was around 8.8 per cent.
2.1.4 1985 to 1998: Monetary Targeting

In the 1980s, fiscal dominance accentuated as reflected in automatic monetisation of budget deficit
through ad hoc treasury bills and progressive increase in SLR by 1985. Concomitantly, inflationary impact
of deficit financing warranted tightening of monetary policy – both the CRR and Bank Rate were raised
significantly. The experience of monetary policy in dealing with the objectives of containing inflation and
promoting growth eventually led to adoption of monetary targeting as a formal monetary policy
framework in 1985 on the recommendations of the Chakravarty Committee. In this framework, with the
objective of controlling inflation through limiting monetary expansion, reserve money was used as
operating target and broad money as intermediate target. The targeted growth in money supply was
based on expected real GDP growth and a tolerable level of inflation. This approach was flexible as it
allowed for feedback effects. CRR was used as the primary instrument for monetary control. Nonetheless,
due to continued fiscal dominance, both SLR and CRR reached their peak levels by 1990.
The worsening of fiscal situation in late 1980s was manifested in deterioration of external balance
position and collapse in domestic growth in 1991-92, in the backdrop of adverse global shocks – the gulf
war and disintegration of the Soviet Union. The resultant balance of payments crisis triggered large scale
structural reforms, financial sector liberalization and opening up of the economy to achieve sustainable
growth with price stability. Concurrently, there was a shift from fixed exchange rate regime to a market
determined exchange rate system in 1993. In the wake of trade and financial sector reforms and the
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consequent rise in foreign capital flows and financial innovations, the assumption of stability in money
demand function as well as efficacy of broad money as intermediate target came under question. At the
same time, there was a notable shift towards market-based financing for both the government and the
private sector. In fact, automatic monetisation through ad hoc treasury bills was abolished in 1997 and
replaced with a system of ways and means advances (WMAs). During this period, average domestic
growth rate was 5.6 per cent and average WPI-based inflation was 8.1 per cent.
2.1.5 1998 to 2015: Multiple Indicators Approach

As liberalisation of the economy since the early 1990s and financial innovations began to undermine the
efficacy of the prevalent monetary targeting framework, a need was felt to review the monetary policy
framework and recast its operating procedures. As a result, the Reserve Bank of India adopted multiple
indicators approach in April 1998. Under this approach, besides monetary aggregates, a host of forward
looking indicators such as credit, output, inflation, trade, capital flows, exchange rate, returns in
different markets and fiscal performance constituted the basis of information set used for monetary
policy formulation. The enactment of the Fiscal Responsibility and Budget Management (FRBM) Act in
2003, by introducing fiscal discipline, provided flexibility to monetary policy. Increased market
orientation of the domestic economy and deregulation of interest rates introduced since the early 1990s
also enabled a shift from direct to indirect instruments of monetary policy. There was, therefore, greater
emphasis on rate channels relative to quantity instruments for monetary policy formulation.
Accordingly, short-term interest rates became instruments to signal monetary policy stance of RBI.
In order to stabilise short-term interest rates, the Reserve Bank placed greater emphasis on the
integration of money market with other market segments. It modulated market liquidity to steer
monetary conditions to the desired trajectory by using a mix of policy instruments. Some of these
instruments including changes in reserve requirements, standing facilities and OMOs were meant to
affect the quantum of marginal liquidity, while changes in policy rates, such as the Bank Rate and reverse
repo/repo rates were the instruments for changing the price of liquidity.
An assessment of macroeconomic outcomes suggests that the multiple indicator approach served fairly
well from 1998-99 to 2008-09. During this period, average domestic growth rate improved to 6.4 per cent
and WPI based inflation moderated to 5.4 per cent.
2.1.6 2013-2016: Preconditions Set for Inflation Targeting

In the post-global financial crisis period (i.e., post-2008), however, the credibility of this framework came
into question as persistently high inflation and weakening growth began to co-exist. In the face of
double-digit inflation of 2012-13, the US Fed’s taper talk in May/June 2013 posed significant challenges
to domestic monetary policy for maintaining the delicate balance between sustaining growth,
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containing inflation and securing financial stability. The extant multiple indicators approach was
criticised on the ground that a large set of indicators do not provide a clearly defined nominal anchor
for monetary policy. An Expert Committee was set up by RBI to revise and strengthen the monetary
policy framework and suggest ways to make it more transparent and predictable. In its Report of 2014,
the Committee reviewed the multiple indicators approach and recommended that inflation should be the
nominal anchor for the monetary policy framework in India. Against this backdrop, the Reserve Bank
imposed on itself a glide path for bringing down inflation in a sequential manner – from its peak of 11.5
per cent in November 2013 to 8 per cent by January 2015; 6 per cent by January 2016 and 5 per cent by
Q4 of 2016-17.
2.1.7 2016 onwards: Flexible Inflation Targeting

Amid this, a Monetary Policy Framework Agreement (MPFA) was signed between the Government of
India and the Reserve Bank on February 20, 2015. Subsequently, flexible inflation targeting (FIT) was
formally adopted with the amendment of the RBI Act in May 2016. The role of the Reserve Bank in the
area of monetary policy has been restated in the amended Act as follows:
“the primary objective of monetary policy is to maintain price stability while keeping in mind the
objective of growth”.
Empowered by this mandate, the RBI adopted a flexible inflation targeting (FIT) framework under which
primacy is accorded to the objective of price stability, defined numerically by a target of 4 per cent for
consumer price headline inflation with a tolerance band of +/- 2 per cent around it, while simultaneously
focusing on growth when inflation is under control. The relative emphasis on inflation and growth
depends on the macroeconomic scenario, inflation and growth outlook, and signals emerging from
incoming data. Since then RBI has been conducting monetary policy in a forward-looking manner and
effectively communicating its decisions to maintain inflation around its target and thereby to support
growth. At the same time, RBI is also fine-tuning its operating procedures of monetary policy for effective
policy transmission across the financial markets and thereby onto the real economy. As an outcome,
inflation has fallen successively and has averaged below 4 per cent since 2017-18, notwithstanding recent
up-tick in inflation driven by food prices, especially the sharp increase in vegetable prices reflecting the
adverse impact of unseasonal rains and cyclone.
2.2 Evolution of monetary policy in line with the changing Theoretical Developments and
International Best Practices
The monetary policy framework in India has also been guided by developments in theory and
international best practices. For instance, the collapse of the Bretton-Woods system of fixed exchange
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rates and high inflation in many advanced economies during the 1970s provided the necessary
background to the choice of money supply as a nominal anchor.
Since the late 1980s, however, experience of many advanced countries with monetary targeting
framework was not satisfactory inter alia due to growing disconnect between monetary aggregates and
goal variables such as inflation. A similar instability in money demand function was also evidenced in the
Indian context in the 1990s which led to a shift from monetary targeting to multiple indicators approach
in 1998.
Since early 1990s, beginning with New Zealand in 1990, many advanced and emerging market economies
(EMEs) have switched to inflation targeting as the preferred policy framework. India, however, formally
adopted the framework in 2016 which has helped us in terms of learning from the experiences of a diverse
set of countries over a long period of time. In fact, the post-global financial crisis experience questioned
the relevance of narrow focus on price stability as the sole objective of monetary policy, which called for
adoption of a flexible approach to inflation targeting to achieve macro-financial stability. In this milieu,
financial stability has emerged as another key consideration for monetary policy, though jury is still out
as to whether it should be added as an explicit objective. It is interesting to note that the central banking
function as the lender of last resort (LOLR) has remained intact, notwithstanding the developments and
refinements in the policy frameworks across countries, including India.
2.3 Evolution of monetary policy in line with the financial market developments
Financial markets play a critical role in effective transmission of monetary policy impulses to the rest of
the economy. Monetary policy transmission involves two stages. In the first stage, monetary policy
changes are transmitted through the money market to other markets, i.e., the bond market and the bank
loan market. The second stage involves the propagation of monetary policy impulses from the financial
market to the real economy - by influencing spending decisions of individuals and firms. Within the
financial system, money market is central to monetary operations conducted by the central bank.
In the case of India, money market prior to the 1980s was characterised by paucity of instruments and
lack of depth. Owing to limited participation, money market liquidity was highly skewed, characterised
by a few dominant lenders and a large number of chronic borrowers. In the presence of ad hoc Treasury
Bills with fixed interest rate under the system of automatic monetisation, Treasury Bills could not emerge
as a short-term money market instrument. Administered interest rates and captive investor base in
government securities market further impeded open market operations as an effective instrument of
monetary control. The prevalence of interest rate regulations along with restrictions on participation
prohibited the integration of different market segments which is a prerequisite for effective monetary
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policy transmission. In this environment, monetary policy initially relied mainly on credit planning and
selective credit controls and eventually on monetary targeting through quantitative instruments.
Financial markets reforms since the early 1990s, therefore, focused on dismantling various price and
non-price controls in the financial system to facilitate integration of financial markets. Reform measures
encompassed removing structural bottlenecks, introducing new players/instruments, ensuring free
pricing of financial assets, relaxing quantitative restrictions, strengthening institutions, improving
trading, clearing and settlement practices, encouraging good market practices and promoting greater
transparency. These reforms gradually facilitated the price discovery in financial markets and interest
rate emerged as a signaling mechanism. This paved way for introduction of the Liquidity Adjustment
Facility (LAF) in 2000-01 as a tool for both liquidity management and also a signalling device for interest
rates in the overnight money market. Amid greater integration of domestic financial markets with global
markets, subsequently, the RBI also began to recognise the impact of global developments on domestic
monetary policy. The developments in financial markets enabled the Reserve Bank to use market-based
instruments of monetary policy and utilise the forward-looking information provided by financial markets
in the conduct of monetary policy under the multiple indicators approach.
Although various segments of financial markets had acquired depth and maturity over time, a key
challenge has been on fuller and faster transmission of policy rate changes not only to money market
segments but also to the broader credit markets. In order to address these challenges, the Reserve Bank
has been trying different models. At the same time, the liquidity management framework was also fine-
tuned since April 2016 with the objective of maintaining the operating target close to the policy rate.
Under this framework, the Reserve Bank assured the market to meet its durable liquidity requirements
while fine-tuning its operations to make short-term liquidity conditions consistent with the stated policy
stance. This was achieved through a variety of instruments including fixed and variable rate repo/reverse
repo of various maturities, the marginal standing facility (MSF) and outright open market operations –
complemented at times by the cash management bills and foreign exchange swaps.
2.4 Challenges in the Current Context

One of the major challenges for central banks is the assessment of the current economic situation. As
we all know, the precise estimation of key parameters such as potential output and output gaps on a
real time basis is a challenging task, although they are crucial for the conduct of monetary policy. In recent
times, shifting trend growth in several economies, global spillover effects and disconnect between the
financial cycles and business cycles in the face of supply shocks broadly explain why monetary policy
around the world is in a state of flux. Nonetheless, a view has to be taken on the true nature of the slack
in demand and supply-side shocks to inflation for timely use of counter cyclical policies.
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Reserve Bank, therefore, constantly updates the assessment of the economy based on incoming data
and survey based forward looking information juxtaposed with model-based estimates for policy
formulation. This approach helped the Reserve Bank to use the policy space opened up by the expected
moderation in inflation and act early, recognizing the imminent slowdown before it was confirmed by
data subsequently. Monetary policy, however, has its own limits. Structural reforms and fiscal measures
may have to be continued and further activated to provide a durable push to demand and boost growth.
There are certain potential growth drivers which, through backward and forward linkages, could give
significant push to growth. Some of these areas include prioritising food processing industries, tourism,
e-commerce, start-ups and efforts to become a part of the global value chain. The Government is also
focusing on infrastructure spending which will augment growth potential of the economy. States should
also play an important role by enhancing capital expenditure which has high multiplier effect.
2.5 Conclusion
Monetary policy frameworks in India has thus evolved in line with the developments in theory and
country practices, the changing nature of the economy and developments in financial markets. Within
the broad objectives, however, the relative emphasis on inflation, growth and financial stability has
varied across monetary policy regimes. Although global experience with financial stability as an added
policy objective is still unsettled, the Reserve Bank has always been giving due importance to financial
stability since the enactment of the Preamble to the RBI Act. The regulation and supervision of banks and
non-bank financial intermediaries has rested with the Reserve Bank and has kept pace with the
prescribed global norms over time. More recently, the focus of financial stability has not only confined to
regulation and supervision but also extending the reach of formal financial system to the unbanked and
unserved population.
Apart from financial inclusion, there is also a focus on promoting secured, seamless and real-time
payments and settlements. This renewed focus on financial inclusion and secured payments and
settlements are not only aimed at promoting the confidence of general public in the domestic financial
system but also improving the credibility of monetary policy for price stability, inclusive growth and
financial stability.
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MULTICULTURALISM
FODDER MATERIAL

Contents
1 Multiculturalism Meaning ......................................................................................................................2
1.1 Definitions .......................................................................................................................................3
1.2 Examples .........................................................................................................................................3
1.3 Goals of Multiculturalism ................................................................................................................4
2 Methods of claiming multiculturalism in a society ................................................................................4
3 Models of Multiculturalism ....................................................................................................................5
3.1 Liberal Multiculturalism: .................................................................................................................5
3.2 Pluralist Multiculturalism: ...............................................................................................................6
3.3 Cosmopolitan Multiculturalism: .....................................................................................................7
4 Advantages of Multiculturalism .............................................................................................................7
5 Disadvantages of Multiculturalism .........................................................................................................8
6 Multiculturalism in India ........................................................................................................................9
6.1 Multicultural Constitution of India .................................................................................................9
6.2 Other aspects of Multiculturalism ................................................................................................10
6.3 Multiculturalism and States ..........................................................................................................11
6.4 Unity In Diversity: India’s Approach..............................................................................................12
7 Diversified aspects of Multiculturalism in India ...................................................................................12
7.1 Regionalism In The Indian Context ...............................................................................................13
7.2 The Most Contentious of All Aspects of Multiculturalism ............................................................14
7.2.1 Minority Rights and Nation Building .....................................................................................15
7.2.2 Communalism ........................................................................................................................16
7.2.3 Secularism ..............................................................................................................................18
1 Multiculturalism Meaning
• The term multiculturalism is used to describe a society in which different cultures can coexist. It
signifies attempts to balance diversity against cohesion. Multiculturalism not only recognizes cultural
diversity, but also advocates that such differences should be respected and publicly affirmed.
• It maintains respect for cultural differences and does not favour assimilation of minority culture into
the dominant one. Instead of seeking a melting pot in which minority groups assimilate into the
majority culture, multiculturalism uses metaphors like salad bowl or glorious mosaic where the
minorities can maintain their distinctiveness.

• From the multiculturalism perspective, the public policy should not aim for standardization of cultural
forms or any type of uniformity or homogeneity, but instead, heterogeneity should be maintained.
• It is important to know culture and identity from which the idea of multiculturalism flows. In a macro
sense, culture is the way of life for people, their values, beliefs and practices. Culture, thus,
encompasses tradition, religion, language, moral principles and social norms. The concept of culture
is central to multiculturalism. Identity is a sense of unique and separate selfhood and sees individuals
embedded in a particular culture or social context. Identity may be multiple like gender, religion,
ethnicity etc. Identity is equated with difference as awareness of difference further magnifies an
individual’s sense of identity.
• Apart from the above mentioned categories, multiculturalism has been used as an overarching term
to signify the political and moral claims of other marginalized groups like women, people with special
abilities and LGBT (Lesbian, Gay, Bisexual and Transgender).
• Multiculturalism is not restricted to claims of culture and identity alone, instead, it is also a matter of
political power and economic interest since it involves demands to rectify political and economic
disadvantages suffered by people due to their membership of a marginalized group.
1.1 Definitions
• “Multiculturalism is a term that has come to serve as shorthand for a host of different and not
necessarily related cultural and educational issues. Arguments relating to gender studies, ethnic
and racial studies, affirmative action, freedom of speech on campus, compromise and corruption
among educational administrators have all been aired under the title, multiculturalism.”— A. E.
Barnes
• “With racial and ethnic diversity increasing across the nation as a result of increased immigration,
educational leaders were keen to embrace multiculturalism.”— Diane Ravitch
1.2 Examples
• Canada: This country officially adopted multiculturalism in 1971. It is based on the principle of ius
solis or (the right of citizenship by birth). Further, the Multiculturalism Act of 1988 gives all members
of Canadian society the freedom to preserve and share cultural heritages, and encourages protection
and enhancement of their ancestral languages. It also asks all federal agencies to promote practices
ensuring equal employment opportunities and advancement therein.
• Australia: It sees itself as a country of immigrants. Multiculturalism, in this nation too is based on the
right of citizenship by birth. Easy access to the naturalization process and citizenship for immigrants
has been established long ago. The government believes multiculturalism to have strengthened the
Australian society.

• Sweden: Different from the above examples, Sweden operates by ius sanguinis or (right of blood),
which extends the right of citizenship only if one or both parents are citizens of the country. However,
the procedures of naturalization here are easier.
1.3 Goals of Multiculturalism
2 Methods of claiming multiculturalism in a society

In his book, The Multiculturalism of Fear (2000), Jacob T Levy has divided the different methods of
multiculturalism seen in a society into eight categories. These eight categories are:
• Exemptions from Generally Applicable Laws: Exemptions are based on negative liberty pertaining
to non-interference of state in certain matters as it could increase the burden on a certain group. For
ex, religious exemptions can be extended to a minority group so that they can maintain their identity.
• Assistance Rights: Certain rights are extended to rectify disadvantage experienced by a certain group
in comparison to the majority. This includes positive discrimination or affirmative action to help the
minorities. Examples include funding for schools meant for minority languages.
• Symbolic Claims: This means that all the cultures are represented by the symbols of a country on the
grounds of equality. Not including the symbols from minority cultures could be seen as lack of respect
and unequal treatment towards them.
• Recognition: It is a demand to integrate a cultural practice or a specific law into the larger society.
For ex, inclusion of the history of Indian and Pakistani immigrants in British history books shows the
recognition of these two groups in British multicultural society.
• Special Representation Rights: They are intended to safeguard the groups which have been
systematically marginalized in a bigger society. For ex, extra seats may be set aside for the minorities
in the parliament of a diverse nation.

• Self-Government: The cultural minorities may claim certain degree of autonomy under demands for
self-government. This is required so that they can develop and preserve their culture.
• External Rules: It involves restricting the freedom of other people to preserve a certain culture. For
ex, outsiders have limited freedom of movement in the areas inhabited by Aborigines. Outsiders even
do not have the rights to buy land in these areas.
• Internal Rules: These rules restrict an individual’s behavior within the group. For ex, if somebody
disobeys rules of the group, he/she can be ostracized or excommunicated.
3 Models of Multiculturalism
• Ayelet Shachar gives two types of multiculturalism – strong and weak. Strong multiculturalism is
centred on group identity and group rights and it gives rights to the group over its members. The
central problem for strong multiculturalists is injustice among different groups. In contrast, weak
multiculturalism focuses on intra-group complexities and accommodation. The main focus is on how
to harmonise individual rights with group rights.
• According to Andrew Heywood, there are three main models of multiculturalism:
• Liberal
• Pluralist
• Cosmopolitan
3.1 Liberal Multiculturalism:

• Commitment to freedom and toleration are two hallmarks of liberalism. Toleration is a willingness
to allow existence and expression of rival views.
• Liberalism gives an individual the right to choose his/her beliefs, cultural practices and way of life.
• However, toleration extends to values, views and social practices that are compatible with
autonomy and personal freedom.
• Practices such as forced marriages and female circumcision will not be endorsed by liberal
multiculturalists as they are against individual freedom.
• Will Kymlicka’s theory on liberal multiculturalism is one of the most important, as he combines the
liberal values of equality and autonomy with the value of cultural membership. His views are
expressed in his books, Liberalism, Community and Culture (1989) and Multicultural Citizenship
(1995).
• According to Kymlicka, culture is important to individuals for two reasons. First, membership of a
culture is an important condition of personal autonomy as they serve as ‘contexts of choice’ and

provide meaningful options by which an individual frames his life and goals. Second, cultural
membership is important in shaping self-identity of an individual.
• A person’s self-respect is connected to the respect that is accorded by others to his/her culture. He
further argues that since cultural minorities are disadvantaged in accessing their own culture
compared to members of majority culture, minorities are entitled to special rights.
• He says that it is impossible for the state to be completely neutral and its involvement in the cultural
character of the state is unavoidable.
• For ex, the public holidays that a government decides to observe would promote a certain culture
and those who do not share the culture promoted by the state would be disadvantaged. True
equality, according to him requires different treatment for different groups.
• Kymlicka has listed three types of minority rights or group differentiated rights. First, there are self-
government rights which belong to the national minorities. Examples would include Native 198 Major
Debates Americans and Maoris in New Zealand. Second are the polyethnic rights which help religious
and ethnic minorities and have been developed through immigration to main their culture. For ex,
legal exemptions could be extended to Jews and Muslims from animal slaughtering laws in a country.
Third, there are special representation rights that try to rectify underrepresentation of minorities in
public life, for ex, the affirmative action in the US.
3.2 Pluralist Multiculturalism:

• This theory of cultural diversity is based on value pluralism, an idea that there are many values which
are equally correct and fundamental although they may be in contradiction to each other.
• Isaiah Berlin is one of the main proponents of the idea of value pluralism. In this view, liberal views
like personal freedom and democracy have no greater moral authority than their rival beliefs.
• This results in live and let live type of multiculturalism. However, Berlin was of the view that value
pluralism can exist only within a society that respects individual freedom. Hence, he could not prove
how liberal and illiberal cultures could coexist in the same society.
• Bhikhu Parekh has also given his views on pluralist multiculturalism. He argues that multiculturalism
is neither a political doctrine nor a philosophical school. Instead, it is a perspective on the way of
viewing human life.
• It has three central tenets: First, human beings are culturally embedded and they grow and live
within a culturally structured world. Their thoughts are deeply shaped by culture and they can
overcome some, but not all of its influences.
• Second, different cultures have different meanings of good life. Since each culture can develop
limited range of human capabilities and can understand only a part of human existence as a whole,
it requires other cultures to stretch its imagination and expand its intellectual boundaries. An

individual’s life is likely to be richer if that person has access to others and in an interdependent and
modern world, culturally self-contained life is impossible.
• Third, every culture is internally plural, its different strands of thought are in continuous
conversation and hence, its identity is fluid, open and plural. Various cultures grow by conscious and
unconscious interaction with each other and each carries bits of the other within itself.
• Multiculturalism is a creative interplay between these three factors. He further argues that from a
multicultural perspective, a society does not commit itself to a particular political doctrine or vision
of good life. It also does not ask how much diversity to tolerate within the limits set by it as it
forecloses its future development.
3.3 Cosmopolitan Multiculturalism:

• It celebrates diversity as each culture can learn from the other and prospects for self-development
are offered by a world of wider cultural opportunities and lifestyle choices.
• It endorses exploration of different cultural options from an individual’s perspective.
• Cosmopolitan multiculturalism embraces the idea of multiple identity and hybridity.
• It is argued that irrespective of their different cultural origins, people share the same planet and are
facing similar experiences and challenges. Hence, global consciousness and the idea of
cosmopolitanism is a running thread in this type of multiculturalism.
4 Advantages of Multiculturalism
• Adaptability: A person living in a multi-cultural society is easily adaptable to new situations. In these
societies, every individual develops a sense of understanding to people who may have completely
different set of beliefs and sometimes controversial beliefs. When a person is used to an ever
changing society, changes in other fields of life such as work and education are easily adopted.
• Open Minded: The concept of racism substantially reduces when living in a multi-cultural society.
The core issues of racism is due to following the ideologies of the ancestors without understanding
the real situation. Once a person starts living amongst different cultures, the person would
automatically understand why people behave in certain ways.
• Supportive Environment: Living in a single belief system would mean that doing anything different
would go against the system. There are several cultures that strongly believe that Homosexuality is a
sin and people who are homosexual are abandoned by their community. When living in a multi-
cultural society, a community that does not have the same belief system would help in
understanding and supporting the abandoned individual.

• Interesting: One thing about the global village is that everything they do is interesting. The various
counters are a bouquet of what the world is like. The carnivals, food festivals and celebrations are
always fun and entertaining and learning.
• Culture of Food: The major advantage of living in a multi-cultural society is that one can taste
different cuisines without travelling. The Biryani, Thai green curry, shawarma, shepherd’s pie Turkish
grill at the global village where all an amazing encounter.
5 Disadvantages of Multiculturalism
• Disappearance of culture: When multiple cultures live together the chances of adapting other
convenient cultures highly increase which may result in erasing an entire culture (Eriksen, 2012). The
Khmer culture of Cambodia adopted Theravada Buddhism over years erasing the existence of Khmer.
• Increase of hatred: When two controversial cultures exist in the same area the chances of abuse,
threats and violence is high. The communities may try to prove one another wrong or one above the
other leading to power issues and increase in hatred such as the religion in Israel between Palestinian
and Jewish causing several causalities.
• Host society may be affected: The culture of the host society is considerably diluted by
multiculturalism. The immigrants may or may not work for the benefit of the host society which may
be a threat to the host society.
• Offence: If the cultures one lives in is not completely understood, the chances of offending someone
is high. In certain cultures women should not be touched by a male apart from their husband. When
a person that greets with a hug would be an offender if he does not understand how the other culture
behaves.

6 Multiculturalism in India
• Multicultural concerns have long informed India’s history and traditions, constitution and political
arrangements. Much of the writings on Indian history, culture and politics are marked by some kind
of multicultural concern. The central question in any discussion of multiculturalism in contemporary
India is how a vast, multi-ethnic country – in terms of religion, language, community, caste and tribe
– has survived as a state in conditions of underdevelopment, mass poverty, illiteracy and extreme
regional disparities.
6.1 Multicultural Constitution of India

• The Indian Constitution can be said to be a multicultural document in the International Journal on
Multicultural Societies (IJMS), sense of providing for political and institutional measures for the
recognition and accommodation of the country’s diversity.
• The Indian Constitution makes the conservation and cultivation of such rights the fundamental rights
of every citizen of India. Article 29 (1) says that any section of the citizens of India having a distinct
language, script or culture of its own shall have the fundamental right to conserve the same. This
means that if a cultural minority wants to preserve its own language and culture, the state cannot by
law impose on it any other culture belonging to the local majority. Both religious and linguistic
minorities are protected by this provision. The constitution also defines a positive, directional role
for the state in this respect.
• The constitution directs every state (federal unit) to provide adequate facilities for instruction in the
mother-tongue at the primary stage of education of children belonging to linguistic minority
groups, and empowers the President to issue proper direction to any state (Article 350 A).
• India is the second most populous country (population now over a billion) after China, and socially
and culturally the most diverse in the world. Formed over many thousands of years as a country of
immigrants who brought their own cultures and traditions, India’s diversity is proverbial.
• Although predominantly inhabited by “Hindus” (over 82 per cent) who are regionally rooted, plural
in beliefs and practices, and divided by castes and languages, India’s population also includes a large
proportion of Muslims (about 12 per cent), Sikhs, Buddhists, Christians and Jains.
• The diversity is coupled with enormous cultural diversity that is based on such factors like language,
caste, and ethnicity. There are 114 spoken languages in this country; of these, 22 were spoken by
more than one million people. The state lists 630 communities as Scheduled Tribes. There is diversity
even among these groups and many of the identified communities are said to be internally
heterogeneous, comprising several smaller different tribes.
• Article 29 (2) forbids any discrimination against any citizen on the basis of religion, race, caste or
language in the matter of admission into educational institutions maintained or aided by the state.
• As far as the institutional means of protection and cultivation of minority culture is concerned,
Articles 29 (1) and 30 (1) stipulate that minorities can establish and administer educational
institutions of their own choice, and the state cannot compel them to attend institutions not to
their liking. The Supreme Court, in a series of judgments over the years, has expanded the scope of
those provisions.
• The National Commission for Minorities Act (1992) was passed by parliament in 1992 to monitor the
working of the constitutional safeguards in union and state laws.
• When India attained independence in 1947, the political leadership and the framers of the
Constitution kept this diversity in view while deliberating a framework that would provide for an
amalgamated yet culturally a diverse nation-state that is based on the principle of unity in diversity.
6.2 Other aspects of Multiculturalism

• The multi-religious and multicultural character of the Indian society is deeply rooted in history from
the pre-independence period. The Independence movement against a colonial regime sought to
unite the nation through its culturally diverse people together towards a nationalist goal.
• It was a struggle for acquiring a national identity; it sought to unify the groups belonging to various
religious and cultural groups within a nationalist fold. Though, during the course of the nationalist
struggle many culturally diverse groups were jointly and gradually consolidated on a nationalist
platform.
• It is the home of some hundred languages and dialects and, so far, eighteen languages have been
“officially” recognised and placed under the Eighth Schedule of the Indian Constitution. There are,
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however, sizeable sections of the population, most notably in the North-East, who are a majority
in their locality but whose first language is not yet “officially” recognized. Most of the states have
some dominant ethno-linguistic and ethno-religious groups (Punjab, Jammu and Kashmir, North-
East), although within each of them there are religious and linguistic minorities.
• India’s social and cultural landscape is dotted with various movements towards statehood rooted in
identity searches for communities. There are such movements as Harit Pradesh in western Uttar
Pradesh, Vindhyachal in Madhya Pradesh, Telengana in Andhra Pradesh, Vidarbha in Maharashtra,
Kodagu in Karnataka, Gorkhaland and Kamtapuri in West Bengal, and Bodoland in Assam.
• In the Indian context, Bhargava has identified three problems with multiculturalism in so far as
identity is concerned. First, overemphasis on identity may be exclusive in the sense of excluding
people or “others” from an essential identity. Second, encouragement of cultural particularity
deepens divisions and undermines the “common foundation for a viable society”. Third, it may result
in curbing individual freedom by advocating “aggressive community power over individual freedom”,
and thus corroding the values of liberal democracy.
6.3 Multiculturalism and States

• The strength and viability of the Indian federation in accommodating diversity is illustrated by the
creation of three new states – Chhattisgarh (carved out of Madhya Pradesh), Jharkhand (carved out
of Bihar), and Uttaranchal (carved out of Uttar Pradesh).
• The formation of states on the basis of language was a pledge and a demand of the anti-colonial
nationalist movements. The Indian National Congress (INC), as the main party of independence, from
the beginning of the 1900s began to encourage the idea of linguistic states to obtain a better deal
for ethnic groups, and officially endorsed the demand as early as 1920 when it reorganised its units
on the basis of linguistic regional boundaries.
• The INC’s cultivation of support for ethnic groups also strengthened its bases. The essence of the
nationalist pledge in this respect was to reorganise the Indian State after independence on the basis
of linguistic reorganisation of the country’s territory.
• This encouragement led to an awakening among various nationalities and ethnic groups of the
desire for self-rule and identity prior to independence. Many of the post-independence movements
for statehood had their origins in this pre-independence phase. The statehood movements thus
enjoy some kind of prior legitimacy.
• In the beginning (1950) there were twenty-seven states of differential status and powers, which were
reduced by the first major territorial reorganisation in 1956 to fourteen with equal powers and
functions.
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• The first state created in recognition of the linguistic principle in the post-independence period was
Andhra Pradesh (Telegu language, 1953), and that after its legendary leader Sri Ramalu’s fast unto
death. This prompted the Government of India to form the States Reorganization Commission in
1953 and, on the basis of its recommendations, to pass the famous States Reorganization Act of 1956.
• The basis in the first major reorganisation of states in 1956 was strongly linguistic: federal units were
created to corresponded largely with linguistic boundaries. Since 1956, the formation of new federal
units in India has remained more or less a continuous process. The basis for state creation has been
ethno-regional or linguistic.
• In the 1950s and 1960s, the linguistic factor played the most determining role with the sole
exception of the creation of Punjab (1966) in which it was combined with religion. In the 1970s,
India’s north-east (now comprising seven federal units) became the area of major state
reorganisation, giving birth to three new states as political recognition of tribal identity.
6.4 Unity In Diversity: India’s Approach

• India’s experiment with creating political unity out of unequal and diverse social order has not been
without problems.
• In the post-independence period the identities of language, religion, caste and tribe have been used
and appealed to increasingly for the mobilization of political support so much so that these
diversities have acquired a sharp political presence and have become instruments of adversarial
politic.
• It is pointed out that Indians see themselves first and foremost as members of a caste, tribe, village,
and religion. These community identities constitute people’s self-understanding and shape their
social and political choices.
• Even after so many years of independence, social and political conflicts around the issues of religion,
caste and tribe based community identities have not diminished. On the other hand, social conflicts
have increased and so have incidents of communal violence.
• There is a demand for caste census and caste-based Khap Panchayats are active in some states. All
these pose tremendous challenges to our polity and society.
7 Diversified aspects of Multiculturalism in India

• Community identity is based on birth and ‘belonging’ rather than on some form of acquired
qualifications or ‘accomplishment’. It is what we ‘are’ rather than what we have ‘become’. We don’t
have to do anything to be born into a community – in fact, no one has any choice about which family
or community or country they are born into. These kinds of identities are called ‘ascriptive’ – that is,
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they are determined by the accidents of birth and do not involve any choice on the part of the
individuals concerned. It is an odd fact of social life that people feel a deep sense of security and
satisfaction in belonging to communities in which their membership is entirely accidental.
• Perhaps it is because of this accidental, unconditional and yet almost inescapable belonging that we
can often be so emotionally attached to our community identity. Expanding and overlapping circles
of community ties (family, kinship, caste, ethnicity, language, region or religion) give meaning to
our world and give us a sense of identity, of who we are. That is why people often react emotionally
or even violently whenever there is a perceived threat to their community identity.
• A second feature of ascriptive identities and community feeling is that they are universal. Everyone
has a motherland, a mother tongue, a family, a faith… This may not necessarily be strictly true of
every individual, but it is true in a general sense. And we are all equally committed and loyal to our
respective identities.
• Each side in the conflict thinks of the other side as a hated enemy, and there is a tendency to
exaggerate the virtues of one’s own side as well as the vices of the other side. Thus, when two
nations are at war, patriots in each nation see the other as the enemy aggressor; each side believes
that God and truth are on their side. In the heat of the moment, it is very hard for people on either
side to see that they are constructing matching but reversed mirror images of each other.
7.1 Regionalism In The Indian Context

• Regionalism in India is rooted in India’s diversity of languages, cultures, tribes, and religions. It is
also encouraged by the geographical concentration of these identity markers in particular regions,
and fuelled by a sense of regional deprivation. Indian federalism has been a means of accommodating
these regional sentiments.
• After Independence, initially the Indian state continued with the British-Indian arrangement dividing
India into large provinces, also called ‘presidencies’. (Madras, Bombay, and Calcutta were the three
major presidencies; incidentally, all three cities after which the presidencies were named have
changed their names recently).
• These were large multi-ethnic and multilingual provincial states constituting the major political-
administrative units of a semi-federal state called the Union of India. For example, the old Bombay
State (continuation of the Bombay Presidency) was a multilingual state of Marathi, Gujarati, Kannada
and Konkani speaking people. Similarly, the Madras State was constituted by Tamil, Telugu, Kannada
and Malayalam speaking people.
• In addition to the presidencies and provinces directly administered by the British Indian government,
there were also a large number of princely states and principalities all over India. The larger princely
states included Mysore, Kashmir, and Baroda. But soon after the adoption of the Constitution, all
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these units of the colonial era had to be reorganised into ethno-linguistic States within the Indian
union in response to strong popular agitations.
• Language coupled with regional and tribal identity – and not religion – has therefore provided the
most powerful instrument for the formation of ethnonational identity in India. However, this does
not mean that all linguistic communities have got statehood.
• For instance, in the creation of three new states in 2000, namely Chhatisgarh, Uttaranchal and
Jharkhand, language did not play a prominent role. Rather, a combination of ethnicity based on tribal
identity, language, regional deprivation and ecology provided the basis for intense regionalism
resulting in statehood. Currently there are 28 States (federal units) and 8 Union territories (centrally
administered) within the Indian nation-state.
• Respecting regional sentiments is not just a matter of creating States: this has to be backed up with
an institutional structure that ensures their viability as relatively autonomous units within a larger
federal structure. In India this is done by Constitutional provisions defining the powers of the States
and the Centre. There are lists of ‘subjects’ or areas of governance which are the exclusive
responsibility of either State or Centre, along with a ‘Concurrent List’ of areas where both are allowed
to operate.
• The State legislatures determine the composition of the upper house of Parliament, the Rajya Sabha.
In addition there are periodic committees and commissions that decide on Centre-State relations. An
example is the Finance Commission which is set up every ten years to decide on sharing of tax
revenues between Centre and States. Each Five Year Plan also involves detailed State Plans prepared
by the State Planning Commissions of each state.
• On the whole the federal system has worked fairly well, though there remain many contentious
issues. Since the era of liberalisation (i.e., since the 1990s) there is concern among policy makers,
politicians and scholars about increasing inter-regional economic and infrastructural inequalities.
• As private investment (both foreign and Indian) is given a greater role in economic development,
considerations of regional equity get diluted. This happens because private investors generally want
to invest in already developed States where the infrastructure and other facilities are better. Unlike
private industry, the government can give some consideration to regional equity (and other social
goals) rather than just seek to maximise profits. So left to itself, the market economy tends to increase
the gap between developed and backward regions. Fresh public initiatives will be needed to reverse
current trends.
7.2 The Most Contentious of All Aspects of Multiculturalism

• Perhaps the most contentious of all aspects of cultural diversity are issues relating to religious
communities and religion-based identities. These issues may be broadly divided into two related
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groups – the secularism–communalism set and the minority–majority set. Questions of secularism
and communalism are about the state’s relationship to religion and to political groupings that
invoke religion as their primary identity. Questions about minorities and majorities involve decisions
on how the state is to treat different religious, ethnic or other communities that are unequal in terms
of numbers and/or power (including social, economic and political power).
7.2.1 Minority Rights and Nation Building

• In Indian nationalism, the dominant trend was marked by an inclusive and democratic vision. Inclusive
because it recognised diversity and plurality. Democratic because it sought to do away with
discrimination and exclusion and bring forth a just and equitable society.
• The term ‘people’ has not been seen in exclusive terms, as referring to any specific group defined by
religion, ethnicity, race or caste.
• However, for a strong and democratic nation, special constitutional provisions are required to ensure
the rights of all groups and those of minority groups in particular. When minority is used without
qualification, it generally implies a relatively small but also disadvantaged group.
• The sociological sense of minority also implies that the members of the minority form a collectivity –
that is, they have a strong sense of group solidarity, a feeling of togetherness and belonging.
• This is linked to disadvantage because the experience of being subjected to prejudice and
discrimination usually heightens feelings of intra-group loyalty and interests (Giddens 2001:248).
• However, it is possible to have anomalous instances where a minority group is disadvantaged in one
sense but not in another. Thus, for example, religious minorities like the Parsis or Sikhs may be
relatively well-off economically. But they may still be disadvantaged in a cultural sense because of
their small numbers relative to the overwhelming majority of Hindus.
• Religious or cultural minorities need special protection because of the demographic dominance of
the majority.
• In democratic politics, it is always possible to convert a numerical majority into political power
through elections. This means that religious or cultural minorities – regardless of their economic or
social position – are politically vulnerable.
• They must face the risk that the majority community will capture political power and use the state
machinery to suppress their religious or cultural institutions, ultimately forcing them to abandon
their distinctive identity.
• In the long years of struggle against British colonialism, Indian nationalists understood the imperative
need to recognise and respect India’s diversity. Indeed ‘unity in diversity’ became a short hand to
capture the plural and diverse nature of Indian society.
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• The makers of the Indian Constitution were aware that a strong and united nation could be built only
when all sections of people had the freedom to practice their religion, and to develop their culture
and language.
• One of the many contentious issues that formed the backdrop of the ethnic conflict in Sri Lanka was
the imposition of Sinhalese as a national language. Likewise any forcible imposition of a language or
religion on any group of people in India weakens national unity which is based upon a recognition
of differences.
• Indian nationalism recognises this, and the Indian Constitution affirms this. Finally, it is useful to note
that minorities exist everywhere, not just in India. In most nation-states, there tend to be a dominant
social group whether cultural, ethnic, racial or religious. Nowhere in the world is there a nation-
state consisting exclusively of a single homogenous cultural group.
• Even where this was almost true (as in countries like Iceland, Sweden or South Korea), modern
capitalism, colonialism and large scale migration have brought in a plurality of groups. Even the
smallest state will have minorities, whether in religious, ethnic, linguistic or racial terms.
7.2.2 Communalism
• In everyday language, the word ‘communalism’ refers to aggressive chauvinism based on religious
identity. Chauvinism itself is an attitude that sees one’s own group as the only legitimate or worthy
group, with other groups being seen – by definition – as inferior, illegitimate and opposed.
• Thus, to simplify further, communalism is an aggressive political ideology linked to religion. This is a
peculiarly Indian, or perhaps South Asian, meaning that is different from the sense of the ordinary
English word.
• In the English language, “communal” means something related to a community or collectivity as
different from an individual. The English meaning is neutral, whereas the South Asian meaning is
strongly charged.
• The charge may be seen as positive – if one is sympathetic to communalism – or negative, if one is
opposed to it. It is important to emphasise that communalism is about politics, not about religion.
• Although communalists are intensely involved with religion, there is in fact no necessary relationship
between personal faith and communalism. A communalist may or may not be a devout person, and
devout believers may or may not be communalists.
• However, all communalists do believe in a political identity based on religion. The key factor is the
attitude towards those who believe in other kinds of identities, including other religion-based
identities.
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• Communalists cultivate an aggressive political identity, and are prepared to condemn or attack
everyone who does not share their identity.
• One of the characteristic features of communalism is its claim that religious identity overrides
everything else.
• Whether one is poor or rich, whatever one’s occupation, caste or political beliefs, it is religion alone
that counts. All Hindus are the same as are all Muslims, Sikhs and so on. This has the effect of
constructing large and diverse groups as singular and homogenous.
• It is noteworthy that this is done for one’s own group as well as for others. This would obviously rule
out the possibility that Hindus, Muslims and Christians who belong to Kerala, for example, may have
as much or more in common with each other than with their co-religionists from Kashmir, Gujarat or
Nagaland.
• It also denies the possibility that, for instance, landless agricultural labourers (or industrialists) may
have a lot in common even if they belong to different religions and regions.
• Communalism is an especially important issue in India because it has been a recurrent source of
tension and violence.
• During communal riots, people become faceless members of their respective communities. They are
willing to kill, rape, and loot members of other communities in order to redeem their pride, to protect
their home turf.
• A commonly cited justification is to avenge the deaths or dishonour suffered by their co-religionists
elsewhere or even in the distant past. No region has been wholly exempt from communal violence
of one kind or another.
• Every religious community has faced this violence in greater or lesser degree, although the
proportionate impact is far more traumatic for minority communities.
• To the extent that governments can be held responsible for communal riots, no government or ruling
party can claim to be blameless in this regard.
• In fact, the two most traumatic contemporary instances of communal violence occurred under each
of the major political parties. The anti-Sikh riots of Delhi in 1984 took place under a Congress regime.
The unprecedented scale and spread of anti-Muslim violence in Gujarat in 2002 took place under a
BJP government. India has had a history of communal riots from pre-Independence times, often as a
result of the divide-and-rule policy adopted by the colonial rulers.
• But colonialism did not invent inter-community conflicts – there is also a long history of pre-colonial
conflicts – and it certainly cannot be blamed for post-independence riots and killings.
• Indeed, if we wish to look for instances of religious, cultural, regional or ethnic conflict they can be
found in almost every phase of our history.
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• But we should not forget that we also have a long tradition of religious pluralism, ranging from
peaceful co-existence to actual inter-mixing or syncretism. This syncretic heritage is clearly evident
in the devotional songs and poetry of the Bhakti and Sufi movements.
7.2.3 Secularism
• As we have seen above, the meanings of the terms communal and communalism are more or less
clear, despite the bitter controversies between supporters and opponents. By contrast, the terms
‘secular’ and ‘secularism’ are very hard to define clearly, although they are also equally
controversial. In fact, secularism is among the most complex terms in social and political theory.
• In the western context the main sense of these terms has to do with the separation of church and
state. The separation of religious and political authority marked a major turning point in the social
history of the west. This separation was related to the process of “secularisation”, or the progressive
retreat of religion from public life, as it was converted from a mandatory obligation to a voluntary
personal practice.
• Secularisation in turn was related to the arrival of modernity and the rise of science and rationality
as alternatives to religious ways of understanding the world.
• The Indian meanings of secular and secularism include the western sense but also involve others.
• So, a secular person or state is one that does not favour any particular religion over others.
Secularism in this sense is the opposite of religious chauvinism and it need not necessarily imply
hostility to religion as such.
• In terms of the state-religion relationship, this sense of secularism implies equal respect for all
religions, rather than separation or distancing. For example, the secular Indian state declares public
holidays to mark the festivals of all religions.
• One kind of difficulty is created by the tension between the western sense of the state maintaining
a distance from all religions and the Indian sense of the state giving equal respect to all religions.
• The first generation of leaders of independent India (who happened to be overwhelmingly Hindu and
upper caste) chose to have a liberal, secular state governed by a democratic constitution. Accordingly,
the ‘state’ was conceived in culturally neutral terms, and the ‘nation’ was also conceived as an
inclusive territorial-political community of all citizens.
• Nation building was viewed mainly as a state-driven process of economic development and social
transformation. The expectation was that the universalisation of citizenship rights and the induction
of cultural pluralities into the democratic process of open and competitive politics would evolve
new, civic equations among ethnic communities, and between them and the state.
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7.2.3.1 The Western Model Of Secularism
• All secular states have one thing in common: they are neither theocratic nor do they establish a
religion. However, in most commonly prevalent conceptions, inspired mainly by the American model,
separation of religion and state is understood as mutual exclusion: the state will not intervene in
the affairs of religion and, in the same manner, religion will not interfere in the affairs of the state.
• Each has a separate sphere of its own with independent jurisdiction.
• No policy of the state can have an exclusively religious rationale. No religious classification can be
the basis of any public policy. If this happened there is illegitimate intrusion of religion in the state.
• Similarly, the state cannot aid any religious institution. It cannot give financial support to
educational institutions run by religious communities.
• Nor can it hinder the activities of religious communities, as long as they are within the broad limits
set by the law of the land. For example, if a religious institution forbids a woman from becoming a
priest, then the state can do little about it.
• If a religious community excommunicates its dissenters, the state can only be a silent witness. If a
particular religion forbids the entry of some of its members in the sanctum of its temple, then the
state has no option but to let the matter rest exactly where it is.
• On this view, religion is a private matter, not a matter of state policy or law. This common conception
interprets freedom and equality in an individualist manner.
• Liberty is the liberty of individuals. Equality is equality between individuals. There is no scope for
the idea that a community has the liberty to follow practices of its own choosing.
• There is little scope for community-based rights or minority rights. Except for the presence of the
Jews, most western societies were marked by a great deal of religious homogeneity. Given this fact,
they naturally focused on intra-religious domination.
• While strict separation of the state from the church is emphasised to realise among other things,
individual freedom, issues of inter-religious (and therefore of minority rights) equality are often
neglected.
• Finally, this form of mainstream secularism has no place for the idea of state-supported religious
reform. This feature follows directly from its understanding that the separation of state from church/
religion entails a relationship of mutual exclusion.
7.2.3.2 The Indian Model Of Secularism

• Indian secularism is fundamentally different from Western secularism. Indian secularism does not
focus only on church-state separation and the idea of inter-religious equality is crucial to the Indian
conception.
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• For a start it arose in the context of deep religious diversity that predated the advent of Western
modern ideas and nationalism. There was already a culture of inter-religious ‘tolerance’ in India.
• However, we must not forget that tolerance is compatible with religious domination. It may allow
some space to everyone but such freedom is usually limited.
• Besides, tolerance allows you to put up with people whom you find deeply repugnant. This is a great
virtue if a society is recovering from a major civil war but not in times of peace where people are
struggling for equal dignity and respect.
• The advent of western modernity brought to the fore hitherto neglected and marginalised notions of
equality in Indian thought. It sharpened these ideas and helped us to focus on equality within the
community.
• It also ushered ideas of inter-community equality to replace the notion of hierarchy. Thus Indian
secularism took on a distinct form as a result of an interaction between what already existed in a
society that had religious diversity and the ideas that came from the west.
• It resulted in equal focus on intra-religious and inter-religious domination. Indian secularism equally
opposed oppression of dalits and women within Hinduism, the discrimination against women within
Indian Islam or Christianity, and the possible threats that a majority community might pose to the
rights of the minority religious communities. This is its first important difference from mainstream
western secularism.
• Connected to it is the second difference. Indian secularism deals not only with religious freedom of
individuals but also with religious freedom of minority communities. Within it, an individual has the
right to profess the religion of his or her choice. Likewise, religious minorities also have a right to
exist and to maintain their own culture and educational institutions.
• A third difference is this. Since a secular state must be concerned equally with intra-religious
domination, Indian secularism has made room for and is compatible with the idea of state-
supported religious reform. Thus, the Indian constitution bans untouchability.
• The Indian state has enacted several laws abolishing child marriage and lifting the taboo on inter-
caste marriage sanctioned by Hinduism.
• The question however that arises is: can a state initiate or even support religious reforms and yet be
secular? Can a state claim to be secular and not maintain separation of religion from state? The
secular character of the Indian state is established by virtue of the fact that it is neither theocratic
nor has it established any one or multiple religions.
• Beyond that it has adopted a very sophisticated policy in pursuit of religious equality. This allows it
either to disengage with religion in American style, or engage with it if required.
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• The Indian state may engage with religion negatively to oppose religious tyranny. This is reflected in
such actions as the ban on untouchability.
• It may also choose a positive mode of engagement. Thus, the Indian Constitution grants all religious
minorities the right to establish and maintain their own educational institutions which may receive
assistance from the state.
• All these complex strategies can be adopted by the state to promote the values of peace, freedom
and equality. It should be clear by now why the complexity of Indian secularism cannot be captured
by the phrase “equal respect for all religions”.
• If by this phrase is meant peaceful coexistence of all religions or inter-religious toleration, then this
will not be enough because secularism is much more than mere peaceful coexistence or toleration. If
this phrase means equal feeling of respect towards all established religions and their practices, then
there is an ambiguity that needs clearing.
• Indian secularism allows for principled state intervention in all religions. Such intervention betrays
disrespect to some aspects of every religion. For example, religiously sanctioned caste-hierarchies
are not acceptable within Indian secularism.
• The secular state does not have to treat every aspect of every religion with equal respect. It allows
equal disrespect for some aspects of organised religions.
Cultural diversity can drive economies, here are lessons from India: World Economic Forum
• In times when globalization seems to challenge local certainties, people often rediscover their
emotional, cultural and religious identities, and project them onto the nation state. But they tend
to forget that nation states are primarily occupied with political, administrative and legal
controls.
• Increasingly however, transnational communities, as well as communal pluralism, are having an
economic, social and political impact. In this regard, India and South Asia are role models, holding
an advantage in the new global order.
What are the benefits of cultural and religious pluralism in today's world? How do South Asia and in
particular India perform?
• Indians and most people in neighbouring South Asian countries commonly speak more than one
language daily, as a matter of routine.
• Their highly diverse expat, diaspora and migrant communities provide them not only with global
access, but also with global sources of income.
• India and other South Asian countries are among the largest recipients of monthly transfers from
their diaspora workers.
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• Due to their religious, ethnic and social diversity, more than 30 million Indians access and transfer
remittances from countries as various as Saudi Arabia, the UAE, Malaysia, Singapore, the US,
Canada, the UK and Australia.
• Regional languages and minority religions have established themselves as global community
networks. This is as much true for the Tamils in Malaysia as for the Sikhs in Canada. Such
connections provide them with access to education and jobs, partly through professional visa
arrangements, and despite the limitations and constraints of our current times. These communities
have created their own formats, many of which have become international actors, such the Global
Tamil Forum and the World Sikh Organisation.
• India may be in disagreement with China over historical borders, but it still shares with it (and with
its other neighbours in the Northeast, such as Myanmar) local languages and Buddhist religious
minorities. Issues that are today seen as a liability, such as the problems surrounding the Tibetan
exile community and the Rohingya, could become an asset of shared cultural capital, if treated
differently.
• This also applies to the world’s 600 million South Asian Muslims. While they are perceived by some
Islamic institutions as living on the margins of the Muslim world, they more than double Arabic-
speaking Muslims in number. They make significant contributions to the cultural, ethnic and
linguistic diversity of the Muslim world, allowing India economic, social and political access to
diverse international actors, including Iran, Palestine, Saudi Arabia, Egypt and countries in Central
Asia.
Diversity for development
• There are 2.2 million Indians working in the UAE and 1.5 million in Saudi Arabia. The diaspora
community from the state of Kerala in South India has become a development and social factor in
its own right in the Gulf region, with Kerala providing 40% of Indian workers in the UAE. Keralan
Muslims run their own centres of Islamic teaching there, offering lessons in Malayam. One of these
is the Indian Islami Centre, founded in 1995.
• This turn in global politics and economics has enabled and advanced the mobilization of
emotional capital, drawing on local diversities for the development of areas and communities that
feel left behind.
• Notions of piety and cultural identity are used as a source of development. Faith and identity is
marketed or used to sell other services and goods. This can either promote awareness of diversity,
or increase tension based on difference.
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• Accordingly, inclusiveness is the most important quality of this transformation - not only in
cultural and religious or sectarian terms, but also in social matters. This quality is just as important
within communities as between different ones, since they are all highly diverse
themselves. Inclusiveness is therefore becoming an important development tool, turning
diversity into an asset for achieving broader social and economic development goals in India and
across South Asia.
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OPENING UP OF THE INDIAN ECONOMY,
BALANCE OF PAYMENTS
FODDER MATERIAL

Contents
1 Openness and Growth in the Indian Economy ......................................................................................3
1.1 Is there a link between openness and growth? ..............................................................................4
1.2 Openness – Growth Link .................................................................................................................4
1.3 The 1980s ........................................................................................................................................5
1.4 Services ...........................................................................................................................................6
1.5 Agriculture & Industry.....................................................................................................................7
1.6 Product Structure of Trade .............................................................................................................9
1.7 Competition and Productivity Effects ...........................................................................................11
1.8 Capital Inflows and Exchange Rate Policy .....................................................................................13
1.9 Regional Growth ...........................................................................................................................15
1.10 India and the Global Crisis ............................................................................................................16
1.11 Summary .......................................................................................................................................18
2 Exploring the Global Integration of the Indian Economy.....................................................................19
2.1 Growth of Merchandise Trade ......................................................................................................20
2.2 Changing Structure of Trade .........................................................................................................21
2.2.1 Export Structure.....................................................................................................................21
2.2.2 Import Structure ....................................................................................................................23
2.3 Changing Geography of Trade ......................................................................................................25
2.4 Services in India’s Trade ................................................................................................................27
2.5 Current Account Balance ..............................................................................................................28
2.6 Foreign Institutional Investment Inflows and Exchange Rate Instability .....................................30
2.6.1 Perils of High Exposure to FII Inflows ....................................................................................32
2.7 Foreign Direct Investment (FDI) Flows and Their Quality .............................................................33
2.7.1 Trends in Inward FDI Flows ....................................................................................................33
2.7.2 Quality of FDI Inflows ............................................................................................................34
2.7.3 Trends and Patterns in Outward FDI by Indian Enterprises ..................................................39
2.8 Regional Economic Integration .....................................................................................................40
2.9 Towards a More Inclusive and Sustainable Integration ...............................................................42
3 Multinational Corporations ..................................................................................................................43
3.1 Need for MNCs in Emerging Markets ...........................................................................................44
3.2 Why MNCs Need Emerging Markets?...........................................................................................45
3.3 Role of MNCs in Developing Economies .......................................................................................46
3.4 Arguments against MNCs..............................................................................................................46

3.5 Gauging MNCs Performance .........................................................................................................47
1 Openness and Growth in the Indian Economy

Since the initiation of economic reforms in 1991, India’s economic policy has shifted continuously to
outward orientation and market incentives. Imparting a big push to an economy struggling on a low
growth trajectory must have been among the main objectives of the architects of policy change. Their
expectations were not belied.
If we go back to 1950 and look at the performance over three successive decades, the following picture
emerges.
• Gross domestic product growth rates (at constant prices) for the decades 1950–60, 1960–70, and
1970–80 were 3.9 per cent, 3.7 per cent, and 3.1 per cent respectively; a pretty depressing picture
all through.
• Then came the first noticeable break away from the trend. Over 1980–90, growth jumped to 5.8
per cent and continued at this rate over the next decade too. But the miracle came later.
• The nine years spanning 2000–9 witnessed uninterrupted growth at 7.2 per cent and China ceased
to be the sole poster boy of market reforms and globalization. In the sub-period 2003–9, the
growth was actually up there at 8.3 per cent, second only to China’s.
• There was a short but sharp downturn in 2008–9 when the GDP grew by 6.7 per cent but the
recovery was fairly quick.
• It was hoped that India would soon regain its position on the path of dazzling performance.
Unfortunately, that did not happen and the slideback continued. Over the last three years or so,
the growth engine has slowed down considerably.
• This is not good news for sure, but the very fact that 6.9 per cent can cause dejection speaks
volumes for what we have managed to achieve over the past quarter century. What was once
unthinkable has come within the realm of possibility.
Openness and growth have proceeded in tandem.
• The trade–GDP ratio (export + import/GDP), the most widely used measure of openness,
increased from as low a value as 8 per cent in 1970 to 22 per cent in 2000–1, and to 48 per cent
at present.

• Along with this current account openness, Indian policymakers have taken significant steps to
open up the capital account too. There are far fewer restrictions now on the movement of
investible funds in and out of the country.
1.1 Is there a link between openness and growth?

The objective of this chapter is to understand to what extent openness (on both current and capital
accounts) has contributed to the Indian growth miracle. As is well known, the link between free trade
and growth is a hotly discussed issue and no consensus has emerged from the debate. In this context,
the experiences of the newly industrializing countries (NIC), Hong Kong, South Korea, Singapore, and
Taiwan, have been intensely studied with mixed conclusions. For some observers, the key element was
the successful export of labour-intensive manufactured products throughout the 1970s and 1980s. This,
it is maintained, refutes the conventional wisdom that industrial development and growth must take place
via import substitution.
Others point out that the spectacular export success was actually facilitated by previous import
substitution and careful policy planning.
There is a plethora of cross-country studies that investigate the growth-openness linkage. They have
produced mixed results, with Sachs and Warner (1995), Frankel and Romer (1999), and Dollar and Kraay
(2000, 2002) on the supportive side and Harrison (1996) and Rodriguez and Rodrik (2001) strongly on the
other. One major conclusion of the last study mentioned is that the robustness of the correlation
between openness and growth declines as other variables are included in the model.
Dodzin and Vambakidis (2004) use a panel of 92 developing countries over 1960–2000 and conclude that
greater openness in trade raises the share of industry in value added at the expense of the agricultural
sector. Thus, trade actually facilitates industrialization, contrary to the conventional infant industry
argument. Rodrik, Subramanian, and Trebbi (2004) considered the simultaneous effects of institutions,
geography, and trade on per capita income and concluded that the quality of institutions matters a great
deal for a positive trade-income nexus.
1.2 Openness – Growth Link

The major channels through which greater openness is supposed to stimulate an economy are as follows:
• Demand pull and cost reduction effect: Net exports form an important component of aggregate
demand in an open economy. A sustained rise in this component has historically played an important
role in the success stories of Japan, the NICs, and more recently China, which has become the
workshop of the world. Besides getting an additional source of demand, home producers can import
cheaper and better quality inputs and capital equipment from abroad after trade liberalization.

Rising demand and falling costs give a strong boost to profits and encourage capital formation and
other expansion plans.
• Competition effect: Exposure to foreign competition forces domestic firms to improve efficiency for
survival. A protected domestic market tends to shelter too many firms. The car industry in Argentina
in the 1980s and 1990s is a classic example. Examples from India and other developing countries can
be multiplied at will. Greater competition raises the average efficiency by forcing the less efficient
firms to contract or shut down. Even the more efficient ones feel the compulsion to pay careful
attention to the choice of products, production locations, and techniques. The industrial structure
experiences salubrious ‘rationalization’.
• Learning effect: Ongoing contact with partners operating with better technology, managerial skills,
and marketing networks induces learning that boosts efficiency and competitiveness over time.
Historically, this has been one of the most prominent sources of dynamic gains from trade. The
efficiency improvement due to combined competition and the learning effect is supposed to show
up in improvement in total factor productivity (TFP) of an open economy. TFP growth as an index of
efficiency has many limitations, but it remains the most widely used measure nevertheless.
• Capital inflow effect: Openness involves freer movement of both commodities (and services) and
investible funds. Capital inflow may be either long term foreign direct investment (FDI) or short term
foreign portfolio investment (FPI). Of the two, FDI has the potential to act as a vehicle for
transnational transfer of technological knowledge and managerial skills. This has a positive supply-
side effect and tends to pull in local investments. The benefit once again should show up in the
growth of TFP. The benefits of FPIs, on the other hand, are supposed to flow by improving the depth
and liquidity of the stock market and by stimulating investments through a reduction in the cost of
capital.
1.3 The 1980s

The growth spurt over the 1980s may safely be taken as domestically driven. Policy reforms during this
period mainly focused on domestic industrial liberalization rather than foreign trade. Hardly anything
was done to expose the industry to external competition. Import liberalization related to inputs and
components, which actually raised the effective protection of final products.
In the early 1980s there was a significant attitudinal change on the part of the national leadership,
signaling a shift in favour of the private sector. The fillip to business confidence and profitability
stimulated investment in a big way.
As a proportion of the GDP, investment accounted for 18.27 per cent over 1971–80, but for 1981–90 the
figure was significantly higher at 22.04 per cent. Public investments over the latter period grew at 6.89

per cent per annum, while the rate for private investments was 7.60 per cent. The jump in the investment
ratio was accompanied by improvements in productivity of capital as reflected in the drop in the
incremental capital–output ratio (ICOR) from 5.98 to 3.65 over the same periods. Sectoral contributions
to the GDP growth during the latter period were: 27.5 per cent (agriculture), 28.9 per cent (industry), and
43.6 per cent (services).
International trade accounted for a small part of the economy with the trade ratio standing stagnant at
around 14 per cent over the 1980s, an increase of a mere 4 per cent over the previous decade. Moreover,
the bulk of the trade, almost 80 per cent, was in goods and this was actually in deficit. Services trade
was more or less balanced. All this suggests that the degree of integration with the global market was
rather weak and that the growth boost was largely due to increase in domestic investments and the
productivity of capital.
1.4 Services
In the 1990s, the speed and depth of integration went on increasing. The trade–GDP ratio had already
reached 22.1 per cent by 2000–1.
In sharp contrast to the 1980s, goods exports now failed to keep pace with imports and ran into
persistent deficit while the net export of services accelerated.
The chief contributory factor was our ability to capitalize on a great change in the technology of
production and distribution. IT-aided modularization and fragmentation led to a dramatic reversal of the
process of vertical integration and enabled the MNCs to bring together resources, ideas, and skills from
different regions of the world to lower the cost of producing a good or delivering a service. India, with
its huge stock of scientific and technical manpower and significantly lower wage rate, naturally emerged
as a leader in the export of business services.
From an average of 6.2 per cent in 1980–95, the growth rate of such services rose to 21 per cent during
1996–2004 and further to 27 per cent during 2005–11. The share in world exports of commercial services
climbed steadily to reach the value of almost 4 per cent in 2011. Over the same period, agriculture was
nearly stagnant and industry grew at a much slower pace. Sectoral shares have been deeply impacted as
a result of this pattern of uneven sectoral growth. The services component swelled and swelled and
commands about 57 per cent share in the GDP at present.
Export oriented services are not the only type that have witnessed rapid growth since the early 1990s.
Rate of expansion of telephone services or miscellaneous communications services have over some
periods, 1992–6 for example, actually exceeded that of business services (Nagaraj 2008). But since 2006,
business services have continued to dominate.

It is worth noting at this point that the Indian services sector is not homogeneous and displays a
distinctive dual character. The unorganized part of it that is not directly linked to external demand
actually accounts for no less than two-thirds of the total output. But recent growth (in terms of value
added) in the sector has undoubtedly been dominated by growth in the organized component that
responds positively to the growing global demand. In terms of growth of output, however, the
unorganized sector has not been negligible. For most periods in the past two decades, it has actually
outpaced the manufacturing sector. These traditional services are usually provided by small enterprises
and are likely, in recent times, to have been gaining in importance as subcontractors to large firms. There
are indications of significant spillover of the telecommunications revolution into the unorganized
segment. This intra-services interlinkage is still awaiting careful empirical investigation.
1.5 Agriculture & Industry

The GDP share of agriculture has been declining continuously and quite steeply since the 1950s. In the
course of the last two decades, it has fallen from around 40 per cent to almost 15 per cent. This decline
is the direct consequence of a persistently low rate of growth relative to the other two sectors.
Greater openness of the economy has failed to provide a stimulus because agricultural exports never
really picked up in the era of greater global integration. In our reforms program, industry was taken up
first, then trade, and then finance. Agriculture got the least attention. On the external front too,
prospects were fairly depressing. Yielding to the pressure of their immensely strong farm lobbies, the
developed countries did not (and still have not) opened up their markets to agricultural imports from
the developing world. At home, the pressure on fiscal consolidation coupled with the inability to bring
down subsidies and other unproductive populist transfers led to sharp cutbacks in public investments.
Agriculture and infrastructure were the worst sufferers. A possible diversification into horticulture and
livestock was hampered by the poor state of cold storages, refrigerated transport, insurance, and
organized marketing. Thus, the negative effect of stagnant external demand has been reinforced by
persistent decline in domestic investment and serious deficiencies in infrastructural facilities.
Indeed, with the domestic supply-side constraints being so severe, it would be foolish to hope that
better access to the markets of developed countries will automatically provides the necessary fillip to
dynamism and growth. For the major crops, both acreage and yield have tended to stagnate, as noted by
the Economic Survey of 2011–12 (GOI 2012) in detail. The Survey contains a long list of ‘options for
addressing supply-side constraints’, but all action seems to end there. Nothing is said about a sustained
government initiative (actual or planned), either at the central or the state level, for easing or removing
these constraints.

As a proportion of the agricultural GDP, subsidies have been rising steadily since the 1970s while public
investment has declined almost continuously since around 1980. The bulk of public investments in
agriculture is in surface irrigation. As in education, expenditure in rupee terms is a poor index of addition
to real productive capacity. And whatever real capacity is created fails to be properly utilized due to
inefficient local level management and poor maintenance. Spending on rural electrification, roads,
storage facilities, and provision of extension services has declined sharply over the years.
Given its strong complementarity with private capital formation, the slowdown in public investment has
had very serious negative consequences for the overall GDP growth in general and agricultural
performance in particular. The expectation of the government that enough private sector funds will flow
into the areas it was withdrawing from proved wildly off the mark. The explanation lies in a conjunction
of factors. The public goods nature of most infrastructural services, return uncertainty, lumpiness of
investment, and heightened difficulties of procuring finance in the new deregulated environment all
played their part in discouraging private entry into the field.
It is important to keep in mind in this context that India’s emergence as a major provider of IT services
undoubtedly owed much to the unleashing of private energy through deregulation and external sector
liberalization, but equally important were the availability of skilled scientific and technical manpower in
the major metropolitan centres and the massive extension and improvement in telecommunication
facilities. In all this, planned public investment played a decisive role. Fund and infrastructure
requirements of most IT units are considerably smaller than those of capital-intensive manufacturing, but
in no way does it detract from the government’s positive role in laying the foundations of our glorious
‘services revolution’.
The relative stagnation of the manufacturing sector (it has managed to hold its sectoral share at an
average of 22–3 per cent over 1980–1 to 2009–10) can be explained by the increased competition from
China in the global market, larger import penetration in some important segments, persistent
inefficiency, and, very crucially, serious deficiencies in such basic infrastructural facilities as ports, roads,
and power. Deceleration in public investments has acted as a major damper on private capital
accumulation. While managing to avert the fate of agriculture, manufacturing has failed to keep pace with
the burgeoning tertiary sector.
Even external capital has failed to provide adequate succour. After a brief period in the early 1990s when
foreign companies took a lively interest in investing in Indian manufacturing, the FDI flows dramatically
shifted towards newly emerging tertiary activities in which the problems of outdated technology, poor
supporting infrastructure, and inflexible labour laws (and militant trade unionism) were far less serious.

In China, the workshop of the world, manufacturing continues to account for more than 70 per cent of
the net FDI every year. In respect of the FDI in manufacturing, Thailand, Malaysia, and the Philippines
are all substantially ahead of us.
The overall health and dynamics of manufacturing have also been adversely affected by the absence of
a broad industrial base in the rural areas. Here, the contrast with China is remarkable. The Chinese
Township and Village Enterprises (TVEs) formed an integral part of a vibrant rural enterprise boom
triggered by the initiation of reforms in the late 1970s. Trade liberalization was successfully decentralized
to provincial and local levels and the TVEs participated vigorously in the growth of exports. Their
efficiency, already higher than that of state owned enterprises, was boosted by sustained gains in the TFP
over time. The absence of anything comparable in our countryside has without a doubt weakened the
ability of foreign trade to bring about broad-based industrial transformation and is also responsible in
a big way for the much-lamented muted impact of reforms on rural poverty.
1.6 Product Structure of Trade

It is not merely export growth that is important but its quality as well. Stimulus to growth through exports
will be stronger if the composition changes in favour of more skill-intensive and more technologically
sophisticated products. The following table presents the export and import shares of four broad product
groups.
Product structure of export and import

In exports, the share of labour and resource-intensive goods fell substantially between 1996 and 2006.
Medium and high skill products gained in importance, though not very dramatically.
The shares of engineering goods and petroleum products have gone up and those of textiles and leather
goods have come down substantially. The share of petroleum products has undergone a quantum leap
from 1.6 to 16.5 over the last decade. Compared to their status in 1990–1, chemical and related products
have grown in importance. Electronic goods have looked up, but only marginally. The surge in demand
from China explains the rise in ores and minerals. Gems and jewellery have held their position steady.
Though the movement up the value ladder of industrial exports has been encouraging, there is much
scope for improvement here. In manufacturing, our comparative advantage has remained mostly stable
over four decades. As part of the global supply chain, China, Malaysia, and the Philippines import
components, assemble and re-export high and medium technology products on a big scale. India
remains a marginal player in this field. This has slowed the process of technology upgradation and skill
improvement in the industry.
To benefit more substantially from globalization India needs to broaden its trade beyond a narrow
category of services. For that to happen, our manufacturing-cum-export-oriented infrastructure has to
be expanded and improved. The incentive regime still favours the domestic market and the protection
of inefficient industries still persists, though at a lower level compared to the pre-reform days. The
involvement of MNCs in the Indian export activities is still relatively low and has limited our ability to
utilize their marketing networks and skills. Affiliates of multinationals in India contribute less than 5 per
cent of our total exports, whereas the corresponding contributions exceed 50 per cent for China and
Malaysia.
Import composition has also undergone significant change. Though petroleum and related products
continue to dominate (30 per cent on average), there has been a perceptible shift away from petro-
products towards crude imports following significant rise in refinery capacity. Actually from 2001–2, India
has transformed itself from a net importer of finished petroleum products to a net exporter. At the same
time, the shares of capital goods and export related items have displayed a more or less upward trend
since the 1990s. All these factors are positively correlated with growth.
A large proportion of Indian manufacturing firms added new products to their production lines and these
products contributed substantially to manufacturing output growth. A key driver of the process was the
expansion in the range of imported intermediate inputs in the wake of substantial tariff harmonization
and reduction.
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It is also relevant in this context that there have been important changes in India’s export destinations
with the share of the developing countries increasing at the cost of the Organization for Economic
Cooperation and Development (OECD). And within the developing countries it is developing Asia (China,
South Korea, Hong Kong (China), Malaysia, Thailand, and Singapore) that is gaining in importance. This
augurs well because these countries constitute the fastest growing region of the world economy today.
Within the category of business services, there has been a noticeable shift towards more sophisticated,
higher value added activities over the last decade. The share of routine programming work and
maintenance accounted for 68.9 per cent of the total export revenue in 2001, this had fallen to 33.7 per
cent by 2008. Share of software products and the RDES (research, development and engineering services)
went up from 10 per cent to 21 per cent over the same period.
An internal study (see GOI 2012) of our exports of the world’s top import items using the latest UN
commodity trade data shows that: (a) in the top 100 imports of the world in 2010, India has only six
items with a share of 5 per cent and above and only 15 items with a share of 2 per cent and above, (b)
among the top 100 items, there are many where the country has acquired competence, but the share
continues to be very low. Most of these are simple items like taps, cocks, valves, suitcases, briefcases,
school satchels, musical instrument cases, various types of containers, flat rolled iron and steel products,
simple electric motors, and generators.
Clearly, there is enormous scope for greater export basket diversification and movement into more
sophisticated, more valuable industrial products. A lot needs to be done to have a perceptible share in
the leading items of world trade. This may, however, be difficult to achieve without greater involvement
of multinationals.
1.7 Competition and Productivity Effects

A large number of studies for developing economies have concluded that increased exposure to foreign
competition causes profit margins or price-cost mark-ups to decline, with the largest effect in the most
concentrated industries. Thus, liberalization imposes discipline on domestic business and forces it to
develop its competitive muscle. Has the disciplining device worked for India?
What is the evidence for India?
Sources of Growth by Major Sectors (percentage change per annum)
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Annual rate of growth of industrial output between 1978 and 1993 was 5.4 per cent and was 6.7 per
cent between 1993 and 2004. The corresponding TFP growth rates were 0.3 per cent and 1.1 per cent.
There was considerable expansion of the varieties of imported inputs as well as of new domestic
products following reductions in import tariffs on inputs. This is very important gain reaped by Indian
firms after trade liberalization. All of the estimated increase in sectoral productivity is due to the scaling
down of input tariffs.
The service sector in India experienced the most significant growth. The TFP in this field jumped from an
annual average of 1.4 per cent in 1978–93 to 3.9 per cent in 1993–2004. So, there is a strong correlation
between openness and productivity in this vibrant area of the economy.
Balakrishnan et al. (2000) failed to find any significant rise in productivity growth in manufacturing since
1991. Goldar and Kumari (2003) concluded that the post-reforms deceleration in TFP growth in industry
should not be attributed to import liberalization. They suggested gestation lags in industrial projects,
underutilization of capacity, and fall in agricultural growth as possible factors contributing to the
deceleration.
In principle, the FDI is capable of transforming a developing economy by promoting capital formation
and boosting efficiency by bringing over knowledge of new techniques and managerial methods. These
beneficial effects, real as they are, are notoriously difficult to isolate and capture in empirical work.
Serious as it is, data availability may not be the major problem here. Usually, external sector liberalization
forms just one component of a whole gamut of policy reforms that may directly or indirectly impact
productivity at the firm level. Disentangling the contribution of foreign investment becomes very difficult
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as a result. Also, fuzziness of results may be due to the imprecision of the measures of openness or foreign
investment or efficiency.
Several studies have demonstrated that the power to assimilate new technology and ideas require a
critically high stock of human capital that determines the absorptive capacity of an economy. Only
beyond that level of human capital does the FDI’s impact on growth become discernible. This seems to be
a good explanation of the weak FDI-growth link in India (and much of Africa). Also, it is the quality of
human capital that is critical. Conventional measures of education, such as literacy or school enrollment
or expenditure on education, are generally very poor guides to the quality of education imparted.
1.8 Capital Inflows and Exchange Rate Policy

Despite sincere efforts by the Government of India to encourage FDI, capital inflows into the country
remain heavily tilted in favour of portfolio investment by foreign institutional investors. The share of
FPI in the total net foreign investment in 2009–10 was almost 58 per cent; in 2010–11, the total was lower,
but FPI’s share was more than 70 per cent of that. In 2008–9, in the wake of the global crisis, the net
portfolio inflow actually turned negative while the FDI stood practically steady. In 2010, however, the
FPI was the first to recover from the shock and continued on more or less an upward trend till it swerved
dramatically down again in the second half of 2011. This underscores the volatility of such flows.
A closer look at the FDI inflows reveals that on average a substantial portion (as high as 29 per cent
between 2004 and 2007 according to Nagaraj 2008) goes into acquiring managerial control in domestic
companies, which does not add to the real capital stock. Also, a high percentage consists of ‘reinvested
earnings’, which does not represent a fresh flow of funds.
Our national accounts show that both the gross domestic saving ratio and the gross investment ratio
have been rising steadily over time in close correspondence with each other. Over 2006–7 to 2009–10,
for example, both rates hovered around an average value of 33–4 per cent with the investment rate
maintaining a slender lead over most of the years. The implication of this close match between the two
critical ratios is that the increases in domestic investment have been almost entirely financed by
domestic resources with foreign capital playing a modest role at best. It is worthy of note in this context
that it is the household segment, and not the private corporate sector, that is chiefly responsible for the
sharp rise in domestic savings and investments.
Given the prominence of portfolio funds in the total funds inflow into the economy, an important
question concerns their contribution to the nation’s growth. The beneficial effects of greater portfolio
flow into underdeveloped financial markets are supposed to operate through three main routes:
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(a) it lowers the cost of capital by raising stock prices (and hence the price-earning ratio) and thereby
stimulates new investment,
(b) it lowers transaction costs by enhancing the depth of the stock market, and
(c) it encourages savings by providing a new equity instrument to the savers.
What is the scenario for India?
The doors of the Indian capital market were thrown open to portfolio flows in 1992. It was followed by
a considerable stock market growth. Both the Sensex and the ‘depth index’ (stock market
capitalization/GDP) rose steadily during the early 1990s. However, over time, Foreign institutional
investment (FII) activities have come to mostly be confined to the secondary market for blue chip
company shares and direct contact with the real sector seems to have been lost. Empirical research has
failed to unearth any strong link between stock indices and private corporate investment in the Indian
context.
Short-term portfolio flows driven mainly by the prospect of capital gains have enhanced the volatility of
the stock market. This has been reflected in the volatility of the exchange rate. As a precaution against
sudden outflow of short-term capital (hot money) and the consequent turmoil in the foreign exchange
market, the RBI has decided to maintain a large stock of foreign reserves mainly invested in low-yielding
US T-bills. The paradoxical implication is that capital poor India is providing cheap loan to capital rich
USA. Obviously, this perversity is creating serious growth costs. China is doing the same on a much bigger
scale. There is an important difference though. Most of China’s reserves are ‘earned’ through a positive
trade balance whereas our reserves are basically ‘borrowed’, generated by surplus in the capital account.
The growth costs of reserves are, however, counterbalanced by their insurance or buffer value in an
environment of highly volatile cross-border flow of short-term funds (hot money). A comfortable position
in respect of foreign assets is taken by international credit rating agencies as an indicator of good health
and enables the country to access the international capital market on more favourable terms.
Addition to the stock of foreign reserves directly translates into growth of high powered money. Fear of
inflation led the RBI to undertake sterilization on a substantial scale to sever the balance of payments–
money supply link. But sterilization entails significant costs. In particular, contraction of domestic credit
on a big scale in a situation of excess capacity and demand constraints has had a serious adverse impact
on growth. Over the past few years, the RBI has scaled down its foreign exchange intervention
considerably and this negative effect of the exchange rate policy has been mitigated to that extent.
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Openness bestows on an economy the capability to invest beyond its domestic savings by utilizing the
savings of foreigners through the current account deficit. Under a flexible exchange system, greater
capital inflows potentially boost investment by widening the deficit. A policy that reduces the flexibility
of the exchange rate blocks this route or makes it narrower. From this perspective, RBI’s policy of heavy
intervention in the forex market has entailed some growth cost. This, however, is not easy to quantify. It
is worth repeating that the intervention was undertaken primarily to counter volatility and ‘maintain
orderly conditions’ in the forex market. Volatility and the consequent need for RBI action would have been
much lower had the flows come to our shores more in the form of long term, stable FDI.
The experience of East Asia has amply demonstrated that inflows intermediated through commercial
banks may lead to credit expansion which, instead of stimulating investment, may trigger a
consumption boom (with a strong import bias) or a speculative asset bubble (mainly in equity or real
estate). Capital takes flight en masse when the bubble inevitably bursts. To avert disasters of this type,
the RBI has kept a close watch on bank intermediation of inflows.
The impact of inflows on India’s banking sector has not been very strong. Bank assets as a proportion
of the GDP underwent a modest growth of 3 per cent over 1990–2000 and has not risen significantly
thereafter.
The new prudential norms have induced banks to enlarge their holding of safe government securities to
improve the quality of their portfolios, but actual investments in such securities is substantially in excess
of prudential requirements. Heightened risk aversion in an environment of heightened financial
turbulence has undoubtedly played an important role here.
Private domestic credit has expanded much more slowly. Bank financed asset speculation and the
resultant banking crises have been successfully prevented, but large-scale fund diversion to safe
government bonds has impacted private investment adversely. The drying up of credit has been
particularly disastrous for small-scale enterprises. Their export operations have suffered heavily in
consequence.
1.9 Regional Growth

An overwhelming majority of studies in the vast trade-growth literature have worked with country-level
income or per capita income. On the other hand, research on regional growth in India has for the most
part concentrated on issues of convergence or divergence without paying attention to the role of external
sector integration in the process.
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In a novel attempt, Maiti and Marjit (2009) constructed three indices—the export intensity index, the
import intensity index, and the regional openness index—to scrutinize the impact of export orientation
and import penetration on regional trade and disparity across 15 major Indian states during 1980–2004.
It is indeed very important for a massively heterogeneous country like India to know whether greater
openness has had an equalizing impact or not. Their major conclusion is that more open states grew
faster by 1–1.5 per cent per annum. States that were able to change their production structure towards
export production showed greater change in growth. And this ability was strongly correlated with the
quality of institutions and the prevailing investment climate. Per capita net state domestic products all
grew over the period but at different rates, exacerbating regional inequality. Dispersion in regional
openness seems to have been a major contributory factor.
1.10 India and the Global Crisis

Initially, India and other emerging economies were hit hard by the GFC or the Great Recession that
originated in the sub-prime housing market in the USA and then spread rapidly to the rest of the world.
Their recovery was remarkably rapid and spectacular, only to be followed by a sharp downturn since
2010. This was particularly so for India where the growth rate jumped from 3.89 per cent in 2008–9 to
8.48 per cent in 2009–10 and to 10.26 per cent in 2010–11, but collapsed thereafter to 6.64, 4.74, and
4.98 per cent respectively over the next three years.
To get an idea of the differential impact of the crisis, we note that over 2008–11 the developed countries
averaged a growth rate of -4 per cent. Under the eurozone crisis that followed the US sub-prime crisis,
the average growth in the euro area was 0.7 per cent. This was far below India’s average growth over
the decade covering the two crises. The reasons for the remarkably muted impact will become clear in
the discussion that follows.
Before touching briefly on the slowdown, let us first have a broad idea about the GFC’s impact on India.
(a) Capital outflow and value of the Indian currency: The main blow emanated from significant changes
experienced in the capital account. While there was no slowdown in the FDI flows, portfolio investments
by foreign institutional investors witnessed a net outflow of about USD 6.4 billion in April–September
2008 as compared to the net inflow of USD 15.5 billion in the corresponding period the previous year.
This was primarily a flight-to-safety phenomenon. (There was such a flight within the country too as
investors shifted from stocks to mutual funds and other safer assets and from private to public sector
banks.) External commercial borrowings of the corporate sector also declined sharply between April–
June 2008 to April–June 2009.
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The heavy capital outflow led to the most precipitous fall in the value of rupee in more than two decades.
The possible inflationary impact was muted by the fall in oil prices in the global market. On the positive
side, this depreciation had a role in cushioning, to some extent, the drop in our net exports triggered by
the drop in the US GDP. The adverse balance sheet effect did not take a devastating form chiefly because
of the low share of dollar denominated debt in the liabilities of banks and the corporate sector.
(b) Impact on the stock market: Stock prices were severely affected by the withdrawals of the foreign
institutional investors. Huge FIIs between January 2006 and January 2008 drove the Sensex past 20,000
over the period. Equally massive withdrawals caused it to tumble below 9,000 the year after. Both primary
and secondary markets got severely disrupted and corporate plans for raising resources for all types of
projects, major or minor, had to be either abandoned or put on hold.
(c) Impact on the banking sector: Thanks to the RBI’s close supervision and oversight, the Indian banking
system did not experience any serious contagion. It did not suffer any direct exposure to the sub-prime
mortgage assets and even indirect exposure was low. This was generally true of most of the emerging
economies. The average capital to risk-weighted assets ratio (CRAR) for the Indian banking system in
March 2008 was 12.6 per cent, as against the regulatory minimum of 9 per cent and the Basel norm of
8 per cent.
In the aftermath of the turmoil following the bankruptcy of Lehman Brothers, the RBI promptly
announced a series of measures, including the provision of additional liquidity support to distressed
banks, to prevent a serious disruption of financial activities.
To counteract the fall in net exports and other components of aggregate demand, fiscal stimulus was
also initiated promptly and on a substantial scale. The budget deficit, quite naturally, temporarily overshot
the limits of Fiscal Responsibility and Budgetary Management (FRBM) Act. But, as a result of these
concerted and well-planned efforts, the Indian economy succeeded in averting any major catastrophe.
Regarding the subsequent slowdown in India (and China), according to the IMF (2013), it was caused by
the operation of both demand- and supply-side factors. While supply-side constraints have reduced the
potential growth, part of the slowdown—in fact, one half for India by IMF’s estimates—is due to demand-
side factors. The RBI’s findings are also similar. Various measures were suggested and tried to reverse the
trend.
Interesting as this slowdown is from the macroeconomist’s point of view, it does not fall within the
purview of our present essay. We conclude this section by noting once again that although the Indian
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economy is considerably open now, it could escape the global crisis relatively unscathed chiefly due to
quick and appropriate action, both on fiscal and monetary fronts, within a tight regulatory structure.
1.11 Summary
The major ideas of this section can be summarized as follows. Openness to current account trade has
indeed played a significant role in India’s growth surge. The main drivers have been the lowering of trade
restrictions on a wide range of imported technologies and inputs and a spectacular acceleration in the
export of commercial IT-enabled services in more recent times. The pull effect of foreign demand has
been much weaker for manufacturing and non-existent for agriculture. Manufacturing has suffered from
intense Chinese competition no doubt, but domestic deficiencies, such as inadequacy and low quality
of basic infrastructure (barring telecommunications), persistence of inefficiency and declining public
investments (in both industry and agriculture) have been more important contributors.
On the export front, a movement up the value ladder is noticeable and import composition too has
broadly changed for the better. But there is considerable scope for improvement along both dimensions.
Supply-side effects of greater openness working through heightened competition and efficiency
improvement have been rather muted and difficult to measure. But there is evidence to show that TFP
growth has been stimulated and the boost given by reduction in the cost of importing inputs and
technical knowledge has been substantial. Inefficient domestic firms continue to enjoy protection by
the government. But for this the dynamic efficiency gains would have been greater.
The FDI has failed to effect any major supply-side change. This is not surprising, given its low share and
the deficiencies of complementary local inputs, such as physical infrastructure and human capital. The
FPI has been confined mostly to the secondary market and has, on the whole, not succeeded in
stimulating real capital formation through any significant reduction in the cost of capital. The stock
market remains shallow, dominated by a few big sellers. In spite of better regulation and lower frequency
of scams, participation of domestic agents continues to be low and the promised stimulus to household
savings has not materialized. On the positive side, a strict supervision of banks in their handling of foreign
funds has successfully prevented the occurrence of financial crises that have caused terrible growth
disruption in a large number of developing countries.
The objectives of maintaining orderly conditions in the forex market in the face of a volatile FPI and
sustaining the confidence of global investors in the Indian economy have led the RBI to run up huge
foreign reserves. Attendant sterilization programmes generated by fear of inflation have had a negative
impact on growth. Overall, lifting of capital account restrictions has been less beneficial than greater
openness on the current account.
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The gains from openness have not been shared evenly by the heterogeneous regions of the country.
External liberalization may have added to regional disparity.
With better infrastructure, better human capital, less corruption, better management of credit supply
to the small scale sector, a broader industrial base in the countryside, a more diversified export basket,
closer integration with the global supply chain, and a more favourable FDI-FPI mix, the positive impact
of greater openness on growth would have been much higher, more solidly founded, and the fruits of
prosperity more evenly shared throughout the economy. A nagging anxiety over the sustainability of the
current export-led growth would also have been far less acute in that case.
2 Exploring the Global Integration of the Indian Economy

A major liberalization of trade and investment regimes has taken place since 1991 as a part of the
package of reforms undertaken to deepen the integration of the Indian economy with the world economy
as a whole.
• Peak tariff rates came down from 150 per cent in the early 1990s to just 10 per cent by 2007.
• The quantitative restrictions on imports were phased out and a bulk of the tariff lines (over 70 per
cent) have been bound under the World Trade Organization (WTO).
• Most sectors of the economy are open to foreign direct investment (FDI) today with up to 100 per
cent foreign ownership, although sectoral ownership limits apply in service sectors.
• Since 1992, foreign institutional investors (FIIs) have also been allowed to invest in India.
• The Indian rupee was made convertible in the current account and the capital account is being
opened gradually, including a gradual liberalization of the regime governing outward FDI from India.
• Through a visionary Look East policy (LEP) pursued since 1992, India has taken steps to deepen its
engagement with the dynamic East Asian economies through a growing web of free trade
agreements (FTAs).
What has been the outcome of undertaking the above reforms?
• These economic reforms have led to industrial restructuring in the country with a focus on
competitiveness and global economic integration.
• The growing economic integration of the Indian economy is reflected in various indicators including
the rising share of trade in the economy.
• The structure and direction of trade have changed over time along with growing magnitudes.
• An important and more dynamic aspect of India’s integration with the world economy is through the
growing trade in services.
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• India has emerged as a hub for outsourcing of IT software and other business services, such as
business process outsourcing (BPO).
• India is also attracting attention from major multinational enterprises (MNEs) around the world
wishing to make India a hub for knowledge-based services to tap the availability of high-quality–low-
cost trained human resources as well as scientific and technological infrastructure.
• Another aspect of growing global integration is through the FDI—both inward and outward. With a
liberal FDI policy regime and a large and growing domestic market among other advantages, India is
attracting increasing attention of the MNEs even as Indian enterprises develop global ambitions and
undertake outward investments in increasing numbers and with growing magnitudes.
• India is known for an impressive turnaround of the external sector from a foreign exchange crisis
faced in 1991, when the current account deficit touched 3 per cent of the GDP, to a current account
surplus during 2001–4 and the buildup of large foreign exchange reserves.
However, the balance of payments situation is yet to become sustainable and continues to face
occasional periods of stress linked to the fluctuations in oil prices. This calls for harnessing the
opportunities for geographical and product diversification besides deepening the industrial base of the
country through strategic import substitution, leveraging the large domestic market.
2.1 Growth of Merchandise Trade

• The reforms of the 1990s led to a rapid expansion of India’s trade. The growth rates of India’s exports
and imports averaged over 10 per cent during the 1990s but stepped up to an average of 22 per cent
during 2001/2 to 2008/9.
• Imports have generally grown at faster rates (25.8 per cent) than exports (20 per cent).
• The global financial crisis, which started with the collapse of the Lehman Brothers in 2007, is a
structural break for the world trade, having brought down its growth rate. India’s trade has also been
affected significantly from it as the average rate of growth of exports and imports has come down
during 2009/10 to 2016/17 to 6 and 4 per cent respectively, which is only a fraction of the pre-crisis
rates. The values of trade actually shrunk in the four years following the financial crisis. As a result,
the current trade magnitudes are actually lower than the peak levels of USD 314 billion for exports
(2013/14) and USD 490.7 billion for imports (in 2012/13).
• This calls for a geographical diversification of trade away from the traditional trade partners and in
favour of more dynamic economies in East Asia.
• The other noticeable trend is the widening deficit in the balance of trade with imports growing at a
faster rate than exports, especially in the pre-crisis period. The trade deficit has snowballed from
USD 7–8 billion a year at the turn of century to USD 190 billion in 2012–13, amounting to around 10
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per cent of the GDP. Since then, however, trade deficit came down gradually to USD 108 billion in
2016–17 as the oil prices cooled down.
2.2 Changing Structure of Trade
2.2.1 Export Structure

• The export structure is expected to change with the level of development from one dominated by
primary products to one dominated by products with greater value added.
• Diversification of the export structure also makes the exporting country less vulnerable to external
shocks compared to a country with a more concentrated export structure.
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• First, as expected, the share of primary products, including agricultural and mineral products,
declined steadily from nearly a quarter of India’s merchandise exports in the 1990s to 16 per cent at
the turn of the century and to just 12 per cent in 2016/17.
• But, the declining share of India’s manufactured exports from a peak of 77 per cent of merchandise
exports in 2000/1 to 62 per cent in 2009/10 was a matter of concern, before they recovered to 70 per
cent in 2016/17. However, this decline can be seen as a statistical artifact due to the emergence of
India as a petroleum refining hub. Exports of refined petroleum products rose from just 4 per cent
of India’s exports at the turn of the century to 16 per cent by 2009/10 and accounted for 11 per cent
of India’s exports of merchandize in 2016/17. If refined petroleum products are considered as value
added products like other manufactured and processed products, then the share of manufactured
goods in exports comes out to be nearly 81 per cent in 2016/17.
• There is also a reorganization of exports of manufactured products as the share of conventional
products such as textiles and clothing has declined from 25 per cent in 2000/1 to just 12 per cent in
2016/17.
• Gems, Jewellery, and leather products have also either stagnated or declined in terms of their share
in exports.
• On the other hand, engineering goods have increased their share from 15 per cent to 26 per cent over
2000–17.
o Chemicals and related products have maintained their share of 13 per cent in this period.
o The two broad sectors of engineering and chemicals now account for nearly two fifths of
India’s merchandise exports and over 55 per cent of manufactured exports.
o Among engineering goods, exports of transport equipment rose very fast from less than a
billion dollars in 1995 to nearly USD 21 billion by 2011–12.
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o Besides exporting vehicles and two wheelers, India has emerged as a competitive exporter of
auto parts and a number of procurement groups of auto companies, such as Delphi Systems
(for General Motors) and Visteon (of Ford), have set up procurement subsidiaries in India.
o This emergence owes itself to a particular strategic intervention by the government in the
form of an erstwhile performance requirement that required foreign-owned companies to
balance imports by foreign exchange earnings.
o Chemicals and related products is another group of manufactured products that has improved
its share in the total merchandise exports even if only marginally from 10 to 13 per cent over
2009/10 to 2016/17. But among chemicals and allied products, the chemicals and
pharmaceuticals group has gained the most.
o This is due to India’s emergence as a major exporter of generic medicines in the world,
accounting for a third of global pharmaceuticals exports by volume. A major supplier of cost-
effective generics to developing countries and multilateral organizations such as the World
Health Organization (WHO) for their health care programmes in developing countries, India is
sometimes referred to as the pharmacy of the developing world.
o This success owes itself to another strategic intervention by the government in terms of the
adoption of a patent law that abolished product patents for pharmaceuticals in 1970, which
encouraged the development of generics by Indian companies.
• It is clear that India’s export structure has continued to move away from the export of primary and
conventional products such as textiles and clothing, leather products, and gems and jewelry towards
products with a greater value added, such as transport equipment, generic pharmaceuticals, and
refined petroleum products.
• However, primary commodities and conventional products together still account for as much as 42
per cent of the total merchandise exports. Second, the share of high-technology exports in India’s
export basket was only 7.5 per cent compared to 25.2 per cent for East Asian countries.
• India has also not been able to make a mark in fast-growing high value added segments of
manufacturing, such as electronic and telecom equipment. In fact, the growing imports of electronic
equipment and other hardware are straining India’s trade balance, as observed later.
• India has also not been able to exploit the job-creating potential of exports and has been unable to
develop highly labour-intensive export-oriented industries such as toys and electronic assembly,
among others.
2.2.2 Import Structure

India’s import structure has also changed over the years.
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• First, bulk imports comprising crude oil, raw materials, and certain foods accounted for as much as
45.7 per cent of the total merchandise imports in 2012/13, but declined to 36.4 per cent in 2016/17
as the oil prices came down. As oil prices have begun to rise again in 2018, their share is likely to go
up again.
• In recent times, imports of coal, coke, and briquettes, etc. have also risen sharply from USD 3.9 billion
to USD 15.7 billion as some Indian business houses invested in coal mines in other countries such as
Indonesia and Australia to secure reliable and stable supplies of coal for their thermal power plants.
• Considering that the demand of bulk imports that are mainly raw materials and foods is relatively
price-inelastic, one needs to pay attention to the rising imports of capital and other manufactured
goods in the context of the rising trade deficit.
o Among the capital goods, major categories included machinery accounting for USD 32 billion,
electronic goods worth USD 42 billion, and transport equipment making up USD 21 billion in
2016/17. In particular, imports of electronic goods are rising rapidly and are expected to grow
to USD 400 billion in a few years, according to some projections.
• In this context, it is also worth looking at the trends and patterns in India’s import dependence for
final consumption. There is a sharp rise in the share of imports in final consumption over 2001–11,
particularly in Electrical and Optical Equipment (from 20 per cent to 52.2 per cent), Machinery, n.e.c.
(from 5.9 per cent to 15.1 per cent), Transport Equipment (from 0.5 per cent to 4.7 per cent), and
Other Non-Metallic Minerals (8.3 to 37.1 per cent).
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• Given the weight of these sectors in the manufacturing value added, it can be concluded that the
country was witnessing a premature deindustrialization or ‘hollowing out’ of the industry during the
period.
• The demise of India’s fledgling electronic hardware industry can partly be explained in terms of
India’s premature signing of the WTO’s Information Technology Agreement 2000.
o It exposed Indian manufacturers to direct competition with established rivals in East Asian
countries that have massive scales of production due to their links with multinational supply
chains.
o It is in these categories of imports that an attempt needs to be made to pursue strategic
import substitution to leverage sizeable domestic markets to develop domestic supply
capabilities that will also generate value added and jobs while helping to moderate the trade
deficit.
2.3 Changing Geography of Trade

• A major transformation has taken place in the direction of India’s trade in terms of declining
dependence on conventional trade partners, such as the European Union and the United States, and
diversification of trade in new and emerging markets.
• The share of the EU in India’s trade in 2016 was less than half of what it was in 1990. Similarly, North
America’s share came down from 14 per cent to 11 per cent over the same period. Japan’s share in
India’s trade is now only a fourth of what it was in 1990. The trade structure is gradually diversifying
in favour of emerging countries in the Asia-Pacific region and beyond. The most impressive rise is
that of China from a negligible share in 1990 to over 11 per cent of India’s trade by 2016, making
China the single largest trade partner of India.
Changing direction of India’s trade, 1990-2016
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• ASEAN’s share in India’s trade also went up from 5.7 per cent to nearly 10.5 per cent in 2016. China
and ASEAN’s emergence explains the rising share of ASEAN+6 countries, namely China, Japan,
Republic of Korea, Australia, and New Zealand that are India’s partners in the East Asia Summit (EAS),
in India’s trade from 17.70 per cent to nearly 27 per cent between 1990 to 2016.
• The shift in the geography of India’s trade from the advanced economies of the West to East Asian
economies did not happen automatically but was a result of a conscious and well thought out
strategic policy pursued since 1992 called the Look East policy.
• However, India’s trade with China is heavily tilted in favour of imports, unlike that with other trade
partners in ASEAN+6.
• Another region rising in prominence as a trade partner is the Middle East with its share in India’s
trade nearly doubling between 1990 and 2010 to 18.9 per cent, mainly on account of India’s high
dependence on the region for fuels. But trade with the Middle East is also increasing because of
India’s growing exports of manufactures, sometimes trans-shipped through the region to other
countries like Pakistan.
• Shares of South Asia, Africa, and Latin America and the Caribbean have also risen very fast from
rather low bases.
• In particular, it is worth noticing that the share of South Asian countries in India’s trade not only
doubled between 2000–16 but is also much more balanced across imports and exports, unlike in 2000
when the share in exports was more than four times as much as in imports. With unilateral offers of
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market access on a duty-free-quota-free basis to the least developed countries (LDCs) in South Asia,
abolition of the negative list for the LDCs under the SAFTA, and a bilateral FTA with Sri Lanka, South
Asian countries have been able to expand their exports of value added products to India, sometimes
through India’s outward FDI.
• Yet, the potential of intra-regional trade is far from being realized because of high cost of trade due
to poor land transport connectivity and facilitation (UNESCAP 2013, 2018).
2.4 Services in India’s Trade

• The emergence of the services sector as the most dynamic sector driving India’s growth has been
accompanied by its growing importance in trade. The share of trade in services in India’s GDP
quadrupled from 3.3 per cent to 20 per cent between 1990 and 2016.
• Unlike in goods trade, the growth rate of services exports was higher than that for imports. There
has been a striking transformation of India as a net exporter of services from being a net importer in
2005. Exports of USD 162 billion worth of services in 2016 left a surplus of USD 28 billion after imports.
• Growth of trade in services in India was also faster than in other countries, leading to a 69 per cent
increase in India’s share in the global services exports over 2005–16. The transformation of India’s
services trade has attracted attention in a number of studies
Services trade balances
• The dynamism of services trade is a result of India’s emergence as a hub for IT software development
and other IT-enabled services, also referred to as business process outsourcing (BPO) services. In
these services, India is recognized as the global leader. According to the Indian Ministry of Information
Technology, India’s exports of IT and ITES services were of the order of USD 117 billion in 2016/17.
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• In the Global Services Location Index by AT Kearney, a global consultancy organization, India was
ranked first globally in 2017, a position it has consistently retained since the inception of the index
in 2004.
• Among the sources of its strength in the sector are people skills and their abundance, given the large
youthful workforce of the country. India’s success in IT services has been attributed to, among other
factors, a far-sighted government policy to spot emerging opportunities and create high-end
education and training facilities and computing infrastructure way back in the late 1970s (Kumar
2001). In future, this strength in Information and Communication Technology (ICT) services can and
should be leveraged to build a globally competitive electronic goods industry.
2.5 Current Account Balance

• India faced a major balance of payments crisis in 1991 when its current account deficit crossed 3 per
cent of GDP and the government had to mortgage its gold reserves to borrow foreign exchange to
stave off a liquidity crisis.
• However, subsequent reforms and structural adjustment led to a major turnaround of the external
sector with India running current account surpluses during the 2001–2 to 2003–4 period. But since
2004–5, the current account situation has again turned adverse with widening deficits.
• Despite significant surpluses in services trade, current account deficits have been widening due to a
steadily worsening merchandise trade deficit.
Current Account Balance Indicators, 2000-2017
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• As the above table shows, the merchandise trade deficit of India widened steadily from 1.7 per cent
of the GDP in 2002–3 to 10.5 per cent in 2012–13, an unprecedented level in India’s post-
Independence history.
• One of the reasons for this widening was the faster growth rate of imports compared to that of
exports, especially during 2002–3 to 2008–9.
o Rising import intensity of Indian economy in this period, as indicated earlier, could be resulting
from an appreciating exchange rate, besides trade liberalization.
o In terms of the real effective exchange rate, the rupee appreciated by 14.5 per cent over
2004–5 to 2016–17.
o By making imports cheaper in relative terms, this trend of appreciation pushed Indian
enterprises to outsource the manufacturing of a number of their products to cheaper
locations, such as China, in addition to affecting the competitiveness of India’s exports.
o The appreciating exchange rate has promoted a premature hollowing out of the Indian
economy.
• It is strange, however, that the exchange rate of the country should be appreciating while it has a
widening current account deficit. Normally, a country with a widening current account deficit should
face a depreciating exchange rate, which would help in bringing down the deficits by enhancing the
competitiveness of exports and by making imports more expensive. The culprit has been the short-
term capital flows as those by foreign institutional investors (FII) that have pushed the exchange rate
while the current account deficits were widening.
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• Even though the current account deficit touched an alarming level of 4.8 per cent of the GDP in
2012/13, it came down gradually and was in a comfortable range of around 1 per cent of the GDP in
recent years, helped by the low oil prices. However, as the oil prices have started to harden again
since 2018, the balance of payments situation may worsen in the coming years.
• Despite that, a comforting factor is that India has built sizeable foreign exchange reserves of over
USD 400 billion over the years. There should be no room for complacency though, given the fact that
India’s foreign exchange reserves are primarily made up of highly volatile short-term capital flows.
2.6 Foreign Institutional Investment Inflows and Exchange Rate Instability

What explains the appreciation of the rupee despite the fact that India has been running trade and current
account deficits for so long?
The rapid rise in inflows of portfolio investments in India since 2003–4 is summarized in following table.
FDI & FPI inflows to India
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• Large magnitudes of portfolio investments in the form of short-term equity investments by foreign
institutional investors (FII) flowed in as the Indian economy gathered momentum and capital markets
started giving attractive returns. The annual net inflows, however, are highly volatile.
• FII inflows rose to a sizeable USD 27 billion in 2007–8 that not only led to stock prices booming, with
the Bombay Stock Exchange (BSE) Sensex more than doubling from under 10,000 to 20,000, but also
to the rupee exchange rate appreciating sharply from 47 rupees to a US dollar in 2006 to 38 rupees
in 2008.
• In 2008–9, in the wake of the global financial crisis, there was a net outflow of the FIIs to the tune of
USD 14 billion dollars that brought down the BSE Sensex from nearly 20,000 points to less than 9000
points in the early part of 2009. Much more importantly, it led to a sharp depreciation of the rupee
by nearly 25 per cent in early 2009.
• The depreciation would have been greater if the Reserve Bank of India had not intervened in the
market by selling dollars. This depleted the RBI’s foreign exchange reserves by USD 58 billion to about
USD 252 billion from USD 310 billion from 2007–8 to 2008–9.
• However, FIIs returned rapidly to the market with the onset of recovery and the FII inflows to the
country in 2010 were of the order of USD 32 billion, bringing the Sensex back above 20,000 points in
October 2010.
• Despite the RBI’s market intervention to offset the subsequent exchange rate pressure, the rupee
appreciated by nearly 8 per cent, although foreign exchange reserves were augmented to about USD
284 billion.
• FII inflows have become primary determinants of movements in the stock exchange indices and the
exchange rate of the rupee. As there are sharp movements in these inflows linked to global
developments, they become channels of transmission of instability to the country’s financial system.
• As a result, the rupee has been on a roller coaster ride: from Rs 44 per dollar in January 2007 to Rs 39
in January 2008 to an increase again to Rs 49 per dollar in January 2009 to Rs 44 in October 2010.
The rupee fluctuated around Rs 54 in 2012 as the FIIs showed a lukewarm response to the Indian
capital markets. As the capital flows started to decline due to the improving economic prospects of
the US economy and the expectation of withdrawal of monetary stimulus by the Fed between May
and September 2013, the rupee depreciated substantially, touching an all-time low of Rs 68.80 before
appreciating in the second half of September 2013 as the Fed announced a delay in the tapering of
the quantitative easing. The postponement of tapering by the Fed provides a short reprieve to the
country, but the recent episodes have exposed the country’s vulnerability in view of the high current
account deficit, foreign exchange reserves built up of short-term capital flows, and the declining FDI
inflows.
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• The volatility of FII inflows has continued in the recent years with magnitudes fluctuating between a
high of USD 42 billion in 2014/15 to a net outflow of USD 4.1 billion in 2015/16 and an inflow of USD
7.6 billion in 2016/17.
2.6.1 Perils of High Exposure to FII Inflows

• Besides being highly volatile, FII inflows have a very high servicing burden. Among foreign resources
such as the FDI, foreign borrowings, non-resident Indian (NRI) deposits, American depositary receipts
(ADRs), and global depositary receipts (GDRs), FII investments are the most expensive in terms of the
servicing burden.
o This is because they come to chase primarily good returns at the stock markets and the
exchange rate speculation.
o As they tend to be stock price makers rather than takers, they manage to exit safely before
the markets’ major crashes, thereby precipitating the declines.
o They are fair-weather friends and pro-cyclical in nature. They cannot be relied upon when
the country needs them most.
o One may argue that FII inflows help a country build foreign exchange reserves. What is not
appreciated very well is the fact that exposure to these inflows also enhances the need to
have large foreign exchange reserves due to their highly volatile nature.
o Therefore, developing countries such as India should rely more on FDI inflows for their
foreign resource needs and raise the ADRs/GDRs and deposits from NRIs, where possible,
rather than relying on the FIIs.
• In view of their high cost and other deleterious effects, such as volatility, a number of emerging
economies such as Brazil, South Korea, Thailand, and Indonesia imposed capital controls in 2010 to
moderate their volatility.
• The unprecedented injection of liquidity by the governments in developed countries in the wake of
the global financial crisis has exposed emerging economies of Asia such as India to a much larger
volatility through capital flows. There is now a growing consensus on the relevance of capital
controls as elements of the policy tool kit for the governments in emerging economies (UN-ESCAP
2010; Ostry et al. 2010).
• The benefits of maintaining open capital accounts, if any, are ambiguous. However, capital controls
need to be exercised when the economy is on the upswing and net capital flows are positive rather
than when they are negative as their imposition may further precipitate the crisis.
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2.7 Foreign Direct Investment (FDI) Flows and Their Quality
2.7.1 Trends in Inward FDI Flows

• Besides the liberalization of trade, 1991 was also the time for substantial liberalization of the FDI
policy regime for both inward as well as outward FDI.
• The key features of the FDI policy regime of India include up to 100 per cent foreign ownership in
most sectors except those due to sensitivities and security concerns, such as arms and ammunition.
Sectoral caps also apply to services sectors. Full repatriation of capital and remittances of profits,
dividends, technical fees, and royalties is permitted.
• The FDI inflows to India have been growing since 1991, but the big break came in 2006 when annual
inflows to the country nearly tripled in one year from USD 7.6 billion to USD 20 billion and increased
from that level peaking to USD 47 billion in 2008 before declining to USD 24 billion in 2010 in the wake
of the global financial crisis but recovering to USD 44 billion by 2015.
Inward foreign direct investment flows, annual, 2005-16 (in million USD)
• India’s share in the global FDI inflows nearly doubled over 2005–6 and again between 2006 and 2009
before moderating to around 2.5 per cent by 2015.
FDI Inflows as a percentage of gross fixed capital formation, 2005-15
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• The relative importance of the flows in relation to gross fixed investment also rose from 2.9 per cent
in 2005 to 6.8 per cent in 2016. The share of FDI in gross fixed investments in India has been lower
than that for other developing countries, but is catching up. In 2008 when FDI inflows peaked in India,
this ratio was at 10.1 per cent—quite close to that for developing Asia at 10.4 per cent—indicating the
potential for a rise in the future.
• The rise in FDI inflows since 2006 reflected an improving investment climate in India with the
acceleration of growth rate since 2003, the rise of a sizeable middle class with purchasing power, and
the recognition of India’s comparative advantage in knowledge-based industries. This is not only
evident from the rising magnitudes of FDI inflows but also from investor surveys conducted by global
consultancy organizations. In the FDI Confidence Index published by AT Kearney, covering the 25 top
destinations for FDI, India has remained within the top six or seven ranks for the past decade. Similar
upgrading in India’s ranks has been reported by surveys of investors conducted by the Japanese Bank
of International Cooperation (JBIC) as well as in UNCTAD’s World Prospects Surveys, where India is
ranked among the most preferred FDI locations (UNCTAD 2012). Recent reforms also helped improve
India’s ranking in the World Bank’s studies on Ease of Doing Business based on perception surveys.
• As the economy recovers from the recent disruptive reforms of currency in 2016 and introduction of
the GST in 2017 and returns to its high growth trajectory, FDI inflows are likely to grow further in the
coming years.
• FDI inflows may also assist in manufacturing-oriented structural transformation of the economy and
technological upgrading of exports that India needs by working together with local entrepreneurs
and bringing in technologies and other resources as a part of the ‘Make in India’ programme of the
NDA government.
2.7.2 Quality of FDI Inflows

There can be several indicators of the quality of FDI inflows, capturing different aspects of direct and
indirect impacts on the development of the host country. In what follows, we discuss India’s performance
in terms of a few such indicators.
2.7.2.1 Sectoral Composition

• One of the indicators of quality is the sectoral composition of FDI inflows.
• It matters whether the FDI is going to the modern technology-intensive sectors and building
productive capabilities or to the conventional sectors, crowding out domestic investments.
• In terms of the sectoral composition of FDI inflows, there has been a shift since 1991 in India’s case.
Earlier, the bulk of FDI inflows were directed to manufacturing especially the high technology
industries through a selective policy.
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• Since liberalization, a substantial proportion of FDI inflows has been directed to services.
Manufacturing accounted for only about 40 per cent of inflows in the post-1991 period with services
accounting for about 35 per cent share.
• Furthermore, among the manufacturing sub-sectors, FDI stock in the post-1991 period is also more
evenly distributed between food and beverages, transport equipment, metals and metal products,
electricals and electronics, chemicals and allied products, and miscellaneous manufacturing. This
stands in contrast to the situation prior to 1990 when there was a very heavy concentration in
relatively technology-intensive sectors, that is, machinery, chemicals, electricals, and transport
equipment.
• In China, on the other hand, the bulk of FDI inflows have been directed by government policy to
manufacturing (of the export-oriented type) and very little has gone to services. Of the FDI in
manufacturing in China, 11 per cent went to electronics and telecommunication equipment, helping
the country emerge as the leading producer and exporter of these products. A policy guiding FDI
inflows to manufacturing helped China to emergence as a global factory. Therefore, FDI inflows in
China have been directed to assist in the development of the industry that has made China a global
factory, generating billions of dollars of output and exports and millions of jobs in the process.
2.7.2.2 Impact of FDI on Growth and Domestic Investment

• FDI inflows could contribute to growth rate of the host economy by augmenting the capital stock as
well as with infusion of new technology. However, high growth rates may also attract more FDI
inflows by enhancing the investment climate in the country. Therefore, the FDI-growth relationship
is subject to causality bias given the possibility of two-way relationship.
• It has also been shown that FDI projects may sometimes actually crowd out or substitute domestic
investments from product or capital markets with the market power of their well-known brand names
and other resources and may thus be immiserizing. Therefore, it is important to examine the impact
of the FDI on domestic investment to evaluate its impact on growth and welfare in the host economy.
• FDI inflows received by India have been of a mixed type, combining some inflows crowding-in
domestic investments while others crowding them out, where no predominant pattern emerged.
• In the case of East Asian countries such as South Korea and Thailand, the relationship clearly indicated
the FDI crowding-in domestic investments.
• Therefore, the quality of the FDI in India with respect to its impact on growth and domestic
investment is of a mixed type and leaves scope for improvement.
• Empirical studies on the nature of the relationship between the FDI and domestic investments suggest
that the effect of the FDI on domestic investments depends on the policies of the host government.
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• Governments have extensively employed selective policies and imposed various performance
requirements such as local content requirements (LCRs) to deepen the commitment of the MNEs
towards the host economy.
• The Indian government, in the past, had imposed a condition of phased manufacturing programmes
(or LCRs) in the auto industry to promote vertical inter-firm linkages and encourage the development
of the auto component industry (and the crowding-in of domestic investments). A case study of the
auto industry where such a policy was followed shows that these policies (in combination with other
performance requirements, that is, foreign exchange neutrality) have succeeded in building an
internationally competitive vertically integrated auto sector in the country. The Indian experience in
this industry, therefore, is in tune with the experiences of Thailand, Brazil, and Mexico.
2.7.2.3 FDI and Export-Platform Production

• A number of developing countries have used FDI to exploit the resources of MNEs, such as globally
recognized brand names, best practice technology or by increasing integration with their global
production networks, among others, for expanding their manufactured exports.
• In this respect, China has had considerable success in exploiting the potential of FDI for export-
oriented production. A very substantial (55 per cent) proportion of China’s manufactured exports are
undertaken by foreign invested enterprises, which account for as much as 80 per cent of all
technology-intensive exports (UNCTAD 2005).
o Foreign enterprises, while setting up export-oriented production bases, had created 23 million
jobs by 2003, making China a global factory.
o Export-oriented FDI also helps in bringing the world’s best practice technology as the affiliate
has to compete globally right from the beginning.
o It also enhances the chances of FDI inflows crowding-in domestic investments and reducing
the chances of crowding-out as the foreign affiliate will mainly be catering to outside markets
rather than eating into domestic firms’ markets.
o It will also create fresh possibilities of market information spillovers for domestic firms on
export possibilities.
• Unlike East Asian countries, India has not been able to exploit the potential of the FDI for export-
oriented production. The bulk of FDI inflows in India are market-seeking, coming to tap the domestic
market, with the share of foreign affiliates in exports being around 10 per cent. Therefore, the quality
of FDI in respect of export orientation is poorer compared to the FDI received by East Asian countries.
• In this respect, two observations can be made.
o The first is that recent studies of export-performance are beginning to indicate a relatively
superior performance of foreign enterprises in terms of export orientation compared to early
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studies suggesting a poorer performance of foreign companies (see Kumar and Joseph 2007).
Therefore, the MNEs are beginning to exploit the potential of India as base for export-
oriented production.
o The second observation is about the role of host country policies in exploiting the potential of
FDI for export-oriented production. A quantitative study analysing the determinants of the
patterns of export-orientation of MNE affiliates across 74 countries in seven branches of the
industry over three points of time has shown that in host countries with large domestic
markets, export-obligations were effective for promoting export-orientation of foreign
affiliates to third countries (see Kumar 1998).
• Export-obligations have also been employed fruitfully by many countries to prompt the MNE affiliates
to exploit the host country’s potential for export platform production. For instance, in China, which
has succeeded in expanding manufactured exports with help from the MNE affiliates, regulations
stipulate that 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 manufactured
exports has steadily increased to over 55 per cent as observed above.
• India has not imposed export obligations on the MNE affiliates, except for those entering the
products reserved for the SMEs. However, indirect export obligations in the form of dividend
balancing have been imposed for enterprises producing primarily consumer goods (since phased out
in 2000). Under these policies, a foreign enterprise was obliged to earn the foreign exchange that it
wished to remit abroad as dividend so that there was no adverse impact on host country’s balance of
payments. Sometimes a condition of foreign exchange neutrality has been imposed where the
enterprise is required to earn enough foreign exchange to cover the outgo on account of imports.
Therefore, these regulations have acted as indirect export obligations prompting foreign enterprises
to export to earn the foreign exchange required by them.
• The available evidence suggests that such regulations have prompted foreign enterprises to
undertake exports. In the case of the auto industry, in order to comply with their export commitments
to comply with the foreign exchange neutrality condition, foreign auto majors undertook the export
of auto components from India, which not only opened up new opportunities for the Indian
component manufacturers but also in that process found profitable business opportunities. Hence,
exports of auto components from India are now growing rapidly as was observed earlier.
• These regulations have acted to remove the information asymmetry existing about the availability
of quality components in India among foreign auto majors. In that respect, India’s experience is very
similar to that of Thailand that has emerged as a major auto hub of South East Asia.
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2.7.2.4 R&D and Other Knowledge-Based Activities and Local Technological Capability
• A comparison of the R&D intensity of foreign firms in India and in other countries has not been possible
due to lack of data.
• Within the country, foreign firms appear to be spending more on R&D activity than the local firms,
although the gap between their R&D intensities has tended to narrow down.
• A study analysing the R&D activity of Indian manufacturing enterprises in the context of liberalization
found that after controlling for extraneous factors, the MNE affiliates reveal a lower R&D intensity
compared to local firms, presumably on account of their captive access to the laboratories in their
parent and associated companies.
• The study also observed differences in the nature or motivation of R&D activity of foreign and local
firms. Local firms seem to be directing their R&D activity towards absorption of imported knowledge
and provide a backup to their outward expansion. The MNE affiliates, on the other hand, focus on
the customization of their parents’ technology for the local market.
• An important issue is the diffusion and absorption of technology brought by foreign firms in the host
countries. Some governments have imposed technology transfer requirements on foreign
enterprises, for example Malaysia. However, such performance requirements do not appear to have
been very successful in achieving their objectives. Instead, other performance requirements such as
local content requirements or domestic equity requirements may be more effective in the transfer
of technology.
• As mentioned above, local content requirements and export performance requirements have
prompted foreign enterprises to transfer and diffuse some knowledge to domestic enterprises in order
to comply with their obligations.
• Similarly, the domestic equity requirements may facilitate the quick absorption of the knowledge
brought in by foreign enterprises, which is an important pre-requisite of the local technological
capability, as is evident from case studies of the Indian two-wheelers industry where Indian joint
ventures with foreign firms were able to absorb the knowledge 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 for exports on their own.
• Some have expressed the view that domestic equity requirements may adversely affect the extent
or quality of technology transfer. However, it has been shown that the MNEs may not transfer key
technologies even to their wholly owned subsidiaries abroad, fearing the risk of dissipation 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 as opposed to a joint venture, from the host
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country’s point of view, the latter may have more desirable externalities in terms of local learning
and diffusion of the knowledge transferred.
2.7.3 Trends and Patterns in Outward FDI by Indian Enterprises

FDI flows no longer represent a one way street in India’s case. In fact, outward investments from Indian
enterprises have been growing fast especially since the turn of the century and have become quite
significant in magnitude.
As a part of economic reforms since 1991, the policy governing outward investments was also liberalized
in 1992 when an automatic approval system for overseas investments was introduced. In a significant
liberalization of the policy governing outward investments in March 2003, the government allowed Indian
companies to invest under automatic route upto 100 per cent of their net worth, which was gradually
raised to 400 per cent of their net worth in 2008 and more to facilitate large acquisitions including those
for securing access to natural resources.
Although Indian companies have been investing abroad since the early 1970s, the magnitude of
investments was quite little until the mid-1990s when the investment limits were raised. However, the
magnitude as well as number of outward investments have suddenly swelled since 2000 to around USD
1.5 billion per annum. Since 2006, the outward investments have climbed new heights, as apparent from
the following table.
The FDI outflows from India in a global comparative perspective, 2001-16 (in millions USD)
• In 2006, the magnitude of outward investments by Indian companies more than tripled from the
2005 levels to USD 14 billion and peaked at USD 21 billion in 2008. Since then, it has gradually declined
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in the wake of the global financial crisis with the slowdown of the world economy. In recent years,
outward flows from India have been in the range of USD 5–7 billion.
• In 2016, Indian companies had a total stock on outward FDI of USD 144 billion, which is substantial
compared to just USD 1.7 billion at the turn of the century. It accounts for 2.47 per cent of the total
stock of outward FDI from developing countries (UNCTAD 2017).
• In putting the magnitude of Indian outward FDI (OFDI) in a global comparative perspective of other
emerging economies, one finds that China has emerged as a significant source of outward FDI in
recent years as a part of its ‘going global’ strategy. However, outward investments from Brazil have
fluctuated like those of India and have been comparable in magnitude. The share of outward FDI as
a percentage of gross fixed capital formation (GFCF) was higher for India than for China in 2006–10,
before it declined in the recent years. It is likely that the recovery of the Indian economy to its growth
trajectory will also lead to greater outflows as Indian enterprises pursue assets-seeking strategies,
acquire access to markets, technology, brands, and sources of raw materials that have dominated
their recent investments.
A detailed examination of the quality of outward FDI flows from India from a host country’s perspective
is yet to be made. While comparing the OFDI from India and China, it can be observed that the Indian
enterprises active abroad are typically privately managed enterprises seeking to globalize their
operations, compared to the much larger state-owned enterprises in China going abroad to secure their
natural resource supplies. This stylized fact was corroborated by the case study of the steel industry,
where leading Indian enterprises had undertaken green field investments as well as acquisitions of
established global firms in the Western world to acquire global footprints. Whereas, Chinese enterprises
in the industry were found to have focused their outward investments primarily on raw material–seeking
activities. From a host country’s point of view, green field investments in value-adding downstream
activities generate more favourable direct and indirect impacts compared to just extractive activities.
2.8 Regional Economic Integration

• India has generally pursued multilateralism faithfully in its trade policy with very few exceptions till
the end of the last century. However, it has increasingly begun to pay due respect to regionalism in
its trade policy since the turn of the century, following the emerging trend globally.
• Among the early schemes for regional cooperation, India has been a member of one of the earliest
preferential trading arrangements in Asia-Pacific, namely the Asia-Pacific Trade Agreement (APTA),
earlier known as the Bangkok Agreement, negotiated under the auspices of ESCAP in 1975.
• India has also been a member of the South Asian Association for Regional Cooperation (SAARC),
formed in 1985, that adopted SAARC Preferential Trading Agreement (SAPTA) in 1993 that eventually
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evolved into the SAARC Free Trade Agreement (SAFTA) in 2004, implemented in the decade starting
from 2006.
• In 1998, India also signed a bilateral FTA with Sri Lanka that has been operational since 2000. India
also has trade and transit agreements with Bhutan and Nepal that provide them non-reciprocal free
access to the Indian market.
• Since 1992, in the wake of the economic reforms, a new thrust was given to India’s approach to
regional cooperation as a part of what is called the Look East policy.
o As a part of this policy, India became a sectoral dialogue partner of ASEAN. India was made a
full dialogue partner by ASEAN in 1995 and was accorded a membership of the ASEAN
Regional Forum in 1996. The ASEAN-India dialogue partnership was further upgraded to an
annual summit-level dialogue from 2002. Therefore, the India-ASEAN partnership saw a
remarkable transformation from being a sectoral dialogue partnership to a summit-level
interaction within the decade of 1992–2002.
o At their second summit in October 2003, ASEAN and India signed a framework agreement on
Comprehensive Economic Cooperation (CEC), allowing for a free trade arrangement. At the
Laos Summit in 2004, they signed a long-term Partnership for Peace, Progress and Shared
Prosperity based on the work done by the think tanks of ASEAN and India. CEC is usefully
complemented by a Comprehensive Economic Cooperation Agreement (CECA) signed
between India and Singapore in 2005.
o Since 2004, the early harvest scheme of the India–Thailand bilateral Free Trade Agreement
has been operational. India has also signed a bilateral FTA with Malaysia and is negotiating
one with Indonesia. The India–ASEAN FTA was also concluded in 2009. Subsequently, a
services agreement was also signed.
o The India–ASEAN partnership is also complemented by the Mekong–Ganga Cooperation
(MGC), and the Bay of Bengal Initiative for Multisectoral Techno-Economic Cooperation
(BIMSTEC) which combines seven South and Southeast Asian countries.
o India has been assisting the new ASEAN countries, namely Cambodia, Laos, Myanmar, and
Vietnam (CLMV), as part of ASEAN’s Initiative for ASEAN Integration (IAI). India is assisting
them particularly with capacity-building by setting up centres for entrepreneurship
development, ICT, and English language training among other areas.
o The high-level interactions between India and ASEAN countries have steadily grown in both
directions. In January 2018, India hosted an India–ASEAN Commemorative Summit in New
Delhi to commemorate the 25th anniversary of their summit-level dialogue.
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o India’s Look East policy started with its engagement with ASEAN but is not confined to it. As a
part of it, India has also engaged East Asian countries like the Republic of Korea and Japan,
concluding the CEPA with both of them. Negotiations are on with Australia and New Zealand.
o The engagement of ASEAN and the East Asian countries by India led to her inclusion in the East
Asia Summit (EAS) established in 2005 as an annual summit-level forum between ASEAN and
its six dialogue partners. In 2011, the EAS was joined by the US and Russia. Within the
framework of the EAS, a Comprehensive Economic Partnership of East Asia (CEPEA) that
brought together ASEAN and its six FTA partners into a single trade agreement was proposed
and accepted in principle in the 2009 Hua Hin Summit and four working groups were set up to
take the negotiations forward. In 2011 at the Bali Summit, ASEAN proposed a framework on
Regional Comprehensive Economic Partnership of East Asia (RCEP) with the six partners.
• In a new and changed post-crisis international context where the advanced economies of the West
are not able to play their role as the engines of growth in view of the compulsions of unwinding their
huge debt accumulations, a rebalancing of external orientation in favour of regional economic
integration is clearly important with the Asia-Pacific region emerging as the centre of gravity of the
world economy.
• In that respect, the Indian Look East policy, now reinforced as ‘Act East Policy’, of turning attention
to East Asia was farsighted. Hopefully, the business enterprises of the country will be able to take
advantage of the preferential markets access, made available through the emerging RTAs in some of
the fastest growing markets of the world, in the coming years to address the balance of trade
concerns.
2.9 Towards a More Inclusive and Sustainable Integration

The reforms pursued since 1991 have led to a much deeper integration of the Indian economy with the
global economy in terms of a rising share of merchandise trade, an even more dramatic transformation
of services trade, and the emergence of the country as one of the most attractive destinations for FDI as
well as an important source of FDI outflows. The trade structure has changed in terms of product
composition and destinations.
However, the analysis presented suggests that much of the export growth benefited from the expansion
of world trade, while the potential of product diversification and market diversification remains to fully
be exploited.
India needs to leverage the opportunities of product and geographical diversification of the export
structure and strategic import substitution through deepening her industrial structure and reversing the
trend of premature deindustrialization. In that context, the Make in India programme launched by the
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NDA government is timely. Besides the compulsion of creating decent jobs for India’s burgeoning
youthful workforce, Make in India is critical also for making India’s balance of payments situation more
sustainable.
Despite healthy trade surpluses earned by services exports with India emerging as a global hub for ICT
outsourcing, the balance of payments situation continues to face periodic stress depending on the oil
price fluctuations. With the rising oil prices and the growing threat of protectionism and trade wars
against the backdrop of the anaemic growth of world trade, such a strategy is becoming increasingly
critical.
The growth and sizeable imports of electronic goods, non-electrical machinery, and other equipment—
including those for defence, among others—provide fruitful opportunities for strategic import
substitution. To exploit these opportunities, policy measures normally grouped as industrial policy—
including infant industry protection (to leverage the domestic market for exploiting the economies of
scale), pioneer industry programmes, public procurement preferences, a proactive FDI policy, and
exchange rate management—as employed extensively by the industrialized countries and East Asian
countries in the past may be fruitful in the context of ‘Make in India’, while avoiding the pitfalls of the
earlier import substitution regime.
Finally, in the context of the dramatically changed international scenario in the aftermath of the global
financial crisis, when advanced economies are not able to provide a growth stimulus to Asian economies,
a rebalancing of growth in favour of domestic and regional sources of demand is imperative. India has
already moved towards integration with East Asian economies with a number of bilateral and regional
FTAs. Indian industry should aggressively exploit the export opportunities of preferential access to East
Asian markets provided by these agreements rather than only using these FTAs to import duty free from
the partners.
3 Multinational Corporations
Prior to 1991, India was perceived to be a socialist straitjacket and there was an impending need to bring
about market-friendly reforms. India’s untapped markets and enormous resource potential always
attracted the foreign investors but they were apprehensive and reluctant due to the prevalent archaic
policies of the country. India had initiated some steps towards improving the investment climate in the
late 80s but the real process, in sincerity, started only in 1991. This change was necessitated by a
combination of internal and external factors such as – deepening fiscal deficit, rising inflation,
burgeoning foreign debt, opening up of the world economy and blurring of geographical boundaries.
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Additionally, disintegration of USSR and success of South East Asian countries by resorting to export
promotion helped in making a landmark move from Nehru Socialism to Western Capitalism.
The economic reforms were ushered – devaluation of rupee, substantial reduction in import tariffs,
abolishment of import-licensing and elimination of public sector monopolies in telecom, port, power,
road, and aviation. This indicated towards a systemic shift to a more open economy with greater reliance
on market dynamics, greater participation of the private sector, focused flow of foreign investment, and
change in the local government’s approach and implementation process. The key characteristics of the
economic policy of 1991 were – providing access of global markets to domestic economy, stabilizing the
economy through structural reforms and reduction in state intervention in domestic policy decisions.
3.1 Need for MNCs in Emerging Markets

The introduction of this policy underlined that the economy understood, more than ever before, the
relationship between domestic and foreign industry needed to be much more dynamic than it had been
in the past in terms of technology and investment.
“Multi-National Corporations (MNCs) are carriers of foreign capital. These firms, by definition, are
industrial organizations which extend their industrial and marketing operations through a network of
their branches in several countries. They provide services on a global scale, control the policies of their
affiliates, and implement business strategies in production, marketing, finance and staffing that transcend
national boundaries.”
Developing economies are often characterized by the fact that domestic savings are often inadequate to
support the amount of investment that is required for development, leading to a savings-investments
gap. NCAER-SEBI, Household Survey 2011 says India is a nation of savers. The problem with developing
economies is the poor rate of mobilization of savings into investments.
New Industrial Policy 1991, aimed at growth of economy through demand and supply side adjustments.
Liberalization aimed at relaxing norms in various industries and inviting investments from private
corporate sector and globalization served as a mechanism to link Indian economy to the world.
MNCs were apparently a win-win combination for Indian government. They could mobilize the savings
of Indian investors on one hand and bring along benefits of technical and marketing economies of scale
on the other. MNCs act as a conduit for bridging this gap in savings, by bringing investments from abroad.
This additional investment in the economy acts as a catalyst leading to an increased need for labour that
results in their increased income levels, thereby moving towards income equality. MNCs are generally
technologically superior to the domestic companies and that is seen as a critical reason for which MNCs
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have been encouraged by the developing economies to participate in their industrial development. MNCs
bring with them skills such as managerial ability, organizational competence and the knack to avoid
inefficiencies.
The extent to which the domestic economy is able to absorb this new technology and expertise depends
a lot on the level of education, existing skill sets and the quality of institutions that exist and are capable
of providing the required training.
Employment generation being a function of ‘rate of growth of investment and technology’, an inherent
inference is that MNCs provide direct employment opportunities to the more educated section of the
working population. Further, there could also be indirect employment generated in the lower end
services sector occupations thereby catering to some extent even to the relatively less educated and
unskilled people. Ancillary units crop-up close to the places where MNCs set up their production units,
resulting in job creation and skill development for the labour engaged in those units. Lifting of trade
barriers opened the economy to a more extensive market that results in greater division of labour,
increased efficiency and consequently higher production levels. MNCs by drawing on their better
management skills, technology, efficient distribution and marketing networks are able to assist the
developing economy in gaining excess to external markets which increases their efficiency and makes
them more competitive internationally. Domestic units combining forces and / or competing with MNCs,
directly or indirectly benefit from better work culture norms and higher productivity standards that
these foreign companies bring to the floor. In this context, MNCs can be viewed as setting benchmarks
thereby contributing to human resources development in general.
3.2 Why MNCs Need Emerging Markets?

MNCs are private organizations and by nature are oriented towards profit maximization. To further their
interest, these firms are on the constant look out to expand their operations and market territory to new
investment destinations. Armed with market reputation, proficient marketing tools, reliable information
systems and efficient inventory management, these firms proceed with a clear intent to capture largest
share of the markets of the developing economies. MNCs have deep pockets and invest time and effort
in customizing their products to the needs and requirements of the local markets. On the basis of their
international reputation they have relatively easier access to domestic capital markets, with large
domestic investors and banks keen to be a part of their success stories. MNCs feed on the fact that
developing countries regard transfer of technology useful as industrialization represents the surest and
the fastest way out of under development. MNCs get easier access to domestic markets as they are
perceived to assist the domestic economy in producing goods that meet the international standards and
quality specifications.
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3.3 Role of MNCs in Developing Economies
With insufficient investment, the host country is unable to harness its potential, in terms of natural
resources, manpower and capital. Alternatively, depending totally on local companies would require
heavy imports of raw materials, capital equipment, and machinery and technical knowledge whereas
MNCs bring these on their own.
MNCs have a vital role in the economic development of developing countries. These countries are not
able to achieve the target rate of economic growth as the domestically mobilized savings are not
sufficient to meet the targeted investment. The most important contribution of MNCs is to bridge this
resource gap and assist the developing countries in their economic development. MNCs aid in reduction
of the balance of payments deficit in a two-fold manner – by bringing in foreign capital for setting up
operations in the host country and secondly by generating a net positive flow of trade revenue. MNCs
bring cheer to the domestic governments by filling the coffers through payment of direct and indirect
taxes. The additional revenue so generated provides financial resources to local government to undertake
development projects. MNCs bring sophisticated technological know-how about production processes
alongwith modern machinery and equipment to capital challenged developing nations. The host country
immensely benefits from these transfers of knowledge, skills, and technology. Other concomitant
advantages are more employment opportunities, higher real wages for the working population, better
quality products for consumers, more domestic investment in the form of setting up of auxiliary units,
etc.
3.4 Arguments against MNCs

Extending the logic that MNCs are not in social service, it is important to realize that MNCs are driven by
a clear vision of chasing greater revenues and higher profits. In their quest to garner higher market
shares, MNCs may inhibit the expansion of domestic firms through exclusive production arrangements
with the local government. This would also result in having little impact on developing local skills and
resources and stifling of the growth of indigenous entrepreneurship.
▪ Adverse impact on forex earnings: From the developing country’s perspective, the aim of
encouraging MNC investment is to improve the foreign exchange position, however, it may not so
happen. In the long run, the operations of MNCs may reduce foreign exchange earnings on both
current and capital accounts. The current account may fall prey to extensive import of intermediate
and capital goods while the capital account may deteriorate on account of overseas repatriation of
profits, interest, royalties, technical fees, etc. This flight of capital might put a drain on the foreign
exchange reserves and accentuate the balance of payments deficit of the host country.
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▪ Transfer pricing: With freer mobility of capital, the frequency of flight of profits and capital from one
country to the other would be higher. MNCs are often accused of indulging in transfer pricing. This
refers to the practice of showing lower profits in countries with high tax rates and transfer them to
low-tax countries to camouflage capital outflow and lower tax liability.
▪ Hogwash with respect to generation of employment opportunities: MNCs may adopt capital
intensive techniques for production which would help the more educated and generate fewer jobs
and thus may not turn out to be useful for the labour surplus developing economies. The basic
problems of poverty and unemployment, the two fundamental areas of concern for developing
countries, would thus, not get addressed from this kind of investment. In fact, it would be counter-
productive as it would exacerbate both unemployment and income inequalities.
▪ Liberalized tax structures may reduce funds needed for public good: The developing countries in
their bid to attract more MNCs might provide liberal tax concessions, cheap provision of sites,
excessive investment allowances, subsidies and tariff protections to them thereby lowering the
expected contribution to public revenue in the form of corporate taxes.
▪ Lobbying for west favouring policies: MNCs because of their immense financial power enjoy political
clout so as to influence the decision making processes in the developing countries. This endangers
autonomy and sovereignty of the host countries. Another criticism faced by MNCs is that to further
their selfish interest they might use their economic power to influence policies of the government
which might be unfavourable to development. Consequently, private profits of MNCs may exceed
social benefits.
▪ Exacerbate Regional Disparities: The regions or states which are already well endowed in terms of
infrastructure and availability of natural resources would be more probable recipients of foreign
investment. This has the potential to increase regional disparity.
3.5 Gauging MNCs Performance

More than two decades have passed since Indian economy had set the stage right and offered a warm
welcome to MNCs. A critical rethink is essential to evaluate the performance of MNCs vis-à-vis
expectations of Indian government.
When the policy changes were introduced, they were expected to generate faster industrial growth and
greater penetration of world markets, however, the performance in this respect has been rather
disappointing.
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While the Industrial growth in the first five years showed promise, in the next 5 years the growth tapered
off to an annual rate of 4.5 %. It is observed that the foreign direct investment in India was not directed
towards export promotion but was instead oriented mainly towards the domestic market.
A major reason for the modest performance of the exports sector is the tardy progress in reducing the
import duties. This has led to the high cost of domestic production, thereby reducing India’s
attractiveness as a base for export production. It can well be stated that the initial momentum of high
rate of industrial growth could have been sustained only if the foreign investment had been directed
towards tapping the export markets.
The one sector which has been the bright spot having shown robust growth and strong export potential,
throughout the 1990s and continuing well into the 2000s, is software development and various other
services enabled by information technology. India’s resounding success in this field is one of the most
visible achievements of trade policy reforms.
One of the critical factors contributing to its success is the fact that exports in this area depend primarily
on telecommunications infrastructure that has also shown promise and has improved drastically in the
post-reforms period.
Another noteworthy trend is that rather than the central government enticing foreign investment, the
mantle has been donned by the States. The States have taken the onus upon themselves to attract foreign
direct investment. This is breeding healthy competition among states but as expected the competition is
slightly lopsided in favour of the progressive and better endowed States. The States are viewing foreign
investment as the catalyst for development and are offering incentives coupled with reduced
bureaucratic hassles thereby enabling ease of conducting business for the foreign investors.
India’s large reservoir of skilled and unskilled labour has certainly benefitted from these MNCs setting
up operations in the country. MNCs have been effective in stimulating domestic production in the
country. This has led to establishment of ancillary units supplying to the mother unit of the MNC. With
MNCs giving paramount importance to quality and cost, this has led to intense competition, higher
efficiency and increased production levels of the domestic industry.
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POLITICAL ECONOMY
FODDER MATERIAL

Contents
1 Political Economy: Concept ....................................................................................................................2
2 Underdevelopment at the Time of Independence ................................................................................3
3 Development Thinking ...........................................................................................................................5
4 Development Planning ...........................................................................................................................7
5 The Regime of Economic Liberalisation ...............................................................................................13
6 Political Economy of Liberalisation ......................................................................................................16
1 Political Economy: Concept

Political economy offers a framework of analysis that is wider than conventional economics.
Conventional economics has markets at the center of analysis. Society is seen as an aggregation of
individuals as rational agents maximising their utility or profit. In this view of the economy, markets
solve practically all problems of interest to the economist. These include production (namely, what and
how much to produce along with the technique of production); exchange (or what prices various goods
and services should be fetching); distribution (or the claims of different ‘factors’ of production on national
income); and growth (the rate and pattern of growth of national income). The state or its agent, the
government of the day, exists on the sidelines of the market economy without playing an essential role
in it.
You may be wondering how political economy is different from this conventional view.
Political economy is equally concerned with the four basic economic processes just mentioned. However,
its approach is different in three fundamental ways.
• First, individuals in society are first and foremost members of social classes. The social classes
relate to the economy in specific ways, for example as owners of capital, workers, landlords,
peasants, bureaucracy and so on. The distribution of economic power among the social classes
and its impact on policies of the state are of particular importance to political economists.
Individuals are thus social individuals, their activities and behaviour being conditioned by the
social class to which they belong.
• Secondly, while markets are important as an economic institution, political economy views the
historical, social and political forces underpinning markets to be more fundamental. It is these
forces that determine the nature and functioning of markets.

• Finally, the state is an integral part of the economy. Its economic policies mediate the interests
of social classes. Often, there is a conflict of interests and the state must deal with them one way
or another.
2 Underdevelopment at the Time of Independence

Indian independence from British rule in 1947 raised hopes of a new India. Two and a half centuries of
colonial experience (from c.1700 to 1947) left our economy in ruins. Both agriculture and industry were
characterised by extremely low levels of productivity. This implied mass poverty, widespread disease
and ignorance. Any hope of improving the general standard of living on a sustained basis rested on the
creation of a firm economic foundation. This was the major challenge before India after independence.
There was a second challenge as well. This related to nation-building in the vast sub-continent. A diverse
society deeply divided by language, geography, caste, religion and feudal power structures was to be
transformed into a modern democracy based on universal suffrage and commitment to a national
constitution.
Any programme of economic reconstruction could not rely exclusively on private enterprise (or market
economy) and required an active role of the state (or, roughly speaking, the public sector). In fact, the
development of private enterprise itself depended heavily on the basic economic foundation to be
created by the state. The programme of economic reconstruction therefore had to be executed in the
context of a ‘mixed’ economy with clearly demarcated areas for the market and the state. Moreover,
such an economic leadership of the state was to operate within the political framework of democracy.
This was undoubtedly a great social experiment with no parallel in history. It was eagerly awaited by the
world divided into two major power blocks led by the United States of America and Soviet Russia.
To understand the problem of underdevelopment in India at the time of independence, we need a

historical perspective. India’s colonial experience provides that perspective. The framework of political
economy requires that we look at colonial impact on broad sectors of the economy and social classes.
Since the eighteenth century, the world economy has been transformed by two major forces: (i)
Industrial Revolution, and (ii) colonialism. These forces combined to divide the world into ‘developed’
and ‘developing’ economies.
Industrial Revolution in Western Europe, especially Britain, led to significant increases in productivity of
labour and prosperity there. However, the benefits of that revolution did not spread over to much of
Asia, Africa and Latin America because of colonialism. These regions became especially impoverished
after they became colonies. Industrial Revolution and colonialism operated in tandem because the

countries that prospered were imperial powers of Europe and the countries which were impoverished
were their colonies.
India’s colonial experience, primarily under the British, spanned two and a half centuries, from c.1700 to
1947. The period from 1700 to 1857 was marked by the rule by East India Company, while the period from
1858 to 1947 witnessed direct rule by the British Crown. The two sub-periods presented different kinds
of British interests in India and therefore economic policies for India. The trading activities of East India
Company, often involving underpayment, coercion and violence, damaged local merchants, peasants
and weavers. Indian agriculture and peasantry received a major setback through land revenue
settlements. Both the zamindari and ryotwari systems of land settlement led to a new class of
intermediaries between the tiller and the company. The peasantry was weighed down by onerous
revenue demands of the company and margins of intermediaries even during famines. Because revenue
payments had to be made in cash, farmers were forced to shift cultivation from food crops to commercial
crops. They became market-dependent for food grains.
Under the combined weight of revenue demands, usury and rack-renting, peasants were forced to sell
their lands to merchants and moneylenders or become tenants on the estate lands. The simultaneous
decline of rural crafts and urban industry meant that crafts persons and industrial workers joined the
ranks of the rural landless and the poor. The intermediaries emerged as the new dominant social class.
Neither the company nor intermediaries showed any interests in the longterm development of
agriculture through investments.
These tendencies only worsened during the rule by the crown. A shift from company rule to direct rule
by the crown became imminent as British industry required India to be both a major source of raw
materials and an assured market for British manufactures. These considerations did force the imperial
power to invest in India in the selected sectors of irrigation and transport network to port towns. As
manpower requirements of civil and revenue administration grew, liberal English education was
introduced. However, increasing commercialisation of agriculture to serve British interests did not
provide any relief to the peasantry that continued to reel under revenue demands and the combined
hold of landlords, merchants and moneylenders on the rural economy. Labour employed in British tea,
coffee and rubber plantations in India lived in slave-like conditions.
Indian industry also suffered a major decline under the crown rule. Competition from British
manufactures meant a decline in demand for domestic handlooms, metals, tools, glass, paper products
and so on. This ruined millions of artisans and craft industries. The decline of traditional industries was
not compensated by the development of modern industries. As British capital was mainly directed to

banking, commerce, shipping and insurance, no foundation was laid for the development of heavy
industries. There was no scope for nurturing a native entrepreneurial class. This phenomenon of decline
of traditional industries and the lack of development of modern and heavy industries is known as de-
industrialisation.
New ways of draining away the economic surplus generated in India were introduced. India’s foreign
trade surplus was transferred to British accounts. Home Charges and making India pay for British wars in
Afghanistan and China were other means of drain. The economic impact of colonial rule in India was
devastating. The colonial state took no responsibility for the general welfare of Indians. While markets
in output advanced significantly, labour, credit and land markets remained underdeveloped. The colonial
legacy of economic stagnation and decline posed a major challenge for development in independent India.
3 Development Thinking
On attaining independence India had to reckon with the challenge of building from scratch an economy
that could promise a life of security and dignity for the millions within an acceptable time frame. Leaders
of the nationalist movement were aware that freedom from foreign rule was not the ultimate goal.
Nationalist writings and regional social reform movements also bear testimony to an understanding of
what we today call ‘human development’. The Gandhian approach to economic development
emphasised voluntary limitation of wants, sustainable use of natural resources and self-sufficient village
communities. Although this approach did generate some debate before and after independence, the
modernising approach of Nehru, stressing growth in commodity production and capital stock found
favour with both congress workers and the left wing politicians. In terms of development thinking, there
was a general consensus among all classes on two issues: (i) that industrialisation was the key to
economic growth, and (ii) that the state must take the lead to initiating the process of economic growth.
Both the ‘Bombay Plan’ prepared by leading industrialists even before independence and the Industrial
Policy Resolution of 1948 bore testimony to this consensus. Industry, unlike agriculture, has the potential
of unlimited expansion of output, employment and productivity. Its development is imperative for
transferring the huge reservoir of underemployed labour from low productivity agriculture. On the
other hand, modernisation of agriculture required industrial inputs such as farm machinery, irrigation
and transport equipment and fertilizers. Active role of the state in industrialisation was envisaged on
two grounds. First, a native class of industrialists was yet undeveloped. Secondly, the quantum of
resources required for creating basic industries and infrastructure being huge, and the risks of such large
projects being very high, private enterprise could not be relied up on to take the lead in industrialisation.
Advent of ‘State Capitalism’ and ‘State Intervention’ in India

The economic policy regime erected in the 1950s had its roots in the freedom struggle itself. The
economy had been dominated by metropolitan capital and metropolitan commodities in the pre-
independence period. Freedom meant freedom from this domination; and this could not be ensured
without giving the state in independent India a major role in building up infrastructure, expanding and
strengthening the productive base of the economy, setting up new financial institutions and regulating
and coordinating economic activity. This was necessary even for building capitalism itself, although it
was proclaimed by some to be also a means of transition to socialism. State capitalism and state
intervention were essential instruments for the development of a relatively autonomous Indian
capitalism, displacing metropolitan capital from the pre-eminent position it had occupied in the colonial
economy.
An important idea that emerged out of this development thinking was that of planning. This idea and its
formal acceptance as a vehicle for carrying out the programme of industrialisation had two major sources.
At the political level, Prime Minister Nehru was impressed by the industrial achievements of socialist
planning in Soviet Union after the Russian Revolution. The Industrial Policy Resolution 1948 accepted the
idea of planning as a time-bound process of achieving prespecified targets through prioritised allocation
of investments. The IPR demarcated broad areas of action for the government (public sector), the big
private industry and the traditional industry. A Planning Commission as a non-statutory advisory body
was set up with the Prime Minister as the chairman. At the theoretical level, planning was inspired by the
experience of post-War reconstruction in Eastern Europe. The literature that grew out of this experience
emphasised the advantages of coordinated industrial investments. These included complementarities,
linkages, spread effects and externalities of a major industrialisation programme. Since markets either
did not exist or could not adequately signal these advantages in a backward economy, a plan was thought
to be essential. Accordingly, the First Five Year Plan (1951-55) was put together rather hastily based on a
meagre data base of the Indian economy. A target rate of growth of national income over the plan period
was derived from an estimated saving rate and an estimated capital-output ratio.
A technically more sophisticated plan model was developed by the physicist turned statistician P.C.
Mahalanobis. This model emphasised a conscious bias towards heavy industry and came to be known as
the Nehru-Mahalanobis strategy. The Mahalanobis model became the bedrock of the Second Five Year
Plan (1956-60) and all subsequent plans until the early 1990’s. The final version of the model divides the
economy into two sectors: the capital goods sector and the consumer goods sector. The model
demonstrates how long-term rate of growth of the economy would be the maximum if the share of
annual investment going into the capital goods sector increased progressively. However, the country

had the technical option of importing capital goods rather than produce them at home. This option was
ruled out as there was a shortage of foreign exchange reserves. The development of a domestic capital
goods industry would then have a double advantage. First, the country could save on its meagre foreign
exchange resources and secondly, it could reap the benefits of creating a base for industrial growth. It is
also important to note that certain critical components of infrastructure such as power and transport
networks cannot be imported. They must be erected domestically. Such items are known as ‘non-
tradables’. Each five year plan will have separate components for the public and private sectors giving out
targets of growth and investment. Thus a state-led import-substituting industrialisation strategy with a
bias towards heavy industry through five year plans came to be established in India. In the following
section, we shall evaluate the career of this system of development planning in India. Our focus, again
in the spirit of political economy framework, will be on in sectors, institutions, social classes and the
state.
4 Development Planning
We can identify the following four major components of the Nehru-Mahalanobis strategy:
1) The need for a comprehensive programme of import-substituting industrialisation to break out of the
syndrome of centuries of economic backwardness; 2) A conscious bias towards heavy industries; 3) The
commanding role of the state in a ‘mixed’ economy with a private sector; and 4) The need to carry out
the programme in a framework of five-year/annual plans.
Translating the first three strategic choices into implementable plans, a policy framework was needed.
First and foremost, the separate domains of operation for the state (public) sector and the private sector
were demarcated. For this, the policy instrument of reservation of industries for the two sectors was
implemented. According to the Industrial Policy Resolution 1956, the public sector was to cover, apart
from defence production, atomic energy and railways, the core industries of coal, iron and steel,
shipbuilding, communications, heavy machinery and heavy electrical. The private sector had an
exclusive schedule of industries. However, it could enter some areas reserved for the public sector
subject to a system of licensing. Small and village industries also had a list of items reserved for them.
The scope of industrial licensing was wide. In addition to regulation of entry into particular industries,
licensing covered capacity, production level, product mix and import of technology and capital goods.
There were wide-ranging import controls, covering quantitative restrictions and tariffs, to protect and
promote home industry. Controls on foreign exchange were also put in place. Planned industrial
development thus involved a plethora of controls.

The era of planning with the dominant role for the public sector and an elabourate system of controls,
licensing and permits operated for at least three and a half decades, viz. from 1956 to 1990. The career
of planning must be evaluated against the objectives set out for planning. It is important to take a
dispassionate and balanced view of the outcome of Nehru-Mahalanobis strategy. There were significant
achievements but also significant failures. Development planning helped the economy overcome some
constraints but it was also subject to new constraints.
In the first half of the twentieth century Indian economy suffered a near stagnation in growth. As
compared to this, real national income (at 1948-49 prices) grew at an average of four per cent per annum
during 1950-90. By itself, this was a significant achievement. A second major achievement was that a solid
foundation for industrial development was laid during this period. Apart from basic infrastructure, key
basic and capital goods industries were established. As envisaged by the plan strategy, the public sector
took the lead role in building this base. The private sector achieved a significant growth and
diversification in intermediate and consumer goods industries. This would not have been possible without
the foundation laid by the public sector. The size of the public sector, measured as its share in gross
domestic product (GDP), rose from ten per cent in the early 1960’s to 24 per cent in the early 1990’s. The
economy built up production and technological competencies and manpower and skills in a host of
industrial lines. This implied that the country became self-reliant (i.e. not critically dependent on imports)
over a wide range of industrial goods and services.
There were two major failures of planning over a long haul of nearly four decades. First, the overall rate
of economic growth, respectable though it was historically, did not translate into an appreciable rise in
average standard of living in India. As against the overall growth of four per cent per annum, growth in
per capita income averaged only 1.8 per cent per annum. This was well below the plan targets. The
proximate reason for this was population growth. Following a decline in the death rate after
independence, population growth in India averaged 2.1 per cent per annum. Given the large base of
India’s population, this amounted to huge additions to the stock of population year after year.

Note: Above table presents decadal compound rates of growth since the early 1950s, for Gross Domestic
Product and per capita Net National Product at constant 1993-94 prices. It is evident that real GDP
growth rates increased to a higher level in the latter two decades. Increases in per capita income were
even more marked because of the fall in the rate of population growth.
A second major failure of development planning in India has been a very slow growth of employment.
Although Indian economy grew appreciably over the four decades under reference, Indians did not
benefit from either employment growth or productivity growth. The share of agricultural sector in GDP
steadily declined, but there was no corresponding decline in the concentration of workforce in
agriculture. The non-agricultural sectors of the economy, whose share in GDP rose sharply, did not
generate opportunities of productive employment on a scale necessary to ease pressure on agriculture.
This asymmetry between economic growth and employment growth holds the key to the paradox of
economic growth and persistence of absolute poverty in India. In particular, employment growth in
manufacturing sector was extremely low. This is because, contrary to the original intent of Mahalanobis,
traditional and small scale industries have not been developed.

Note: India’s economic growth has been associated with some amount of structural change, although
perhaps not as much as might be expected. Investment rates have increased over time, which is only to
be expected in a developing economy achieving higher rates of per capita income, but the rate of
increase actually slowed down, until the last decade shows almost no change in the investment rate.
Meanwhile, the share of agriculture in GDP has fallen along predictable lines in the course of
development, but there has been little increase in the share of the secondary sector, which has not
changed at all since the early 1990s. Rather, the share of the tertiary sector has increased dramatically,
to the point where it now accounts for around half of national income.
The long-run growth of the economy at four per cent mentioned above is an average. It hides significant
fluctuations in growth year to year or plan to plan. There were also unexpected ‘shocks’ to the economy
induced by weather, wars, internal emergency and international developments. The lowest average
growth occurred in the Third Plan (1961-66). In this period India had wars with China and Pakistan, apart
from famines. This led to the suspension of planning for three consecutive years (1966-69). The Fourth
Plan (1969-74) saw India’s second war with Pakistan, the Bangladesh war and the First Oil Shock of 1973.
The Fifth Plan (1974-79) witnessed declaration of internal emergency and the Second Oil Shock. The
economy posted negative growth in 1979-80.
What led to the “secular stagnation” of the Indian economy observed in late-1960s and 1970s?
• The basic stimulus to growth during the early post independence years came from the State itself.
It provided domestic capitalists with a large once-for-all market for manufactures by widening and
intensifying trade protection and displacing imported goods from the domestic market. It sought to
expand that market through its current and capital expenditures and it supported the domestic
capitalist class by investing in crucial infrastructure sectors and directing household savings to
finance private investment through the creation of a number of industrial development banks.
• One consequence of the persistence of asset and income inequality was that there were definite
limits to the expansion of the market for mass consumption goods in the country. Under these
circumstances, continuous growth in State spending was essential for the growth of the market
since it was the key element in whatever overall dynamism the system displayed.
• This strategy did pay dividends during the decade and a half immediately following Independence.
In this period rates of industrial growth were creditable by international standards, India built up a
diversified industrial base, and the public sector expanded rapidly enough to provide crucial
infrastructural services, industrial raw materials and capital goods to sustain industrial growth even
when the foreign exchange available to import these commodities was limited.
• By the mid-1960s, however, not only was the once-for-all stimulus offered by import substitution
exhausted, but the ability of the State to continue to provide the stimulus to growth was also
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undermined by its inability to raise adequate resources. In consequence, aggregate growth
decelerated leading to the “secular stagnation” of the late-1960s and 1970s.
It would, however, be wrong to attribute the failures of planning to these unanticipated shocks. There
were specific constraints on economic growth that were operating and these were well known to
planners. There were four major constraints: food, savings, foreign exchange and demand. They were
also interrelated. Overcoming them required a policy framework beyond controls and licensing,
institutional changes and political mobilisation, apart from dealing with class interests and conflicts.We
must consider the constraints briefly.
A growing output of food grains is absolutely crucial in a situation of growing population and additional
purchasing power that plan expenditure generates. Yet a proliferation of small holdings, traditional
technologies of farm production under mainly rain-fed conditions and the specific characteristics of
agrarian markets meant that food grain output was not elastic with respect to demand. The consequent
rise in food prices fuels general inflation. In the 1950’s and early 1960’s India was dependent on food
imports. This was not a long-term solution.
To deal with the institutional aspects of agricultural backwardness, land reforms were vigorously debated
as a means to increase productivity and production in agriculture. However, comprehensive land
reforms, especially a radical redistribution of land, were a non-starter given that the Indian state was
dominated by landed interests. Consequently, India had only token land reforms in terms of abolition of
intermediaries and legal protection of tenants. A way-out to increased food production without radical
land reforms was found in new agricultural technology. Better known as Green Revolution technology,
this involved short-duration high yielding varieties of seeds of rice and wheat, controlled application of
water through irrigation and chemical fertilizer. This yield-raising technology was initially adopted in the
more favourable regions of Punjab, Western Uttar Pradesh and deltaic regions and took a long time to
diffuse to other regions. This technology was combined with a policy of food procurement and buffer
stocks, along with minimum support prices. This policy did succeed in achieving self-sufficiency in food
grains but led to other contradictions in terms of regional and social inequalities, land degradation due
to intensive cropping and decline of water tables in several regions following extensive use of ground
water for irrigation. The agricultural policy also started a conflict of interest between industrialists and
large farmers whereby the relative prices of agricultural commodities and manufacturing, known as
intersectoral terms of trade, became a major political issue.
Impact of Failure of Land Reforms
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• There were a number of features of India’s post-Independence growth strategy that structurally
limited the potential of the system. To start with, despite talk of land reform, of providing “land-to-
the-tiller” and curbing the concentration of economic power, little was done to attack or redress
asset and income inequality after Independence.
• The worst forms of absentee landlordism were done away with, but the monopoly of land remained
intact in most of rural India.
• Large mass of peasantry, faced with insecure conditions of tenure and often obtaining only small
shares of the outputs they produced, had neither the means not the incentive to invest.
• The prospect of increasing productivity and incomes in rural India (which was home to the majority
of its population) in order to stimulate domestic demand was therefore restricted. The absence of
any radical land redistribution meant that the domestic market, especially for manufactured goods,
remained socially narrowly based. It also meant that the growth of agricultural output, though far
greater than in the colonial period, remained well below potential.
• For the country as a whole, the benefits of such agricultural growth as did occur was largely confined
to a relatively narrow stratum of landlords-turned-capitalists and sections of rich peasants who had
improved their economic status. Meanwhile, industrial growth was not sufficiently employment
generating to create large increases in demand from this source.
A second constraint related to shortage of savings. The huge investment demands for new industrial
projects coupled with a low rate of saving in the economy and limited possibility of foreign investment
meant that the plans depended heavily on budget deficits. In the context of low elasticity of supply of
wage goods, especially food, and long gestations periods of industrial projects, this led to high rates of
price inflation. The burden of taxation inevitably fell on indirect taxes. This contributed among other
things to increased inequality.
Thirdly, shortage of foreign exchange resources meant limited ability to import critical capital
equipment. The cost of imports also was high because of a fall in the exchange rate. At the same time,
Indian exports were not cost competitive in the international markets. All these cumulated into an
endemic pressure on account of balance of payments.
Finally, because of the various mechanisms operating to sustain mass poverty in the country, the
economy has faced a persistent problem of insufficiency of domestic demand. This is despite the fact
that India has a potentially huge home market given the size of her population. All these constraints
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operated to ensure that economic growth and development in the era of planning was low and halting.
Planning could not get over the structural problems of poverty and unemployment.
This is despite some radical measures such as nationalisation of scheduled commercial banks in 1969 by
Indira Gandhi. Bank nationalisation did achieve expansion of banking facilities throughout the length and
breadth of the country, besides directing credit to agriculture and household and small industry. Such
measures were not by themselves sufficient to make a dent on mass poverty. In fact, by the late 1960’s
it became clear that two decades of planned economic development had not improved the general
levels of living of people. This was because planning had not delivered on expansion of productive
employment for labour at large. Indira Gandhi’s subsequent call for GaribiHatao (Banish Poverty) took a
turn towards various poverty alleviation programmes without reorienting industrialisation for growth of
productive employment.
5 The Regime of Economic Liberalisation

The year 1991 marks an important landmark in the history of Indian economy. For in this year, the country
adopted comprehensive macro-economic reforms. The reforms were to replace the Nehru-Mahalanobis
strategy with policies aimed at reducing the role of the state including the public sector, dismantling of
controls, opening up the economy to foreign trade, investment and finance. We survey the background,
the process and the general outcome of this ongoing programme of economic liberalisation.
The switch to a regime of economic liberalisation was driven by a crisis of balance of payments.
Government finances were in a bad shape thanks to regular fiscal deficits. The country’s foreign
exchange resources were at a record low. Early 1991, foreign reserves were not adequate to finance even
a month of imports. Inflation was high. There was political instability with frequent changes in
government. Internationally, the turbulent situation in the Middle East and the collapse of the USSR
meant that the remittances from non-resident Indians declined sharply and the panic-stricken NRIs
actually sought to withdraw their foreign currency deposits in India, making our payments position even
more precarious. Driven by this acute payments crisis, India contracted a huge loan of 3.6 billion SDR
(Special Drawing Rights, an international reserve asset) from the International Monetary Fund (IMF) in
June 1991. However, the loan came with the condition that India, as loan recipient, would carry out
comprehensive economic reforms.
There was also an important shift in the intellectual climate worldwide at the time. The new approach
to managing the world economies, including the developing countries, recommended an enlarged role
for the market (as against the state) and deregulation of foreign trade and financial markets. Promoted
by the World Bank and the IMF, the approach came to be known as ‘Washington Consensus’. It replaced
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the older ‘development consensus’ of the 1950’s which favoured pursuit of autonomous
industrialisation strategies including protection of domestic industry by the developing countries. The
change in the intellectual climate was also occasioned by the success stories of several East Asian
countries. Liberal economic policies followed earlier in the 1980’s by President Reagan in the US and
Prime Minister Thatcher in Britain lent political support to the shift. Not in the least, the decline of
Keynesian macro-economics and its replacement by orthodoxy in the academia and the policies of
central banks in the West were an influence. Meanwhile, there was a tremendous growth in global
finance capital which came to dominate trade in goods, services and investment. Multinational banks
and corporations controlling the global finance were mounting pressure on all economies to open up
their markets to it.
The programme of liberalisation adopted by India in 1991 had two major components: (1) stabilisation
and (2) structural adjustment. Both are based on the conviction that the economy works best when it is
left to market forces with minimal state interference.
The programme of stabilisation, recommended by the IMF, seeks to stabilise prices, budget and balance
of payments deficits and exchange rates in the short run. There are two instruments for achieving
stabilisation. The first is deflation, or reduction of aggregate demand, particularly through reduction in
government expenditure. Deflation is supposed to improve balance of payments through reduced
imports. Deflation would bring down the price level and therefore take the exchange rate to a realistic
level. The second component is monetary policy. A tight monetary policy and the resulting high interest
rates would attract private capital flows into the economy.
Structural adjustment, the other major component of the liberalisation programme, is recommended by
the World Bank. It is focused on long-run growth and efficiency. According to this, a developing country
will place itself on to a high and efficient growth path when it aligns domestic prices with international
prices and its resources shift to private uses and exports. On this belief, the Bank would recommend
complete liberalisation of foreign trade in goods, investment, technology and finance. In addition, it
recommends deregulation and privatisation in the domestic economy.
The Fund-Bank prescriptions are thus a complete reversal of ‘development consensus’ and the Nehru-
Mahalanobis strategy.
The Fund-Bank package of reforms would obviously affect the interests of certain social classes while
they may damage the interests of other classes. Which section of India should bear the burden of
adjustment? This, of course, was a hard political choice. While India accepted the package in full, it had
to adopt a particular sequencing of reforms that would meet with least political resistance. The external
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sector, domestic private industry and financial sector were favoured for reforms. Agriculture and the
public sector have hardly been touched so far.
On the external front, major reforms have been implemented. Practically all restrictions on trade have
been removed. Peak customs duties have been reduced. Capital flows of both direct and portfolio types
have been freed. The exchange rate is more or less market determined.
The new industrial policy of 1991 brought out far-reaching changes. Industrial licensing was effectively
abolished and limits on investment were softened through amendments to Monopolies and Restrictive
Trade Practices (MRTP) Act. The new policy permits mergers and acquisitions among companies.
Reforms in the financial sector spanned banking, government securities market and deficit financing
following the recommendations of the Committee of the Financial System, better known as the
Narasimham Committee. To improve profitability of banks, strict limits were placed on government
borrowing from banks. The policy envisaged reduction in the non-performing assets (NPAs),
improvement of capital adequacy of banks and reduction in cash reserve ratio (CRR) and statutory
liquidity ratio (SLR).
The post-reform, especially since 1996-97 saw a clear acceleration in the growth of Indian economy. The
same period saw a striking growth of the tertiary sector, while agriculture posted a steady decline as a
share of GDP. Growth of employment remains dismal. Deflationary policy has meant that government
expenditure, especially on capital account, has declined. This has especially affected agriculture and
created a scenario of agrarian distress. There was a spate of farmer suicides all over the country and
traditional, labour-intensive industries such as handlooms have suffered. Poverty ratio remained as high
as 37 per cent in 2004-05. Despite all the focus of reforms, the share of secondary sector, in particular
manufacturing, in GDP has not shown a marked growth. The service sector growth, while it has been
impressive, has been concentrated on selected sub-sectors such as financial services, information
technology, real estate and public administration with limited opportunities for ordinary labour for
productive employment. The foreign exchange reserves, thanks to IT exports and large inflows of short
term capital, have improved. These gains have been lost, however, after the global economic crisis since
2008. This period has seen again a stress on balance of payments, high inflation combined with a tight
monetary policy and slippages on fiscal deficit targets. A paradox of the reform process for a long time
was that agriculture sector and the public sector remain untouched, excepting the policy of
disinvestment in public sector enterprises. The long-term objectives of economic development –
elimination of structural poverty, unemployment and inequality – remain unfulfilled after both the
major shifts in economic policy in independent India.
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Even so, the very process of economic reforms faced a political constraint. The decline of hegemonic
national political parties and the emergence of coalitional politics after the 1980’s has led to a lack of
consensus on the pace and pattern of economic reforms. According to the dominant view, more through-
going reforms are needed to realise the full growth potential of the Indian economy.
6 Political Economy of Liberalisation

There is no doubt that, whatever the external pressures upon the state, the neoliberal reform process
could not have occurred without what was at first conditional and subsequently more unqualified
support extended to it by various elements of the domestic large capitalist class, along with other social
groups with substantial political voice, such as the middle classes. To some extent this can be explained
by the proliferation and diversification of the Indian capitalist class that took place during the years of
import-substituting growth and later. The emergence of new capitalists operating outside the traditional
bases of existing monopolistic groups, such as trade, finance, services of various kinds and operations
abroad by Non-Resident Indian groups, was an important factor. These new entrants sought to diversify
into manufacturing, and therefore welcomed deregulation and also, because of access to newer
technology, were less averse to import competition.
This created a direct challenge for several of the traditional monopolies, which had in the past been
protected by the barriers to entry created by the state’s industrial and trade policies. Such established
large capital found its relative position worsening in the economy over time. To reverse this decline, it
looked for new avenues, including expansion abroad through the export of capital and by moving into
areas previously reserved for small-scale entrepreneurs. So even the established big businesses that
were, to start with, the beneficiary of state controls of various kinds, began to chafe against these controls
at a certain stage. Among certain other sections such as the agricultural capitalists the economic regime
change met with qualified approval. Rich farmers were hostile to the withdrawal of subsidised inputs
and directed credit, but still favourably anticipated the prospect of exporting at favourable prices in the
international market. This meant that a substantial section of domestic capital was willing to make
compromises with metropolitan capital, in the hope of being able to better its own prospects as a junior
partner, both in the domestic as well as in the international market. It was therefore in favour of import
liberalisation and a retreat from state interventionism.
In addition, there was support for economic liberalisation from other quarters: from new businessmen
involved in what were essentially “parallel market” transactions; a section of the top bureaucracy; and
perhaps more significantly, the large and politically powerful urban middle classes, along with more
prosperous rural farming groups, whose real incomes increased in the consumption-led boom of the
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1980s. The latter groups actively began to desire access to international goods and gave potency to the
demands for trade liberalisation. And of course the technological and media revolutions, especially the
growing importance of satellite television, imparted a significant impetus to the international
demonstration effect, which further fuelled liberalising and consumerist demands. This process was
given further stimulus by the accelerated globalisation of a section of Indian society. Apart from the
media, one major instrument of this was the postwar Indian diaspora. The “NRI phenomenon”, by means
of which a qualitatively significant number of people from the Indian elites and middle classes actually
became resident abroad, contributed in no small measure to consumerist demands for opening up the
economy. The importance of Non-Resident Indians was not only because they were viewed as potentially
important sources of capital inflow, but also because of their close links with dominant groups within
the domestically resident society.
Despite (or rather, because of) the imbalanced and unequal economic growth pattern of these years,
there was a definite improvement in material conditions for a substantial section of the upper and
middle classes. Since these groups had a political voice that was far greater than their share of
population, they were able to influence economic strategy to their own material advantage. So the local
elites and middle classes were not only complicit in the process of integration with the global economy,
but active proponents of the process.
This becomes clear even from data on the distribution of consumption expenditure by different fractile
groups. As the following chart suggests, in the 1990s and until 2002, the urban top 20 per cent of the
population (in terms of per capita household consumption categories) experienced increases in per capita
consumption which were the most rapid in post-Independence history. The other groups that also
appear to have increased per capita consumption significantly were the next 40 per cent of the urban
population and the top 20 per cent of the rural population.
By contrast, the per capita consumption of the bottom 40 per cent of the rural population actually
declined over this same period. Such patterns not only give some idea of the spread of the “gainers” of
the economic growth process, but also indicate the political constituency for the liberalising reforms of
the 1990s.
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While the neoliberal economic reform programme entailed a changed relationship of government
interaction with economy and polity, it was not a “withdrawal of the state” so much as a change in the
character of the association. Thus, while the state effectively reneged on many of its basic obligations in
terms of providing its citizens access to minimum food, housing, health and education, it was still the
case that state actions were essential in determining the way in which markets functioned and the ability
of capital to pursue its different goals. Government and bureaucracy remained crucial to economic
functioning; in fact the overall context became one of greater centralisation of economic and financial
power. Many had believed that a “retreat of the state” and the exposure of the economy to the discipline
of the market would cut out arbitrariness of decision-making and the corruption that is inevitably
associated with it. What happened instead in the Indian economy during this period of neoliberal
structural adjustment was an increase in the levels of corruption, cronyism, and arbitrariness to
unprecedented levels. For example, the privatisation exercise became another vehicle of primitive
accumulation by private capital as it acquired public assets cheaply. With the wider corruption that
increasingly pervaded the system, the “discipline of the market” proved to be a chimera.
The increased income inequalities over this period have accentuated certain longerterm structural
features of Indian society, whereby more privileged groups have sought to perpetuate and increase their
control over limited resources and channels of income generation in the economy. This in turn has
involved the effective economic disenfranchisement of large numbers of people, in rural India as well as
among the urban poor. These concomitant trends of greater economic and financial centralisation and
increased income inequality in turn operated to aggravate various regional, fissiparous and community-
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based tensions. While the roots of such tensions are obviously complex, these conflicts both emerged
from the prevailing material contradictions and contributed to them.
This situation was neither inevitable nor permanent. The economic context of India was one in which the
need to rethink, modify and revise at least some of the economic strategy of the recent past, was
becoming increasingly obvious. In particular, the supposed emphasis on fiscal discipline, which had not
been reflected so much in actual declines in the fiscal deficit to GDP ratios, but in compression of
important productive public expenditure with high linkage and multiplier effects, required reversal. The
neglect of important policy issues with respect to agriculture could not continue. In addition to greater
emphasis on public expenditure with high direct and indirect effects on employment generation,
addressing the issue of higher resource mobilisation from the rich had become urgent. Further, it was
necessary to counter some of the adverse effects of trade liberalisation on employment, apart from
more directly addressing the basic structural issues of asset and income inequality and the persistence
of low-productivity employment mentioned above, which remained so significant in the Indian economy.
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POVERTY ALLEVIATION & EMPLOYMENT
GENERATION IN INDIA
FODDER MATERIAL

Contents
1 Poverty Alleviation .................................................................................................................................3
1.1 Types of Poverty..............................................................................................................................3
1.1.1 Relative Poverty .......................................................................................................................3
1.1.2 Absolute Poverty .....................................................................................................................3
1.1.3 Poverty: a multi-dimensional problem ....................................................................................4
1.2 Measurement of Poverty ................................................................................................................5
1.2.1 Human Poverty Index ..............................................................................................................5
1.2.2 Multidimensional Poverty Index..............................................................................................5
1.2.3 Poverty Line .............................................................................................................................7
1.2.4 Post-Independence Poverty Estimates ....................................................................................8
1.2.5 Tendulkar Committee ..............................................................................................................9
1.3 Trends in Poverty ..........................................................................................................................10
1.3.1 Impact of growth on poverty alleviation ...............................................................................10
1.4 Causes of Poverty ..........................................................................................................................13
1.5 Measures to Reduce Poverty ........................................................................................................17
1.5.1 Poverty Alleviation Programs in India ...................................................................................19
1.5.2 Role of Public Distribution System in Poverty Alleviation .....................................................20
1.5.3 Role of Employment Generation in Poverty Alleviation in India? .........................................20
1.5.4 How can a Basic Income Programme Help in Poverty Alleviation? ......................................21
1.5.5 Reasons for Ineffectiveness of Poverty Alleviation Programmes .........................................21
1.5.6 Challenges in Poverty Eradication Going Ahead ...................................................................23
1.5.7 Way Forward..........................................................................................................................23
2 Employment Generation ......................................................................................................................25
2.1 Types of Unemployment ...............................................................................................................26
2.2 Causes of Unemployment .............................................................................................................27
2.3 Consequences of Unemployment .................................................................................................30
2.4 Trends in Unemployment .............................................................................................................31
2.4.1 Recent Trends ........................................................................................................................33
2.4.2 Employment Structure...........................................................................................................34
2.4.3 Increasing Casualisation ........................................................................................................35
2.4.4 Impact of policy of liberalisation on rural and urban employment ......................................39
2.5 Issue of Jobless Growth.................................................................................................................40
2.5.1 Meaning .................................................................................................................................40
2.5.2 Trend ......................................................................................................................................41
2.5.3 Reasons ..................................................................................................................................41
2.5.4 Solution ..................................................................................................................................44
2.6 Measures to Reduce Unemployment ...........................................................................................46
2.6.1 Steps Taken by Government..................................................................................................50
2.7 Way Forward .................................................................................................................................53
1 Poverty Alleviation
Poverty is a state or condition in which a person or community lacks the financial resources and
essentials for a minimum standard of living. Poverty means that the income level from employment is
so low that basic human needs can't be met.
According to World Bank, Poverty is pronounced deprivation in well-being, and comprises many
dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary
for survival with dignity. Poverty also encompasses low levels of health and education, poor access to
clean water and sanitation, inadequate physical security, lack of voice, and insufficient capacity and
opportunity to better one's life.
In India, 21.9% of the population lives below the national poverty line in 2011.
In 2018, almost 8% of the world’s workers and their families lived on less than US$1.90 per person per
day (international poverty line).
1.1 Types of Poverty
1.1.1 Relative Poverty

Relative poverty refers to the income or asset position of one class or group of people in comparison
with the other classes or groups, or one individual vis-a –vis the other. The essential point of significance
is that poverty of one is relative to the richness of the other. For example, an average middle class person
is relatively poor when compared to an upper middle class person. The upper middle class person is
relatively poor in comparison to the richer persons. This kind of comparison does not take into account
the level of economic conditions, whether he is sufficiently endowed or not. The condition of the person
is understood in relation to what others have. The concept of relative poverty is essentially a problem
of inequality: inequality of income and ownership of assets.
1.1.2 Absolute Poverty

The concept of Absolute poverty is associated with a minimum level of living or minimum consumption
requirements of food, clothing, house, health and so on. Therefore, absolute poverty can be defined as

the ‘inability to achieve the minimum requirements of life, health and efficiency due to very low income
or inadequate assets’. Poverty is viewed as a ‘state of absolute deprivation.’
Absolute poverty is defined in terms of a certain normative minimum level of living operationally
measured by ’consumption expenditure’ that is necessary to ensure that ‘minimum desirable level of
living’. Therefore, all those people who are deprived of these minimum consumption requirements are
categorized as poor.
The minimum consumption requirements includes:
• a reasonable satisfactory nutritional diet

• reasonable clothing, housing etc
• Access to minimum level of education, health, water facilities etc.
Absolute poverty is a more comprehensive concept than relative poverty, as it manifests itself in denial
of basic/minimum ‘human requirements’ of food, clothing, shelter , education ,health and so on. The
eradication of absolute poverty is challenging but nonetheless one of the most important priority of
every country. Thus, a state of absolute poverty is characterized by low life conditions in the form of
disease, illiteracy, malnutrition, and squalor which denies a minimal state of human existence. Poverty is
also taken as ‘denial of human rights’ and is a major challenge for the planners.
1.1.3 Poverty: a multi-dimensional problem

Poverty is often defined by one-dimensional measures – usually based on income. But no single
indicator can capture the multiple dimensions of poverty.
Multidimensional poverty encompasses the various deprivations experienced by poor people in their
daily lives – such as poor health, lack of education, inadequate living standards, disempowerment, poor
quality of work, the threat of violence, and living in areas that are environmentally hazardous, among
others.
A multidimensional measure of poverty can incorporate a range of indicators that capture the complexity
of this phenomena in order to inform policies aimed at reducing poverty and deprivation in a country.
Why use a multidimensional approach?
• Monetary-based poverty measures can miss a lot. Studies have revealed that the overlap between
monetary and non-monetary measures of poverty is not perfect. In most cases, not all individuals who
are income poor are multidimensionally poor and not all multidimensionally poor individuals are
income poor. Both monetary and non-monetary measures of poverty are needed to better inform the
policies intended to address the needs and deprivations faced by poor populations.
• Economic growth does not always reduce poverty or deprivation. Several studies have found that
economic grow is not strongly associated with a reduction in other deprivations, such as child
malnutrition or child mortality.
• Poor people describe their experience of poverty as multidimensional. Participatory exercises reveal
that poor people describe ill-being to include poor health, nutrition, lack of adequate sanitation and
clean water, social exclusion, low education, bad housing conditions, violence, shame,
disempowerment and much more.
• The more policy-relevant information there is available on poverty, the better-equipped
policymakers will be to reduce it. For example, an area in which most people are deprived in
education requires a different poverty reduction strategy from an area in which most people are
deprived in housing conditions.
1.2 Measurement of Poverty
1.2.1 Human Poverty Index

The Human Poverty Index was introduced by the United Nation’s Human Development Report in 1997
with a view to measuring the extent of deprivation and the degree of poverty in a country. The HPI Index
uses the same parameters as are used in the Human Development Index (HDI) such as, Longevity,
Knowledge and Living standards. The HPI Index also includes other parameters as:
1. Vulnerability to death at a relatively early age as measured by percentage of people with probability
of death before the age of forty years.
2. Adult illiteracy rate as measured by percentage of illiterate adults in total adult population.
3. Living standards as measured by three variables, viz/; the percentage of people with access to
(i) health services
(ii) safe drinking water
(iii) malnourished and underweight children below the age of five years.
The HPI is the average of the above three components and measures deprivation on a scale of one to one
hundred. The Countries with high HDI rankings have lower HPI rankings.
1.2.2 Multidimensional Poverty Index

The Global Multidimensional Poverty Index (MPI) is published by Oxford Poverty & Human
Development Initiative (OPHI) and the United Nations Development Programme (UNDP) Human
Development Report. It aims to give a “multidimensional picture of people living in poverty,” and
measures poverty at the individual level in education, health and standard of living. The MPI is featured

in the 20th Anniversary edition of the UNDP Human Development Report 2010 and has been updated
every year since.
‘Charting pathways out of multidimensional poverty: Achieving the SDGs’ report

Released By: United Nations Development Programme (UNDP) and the Oxford Poverty and Human
Development Initiative (OPHI)
Global Findings
• 65 out of the 75 countries that were studied have lowered their MPI value and 50 nations have
even reduced the number of people living in poverty.
• It has predicted that if left unaddressed the Covid crisis could set back global progress across 70
developing countries by 3-10 years.
• It has found that four countries — India Armenia, Nicaragua and North Macedonia — have
reduced their MPI by half or more in 5.5 to 10.5 years.
• Three South Asian nations — India, Bangladesh and Nepal have been among the 16 fastest
countries to reduce their MPI value.
• According to the study, 10 countries accounted for 60 per cent unvaccinated children.
• Around 40 per cent of the children who were not vaccinated for DTP3 lived in four countries —
India, Nigeria, Pakistan and Indonesia.
India Specific Findings

• About 273 million Indians moved out of multi-dimensional poverty between 2005-6 and 2015-16.
• Jharkhand had the greatest improvement, with Arunachal Pradesh, Bihar, Chhattisgarh, and
Nagaland.
• 55.1 per cent of the population in India lived under multidimensional poverty in 2005-06, it has
come down to 27.9 per cent in 2015-16.
• As of 2015-16, the intensity of deprivation has been 43.9 per cent, while the population under
severe multidimensional poverty was 8.8 per cent.
• 37.7 crore people in India lived under multidimensional poverty as of 2018.
• Deprivation of People as of 2016
✓ Nutrition - 21.2 per cent
✓ Cooking fuel - 26.2 per cent
✓ Sanitation – 24.6 percent
✓ Drinking water – 6.2 per cent
✓ Electricity – 8.6 per cent

✓ Housing – 23.6 per cent
• The percentage of children receiving three doses of diphtheria, tetanus and pertussis (DTP3)
vaccines had been used as an indicator of how well countries were providing routine immunization.
1.2.3 Poverty Line

Absolute poverty is measured by ‘Poverty Line’ which refers to some cut-off level in terms of
consumption or income level.
The extent of poverty in a country is measured by the number of people who live below the poverty line
and their ratio to the total population (poverty ratio).
Poverty line is drawn on the basis of expenditure that is necessary to secure the minimum acceptable
living standard, according to the work and efficiency. In India, poverty line is drawn on the basis of a
minimum necessary nutritional requirement, which is expressed in calorie intake of a person (2,400
calories for rural and 2100 calories for urban areas). The minimum calorie intake for rural areas is higher
than the urban areas because rural people put in more physical efforts in comparison to the population
in urban areas.
Planners in India estimates poverty using data from sample surveys on household expenditure carried
out by National Sample Survey Organization (NSSO) every five year. It defines poverty line on the basis
of monthly per capita consumption expenditure (MPCE).
The percentage of the population living below the poverty line in India decreased to 22% in 2011-12
from 37% in 2004-05, according to data released by the Planning Commission in July 2013.
The current methodology for poverty estimation is based on the recommendations of an Expert Group
to Review the Methodology for Estimation of Poverty (Tendulkar Committee) established in 2005. The
Committee calculated poverty levels for the year 2004- 05. Poverty levels for subsequent years were
calculated on the basis of the same methodology, after adjusting for the difference in prices due to
inflation.
Following table shows national poverty levels for the last twenty years, using methodology suggested by
the Tendulkar Committee. According to these estimates, poverty declined at an average rate of 0.74
percentage points per year between 1993-94 and 2004-05, and at 2.18 percentage points per year
between 2004-05 and 2011-12.
Table: National poverty estimates (% below poverty line) (1993 - 2012)

Year Rural Urban Total
1993-94 50.1 31.8 45.3
2004-05 41.8 25.7 37.2
2009-10 33.8 20.9 29.8
2011-12 25.7 13.7 21.9
Following table outlines the poverty lines computed using the Tendulkar Committee methodology for the
years 2004-05, 2009-10 and 2011-12.
Table: National poverty lines (in Rs per capita per month) for the years 2004-05, 2009-10 and 2011-12
Year Rural Urban

2004-05 446.7 578.8
2009-10 672.8 859.6
2011-12 816.0 1000.0
From the above tables, we can see that the incidence of poverty is higher in the rural areas than the
urban areas. It is also clear that the overall poverty ratio is declining at the all India average. The decline
in the number of rural poor in spite of rapid increase in population has been caused (i) due to the large
number of anti-poverty programmes launched by the government from time to time. (ii) due to the
effects of migration wherein rural population moves to towns and cities in search of better economic
avenues/employment and consequent urbanization.
1.2.4 Post-Independence Poverty Estimates

▪ In 1962, the Planning Commission constituted a working group to estimate poverty nationally, and it
formulated separate poverty lines for rural and urban areas – of Rs 20 and Rs 25 per capita per year
respectively.
▪ VM Dandekar and N Rath made the first systematic assessment of poverty in India in 1971, based on
National Sample Survey (NSS) data from 1960-61. They argued that the poverty line must be derived
from the expenditure that was adequate to provide 2250 calories per day in both rural and urban
areas. This generated debate on minimum calorie consumption norms while estimating poverty and
variations in these norms based on age and sex.
▪ Alagh Committee (1979): In 1979, a task force constituted by the Planning Commission for the
purpose of poverty estimation, chaired by YK Alagh, constructed a poverty line for rural and urban
areas on the basis of nutritional requirements (2400 calories in rural areas and 2100 calories in urban
areas).
▪ Lakdawala Committee (1993): In 1993, an expert group constituted to review methodology for
poverty estimation, chaired by DT Lakdawala, made the following suggestions: (i) consumption

expenditure should be calculated based on calorie consumption as earlier; (ii) state specific poverty
lines should be constructed and these should be updated using the Consumer Price Index of Industrial
Workers (CPI-IW) in urban areas and Consumer Price Index of Agricultural Labour (CPI-AL) in rural
areas.
1.2.5 Tendulkar Committee

▪ In 2005, another expert group to review methodology for poverty estimation, chaired by Suresh
Tendulkar, was constituted by the Planning Commission to address the following three
shortcomings of the previous methods:
i. consumption patterns were linked to the 1973-74 poverty line baskets (PLBs) of goods and
services, whereas there were significant changes in the consumption patterns of the poor
since that time, which were not reflected in the poverty estimates
ii. there were issues with the adjustment of prices for inflation, both spatially (across regions)
and temporally (across time); and
iii. earlier poverty lines assumed that health and education would be provided by the State
and formulated poverty lines accordingly.
▪ It recommended four major changes:
i. a shift away from calorie consumption based poverty estimation;
ii. a uniform poverty line basket (PLB) across rural and urban India;
iii. a change in the price adjustment procedure to correct spatial and temporal issues with price
adjustment; and
iv. incorporation of private expenditure on health and education while estimating poverty.
▪ The Committee recommended using Mixed Reference Period (MRP) based estimates, as opposed
to Uniform Reference Period (URP) based estimates that were used in earlier methods for estimating
poverty.
▪ It based its calculations on the consumption of the following items: cereal, pulses, milk, edible oil,
non-vegetarian items, vegetables, fresh fruits, dry fruits, sugar, salt & spices, other food,
intoxicants, fuel, clothing, footwear, education, medical (non-institutional and institutional),
entertainment, personal & toilet goods, other goods, other services and durables.

▪ The Committee computed new poverty lines for rural and urban areas of each state. To do this, it
used data on value and quantity consumed of the items mentioned above by the population that
was classified as poor by the previous urban poverty line.
▪ It concluded that the all India poverty line was Rs 446.68 per capita per month in rural areas and Rs
578.80 per capita per month in urban areas in 2004-05.
1.3 Trends in Poverty

Since India commenced the process of economic reforms, a major shift has taken place in the country’s
policy-orientation towards poverty alleviation and employment generation—in place of wage
employment, the focus has shifted to self-employment – so that ‘gainful employment’ could be created
and poverty could be alleviated permanently.
The Planning Commission used to estimate poverty using data from the large sample surveys on
household consumer expenditure carried out by the National Sample Survey Office (NSSO) every five
years. It defines poverty line on the basis of monthly per capita consumption expenditure (MPCE). The
methodology for estimation of poverty followed by the Planning Commission has been based on the
recommendations made by experts in the field from time to time—the recent estimates based on the
recommendations of the Expert Group headed by Prof. Suresh D. Tendulkar which submitted its report
in December 2009.
As per this methodology, poverty estimates (NSSO, 68th Round, 2011–12) for the period 2004–05 to
2011–12 are as given below:
(i) Total poverty declined from 37.2 to 21.9 per cent.
(ii) Rural poverty declined from 41.8 to 25.7 per cent.
(iii) Urban poverty declined from 25.7 to 13.7 per cent
As per the Rangarajan committee report (2014), the poverty line is estimated as Monthly Per Capita
Expenditure of Rs. 1407 in urban areas and Rs. 972 in rural areas.
Looking at the controversy and confusion related to per day monetary estimates of poverty line criteria,
late 2015, the GoI did set up a task force under the vice-chairman of the NITI Aayog (Arvind Panagariya)
to suggest a new method for poverty estimates.
1.3.1 Impact of growth on poverty alleviation

• First, India’s long-run progress against absolute poverty is evident when using data spanning nearly
six decades from 1957 to 2012. This is found in both urban and rural areas. Rural poverty measures—
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historically higher than for urban areas—have been converging with urban measures over time.
There has been a marked urbanization of poverty, from about one-in-eight of the poor living in urban
areas in the early 1950s to one-in-three today.
• Second, even though a trend decline in poverty started to emerge around the mid-1970s, the pace of
poverty reduction accelerated post-1991, with a 5-6 fold increase in the proportionate rate of
decline in the incidence of poverty relative to the preceding 35 years. The acceleration in rural
poverty decline was even higher than that for urban poverty. This happened alongside the significant
increase in inequality both within and between urban and rural areas, in contrast with a decline in
rural inequality and no trend in urban inequality pre-91. Despite the increase in inequality, we find
post-91 responsiveness of poverty to growth (measured by the growth elasticity of poverty reduction)
in the aggregate to be no less than in the preceding period.
• Third, there was a significant change in the relationship between poverty reduction and economic
growth around the time of the economic reforms. Something quite striking happened in the
trajectory of India's poverty measures and their relationship to growth around this time.
• Fourth, the most notable elements of the structural break have been the changes in the relationship
between poverty and the rural-urban and the economic sector (output) composition of growth. In the
post-reform period, urban growth emerged as a major driver of national poverty reduction. Urban
poverty has become significantly more responsive to urban growth, but (even more importantly)
urban growth has become significantly more rural poverty reducing. This is in sharp contrast to the
prior pattern, when urban growth had little or no impact on rural poverty. In parallel, there was a
change in the poverty-reducing effects of growth of output in different sectors of the economy. Unlike
the pre-91 period, when only primary and tertiary sector growth contributed to poverty reduction,
after 1991 all three sectors have had a significant impact, and we cannot reject the hypothesis of
uniform marginal impacts.
• Fifth, our decomposition results reflect these changes in the poverty-growth relationship. The pre-91
poverty decline was almost entirely driven by rural growth and favourable distributional changes;
the contribution of urban growth was negligible. Post-91, rural growth, though still important, has
been displaced by urban growth as the most important contributor to the (more rapid) poverty
decline, even though higher growth has come with adverse distributional effects. The contribution of
primary sector growth has rapidly dwindled from accounting for about two-fifths of the total poverty
decline pre-91 to less than 10 percent of the total (and larger) poverty decline post-91. The tertiary
sector alone has contributed over 60% of the post-91 poverty reduction. The secondary sector
growth, aided by India’s construction boom since 2000, has contributed about a quarter.
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• In relation to the growth process, both urban-rural and sectoral (output) growth-poverty
relationships are suggestive of stronger inter-sectoral linkages in the economy, whereby growth in
one sector transmits its gains elsewhere. At the same time, structural transformation with the
secondary and tertiary sectors now accounting for much larger shares of national output and
employment, has amplified the significance of growth in the non-agricultural and urban economy
for poverty reduction.
• This does not imply that agricultural growth is no longer important for poverty reduction. Until such
time that structural transformation of employment catches up with the transformation of output,
there will be an important role for the agricultural sector. Results on the growing contribution of the
non-agricultural and urban economy to national poverty reduction indicate that the catch up has
started, but faster growth in agricultural productivity can substantially hasten the process.
Deen Dayal Antyodaya Yojana – NULM

Nodal Ministry: Ministry of Housing and Urban Affairs
Aim:
• To reduce poverty and vulnerability of the urban poor households by enabling them to access self-
employment and skilled wage employment opportunities, resulting in an appreciable improvement
in their livelihoods on a sustainable basis.
• To provide shelter equipped with essential services to the urban homeless in a phased manner.
• To address livelihood concerns of the urban street vendors by facilitating access to suitable spaces,
institutional credit, social security and skills for accessing emerging market opportunities.
Target Beneficiaries:
• It will be implemented in all District Headquarter Towns and all other cities with a population of
1,00,000 or more as per 2011 census.
• The primary target of DAY-NULM is the urban poor, including the urban homeless. Their
identification would be done using the SECC 2011.
Process and Mechanism/Components:
• Employment through Skill Training and Placement - An expenditure of Rs.15, 000 per person is
allowed on training of urban poor which is Rs.18, 000 in North-East and J&K.
• Social Mobilization and Institution Development - It will be done through formation of Self-Help
Groups (SHG) for training members and hand holding, an initial support of 10, 000 is given for each
group. Assistance of Rs.50, 000 is provided to Registered Area Level Federations.
• Subsidy to urban poor - An interest subsidy of 5% - 7% for setting up individual micro-enterprises
with a loan of up to 2 lakh and for group enterprises with a loan limit of up to Rs.10 lakhs.
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• Shelters for urban homeless - Cost of construction of shelters for urban homeless is fully funded
under the Scheme.
• Other means - Development of vendor markets and also the promotion of skills for the vendors
through setting up infrastructure and special projects for the rag picker and differently abled etc.
1.4 Causes of Poverty

Poverty still exists in spite of seven decades of planning and specific poverty removal schemes. Poverty
is deep rooted on account of various reasons, out of which the most important ones are:
▪ Rapid growth of population: Rapid increase in population has been a major factor responsible for high
incidence of poverty. Between 1951 and 2001, about 66 crores of people were added to the existing
population. From 36 crores in 1951, the population in 2014 is 120 billion. Unfortunately, the pace of
development has been slow. During the period 1951-81, there was a massive increase in population
on account of a high birth rate and a rapidly declining death rate. The growth rate of population per
annum was 1 percent at the time of independence increased to 2.22 percent in 1981, tended to
moderate to 2.14 percent in 1991 and came down to 1.93 percent in 2001 and is 1.72 percent in 2011.
Heavy population means higher burden of dependents and consequently low savings and
investments and a low level of economic growth. Thus, high population growth and a slow rate of
economic growth depress the growth rate of per capita income.
▪ Underdeveloped structure of the economy: Indian economy still exhibits pockets of backwardness,
particularly evident in the agricultural sector. Since, a majority of the population depend on
agriculture for livelihood, the low productivity of the sector leads to low levels of income and poverty.
Not only agriculture, our industrial sector too is slow and the lack of infrastructure leads to a slow
growing output.
▪ Inequalities in income and asset ownership: An important reason for wide scale poverty is the
growing inequalities in income distribution and ownership of assets. Because of lack of education,
skill and so on, a large section of population are unable to reap opportunities to develop. The rich
becomes richer and the poor becomes poorer. Most of the development opportunities are pocketed
by few. Inequality perpetuates further inequality.
▪ Chronic unemployment and underemployment: India is a vast country with chronic unemployment
– seasonal, structural, frictional, and open and underemployment. There are problems of educated
unemployment and disguised unemployment. Though large number of employment schemes have
been launched by the governments but the number of job seekers is too large in comparison to the
jobs created. There is huge backlog of unemployed youths resulting in unemployment, poverty.
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▪ Inflation: Rising prices/inflation is a common feature of developing economies. Rising prices leads to
falling purchasing power and real incomes. The fixed income group suffers immensely as compared
to the business class. Particularly, the unorganized sector comprising of casual workers, labourers,
rickshawallah etc are driven to poverty on account of rising prices.
▪ Lack of Capital and Entrepreneurship: The shortage of capital and entrepreneurship results in low
level of investment and job creation in the economy.
▪ Social Factors: Apart from economic factors, there are also social factors hindering the eradication of
poverty in India. Some of the hindrances in this regard are the laws of inheritance, caste system,
certain traditions, etc.
▪ Colonial Exploitation: The British colonization and rule over India for about two centuries de-
industrialised India by ruining its traditional handicrafts and textile industries. Colonial Policies
transformed India to a mere raw-material producer for European industries.
▪ Climatic Factors: Most of india’s poor belong to the states of Bihar, UP, MP, Chhattisgarh, odisha,
Jharkhand, etc. Natural calamities such as frequent floods, disasters, earthquake and cyclone cause
heavy damage to agriculture in these states.
Poverty and Shared Prosperity 2020: Reversals of Fortune

About the report-
• It is a biennial report released by World Bank.
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• It offers the latest and most accurate estimates on trends in global poverty and shared prosperity
and presents new estimates of COVID-19’s impacts on global poverty and inequality.
• It states that the COVID-19 pandemic has ended the progress made since year 1990 in poverty
reductions worldwide.
• It also provides analysis on the causes and consequences of the reversal in the gains of poverty.
The report mentions the below factors responsible for reversal of gains in global poverty-
o COVID-19 Pandemic
o Armed Conflict
o Climate Change
Extreme Poverty and the related findings-
What is Extreme Poverty?
• The report measures "extreme poverty" as the number of people living on less than $1.90perday.
• “No poverty” is also the first goal among the 17 Sustainable Development Goals (SDGs) adopted by
all United Nations Member States in 2015 as a universal call to action to end poverty, protect the
planet and ensure that all people enjoy peace and prosperity by 2030.
Key findings–Global
• COVID-19’s impact-
o Poverty is expected to rise in 2020 for the first time since 1998.
o Covid-19 will add around 88-115 million new people into extreme poverty in year 2020 and
is expected to further add about 23-35 million in 2021, hence bringing the total number of
new people living in extreme poverty to between 110-150 million by year 2021. So, it may
cause 1.4% of the world population to fall into extreme poverty.
o About 82% of the poor individuals will be from the middle income countries (MICs).
o Many of the new poor (recently pushed to extreme poverty) are likely to live in congested
urban settings and work in the sectors most affected by lockdowns and mobility restrictions.
o The new poor are more urban, better educated, and are less likely to work in agriculture than
those living in extreme poverty before COVID-19.
After studying the above findings of the report, we can understand the changes caused by COVID-19
in the global poverty rates-
Background- The global poverty rate declined by 26% from 36% in 1990 to 10% in 2017. This number
was projected to drop to 7.9% in year 2020, but COVID-19 took place and changed the scenario. Lets
see the impact of COVID-19 on the projections of Global Poverty Rates-
New projections-
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Covid-19 impact in different time-frame Global Poverty Rate Projections after COVID-19
Baseline scenario Downside scenario
**Without COVID-19 in year 2020 7.9% (earlier projection)
In Year 2020 9.1% 9.4%

In Year 2021 8.9% 9.4%
In Year 2030 6.7% 7%
o Due to the COVID-19 outbreak in the whole world and analysing its impacts stated above, it
has become unrealistic to attain the goal of reducing extreme poverty to below 3% at the
global level by year 2030.
o Worst hit regions of the world-
Region Additional Poor (in 2020) as per COVID-19
Baseline scenario Downside scenario
South Asia 49 million 57 million
Sub-Saharan Africa 26 million 40 million
o Impact on global GDP growth- The report expects contraction in global per capita gross
domestic product (GDP) growth of between 5% (in a baseline scenario) and 8% (in a
downside scenario) during 2020.
• Impact of other factors i.e. armed conflict and climate change:
o More than 40% of the global poor live in economies affected by conflict and violence.
o Globally, some 1.47 billion people, out of which around 132 million are poor, are
estimated to be living in areas with high flood risk, one of the potential impacts of climate
change.
Key findings - India
• World Bank’s estimates on India are based on “strong assumptions” because it has estimated
India’s poverty numbers for 2017 as the Indian government did not released the 2017-18 All India
Household Consumer Expenditure Survey data from the 75th Round conducted by the National
Statistical Office, and hence it comprises of “considerable uncertainties”.
• The report stated that India accounted for 139 million of the 689 million people living in poverty in
2017.
Shared Prosperity and the related findings-
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Shared prosperity and the shared prosperity premium are important indicators of inclusion and well-
being in any country and correlate with reductions in poverty and inequality. Now let us discuss them
one by one:
o Shared Prosperity is defined as the annualized growth rate of the mean household per
capita income or consumption of the poorest (bottom) 40% of a population.
o Shared Prosperity Premium is the difference between the annualized growth rate for the
bottom 40% of a population and the whole population.
Projections related to shared prosperity-
• Shared prosperity will drop sharply in nearly all economies in 2020–21, as the pandemic’s
economic burden is felt across the entire income distribution.
• It presents new data on shared prosperity and the shared prosperity premium for 91 economies
from 2012-2017-
o Growth was inclusive for most of these 91 economies given 74 had positive shared
prosperity, and 53 had positive shared prosperity premiums, indicating a reduction in
inequality in the majority of economies.
o In global terms, the average shared prosperity index was 2.3%.
Recommendations given by World Bank in the report-
To reverse this serious setback to development progress and poverty reduction-
• It recommends for a complementary two-track approach- Responding effectively to the urgent
crisis in the short run while continuing to focus on foundational development problems, including
conflict and climate change.
1.5 Measures to Reduce Poverty

Apart from the following indirect measures for countering poverty, there are direct measures/anti-
poverty schemes running both at urban and rural areas.
▪ Accelerate the growth rate of GDP – develop agriculture, promote village and small industries to
create employment opportunities.
▪ Growth should be employment oriented.
▪ Inclusive growth process – emphasis on rural areas, marginal sections of society.
▪ Reducing inequalities in income and asset ownership.
▪ Reduce the growth rate of population.
▪ Impart vocational training along with education.
▪ Design proper monetary policy to control price rise.
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▪ Poverty alleviation programmes should be accompanied by asset creation, self-employment
initiatives.
▪ Programmes to ensure accessibility to minimum standards of education, health, roads, drinking
water.
The Anti-poverty programmes were designed to make a direct attack on poverty.
These programmes included self-employment and income generating schemes for the poor like,
Integrated Rural Development Programme (IRDP), Training of Rural Youth for Self Employment (TRYSEM),
Rural Landless Employment Guarantee Programme (RLEGP), National Rural Employment Programme
(NREP).
These were redesigned and restructured and merged to form a single programme named Swarnajayanti
Gram Yojana (SGSY) from April 1, 1999. The objective of the SGSY is to help the poor families to cross the
poverty line by providing them income yielding assets – such as sewing machines to poor women, pair of
bullocks to plough, through a mix of government subsidies and bank loans.
The Pradhan Mantri Gramodaya Yojana (PMGY) launched in 2000-01 for alleviation of poverty in rural
areas. The Indira Awas Yojana (IAY) a major scheme launched to build houses (free of cost) for the poor.
Antodaya Anna Yojana (AAY) launched in 2000 to provide highly subsidized foodgrains to the poor people.
The National Food for Work Programme was launched in November 14, 2004 in 150 backward states of
India with the objective of providing more opportunities of wage employment and ensuring minimum
nutritional levels for the rural poor.
The National Rural Employment Guarantee Act (NREGA) was passed in 2005 to enhance the livelihood
security of people in rural areas by generating wage employment through works that develop
infrastructure base of the area. The NREGA provides that every State government shall make a scheme
for providing not less than 100 days of guaranteed work in a financial year to every household in the
rural areas.
The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was launched in 2005-06 for poverty
removal in the urban areas. The mission comprises of (i) basic services to the urban poor (ii) Integrated
Housing and Slum Development (IHSDP). This programme will help the urban poor in construction of
houses and upgradation of slums.
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1.5.1 Poverty Alleviation Programs in India
• Integrated Rural Development Programme (IRDP): It was introduced in 1978-79 and universalized
from 2nd October, 1980, aimed at providing assistance to the rural poor in the form of subsidy and
bank credit for productive employment opportunities through successive plan periods.
• Jawahar Rozgar Yojana/Jawahar Gram Samridhi Yojana: The JRY was meant to generate meaningful
employment opportunities for the unemployed and underemployed in rural areas through the
creation of economic infrastructure and community and social assets.
• Rural Housing – Indira Awaas Yojana: The Indira Awaas Yojana (LAY) programme aims at providing
free housing to Below Poverty Line (BPL) families in rural areas and main targets would be the
households of SC/STs.
• Food for Work Programme: It aims at enhancing food security through wage employment. Food grains
are supplied to states free of cost, however, the supply of food grains from the Food Corporation of
India (FCI) godowns has been slow.
• National Old Age Pension Scheme (NOAPS): This pension is given by the central government. The job
of implementation of this scheme in states and union territories is given to panchayats and
municipalities. The states contribution may vary depending on the state. The amount of old age
pension is ₹200 per month for applicants aged 60–79. For applicants aged above 80 years, the amount
has been revised to ₹500 a month according to the 2011–2012 Budget. It is a successful venture.
• Annapurna Scheme: This scheme was started by the government in 1999–2000 to provide food to
senior citizens who cannot take care of themselves and are not under the National Old Age Pension
Scheme (NOAPS), and who have no one to take care of them in their village. This scheme would
provide 10 kg of free food grains a month for the eligible senior citizens. They mostly target groups of
‘poorest of the poor’ and ‘indigent senior citizens’.
• Sampoorna Gramin Rozgar Yojana (SGRY): The main objective of the scheme continues to be the
generation of wage employment, creation of durable economic infrastructure in rural areas and
provision of food and nutrition security for the poor.
• Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005: The Act provides
100 days assured employment every year to every rural household. One-third of the proposed jobs
would be reserved for women. The central government will also establish National Employment
Guarantee Funds. Similarly, state governments will establish State Employment Guarantee Funds for
implementation of the scheme. Under the programme, if an applicant is not provided employment
within 15 days s/he will be entitled to a daily unemployment allowance.
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• National Rural Livelihood Mission: Aajeevika (2011): It evolves out the need to diversify the needs of
the rural poor and provide them jobs with regular income on a monthly basis. Self Help groups are
formed at the village level to help the needy.
• National Urban Livelihood Mission: The NULM focuses on organizing urban poor in Self Help Groups,
creating opportunities for skill development leading to market-based employment and helping them
to set up self-employment ventures by ensuring easy access to credit.
• Pradhan Mantri Kaushal Vikas Yojana: It will focus on fresh entrant to the labour market, especially
labour market and class X and XII dropouts.
• Pradhan Mantri Jan Dhan Yojana: It aimed at direct benefit transfer of subsidy, pension, insurance
etc. and attained the target of opening 1.5 crore bank accounts. The scheme particularly targets the
unbanked poor.
1.5.2 Role of Public Distribution System in Poverty Alleviation

The Public Distribution System (PDS) which evolved as a system of management for food and distribution
of food grains plays a major role in poverty alleviation. This programme is operated jointly by the Central
Government and the State Government of India. The responsibilities include:
• Allocations of commodities such as rice, wheat, kerosene, and sugar to the States and Union
Territories.
• Issue of Ration Cards for the people below the poverty line.
• Identification of families living below the poverty line.
• Management of food scarcity and distribution of food grains.
PDS was later relaunched as Targeted Public Distribution System (TPDS) in June 1997 and is controlled
by the Ministry of Consumer Affairs, Government of India. TPDS plays a major role in the implementation
and identification of the poor for proper arrangement and delivery of food grains. Therefore, the
Targeted Public Distribution System (TPDS) under the Government of India plays the same role as the PDS
but adds a special focus on the people below the poverty line.
1.5.3 Role of Employment Generation in Poverty Alleviation in India?

The unemployment issue in India is considered as one of the major causes of poverty in India. The
poverty rate of a country can be reduced with high economic growth and by reducing the unemployment
problem. Various poverty alleviation programmes are set up under the Government of India that aims to
eradicate poverty by providing employment on-demand and through specific guaranteed wage
employment every year to the households living below the poverty line.
The generation of employment is important in poverty alleviation because of the following reasons:
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• It will increase the income level of the poor household families and will help in reducing the rate of
poverty in the country. Hence, there is a significant relationship between unemployment and poverty.
• It will decrease the rural-urban migration through the generation of employment programmes in
rural areas.
• An increase in the income level through the generation of employment programmes will help the poor
in accessing basic facilities including education, health facilities, and sanitation.
1.5.4 How can a Basic Income Programme Help in Poverty Alleviation?

• The new approach towards poverty alleviation should involve targeted income transfers.
• Under a targeted basic income programme, which is a top-up scheme, the government transfers the
poverty gap (difference between per capita consumption of the household and the poverty line faced
by the household) into the bank account of the poor.
• The cost of such a programme is likely to be between Rs 2.5 and 3 trillion and it will ensure nobody
has a consumption below the poverty line.
• India’s current expense on poverty alleviation programmes is approximately Rs 3.4 trillion and the
cost to make one person non-poor through the PDS in 2011-12 was Rs 24,000.
• The same for MGNREGA was Rs 40,500.
• Therefore, assuming perfect targeting, a basic income programme is likely to cost substantially less
that the current policies and it will ensure that the poverty rate is reduced to zero based on the higher
poverty line.
Benefits of direct benefit transfer
• The direct benefit transfer mechanism of the government has been able to resolve targeting
problems for a bulk of the 430 government schemes and subsidies.
• The current PM-Kisan programme that provides income support to approximately 14 crore farmers
is an example of how, through DBT, the government can provide direct income support as its focal
policy towards poverty alleviation.
• Such a policy is likely to help the government in rationalising and consolidating its poverty reduction
programmes, thereby freeing up resources for other sectors in the economy.
1.5.5 Reasons for Ineffectiveness of Poverty Alleviation Programmes

Efforts at poverty alleviation have borne fruit in that for the first time since independence, the percentage
of absolute poor in some states is now well below the national average. Despite various strategies to
alleviate poverty, hunger, malnourishment, illiteracy and lack of basic amenities continue to be a common
feature in many parts of India. Though the policy towards poverty alleviation has evolved in a progressive
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manner, over the last seven decades, it has not undergone any radical transformation. You can find a
change in nomenclature, integration or mutations of programmes.
However, none resulted in any radical change in the ownership of assets, process of production and
improvement of basic amenities to the needy. Scholars, while assessing these programmes, state three
major areas of concern which prevent their successful implementation. Due to the unequal distribution
of land and other assets, the benefits from direct poverty alleviation programmes have been appropriated
by the non-poor.
• Compared to the magnitude of poverty, the amount of resources allocated for these programmes is
not sufficient. Moreover, these programmes depend mainly on government and bank officials for
their implementation.
• Since such officials are ill-motivated, inadequately trained, corruption-prone and vulnerable to
pressure from a variety of local elites, the resources are inefficiently used and wasted. There is also
non-participation of local-level institutions in programme implementation.
• Government schemes have also failed to address the vast majority of vulnerable people who are
living on or just above the poverty line. It also reveals that high growth alone is not sufficient to
reduce poverty. Without the active participation of the poor, successful implementation of any
programme is not possible.
Other major reasons for the ineffectiveness of the poverty alleviation programmes are mentioned
below:
• The poverty alleviation programme may not properly identify and target the exact number of poor
families in rural areas. As a result, some of the families who are not registered under these
programmes are benefited by the facilities rather than the eligible ones
• Overlapping of similar government schemes is a major cause of ineffectiveness as it leads to confusion
among poor people and authorities and the benefits of the scheme do not reach the poor. Numerous
already functional poverty alleviation programmes work in silos. There is no systematic attempt to
identify people who are below poverty line and to determine and address their needs enabling them
to move above the poverty line.
• Overpopulation of the country increases the burden of providing the benefits of the schemes to a
large number of people and thus reduces the effectiveness of the programmes.
• Corruption at various levels of implementation of schemes is another major reason.
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• Modern digital divides also add up to the issues. World Development Report 2017 highlights India’s
lagging in encashing Digital dividend resulting Digital Divide. Thus poor are not able to reap the
benefits of Digital Technologies.
1.5.6 Challenges in Poverty Eradication Going Ahead

• India is still far from achieving SDG 1.
• Incidence of extreme poverty continues to be much higher in rural areas than in urban areas.
• Despite rapid growth and development, an unacceptably high proportion of our population continues
to suffer from severe and multidimensional deprivation.
• While a large number of poverty alleviation programmes have been initiated, they function in silos.
There is no systematic attempt to identify people who are in poverty, determine their needs, address
them and enable them to move above the poverty line.
• The resources allocated to anti-poverty programmes are inadequate and there is a tacit understanding
that targets will be curtailed according to fund availability. For instance, Mahatma Gandhi National
Rural Employment Guarantee Act (MGNREGA) does not provide the guaranteed 100 days of work in
many states.
• There is no method to ensure that programmes reach everybody they are meant for.
• Lack of proper implementation and right targeting
• There has been a lot of overlapping of schemes.
• Every year a huge number is added to the population pool of the country. This renders the scheme
ineffective.
1.5.7 Way Forward

• Accelerating rural poverty reduction:
o It’s not just about agricultural growth, which has long been considered the key driver of
poverty reduction. In fact, rural India is not predominantly agricultural and shares many of the
economic conditions of smaller urban areas.
o Capitalizing on growing connectivity between rural and urban areas, and between the
agriculture, industry and services sectors, has been effective in the past two decades and holds
promise for the future.
o Investment in Agriculture by the government is necessary to decrease rural poverty. Subsidies
address only short-term issues. Also, there is a need to develop technologies, with the help of
which farmers can practice all weather agriculture.
o By improving social infrastructure and job opportunities in rural areas, migration to urban
areas can be decreased, and thus urban poverty can also be decreased.
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Start-up Village Entrepreneurship Programme (SVEP)
Launch Year: 2016
Nodal Ministry: Ministry of Rural Development
Aim: To develop an eco-system for supporting small businesses in rural areas.
Vision: The long term vision of the SVEP is to provide support for start-up to 1 crore village enterprises
and provide direct employment to 2 crore people.
Objectives: The overall objective of SVEP is to implement the Government's efforts to stimulate
economic growth and reduce poverty and unemployment in the villages by helping start and support
rural enterprises.
Beneficiaries:
• Any Rural poor who is willing to be entrepreneurial and self-reliant is eligible to be part of this
programme.
Highly vulnerable beneficiaries under MGNREGA, marginalized sections, women, SC and ST
communities and rural artisans will be given specific preference in selection, as part of this programme.
• Creating more and better jobs

o The road out of poverty in India has been built on the performance of the labor market, but
also benefited from rising transfers and remittances, and favorable demographics among other
factors.
o Future efforts will need to address job creation in more productive sectors, which has until
now been lukewarm and has yielded few salaried jobs that offer stability and security.
• Focusing on Women and Scheduled Tribes
o The most worrying trends are the low participation of women in the labor market and the slow
progress among scheduled tribes.
o India’s women have been withdrawing from the labor force since 2005 and less than one-third
of working age women are now in the labor force. As a result, India today ranks last among
BRICS countries, and close to the bottom in South Asia in female labor force participation.
o Scheduled Tribes started with the highest poverty rates of all of India’s social groups, and have
progressed more slowly than the rest.
o Women and Scheduled Tribes are at risk of being locked out of India’s growth and prosperity.
• Creating more good locations
o Where people live largely shapes their prospects in life. India’s states continue to see large
and growing differences in poverty levels and basic opportunities.
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o More and more of India’s poor are concentrated in the poorest states, and even within
relatively prosperous states, certain pockets of deprivation persist where people are unable
to share in the state’s successes.
• Improving human development outcomes for the poor
o This is central to improving their quality of life and income earning opportunities.
o The recent past shows that some problems, such as undernutrition and open defecation, are
endemic and not only confined to the poor but others too, and have not improved with
economic growth.
o Better health, sanitation and education will not only help raise the productivity of millions,
they will also empower the people to meet their aspirations, and provide the country with new
drivers of economic growth.
Continuous Economic Growth is a prerequisite for the removal of poverty. Ultimately, political will is
necessary to eradicate poverty from the country through the implementation of various schemes.
Investment in infrastructure, overall, is needed to reduce the cost of utilities. China did so and witnessed
the huge fall in the number of people in the poor category. More initiatives like Ayushman Bharat, that
empower people, are required.
2 Employment Generation
Unemployment occurs when a person who is actively searching for employment is unable to find work.
Unemployment is often used as a measure of the health of the economy. The most frequent measure of
unemployment is the unemployment rate, which is the number of unemployed people divided by the
number of people in the labor force.
National Sample Survey Organization (NSSO) defines employment and unemployment on the following
activity statuses of an individual:
• Working (engaged in an economic activity) i.e. 'Employed'.

• Seeking or available for work i.e. 'Unemployed'.
• Neither seeking nor available for work.
The first two constitutes labour force and unemployment rate is the percent of the labour force that is
without work.
Unemployment rate = (Unemployed Workers / Total labour force) × 100
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2.1 Types of Unemployment
Structural Unemployment: Unemployment caused by a mismatch between workers' skills and skills
needed for available jobs. Structural unemployment essentially occurs because resources, especially
labor, are configured (trained) for a given technology but the economy demands goods and services
using another technology. Employers seek workers how have one type of skill and workers who seek
employment have a different type of skill. This mismatch in skills, which is largely the result of
technological progress, creates unemployment of the structural variety.
Frictional Unemployment: Unemployment attributable to the time required to match production

activities with qualified resources. Frictional unemployment essentially occurs because resources,
especially labor, are in the process of moving from one production activity to another. Employers are
seeking workers and workers are seeking employment, the two sides just haven't matched up. Hence
unemployment of the frictional variety increases. This mismatch is largely the result of limited
information, which is often compounded by geographic separation between producer and resource.
Natural Unemployment: The combination of frictional and structural unemployment that persists in an
efficient, expanding economy when labor and resource markets are in equilibrium. Natural
unemployment exists when the economy is at full employment, which for practical purposes is defined
as the condition in which the quantity of resources demanded is equal to the quantity of resources
supplied. Most important for policy purposes, natural employment exists with stable prices, that is, no
inflation.
Cyclical Unemployment: Unemployment attributable to a general decline in macroeconomic activity,

especially expenditures on gross domestic product, that occurs during a business-cycle contraction.
When the economy dips into a contraction, or recession, aggregate demand declines, so less output is
produced and fewer workers and other resources are employed. Hence unemployment of the cyclical
variety increases.
Seasonal Unemployment: Unemployment is caused by relatively regular and predictable declines in

particular industries or occupations over the course of a year, often corresponding with the seasons.
Unlike cyclical unemployment, that could occur at any time, seasonal unemployment is an essential part
of many jobs. In India, agricultural workers witness seasonal unemployment corresponding with the
sowing-harvest cycle.
Voluntary Unemployment: Unemployment that results when resources which are willing and able to
engage in production choose not to produce output. These are resources (especially labour) that decide
to leave one job, often in search of another.
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Involuntary Unemployment: Unemployment that results when resources which are willing and able to
engage in production are not because no one is buying the output they produce. From a macroeconomic
perspective, involuntary unemployment results when aggregate demand is not sufficient to purchase all
of the output produced by the resources. This is the primary problem of business-cycle contractions.
Vulnerable Employment: This means, people working informally, without proper job contracts and thus
sans any legal protection. These persons are deemed ‘unemployed’ since records of their work are never
maintained. It is one of the main types of unemployment in India.
Related Terms
Unemployment trap is a situation when unemployment benefits discourage the unemployed to go to
work. People find the opportunity cost of going to work too high when one can simply enjoy the benefits
by doing nothing. Description: While the purpose of social security and welfare systems is to provide
relief to the unemployed, they end up providing them with an incentive not to return to work. An
unemployment trap arises when opportunity cost of going to work is higher than the income received,
discouraging people from returning to work and being productive.
Harmonised unemployment rates define the unemployed as people of working age who are without
work, are available for work, and have taken specific steps to find work. The uniform application of this
definition results in estimates of unemployment rates that are more internationally comparable than
estimates based on national definitions of unemployment. This indicator is measured in numbers of
unemployed people as a percentage of the labour force and it is seasonally adjusted. The labour force
is defined as the total number of unemployed people plus those in civilian employment.
2.2 Causes of Unemployment

The theories on unemployment and the categorizations gives us basic understanding of the kind of
unemployment that exists in different countries. The major concern of any country is structural unemployment
as this long-term unemployment and various policy actions are required to bring down this kind of
unemployment. We will now discuss various reasons for unemployment.
1. Slow growth of GDP: In developed economies, there is a strong link relation between GDP growth and
employment creation. A sluggish growth of GDP can dampen job creation.
2. Rapid changes in technology: The use of modern technology is the one of the biggest reasons for
increase in unemployment. It’s a cause that is common worldwide. As technology is progressing there is
lesser need for manual labour and more demand for skilled labour. The developed nations are faster in
adjusting to the new technology have lesser people unemployed as they gave better educational and
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training facilities. However, the countries where major labour force is unskilled the issue is even bigger.
The new technology is displacing hundreds of people, as they don’t have the necessary skills or the
institutions to develop these skills.
3. Lack of capital: Most countries, which face high unemployment, are those who have shortage of
capital. When new projects start, they create millions of jobs for both skilled and unskilled labour.
However, countries facing shortage of capital cannot invest in such projects to create such jobs.
Moreover, the lack of capital inhibits a country’s capacity to build institutions to train labour and meet
the growing market demand. Thus, such countries have large pool of unskilled labour force.
4. Over Population: Another reason for high unemployment is high rate of population growth. Large
population puts a pressure on the economy’s resources and further aggravates the unemployment issue.
5. Low Level of Education: As the technology is advancing there is a demand for skilled labour force.
However, if the educational level in a country is low then it cannot have a skilled set of labour force.
Thus, unemployment increases due to low level of education.
6. Poverty: Another major reason for high unemployment in a country is mass level poverty. Poverty
means people cannot afford good educational facilities. This means that level of education is low and
thus these people cannot get a job as they do not meet the desired level of skill set. Thus, either it
increases structural unemployment or disguised unemployment.
7. Poor performance of Agriculture sector: This issue is relevant for all countries that have agriculture as
a primary sector. This sector creates disguised employment at large scale. Eg. In India agriculture provides
employment to approximately 55% of the population where its contribution to GDP is just about 15%.
This means the marginal productivity of an additional labour is negligible. Just like India most of the
developing and underdeveloped countries are agrarian in nature and stuck in between the transition from
agriculture to service sector oriented economy
8. Jobless Economic Growth: India’s GDP grown at about 7-8% in last decade, but growth does not
translated into creating more employment opportunities for the labour force of the country.
9. Joint Family System: It encourages disguised unemployment. In big families having large business
establishments, many such persons are found who do not do any work and depend on the joint income
of the family. Joint family system is more prevalent in rural areas; hence a high degree of disguised
unemployment there.
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10. Rush for government jobs: Many educated youth run behind government jobs due to job profile and
security. This lead to many remain unemployed due to students preparing for government jobs.
The Future of Jobs Report 2020

About the report- This is third edition of the report.
• Released by- The World Economic Forum (WEF).
• It sheds light on the pandemic-related disruptions in 2020, contextualized within a longer
history of economic cycles and the expected outlook for technology adoption, jobs, and skills in
the next five years i.e. by year 2025.
Key findings- Global
• 85 million jobs may be displaced by a shift in the division of labour between humans and machines
o While 97 million new roles may emerge that are more adapted to the new division of labour
between humans, machines, and algorithms.
• Number of jobs destroyed will be surpassed by the number of ‘jobs of tomorrow’ created.
• Increasingly redundant roles will decline from 15.4% of the workforce to 9%.
o For example- data entry, accounting, and administrative support
• Emerging professions will grow from 7.8% to 13.5% of the total employee base of company
respondents. Top emerging professions over the next five years- data and artificial intelligence,
content creation, cloud computing.
• Automation, along with the COVID-19 recession, is creating a 'double-disruption' scenario for
workers.
o It has deepened existing inequalities across labour markets and reversed gains in
employment made since the global financial crisis in 2007-2008.
• Technological adoption by companies will transform tasks, jobs, and skills by 2025.
• Machines will be primarily focused on-
o information and data processing, administrative tasks and routine manual jobs for white
and blue-collar positions.
• Workforce related plans-
o around 43% of businesses surveyed are set to reduce their workforce due to technology
integration
o around 41% plan to expand their use of contractors for task-specialised work
o around 34% plan to expand their workforce due to technology integration
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• 84% of business executives are accelerating plans to digitize work processes and deploy new
technologies, while 50% of employers are expecting to accelerate the automation of some roles in
their companies.
o While firms with operations in India are accelerating their automation and digitisation
above the global average.
✓ 58% are accelerating automation of tasks, above the global average of 50%
✓ 87% are accelerating digitalisation of work processes, above the global average of
84%
• By 2025, time spent on current tasks at work by humans and machines will be equal.
• Significant share of companies expect to make changes to locations, their value chains, and the size
of their workforce due to factors beyond technology by year 2025.
• The tasks where humans are set to retain their comparative advantage include-
o managing, advising, decision-making, reasoning, communicating and interacting
• Workers set to remain in their roles, the share of core skills that will change in the next five years is
40%, and 50% of all employees will need reskilling.
• Top skills needed over the next five years- analytical thinking, creativity, flexibility
Most competitive businesses- That choose to reskill and upskill current employees.
2.3 Consequences of Unemployment

1. Increase in Poverty: unemployment as defined earlier is the state where people willing to work are
unable to find work. Thus, if people can’t find work it means they don’t have money which increases the
extent of poverty.
2. Increase in Inequality: Unemployment has led to increase in the income gap among people. Since the
rich are able to afford better education hence better skills they get easily absorbed in the labour market.
However, the poor or the less privileged that have lesser access are unable to find jobs matching their
skills. Thus, this further increased the inequality gap.
3. Low level of living Standard: No income means people cannot afford basic amenities such as a clean
drinking water and sanitation also. Thus, countries that have high unemployment rate have a low
standard of living.
4. Less Access to healthcare: Poverty due to lack of unemployment opportunity further inhibits the
unemployed from accessing healthcare services. Poor health itself constraints physical strength of
workers lowering further employment opportunities.
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5. Social Cost: As we all know an empty mind is a devil’s workshop the increase in unemployment is
directly related to the growth of crime rate. People unable to find jobs find themselves stealing,
murdering and committing all sorts of crimes to make money. Social cost is also in terms of loss in self-
esteem of a person looking for a job. He/she may have the skills but due to lack of demand for his skills
he/she is unable to find the job for his/her potential. In case the person in question doesn’t want to settle
for anything lower he/she might remain unemployed which also lowers the self-esteem.
6. Loss of national output: Unemployment also involves a loss of potential national output. This is because
when an economy is operating below full employment level it implies GDP is below potential. It is a
waste of scarce resources. Moreover, lack of opportunities may cause some people to permanently
move out of labour market because they have lost the motivation of looking for a job. This can have a
negative effect on long run aggregate supply and thereby damage the economy’s growth potential.
Some economists call this the “hysteresis effect”. When unemployment is high there will be an increase
in spare capacity - in other words the output gap will become negative and this can have deflationary
forces on prices, profits and output.
7. Fiscal costs: Government loss comes in form of loss of potential tax revenue and higher spending on
welfare benefits and unemployment benefits. This results in increase in pressure on the budget deficit.
This increases the risk of government raising taxes to meet the deficit or cutting down various
expenditures.
2.4 Trends in Unemployment

Employment has featured as an important priority in the development agenda in India. Approaches to
it have, however, varied in different periods over the more than fifty years of Independence.
In the initial years of development planning, unemployment was not expected to emerge as a major
problem; yet some thought was given to ensure the generation of employment of a fair magnitude in the
development process to productively employ the growing labour force. A reasonably high rate of
economic growth combined with an emphasis on labour-intensive sectors like small-scale industry was
envisaged to achieve this goal. The rate and structure of growth rather than technology were seen as the
instruments of employment generation. Thus while granting that in ‘an economy with relative abundance
of labour, a bias in favour of comparatively labour intensive techniques is both natural and desirable’,
it was clearly recognized that ‘considerations of size and technology should not be set aside to
emphasise employment’ (Planning Commission 1956: 112–13).
Unemployment was estimated to be relatively low, as also the growth rate of the labour force, and a
targeted economic growth rate of 5 per cent with some emphasis on labour-intensive consumer goods
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sectors was expected to generate enough employment over the years to prevent any increase in
unemployment.
These assumptions and expectations continued from one Five Year Plan to the next during the 1950s and
1960s. Meanwhile the magnitude and rate of unemployment increased significantly. The economy grew
at a rate of around 3.5 per cent as against the planned rate of 5 per cent per annum. Yet employment
grew at a relatively high rate of 2 per cent per annum. However, since labour force growth was much
higher at 2.5 per cent as against the less than 2 per cent per annum envisaged, the result was an increase
in unemployment. The magnitude of unemployment had almost doubled during 1956–72, from around
5 to 10 million, and the unemployment rate from 2.6 to 3.8 per cent. These figures are, however, only
approximations as detailed data on employment and unemployment started becoming available from the
National Sample Survey Organization (NSSO) through its quinquennial surveys starting with 1972–3.
They, nevertheless, do indicate overall trends during the first two decades of planned development in
India.
With the availability of comprehensive data on levels of consumption, employment, and unemployment
for 1972–3 which revealed a high incidence of poverty (54 per cent rural and 41 per cent urban) and high
unemployment rates (8.4 per cent on current daily status [CDS] and 4.3 per cent on currently weekly
status [CWS] basis), the official approach to the employment problem underwent a change in the mid-
1970s. The Fifth Five Year Plan (1974–9) sought to address the employment issue by reorienting the
pattern of growth in favour of employment-intensive sectors. At the same time, a strong view was
emerging to suggest that growth alone cannot solve the problems of poverty and unemployment, and
therefore a number of special employment and poverty-alleviation programmes were launched. They
were mostly of two kinds: providing financial and other assistance for productive self-employment, and
offering supplementary wage employment to the underemployed. Over the years, these programmes
have been continued in one form or another with modifications or integrations, or new ones have been
started while some old ones have been discontinued. The latest in the series is the National Rural
Employment Guarantee Programme which aims at legally guaranteeing employment of up to 100 days
annually to every rural household, under an Act of Parliament.
While these programmes seem to have been able to reduce the degree of underemployment to a certain
extent, the open unemployment rates have not declined over the years. This can be discerned from
unemployment rates on CDS basis, which includes both open and under employment and on CWS and
usual principal status (UPS) bases.
Table: Unemployment Rates (% of labour force)
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Year UPS UPSS CWS CDS
1972-73 3.80 1.61 4.32 8.35
1977-78 4.23 2.47 4.48 8.18
1983 2.77 1.90 4.51 8.28
1987-88 3.77 2.62 4.80 6.09
1993-94 2.56 1.90 3.63 6.03
2000 2.81 2.23 4.41 7.32
Notes:
UPS: Usual Principal Status. A person is considered unemployed according to this concept if available for
but without work for major part of the year.
UPSS: Usual Principal and Subsidiary Status includes, besides UPS, those available but unable to find
work on a subsidiary basis, during a year.
CWS: Current Weekly Status. A person is unemployed if available for but unable to find work for even
one hour during the reference week.
CDS: Current Daily Status measures unemployment in terms of person-days of unemployment of all
persons in the labour force during the reference week.
Looking at different rates of unemployment, it is clear that underemployment is a problem of much larger
magnitude than open unemployment. For example, in 1999–2000, the UPS unemployment rate was
estimated to be only 2.81 per cent as compared to a CDS rate of 7.32 per cent. The problem, however, is
not confined to these time-criterion-based rates; a large part of the employed people work at very low
levels of income, as indicated by a much higher incidence of poverty (26 per cent in 1999–2000) than of
unemployment. Thus the employment challenge in India consists not only of creating jobs for the
unemployed, and providing additional work to the underemployed, but, to a much larger extent, of
enhancing productivity and income levels of a large mass of the ‘working poor’.
2.4.1 Recent Trends
As per the new PLFS (Periodic Labour Force Survey) estimates, the share of regular wage/salaried
employees has increased by 5 percentage points from 18 per cent in 2011–12 to 23 per cent in 2017-18
as per usual status (US). In absolute terms, there was a significant jump of around 2.62 crore new jobs in
this category with 1.21 crore in rural areas and 1.39 crore in urban areas. Remarkably, the proportion of
women workers in regular wage/salaried employees’ category have increased by 8 percentage points
(from 13 per cent in 2011-12 to 21 per cent in 2017-18) with addition of 0.71 crore new jobs for female
workers in this category.
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Among the self-employed category (consists of employers, own account workers and unpaid family
labour), while the proportion of own account workers and employers increased, the proportion of unpaid
family labour (helper) has declined, especially for females between 2011–12 and 2017–18. The proportion
of total self-employed workers however remained unchanged at 52 per cent during this period.
The distribution of workers in casual labour category decreased by 5 percent-age points from 30 per cent
in 2011–12 to 25 per cent in 2017–18 with the decline being in rural areas.
2.4.2 Employment Structure

With differential growth of employment among different sectors of the economy, there have obviously
been changes in the structure of employment. Among the three major sectors by broad division of
economic activity, namely agriculture, industry, and services, there has been a decline, as expected, in
the share of agriculture and increase in the share of industry and services in total employment. The
structural changes have, however, been slow. In a period of twenty-seven years, from 1973 to 2000, the
share of agriculture has declined by 17 percentage points only from 74 to 57 per cent. The share of
industry has increased from 11 to 18 per cent and that of services has risen faster from 15 per cent in
1972–3 to 26 per cent in 1999–2000, growing particularly fast during 1987–8 to 1999–2000.
Table: Employment Shares of Major Sectors
1972- 1977- 1987- 1993-

1983 2000
73 78 88 94
Agriculture 74.0 72.3 68.4 65.5 60.38 56.70
Industry 11.4 12.3 13.7 15.5 15.82 17.56
Services 14.6 15.4 17.5 18.4 23.80 25.74
The slow change in employment structure assumes the nature of a problem particularly when seen along
with the change in the structure of the national gross domestic product.
During the period when the share of employment in agriculture declined from 74 per cent to 57 per cent,
its contribution in GDP declined from over 40 per cent to 22 per cent; and while the share of the services
sector in employment increased from 15 to 26 per cent, its contribution to GDP increased much faster
from around 30 per cent to 52 per cent. As a result, the asymmetry between the income and employment
shares among different sectors has sharply increased, particularly between the agricultural and non-
agricultural sectors.
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A sharper decline in the contribution of agriculture in GDP than in its share in employment implies a
decline in its relative productivity and increase in income differentials between agriculture and the non-
agricultural sectors.
An opposite trend is seen in services, where the increase in GDP share has been faster than in
employment, while industry has retained its position in respect of relative productivity.
That there would be a decline in the share of agriculture in GDP was expected, but a continuance of the
heavy dependence of workers and population on agriculture as a source of income and livelihood is a
matter of concern from the viewpoints of poverty and inequality.
2.4.3 Increasing Casualisation

Another aspect of employment trends and structure that is of interest in a developmental context is the
distribution of workers by employment category as self-employed, regular wage, and salaried workers,
and casual wage earners.
It has been generally expected that with shift of workers from agriculture to non-agricultural activities
and from footloose to enterprise-based employment, there will be an increase in the proportion of
workers employed on a regular wage and salary basis. There has been a decline, albeit slow, in the share
of the self-employed, from 61 per cent in 1972–3 to 53 per cent in 1999–2000. The share of regular wage-
salaried workers has, however, stagnated at around 14 per cent, while that of casual workers has
increased from 23 to 33 per cent.
This situation has generally been interpreted to mean an increasing ‘casualization’ of workforce. Insofar
as the term describes an increase in the share of casual workers, it is factually true. But if it is meant to
imply a process of ‘regular’ workers turning ‘casual’, or a decline in employment and earnings, the trend
needs to be carefully analysed. The shift is seen from the self-employed to casual workers category and
most of it has taken place in rural areas, from agriculture to non-agricultural activities such as
construction, trade, and services. There has, no doubt, been displacement of workers from large
industries in urban areas, reducing regular workers to the status of casual workers. But the magnitude of
such change has not been very significant in relation to the total numbers involved.
The phenomenon of casualization, therefore, needs to be seen in the overall perspective of employment
trends in the economy. Agriculture is increasingly unable to productively absorb the growing rural labour
force. At the same time, there has been some growth of non-agricultural activities in rural areas in
construction, trade, and services which have generally offered better earnings than agriculture. Most of
these employment opportunities have been of temporary and casual nature. But they have provided
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either full-time or supplementary employment, adding to the incomes of rural households. On the other
hand, regular jobs have hardly increased in urban areas; in fact, there is evidence to show that such jobs
have declined due to redundancy caused by technological and competitive compulsions in the larger
industrial enterprises. So part of the regular workforce has been rendered casual and most new jobs
have been in the casual category.
The increasing proportion of casual workers in total employment is thus mostly a result of structural
shifts taking place in rural areas. To some extent, it is distress-driven, small and marginal landholders
and the landless not finding gainful work in agriculture and taking up whatever work they find in the non-
agricultural activities, irrespective of earnings. But there is evidence to suggest that many are opting for
non-farm work due to more regular employment and better earnings. This has been possible partly on
account of various state-sponsored employment programmes, and partly because of an increase in the
demand for labour in expanding construction, trade, and service activities in rural areas. In other words,
‘casualization’ of the nature observed does not necessarily imply a deterioration in the quality of
employment. A small part of the real casualization that has taken place due to displacement of regular
workers from large enterprise in urban areas, no doubt, indicates such a deterioration.
Slow growth of employment in the organized sector has been a major factor in stagnancy in the
proportion of regular wage and salary earners. This sector consisting of public services and enterprises
and large private firms is the one that offers regular jobs. Employment growth in this sector has been just
about 0.5 per cent during 1994–2000. In the post-2000 period, organized-sector employment has, in fact,
shown an absolute decline— declining by about one million from around 28 million to 27 million during
2000–3 (GOI 2005a). Of around 21million new employment opportunities generated during 1994–2000,
only about 4 per cent have been in the organized sector and the remaining 96 per cent in the unorganized
sector (Planning Commission 2002). As a result, the share of the unorganized sector in total employment
has increased from around 92 per cent to 93 per cent. The high and increasing preponderance of the
unorganized sector has been a matter of anxiety from the viewpoint of quality of employment as workers
in this sector suffer from poor conditions of work, low earnings, and lack of employment and social
security.
Formalization of Jobs
In recent times, the Government has been making efforts to formalize the economy. In this direction,
several initiatives have been taken, namely— introduction of GST, digitization of payments, direct benefit
transfer of subsidies/scholarships/wages & salaries to bank accounts, opening of Jan Dhan accounts,
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extending social security coverage to more workers. As a result of these initiatives, an increase in formal
employment is evident as is shown through multiple data sources:
• As per the Annual Survey of Industries (ASI), there has been an increase in employment in the
‘organized’ manufacturing sector. Between 2014–15 and 2017–18, the total number of workers
engaged in the sector increased by 14.69 lakh while total persons engaged (inclusive of employees
and employers) increased by 17.33 lakh.
• To indicate the extent of formalization of workforce by extending coverage of organized social
security, the Government since September, 2017 publishes the monthly payroll data indicating the
number of new subscribers who have availed benefits under three major social security schemes,
namely— Employees’ Provident Fund (EPFO); Employees’ State Insurance Scheme (ESIC); and the
National Pension Scheme (NPS). Of these, EPFO has more than 6 crore active members (with at least
one-month contribution during the year). EPFO manages social security funds of workers in the
organized/semi- organized sector in India. The pay roll data of EPFO for 2019–20 as on 20th December
2019 shows a net increase of 55.6 lakhs as EPFO subscriber compared to 61.12 lakhs in 2018–19. These
estimates are net of the members newly enrolled, exited and re-joined during the year as per records
of the EPFO.
• The estimates of share of workers in informal sector in non-agriculture and AGEGC (Agricultural sector
excluding only growing of crops, market gardening, horticulture and growing of crops combined with
farming of animals) sectors obtained from the NSO-EUS and PLFS 2017–18, also show a decline from
77.5 per cent in 2004–05 to 68.4 per cent in 2017–18, with more pronounced decline among females.
Payroll Reporting in India: An Employment Perspective – October, 2020

Released by- The National Statistical Office (NSO), Ministry of Statistics and Programme
Implementation has released the press note on Employment Outlook of the country covering the
period September, 2017 to October, 2020.
• Since April, 2018 the ministry has been bringing out the employment related statistics in the formal
sector covering the period September 2017 onwards, using information on the number of
subscribers who have subscribed under three major schemes, namely-
o Employees’ Provident Fund (EPF) Scheme
o Employees’ State Insurance (ESI) Scheme
o National Pension Scheme (NPS)
• The report gives different perspectives on the levels of employment in the formal sector and does
not measure employment at a holistic level.
Key Findings:
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• New Subscribers during September 2017 to October 2020 under the 3-schemes -
o Employees Provident Fund (EPF) scheme - 3,77,53,459.
o Employees’ State Insurance (ESI) scheme - 4,40,59,863.
o National Pension Scheme (NPS) - 22,53,686.
To get a holistic picture of the extent of ‘formal-informal’ employment in the economy, if the NCEUS
(2007a) definition is applied upon the workforce estimates of PLFS to identify the total number of formal
and informal workers employed in the organized and unorganized sector, the following facts came to
light—
• The proportion of workers in organized sector increased from 17.3 per cent in 2011–12 to 19.2 per
cent in 2017–18. In actual terms, the number of workers in the organized sector increased to about
9.05 crore workers in 2017–18, an increase of 0.87 crore over 2011–12. This was mainly due to the
increase in formal employment, the share of which in organized sector increased from 45 per cent in
2011–12 to 49 per cent in 2017–18.
• Total formal employment increased from 8 per cent to 9.98 per cent during this period. In absolute
terms, the number of workers with formal employment increased from 3.8 crore in 2011–12 to 4.7
crore in 2017–18.
Global Wage Report 2020-21

Released by- International Labour Organisation (ILO) has released the 7th edition of its flagship report
with title “Global Wage Report 2020-2021- Wages and minimum wages in the time of COVID-19”.
India specific findings-
• In India, the report suggests that formal workers’ wages have been cut by 3.6%, while informal
workers have experienced a much sharper fall in wages of 22.6%.
• The states of Bihar, Chhattisgarh, Goa, Gujarat, Karnataka, Madhya Pradesh, Tamil Nadu,
Uttarakhand and Uttar Pradesh adjusted their minimum wage rates since the first quarter, by
which point the COVID-19 pandemic had become a major concern.
• It is worth noting that in many countries, delayed increases or freezes in minimum wages because
of the COVID-19 crisis have taken place at the local or sectoral level. For example, in the Punjab
region of India, the local Government reversed its order announcing a minimum wage increase.
• In India, each state used to set different minimum wage rates for employees in each occupation
and in “scheduled” employment. This gave rise to over 1,915 occupational minimum wage rates
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across state spheres and 48 minimum wages in the central sphere, it said, citing the Economic
Survey 2019–20 which covered two thirds of all wage earners.
• The implementation of the Code on Wages (one of the four Codes that have subsumed 29 central
labour laws) will reduce the number of rates to a minimum of 4 and a maximum of 12 per state
and is intended to make the wage-setting process in India more efficient and dynamic
o The Code on Wages aims at extending coverage of the minimum wage through a universal
national floor wage and reducing the number of minimum wages rates across states. The
other three codes are Code on Social Security, the Industrial Relations Code and the
Occupational Safety, Health and Working Conditions.
2.4.4 Impact of policy of liberalisation on rural and urban employment

Liberalisation was expected to formalise India’s largely informal agrarian economy, with labour moving
from agriculture--the largest employer--to the organised industrial sector. The formal and informal
sectors are distinguished based on size of workplace and accompanying government regulations on
working hours, hiring and firing norms, rights of association, minimum wages, and other aspects.
Liberalisation aimed to effect a decline in poverty and a rise in living standards through better wages and
working conditions as labour moved toward formal jobs.
Of around 61 million jobs created in India over 22 years post-liberalisation of the economy in 1991, 92%
were informal jobs, according to an IndiaSpend analysis of National Sample Survey Office (NSSO) data for
2011-12, the latest available, released in 2014.
In 2011-12, 51% of all jobs in the organised sector were informal, data show.
The number of informal sector workers increased from 341.28 million in 1999-2000 to 386.02 million in
2011-12, a 13% increase over 13 years. The number of formal workers increased by 81.5% from 20.46
million to 37.15 million in the same time period.
However, while formal workers comprised 6% of the total workforce in 1999-2000, this increased to just
9% in 2011-12, showing that the jobs that were created in the formal sector were mainly informal,
employing workers with low earnings and with limited or no social protection.
A January 2019 report by Delhi-based economic policy think-tank ICRIER found that while total
employment in the organised manufacturing sector had increased 78% to 13.7 million in 15 years to 2015-
16, the share of contract workers in total employment had increased from 15.5% to 27.9%, and that of
directly hired workers had fallen 10.8 percentage points to 50.4% in the same period.
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Over half of informal sector workers in 2012 were self-employed, largely with a poor asset-base, and
around 30% were casual labourers seeking daily wages, according to a University of Calcutta 2018 study of
informal sector workers across India. About 18% of those employed were regular workers, and among
them less than 8% had regular, full-time employment with social protection.
Employment opportunities in the organised sector increased by 8.4% between 2004-05 and 2009-10,
according to NSSO data, but the share of informal employment in this sector increased from 32% in 1999-
2000 to 54% in 2004-05 and 67% in 2011-12.
While the services sector contributed most of the 61 million jobs created between 1991 and 2012, most
of these remained informal in nature. Of 127.3 million people employed in the services sector in 2011-12,
80% were informal workers.
While agriculture continues to provide the major share of employment, its share decreased from 58% in
2004-05 to 49% in 2011-12. Most of the employment here is informal in nature, with the informal
workforce increasing.
The manufacturing sector’s share of total employment increased from 12% in 2004-05 to 13% in 2011-12.
The services sector also saw an increase from 107.3 million in 2004-05 to 127.3 million (19% increase) in
2011-12, but 80% of the jobs are informal.
Note:
The International Labour Organization and the World Employment Federation have described
predominance of informal employment as an indicator of lower quality of life, as workers in such jobs
are vulnerable, without the social protections afforded to workers in formal jobs.
The 17th International Conference of Labour Statisticians held by the International Labour
Organization in 2003 defines informal employment as those jobs where “…employment relation is, in
law or in practice, not subject to national labour legislation, income taxation, social protection or
entitlement to certain employment benefits (advance notice of dismissal, severance pay, paid annual
or sick leave, etc.)”.
2.5 Issue of Jobless Growth
2.5.1 Meaning
Jobless growth is defined as a phenomenon where the economy of a country grows but its
unemployment rate remains stubbornly high. India has been witnessing this paradoxical pattern of
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economic growth where the economy has been on a sustained growth path. However, there has not
been a commensurate increase in the level of job creation.
In most economic growth theories, jobs and employment go hand in hand. If there is economic growth it
is expected to lead to an increase in employment and if there is an employment increase there would
be economic growth, as suggested in the famous Okun’s Law of economics.
2.5.2 Trend
During the last decade (2001-11), the growth rate of the labour force (2.23 per cent) was significantly
higher than the growth rate of employment (1.4 per cent), which itself was several-fold less than the
growth rate of the economy. According to Census 2011, the average growth rate of the economy was 7.7
per cent per annum, when it was only 1.8 per cent for employment.
66th round of the National Sample Survey Office (NSSO) data on employment in 2011 revealed that
between 2004-05 and 2009-10, only 1 million jobs were added per year; in a period when the economy
averaged a record 8.43% growth annually.
An Indian Labour Bureau survey of 2015 showed that 2,000 companies in eight sampled industries
generated all of one lakh jobs, a fall from the four lakh generated in 2014, even though growth in 2014
was lower than in 2015.
A HDFC Bank report on India’s tapering jobs growth says that “employment elasticity” in the economy is
now close to zero – for every one point rise in GDP, jobs grow only 0.15. Fifteen years ago, it was 0.39.
Multiple data sources clearly show that job opportunities in India are, at present, limited, with the average
annual addition to regular jobs during 2012-16 falling to 1.5 million from 2.5 million in 2004-12.
The National Sample Survey Office’s (NSSO) estimates for the year 2017-18 show that India’s joblessness
was 6.1 per cent of the labour force, which is amongst the highest since 1972-73. In fact, this
unemployment crisis seems to be cutting across location and gender. At 27.2 per cent, urban women are
worst-affected, followed by their male counterparts at 18.7 per cent. More men in villages (17.4 per cent)
are jobless than women (13.6 per cent). Although it cannot be disputed that the presence of jobless
growth in India has been apparent for the past decade and more, the numbers today have become
strikingly high.
2.5.3 Reasons
Services sector: India’s economic growth since the 1990s has largely been on account of an expansion of
the services sector, in which exports are seen as having played an important role. The rise in the share of
services in GDP was particularly sharp after 1996-97 amounting to 6.8 percentage points over the
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subsequent 10 years as compared with just 1.9 percentage points during the previous 10 years. In the
event, services as a group came to dominate the Indian economy, accounting for more than half its GDP.
The share of the services sector in total employment was relatively low, and despite the expansion of
services, the growth of employment in this sector has been limited. Between 1999-00 and 2004-05,
employment in the tertiary sector increased by only 22 per cent, whereas GDP at constant prices
contributed by the services sector expanded by 44 per cent. Tertiary sector employment in 2009-10
amounted to only 25 per cent of the work force, despite the fact that around 55 per cent of GDP came
from this sector.
Agriculture sector: According to the National Sample Survey Office’s (NSSO’s) periodic labor force survey
(PLFS) report showed a collapse in agricultural jobs as a key reason behind rising unemployment,
particularly in the rural parts of the country. The proportion of people, in the working age group,
employed in agriculture fell by 8 percentage points for rural men and 9.3 percentage points for rural
women, an analysis of the NSSO’s PLFS report for 2017-18.
Productivity across all sectors: A large share of India’s workforce is employed in low productivity activities
with low levels of remuneration. This is especially true of the informal sector where wages can be one
twentieth of those in firms producing the same goods or services but in the formal sector.
Manufacturing sector: Work Opportunities that are lost in traditional agriculture have to be replaced by
work opportunities in some other sector. In the normal course it is the secondary sectors (manufacturing,
electricity and construction) that grow much faster than agriculture during transition of an economy.
However, in the post reform period the growth of manufacturing industries has been constrained by
competition from imports. Thus, in the medium term, the ability of manufacturing sector to replace the
work opportunities lost in traditional agriculture is rather limited over the years.
Role of MSMEs: The MSME sector in India is one of the country’s biggest providers of jobs, right from
workers to middle management levels. However, larger companies have sufficient funding to install
machinery and automation, which small scale industries do not. The small scale businesses are mostly
one-person shows, with the entrepreneur running their company with some assistants and workers. Even
marketing is usually done by the entrepreneur. This owner runs a low-cost operation, as profits derive
from low-cost of operations. So even though MSMEs had the potential but unable to tap it due to multiple
constraints.
Uttar Pradesh among Top 5 in MSME employment generators amid Covid-19
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• In a recent report of Reserve Bank of India (RBI)- ranking of states for providing employment under
the Micro, Small and Medium Enterprises (MSMEs) during Corona pandemic-
o Uttar Pradesh (UP) stood 5th in India in providing employment under MSMEs.
• In the rankings-
o States ahead of UP are Madhya Pradesh, Gujarat, Tamil Nadu, and Maharashtra.
• 'Sathi' Portal launched to help entrepreneurs in setting up new units.
• One District One Product (ODOP) scheme under MSME in UP has emerged as a game changer in
the times of the pandemic.
o Under this, products of 75 districts are being promoted, and sold nationally and
internationally on online platforms like Amazon and Flipkart.
Employment elasticity: Employment elasticity is a measure of the percentage change in employment

associated with a 1 percentage point change in economic growth. The employment elasticity indicates the
ability of an economy to generate employment opportunities for its population as per cent of its growth
(development) process. The aggregate employment elasticity estimates for India vary from 0.18 (arc
elasticity) to 0.20 (point elasticity) during the post reform period (1993-94 to 2011-12). In India there is
very low employment elasticity means economic growth does not leads to needed employment
generation.
India’s focus on higher education:
▪ Indian Government since the second five-year plan focussed more on higher education rather than
basic education (Unlike Southeast Asia). In order to create mass scale manufacturing jobs, the
workforce should have some basic skills however in India because the focus was on higher education,
we failed to create enough basic skilled workforce required for labour-intensive manufacturing.
▪ When India adopted economic reforms in 1991, We had a pool of highly educated workforce but we
had a shortage of labour force with basic skills,
▪ This meant that India’s growth story of the last 2 decades was led by Few sectors in Service sector like
IT, Banking, telecommunication etc because these sectors required highly educated workers which we
had plenty.
▪ However, these sectors are not labour intensive. While the share of Service sector increased
significantly in India’s GDP, however the share of services in the employment structure remained more
or less stagnant.
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Import-oriented economy:
▪ India did not move from the import-substituting phases of its economic development to an export-
oriented development strategy and hence failed to witness a strong growth in the labour-intensive
segment of the manufacturing sector.
▪ If India would have followed Labour intensive goods export-led model like Southeast Asian countries,
it would have created many jobs in the MSME sector. Opening up of the economy lead to the
availability of cheap capital goods from abroad.
2.5.4 Solution
Enhance skills and apprentices: The Labour Market Information System (LMIS) is important for identifying
skill shortages, training needs and employment created. The LMIS should be made functional urgently.
Ensure the wider use of apprenticeship programmes by all enterprises. This may require an enhancement
of the stipend amount paid by the government for sharing the costs of apprenticeships with employers.
Labour law reforms: Complete the codification of labour laws at the earliest. Simplify and modify labour
laws applicable to the formal sector to introduce an optimum combination of flexibility and security. Make
the compliance of working conditions regulations more effective and transparent. The National Policy for
Domestic Workers needs to be brought in at the earliest to recognize their rights and promote better
working conditions.
Enhance female labour force participation: according to NITI Aayog strategy for new India @ 75 Ensure
the implementation of and employers’ adherence to the recently passed Maternity Benefit (Amendment)
Act, 2017, and the Sexual Harassment of Women at Work Place (Prevention, Prohibition and Redressal)
Act. It is also important to ensure implementation of these legislations in the informal sector. Further
details may be found in the chapter on Gender. Ensure that skills training programmes and
apprenticeships include women.
Rural transformation and agriculture sector: there are immense possibilities for diversification in
agricultural sector towards more value added activities such as food processing. This is an area, which has
by and large remained unexploited, because reforms in agriculture sector having been very slow,
resources have not yet started flowing into food processing industries. Involvement of State Governments
in implementing reforms in agriculture and food processing sectors is of crucial importance. Economic
returns from States initiatives in transforming the rural economy from traditional agriculture to more
value added activities in horticulture, etc. has been demonstrated well in some of the States, such as
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Maharashtra and Himachal Pradesh. Such diversification has immense potential for bridging some of the
gaps in prodcivity levels of workers in agriculture vis a vis other sectors. Besides diversification of
agriculture there is a strong need to restructure the rural economy by way of promotion of nonfarm
activities in rural areas. Whatever nonfarm activities are being carried out in the rural areas now are more
out of desperation to eke out a living rather than an informed choice of a vocation, backed by
infrastructural and institutional facilities. A massive improvement in infrastructure is required to promote
growth of rural industries on a sustainable basis. This will go a long way in generating good quality
employment and meeting many of the consumption requirements of rural people. Many steps have been
taken in regard to village connectivity, e.g., Prime Minister Gram Sadak Yojana (PMGSY) and
telecommunication. But power sector reforms are urgently needed to set up modern processing facilities.
In this rural areas will be self sustained in creating employment opportunities.
Public investments in health, education, police and judiciary:
▪ This can create many government jobs.
▪ Public investment in the health sector has remained even in the last three years at 1.15% of GDP,
despite the creation of the national health policy at the beginning of 2017.
▪ The policy indicates that expenditure on health will rise to 2.5% of GDP by 2025.
▪ Given the state of health and nutrition of the population, it is critical that public expenditure on health
is increased immediately.
▪ In the absence of greater public expenditure, the private sector in health keeps expanding, which
raises the household costs on health without necessarily improving health outcomes, because the
private sector does not spend on preventive and public health measures.
▪ Preventive and public health have been in all countries the responsibility of government. More
government expenditure in health means more jobs in government hospitals and better health
outcomes.
▪ Next important area should be Revitalising schools. Government schools should maintain education
quality on par with private schools. Many new government jobs can be provided if more young people
could be trained specially to become teachers for science and mathematics at the secondary and
higher secondary levels in government schools.
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▪ The same applies to the police and the judiciary. All the vacancies in Police and judiciary should be
filled immediately. More police and a larger judiciary can both reduce crime as well as speed up the
process of justice for the ordinary citizen
Cluster development:
▪ There should be cluster development to support job creation in micro, small and medium enterprises
(MSMEs).
▪ Most of the unorganised sector employment is in MSMEs, which tend to be concentrated in specific
geographic locations.
▪ There are 1,350 modern industry clusters in India and an additional 4,000 traditional product
manufacturing clusters, like handloom, handicraft and other traditional single product group clusters.
▪ There is a cluster development programme of the Ministry of MSMEs, which need to be funded
adequately and better designed to create more opportunities.
Align urban development with manufacturing clusters to create jobs:
▪ The Ministry of Urban Development has a programme called AMRUT (Atal Mission for Rejuvenation
and Urban Transformation) aimed at improving infrastructure for small towns. Infrastructure
investment by the government creates many jobs.
▪ The same intervention should be made in towns which have clusters of unorganised sector economic
activities.
▪ Hence an engagement between the Urban Development and MSME Ministries is necessary to attract
more investment to industrial clusters and increase non-agricultural jobs.
2.6 Measures to Reduce Unemployment

Now the big question that arises is how can an ailing job market be cured and what can be done to create
more jobs and promote decent work. There are few policy actions that can be taken by the government to
reduce unemployment.
1. Increase aggregate demand: Increase in aggregate demand means increase in output to meet the
demand. This means organizations need to hire more workers to increase production. This can be done
through an expansionary monetary policy or an expansionary fiscal policy.
2. Government Expenditure of Infrastructure and Public Works Projects: Most developing countries do
not have adequate infrastructure. So one of the best ways to create jobs is public expenditure on
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infrastructure such as roads, buildings, hospitals schools etc. This not only creates demand for skilled
workers like engineers and managers who design such structures but also unskilled workers like masons
and plumbers.
3. Developing institutes and better training programs: Another step towards combatting unemployment
is to develop institutes, which gives training to workers. There is mass level unemployment due to a
mismatch between the demand for skill and supply. To bridge the gap a government needs to build
institutions which give professional training so that can get a better opportunities in the market. Building
such institutes itself gives employment opportunities to people who have the ability to give the training
like teachers for example.
4. Support to small and medium scale enterprises: Large organizations have easier access to capital and
economies of scale in operation. However, banks reluctance to fund the small-scale operations that have
little or no cash and uncertain prospects and a relatively small number of customers. The central
government should shoulder some of the risk of small business loans and provide new incentives for
banks to lend to smaller businesses. Government should support the struggling business enterprises as
they have the potential to create many job opportunities.
Prime Minister’s Employment Generation Programme (PMEGP)

Launch Year: It is a credit-linked subsidy programme launched in 2008.
Nodal Ministry: Ministry of MSME
Implemented by:
• The scheme is implemented by Khadi and Village Industries Commission (KVIC) functioning as the nodal
agency at the national level.
• At the state level, the scheme is implemented through State KVIC Directorates, State Khadi and Village
Industries Boards (KVIBs), District Industries Centres (DICs) and banks.
Objectives:
• Generation of sustainable and continuous self-employment opportunities in urban and rural areas of
the country.
• Providing sustainable and continuous employment to a large segment of rural and urban unemployed
youth, traditional and prospective artisans through the establishment of micro-enterprises.
• Facilitating the financial institution’s participation for higher credit flow to the micro sector.
Eligibility:
• Individuals with age of 18 years or more
• Passing standard VIII is required for a project above Rs 5 lakh in the service sector and above Rs 10 lakh
in the manufacturing sector
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• Institutions registered under Societies Registration Act- 1860
• Production based co-operative societies
• Self-help groups and charitable trust
Subsidy provided by the government
• General Category States: The eligible subsidy is 25% of the cost of the project in rural areas and 15% in
urban areas.
• Special Category States: The eligible subsidy is 35% of the cost of the project in rural areas and 25% in
urban areas.
Rate of Interest and Repayment Schedule: The normal interest rate is applicable to the enterprise from
time to time. The Repayment Schedule ranges from 3 -7 years.
Security: No collateral security nor any third party guarantee is insisted here. Any assets created from the
bank loan should be hypothecated to Bank.
Training: 2 weeks training period is mandatory for all the beneficiaries.
Other Key Features:

• Assistance under the PMEGP is only available to new units that are to be established
• There is no income ceiling for setting up projects
• Existing units or units that are already availing any government subsidy (State or Central) are ineligible
• Any industry including coir based projects (excluding those mentioned in the negative list) can take
advantage of this scheme
• The per capita investment under the scheme should not exceed Rs 1 lakh in plain areas and Rs 1.5 lakh
in hilly areas.
• Maximum project cost Rs 10 lakh in the service sector and Rs 25 lakh in the manufacturing sector is this
limit.
5. Providing Unemployment Benefits: Unemployment benefits should be provided to those who register
them as unemployed with an undertaking that they will actively look for work. This is a form of social
security for the unemployed. It prevents them from falling into acute poverty. Increase in unemployment
also means fall in the purchasing power of these people. By government ensuring social security to these
people government can prevent fall in aggregate demand and ensure the unemployed do not resort to
crime and other means of income.
Atal Bimit Vyakti Kalyan Yojana

Launch Year: 2018
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Nodal Ministry: Ministry of Labour and Employment
Launched by/Implementing Agency: Employee's State Insurance Corporation (ESIC)
Aim: It aims to financially support those who lost their jobs or rendered jobless for whatsoever reasons
due to changing employment pattern.
Target Beneficiary: Its beneficiaries will be insured persons covered under Employees’ State Insurance
Act, 1948 for period of 2 years continuously.
Eligibility Conditions for Insured Persons:
• Employees covered under Section 2(9) of the ESI Act 1948.
• The Insured Person (IP) should have been rendered unemployed during the period the relief is
claimed.
• The Insured Person should have been in insurable employment for a minimum period of 2 years.
• The Insured Person should have contributed not less than 78 days during each of the preceding
four contribution periods.
• The contribution in respect of him should have been paid or payable by the employer.
• The contingency of the unemployment should not have been as a result of any punishment for
misconduct or superannuation or voluntary retirement.
• Aadhar and Bank Account of the Insured Person should be linked with insured person database.
• In case the IP is working for more than one employers and is covered under the ESI scheme he will
be considered unemployed only in case he is rendered unemployed with all employers.
Key Features
• The scheme provides relief to the extent of 25% of the average per day earning during the previous
four contribution periods to be paid up to maximum 90 days of unemployment once in lifetime of
the Insured Person.
• The claim for relief under the Atal Beemit Kalyaan Yojana will be payable after the 3 months of
his/her clear unemployment.
• Workers will be able to draw 47% of their total contributions towards ESIC after remaining
unemployed for at least 3 months from date of leaving their previous jobs. They can choose to
receive the cash at one go or in instalments. It will be applicable to all factories and establishments
employing at least 10 workers.
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2.6.1 Steps Taken by Government
• Integrated Rural Development Programme (IRDP) was launched in 1980 to create full employment
opportunities in rural areas.
• Training of Rural Youth for Self-Employment (TRYSEM): This scheme was started in 1979 with
objective to help unemployed rural youth between the age of 18 and 35 years to acquire skills for self-
employment. Priority was given to SC/ST Youth and Women.
• RSETI/RUDSETI: With the aim of mitigating the unemployment problem among the youth, a new
initiative was tried jointly by Sri Dharmasthala Manjunatheshwara Educational Trust, Syndicate Bank
and Canara Bank in 1982 which was the setting up of the “RURAL DEVELOPMENT AND SELF
EMPLOYMENT TRAINING INSTITUTE” with its acronym RUDSETI near Dharmasthala in Karnataka. Rural
Self Employment Training Institutes/ RSETIs are now managed by Banks with active co-operation from
the Government of India and State Government.
• By merging the two erstwhile wage employment programme – National Rural Employment
programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP) the Jawahar
Rozgar Yojana (JRY) was started with effect from April, 1, 1989 on 80:20 cost sharing basis between
the centre and the States.
• Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA):
o It is an employment scheme that was launched in 2005 to provide social security by
guaranteeing a minimum of 100 days paid work per year to all the families whose adult
members opt for unskilled labour-intensive work.
o This act provides Right to Work to people.
NREGA National Tracker December 2020

About the report- Released by People's Action for Employment Guarantee (PAEG).
Key Highlights-
• 1.3 crore job cards have been issued under Mahatma Gandhi National Rural Employment
Guarantee Act (MGNREGA) in 2020.
• Total active job cards – 9.02 crore
• Total job cards demanding work in 2020 is 7.5 crore i.e. 83% of all active job cards.
• Only 1.9 million households have finished 100 days of work (mandated under MGNREGA) in 2020
as compared to 4.06 million in 2019.
• All-India average percentage of active users from total registered job cards– 30.75%
o Tamil Nadu had the highest percentage of active users from its total registered job cards
(56.81%)
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o Maharashtra had the lowest percentage of active users from its total registered job cards
(13.61)
• National Demand for Work – 83.9%
o Highest percentage of Demand for work – Uttar Pradesh (98.16%)
o Lowest percentage of Demand for Work – Maharashtra (46.65%)
• Cards Issued nationwide- 17.01%
o State that issued highest percentage of cards – Jharkhand
o State that issued lowest percentage of cards – Telangana
• 1.7 million households have completed 100 days of employment.
o 6.4 million households have finished 80 days of employment.
• Year 2020 recorded a 43% increase in persondays generated till November, compared to last year
i.e. 2019.
• Out of the total allocation of Rs 1,05,000 crore, 71% of the allocated funds i.e. Rs 74,563 crore has
been utilized.
• Pradhan Mantri Kaushal Vikas Yojana (PMKVY), launched in 2015 has an objective of enabling a large
number of Indian youth to take up industry-relevant skill training that will help them in securing a
better livelihood.
Pradhan Mantri Kaushal Vikas Yojana (PMKVY)

Launch Year: 2015
Nodal Ministry: Ministry of Skill Development and Entrepreneurship
Implementing Agency: National Skills Development Corporation (NSDC)
Objective: To enable a large number of Indian youths to take up industry-relevant skill training that will
help them in securing a better livelihood.
Target: The scheme will cover 1 crore youth during the period 2016-20 in Phase 2 (PMKVY 2.0).
Eligible Beneficiaries: The scheme is applicable to any candidate of Indian nationality who:
• An unemployed youth, college / school dropout
• Has a verifiable identity proof - Aadhaar / Voter id and a bank account
Components of the Scheme:
• Short Term Training: at PMKVY Training Centres (TCs) will benefit candidates of Indian nationality
who are either school/college dropouts or unemployed. Training in Soft Skills, Entrepreneurship,
Financial and Digital Literacy will also be imparted.
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• Recognition of Prior Learning: Individuals with prior learning experience or skills shall be assessed
and certified. It aims to align the competencies of the unregulated workforce of the country to the
NSQF. MSDE has launched a dedicated portal for this.
• Special Projects: It is a platform that will facilitate trainings in special areas and/or premises of
Government bodies, Corporates or Industry bodies, and trainings in special job roles not defined
under the available Qualification Packs (QPs)/National Occupational Standards (NOSs).
• Kaushal and Rozgar Mela: Social and community mobilization is extremely critical for the success
of PMKVY. It would ensure transparency and accountability and help leverage the cumulative
knowledge of the community for better functioning.
• Placement: Placement opportunities would be provided to candidates who are trained and certified
under the scheme. Support for entrepreneurship development would also be provided.
• Monitoring: To ensure that high standards of quality are maintained by PMKVY Training Centres,
NSDC and empaneled Inspection Agencies shall use various methodologies, such as self-audit
reporting, call validations, surprise visits, and monitoring through the Skills Development
Management System (SDMS).
Implementation:
• The scheme would be implemented through National Skill Development Corporation (NSDC).
• In addition, Central / State Government affiliated training providers would also be used for training
under the scheme.
• All training providers will have to register on the SMART (Skill Management & Accreditation of
Training Centres) portal before being eligible for participating under this scheme.
• Training would include soft skills, personal grooming, behavioral change for cleanliness, good work
ethics.
• Sector Skill Councils and the State Governments would closely monitor skill training that will happen
under PMKVY.
• Start Up India Scheme, launched in 2016 aims at developing an ecosystem that promotes and nurtures
entrepreneurship across the country.
• Stand Up India Scheme, launched in 2016 aims to facilitate bank loans between Rs 10 lakh and Rs. 1
crore to at least one SC or ST borrower and at least one women borrower per bank branch for setting
up a greenfield enterprise.
• National Career Service portal was launched serving as a common platform connecting job-seekers,
employers, skill providers, placement organisations and counsellors.
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2.7 Way Forward
• There are number of labour intensive manufacturing sectors in India such as food processing, leather
and footwear, wood manufacturers and furniture, textiles and apparel and garments. Special
packages, individually designed for each industry are needed to create jobs.
• Public investment in sectors like health, education, police and judiciary can create many government
jobs.
• Decentralisation of Industrial activities is necessary so that people of every region get employment.
• Development of the rural areas will help mitigate the migration of the rural people to the urban areas
thus decreasing the pressure on the urban area jobs.
• Entrepreneurs generate employments to many in a country; therefore government needs to
encourage entrepreneurship among the youth.
• Concrete measures aimed at removing the social barriers for women’s entry and their continuous
participation in the job market is needed.
• Government needs to keep a strict watch on the education system and should try to implement new
ways to generate skilled labour force.
• Effective implementation of present programs like Make in India, Skill India, Start up and Stand-Up
India.
• There is a need for National Employment Policy (NEP) that would encompass a set of
multidimensional interventions covering a whole range of social and economic issues affecting many
policy spheres and not just the areas of labour and employment. The policy would be a critical tool to
contribute significantly to achieve the goals of the 2030 Agenda for Sustainable Development.
• The underlying principles for the National Employment Policy may include
o enhancing human capital through skill development;
o creating sufficient number of decent quality jobs for all citizens in the formal and informal
sectors to absorb those who are available and willing to work;
o strengthening social cohesion and equity in the labour market;
o coherence and convergence in various initiatives taken by the government;
o supporting the private sector to become the major investor in productive enterprises;
o supporting self-employed persons by strengthening their capabilities to improve their
earnings;
o ensuring employees’ basic rights and developing an education training and skill development
system aligned with the changing requirements of the labour market.
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ECONOMIC SURVEY & UNION BUDGET:
PRIORITIES & RECOMMENDATIONS
FODDER MATERIAL

Contents
1 Union Budget 2021-22 ...........................................................................................................................4
1.1 Health and Wellbeing......................................................................................................................5
1.1.1 Vaccines ...................................................................................................................................5
1.1.2 Health Systems ........................................................................................................................5
1.1.3 Nutrition...................................................................................................................................6
1.1.4 Universal Coverage of Water Supply .......................................................................................6
1.1.5 Swachch Bharat, Swasth Bharat ..............................................................................................6
1.1.6 Clean Air ...................................................................................................................................6
1.1.7 Scrapping Policy .......................................................................................................................6
1.2 Physical and Financial Capital and Infrastructure ...........................................................................6
1.2.1 Production Linked Incentive scheme (PLI) ..............................................................................6
1.2.2 Textiles .....................................................................................................................................7
1.2.3 Infrastructure ...........................................................................................................................7
1.2.4 Roads and Highways Infrastructure.........................................................................................8
1.2.5 Railway Infrastructure .............................................................................................................9
1.2.6 Urban Infrastructure ................................................................................................................9
1.2.7 Power Infrastructure .............................................................................................................10
1.2.8 Ports, Shipping, Waterways ...................................................................................................10
1.2.9 Petroleum & Natural Gas.......................................................................................................10
1.2.10 Financial Capital .....................................................................................................................11
1.2.11 Increasing FDI in Insurance Sector.........................................................................................11
1.2.12 Stressed Asset Resolution ......................................................................................................11
1.2.13 Recapitalization of PSBs .........................................................................................................11
1.2.14 Deposit Insurance ..................................................................................................................11
1.2.15 Company Matters ..................................................................................................................11
1.2.16 Disinvestment and Strategic Sale ..........................................................................................12
1.2.17 Government Financial Reforms .............................................................................................12
1.3 Inclusive Development for Aspirational India ...............................................................................12
1.3.1 Agriculture .............................................................................................................................12
1.3.2 Fisheries .................................................................................................................................13
1.3.3 Migrant Workers and Labourers ...........................................................................................13
1.3.4 Financial Inclusion..................................................................................................................14
1.4 Reinvigorating Human Capital ......................................................................................................14

1.4.1 School Education ...................................................................................................................14
1.4.2 Higher Education ...................................................................................................................14
1.4.3 Scheduled Castes and Scheduled Tribes Welfare..................................................................14
1.4.4 Skilling ....................................................................................................................................14
1.5 Innovation and R&D ......................................................................................................................15
1.6 Minimum Government, Maximum Governance ..........................................................................15
1.7 Tax Proposal ..................................................................................................................................16
1.7.1 Direct taxes ............................................................................................................................16
1.7.2 Indirect Taxes .........................................................................................................................17
1.8 Achievements and Milestones during the COVID-19 pandemic ..................................................19
1.9 Vision for AatmaNirbhar Bharat ...................................................................................................20
1.10 Union Budget 2021-22: Analysis ...................................................................................................22
1.10.1 Union Budget 2021-22: Analysing Key Numbers...................................................................22
1.10.2 Union Budget 2021-22: Looking through a gender lens........................................................30
1.10.3 Union Budget 2021-22: How to Increase Income Tax Collection? ........................................32
1.10.4 Union Budget 2021-22: Is Infra Spending a Panacea for all Ills? ...........................................33
1.10.5 Union Budget 2021-22: Insufficient allocation to Health and Education Sector ..................35
1.10.6 Union Budget 2021-22: Is it sufficiently pro-poor? ...............................................................36
1.10.7 Union Budget 2021-22: Are we shifting away from welfarism? ...........................................37
1.10.8 Union Budget 2021-22: The Good and the Bad.....................................................................38
1.10.9 Union Budget 2021-22: Does it Address Structural Issues? ..................................................39
1.10.10 Union Budget 2021-22: An unfinished agenda on jobs and skills .....................................40
1.10.11 Union Budget 2021-22: A need to correct subsidy bias in Agriculture?............................41
1.10.12 Union Budget 2021-22: Does budget fulfill needs of an ailing economy? ........................42
1.10.13 Union Budget 2020-21: Analysing the Financial Proposals ...............................................44
2 Economic Survey 2020-21 ....................................................................................................................45
2.1 Saving Lives and Livelihoods amidst a Once-in-a-Century Crisis ..................................................45
2.2 Does Growth lead to Debt Sustainability? Yes, But Not Vice- Versa! ...........................................46
2.3 Does India’s Sovereign Credit Rating Reflect Its Fundamentals? No! ..........................................49
2.4 Inequality and Growth: Conflict or Convergence? .......................................................................50
2.5 Healthcare takes Centre Stage, Finally! ........................................................................................51
2.6 Process Reforms ............................................................................................................................53
2.7 Regulatory Forbearance an emergency medicine, not staple diet! .............................................54
2.8 Innovation: Trending Up but Needs Thrust, Especially from the Private Sector ..........................55

2.9 JAY Ho: Ayushman Bharat’s Jan Arogya Yojana (JAY) and Health Outcomes ...............................56
2.10 The Bare Necessities .....................................................................................................................57
2.11 State of the Economy 2020-21: A Macro View .............................................................................60
2.12 Fiscal Developments .....................................................................................................................62
2.13 External Sector ..............................................................................................................................64
2.14 Monetary Management and Financial Intermediation ................................................................67
2.15 Prices and Inflation .......................................................................................................................68
2.16 Sustainable Development and Climate Change............................................................................71
2.17 Agriculture & Food Management .................................................................................................74
2.18 Industry and Infrastructure ...........................................................................................................77
2.19 Services .........................................................................................................................................79
2.20 Social Infrastructure, Employment and Human Development.....................................................80
Note: How to Use this Document?

1. Sections 1.1-1.9 provides objective information regarding Union Budget 2021-22. This can be helpful
for answering objective MCQ type questions. Remembering this information can also be helpful in
answering descriptive type questions.
2. Section 1.10 on ‘Union Budget 2021-22: Analysis’ contains analytical information in question-
answer format. This section can be helpful for answering descriptive type questions.
3. Sections 2.1-2.20 contains a summary of individual chapters of Economic Survey 2020-21. Knowing
this section well can help in answering both objective and descriptive type questions.
4. This is a long chapter because it tries to cover the entire gamut of Indian economy. If done well, this
chapter will also help in answering questions pertaining to other chapters in the syllabus.
1 Union Budget 2021-22

Presenting the first ever digital Union Budget, Union Minister of Finance and Corporate Affairs Smt.
Nirmala Sitharaman stated that India’s fight against COVID-19 continues into 2021 and that this moment
in history, when the political, economic, and strategic relations in the post-COVID world are changing, is
the dawn of a new era – one in which India is well-poised to truly be the land of promise and hope.
The key highlights of the Union Budget 2021-22 are as follows:
6 pillars of the Union Budget 2021-22:

1. Health and Wellbeing
2. Physical & Financial Capital, and Infrastructure
3. Inclusive Development for Aspirational India
4. Reinvigorating Human Capital
5. Innovation and R&D
6. Minimum Government and Maximum Governance
1.1 Health and Wellbeing

• Rs. 2,23,846 crore outlay for Health and Wellbeing in BE 2021-22 as against Rs. 94,452 crore in BE
2020-21 – an increase of 137%
• Focus on strengthening three areas: Preventive, Curative, and Wellbeing
Steps being taken for improving health and wellbeing:
1.1.1 Vaccines
• Rs. 35,000 crore for COVID-19 vaccine in BE 2021-22.
• The Made-in-India Pneumococcal Vaccine to be rolled out across the country, from present 5 states
– to avert 50,000 child deaths annually.
1.1.2 Health Systems

• Rs. 64,180 crore outlay over 6 years for PM Aatma Nirbhar Swasth Bharat Yojana – a new centrally
sponsored scheme to be launched, in addition to NHM.
• Main interventions under PM AatmaNirbhar Swasth Bharat Yojana:
o National Institution for One Health
o 17,788 rural and 11,024 urban Health and Wellness Centers
o 4 regional National Institutes for Virology
o 15 Health Emergency Operation Centers and 2 mobile hospitals
o Integrated public health labs in all districts and 3382 block public health units in 11 states
o Critical care hospital blocks in 602 districts and 12 central institutions
o Strengthening of the National Centre for Disease Control (NCDC), its 5 regional branches and
20 metropolitan health surveillance units.
o Expansion of the Integrated Health Information Portal to all States/UTs to connect all public
health labs
o 17 new Public Health Units and strengthening of 33 existing Public Health Units
o Regional Research Platform for WHO South-East Asia Region
o 9 Bio-Safety Level III laboratories

1.1.3 Nutrition
• Mission Poshan 2.0 to be launched
o To strengthen nutritional content, delivery, outreach, and outcome
o Merging the Supplementary Nutrition Programme and the Poshan Abhiyan
o Intensified strategy to be adopted to improve nutritional outcomes across 112 Aspirational
Districts
1.1.4 Universal Coverage of Water Supply

• Rs. 2,87,000 crore over 5 years for Jal Jeevan Mission (Urban) - to be launched with an aim to provide:
o 2.86 crore household tap connections
o Universal water supply in all 4,378 Urban Local Bodies
o Liquid waste management in 500 AMRUT cities
1.1.5 Swachch Bharat, Swasth Bharat

• Rs. 1,41,678 crore over 5 years for Urban Swachh Bharat Mission 2.0
• Main interventions under Swachh Bharat Mission (Urban) 2.0:
o Complete faecal sludge management and waste water treatment
o Source segregation of garbage
o Reduction in single-use plastic
o Reduction in air pollution by effectively managing waste from construction-and-demolition
activities
o Bio-remediation of all legacy dump sites
1.1.6 Clean Air

• Rs. 2,217 crore to tackle air pollution, for 42 urban centers with a million plus population.
1.1.7 Scrapping Policy

• Voluntary vehicle scrapping policy to phase out old and unfit vehicles.
• Fitness tests in automated fitness centres:
o After 20 years in case of personal vehicles
o After 15 years in case of commercial vehicles
1.2 Physical and Financial Capital and Infrastructure
1.2.1 Production Linked Incentive scheme (PLI)

• Rs. 1.97 lakh crore in next 5 years for PLI schemes in 13 Sectors
• To create and nurture manufacturing global champions for an AatmaNirbhar Bharat

• To help manufacturing companies become an integral part of global supply chains, possess core
competence and cutting-edge technology
• To bring scale and size in key sectors
• To provide jobs to the youth
1.2.2 Textiles
• Mega Investment Textiles Parks (MITRA) scheme, in addition to PLI:
o 7 Textile Parks to be established over 3 years
• Textile industry to become globally competitive, attract large investments and boost employment
generation & exports.
1.2.3 Infrastructure
• National Infrastructure Pipeline (NIP) expanded to 7,400 projects:
o Around 217 projects worth Rs. 1.10 lakh crore completed
• Measures in three thrust areas to increase funding for NIP:
o Creation of institutional structure
▪ Rs. 20,000 crore to set up and capitalise a Development Financial Institution(DFI) – to
act as a provider, enabler and catalyst for infrastructure financing
▪ Rs. 5 lakh crore lending portfolio to be created under the proposed DFI in 3 years
▪ Debt Financing by Foreign Portfolio Investors to be enabled by amending InvITs’ and
REITs’ legislations
o Big thrust on monetizing assets
▪ National Monetization Pipeline to be launched
▪ Important asset monetization measures:
a) 5 operational toll roads worth Rs. 5,000 crore being transferred to the
NHAIInvIT
b) Transmission assets worth Rs. 7,000 crore to be transferred to the PGCILInvIT
c) Dedicated Freight Corridor assets to be monetized by Railways, for operations
and maintenance, after commissioning
d) Next lot of Airports to be monetized for operations and management
concession
e) Other core infrastructure assets to be rolled out under the Asset Monetization
Programme:
o Oil and Gas Pipelines of GAIL, IOCL and HPCL
o AAI Airports in Tier II and III cities

o Other Railway Infrastructure Assets
o Warehousing Assets of CPSEs such as Central Warehousing Corporation
and NAFED
o Sports Stadiums
o Enhancing the share of capital expenditure
▪ Rs. 5.54 lakh crore capital expenditure in BE 2021-22 – sharp increase of 34.5% over Rs.
4.12 lakh crore allocated in BE 2020-21 :
a) Over Rs. 2 lakh crore to States and Autonomous Bodies for their Capital
Expenditure.
b) Over Rs. 44,000 crore for the Department of Economic Affairs to provide for
projects/programmes/departments exhibiting good progress on Capital
Expenditure
1.2.4 Roads and Highways Infrastructure

• Rs. 1,18,101 lakh crore, highest ever outlay, for Ministry of Road Transport and Highways – of which
Rs. 1,08,230 crore is for capital
• Under the Rs. 5.35 lakh crore Bharatmala Pariyojana, more than 13,000 km length of roads worth Rs.
3.3 lakh crore awarded for construction:
o 3,800 km have already been constructed
o Another 8,500 km to be awarded for construction by March 2022
o Additional 11,000 km of national highway corridors to be completed by March 2022
• Economic corridors being planned:
o Rs. 1.03 lakh crore outlay for 3,500 km of NHs in Tamil Nadu
o Rs. 65,000 crore investment for 1,100 km of NHs in Kerala
o Rs. 25,000 crore for 675 km of NHs in West Bengal
o Over Rs. 34,000 crore to be allocated for 1300 km of NHs to be undertaken in next 3 years in
Assam, in addition to Rs. 19,000 crore works of NHs currently in progress in the State
• Flagship Corridors/Expressways:
o Delhi-Mumbai Expressway – Remaining 260 km to be awarded before 31.3.2021
o Bengaluru-Chennai Expressway – 278 km to be initiated in the current FY; construction to
begin in 2021-22
o Kanpur-Lucknow Expressway – 63 km expressway providing an alternate route to NH 27 to be
initiated in 2021-22
o Delhi-Dehradun economic corridor – 210 km to be initiated in the current FY; construction to
begin in 2021-22

o Raipur-Vishakhapatnam – 464 km passing through Chhattisgarh, Odisha and North Andhra
Pradesh, to be awarded in the current year; construction to start in 2021-22
o Chennai-Salem corridor – 277 km expressway to be awarded and construction to start in 2021-
22
o Amritsar-Jamnagar – Construction to commence in 2021-22
o Delhi-Katra – Construction will commence in 2021-22
• Advanced Traffic management system in all new 4 and 6-lane highways:
o Speed radars
o Variable message signboards
o GPS enabled recovery vans will be installed
1.2.5 Railway Infrastructure

• Rs. 1,10,055 crore for Railways of which Rs. 1,07,100 crore is for capital expenditure
• National Rail Plan for India (2030): to create a “future ready” Railway system by 2030
• 100% electrification of Broad-Gauge routes to be completed by December, 2023
• Broad Gauge Route Kilometers (RKM) electrification to reach 46,000 RKM, i.e. 72% by end of 2021
• Western Dedicated Freight Corridor (DFC) and Eastern DFC to be commissioned by June 2022, to
bring down the logistic costs – enabling Make in India strategy
• Additional initiatives proposed:
o The Sonnagar-Gomoh Section (263.7 km) of Eastern DFC to be taken up in PPP mode in 2021-
22
o Future dedicated freight corridor projects –
▪ East Coast corridor from Kharagpur to Vijayawada
▪ East-West Corridor from Bhusaval to Kharagpur to Dankuni
▪ North-South corridor from Itarsi to Vijayawada
• Measures for passenger convenience and safety:
o Aesthetically designed Vista Dome LHB coach on tourist routes for better travel
o High density network and highly utilized network routes to have an indigenously developed
automatic train protection system, eliminating train collision due to human error.
1.2.6 Urban Infrastructure

• Raising the share of public transport in urban areas by expansion of metro rail network and
augmentation of city bus service
• Rs. 18,000 crore for a new scheme, to augment public bus transport:
o Innovative PPP models to run more than 20,000 buses

o To boost automobile sector, provide fillip to economic growth, create employment
opportunities for our youth
• A total of 702 km of conventional metro is operational and another 1,016 km of metro and RRTS is
under construction in 27 cities
• ‘MetroLite’ and ‘MetroNeo’ technologies to provide metro rail systems at much lesser cost with
similar experience in Tier-2 cities and peripheral areas of Tier-1 cities.
• Central counterpart funding to:
o Kochi Metro Railway Phase-II of 11.5 km at a cost of Rs. 1957.05 crore
o Chennai Metro Railway Phase –II of 118.9 km at a cost of Rs. 63,246 crore
o Bengaluru Metro Railway Project Phase 2A and 2B of 58.19 km at a cost of Rs. 14,788 crore
o Nagpur Metro Rail Project Phase-II and Nashik Metro at a cost of Rs. 5,976 crore and Rs. 2,092
crore respectively
1.2.7 Power Infrastructure

• 139 Giga Watts of installed capacity and 1.41 lakh circuit km of transmission lines added, and
additional 2.8 crore households connected in past 6 years
• Consumers to have alternatives to choose the Distribution Company for enhancing competitiveness
• Rs. 3,05,984 crore over 5 years for a revamped, reforms-based and result linked new power
distribution sector scheme
• A comprehensive National Hydrogen Energy Mission 2021-22 to be launched
1.2.8 Ports, Shipping, Waterways

• Rs. 2,000 crore worth 7 projects to be offered in PPP-mode in FY21-22 for operation of major ports
• Indian shipping companies to get Rs. 1624 crore worth subsidy support over 5 years in global tenders
of Ministries and CPSEs
• To double the recycling capacity of around 4.5 Million Light Displacement Tonne (LDT) by 2024; to
generate an additional 1.5 lakh jobs
1.2.9 Petroleum & Natural Gas

• Extention of Ujjwala Scheme to cover 1 crore more beneficiaries
• To add 100 more districts to the City Gas Distribution network in next 3 years
• A new gas pipeline project in J&K
• An independent Gas Transport System Operator to be set up for facilitation and coordination of
booking of common carrier capacity in all natural gas pipelines on a non-discriminatory open access
basis
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1.2.10 Financial Capital
• A single Securities Markets Code to be evolved
• Support for development of a world class Fin-Tech hub at the GIFT-IFSC
• A new permanent institutional framework to help in development of Bond market by purchasing
investment grade debt securities both in stressed and normal times
• Setting up a system of Regulated Gold Exchanges: SEBI to be notified as a regulator and Warehousing
Development and Regulatory Authority to be strengthened
• To develop an investor charter as a right of all financial investors
• Capital infusion of Rs. 1,000 crore to Solar Energy Corporation of India and Rs. 1,500 crore to Indian
Renewable Energy Development Agency
1.2.11 Increasing FDI in Insurance Sector

• To increase the permissible FDI limit from 49% to 74% and allow foreign ownership and control with
safeguards
1.2.12 Stressed Asset Resolution

• Asset Reconstruction Company Limited and Asset Management Company to be set up
1.2.13 Recapitalization of PSBs

• Rs. 20,000 crore in 2021-22 to further consolidate the financial capacity of PSBs
1.2.14 Deposit Insurance

• Amendments to the DICGC Act, 1961, to help depositors get an easy and time-bound access to their
deposits to the extent of the deposit insurance cover
• Minimum loan size eligible for debt recovery under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 proposed to be reduced from Rs.
50 lakh to Rs. 20 lakh for NBFCs with minimum asset size of Rs. 100 crore
1.2.15 Company Matters

• To decriminalize the Limited Liability Partnership (LLP) Act, 2008
• Easing Compliance requirement of Small companies by revising their definition under Companies
Act, 2013 by increasing their thresholds for Paid up capital from “not exceeding Rs. 50 Lakh” to “not
exceeding Rs. 2 Crore” and turnover from “not exceeding Rs. 2 Crore” to “not exceeding Rs. 20 Cr”.
• Promoting start-ups and innovators by incentivizing the incorporation of One Person Companies
(OPCs):
o Allowing their growth without any restrictions on paid up capital and turnover
o Allowing their conversion into any other type of company at any time
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o Reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days
and
o Allowing Non Resident Indians (NRIs) to incorporate OPCs in India.
• To ensure faster resolution of cases by:
o Strengthening NCLT framework
o Implementation of e-Courts system
o Introduction of alternate methods of debt resolution and special framework for MSMEs
• Launch of data analytics, artificial intelligence, machine learning driven MCA21 Version 3.0 in 2021-
22
1.2.16 Disinvestment and Strategic Sale

• Rs. 1,75,000 crore estimated receipts from disinvestment in BE 2020-21
• Strategic disinvestment of BPCL, Air India, Shipping Corporation of India, Container Corporation of
India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam limited etc. to be completed in 2021-22.
• Other than IDBI Bank, two Public Sector Banks and one General Insurance company to be privatized
• IPO of LIC in 2021-22
• New policy for Strategic Disinvestment approved; CPSEs except in four strategic areas to be privatized
• NITI Aayog to work out on the next list of CPSEs to be taken up for strategic disinvestment
• Incentivizing States for disinvestment of their Public Sector Companies, using central funds
• Special Purpose Vehicle in the form of a company to monetize idle land
• Introducing a revised mechanism for ensuring timely closure of sick or loss making CPSEs
1.2.17 Government Financial Reforms

• Treasury Single Account (TSA) System for Autonomous Bodies to be extended for universal
application
• Separate Administrative Structure to streamline the “Ease of Doing Business” for Cooperatives
1.3 Inclusive Development for Aspirational India
1.3.1 Agriculture
• Ensured MSP at minimum 1.5 times the cost of production across all commodities.
• With steady increase in the procurement, payment to farmers increased as under:
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• SWAMITVA Scheme to be extended to all States/UTs, 1.80 lakh property owners in 1,241 villages
have already been provided cards
• Agricultural credit target enhanced to Rs. 16.5 lakh crore in FY22 - animal husbandry, dairy, and
fisheries to be the focus areas
• Rural Infrastructure Development Fund to be enhanced to Rs. 40,000 crore from Rs. 30,000 crore
• To double the Micro Irrigation Fund to Rs. 10,000 crore
• ‘Operation Green Scheme’ to be extended to 22 perishable products, to boost value addition in
agriculture and allied products
• Around 1.68 crore farmers registered and Rs. 1.14 lakh crore of trade value carried out through e-
NAMs; 1,000 more mandis to be integrated with e-NAM to bring transparency and competitiveness.
• APMCs to get access to the Agriculture Infrastructure Funds for augmenting infrastructure facilities
1.3.2 Fisheries
• Investments to develop modern fishing harbours and fish landing centres – both marine and inland
• 5 major fishing harbours – Kochi, Chennai, Visakhapatnam, Paradip, and Petuaghat to be developed
as hubs of economic activity
• Multipurpose Seaweed Park in Tamil Nadu to promote seaweed cultivation
1.3.3 Migrant Workers and Labourers

• One Nation One Ration Card scheme for beneficiaries to claim rations anywhere in the country -
migrant workers to benefit the most
o Scheme implementation so far covered 86% of beneficiaries across 32 States and UTs
o Remaining 4 states to be integrated in next few months
• Portal to collect information on unorganized labour force, migrant workers especially, to help
formulate schemes for them
• Implementation of 4 labour codes underway
o Social security benefits for gig and platform workers too
o minimum wages and coverage under the Employees State Insurance Corporation applicable
for all categories of workers
o Women workers allowed in all categories, including night-shifts with adequate protection
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o Compliance burden on employers reduced with single registration and licensing, and online
returns
1.3.4 Financial Inclusion

• Under Stand Up India Scheme for SCs, STs and women,
o Margin money requirement reduced to 15%
o To also include loans for allied agricultural activities
• Rs. 15,700 crore budget allocation to MSME Sector, more than double of this year’s BE
1.4 Reinvigorating Human Capital
1.4.1 School Education

• 15,000 schools to be strengthened by implementing all NEP components. Shall act as exemplar
schools in their regions for mentoring others
• 100 new Sainik Schools to be set up in partnership with NGOs/private schools/states
1.4.2 Higher Education

• Legislation to be introduced to setup Higher Education Commission of India as an umbrella body with
4 separate vehicles for standard-setting, accreditation, regulation, and funding
• Creation of formal umbrella structure to cover all Govt. colleges, universities, research institutions in
a city for greater synergy.
o Glue grant to implement the same across 9 cities
• Central University to come up in Leh for accessibility of higher education in Ladakh
1.4.3 Scheduled Castes and Scheduled Tribes Welfare

• 750 Eklavya model residential schools in tribal areas:
o Unit cost of each school to be increased to Rs. 38 crore
o For hilly and difficult areas, to Rs. 48 crore
o Focus on creation of robust infrastructure facilities for tribal students
• Revamped Post Matric Scholarship Scheme for welfare of SCs
o Rs. 35,219 crore enhanced Central Assistance for 6 years till 2025- 2026
o 4 crore SC students to benefit
1.4.4 Skilling
• Proposed amendment to Apprenticeship Act to enhance opportunities for youth
• Rs. 3000 crore for realignment of existing National Apprenticeship Training Scheme (NATS) towards
post-education apprenticeship, training of graduates and diploma holders in Engineering
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• Initiatives for partnership with other countries in skilling to be taken forward, similar to partnership:
o With UAE to benchmark skill qualifications, assessment, certification, and deployment of
certified workforce
o With Japan for a collaborative Training Inter Training Programme (TITP) to transfer of skills,
technique and knowledge
1.5 Innovation and R&D

• Modalities of National Research Foundation announced in July 2019 –
o Rs. 50,000 crore outlay over 5 years
o To strengthen overall research ecosystem with focus on national-priority thrust areas
• Rs. 1,500 crore for proposed scheme to promote digital modes of payment
• National Language Translation Mission (NTLM) to make governance-and-policy related knowledge
available in major Indian languages
• PSLV-CS51 to be launched by New Space India Limited (NSIL) carrying Brazil’s Amazonia Satellite and
some Indian satellites
• As part of the Gaganyaan mission activities:
o 4 Indian astronauts being trained on Generic Space Flight aspects, in Russia
o First unmanned launch is slated for December 2021
• Rs. 4,000 crore over five years for Deep Ocean Mission survey exploration and conservation of deep
sea biodiversity
1.6 Minimum Government, Maximum Governance

• Measures being undertaken to bring reforms in Tribunals to ensure speedy justice
• National Commission for Allied Healthcare Professionals already introduced to ensure transparent
and efficient regulation of the 56 allied healthcare professions
• The National Nursing and Midwifery Commission Bill introduced for the same in nursing profession
• Proposed Conciliation Mechanism with mandate for quick resolution of contractual disputes with
CPSEs
• Rs. 3,768 crore allocated for first digital census in the history of India
• Rs. 300 crore grant to the Government of Goa for the diamond jubilee celebrations of the state’s
liberation from Portuguese
• Rs. 1,000 crore for the welfare of Tea workers especially women and their children in Assam and
West Bengal through a special scheme
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1.7 Tax Proposal
Vision of a transparent, efficient tax system to promote investments and employment in the country with
minimum burden on tax payers
1.7.1 Direct taxes
1.7.1.1 Achievements
• Corporate tax rate slashed to make it among the lowest in the world
• Burden of taxation on small taxpayers eased by increasing rebates
• Return filers almost doubled to 6.48 crore in 2020 from 3.31 crore in 2014
• Faceless Assessment and Faceless Appeal introduced
1.7.1.2 Relief to Senior Citizens

Exemption from filing tax returns for senior citizens over 75 years of age and having only pension and
interest income; tax to be deducted by paying bank
1.7.1.3 Reducing Disputes, Simplifying Settlement

• Time limit for re-opening cases reduced to 3 years from 6 years
• Serious tax evasion cases, with evidence of concealment of income of Rs. 50 lakh or more in a year, to
be re-opened only up to 10 years, with approval of the Principal Chief Commissioner
• Dispute Resolution Committee to be set up for taxpayers with taxable income up to Rs. 50 lakh and
disputed income up to Rs. 10 lakh
• National Faceless Income Tax Appellate Tribunal Centre to be established
• Over 1 lakh taxpayers opted to settle tax disputes of over Rs. 85,000 crore through Vivad Se Vishwas
Scheme until 30th January 2021
1.7.1.4 Relaxation to NRIs

Rules to be notified for removing hardships faced by NRIs regarding their foreign retirement accounts
1.7.1.5 Incentivising Digital Economy

Limit of turnover for tax audit increased to Rs. 10 crore from Rs. 5 crore for entities carrying out 95%
transactions digitally
1.7.1.6 Relief for Dividend

• Dividend payment to REIT/ InvIT exempt from TDS
• Advance tax liability on dividend income only after declaration/ payment of dividend
• Deduction of tax on dividend income at lower treaty rate for Foreign Portfolio Investors
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1.7.1.7 Attracting Foreign Investment for Infrastructure
• Infrastructure Debt Funds made eligible to raise funds by issuing Zero Coupon Bonds
• Relaxation of some conditions relating to prohibition on private funding, restriction on commercial
activities, and direct investment
1.7.1.8 Supporting ‘Housing for All’

• Additional deduction of interest, up to Rs. 1.5 lakh, for loan taken to buy an affordable house extended
for loans taken till March 2022
• Tax holiday for Affordable Housing projects extended till March 2022
• Tax exemption allowed for notified Affordable Rental Housing Projects
1.7.1.9 Tax incentives to IFSC in GIFT City

• Tax holiday for capital gains from incomes of aircraft leasing companies
• Tax exemptions for aircraft lease rentals paid to foreign lessors
• Tax incentive for relocating foreign funds in the IFSC
• Tax exemption to investment division of foreign banks located in IFSC
1.7.1.10 Ease of Filing Taxes

Details of capital gains from listed securities, dividend income, interest from banks, etc. to be pre-filled in
returns
1.7.1.11 Relief to Small Trusts

Exemption limit of annual receipt revised from ₹1 crore to ₹5 crore for small charitable trusts running
schools and hospitals
1.7.1.12 Labour Welfare

• Late deposit of employee’s contribution by the employer not to be allowed as deduction to the
employer
• Eligibility for tax holiday claim for start-ups extended by one more year
• Capital gains exemption for investment in start-ups extended till 31st March, 2022
1.7.2 Indirect Taxes
1.7.2.1 GST
Measures taken till date:
• Nil return through SMS

• Quarterly return and monthly payment for small taxpayers
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• Electronic invoice system
• Validated input tax statement
• Pre-filled editable GST return
• Staggering of returns filing o Enhancement of capacity of GSTN system
• Use of deep analytics and AI to identify tax evaders
1.7.2.2 Custom Duty Rationalization

• Twin objectives: Promoting domestic manufacturing and helping India get onto global value chain and
export better
• 80 outdated exemptions already eliminated
• Revised, distortion-free customs duty structure to be put in place from 1st October 2021 by reviewing
more than 400 old exemptions
• New customs duty exemptions to have validity up to the 31st March following two years from its issue
date
1.7.2.3 Electronic and Mobile Phone Industry

• Some exemptions on parts of chargers and sub-parts of mobiles withdrawn
• Duty on some parts of mobiles revised to 2.5% from ‘nil’ rate
1.7.2.4 Iron and Steel

• Customs duty reduced uniformly to 7.5% on semis, flat, and long products of non-alloy, alloy, and
stainless steels
• Duty on steel scrap exempted up to 31st March, 2022
• Anti-Dumping Duty (ADD) and Counter-Veiling Duty (CVD) revoked on certain steel products
• Duty on copper scrap reduced from 5% to 2.5%
1.7.2.5 Textiles
Basic Customs Duty (BCD) on caprolactam, nylon chips and nylon fiber & yarn reduced to 5%
1.7.2.6 Chemicals
• Calibrated customs duty rates on chemicals to encourage domestic value addition and to remove
inversions
• Duty on Naptha reduced to 2.5%
1.7.2.7 Gold and Silver

• Custom duty on gold and silver to be rationalized
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1.7.2.8 Renewable Energy
• Phased manufacturing plan for solar cells and solar panels to be notified
• Duty on solar invertors raised from 5% to 20%, and on solar lanterns from 5% to 15% to encourage
domestic production
1.7.2.9 Capital Equipment

• Tunnel boring machine to now attract a customs duty of 7.5%; and its parts a duty of 2.5%
• Duty on certain auto parts increased to general rate of 15%
1.7.2.10 MSME Products

• Duty on steel screws and plastic builder wares increased to 15%
• Prawn feed to attract customs duty of 15% from earlier rate of 5%
• Exemption on import of duty-free items rationalized to incentivize exporters of garments, leather, and
handicraft items
• Exemption on imports of certain kind of leathers withdrawn
• Customs duty on finished synthetic gem stones raised to encourage domestic processing
1.7.2.11 Agriculture Products

• Customs duty on cotton increased from nil to 10% and on raw silk and silk yarn from 10% to 15%.
• Withdrawal of end-use based concession on denatured ethyl alcohol
• Agriculture Infrastructure and Development Cess (AIDC) on a small number of items
1.7.2.12 Rationalization of Procedures and Easing of Compliance

• Turant Customs initiative, a Faceless, Paperless, and Contactless Customs measures
• New procedure for administration of Rules of Origin
1.8 Achievements and Milestones during the COVID-19 pandemic

• Pradhan Mantri Garib Kalyan Yojana (PMGKY)
o Valued at Rs. 2.76 lakh crore 19 o Free food grain to 80 crore people
o Free cooking gas for 8 crore families
o Direct cash to over 40 crore farmers, women, elderly, the poor and the needy
• AatmaNirbhar Bharat package (ANB 1.0)
o Estimated at Rs. 23 lakh crore – more than 10% of GDP
• PMGKY, three ANB packages (ANB 1.0, 2.0, and 3.0), and announcements made later were like 5
mini-budgets in themselves
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• Rs. 27.1 lakh crore worth of financial impact of all three ANB packages including RBI‟s measures –
amounting to more than 13% of GDP
• Structural reforms:
o One Nation One Ration Card
o Agriculture and Labour Reforms
o Redefinition of MSMEs
o Commercialisation of the Mineral Sector
o Privatisation of Public Sector Undertakings
o Production Linked Incentive Schemes
• Status of India’s fight against COVID-19
o 2 Made-in-India vaccines – medically safeguarding citizens of India and those of 100-plus
countries against COVID-19
o 2 or more new vaccines expected soon
o Lowest death rate per million and the lowest active cases
1.9 Vision for AatmaNirbhar Bharat

• AatmaNirbharta – not a new idea – ancient India was self-reliant and a business epicentre of the
world
• AtmaNirbhar Bharat – an expression of 130 crore Indians who have full confidence in their
capabilities and skills
• Strengthening the Sankalp of:
o Nation First
o Doubling Farmer’s Income
o Strong Infrastructure
o Healthy India
o Good Governance
o Opportunities for Youth
o Education for All
o Women Empowerment o Inclusive Development
• 13 promises made in the Union Budget 2015-16, and resonating with the vision of AatmaNirbharta,
to materialise during the AmrutMahotsav of 2022 – on the 75th year of our independence.
Major Structural Reforms Undertaken as a Part of Atmanirbhar Bharat Package
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1.10 Union Budget 2021-22: Analysis
1.10.1 Union Budget 2021-22: Analysing Key Numbers
1.10.1.1 Government receipts and expenditure

• Actual receipts (provisional figures) for April-December 2020 were only 50% of FY2020-21’s
budgetary estimates (BE). This number stood at about 55% for the previous financial year.
• However, the Centre’s expenditures in the two years were broadly similar as a proportion of the
budgeted amounts.
• It is clear that the ‘automatic stabilisers’ of public spending kicked in while the other three levers of
demand – consumption, expenditure, and net exports – remained muted.
• However, some may wonder whether the Centre could have done more during the peak of the
pandemic – only 75% of the budgetary allocations were spent in the crisis year, compared to 76%
during the previous financial year.
• As per the revised estimates (RE) however, total spending in FY2020-21 was raised by 13.4% over the
budgeted amount.
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1.10.1.2 Deficit numbers reach historical levels
• Since revenues were not expected to recover sharply (revised non-debt receipts were lower by
28.7%), budgetary deficits reached historically high levels.
• The Centre’s fiscal deficit stands at 9.5% of GDP (gross domestic product) as per FY2020-21 RE but is
estimated to decline to 6.8% during FY2021-22 (BE).
• However, these deficit figures reflect the fact that off-budget borrowings were finally recognised in
FY2020-21 RE after years of being hidden in various parts of the Budget.
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1.10.1.3 Revenue deficit remains high as a proportion of fiscal deficit
• Centre has been unable to meet the 0% revenue deficit target – a hallmark of sound public finance.
• Of late, revenue deficits have also remained stubbornly high as a proportion of fiscal deficit, implying
that most of the government’s borrowings are financing current expenditures.
• However, this ratio is estimated to decline to 75% in FY2021-22 (BE) from almost 80% in FY2020-21
(RE).
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1.10.1.4 Steep increase in subsidies as a percentage of total expenditure, stagnation in defence
• One of the biggest components of the Centre’s revenue expenditures – besides interest repayments
– is subsidies.
• Its share in government expenditure over nine major discretionary categories has doubled in FY2020-
21 (RE).
• This is on account of the belated admittance by the Centre of hidden food subsidy outlays, financed
mainly by coercing the Food Corporation of India (FCI) to borrow from National Small Savings Fund
(NSSF) and other agencies.
• The government has finally recognised these borrowings as part of public expenditure and hence,
there is a steep one-time increase in FY2020-21. In FY2021-22 BE, the outlay on subsidy is estimated
to drop sharply, although it is estimated to remain high relative to pre-pandemic levels.
1.10.1.5 Sharp uptick in capital expenditure

• This year’s Budget has been praised by some commentators for substantially increased spending on
capital expenditure. Capital expenditure has remained roughly stagnant for most of the past decade,
despite an initial increase in the first half of the NDA-II (National Democratic Alliance) regime (2019-
2024).
• However, this is all set to change with much higher allocations in FY2020-21 (RE) and FY2021-22 (BE).
The Budget suggests that capital expenditure will soon touch 2.5% of GDP – the highest figure in the
past decade.
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• If we ignore the temporary blip between 2014-15 and 2017-18, capital expenditure has remained
roughly constant at about 1.75% of GDP in the last decade. Similarly, its share in total government
spending too has stagnated at around 12%.
• FY2020-21 RE represent a sharp increase in capital expenditure, as a proportion of GDP, relative to
BE. This is not unexpected because nominal GDP fell by 4.2% in the year while overall government
expenditure remained the same. Thus, the share of total public spending in GDP also registered a
sharp increase in FY2020-21 and capital spending was no exception. If we look closely at capital
expenditure as a proportion of total expenditure, this figure is estimated to grow in FY2021-22 (BE) to
about 16% – a substantial figure given the historical trend.
• Most of the reporting on the Centre’s capital expenditure looks only at the outlay from the Union
Budget.
• However, Public Sector Undertakings (PSUs) also incur investment expenditure from their own
sources. The latter component is known as internal and extra budgetary resources (IEBR), and since
2014-15, it has replaced ‘GBS’ to capital expenditure from the Centre as the principal component of
the Centre’s public expenditure.
• A report of the Reserve Bank of India (RBI) argues that both of these must be considered together
to reach a fuller picture of the capital expenditure incurred by India’s public sector.
1.10.1.6 Agriculture in the 2021-22 Budget
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• Total spending on agriculture might have risen sharply in the last two years but most of this is on
account of higher (food) subsidies for repaying the FCI’s past debts.
o Year after year, a substantial part of the food subsidy was being put under the carpet by
increasing the Food Corporation of India’s (FCI) borrowings — these had crossed Rs 3 lakh
crore. No one believed that the budgeted figure of Rs 1,15,570 crore in the 2020-21 financial
year reflected the true picture of this subsidy. The FM has revised this figure to Rs 4,22,618
crore, a whopping increase of Rs 3,07,048 crore. The revised estimate (RE) for FY 2020-21 is
3.66 times the budgeted figure, indicating that almost all borrowings of FCI have been cleared.
This is indeed a historic step towards introducing transparency in the Union Budget. And for
FY 2021-22, the budgeted estimate is Rs 2,42,836 crore.
• Public investment as a share of total government expenditure in agriculture, has remained low since
the 1990s.
• The 2021-22 Budget does little to reverse this concerning trend – although the high allocations in
FY2020-21 (BE) gave room for optimism, a subsequent cutback in FY2020-21 (RE) and an insignificant
increase this year are disappointing.
• PM-KISAN (Pradhan Mantri Kisan Samman Nidhi) too has seen a reduction in outlay from Rs. 75,000
crore to Rs. 65,000 crore, reflecting the smaller number of farmers availing this scheme compared to
what was originally envisaged.
• Expenditure towards agricultural research and development (R&D) fell by 1% between 2019-20
(actuals as mentioned in 2021-22 Budget) and FY2020-21 (RE) – reflecting the shift in priorities post
Covid-19 – but is budgeted to grow by 9.7% in the coming year. Estimates suggest that the recently
revisited rate of return on agricultural R&D is quite substantial, which thus warrants a much steeper
hike in allocations.
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1.10.1.7 Disinvestment and taxation in the 2021-22 Budget
• Of late, proceeds from equity sales of PSUs have lagged behind BE. In FY2020-21, only 15% (Rs. 32,000
crore) of the budgeted Rs. 210,000 crore could be realised.
• However, the Centre remains ambitious in banking on non-debt capital receipts to finance its growing
expenditure burden.
• In the FY2021-22 BE, it is estimated to gather Rs. 175,000 crore from disinvestment – to anyone
underestimating the challenge, shows the steep climb required to close in on the target.
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1.10.1.8 Centre assumes buoyant tax revenues post-pandemic
• The Budget works with the assumption that revenues from corporation tax, income tax, and goods
and services tax (GST) will grow by over 22% in FY2021-22 over the RE of the previous budget.
• On the other hand, central excise revenues are expected to fall by 7% even as nominal GDP grows by
14.4%. This is a consequence of the new agricultural cess introduced in the Budget that will replace
and reduce central excise duties and customs on certain products and hence, sharply lowers the
revenues obtained from central excise, reflected in the negative buoyancy figures.
• The overall buoyancy of gross tax revenues for FY2021-22 is estimated to be only slightly higher than
historical averages computed by the Reserve Bank of India (2010-2019)
• However, last year, the Centre assumed a less optimistic 1.2 buoyancy figure, while for FY2021-22 it
is estimated to increase its forecast to 1.55.
• The implied buoyancy of 1.57 for corporation taxes in FY2021-22 might be difficult to attain with
2019’s steep reduction in rates.
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1.10.2 Union Budget 2021-22: Looking through a gender lens
• Gender budget stands at Rs. 153,326.28 crore for FY2021-22. Last year’s allocation was Rs.
143,461.72 crore (budget estimate) revised to Rs. 207,261.02 crore.
• As a proportion of total expenditure, the allocation (budget estimates) has fallen to 4.4%, from 4.7%
last year and 4.9% in the July 2019 budget.
• In a country that ranks 112th in the World Economic Forum’s Global Gender Gap Index (2020) and is
notorious for its low female labour force participation rates (FLFPR), it is bewildering that there was
almost no mention of women’s issues under ‘inclusive development for aspirational India’ and
‘reinvigorating human capital’ – two of the six pillars of this budget.
• Budget 2021-22 – the first digital budget of India – has given a strong push to digitisation.
• According to data from the 75th National Sample Survey (NSS) conducted in 2017-18, 12.8% of
females reported being able to operate a computer versus 20% of males, and 14.9% reported being
able to use the internet as compared to 25% of males. Seventy-one per cent of men in India own
mobile phones, while only 38% of women do. Anecdotally, we see that even if a household owns a
digital device and has internet connectivity, the male members are likely to have priority in using the
devices for work or study.
• From a budget perspective, a move such as giving out free/subsidised devices to women – potentially
linked to participation in public skilling programmes – could have an immediate positive impact.
• The massive boost in the budget to urban public transport is well-received. However, women face
particular challenges in accessing public transport, which restrict their physical and economic mobility.
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These new investments should be seen as opportunities to create gender-sensitive infrastructure
designs, especially last-mile connectivity.
• Under the Nirbhaya Fund (scheme for safety of women), there is an allocation of Rs. 10.4 crore versus
Rs. 855.23 crore budget estimate for FY2020-21. The revised estimate for FY2020-21 was slashed to
Rs. 8.53 crore, which might possibly be because this scheme is for women’s safety in the public space
and 2020 was about staying in for most of us. However, we see no compensatory focus on funding
interventions to address domestic abuse – termed as the ‘shadow pandemic’ by UN Women – such
as shelter homes and legal aid. The “women helpline” and “one stop centre” line items in the gender
budget, both show reduced figures under revised estimates for FY2020-21, and these are, in fact,
empty for FY2021-22. For FY2019-20 – the latest year for which actual spend figures are available
under the gender budget – the actual spend for the Nirbhaya Fund is Rs. 11.38 crore versus an
allocation (budget estimate) of Rs. 891.23 crore.
• The health sector focus could have been a chance to underscore its role in job creation for women
but the only announcement that could potentially impact women workers in the sector was the
introduction of the National Nursing and Midwifery Commission Bill, to promote transparency,
efficiency and governance reforms in the nursing profession.
• An announcement in the budget increasing the currently pitifully low minimum wage for ASHA,
anganwadi and ANM (auxiliary nurse midwife) workers would have been an excellent and much-
needed tribute to the sterling role played by frontline health workers, who worked long hours, under
hazardous and arduous conditions, risking personal attacks due to the stigma associated with COVID-
19. (Note: No such announcement was made. This is a negative point regarding budget. Such an
announcement should’ve been there.)
• A major thrust of the budget is the textile industry. There are plans to launch a scheme of Mega
Investment Textiles Parks (MITRA) to enable the industry to become globally competitive, attract
large investments, and boost employment generation. This is in addition to the ‘Production-linked
Incentive’ Scheme, which was earlier announced for 10 key sectors, including textile. There has also
been rationalisation of duties on raw material inputs for the sector. To ensure that expansion of the
sector translates into greater employment for women, enabling conditions should be created such as
provision of targetted skilling and apprenticeship, reliable childcare facilities, safety at the workplace
and commute to work, fair pay, parental leave, flexible hours, and so on. A positive move in this
regard is the labour code provision of women being entitled to all kinds of work, including in night
shifts with “adequate protection”.
• In terms of women’s well-being, time use, and participation in paid work outside the home, anything
that improves the provision of public services, eases the burden of domestic work, which tends to be
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disproportionately borne by women. Hence, the spotlight on universal water supply under the Jal
Jeevan Mission is welcome.
• This budget prioritises the issue of air pollution in urban areas but does not highlight the problem
of indoor air pollution – caused by use of unclean fuel for cooking, which has a greater negative impact
on the women of the household. It is well-known that the Ujjwala scheme has expanded the coverage
of LPG (liquefied petroleum gas) in rural India but the usage of LPG by households remains limited.
• Finally, under Swachh Bharat, Swasth Bharat (clean India, healthy India), the focus is mainly on proper
waste management and clean air in urban centres – two significant matters – but excluded aspects
like public toilets that are important for women venturing out of their homes.
• The allocation for the vaccination drive announced as part of the budget seems generous. If this is
rolled-out efficiently and the pandemic is controlled over the next few months, it can have an
immediate positive impact on services such as hospitality and beauty as these tend to have high
person-to-person contact. Such services have emerged as vital avenues for women’s economic
participation in recent years, particularly in cities.
1.10.3 Union Budget 2021-22: How to Increase Income Tax Collection?

• Budget estimates for 2021-22 show that only a little over half of the receipts of the central
government will come from taxes; 47% comes from non-tax revenues, non-debt capital receipts, and
borrowings and other liabilities. There is a clear need to raise the tax collection in India.
• As per the budget estimates for 2021-22, only 14% of the receipts (and 26% of the tax receipts) are
constituted by income tax. There is, of course, a need to check tax evasion.
• High Individual Threshold: The threshold for exemption from payment of any income tax, Rs. 5 lakh,
is over 3.5 times the national per capita income, and higher than most countries. (Business Standard
2021). Unlike most previous years, there has been no further increase to this threshold in the budget,
and this is a positive development.
• High threshold for a family: This threshold is at the individual level, and the same is applicable to other
adult members in the family who have incomes. So, if there are two adults in a family, the total
potential exemption is Rs. 10 lakh annually. The story does not end here. If a family files taxes not
just in individual names but also in the name of ‘Hindu Undivided Family’, then there is an additional
Rs. 2.5 lakh exemption per year.
• Should Multiple Exemption be Offered? There are many exemptions under income tax laws. Let us
consider one example in detail. There is a tax benefit if an investment of up to Rs. 1.5 lakh is made in
Equity Linked Savings Scheme (ELSS) – an equity mutual fund with a lock-in period of three years. The
ELSS exemption was conceived at a time when the stock market and mutual funds were not very
popular, but the provision has remained. Currently, the Bombay Stock Exchange Sensex is performing
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rather well. So, it is not clear if such an incentive is needed now – assuming there was some valid
rationale in the past, which too is doubtful.
• There are two more longstanding provisions under the income tax law:(i) exemption for premium paid
on medical insurance policy of up to Rs. 25,000 per assessee, (ii) interest income from savings
accounts in banks is exempt up to Rs. 10,000 for each assessee.
• It is interesting that when people (including many economists) think of tax exemptions, they tend to
think of exemption for agricultural income. In fact, that is hardly an effective exemption, given low
agricultural incomes and high threshold before income tax becomes applicable anyway. That
exemption can be removed without much difficulty – alongside the removal of many other exemptions
outside of agriculture.
• There are some issues here. First, while it is possibly true that each of the above exemptions do not
cost the central government too much, the total impact of all the different exemptions can be
significant. Secondly, the exemptions are availed primarily by the more-aware segments in the
population, and those who are able and willing to find and pay a good tax advisor. So, it is not an
egalitarian policy. Third, though there may be some similar provisions for exemptions in developed
countries too, the number of exemptions is not so high.
• It is important to reduce – if not remove – the various income tax exemptions in a phased manner,
and alongside deal with the difficulties people face in a well-targetted way through other appropriate
policies.
• A policy suggestion on income tax threshold:
o Given that the income threshold for tax is very high relative to the national per capita
income, there is a need to reduce this substantially. This will increase income tax collection.
o There is a need to increase tax collection in India – gradually and carefully, but in a sustained
manner. An important way is to check evasion of all taxes. However, it is also important to
ensure that the law requires people to pay taxes in the first place, this is particularly true of
income tax on the one hand, and wealth and inheritance tax on the other – though the
segments that need to be ‘targetted’ are very different in the two cases
o Furthermore, given the imposition of a tax, there is a need to move in a phased manner to
keep exemptions to the minimum, and at the same time, use other suitable policy measures
to provide much-needed relief to people in different spheres of their lives.
1.10.4 Union Budget 2021-22: Is Infra Spending a Panacea for all Ills?
• The 2021-22 Union Budget, announced on 1 February 2021, made a definitive turn to the right as it
turned its back on providing any direct fiscal stimulus. Instead, it focussed heavily on investment in
infrastructure to bring the Indian economy out of the current recession.
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• There is no doubt that high-quality public infrastructure supports economic growth, generates jobs,
and improves the well-being of the citizens. The budget proposes investment in national highway
projects, especially for the four poll-bound states (namely, Assam, Kerala, Tamil Nadu, and West
Bengal), road transport, and power distribution, among others.
• Can infra spending give an immediate boost? Yet, infrastructure investment is complex, and getting
from conception to construction and operation, is a long road fraught with obstacles and pitfalls.
Poor governance is a major reason why infrastructure projects often fail to meet their timeframe,
budget, and service delivery objectives, and often get stalled. As such, it is argued that the strong
‘multiplier effect’ of infrastructure spending can be realised, only if it is delivered in a timely manner
and is effectively targetted.
• Meeting these criteria may, however, be a challenge, especially during a recession triggered by the
pandemic. Infrastructure construction projects take a few quarters to a few years to even get off the
ground due to implementation lags in planning and permissions, including environmental permits,
and issues of land acquisition. This means that the boost to infrastructure investment may not be
well-timed and may actually amplify, rather than smoothen, economic cycles.
• Infra spending does not provide support to those most affected by Covid-19 pandemic directly:
Targetting such spending effectively may also be problematic. In order to stimulate the economy,
money needs to get into the hands of the most vulnerable people who would spend it quickly to
multiply its impact. It is however difficult to achieve this by investing in infrastructure that typically
targets the heavy construction industry, which may not be particularly hard hit in a recession.
However, sectors that have been most adversely impacted by the pandemic, such as exports and
tourism, including many micro, small and medium sized firms (MSMEs), are not easily reached
through this stimulus.
• Infra spending is highly localised: Furthermore, investment in infrastructure is highly localised – there
is no reason to expect that the regional distribution of infrastructure needs will necessarily coincide
with the geographic distribution of its impact.
• Besides, the actual budget allocation towards infrastructure is rather modest: it is around Rs. 1.77
lakh crore of the additional economic stimulus for 2021-22, which is just 0.8% of GDP. This extra
spending will be divided amongst projects to build highways and roads, to provide safe drinking water
under the Jal Jeevan Mission, to build a new development finance institution called National Bank for
Financing Infrastructure and Development (NaBFID), and also to offer credit to MSMEs. More
specifically, a comparison of the budgetary allocation to the Ministry of Highways and Road Transport
in 2020-21 (Rs. 91,823 crore) and 2021-22 (Rs. 118,101 crore) indicates an impressive growth rate of
28.6% - although the budgeted spending on highways and road transport is still only about 3.4% of
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total budgeted expenditure of Rs. 34,83,236 crore in 2021-22. Insufficient funding for capital
expenditure may stall projects especially if they run over time and may, ultimately, fail to boost
income or employment to the levels required to pull the economy out of the recession.
• Premature Infra Spending can result in NPAs: Even in pre-Covid economic slowdown, premature
infrastructure projects were an important factor for the growth of non-performing assets (NPAs) on
the banks' balance sheets. If a road is built in anticipation of a new industrial sector that will use the
road and pay the user fee, but the industry takes too long to materialise, the firm that built the road
under a public-private partnership goes belly-up, creating a NPA in a bank that issued the loan.
• Conclusion: 2021-22 Budget has gone for a strong infrastructure push (albeit still modest shares of
infrastructure spending in total expenditure and GDP), accompanied by a cut in the education budget
and insufficient investment in health The sprawling construction sites that public infrastructure
spending creates are visible reminders to voters that the government is working to address a crisis –
in line with the “New Welfarism” of the Modi government – in a year when four states go to polls.
Leaving aside this political dividend, the expected contribution of infrastructure investment to pull the
economy out of this deep recession crucially depends on whether it can generate timely, well-
targetted, and inclusive growth. While the budget has made the stock market happy – largely because
there has been no new tax or increase in existing tax that many feared – serious doubts remain about
its adequacy to steer a ‘V-shaped recovery’ as claimed by the government.
1.10.5 Union Budget 2021-22: Insufficient allocation to Health and Education Sector
• This budget has failed to prioritise investment in less risky and more labour-intensive, traditional
public goods such as basic health and education – as governments around the world have done to
tackle recession currently and historically.
• Hype of 137% increase in health spending: There has been considerable hype about the 137%
increase in healthcare spending in 2021. However, in reality, these increased healthcare allocations
are arrived at by adding the following budget heads: Health Ministry, AYUSH (Ayurveda, Yoga and
Naturopathy, Unani, Siddha and Homoeopathy) Ministry, Department of Drinking Water and
Sanitation; allocations by the Finance Commission for health, water and sanitation, and a new head
of money for Covid-19 vaccination. For 2021-22, India's Health Ministry has been allotted Rs.
73,931.77 crore. This is up 10.16% from the budget estimate for 2020-21. A 10% increase in health
allocations this year – in a country that has always been underspending on health – does not seem
sufficient. Moreover, the amount allocated towards Covid-19 vaccination accounts for only 9% of the
extra spending intended to tackle a recession that has been caused by the pandemic.
• Education allocation slashed: The role of investment in education in a recession is difficult to ignore
as it can directly contribute to more productivity, efficiency, and hence higher earnings, and less
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vulnerability to unemployment. Hence, a government with an ambitious investment and growth
programme is expected to invest significantly in education and skills training. Contrary to everyone’s
expectations, however, the 2021-22 Budget has slashed education allocation by about 6%.While the
Education Ministry rationalised the cut on account of Covid-19 exigencies, the sharp dip in the
education budget highlights the utter negligence of the sector at a time when schools and universities
– that have remained shut for over 10 months – are in desperate need of a special package to get back
on track.
• Digital Divide unaddressed: While the government of India quickly recommended schools to move to
online teaching, it was easier said than done. India has an immense digital divide, with embedded
gender and class divides: only 42% (14.9%) of urban (rural) households have access to internet, where
males are the primary users. Most teachers are ill-equipped for online teaching too. Technology has
the potential to achieve universal and high-quality education and improve learning outcomes. But in
order to unleash its potential, digital capabilities, the required infrastructure, and connectivity must
reach the remotest and poorest communities. Unfortunately, the 2021-22 Budget on education has
not addressed this.
1.10.6 Union Budget 2021-22: Is it sufficiently pro-poor?

• Need for pro-poor tilt: The Indian economy has suffered more than most others with gross domestic
product (GDP) plummeting by 7.7% during the last financial year. What is worse is that it is the bottom
third of the population that has suffered the most. So, it was crucial for the Finance Minister and her
team to formulate a budget that would enable the economy to stage a quick recovery while ensuring
that the overall growth process exhibits a pronounced pro-poor tilt.
• Difficulty in being pro-poor: This was no easy task because the virtual collapse of economic activity
during the past year has left government coffers empty, with both tax and non-tax revenues being
significantly lower than the budget estimates.
• How does the Budget fare in terms of these criteria? While there are several positive features in the
Budget, the overall thrust is disappointing because it does not address the needs of the poor.
• Job Creation: The government may be hoping that since road construction and other infrastructure
projects are relatively labour-intensive, the pattern of new investments will have a significant impact
on employment. Perhaps, the government also has faith that the proposed Mega Textiles Parks will
contribute to job creation since the textiles industry too is quite labour intensive. However, the Budget
does not contain any specific proposals or schemes that are designed to boost employment. In fact,
the budgetary allocation for MNREGA itself is almost 30% lower than the revised estimates for 2020-
21. Note, however, that there was a steep increase in the allocation to MNREGA during the past
financial year in order to provide employment to migrants after they returned from urban areas.
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o There was no clear statement in the budget on boosting employment, especially female
employment, which has been falling over the last several years.
o Infrastructure spending (which, not unsurprisingly, was targeted towards poll-bound states)
might boost employment to a certain extent, but it is not clear that the increased outlay is
sufficient to meet the massive employment challenge.
o Medium, small and micro enterprises (MSMEs) employ a very large part of the non-agrarian
workforce. These enterprises, several already precarious, have been struggling to survive
during the economic recession. The budget would have been the right forum to announce big-
bang support and revival policies for this sector.
• Explicitly pro-poor measures that could have been taken: The allocation for MNREGA could have
been kept at a level closer to the revised estimates for 2020-21. Some version of an urban MNREGA
could have been started – even if as a ‘pilot’ project. The government could also, at least for a limited
period, distribute a larger amount of foodgrains more widely from the overflowing warehouses of the
Food Corporation of India (FCI). The buffer stock is so far in excess of any reasonable levels that a
sizeable fraction will rot or be eaten by rats. Additionally, direct transfers of small amounts of cash to
targetted sections of the population would have been a wonderful step.
1.10.7 Union Budget 2021-22: Are we shifting away from welfarism?

• Budget furthers an important political shift in the economic narrative of the NDA government.
• Prime Minister Narendra Modi’s first term in office was marked by a ‘welfarist’ orientation – visible in
the plethora of schemes for sanitation, housing, gas cylinders, and so on. Without debating the
effectiveness of these schemes, there is no doubt they played an important role in the 2019 elections,
and were emblematic of the central government’s approach.
• Since the start of the pandemic, this welfarist-focussed politics has taken a backseat. The
government’s stubborn refusal to loosen its purse strings and provide direct fiscal support – and
instead rely on monetary policy levers – is evidence of this shift. Rather than expanding, government
expenditure contracted, picking up only in November 2020.
• Importantly, the increased total expenditure in FY2020-21 (from Rs. 30.4 lakh crore BE to Rs. 34.5 lakh
crore RE) includes Rs. 1.5 lakh crore of prepayment of past dues to the Food Corporation of India. The
emphasis on physical infrastructure over continued expansion of the food subsidy and MNREGA
(Mahatma Gandhi National Rural Employment Guarantee Act)7 (the two pillars of the Covid-19 relief
measures) in the FY2021-22 budget, and the absence of any direct support to migrant workers and
the urban poor, points to a decided shift away from the welfarism of the past.
• A new political economy approach is now being crafted. India’s poor will disproportionately bear the
costs of this shift away from expanded welfare support toward physical infrastructure.
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• The gains from increased investments in physical infrastructure will not immediately translate into
employment and increased wages for the poor. There are continuing governance challenges, which
despite announcements of a ‘bad bank’ and Development Finance Institution (DFI), will not be
addressed overnight.
• India’s post-lockdown economic recovery is showing signs ofs deepening structural inequality.
Economic activity has reached near pre-pandemic levels but this is largely profit-led. Large, listed firms
have profited at the cost of small firms and the informal sector. The scars in the labour market,
particularly informal labour, run deep. The shifting political economy underlying the policy choices
made at the peak of pandemic and in its aftermath in the 2021-22 Budget, suggest that these scars
will likely deepen in the years to come.
1.10.8 Union Budget 2021-22: The Good and the Bad

There are some positives in the Budget.
• For instance, there has been a conscious effort to avoid fudging of data – no mean feat in India. The
usual practice so far was to hide the size of the food subsidy bill by passing it off as FCI market
borrowings. This practice has been shelved and the FCI will have to be funded transparently from
now on.
• The government has also taken another big step forward by clearing off the arrears of the fertiliser
industry.
• The Budget speech has also been remarkably brave by announcing plans that go against what is
generally considered politically acceptable. The government has said that it will raise the foreign
direct investment (FDI) limit in insurance to 74%. It also plans to reduce its holding in the Life
Insurance Corporation (LIC) and sell two public sector banks. The Finance Minister even went so far
as to use the word “privatisation” in this connection! Of course, we will have to wait and see the
degree to which these plans can be successfully implemented. But the intention has been clearly spelt
out.
• Not surprisingly, a large sum of Rs 35,000 crores has been allocated to the Covid-19 vaccination drive.
• Water and sanitation have also been given additional outlays.
• The Finance Minister has announced a new centrally sponsored initiative to develop capacities of
primary, tertiary, and secondary healthcare systems to detect and cure new diseases.
However, a regressive step in this Budget is the neglect of the education sector – there has actually been
a 6% reduction in the allocation to the Education Ministry. This government has repeatedly emphasised
its desire to build a knowledge economy, and to strengthen universities and research institutions to
compete with the best in the world. Surely, this is not the right way to achieve these goals.
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Among the more disappointing features of the Budget is the strengthening of protectionist tendencies.
The Budget seeks to remove exemptions on a number of items and increase rates on a few others. It is
rather ironic that the current government is turning the clock back to bring in policies that were in vogue
during the Nehru years. At any rate, the encouragement of domestic industries behind high tariff walls is
myopic beyond belief. It does not promote self-reliance, but only high-cost industries that cannot
compete in global markets. In some cases, an increase in tariffs on intermediates does not even benefit
domestic intermediate producers simply because there are none. This seems to be the case for some
components used in the manufacture of mobile phones.
1.10.9 Union Budget 2021-22: Does it Address Structural Issues?

Although this Budget was presented in an exceptionally difficult period for the Indian economy,
policymakers remained cognisant of the structural challenges facing the country.
Increasing the share of capital expenditure will create long-term assets and boost growth over the
medium term. Capital spending that is slated to go up by 26 per cent to Rs 5.54 lakh crore over the current
fiscal year’s revised estimate of Rs 4.39 lakh crore, which is 6.6 per cent higher than the original provision.
Transparent fiscal reporting – brought about by phasing out extra-budgetary borrowings almost entirely
– will restore credibility to India’s deficit numbers.
What makes the Budget particularly bold are the proposals to increase the FDI limit in the insurance
sector from the existing 49 per cent to 74 per cent and targeting of the privatisation of at least two state-
owned banks and one general insurance company in 2021-22. This, when the ruling party is already facing
a challenge from the opposition to its farm reform laws. Pushing through the required amendments to
the existing bank and insurance nationalisation acts may not be difficult in Parliament. But, as with the
farm laws, the real test will lie in how the government deals with the strong employee unions in these
two sectors.
Challenges in meeting targets for tax collection and disinvestment proceeds might be significant but in
the absence of a second wave of Covid-19 cases, cheer may return to the Revenue Department.
However, agricultural investment – especially R&D – deserves greater emphasis. The sector’s struggles
over the years can be neatly mapped onto the declining share of capital formation and rising proportion
of subsidies in the Centre’s total outlay on agriculture. Now that the Centre has come clean on food and
fertiliser subsidy, one can hope that investment in agriculture will be increased in the coming years.
Budget has proposed a new bad bank framework to deal with the problem of non-performing assets. It
is not clear how such an entity — whether an asset reconstruction or management company — would
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operate. How will it be financed? At what price, and when will the bad loans of banks be transferred to
it? How will the process be made transparent and shielded from the 3Cs?
Government also announced the setting up of a development finance institution to provide long-term
financing for infrastructure projects. While, in theory, this makes sense — there are asset-liability
mismatch issues when it comes to banks undertaking project financing — the experience with creating
such institutions in the recent past, be it IDFC (which eventually became a bank) or IIFCL (India
Infrastructure Finance Company Limited), is not very inspiring.
Lastly, while it is good to account fully for food and fertiliser subsidies on the government’s books, how
long can their overdue rationalisation wait? The issue prices of subsidised food grains have not been
raised for over two decades, and of urea not since April 2010. The Budget has no roadmap on capping
the existing minimum support price-based grain procurement — which is, of course, too much to expect
in the current circumstances. But this is a reform that cannot be put off indefinitely and it must be hoped
that it is still on the government’s radar. The Budget has also continued with the trend of the last few
years of raising import duties on items such as mobile phone and auto parts to promote domestic
manufacturing. Such proposals dent its reformist intentions.
This is being termed as a growth Budget more than a revivalist one. This shows that the Finance Minister
still has an eye on the ‘US$5 trillion GDP by 2024-25’ goal – the coming year may tell us more about how
realistic that is.
1.10.10 Union Budget 2021-22: An unfinished agenda on jobs and skills

• COVID reminded us that our social security systems need reform and we must tackle EPFO and ESI.
• Decriminalisation of laws and rules was mentioned but we need a 180-day compliance commission
to rationalise, decriminalise and digitise our thousands of compliances and filings.
• We must notify reasonable rules for our four labour codes while simultaneously setting a deadline to
move to one labour code.
• Divestment of two nationalised banks is a great start but truly accelerating the financial inclusion that
explodes small firm job creation needs an independent holding company for the remaining state-
owned banks.
• The creation of the new higher education commission needs acceleration — notwithstanding the
atmanirbhar announcement of online education deregulation, only seven of India’s 1,000
universities have been licenced for online degree delivery (even though 200-plus foreign universities
operate in India online).
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• The proposed amendment to the Apprentices Act is welcome and must create space for skill
universities. Degree apprentices are the future of massifying higher education because they innovate
at the intersection of financing, employability, and signalling value.
1.10.11 Union Budget 2021-22: A need to correct subsidy bias in Agriculture?

• Finance Minister Nirmala Sitharaman needs to be complimented for bringing about transparency in
the Union Budget, at least in the part on the agri-food sector.
• Subsidy for agriculture sector:
o Food subsidy: For FY 2021-22, the budgeted estimate is Rs 2,42,836 crore.
o Fertiliser Subsidy: For FY 2021-22, things are likely to smoothen with a budget provision of
Rs 79,530 crore.
o PM-Kisan: Rs 65,000 crore is now budgeted for FY 2021-22.
o The Pradhan Mantri Fasal Bima Yojana is budgeted at Rs 16,000 crore for FY 2021-22 , not
much different from the RE of FY 2020-21
o The interest subsidy on short-term credit to farmers in FY 2021-22, Rs 19,468 crore, too
will not be very different from the RE of FY 2020-21.
• From a policy perspective in the agri-food space, beyond the transparency in numbers, one must point
to the huge bias towards subsidies — food and fertiliser, PM-Kisan, crop insurance and interest
subvention — as compared to investments, especially research and development.
• The allocation for agri-R&D is a meagre Rs 8,514 crore in FY 2021-22 against a RE of Rs 7,762 crore in
FY 2020-21. This is bewildering as the marginal returns in terms of agri-growth from expenditures on
agri-R&D are almost five to 10 times higher than through subsidies. India spends not even half of
what a private global company like Bayer spends on agri-R&D — almost Rs 20,000 crore every year.
No wonder our growth momentum in agriculture remains subdued and India keeps spending on
freebies with sub-optimal results.
o Investment in human capital, science and research remains the Achilles heel of Indian
policy. The budget allocation for agriculture research and education has constantly
declined from 0.31 per cent of the gross value added of agriculture and allied activities in
2011-12 to 0.24 per cent now. To realise India’s growth story and for us to be in the big
league with the developed nations we need to match their R&E allocations of 2.5 per cent.
• Food Subsidy: Points to ponder
o One with respect to food subsidy, the FCI’s economic cost of rice is Rs 37/kg and of wheat
about Rs 27/kg. This economic cost is roughly 40 per cent higher than the procurement
price. Why not give the public distribution system’s beneficiaries the choice of direct cash
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transfers to the tune of procurement price plus 25 per cent? This could create a more
diversified demand which, in turn, will support diversification in agriculture.
o Further, in food subsidy, it is time to revise the issue prices for beneficiaries. While the
“antyodaya” (most marginal) category can keep receiving grains at Rs 2 or Rs 3/kg, all
others should pay at least half of the procurement price if food subsidy has to be brought
to manageable levels.
o Further, one should debate whether 60 or 67 per cent of the population should be covered
by the food subsidy or this figure should be brought down to 40 per cent.
• Fertiliser Subsidy needs Reform: in the case of the fertiliser subsidy again, massive subsidisation of
urea, to the tune of almost 70 per cent of its cost, is leading to its sub-optimal usage. It is time to move
towards direct cash transfers to farmers based on a per hectare basis and free up prices of fertilisers.
This will help reduce leakages and imbalance in NPK (nitrogen, phosphorus, potassium) usage and lead
to efficiency, equity and environmental sustainability.
• Agri-Insurance Reforms:
o The agriculture insurance pipeline that drains precious government resources in the name
of the farmer should have been turned off. For example, the government owned
Agriculture Insurance Company of India has incurred losses of Rs 10,000-crore, while the
private insurance sector raked in profits of approximately Rs 50,000 crore.
o Many states have stopped participating in the programme — Bihar, West Bengal and
Jharkhand have stopped, while Maharashtra and Madhya Pradesh are also about to dump
the scheme.
• R&D Expenditure needs to increase: Overall, the expenditure on agri-R&D needs to be doubled or
even tripled in next three years, if growth in agriculture has to provide food security at a national level
and subsidies on food and fertilisers need to be contained. Can our policymakers do it? Only time will
tell.
Note: It was heartening to hear the government validating its commitment to MSP procurement, which
has expanded across regions and more farmers are benefitting. Allowing the APMCs to tap into the
Agriculture Infrastructure Fund is also commendable as the money borrowed to develop mandis will
now be eligible for interest subvention. Extending the Operation Green scheme to all perishables is
noteworthy and so is starting the Kisan Rail.
1.10.12 Union Budget 2021-22: Does budget fulfill needs of an ailing economy?
• India – An ailing economy:
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o Indian economy was battered by two years of slowdown, with a pre-pandemic annual growth
rate of 4 per cent being a decadal low and the subsequent collapse in economic activity due to
the pandemic which is expected to reduce the GDP by 7.7 per cent.
o With all-round distress due to declining wages, job losses and decreasing economic activity,
which has affected the majority of the informal working class, this budget was expected to
provide a robust path for recovery.
• There is no need to heap praise on government for being transparent with fiscal deficit numbers:
The government has earned kudos for being transparent on including the off-budget items. This
should have been a normal practice. But when virtue is in short supply, even small steps of
transparency matter.
• Total expenditure of the government in 2020-21 hardly increased compared to the pre-pandemic
budget estimates (BE). The total increase in revised estimates (RE) for 2020-21 is only Rs 33,000 crore,
around 1 per cent more than what was budgeted.
o Of course, the natural question to ask is what happened to the mid-year announcements which
the prime minister called mini budgets as part of pandemic relief in March 2020 — Rs 20 lakh
crore in May 2020 and similar announcements later on.
o The government did deliver by raising the expenditure on food subsidy, direct benefit
transfer to Jan Dhan accounts (Rs 33,000 crore) and the increase in the Mahatma Gandhi
National Rural Employment Guarantee (MGNREGA) (Rs 50,000 crore) and so on. But it did so
not by generating resources and expanding the fiscal deficit but by cutting down essential
expenditure such as agriculture (Rs 18,000 crore), education (Rs 14,000 crore) and social
welfare (Rs 14,000 crore). Whether even these revised estimates will remain the same as
actual expenditure will only be known in the next budget.
• Delusions of grandeur are also seen in the case of the mega announcement of increase in the health
budget to Rs 2.23 lakh crore. This number was achieved by adding one-time expenditures on the
vaccine, Finance Commission grants and inclusion of expenditure on drinking water, sanitation and
nutrition. The reality is that the budget of the health ministry for 2021-21 is lower at Rs 74,602 crore
compared to the revised estimates of Rs 82,445 crore for the current year.
• It is the same case with agriculture where grand claims on farmers covered and amount spent on MSP
purchases were announced. Like in many other essential ministries, the agriculture ministry also
witnessed a cut with estimates of 2021-22 lower by Rs 11,000 crore than last year. No wonder,
farmers have little trust in the government’s claim of reforms when it refuses to spend even the bare
minimum that it promised. Real investment in agriculture has been lower than 2013-14 for every
year of this government.
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• At a time when real wages in rural areas have declined not just compared to last year but also
compared to five years ago and farm gate prices have crashed for most agricultural commodities,
even the lifeline provided by expenditure in rural areas on infrastructure creation and employment
generation has either seen a decline in budgeted expenditure or remained stagnant.
o The budget for the ministry of rural development is lower by Rs 66,000 crore compared to
the RE of last year.
o MGNREGA budget of Rs 73,000 crore is barely enough to cover the increase in wages by 11
per cent announced in March 2020. It is only 1.8 per cent higher than the actual expenditure
of 2019-20, but 52 per cent lower than the RE of last year.
o Pradhan Mantri Gram Sadak Yojna (PMGSY), the budget for 2021-22 has been cut by Rs 4,500
crore, not even enough to cover inflation between the two years.
• Unlike the pandemic, where the arrival of vaccines has given hope, the ailing economy needs much
more than this budget.
1.10.13 Union Budget 2020-21: Analysing the Financial Proposals

• Some of the financial sector proposals unveiled by Finance Minister Nirmala Sitharaman in the Union
budget are bold.
o For one, Sitharaman has stated her intention to privatise two public sector banks — the first
such mention in recent budget speeches.
▪ Saying that a public sector bank will be privatised in the budget has more than a
symbolic value. It is also an acknowledgement that the government simply does not
have the resources to keep recapitalising public sector banks.
▪ The government may have to bring legislative amendments to go ahead. Accomplishing
this, and then expanding the privatisation programme to other public sector banks will
also require the government to expend political capital to convince the bank employee
unions.
o Second, she has proposed setting up a new structure to deal with the vexed issue of bad loans.
▪ Sitharaman has proposed creating a framework — a bad bank of sorts — for tackling
the issue of bad loans that is likely to escalate in the coming months.
▪ An asset reconstruction and management company will be set up to take over the bad
loans of banks. While this will clear the banks’ balance sheets — the Reserve Bank of
India (RBI) expects banks’ non-performing loans to rise to 13.5 per cent at the end of
September 2021, up from 7.5 per cent in September 2020 — freeing them up to lend
to the broader economy, several issues will need to be addressed: Who will fund the
bad bank? At what prices will the transactions between the bad bank and the banks
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take place? Will the process be transparent? Doesn’t this simply absolve bankers of
their past errors, while encouraging them to continue with the same lending practices?
o And third, to help finance long gestation infrastructure projects, a new Development Financial
Institution (DFI) will be set up.
▪ With the public sector bank-led model of infrastructure financing broken, Sitharaman
has also proposed setting up a Development Financial Institution. The budget has
allocated Rs 20,000 crore towards the new institution’s capital base, to enable it to lend
Rs 5 lakh crore over the next three years.
▪ But this is not a new solution. India has experimented with DFIs before, and the
experience has not been encouraging. DFIs like ICICI and IDBI were converted into
universal banks.
▪ Scaling up may prove to be challenging, and political considerations may affect
decisions.
▪ Falling back on the DFI model also signals an acknowledgement of the absence of a
deep and vibrant bond market which could have facilitated long-term infrastructure
financing.
2 Economic Survey 2020-21

2.1 Saving Lives and Livelihoods amidst a Once-in-a-Century Crisis
(Volume 1 – Chapter 1)
Q.) Analyze India’s response to Covid-19 pandemic. Do you think that India has been successful in
tackling the threat posed by Covid-19?
• The Covid-19 pandemic engendered a once-in-a-century global crisis in 2020. Faced with
unprecedented uncertainty at the onset of the pandemic, India focused on saving lives and livelihoods
by its willingness to take short-term pain for long-term gain.
• India’s response stemmed from the humane principle that while GDP growth will recover from the
temporary shock caused by an intense lockdown, human lives that are lost cannot be brought back.
• The response drew on epidemiological and economic research, especially those pertaining to the
Spanish Flu, which highlighted that an early, intense lockdown provided a win-win strategy to save
lives, and preserve livelihoods via economic recovery in the medium to long-term. This strategy was
also tailored to India’s unique vulnerabilities to the pandemic.
• The strategy was also motivated by the Nobel-Prize winning research in Hansen & Sargent (2001)
that recommends a policy focused on minimizing losses in a worst case scenario when uncertainty is
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very high. Faced with an unprecedented pandemic and the resultant uncertainty, loss of scores of
human lives captured thus the worst case scenario.
• India’s strategy flattened the curve, pushed the peak to September, 2020, and helped transform the
short-term trade-off between lives and livelihoods into a win-win in the medium to long-term that
saves both lives and livelihoods. After the September peak, India has been unique in experiencing
declining daily cases despite increasing mobility.
• While the lockdown resulted in a 23.9 per cent contraction in GDP in Q1, the recovery has been a V-
shaped one as seen in the 7.5 per cent decline in Q2 and the recovery across all key economic
indicators.
• Unlike previous crises, the Covid pandemic affects both demand and supply. India was the only
country to announce a slew of structural reforms to expand supply in the medium to long term and
avoid long-term damage to productive capacities.
• On the demand side, India’s policies have been calibrated to ensure that the accelerator is slowly
pushed down only when while the brakes are being removed on economic activities. A public
investment programme centred around the National Infrastructure Pipeline is likely to accelerate
the demand push and further the recovery.
• The upturn in the economy while avoiding a second wave of infections makes India a sui generis case
in strategic policymaking amidst a once-in-a-century pandemic.
2.2 Does Growth lead to Debt Sustainability? Yes, But Not Vice- Versa!
Q.) Discuss the desirability of using counter-cyclical fiscal policy to enable growth during economic
downturns.
• ES establishes clearly that growth leads to debt sustainability in the Indian context but not necessarily
vice-versa. This is because the interest rate on debt paid by the Indian government has been less
than India’s growth rate by norm, not by exception. As Blanchard (2019) explains in his 2019
Presidential Address to the American Economic Association: “If the interest rate paid by the
government is less than the growth rate, then the intertemporal budget constraint facing the
government no longer binds.” This phenomenon highlights that debt sustainability depends on the
“interest rate growth rate differential” (IRGD), i.e. the difference between the interest rate and the
growth rate in an economy.
• In advanced economies, the extremely low interest rates, which have led to negative IRGD, on the one
hand, and have placed limitations on monetary policy, on the other hand, have caused a rethink of
the role of fiscal policy. The same phenomenon of a negative IRGD in India – not due to lower interest
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rates but much higher growth rates – must prompt a debate on the saliency of fiscal policy, especially
during growth slowdowns and economic crises.
• Growth causes debt to become sustainable in countries with higher growth rates; such clarity about
the causal direction is not witnessed in countries with lower growth rates.
• As the COVID-19 pandemic has created a significant negative shock to demand, active fiscal policy –
one that recognises that fiscal multipliers are disproportionately higher during economic crises than
during economic booms – can ensure that the full benefit of seminal economic reforms is reaped by
limiting potential damage to productive capacity. As the IRGD is expected to be negative in the
foreseeable future, a fiscal policy that provides an impetus to growth will lead to lower, not higher,
debt-to-GDP ratios. In fact, simulations undertaken till 2030 highlight that given India’s growth
potential, debt sustainability is unlikely to be a problem even in the worst scenarios. ES 2020-21
thus demonstrates the desirability of using counter-cyclical fiscal policy to enable growth during
economic downturns.
• While acknowledging the counterargument from critics that governments may have a natural
proclivity to spend, the Survey endeavours to provide the intellectual anchor for the government to
be more relaxed about debt and fiscal spending during a growth slowdown or an economic crisis. The
Survey’s call for more active, counter-cyclical fiscal policy is not a call for fiscal irresponsibility. It is a
call to break the intellectual anchoring that has created an asymmetric bias against fiscal policy.
Relevance of Counter-cyclical Fiscal Policy

Indian Kings used to build palaces during famines and droughts to provide employment and improve
the economic fortunes of the private sector. Economic theory, in effect, makes the same
recommendation: in a recessionary year, Government must spend more than during expansionary
times. Such counter-cyclical fiscal policy stabilizes the business cycle by being contractionary (reduce
spending/increase taxes) in good times and expansionary (increase spending/reduce taxes) in bad
times. On the other hand, a pro-cyclical fiscal policy is the one wherein fiscal policy reinforces the
business cycle by being expansionary during good times and contractionary during recessions.
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Channels of Transmission
• Recalling the National Income identity , Y= C+I+G+X-M , the net effect of a recession on the private
sector may be in terms of lower private consumption (C), lower private investment (I), risk aversion
by the private sector and pessimistic expectations/sentiments. In such a scenario, adopting a
counter cyclical policy by expanding the Government Expenditure – both consumption and
investment - will support the GDP and minimise the output gap (as seen in the figure above). This
happens primarily through the following channels:
• An expansion in Government expenditure can cushion the contraction in output by contributing to
the GDP growth, by offsetting the decline in consumption and investment; and also by boosting
private investment and consumption through higher spending multipliers during recession.
• Through risk multiplier by compensating for greater risk-aversion of private sector to bring back
‘animal spirits’.
• Through expectation multiplier by building confidence in tough times: Governments adopting
counter-cyclical fiscal policy are able to credibly exhibit their commitment to sound fiscal
management. As a result, rational agents in the economy would expect the economy not to
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fluctuate as much and therefore their private actions would reinforce this, in turn enabling stronger
macroeconomic fundamentals.
For India, in the current scenario, when private consumption, which contributes to 54 per cent of GDP
is contracting, and investment, which contributes to around 29 per cent is uncertain, the relevance of
counter-cyclical fiscal policies is paramount. In fact, a sustained, productive program of permanent
stimulus directed towards public investment, in both physical and human capital, is the need of the
hour
2.3 Does India’s Sovereign Credit Rating Reflect Its Fundamentals? No!
Q.) ‘If India were to adopt the path of counter-cyclical fiscal policy, there is a possibility that India’s
sovereign credit ratings may be further downgraded.’ In the light of the above statement, discuss the
relevance of India’s sovereign credit ratings.
• Never in the history of sovereign credit ratings has the fifth largest economy in the world been rated
as the lowest rung of the investment grade (BBB-/Baa3). Reflecting the economic size and thereby
the ability to repay debt, the fifth largest economy has been predominantly rated AAA. China and
India are the only exceptions to this rule – China was rated A-/A2 in 2005 and now India is rated BBB-
/Baa3.
• India’s sovereign credit ratings do not reflect its fundamentals. Within its sovereign credit ratings
cohort – countries rated between A+/A1 and BBB-/Baa3 for S&P/ Moody’s – India is a clear outlier on
several parameters, i.e. it is rated significantly lower than mandated by the effect on the sovereign
rating of the parameter. These include GDP growth rate, inflation, general government debt (as per
cent of GDP), cyclically adjusted primary balance (as per cent of potential GDP), current account
balance (as per cent of GDP), political stability, rule of law, control of corruption, investor
protection, ease of doing business, short-term external debt (as per cent of reserves), reserve
adequacy ratio and sovereign default history. This outlier status remains true not only now but also
during the last two decades.
• Credit ratings map the probability of default and therefore reflect the willingness and ability of
borrower to meet its obligations. India’s willingness to pay is unquestionably demonstrated through
its zero sovereign default history. India’s ability to pay can be gauged not only by the extremely low
foreign currency denominated debt of the sovereign but also by the comfortable size of its foreign
exchange reserves that can pay for the short term debt of the private sector as well as the entire
stock of India’s sovereign and non-sovereign external debt. India’s forex reserves can cover an
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additional 2.8 standard deviation negative event, i.e. an event that can be expected to manifest with
a probability of less than 0.1 per cent after meeting all short-term debt.
• As ratings do not capture India’s fundamentals, it comes as no surprise that past episodes of
sovereign credit rating changes for India have not had major adverse impact on select indicators such
as Sensex return, foreign exchange rate and yield on government securities. Past episodes of rating
changes have no or weak correlation with macroeconomic indicators.
• India’s fiscal policy, therefore, must not remain beholden to a noisy/biased measure of India’s
fundamentals and should instead reflect Gurudev Rabindranath Thakur’s sentiment of a mind
without fear.
• Despite ratings not reflecting fundamentals, they can however be pro-cyclical and can affect equity
and debt FPI flows of developing countries, causing damage and worsening crisis. It is therefore
imperative that sovereign credit ratings methodology be made more transparent, less subjective and
better attuned to reflect economies’ fundamentals.
2.4 Inequality and Growth: Conflict or Convergence?

Q.) It is said that inequality is no accident but an essential feature of capitalism. Do you agree? What
should be India’s approach for lifting millions out of poverty?
• The Economic Survey 2019-20 argued that ethical wealth creation – by combining the invisible hand
of markets with the hand of trust – provides the way forward for India to develop economically. An
often-repeated concern expressed with this economic model pertains to inequality.
• Some commentary, especially in advanced economies post the Global Financial Crisis, argues that
inequality is no accident but an essential feature of capitalism. Such commentaries, thus, highlight a
potential conflict between economic growth and inequality.
• Could the fact that both the absolute levels of poverty and the rates of economic growth are low in
advanced economies generate this conflict? If so, could it be that a developing economy such as India
can avoid this conflict – at least in the near future – because of the potential for high economic
growth, on the one hand, and the significant scope for lifting millions out of poverty, on the other
hand? This question becomes pertinent especially because of the inevitable focus on inequality
following the COVID-19 pandemic.
• By examining the correlation of inequality and per-capita income with a range of socio-economic
indicators, including health, education, life expectancy, infant mortality, birth and death rates, fertility
rates, crime, drug usage and mental health, the ES 2020-21 highlights that both economic growth –
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as reflected in the income per capita at the state level –and inequality have similar relationships with
socio-economic indicators.
• Thus, unlike in advanced economies, in India economic growth and inequality converge in terms of
their effects on socio-economic indicators. Furthermore, ES 2020-21 finds that economic growth has
a far greater impact on poverty alleviation than inequality.
• Therefore, given India’s stage of development, India must continue to focus on economic growth to
lift the poor out of poverty by expanding the overall pie. Note that this policy focus does not imply
that redistributive objectives are unimportant, but that redistribution is only feasible in a developing
economy if the size of the economic pie grows.
2.5 Healthcare takes Centre Stage, Finally!

Q.) "It is health that is real wealth and not pieces of gold and silver - Mohandas K. Gandhi.” What steps
should India take to strengthen its healthcare sector?
• The recent COVID-19 pandemic has emphasised the importance of healthcare sector and its inter-
linkages with other key sectors of the economy. The ongoing pandemic has showcased how a
healthcare crisis can get transformed into an economic and social crisis.
• Healthcare policy must not become beholden to “saliency bias”, where policy overweights a recent
phenomenon. To enable India to respond to pandemics, the health infrastructure must be agile.
• The National Health mission (NHM) has played a critical role in mitigating inequity as the access of
the poorest to pre-natal and post-natal care as well as institutional deliveries has increased
significantly. Therefore, in conjunction to with Ayushman Bharat, the emphasis on NHM should
continue.
• An increase in public spend from 1 per cent to 2.5-3 per cent of GDP – as envisaged in the National
Health Policy 2017 – can decrease the OOPE from 65 per cent to 30 per cent of overall healthcare
spend.
• A sectoral regulator to undertake regulation and supervision of the healthcare sector must be
considered given the market failures stemming from information asymmetry; WHO also highlights
the growing importance of the same.
• The mitigation of information asymmetry would also help lower insurance premiums, enable the
offering of better products and help increase the insurance penetration in the country. Information
utilities that help mitigate the information asymmetry in healthcare sector can be very useful in
enhancing overall welfare.
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• Telemedicine needs to be harnessed to the fullest by investing in internet connectivity and health
infrastructure.
Indian Healthcare Currently

Despite improvements in healthcare access and quality (healthcare access and quality scored at 41.2 in
2016, up from 24.7 in 1990), India continues to underperform in comparison to other Low and Lower
Middle Income (LMIC) countries. On quality and access of healthcare, India was ranked 145th out of
180 countries (Global Burden of Disease Study 2016). Only few sub-Saharan countries, some pacific
islands, Nepal and Pakistan were ranked below India.
Poor health outcomes: Despite improvements in MMR and IMR, India still needs to improve
significantly on these metrics. Countries such as China, Bangladesh, Bhutan, Cambodia, etc. have
improved much more on these metrics than India.
Low access and utilization: At 3-4 per cent, the hospitalisation rates in India are among the lowest in
the world; the average for middle income countries is 8-9 per cent and 13-17 per cent for OECD
countries Given the increasing burden of NCD, lower life expectancy, higher MMR and IMR, the low
hospitalisation rates are unlikely to reflect a more healthy population as compared to middle income
or OECD countries. Thus, the low hospitalisation rates reflect lower access and utilisation of healthcare
in India.
High out-of-pocket health expenditures: India has one of the highest levels of OOPE in the world.
However, recent data show that the distribution of the public subsidy has improved in favour of the
poor, more clearly in maternity and child healthcare. In recent times, the percentage of the poorest
utilising prenatal care through public facilities has increased from 19.9 per cent to 24.7 per cent from
2004 to 2018, and there is a similar increase in the percentage of the poor accessing institutional
delivery as well as post-natal care.
Low budget allocations for healthcare: As health is a state subject in India, spending on healthcare by
states matters the most when examining government healthcare spending. According to National
Health Accounts, 2017, 66 per cent of spending on healthcare is done by the states. India ranks 179th
out of 189 countries in prioritization accorded to health in its government budgets (consolidated union
& state government). This prioritisation of health in India is similar to donordependent countries such
as Haiti and Sudan, and well short of its peers in development.
Low human resources for health: Health status of any country crucially depends on the available health
infrastructure in general and human resources for health. World Health Organization (WHO) identified
an aggregate density of health workers to be 44.5 per 10,000 population and an adequate skill-mix of
health workers to achieve composite SDG tracer indicators index by 2030 (WHO 2019). The WHO also
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specified a lower range of 23 health workers per 10,000 population to achieve 80 per cent of births
attended by skilled health professionals. Although aggregate human resources for health density in
India is close to the lower threshold of 23, the distribution of health workforce across states is lop-sided.
Also, the skill mix (doctor/nurse-midwives ratio) is far from adequate.
2.6 Process Reforms

Q.) ‘International comparisons show that the problems of India’s administrative processes derive less
from lack of compliance to processes or regulatory standards, but from overregulation.’ Elaborate
• It is not possible to have complete regulations in a world which has uncertainty as it is not possible
to account for all possible outcomes. The evidence, however, shows that India over-regulates the
economy. This results in regulations being ineffective even with relatively good compliance with
process.
• ES 2020-21 argues that the root cause of the problem of over-regulation is an approach that attempts
to account for every possible outcome. This is illustrated by a study of the time and procedures
needed to voluntarily close a company in India, even when there is no outstanding dispute or
litigation. Even when there is no dispute/ litigation and all paperwork is complete, it takes 1570 days
to be stuck off from the records. This is an order of magnitude longer than what it takes in other
countries.
• Both economic theory and evidence shows that in an uncertain and complex world, it is not possible
to write regulations that account for all possible outcomes. This makes discretion unavoidable in
decision-making. The attempt to reduce discretion by having ever more complex regulations,
however, results in even more non-transparent discretion.
• Real-world regulation is inevitably incomplete because of the combination of: (i) bounded rationality
due to “unknown unknowns”, (ii) complexity involved in framing “complete” contracts across all
possible contingencies, and (iii) the difficulty for a third party to verify decisions. This makes some
discretion unavoidable in decision making.
• The solution is to simplify regulations and invest in greater supervision which, by definition, implies
willingness to allow some discretion.
• The optimal solution is to have simple regulations combined with transparent decision making
process. Having provided the government decision maker with discretion, it is important then to
balance it with three things- improved transparency, stronger systems of ex-ante accountability
(such as bank boards) and ex-post resolution mechanisms. As an illustration, the chapter shows how
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the new Government e Marketplace (GeM portal) has increased the transparency in pricing in
government procurement. This has not only reduced the cost of procurement but has also made it
easier for the honest government official to make decisions.
2.7 Regulatory Forbearance an emergency medicine, not staple diet!

Q.) Current regulatory forbearance on bank loans can be a double edged sword for Indian economy.
Drawing upon the lessons learnt in the aftermath of Global Financial Crisis, outline the steps that should
be taken to ensure that the build-up of Non-Performing Assets is kept to the minimum in the aftermath
of Covid-19.
• During the Global Financial Crisis, forbearance helped borrowers’ tide over temporary hardship
caused due to the crisis and helped prevent a large contagion.
• However, the forbearance continued long after the economic recovery, resulting in unintended and
detrimental consequences for banks, firms, and the economy.
• Given relaxed provisioning requirements, banks exploited the forbearance window to restructure
loans even for unviable entities, thereby window dressing their books.
• As a result of the distorted incentives, banks misallocated credit, thereby damaging the quality of
investment in the economy.
• Concerned that the actual situation might be worse than reflected on the banks’ books, RBI initiated
an Asset Quality Review to clean up bank balance sheets. While gross NPAs increased from 4.3% in
2014-15 to 7.5% in 2015-16 and peaked at 11.2% in 2017-18, the AQR could not bring out all the
hidden bad assets in the bank books and led to an under-estimation of the capital requirements. This
led to a second round of lending distortions, thereby exacerbating an already grave situation.
• The prolonged forbearance policies following the GFC thus engendered the recent banking crisis that
brought down investment rates and thereby economic growth in the country.
• Forbearance represents emergency medicine that should be discontinued at the first opportunity
when the economy exhibits recovery, not a staple diet that gets continued for years
• To enable policymaking that involves an exercise of judgement amidst uncertainty, ex-post inquests
must recognise the role of hindsight bias and not make the mistake of equating unfavorable
outcomes to either bad judgement, or worse, malafide intent.
• Given the problem of asymmetric information between the regulator and the banks, which gets
accentuated during the forbearance regime, an Asset Quality Review exercise must be conducted
immediately after the forbearance is withdrawn.
• The legal infrastructure for the recovery of loans needs to be strengthened de facto.
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2.8 Innovation: Trending Up but Needs Thrust, Especially from the Private Sector
Q.) ‘India’s reliance on “Jugaad innovation” risks missing the crucial opportunity to innovate, which is
a crucial ingredient for rapid economic growth.’ In light of the above statement, discuss the problems
and potential solutions that can help in making India a hub of innovation.
• India entered the top 50 innovating countries for the first time in 2020 since the inception of the
Global Innovation Index (GII) in 2007, by improving its rank from 81 in 2015 to 48 in 2020.
• India ranks first in Central and South Asia, and third amongst lower middle-income group
economies.
• Among the seven pillars of the GII, India ranks 27th in knowledge and technology outputs (KTO);
31st in market sophistication; 55th in business sophistication; 60th in human capital and research
(HCR); 61st in institutions; 64th in creative output; and 75th in infrastructure.
• The GII also highlights areas with scope for improvement. India ranks 107th on education sub-pillar,
mainly on account of ranking 118th on pupil-teacher ratio in secondary education; 115th on new
business per thousand population in ages 15-64; 108th on tertiary inbound mobility; 108th on ICT
access as well as ICT use; 105th on ease of starting a business; and 101st on females employed
with advanced degrees.
• The business sector in India contributes much less to gross expenditure on R&D (about 37 per cent)
when compared to businesses in each of the top ten economies (68 per cent on average). This is
despite the fact the tax incentives for R&D were more liberal in India when compared to those in
the top ten economies.
• The Government does a disproportionate amount of heavy-lifting on R&D by contributing 56 per
cent of the gross expenditure on R&D, which is three times the average contributed by
governments in the top ten economies.
• Indian government sector contributes the highest share of total R&D personnel (36 per cent) and
researchers (23 per cent) amongst the top ten economies (nine per cent on average). Indian
business sector’s contribution to the total R&D personnel (30 per cent) and researchers (34 per
cent) in the country is the second lowest amongst the top ten economies (over 50 per cent on
average).
• Yet, India’s gross expenditure on R&D at 0.65 per cent of GDP is much lower than that of the top 10
economies (1.5-3 per cent of GDP) primarily because of the disproportionately lower contribution
from the business sector.
• Indian residents contribute only 36 per cent of patents filed in India as compared to 62 per cent on
average in the top ten economies.
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• India must significantly ramp up investment in R&D if it is to achieve its aspiration to emerge as the
third largest economy in terms of GDP current US$. Mere reliance on “Jugaad innovation” risks
missing the crucial opportunity to innovate our way into the future.
• This requires a major thrust on R&D by the business sector. India’s resident firms must increase
their share in total patents to a level commensurate to our status as the fifth largest economy in
current US$.
• India must also focus on strengthening institutions and business sophistication to improve its
performance on innovation outputs.
2.9 JAY Ho: Ayushman Bharat’s Jan Arogya Yojana (JAY) and Health Outcomes
Q.) What has been the impact of rollout of Pradhan Mantri Jan Arogya Yojana on maternal and child
health in India?
• ES 2020-21 demonstrates strong positive effects on healthcare outcomes of the Pradhan Mantri Jan
Arogya Yojana (PM-JAY) – the ambitious program launched by Government of India in 2018 to provide
healthcare access to the most vulnerable sections. PM-JAY is being used significantly for high
frequency, low cost care such as dialysis and continued to be utilised without disruption even during
the Covid pandemic and the lockdown. General medicine – the overwhelmingly major clinical
specialty accounting for over half the claims - exhibited a V-shaped recovery after falling during the
lockdown and reached pre-COVID-19 levels in December 2020.
• PM-JAY enhanced health insurance coverage. Across all the states, the proportion of households
with health insurance increased by 54 per cent for the states that implemented PM-JAY while falling
by 10 per cent in states that did not. Similarly, the proportion of households that had health insurance
increased in Bihar, Assam and Sikkim from 2015-16 to 2019-20 by 89 per cent while it decreased by
12 per cent over the same period in West Bengal.
• From 2015-16 to 2019-20, infant mortality rates declined by 12 per cent for states that did not adopt
PM-JAY and by 20 per cent for the states that adopted it.
• Similarly, while states that did not adopt PM-JAY saw a fall of 14 per cent in its Under-5 mortality rate,
the states that adopted it witnessed a 19 per cent reduction.
• While states that did not adopt PM-JAY witness 15 per cent decline in unmet need for spacing
between consecutive kids, the states that adopted it recorded a 31 per cent fall.
• Various metrics for mother and child care improved more in the states that adopted PM-JAY as
compared to those who did not. Each of these health effects manifested similarly when we compare
Bihar, Assam and Sikkim that implemented PM-JAY versus West Bengal that did not.
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• While some of these effects stemmed directly from enhanced care enabled by insurance coverage,
others represent spillover effects due to the same. Overall, the comparison reflects significant
improvements in several health outcomes in states that implemented PM-JAY versus those that did
not. As the difference-in-difference analysis controls for confounding factors, the Survey infers that
PM-JAY has a positive impact on health outcomes.
2.10 The Bare Necessities

Q.) Write a note on the ‘Bare Necessities Index’ introduced in the Economic Survey 2020-21.
• Access to “the bare necessities” such as housing, water, sanitation, electricity and clean cooking fuel
are a sine qua non to live a decent life.
• ES 2020-21 examines the progress made in providing access to “the bare necessities” by constructing
a Bare Necessities Index (BNI) at the rural, urban and all India level. The BNI summarises 26
indicators on five dimensions viz., water, sanitation, housing, micro-environment, and other
facilities. The BNI has been created for all states for 2012 and 2018 using data from two NSO rounds
viz., 69th and 76th on Drinking Water, Sanitation, Hygiene and Housing Condition in India.
• Compared to 2012, access to “the bare necessities” has improved across all States in the country in
2018. Access to bare necessities is the highest in the States such as Kerala, Punjab, Haryana and
Gujarat while it is the lowest in Odisha, Jharkhand, West Bengal and Tripura.
• The improvements are widespread as they span each of the five dimensions viz., access to water,
housing, sanitation, micro-environment and other facilities. Inter-State disparities in the access to
“the bare necessities” have declined in 2018 when compared to 2012 across rural and urban areas.
This is because the States where the level of access to “the bare necessities” was low in 2012 have
gained relatively more between 2012 and 2018.
• Access to “the bare necessities” has improved disproportionately more for the poorest households
when compared to the richest households across rural and urban areas. The improvement in equity
is particularly noteworthy because while the rich can seek private alternatives, lobby for better
services, or if need be, move to areas where public goods are better provided for, the poor rarely have
such choices.
• Using data from the National Family Health Surveys, we correlate the BNI in 2012 and 2018 with
infant mortality rate and under-5 mortality rate in 2015-16 and 2019-20 respectively and find that
the improved access to “the bare necessities” has led to improvements in health indicators.
Similarly, we also find that improved access to “the bare necessities” correlates with future
improvements in education indicators.
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• The network of schemes designed to deliver these necessities include inter-alia the Swachh Bharat
Mission (SBM), National Rural Drinking Water Programme (NRDWP), Pradhan Mantri Awaas Yojana
(PMAY), Saubhagya, and Ujjwala Yojana. These Schemes were equipped with new features such as
use of technology, real time monitoring, geo-tagging of assets, social audit, embedded digital flow
of information, and direct benefit transfers wherever possible. As Economic Survey 2018- 19
highlights, these features improved the transparency in governance and enhanced the efficiency and
effectiveness of the Schemes.
Government Schemes for Bare Necessities

1. Swachh Bharat Mission-Rural and Urban
Objectives:
• Objective of SBM-Rural was to attain Open Defecation Free (ODF) India by 2nd October, 2019 by
providing access to toilet facilities to all rural households in the country.
• Objective of SBM-Uuban is to achieve 100 per cent Open Defecation Free (ODF) status and 100 per
cent scientific processing of the Municipal Solid Waste (MSW) being generated in the country.
Targets & Achievements:
• Under SBM, rural sanitation coverage has made an incredible leap in the target achievement with
more than 10 crore toilets built across rural India. With a view to sustain the gains made under the
programme in the last five years and to ensure that no one is left behind and to achieve the overall
cleanliness in villages, phase II of SBM(G) from 2020-21 to 2024-25 is being implemented focusing
on ODF sustainability and Solid & Liquid Waste Management (SLWM) through convergence
between different verticals of financing and various Schemes of Central and State Governments
such as 15th Finance Commission grants to local bodies, MNREGS, Corporate Social Responsibility
(CSR) funds etc.
• Since its launch in 2014, SBM-U has made significant progress in the area of both sanitation and
solid waste management. 4,327 Urban Local Bodies (ULBs) have been declared ODF so far. This has
been made possible through construction of more than 66 lakhs individual household toilets and
over 6 lakhs community/ public toilets, far exceeding the Mission’s targets. The Mission is now
focusing on holistic sanitation through its ODF+ and ODF++ protocols with a total of 1,319 cities
certified ODF+ and 489 cities certified ODF++ as on date. In the area of solid waste management,
100 per cent of wards have complete door-to door collection. Further, out of 1,40,588 Tonnes Per
Day (TPD) waste generated per day, 68 per cent (i.e., 95,676 TPD) is being processed.
2. Pradhan Mantri Awaas Yojana (PMAY)
Objectives:
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PMAY intends to provide housing for all in urban and rural areas by 2022.
• Under PMAY (Urban), as on 18th January, 2021, 109.2 lakh houses have been sanctioned out of
which 70.4 lakh houses have been grounded for construction of which 41.3 lakh have been built to
the beneficiaries under PMAY(U) since inception of the scheme in June, 2015.
• The target number of houses for construction under PMAY (Gramin) is 2.95 crore in two phases i.e.
1.00 crore in Phase I (2016-17 to 2018-19) and 1.95 crore in Phase II (2019-20 to 2021-22). Since
2014-15, construction of approx. 1.94 crore rural houses have been completed, out of which 1.22
crore houses have been constructed under the revamped scheme of PMAY-G and 0.72 crore under
erstwhile Indira Awaas Yojana scheme.
3. NRDWP, now Jal Jeevan Mission (JJM)
Objectives:
• The objectives of the NRDWP was to provide safe and adequate water for drinking, cooking and
other domestic needs to every rural person on a sustainable basis. Goal of JJM is to provide
functional tap water connection (FTWC) every rural household by 2024 and get assured supply of
potable piped water at a service level of 55 litres per capita per day (lpcd) regularly on long-term
basis by ensuring functionality of the tap water connections.
• At the time of roll out of the scheme in August 2019, about 3.23 crore (17 per cent) households out
of total 18.93 crore rural households had tap water supply. Remaining 15.70 crore (83 per cent)
rural households were to be provided with functional tap water connections by 2024. Upto 16th
January, 2021, so far about 3.2 crore of rural households have been provided with FTWC since the
launch of the Mission. Keeping with ‘no one is left out’ principle, 18 districts in the country spread
across Gujarat (5), Telangana (5), Himachal Pradesh (1), Jammu & Kashmir (2), Goa (2) and Punjab
(3) have become ‘Har Ghar Jal districts’whereas 57,935 villages have also become ‘Har Ghar Jal
Gaon’.
4. Sahaj Bijli Har Ghar Yojana – Saubhagya
Objectives:
Government launched Saubhagya Yojana in October, 2017 with the objective to achieve universal
household electrification by providing electricity connections to all willing un-electrified households in
rural areas and all willing poor households in urban areas in the country, by March, 2019.
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• All States have declared electrification of all households on Saubhagya portal, except 18,734
households in Left Wing Extremists (LWE) affected areas of Chhattisgarh as on 31.03.2019.
Electricity connections to 262.84 lakh households have been released from 11.10.2017 to
31.03.2019. Subsequently, seven States reported that 19.09 lakh un-electrified households
identified before 31.03.2019, which were earlier un-willing but have expressed willingness to get
electricity connection. States have been asked to electrify these households under Saubhagya.
• These households are being electrified by the concerned States and as on 20.12.2019, electricity
connections to 7.42 lakh Households have been released.
5. Pradhan Mantri Ujjwala Yojana (PMUY)
Objectives:
• PMUY launched in May, 2016 in order to provide clean cooking fuel to poor households with a target
to provide 8 crore deposit free LPG connection. This connection is provided in the name of an adult
woman member of a poor family and the beneficiary has an option to avail connection with 14.2 kg
or 5 kg cylinder. The existing beneficiary with 14.2 kg LPG cylinder has an option to swap with 5 kg
cylinder also.
• Under PMUY, a target to provide 8 crore new LPG connections has been achieved in September,
2019, 7 months in advance of the target date of 31st March, 2020.
2.11 State of the Economy 2020-21: A Macro View

• The year 2020 threw at the world a bedlam of novel COVID-19 virus, threatening all that was taken
for granted –mobility, safety, and a normal life itself. This, in turn, posed the most formidable
economic challenge to India and to the world in a century.
• Bereft of a cure or a vaccine, public health policy became central to tackling this all-pervasive crisis.
The imperative of flattening the disease curve was entwined with the livelihood cost of an imminent
recession, which emanated from the restrictions in economic activities from the lockdown required
to contain the pandemic. This inherent trade-off led to the policy dilemma of “lives versus
livelihoods”.
• India recognised the disruptive impact of the pandemic and charted its own unique path amidst
dismal projections by several international institutions of the spread in the country given its huge
population, high population density and an overburdened health infrastructure.
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• The intense lockdown implemented at the start of the pandemic – when India had only a 100
confirmed cases – characterized India’s unique response in several ways.
• Governments and central banks across the world deployed a range of policy tools to support their
economies such as lowering key policy rates, quantitative easing measures, loan guarantees, cash
transfers and fiscal stimulus measures.
• Second, India recognised that the pandemic impacts both supply and demand in the economy. The
slew of reforms – again unique amidst all major economies – were implemented to ensure that the
supply-side disruptions, which were inevitable during the lockdown, are minimised in the medium
to long-run.
• The demand side policy reflected the understanding that aggregate demand, especially that for non-
essential items, reflects precautionary motives to save, which inevitably remains high when overall
uncertainty is high. Therefore, during the initial months of the pandemic when uncertainty was high
and lockdowns imposed economic restrictions, India did not waste precious fiscal resources in trying
to pump up discretionary consumption. Instead, the policy focused on ensuring that all essentials
were taken care of, which included direct benefit transfers to the vulnerable sections and the world’s
largest food subsidy programme targeting 80.96 crore beneficiaries. Government of India also
launched Emergency Credit Line Guarantee Scheme to provide much needed relief to stressed
sectors by helping entities sustain employment and meet liabilities.
• During the unlock phase, when uncertainty declined and the precautionary motive to save subsided,
on the one hand, and economic mobility increased, on the other hand, India has ramped up its fiscal
spending.
• A favorable monetary policy ensured abundant liquidity and immediate relief to debtors via
temporary moratoria, while unclogging monetary policy transmission. India’s demand-side policy,
thus, underscores the idea that pressing on the accelerator while the brakes are clamped only wastes
scarce fuel.
• India has been able to avoid the second wave while ably managing to flatten the epidemiological
curve, with its caseload peaking in mid-September. The initial stringent lockdown was critical to
saving lives and the V-shaped economic recovery. The continuous drop in daily cases and fatalities
bespeak India’s escape from a Sisyphus fate of backand-forth policy responses, enabling continual
unlocking of the economy.
• As anticipated, while the lockdown resulted in a 23.9 per cent contraction in GDP in Q1, the recovery
has been a V-shaped one as seen in the 7.5 per cent decline in Q2 and the recovery across all key
economic indicators. Starting July, a resilient V-shaped recovery is underway, as demonstrated by the
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recovery in GDP growth in Q2 after the sharp decline in Q1, a sustained resurgence in high frequency
indicators such as power demand, E-way bills, GST collection, steel consumption, etc.
• The reignited inter and intra state movement and record-high monthly GST collections have marked
the unlocking of industrial and commercial activity. A sharp rise in commercial paper issuances,
easing yields, and sturdy credit growth to MSMEs portend revamped credit flows for enterprises to
survive and grow. Imports contracted more sharply than exports, with Forex reserves rising to cover
18 months of imports. Inflation, mainly driven by food prices, remained above 6 per cent for much
of the year; the softening in December suggests easing of supply-side constraints.
• India’s GDP is estimated to contract by 7.7 per cent in FY2020-21, composed of a sharp 15.7 per cent
decline in first half and a modest 0.1 per cent fall in the second half. Sector-wise, agriculture has
remained the silver lining while contact-based services, manufacturing, construction were hit
hardest, and have been recovering steadily. Government consumption and net exports have
cushioned the growth from diving further down.
• The V-shaped economic recovery is supported by the initiation of a mega vaccination drive with
hopes of a robust recovery in the services sector. Together, prospects for robust growth in
consumption and investment have been rekindled with the estimated real GDP growth for FY 2021-
22 at 11 per cent.
2.12 Fiscal Developments

• "Precision Beats Power, and Timing Beats Speed“ — By Conor McGregor

• In the backdrop of an unprecedented crisis, the year 2020-21 has been a challenging one on the fiscal
front. The shortfall in revenue collection owing to the interruption in economic activity and the
additional expenditure requirements to mitigate the fallout of the pandemic on vulnerable people,
small businesses, and the economy in general, created immense pressure on the available limited
fiscal resources.
• In order to cater to the increased demand for resources, the target for gross market borrowings of
the Central Government for the financial year 2020-21 was revised from the Budget estimate of Rs
7.8 lakh crore to Rs 12 lakh crore.
• India, therefore, adopted a calibrated approach best suited for the evolving situation of the economy
in contrast to front-loaded large stimulus packages adopted by many countries. India's fiscal policy
reflected the understanding that aggregate demand, especially that for non-essential items, reflects
precautionary motives to save, which inevitably remains high when overall uncertainty is high.
Therefore, during the initial months of the pandemic when uncertainty was high and lockdown
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imposed economic restrictions, India did not waste precious fiscal resources in trying to pump up
discretionary consumption. Instead, the policy focused on ensuring that all essentials were taken care
of, which included direct benefit transfers to the vulnerable sections, emergency credit to the small
businesses, and the world’s largest food subsidy programme targeting 80.96 crore beneficiaries.
• During the unlock phase, when uncertainty declined and the precautionary motive to save subsided,
on the one hand, and economic mobility increased, on the other hand, India ramped up its fiscal
spending focusing on overall demand revival. India’s demand-side policy, thus, underscores the idea
that pressing on the accelerator while the brakes are clamped only wastes scarce fuel.
• Owing to the recovery of the economy over the past few months, the monthly revenue collections
have witnessed a revival. The monthly GST collections have crossed the Rs 1 lakh crore mark
consecutively for the last 3 months, reaching its’ highest ever in December 2020. Reforms in tax
administration have set in motion a process of transparency, accountability and more importantly,
enhancing the experience of an honest tax payer with the tax authority, thus incentivising tax
compliance.
• The expenditure policy for 2020-21 has been focused on re-prioritisation of expenditure according
to evolving situation, with an increasing emphasis on capital expenditure. Capital expenditure during
the last three months of the year 2020 recorded an unprecedented YoY growth of 129 per cent in
October, 249 per cent in November and 62 per cent in December. Keeping in view the revenue
shortfall and the demand for higher expenditure during the year, the Government is expected to
register a fiscal slippage in 2020-21.
• This deviation from the path of fiscal consolidation may however be transient as the fiscal indicators
rebound with the recovery in the economy. Thus, focusing on boosting GDP growth would be pivotal
for enabling a sustainable fiscal path in the medium term.
Measures taken by the Centre to support the States in times of COVID-19

The Central Government has taken consistent steps to impart unflinching support to the States in the
challenging times of the pandemic. These measures are as follows:
1. Enhanced limit of borrowing for FY2020-21 under Atma Nirbhar Bharat package
Under the Atma Nirbhar Bharat package, additional borrowing limit of up to 2 percent of Gross State
Domestic Product (GSDP) was allowed to the States, which was equivalent to Rs 4.27 lakh crore. Of the
additional 2 per cent borrowing allowed to the States, the first instalment of 0.5 per cent borrowing
was untied for all the states. The second part amounting to 1 per cent of GSDP was subject to
implementation of following four specific State level reforms, where weightage of each reform is 0.25
per cent of GSDP:-
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a) Implementation of One Nation One Ration Card System;
b) Ease of doing business reform;
c) Urban Local body/ utility reforms; and
d) Power Sector reforms
The final 0.5 per cent borrowing was conditional on undertaking at least 3 out of the above mentioned
reforms.
2. Compensation to the States for loss in GST revenue
In order to compensate the states for the loss of GST revenue during FY 2020-21, Central Government
had given the states an option to either borrow the shortfall arising out of GST implementation through
issue of debt under a Special Window coordinated by the Ministry of Finance which was passed on to
the States and UTs (Option 1), or raise the entire shortfall through the issue of market debt (Option 2).
All the 28 states and 3 UTs with legislature decided to go for option 1 which involves back-to-back
borrowing coordinated by the Ministry of Finance, and would ensure steady flow of resources similar
to the flow under GST compensation. The special window of Rs 1.1 lakh crore has been operationalised
since 23rd October, 2020 and the Government of India has already borrowed an amount of Rs 54,000
crore on behalf of the States in five instalments and passed it on to the States and UTs.
3. Scheme for Special Assistance to States for Capital Expenditure
During the year 2020-21, considering the fiscal environment faced by the State Governments due to
the shortfall in tax revenues arising from the COVID-19 pandemic, 'Scheme for Special Assistance to
States for Capital Expenditure', has been approved wherein special assistance is being provided to the
State Governments in the form of 50-year interest free loan up to an overall sum not exceeding Rs
12,000 crore.
4. SDRF
The Central Government by way of a special one-time dispensation had decided to treat COVID-19 as a
notified disaster for the purpose of providing assistance under SDRF. To strengthen the States to deal
with the pandemic, the Centre had released the 1st instalment of SDRF amounting to ` 11,092 crore to
State Governments in April 2020. In September 2020, the states’ limit for spending the SDRF during FY
2020-21 was raised to 50%, in order to support them in containment measures of COVID-19 including
measures for quarantine, sample collection and screening; and procurement of essential equipment/
labs for response to COVID-19.
2.13 External Sector

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• COVID-19 pandemic has triggered the worst global recession in 2020 since the Great Depression; the
adverse economic impact is, however, expected to be lesser than initially feared.
• The resulting economic crisis has led to a sharp decline in global trade, lower commodity prices and
tighter external financing conditions with varying implications for current account balances and
currencies of different countries. Global merchandise trade is expected to contract by 9.2 per cent in
2020. Trade balance with China and the US improved as imports contracted. The changing nature of
India’s global trade manifested in terms of sliding exports of gems and jewellery, engineering goods,
textile and allied products and improving exports of drugs and pharma, software and agriculture
and allied products. Pharma exports, in particular, used this opportunity to enhance their share in
total India’s exports and indicate India’s potential to be the pharmacy of the world.
• Supported by resilient software service exports, India is expected to witness a current account
surplus during the current financial year after a gap of 17 years. Balance on the capital account, on
the other hand, is buttressed by robust FDI and FPI inflows. These developments have led to accretion
of foreign exchange reserves that rose to an all-time high of US$ 586.1 billion as on January 8, 2021.
• RBI’s interventions in forex market have been largely successful in controlling the volatility and one-
sided appreciation of the rupee. High levels of headline inflation, however, posits the classical
trilemma before RBI to maintain a fine balance between tightening of monetary policy to control
inflation on the one hand and stimulate growth on the other hand.
• Against the aforesaid backdrop, various initiatives undertaken to promote exports, including
Production Linked Incentive (PLI) Scheme, Remission of Duties and Taxes on Exported Products
(RoDTEP), emphasis on improvement of trade logistics infrastructure and use of digital initiatives
would go a long way in enabling ‘ease of doing exports’.
INITIATIVES TAKEN BY GOVERNMENT TO BOOST EXPORTS

Trade Facilitation: With an aim to reduce trade barriers caused by inefficient and overly burdensome
regulatory administrative procedures, the Trade Facilitation Agreement (TFA), negotiated at WTO,
came into force on 22nd February 2017. India has been making proactive strides in TFA implementation
under the guidance of A National Committee on Trade Facilitation (NCTF). Many of the commitments,
which are otherwise due by 2022, have already been notified to WTO as implemented.
Remission of Duties and Taxes on Exported Products (RoDTEP): Government has rolled out a new WTO
compliant scheme, namely Remission of Duties and Taxes on Exported Products (RoDTEP), for all export
goods with effect from 1st January, 2021. Under this Scheme, duties and taxes levied at the Central,
State and local levels, such as electricity duties and VAT on fuel used for transportation, which are not
getting exempted or refunded under any other existing mechanism will be refunded to exporters in
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their ledger account with Customs. The credits can be used to pay basic customs duty on imported
goods or transferred to other importers – facilitating ease of transactions for exports. The RoDTEP rates
would be notified by the Department of Commerce.
Production-Linked Incentive (PLI) Scheme: In order to boost domestic manufacturing and exports, the
Production-Linked Incentive (PLI) scheme with an outlay of Rs 1.46 lakh crore has been introduced. This
Scheme aims to give incentive to companies on incremental sales from products manufactured in
domestic units. The ten-identified champion sectors under PLI scheme. The scheme is expected to make
Indian manufacturers in these ten sectors globally competitive, attract investment in the areas of core
competency and cutting-edge technology; ensure efficiencies; create economies of scale; establish
backward linkages with MSMEs; enhance exports and make India an integral part of the global supply
chain. It also incentivizes global, capital-rich companies to set up capacities in India. Growth in
production and exports of industrial goods will greatly expose the Indian industry to foreign
competition and ideas, which will help in improving its capabilities to innovate further. Promotion of
the manufacturing sector and creation of a conducive manufacturing ecosystem will not only enable
integration with the global supply chains but also establish backward linkages with the MSME sector in
the country. This will lead to overall growth in the economy and create huge employment opportunities.
Trade Related Logistics: Despite the sector being plagued by some structural issues such as highly
fragmented ownership; few large players; lack of consolidation in operations; sub-optimal modal share
with freight movement highly skewed towards road sector; lack of an integrated approach by user
sectors (multiple line ministries and agencies); absence of consistent policies and regulations; etc., India
has made remarkable progress in logistics sector. India’s rank has improved significantly in trading
across borders parameter of ‘Ease of Doing Business’ index from 146 in 2018 to 68 in 2020.
Important Infrastructure Initiatives which are at various stages of implementation are:

• Bharatmala Pariyojana is a new umbrella program for the highways sector that envisages building
more than 80,000 Km of roads, highways, greenfield expressways, bridges with an investment of
around US$ 107 billion.
• Sagarmala aims at Port Modernization & New Port Development, Port Connectivity Enhancement,
Port-linked Industrialization, Coastal Community Development and giving impetus to Coastal
Shipping. 508 projects have been identified and 111 waterways have been declared National
waterways, for which the work is ongoing in phases.
• Multi-Modal Logistics Parks shall act as hubs for freight movement enabling freight aggregation,
distribution and multi-modal transportation. They would provide modern mechanized warehousing
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space and value-added services such as customs clearance with bonded storage yards, warehousing
management services, etc.
• Dedicated Freight Corridors (DFCs) aims at reduction in unit cost of transportation with higher
speed of freight trains and better turnaround of wagons. Around 70 per cent of freight is expected
to shift to DFC, freeing up capacity on Indian Railways.
• Trade Infrastructure for Export Scheme (TIES) aims to assist creation of appropriate infrastructure
for growth of exports from the States.
2.14 Monetary Management and Financial Intermediation

• Given the unprecedented shock of COVID-19 pandemic, monetary policy was significantly eased from
March 2020 onwards.
• The repo rate has been cut by 115 bps since March 2020, with 75 bps cut in first Monetary Policy
Committee (MPC) meeting in March 2020 and 40 bps cut in second meeting in May 2020. The policy
rates were kept unchanged in further meetings, but the liquidity support was significantly enhanced.
Systemic liquidity in 2020-21 remained in surplus so far.
• RBI undertook various conventional and unconventional measures like Open Market Operations,
Long Term Repo Operations, Targeted Long Term Repo Operations etc. to manage liquidity situation
in the economy.
• The financial flows to the real economy however remained constrained on account of subdued credit
growth by both banks and Non-Banking Financial Corporations. The higher reserve money growth did
not fully translate into commensurate money supply growth due to the lower (adjusted) money
multiplier reflecting large deposits by banks with RBI under reverse repo. Credit growth of banks
slowed down to 6.7 per cent as on January 1,2021. The credit offtake from banking sector witnessed
a broad based slowdown in 2020-21.
• Gross Non Performing Assets ratio of Scheduled Commercial Banks decreased from 8.21 per cent at
the end of March 2020 to 7.49 per cent at the end of September 2020. However, this has to be seen
in conjunction with the asset classification relief provided to borrowers on account of the pandemic.
• Capital to risk-weighted asset ratio of Scheduled Commercial Banks increased from 14.7 per cent to
15.8 per cent between March 2020 and September 2020 with improvement in both Public and Private
sector banks.
• This year saw improvement in transmission of policy repo rates to deposit and lending rates, as
reflected in the decline of 94 bps and 67 bps in Weighted Average Lending Rate on fresh rupee loans
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and outstanding rupee loans respectively from March 2020 to November 2020. Similarly, the
Weighted Average Domestic Term Deposit Rate declined by 81 bps during the same period.
• The recovery rate for the Scheduled Commercial Banks through IBC (since its inception) has been
over 45 per cent. In view of COVID-19 pandemic, initiation of Corporate Insolvency Resolution Process
(CIRP) was suspended for any default arising on or after March 25, 2020 for a period of 6 months.
This was further extended twice for 3 months on September 24, 2020 and December 22, 2020. The
suspension along with continued clearance has allowed a small decline in accumulated cases.
2.15 Prices and Inflation

• CPI-Combined (C) inflation has moderated since 2013-14. However, inflation dynamics have changed
considerably in 2020.
• Overall, headline CPI inflation remained high during the COVID-19 induced lockdown period and
subsequently, due to the persistence of supply side disruptions. The rise in inflation was mostly driven
by food inflation, which increased to 9.1 per cent during 2020-21 (Apr-Dec). Due to COVID-19 induced
disruptions, an overall increase in the price momentum is witnessed, driving inflation since April 2020,
whereas positive base effect has been a moderating factor.
• The difference in rural-urban CPI inflation, which was high in 2019, saw a decline from November
2019 that continued in 2020.
• Inflation ranged between 3.2 per cent to 11 per cent across States/UTs in 2020-21 (Jun-Dec)
compared to (-) 0.3 per cent to 7.6 per cent in the same period last year.
• Thali prices for both vegetarian and nonvegetarian Thalis declined significantly in January-March
2020 before rising sharply during April to November in both rural and urban areas before easing in
December 2020. The easing in CPI-C is expected to ease Thali prices going forward.
• The Survey finds that sole focus on CPI-C inflation may not be appropriate for four reasons.
o First, food inflation, which contributes significantly to CPI-C is driven primarily by supply-side
factors.
o Second, given its role as the headline target for monetary policy, changes in CPI-C anchor
inflation expectations. This occurs despite inflation in CPI-C being driven by supplyside factors
that drive food inflation.
o Third, several components of food inflation are transitory with wide variations within the
food and beverages group.
o Finally, food inflation has been driving overall CPI-C inflation due to the relatively higher
weight of food items in the index. While food habits have undergone revisions over the
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decade since 2011-12, which is base year of CPI, the same is not reflected in the index yet.
The base year of CPI therefore needs to be revised to overcome the measurement error that
may be arising from the change in food habits.
• For all these reasons, a greater focus on core inflation is warranted.
• Further, given the significant increases in e-commerce transactions, new sources of price data
capturing e-commerce transactions must get incorporated in the construction of price indices.
• During the year, the government took several measures to make crucial drugs for COVID-19
treatment available at affordable prices, to stabilise prices of sensitive food items like banning of
export of onions, imposition of stock limit on onions, easing of restriction on imports of pulses etc.
• However, consistency in import policy of sensitive food items warrants attention as frequent
changes in import policy of pulses and edible oils adds to confusion and delays. To rein in the vegetable
inflation, review of relevant buffer stock policies is essential. To avoid supply-side disruptions that
cause inflation seasonality in vegetables, food, CPI-C and in inflation expectations, a system needs to
be developed to reduce wastages and ensure timely release of stock.
Measures to Control Inflation

• In the wake of rising prices of pulses, onion and potato, the Government has taken several steps to
improve the availability of these commodities and make them available to consumers at affordable
prices. These include:
o Banning the export of onion
o Imposition of stock limit on onion under the EC Act
o Easing of restrictions on imports, facilitating imports at integrated check-posts, issuance of
licenses for imports and reduction in import duties.
• Price Stabilization Fund (PSF) Scheme is being efficiently implemented and has succeeded in
achieving its objective of stabilizing prices of pulses and offered significant benefits to all
stakeholders. Government in 2016 has approved creation of a dynamic buffer of up to 20 lakh
tonnes of pulses for appropriate market intervention.
• States/UTs are also being encouraged to set up their own State level PSF. Till date, financial
assistance has been provided to Odisha, West Bengal, Andhra Pradesh, Telangana, Tamil Nadu and
Assam.
• Government of India has entered into a MoU with Mozambique to ensure assured supply of pulses
(Tur and other pulses) in India. The MoU envisages imports of 2 LMT pulses during 2020-21.
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Onion prices and buffer stock policy
Over the years, it has been observed that in the period August-November prices of onion skyrocket.
This happens despite the government efforts to create a buffer stock to sell the onion when retail prices
increase, exposing the absence of a suitable policy to ensure price stability of India’s staple vegetable.
Why Price Spikes in August to November?
Rabi harvesting takes place between March and May in most states and the crop is sold during June-
July period, kharif harvesting takes place between October and November and the crop is available in
the market till rabi harvest. The period between the two that is August to November is when we observe
the prices of onion rise sharply.
Suggestions
• NAFED approached state governments to send their requirements of lean months in advance to
ensure timely evacuation of the stored onion in a planned manner to have a salutary effect on retail
prices, which tend to go up in the period late August to November. However, this process could be
made more transparent and done further well in advance to ensure timely distribution.
• There should be a transparent online platform where all information relating to requirement details
by states, procurement undertaken state wise and month wise, amount disbursed state wise,
agency wise, month wise should be made available for better planning and decision making.
• In Maharashtra, Gujarat, Haryana, Madhya Pradesh and Western Uttar Pradesh largescale storage
of onions is taken in conventionally-designed structures. In other states, the storage is taken only
on small scale but now showing increasing trend after the post-harvest technology and improved
storage structures have been popularized by NHRDF. Traditional storage practices result in
substantial losses in stored onions, hence use of improved storage structures as well as use of good
storer varieties, judicious use of fertilizers, timely irrigation and post-harvest technology are
essential to reduce the losses in stored onions (Operation Greens portal).
• Develop an eVIN like tracking system: eVIN (electronic vaccine intelligence network) aims to
strengthen the evidence base for improved policy-making in vaccine delivery, procurement and
planning for new antigens in India. For onion supply we do not need such a complicated system but
a simple tracking system based on the principles of eVIN might be adequate. This can help provide
real-time information on onion stocks, track storage temperature and moisture level and alert the
authorities whenever any parameter is breached.
• Use of dehydrated onions that has longer shelf life should be promoted for buffer stock purpose.
Hydrated variety should be sold early.
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2.16 Sustainable Development and Climate Change
• Sustainable development remains core to India’s development strategy, despite several challenges
emerging on account of the unprecedented crisis due to COVID-19 pandemic.
• The pandemic has challenged the health infrastructure, adversely impacted livelihoods and
exacerbated the inequality in the food and nutritional availability in the country. This has
reemphasized the criticality of having institutions and mechanisms that can facilitate the country to
absorb exogenous shocks well.
• India has been taking several proactive climate actions to fulfil its obligations as per the principles of
common but differentiated responsibilities and respective capabilities and equity. The first priority
for India is adaptation as the country is highly vulnerable to extreme weather events.
• The NDC submitted by the country has been formulated keeping in mind the developmental
imperatives of the country and is on a “best effort basis”. In its NDC, India has sought to
o reduce the emissions intensity of its GDP by 33 to 35 per cent below 2005 levels by the year
2030;
o achieve 40 per cent of cumulative electric power installed capacity from non-fossil fuel
sources by 2030; and
o enhance forest and tree cover to create additional carbon sink equivalent to 2.5 to 3 billion
tons of carbon dioxide by 2030.
• The country is on its track to successfully decoupling its economic growth from GHG emissions. As
per the second BUR submitted in 2018, India’s emission intensity of GDP reduced by 21 per cent in
2014 over the level of 2005.
• The country is relying on domestic resources to implement adaptation and mitigation action on
mission mode. The financing considerations will remain critical especially as the country steps up the
targets substantially.
• The implementation of NDC has started from 1st January 2021. There is a huge gap between resource
availability and the requirements, implementation of wide-ranging NDC goals presents a major
challenge.
• COP 26 now scheduled in 2021 is expected to discuss and arrive at a consensus on transparency
mechanism; Article 6 (market and non-market mechanisms); common time frames for nationally
determined contributions; long-term climate finance etc. On finance matters, it is essential to arrive
at a consensus on the definition of climate finance and on a common accounting methodology for
assessment and evaluation of climate finance.
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• In 2017, to give push to green bonds issuances in India, SEBI issued guidelines on green bonds
including their listing of green bonds on the Indian stock exchanges. The cumulative issuance of
global green bonds crossed US$ 1 trillion mark in 2020.
• Climate risk insurance is an important tool for providing security against loss of livelihoods and of
assets as a consequence of disasters. Thus, given the significant contribution of the agricultural sector
in the Indian economy, coupled with looming “climatic aberrations,” crop insurance becomes a
necessity to mitigate the risks associated with a majority of the country’s farmers.
• ISA organized the First World Solar Technology Summit (WSTS) in September 2020 with an objective
of showcasing to member countries the state of the art and next generation solar technologies.
• CDRI is another expression of India’s commitment to work with all the partners to address global
challenges. The Coalition functions as an inclusive multi-stakeholder platform led and managed by
national governments, where knowledge is generated and exchanged on different aspects of disaster
resilience of infrastructure. As of December 2020, 19 countries and 4 multilateral organizations have
become members of the Coalition.
• The 2030 agenda for Sustainable Development with 17 Sustainable Development Goals (SDGs) and
169 associated targets encompasses a comprehensive developmental agenda integrating social,
economic and environmental dimensions. Several initiatives have been taken at both the national
and the sub national level to mainstream the SDGs into the policies, schemes and programmes of the
Government.
National Missions under NAPCC
Missions Major Objectives / Targets

National Solar Mission (NSM) Achieve 100 GW of solar power in seven years starting from 2014-15.
• To achieve growth with ecological sustainability.
• Mandating reduction in energy consumption in large
energyconsuming industries,
National Mission for
• Financing for PPP to reduce energy consumption through demand-
Enhanced Energy Efficiency
side management programs in the municipal, buildings, and
(NMEEE)
agricultural sectors,
• Energy incentives, including reduced taxes on energy-efficient
appliances.
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Improved ecosystem services by Increasing forest/tree cover by 5 m
National Mission for a Green
ha and improving quality of forest cover on another 5 m ha (a total of
India (GIM)
10 m ha).
• Development of sustainable habitat standards.
• Promoting energy efficiency as a core component of urban planning
by extending the existing Energy Conservation Building Code
National Mission on (ECBC).
Sustainable Habitat (NMSH) • Strengthening the enforcement of automotive fuel economy
standards, and
• Using pricing measures to encourage the purchase of efficient
vehicles and incentives for the use of public transportation.
• Focuses on monitoring of ground water, aquifer mapping, capacity
building, water quality monitoring and other baseline studies.
National Water Mission • Promoting citizen and state action for water conservation,
(NWM) augmentation, and preservation.
• Focusing attention on overexploited areas.
• Promoting basin-level integrated water resources management.
National Mission for Enhancing food security by making agriculture more productive,
Sustainable Agriculture sustainable, remunerative, and climate resilient.
• To continuously assess the health status of the Himalayan
Ecosystem. Enable policy bodies in their policy formulation
National Mission for
functions.
Sustaining Himalayan
• Start of new centres relevant to climate change in the existing
Ecosystems
institutions in the Himalayan States.
• Regional cooperation with neighbouring countries in Glaciology
• To gain a better understanding of climate science, formation of
National Mission on Strategic knowledge networks among the existing knowledge institutions
Knowledge for Climate engaged in research and development.
Change (NMSKCC) • Development of national capacity for modeling the regional impact
of climate change on different ecological zones within the country
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2.17 Agriculture & Food Management
• India’s agricultural sector has shown its resilience amid the adversities of COVID induced lockdowns.
The Agriculture and allied activities were the sole bright spot amid the slide in GDP performance of
other sectors, clocking a growth rate of 3.4 per cent at constant prices during 2020-21 (1st Advance
Estimates).
• As per the provisional estimates of national income released by CSO on 29th May, 2020, the share of
agriculture and allied sectors in Gross Value Added (GVA) of the country at current prices is 17.8 per
cent for the year 2019-20.
• Gross Capital Formation (GCF) in agriculture and allied sectors relative to GVA in this sector has been
showing a fluctuating trend from 17.7 per cent in 2013-14 to 16.4 per cent in 2018-19, with a dip to
14.7 per cent in 2015-16.
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• In the Agriculture year 2019-20 (as per Fourth Advance Estimates), total food grain production in the
country is estimated at record 296.65 million tonnes which is higher by 11.44 million tonnes than the
production of food grain of 285.21 million tonnes achieved during 2018-19.
• The agricultural credit flow target for the year 2019-20 was fixed at Rs 13,50,000 crores and against
this target the achievement was Rs 13,92,469.81 crores. The agriculture credit flow target for 2020-
21 has been fixed at Rs 15,00,000 crores and till 30th November, 2020 against this target a sum of Rs
9,73,517.80 crores has been disbursed.
• Consequent upon budget announcement on inclusion of livestock sector in Kisan Credit Card in
February 2020, 1.5 crores dairy farmers of milk cooperatives and milk producer companies’ were
targeted to provide Kisan Credit Cards (KCC) as part of Prime Minister’s Atma Nirbhar Bharat Package.
• As of mid January 2021, a total of 44,673 Kisan Credit Cards (KCCs) have been issued to fishers and
fish farmers and an additional 4.04 lakh applications from fishers and fish farmers are with the banks
at various stages of issuance.
• The PMFBY covers over 5.5 crore farmer applications year on year. As on 12th January, 2021, claims
worth Rs 90,000 crores have already been paid out under the Scheme. Aadhar seeding has helped in
speedy claim settlement directly into the farmer accounts. Even during COVID lock down period
nearly 70 lakh farmers benefitted and claims worth Rs 8741.30 crores were transferred to the
beneficiaries.
• An amount of Rs 18000 crore have been deposited directly in the bank account of 9 crore farmer
families of the country in December, 2020 in the 7th installment of financial benefit under the PM-
KISAN scheme.
• The livestock sector grew at CAGR of 8.24 per cent during 2014-15 to 2018-19. As per the estimates
of National Accounts Statistics (NAS) 2020 for sector wise Gross Value Added of agriculture and allied
sector, the contribution of livestock in total agriculture and allied sector GVA (at Constant Prices) has
increased from 24.32 per cent (2014-15) to 28.63 per cent (2018-19). The contribution of the livestock
sector was 4.19 per cent of total GVA in 2018-19.
• Fish production in India reached an all-time high of 14.16 million metric tons in 2019-20. Further, the
Gross Value Added (GVA) by the fisheries sector to the national economy stood at ` 2,12,915 crores
constituting 1.24 per cent of the total national GVA and 7.28 per cent of the agricultural GVA.
• During the last 5 years ending 2018-19, Food Processing Industries (FPI) sector has been growing at
an average annual growth rate of around 9.99 per cent as compared to around 3.12 per cent in
agriculture and 8.25 per cent in manufacturing at 2011-12 prices.
• Under the Pradhan Mantri Garib Kalyan Anna Yojana, 80.96 crores beneficiaries were provided
additional foodgrains, i.e. above the NFSA mandated requirements, of 5 kg per person per month
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free of cost till November, 2020. Over 200 LMT of foodgrains were provided amounting to a fiscal
outgo of over Rs 75000 Crores. Also, under Atma Nirbhar Bharat Package, 5 kg per person per month
was distributed for four months (May to August) to benefit approximately 8 crores migrants who are
not covered under NFSA or state ration card entailing subsidy of Rs 3109 crores approximately.
• About 54.6 per cent of the total workforce in the country is still engaged in agricultural and allied
sector activities (Census 2011). Various interventions of the Government for the development of
allied sectors including animal husbandry, dairying and fisheries exhibit its resolve towards tapping
the potential of allied sectors to further enhance farm welfare.
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2.18 Industry and Infrastructure
• The Indian economy encountered a “once in a century” crisis due to the COVID-19 pandemic that
affected economic activities and consequently impacted the livelihood of billions of people. The
industrial sector, not an exception to this shock, experienced a sharp decline during the period of the
lockdown. The economic activity, however, started recovering as the unlocking process began.
• The various subcomponents of Index of Industrial Production (IIP) and eight-core index have
experienced a V-shaped recovery with consistent movement being seen towards the pre-crisis levels.
• The broad-based quick revival of the industrial activity stemmed from remedial measures, reforms,
and the sizable stimulus package announced by the Government of India (GoI) under the Atmanirbhar
Bharat package.
• Based on the IIP, the industrial activity contracted by 1.9 per cent in November-2020 recovering from
the nadir of -57.3 per cent in April-2020. Further improvement and firming up in industrial activities
are foreseen with the Government enhancing capital expenditure as highlighted in the fiscal policy
chapter, the vaccination drive and the resolute push forward on long pending reform measures.
• As per the Doing Business Report (DBR), 2020, the rank of India in the Ease of Doing Business (EoDB)
Index for 2019 has moved upwards to the 63rd position amongst 190 countries from a rank of 77th
in 2018. India has improved its position in 7 out of 10 indicators, inching up to the international best
practices. The DBR, 2020 acknowledges India as one of the top 10 improvers, the third time in a row,
with an improvement of 67 ranks in three years. It is also the highest jump by any large country since
2011.
• During FY20, total FDI equity inflows were US$49.98 billion as compared to US$44.37 billion during
FY19. The similar number for FY21 (up to September-2020) was US$30.0 billion. The bulk of FDI equity
flow is in the non-manufacturing sector leading to a reduction in the share of manufacturing in the
FDI flows. Within the manufacturing sector, industries like automobile, telecommunication,
metallurgical, non-conventional energy, chemical (other than fertilizers), food processing, and
petroleum & natural gas get the bulk of FDI equity flows.
• With the objective of enhancing India’s manufacturing capabilities and exports, the GoI has
introduced the Production-Linked Incentive (PLI) Scheme in the 10 key sectors under the aegis of
Atmanirbhar Bharat. The scheme will be implemented by the concerned ministries with an overall
expenditure estimated at Rs.1.46 lakh crores and with sector specific financial limits.
Relief and credit support to MSMEs to fight against COVID-19

1. Rs 3 lakh crores Collateral-free Automatic Loans for Businesses, including MSMEs.
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2. Rs 20,000 crores Subordinate Debt for Stressed MSMEs
3. Rs 50,000 crores equity infusion through MSME Fund of Funds
4. New definition of MSME
5. Global tenders to be disallowed upto Rs 200 crores
6. MSME receivables from the Government and the CPSEs to be released in 45 days.
7. Relief of Rs 1500 crores to MUDRA- Shishu loan
8. Ease of doing business for business including MSMEs
Public Sector Enterprise Policy for a New, Self-reliant India

• Government to announce a new coherent policy—where all sectors are open to the private sector
while public sector enterprises (PSEs) will play an important role in defined areas
• List of strategic sectors requiring presence of PSEs in public interest will be notified
• In strategic sectors, at least one enterprise will remain in the public sector but private sector will
also be allowed
• In other sectors, PSEs will be privatized (timing to be based on feasibility etc.)
• To minimize wasteful administrative costs, number of enterprises in strategic sectors will ordinarily
be only one to four; others will be privatized/merged/ brought under holding companies.
Initiative Taken by GoI to Support Startups in India

• Startups Intellectual Property Protection (SIPP) scheme enables a start-up to seek assistance from
any empanelled facilitator to file and prosecute their application. The facilitator can claim payment
for the services given to the start up from the Office of the Controller General of Patents, Designs
and Trademarks (O/o CGPDTM) on submission of certificate in prescribed format.
• The Fund of Funds for Startups (FFS) with a total corpus of Rs. 10,000 crores was established with
contribution spread over the 14th and 15th Finance Commission cycle based on the progress of
implementation.
• So far 319 startups have been granted income tax exemptions till November-2020.
• StartupYatra (an initiative that travels to Tier 2 andTier 3 cities of India to search for entrepreneurial
talent by conducting day long bootcamps) has been conducted across 23 States in 207 districts.
• Further to boost innovation in the sector and encourage the youths to secure their rights on
technology and the product developed by them, startup have been provided 80 per cent rebate in
patent filing fees and 50 per cent rebate on trademark filing fees. Additionally, facility of expedited
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examination of patent applications to reduce the time taken in granting patents is also available to
the startups.
2.19 Services
• The COVID-19 pandemic, the subsequent lockdown and social distancing measures have had a
significant impact on the contact-intensive services sector.
• During the first half of the financial year 2020-21, the services sector contracted by almost 16 per
cent. Air passenger traffic, rail freight traffic, port traffic, foreign tourist arrivals, and foreign
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exchange earnings all contracted sharply following the first lockdown which was announced in March,
2020.
• As the economy gradually entered the unlock phase, most of these indicators showed signs of
recovery. Services purchasing managers’ index, rail freight traffic, and port traffic have bottomed
out and are rising steadily now, showing a V-shaped recovery. Domestic passenger air traffic is also
increasing gradually on a monthly basis, although travel remains muted as compared to last year.
• Interestingly, in spite of the global disruptions, FDI inflows into the services sector increased by 34
per cent YoY during April-September 2020 to reach US$ 23.61 billion.
• The year 2020-21 witnessed many significant structural reforms. The space sector was opened up,
telecom related regulations were removed from the IT-BPO sector, and consumer protection
regulations were introduced for e-commerce.
• India’s space sector has grown exponentially in the past six decades. India spent about US$ 1.8 billion
on space programmes in 2019-20. However, the country still lags behind major players in the sector,
such as USA, China and Russia. The Indian Space ecosystem is undergoing several policy reforms to
engage private players and attract innovation and investment.
• The Indian start-up ecosystem has been progressing well amidst the Covid-19 pandemic. India is
home to 38 unicorns, adding a record number of 12 start-ups to the unicorn list last year.
• The shipping turnaround time at ports has almost halved from 4.67 days in 2010-11 to 2.62 days in
2019-20. As per the latest UNCTAD data, the median ship turnaround time globally is 0.97 days,
suggesting that India has room to further improve upon the efficiency at ports.
• Services sector’s significance in the Indian economy has been steady, with the sector now accounting
for over 54 per cent of the economy and almost four-fifths of total FDI inflows.
2.20 Social Infrastructure, Employment and Human Development

• Year 2020 began with the once-in-a-century pandemic, which saw the frontline health workers
working tirelessly to save human lives from COVID-19. While the pandemic caused its ripples on the
economy and on the social sector, Governments at the Centre and States intervened in a timely
manner to respond to the pandemic.
• India has one of the lowest case fatality rates of less than 1.5 per cent. India has been able to save
lakhs of lives through its effective policy response. Public spending on social sector was increased in
2020-21 to mitigate the hardships caused by the pandemic and the loss to livelihood due to the
lockdown.
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• India’s rank in HDI 2019 was recorded 131 compared to 129 in 2018, out of a total 189 countries. By
looking at the sub-component wise performance of HDI indicators, India's "GNI per capita (2017 PPP
$)" has increased from US$ 6,427 in 2018 to US$ 6,681 in 2019, and "life expectancy at birth" has
improved from 69.4 to 69.7 year, respectively, mean and expected years of schooling remained
unchanged.
• Online schooling took off in a big way during the COVID-19 pandemic. The access to data network,
electronic devices such as computer, laptop, smart phone etc. gained in importance due to online
learning and remote working. Innovative measures were adopted to bring all strata of the society
under the medium of online/digital schooling.
• Formal skill training showed an improvement over the annual cycle of PLFS across all socio-economic
classification including rural, urban and gender classification.
• Year 2018-19 was witnessed as a good year for employment generation. About 1.64 crore additional
employment created during this period consisting of about 1.22 crore in rural area and 0.42 crore in
urban area. Female LFPR increased to 18.6 per cent in 2018-19 from 17.6 per cent in 2017-18.
• The quarterly survey of PLFS for the urban sector saw a major proportion of workforce engaged as
regular wage/salaried during the period of January 2019-March 2020.
• Government has given incentive to boost employment under the scheme Atmanirbhar Bharat Rojgar
Yojana. Existing Central labour laws have been rationalized and simplified into four Labour Codes viz.
(i) the Code on Wages, 2019, (ii) the Industrial Relations Code, 2020, (iii) the Occupational Safety,
Health and Working Conditions Code, 2020 and (iv) the Code on Social Security, 2020 to bring these
laws in tune with the changing labour market trends.
• Time Use Survey, 2019 showed females spending disproportionately large time on unpaid domestic
and caregiving services to household members compared to their male counterparts. This explains
the reason for the relatively low level of female LFPR in India. There is a need to promote non-
discriminatory practices at the workplace like pay and career progression, improve work incentives,
including other medical and social security benefits for female workers.
• In the fight against COVID-19, the initial measures of lockdown, social distancing, travel advisories,
practicing hand wash, wearing masks reduced the spread of the disease. The country also acquired
self-reliance in essential medicines, hand sanitizers, protective equipment including masks, PPE Kits,
ventilators, COVID-19 testing and treatment facilities. The world’s largest COVID-19 immunization
program commenced on 16th January, 2021 through two indigenously manufactured vaccines.
• NFHS-5 (Phase-I), results show improvement in immunization coverage for children, institutional
birth, infant mortality rate and under-five mortality rate in most of the selected States. As shown in
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the Chapter 9 of Volume I, this reduction resulted from the roll out of the Pradhan Mantri Jan Aarogya
Yojana under Ayushman Bharat.
• Under PMGKP announced in March, 2020 cash transfers of upto Rs 1000 in two installments of Rs
500 each were paid to existing old aged, widowed and disabled beneficiaries under the National
Social Assistance Programme (NSAP). An amount of Rs 2814.50 crore was released to 2.82 crore NSAP
beneficiaries. An amount of Rs 500 each was transferred for three months digitally into bank accounts
of the women beneficiaries in PM Jan Dhan Yojana, totaling about 20.64 crores. Free distribution of
gas cylinders to about 8 crore families for three months was also undertaken. Limit of collateral free
lending for 63 lakh women SHGs increased from Rs 10 lakhs to Rs 20 lakhs which would support 6.85
crore households.
• A total of 311.92 crore person-days was generated and a total of 65.09 lakh individual beneficiary
works and 3.28 lakh water conversation related works was completed as on 21st January 2021 during
2020-21. Wages under Mahatma Gandhi NREGA was increased by Rs 20 from Rs 182 to Rs 202 w.e.f.
1st April, 2020, which would provide an additional amount of Rs 2000 annually to a worker.
Programmes and Schemes for School Education during 2020-21
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Samagra Shiksha, an overarching programme for the school education sector extending from preschool
to class 12, is being implemented with the broader goal of improving school effectiveness measured in
terms of equal opportunities for schooling and equitable learning outcomes. The vision of the Scheme
is to ensure inclusive and equitable quality education from pre-school to senior secondary stage in
accordance with the SDG for Education. The main outcomes of the Scheme are envisaged as Universal
Access, Equity and Quality including Vocational Education, Inclusive Education, increased use of
Technology and strengthening of Teacher Education Institutions (TEIs). The scheme was launched in
2018-19 with the following major features:
Holistic approach to education: Treat school education holistically as a continuum from Pre-school to
Class 12 with inclusion of support for senior secondary levels and pre-school levels for the first time.
Focus on Quality of Education:
• Enhanced focus on improving quality of education and learning outcomes by focus on the two T’s –
Teachers and Technology.
• Enhanced Capacity Building of Teachers and School Heads, BRC, CRCs.
• Focus on strengthening Teacher Education Institutions like SCERTs and DIETs to improve the quality
of prospective teachers in the system.
• Annual Grant per school for strengthening of Libraries: Library grant of Rs 5,000 to Rs 20,000/-.
• Support for Rashtriya Avishkar Abhiyan to promote Science and Math learning.
Focus on Digital Education:
• Enhanced use of digital technology in education through smart classrooms, digital boards and DTH
channels and ICT infrastructure in schools from upper primary to higher secondary level.
• Support to “DIKSHA”, a digital platform which offers teachers, students and parents engaging
learning material relevant to the prescribed school curriculum.
Strengthening of Schools:
• Improve the Quality of Infrastructure in Government Schools at all levels.
• Enhanced Transport facility to children from classes I to VIII for universal access to schools.
• Composite school grant increased from Rs 14,500-50,000 to Rs 25,000- 1 lakh and to be allocated
on the basis of school enrolment, with atleast 10 per cent allocation for Swachhta activities –
support ‘Swachh Vidyalaya’
Focus on Girl Education:
• Upgradation of Kasturba Gandhi BalikaVidyalayas (KGBVs) from Class 6-8 to Class 6-12.
• Self-defence training for girls from upper primary to senior secondary stage
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• Stipend for Children with Special Needs (CWSN) girls to be provided from Classes I to XII. – earlier
only IX to XII.
• Enhanced Commitment to ‘Beti Bachao Beti Padhao’
Focus on Inclusion:
• Allocation for uniforms under RTE Act enhanced from Rs 400 to Rs 600 per child per annum.
• Allocation for textbooks under the RTE Act, enhanced from Rs 150/250 to Rs 250/400 per child per
annum. QR coded Energized textbooks introduced.
• Allocation for CWSN increased from Rs 3000 to Rs 3500 per child per annum. Stipend of Rs 200 per
month for Girls with Special Needs from Classes 1 to 12.
• Special training for age appropriate admission of out of school children at elementary level.
Focus on Skill Development:
• Vocational education for Class 9-12 as integrated with the curriculum and to be made more practical
and industry oriented.
Focus on Sports and Physical Education
• Sports Education to be an integral part of curriculum and every school will receive sports
equipment’s at the cost of Rs 5000 to Rs 25,000 to inculcate and emphasize relevance of sports.
Focus on Regional Balance:
• Promote Balanced Educational Development
• Preference to Educationally Backward Blocks (EBBs), LWE affected districts, Special Focus Districts
(SFDs), Border areas and the 115 aspirational districts identified by NITI Aayog
• Under the Samagra Shiksha scheme, a National Mission to improve learning outcomes at the
elementary level through an Integrated Teacher Training Programme called NISHTHA (National
Initiative for School Heads’ and Teachers’ Holistic Advancement) was contextualized and made 100
per cent online according to the needs of teaching and learning during the COVID-19 pandemic.
• Padhna Likhna Abhiyan: An adult education scheme has been introduced in FY 2020-21 with
financial outlay of Rs 142.61 crore with a target to make 57 lakh learners’ literate.
• During 2019-20, the Mid-Day Meal (MDM) Programme in schools covered 11.59 crore children
enrolled in elementary classes (I-VIII) in 11.34 lakh eligible schools. During COVID-19 pandemic, it
was decided to provide food grains and pulses, oil etc., (equivalent to cooking cost) as a one-time
special measure to eligible children during the summer vacations.
Initiatives for school going students during COVID-19 pandemic
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1. PM eVIDYA: This initiative was announced for school and higher education under the Atma Nirbhar
Bharat programme in May, 2020. It is a comprehensive initiative to unify all efforts related to
digital/online/on-air education to enable multi-mode and equitable access to education for
students and teachers. The four PM e-Vidya components of school education are:
a. One nation, one digital education infrastructure: Under this component all States/UTs have
free access to a single digital infrastructure i.e, DIKSHA. It is artificial intelligence based,
highly scalable, and can be accessed through a web-portal and mobile application. It
provides access to a large number of curricula linked e-content through several use cases
and solutions such as QR coded Energized Textbooks (ETBs), courses for teachers, quizzes
and others. DIKSHA has experienced more than 800 crore hits since lockdown. In April, 2020,
VidyaDaan portal was launched on Diksha as a national content contribution program that
leverages the DIKSHA platform and tools to seek and allow contribution/donation of e-
learning resources for school education by educational bodies, private bodies, and individual
experts.
b. One class, one TV channels through Swayam Prabha TV Channels: Swayam Prabha DTH
channels are meant to support and reach those who do not have access to the internet. 12
channels are devoted to telecast high quality educational programmes in school education.
The pilot/beta version has been launched in October, 2020.
c. Extensive use of Radio, Community radio and Podcasts: Radio broadcasting is being used
for children in remote areas who are not online. 303 pieces of curriculum-based radio
programmes (for Classes 1-8) have been produced by CIET-NCERT for its dissemination/
broadcast on 12 GyanVani FM Radio Stations, 60 Community Radio Stations, iRadio and Jio
Saavn Mobile apps. 289 Community Radio Stations have also been used to broadcast
content for NIOS for grades 9 to 12. A Podcast of CBSE called Shiksha Vani is being effectively
used by learners of grades 9 to12. It contains over 430 pieces of audio content for all subjects
of grades 9 to 12.
d. For the differently-abled: One DTH channel is being operated specifically for hearing
impaired students in sign language. For visually and hearing-impaired students, study
material has been developed in Digitally Accessible Information System (DAISY) and in sign
language; both are available on NIOS website/ YouTube. 25 NCERT textbooks have also been
converted into DAISY format.
2. Swayam MOOCs for open schools and pre-service education: Online MOOC courses relating to
NIOS (grades 9 to 12 of open schooling) are uploaded on SWAYAM portal. Around 92 courses have
started and 1.5 crore students are enrolled under Swayam MOOCs.
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3. Funding support for digital initiative: To mitigate the effect of COVID-19, ` 818.17 crore is allotted
to states/UTs to promote online learning through digital initiatives, and ` 267.86 crore for online
teacher training to ensure continuous professional development of teachers under Samagra Shiksha
Scheme.
4. National Repository of Open Educational Resources (NROER): NROER is an open storehouse of e-
content. Nearly 17,500 pieces of e-content are available for various school subjects in all grades.
5. PRAGYATA guidelines on digital education was developed with a focus on online/blended/ digital
education for students who are presently at home due to the closure of schools.
6. MANODARPAN: The ‘Manodarpan’ initiative for psychosocial support has been included in the
Atmanirbhar Bharat Abhiyan, as part of strengthening and empowering the human capital to
increase productivity and efficiency through reforms and initiatives in the education sector.
Policy Reforms under Skill Development Initiatives

• Operationalizing Unified Skill Regulator: A significant step to make the skill ecosystem more
dynamic and credible has been undertaken through the operationalization of the unified skills
regulator- National Council for Vocational Education and Training (NCVET). As a first milestone
towards more credible certifications and assessments, the Awarding and Assessment Bodies
guidelines was notified in October 2020. Unique numbered certification has also been approved by
the new regulator. The regulatory capacity is being continuously strengthened through notification
of various standardization processes, regulatory systems, human resources, LMIS and research
capabilities with an aim to create a regulatory institution at par with international standards.
• Pradhan Mantri Kaushal Vikas Yojana 3.0 (PMKVY 3.0): First phase of PMKVY 3.0 was rolled out in
2020-21 with a tentative target to skill 8 lakh candidates including migrants. A paradigm shift in
implementation strategy is adopted by making it demand driven with bottom up approach for
identification and mapping of job roles. District Skill Committees (DSCs) would be playing a pivotal
role under the guidance of State Skill Development Missions in PMKVY 3.0. DSC shall be the focal
point of implementation of PMKVY 3.0 and shall play a major role in preparation of District level
plan, mobilization and counselling of candidates, formation of training batches, monitoring of
quality assurance and post training support. A phase-wise introduction of vocational courses in
schools shall be initiated in coordination with Ministry of Education. This component shall be
implemented for classes 9 to 12 to expose students to skill development avenues.
• Quality Enhancement: Towards enhancing the quality of long-term training programs and providing
a choice to learners about the institutes, the grading of ITIs has been undertaken to improve their
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quality and transparency. Draft grading of ~11000 ITIs have already been published. For ensuring
greater industrial connect, new model of Dual System of Training (DST) and Flexi MoUs is being
implemented under which more than 950 MoUs with enterprises have already been signed.
• Integration of Vocational and Formal education both at school and higher education: The efforts
towards integration of Vocational Education and Training (VET) in general education has received a
big fillip with the NEP, 2020 envisioning giving 50 per cent of school and higher education candidates
exposure to VET over the next 5 years. Some of the key ingredients of VET integration includes
offering vocational courses in schools and equal weightage to vocational courses for admission in
undergraduate courses have been implemented. The draft Credit Framework for vertical and
horizontal mobility from vocational to general and viceversa is being developed. A ‘hub-n-spoke’
model is also being piloted in 2 States with the conceptual framework of early introduction of VET
in schools and an ITI becoming a ‘Hub’ for providing VET related training and exposure to students
of adjoining 5-7 schools. It is hoped that the artificial separation of the education system into formal
and vocational shall end with such enabling frameworks allowing seamless integration.
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ROLE OF INDIAN BANKS & RESERVE
BANK IN THE DEVELOPMENT PROCESS
FODDER MATERIAL

Contents
1 Role of Reserve Bank ..............................................................................................................................3
1.1 Evolution of the Reserve Bank of India ...........................................................................................3
1.1.1 Banking Functions ....................................................................................................................5
1.1.2 Issue Functions ........................................................................................................................5
1.1.3 Monetary Policy Functions ......................................................................................................6
1.1.4 Public Debt Functions ..............................................................................................................7
1.1.5 Foreign Exchange Management ..............................................................................................7
1.1.6 Banking Regulation & Supervision ...........................................................................................8
1.1.7 Regulation and Supervision of NBFCs ......................................................................................9
1.1.8 Regulation & Supervision of Co-operative banks ....................................................................9
1.1.9 Regulation of Derivatives and Money Market Instruments ..................................................10
1.1.10 Payment and Settlement Functions ......................................................................................11
1.1.11 Credit Information Companies Regulation Functions ...........................................................11
1.1.12 Consumer Protection and promotion Functions ...................................................................11
1.1.13 Financial Inclusion and Development ....................................................................................12
2 Role of Other Indian Banks ...................................................................................................................19
2.1 Commercial Banks .........................................................................................................................20
2.2 State Bank of India ........................................................................................................................21
2.3 Bank Nationalisation .....................................................................................................................21
2.4 Banking Sector Reforms from 1991 ..............................................................................................23
2.5 Narasimhan Committee ................................................................................................................24
2.6 Differentiated Banking ..................................................................................................................24
2.6.1 Small Finance Banks...............................................................................................................25
2.6.2 Payments Bank ......................................................................................................................26
2.7 India Post Payments Bank .............................................................................................................27
2.8 Regional Rural Banks .....................................................................................................................28
2.9 MUDRA Bank .................................................................................................................................30
2.10 Development Banks ......................................................................................................................31
2.11 Cooperative Banks ........................................................................................................................32
2.12 Evolution of Banking Sector in India .............................................................................................33
2.13 Way Forward for the Banking Sector ............................................................................................34

1 Role of Reserve Bank
The importance of central banks has increased manifold in the last decade with such institutions taking
a proactive lead in responding to situations and circumstances that have a bearing on financial stability,
supporting respective economies during the global financial crisis of 2007-08 and more recently in
dealing with the scenario emerging out of Covid-19 pandemic.
The role of Reserve Bank of India (RBI) has also evolved with several dimensions added (recent addition
as regulator for HFCs, for example), several reforms and reformations, modification and re-designing of
functional domains and creation of new Departments/verticals since its establishment on April 1, 1935.
A case in point are the recent additions/modifications to functional domains in the form of creation of
Enforcement Department, the new Supervisory and Regulatory verticals etc.
1.1 Evolution of the Reserve Bank of India

The origins of the Reserve Bank of India (RBI) can be traced to 1926, when the Royal Commission on
Indian Currency and Finance – also known as the Hilton-Young Commission – recommended the creation
of a central bank for India to separate the control of currency and credit from the Government and to
augment banking facilities throughout the country. The Reserve Bank of India Act of 1934 established
the Reserve Bank and set in motion a series of actions culminating in the start of operations in 1935. Since
then, the Reserve Bank’s role and functions have evolved, as the nature of the Indian economy and
financial sector changed. Though started as a private shareholders’ bank, the Reserve Bank was
nationalised in 1949.
The Preamble to the Reserve Bank of India Act, 1934, under which it was constituted, specifies its
objective as “to regulate the issue of Bank notes and the keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the country to its
advantage”.
The primary role of the RBI, as the Act suggests, is monetary stability, that is, to sustain confidence in the
value of the country’s money or preserve the purchasing power of the currency. Ultimately, this means
low and stable expectations of inflation, whether that inflation stems from domestic sources or from
changes in the value of the currency, from supply constraints or demand pressures.
In addition, the RBI has two other important mandates; inclusive growth and development, as well as
financial stability.
In a country where a large section of the society is still poor, inclusive growth assumes great significance.
Access to finance is essential for poverty alleviation and reducing income inequality. One of the core
functions of the RBI, therefore, is to promote financial inclusion that leads to inclusive growth.

As the central bank of a developing country, the responsibilities of the RBI also include the development
of financial markets and institutions. Broadening and deepening financial markets and increasing their
liquidity and resilience so that they can help allocate and absorb the risks entailed in financing India’s
growth is a key objective of the RBI.
India’s financial system is dominated by banks. Their regulation and supervision is therefore important
both from the viewpoint of protecting the depositors’ interest and preserving financial stability. The RBI,
deriving powers from the Banking Regulation Act, 1949, designs and implements the regulatory policy
framework for banks operating in India. Over the years, the purview of regulation and supervision has
been expanded to include nonbanking entities also.
The global economic uncertainties during and after the Second World War warranted conservation of
scarce foreign exchange by sovereign intervention and allocation. Initially, the RBI carried out the
regulation of foreign exchange transactions under the Defence of India Rules, 1939 and later, under the
Foreign Exchange Regulation Act of 1947. Over the years, as the economy matured, the role shifted from
foreign exchange regulation to foreign exchange management.
The 1991 balance of payment and foreign exchange crisis was a watershed event in India’s economic
history. Being at the centre of country’s monetary and financial system, the RBI played a key supporting
role in helping the Government manage the crisis and undertake necessary market and regulatory
reforms. The approach under the reform era included a thrust towards liberalisation, privatisation,
globalisation and concerted efforts at strengthening the existing and emerging institutions and market
participants. The Reserve Bank adopted international best practices in areas, such as, prudential
regulation, banking technology, variety of monetary policy instruments, external sector management
and currency management to make the new policy framework effective.
Central banks are at the heart of a country’s payment and settlement system. “One of the principal
functions of central banks is to be the guardian of public confidence in money, and this confidence
depends crucially on the ability of economic agents to transmit money and financial instruments
smoothly and securely through payment and settlement systems”. The RBI has, over the years, taken
several initiatives in building a robust and state-of-the-art payment and settlement system that not only
improves the “plumbing” of the financial system but also its stability.
The last two and a half decades have also seen growing integration of the national economy and
financial system with the world. While rising global integration has its advantages in terms of expanding
the scope and scale of growth of the Indian economy, it also exposes India to global shocks. The crisis of

2007-08 gave a glimpse of financial instability in other economies posing threat to our financial stability.
Hence, preserving financial stability has become an even more important mandate for the RBI.
1.1.1 Banking Functions

The general superintendence and direction of the affairs and business of the RBI shall be entrusted to
the Central Board having nominees from the Central Government and Directors appointed under Section
8 of the RBI Act.
The Board of the RBI is headed by the Governor and assisted by not more than four Deputy Governors.
The Board exercises all powers and do all acts and things which may be exercised by the RBI.
Section 17 of the RBI Act enables RBI to do banking business, such as accepting deposits, without interest,
from any person. The other business, which the RBI may transact are also mentioned in the said provision.
It states that the RBI may transact various businesses such as acceptance of deposits without interest
from Central Government and State Governments, purchase, sale and rediscount of Bills of Exchange,
making of short term loans and advances to banks and other institutions, providing of annual
Contributions to National Rural Credit Funds, dealing in Derivatives, purchase and sale of Government
Securities, purchase and sale of shares of State Bank of India, National Housing Bank, Deposit Insurance
and Credit Guarantee Corporation, etc., keeping of Deposits with SBI for specific purposes, making and
issue of Banknotes, etc.
Section 18 facilitates the RBI to act as a ‘Lender of Last Resort’. Section 19 lists out the kinds of businesses
which RBI may not transact. The provisions of the RBI Act enable the RBI to act as banker to Central
Government and State Governments. Under Sections 20 and 21 of the RBI Act, RBI has an obligation and
right respectively to accept monies for account of the Central Government and to make payments up to
the amount standing to the credit of its account, and to carry out its exchange, remittance and other
banking operations, including the management of the public debt of the Union. In the case of State
Governments, the said banking functions may be undertaken by way of an agreement between the RBI
and the State Government concerned, as provided in Section 21-A of the RBI Act. These agreements
made between the RBI and the State Governments are statutory as they are required to be laid before
the Parliament as soon as they are made.
1.1.2 Issue Functions

Issuance of bank notes is one of the key central banking functions the RBI is authorised and mandated to
do. Section 22 of the RBI Act confers on RBI the sole right to issue bank notes in India. The issue of bank
notes shall be conducted by a department called the Issue Department, which shall be separated and
kept wholly distinct from the Banking Department. The RBI Act enables RBI to recommend to Central
Government the denomination of bank notes, which can be of two rupees, five rupees, ten rupees,
twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five
thousand rupees and ten thousand rupees or other denominations not exceeding ten thousand rupees.
The design, form and material of bank notes shall be approved by the Central Government on the
recommendations of Central Board of the RBI. Every bank note shall be a legal tender at any place in
India, however, on recommendation of the Central Board, the Central Government may declare any
series of bank notes of any denomination to be not a legal tender. Another important function is
exchange of mutilated or torn notes, which under the RBI Act is not a matter of right, but of grace. The
bank notes that are being issued by the RBI are exempt from payment of stamp duty .
1.1.3 Monetary Policy Functions

Chapter III-F of the RBI Act provides for a statutory basis for the Monetary Policy Framework and the
Monetary Policy Committee. The Central Government, in consultation with the RBI shall determine the
inflation target in terms of the Consumer Price Index, once in every five years, which needs to be notified
in the Official Gazette. Similarly, it is the Central Government that should constitute a Monetary Policy
Committee by notification in the Official Gazette. The Monetary Policy Committee shall consist of (a) the
Governor of the RBI; (b) Deputy Governor of the RBI in charge of Monetary Policy; (c) one officer of the
RBI to be nominated by the Central Board; and (d) three persons to be appointed by the Central
Government. The Monetary Policy Committee has been entrusted with the statutory duty to determine
the Policy Rate required to achieve the inflation target. The decision of the Monetary Policy Committee
is binding on the RBI and the RBI shall publish a document explaining the steps to be taken by it to
implement the decisions of the Monetary Policy Committee. It has been the objective of the statute that
a Committee-based approach will add lot of value and transparency to monetary policy decisions. The
meetings of the MPC shall be held at least 4 times a year and it shall publicize its decisions after each
such meeting.
Measures Taken by RBI to Support Liquidity During Covid-19 Lockdown & its Aftermath:
• Injection of durable liquidity of more than Rs 2.7 lakh crore through Open Market Operation (OMO)
purchases between February 6-December 4, 2020.
• OMOs in State Development Loans (SDLs) as a special case were also introduced during the current
financial year. The OMOs were conducted for a basket of SDLs comprising securities issued by states.
Aggregate liquidity to the tune of Rs 30,000 crore was injected through three OMO purchase
auctions (October 22, 2020, November 5, 2020 and December 23, 2020) under this facility.
• Targeted Long Term Repo Operations (TLTROs) of up to three years’ tenor for a total amount of Rs
1.13 lakh crore for investment in corporate bonds, commercial papers, and non-convertible

debentures, in addition to injection of Rs. 25 lakh crore through Long Term Repo Operations (LTROs)
conducted in February-March 2020.
• Reduction in the CRR requirement of banks from 4 per cent of net demand and time liabilities (NDTL)
to 3 per cent with effect from March 28, 2020 augmenting primary liquidity in the banking system
by about Rs 1.37 lakh crore.
• Raising banks’ limit for borrowing overnight under the MSF by dipping into their Statutory Liquidity
Ratio (SLR) to 3 per cent of NDTL from 2 per cent, allowing the banking system to avail an additional
Rs 1.37 crore of liquidity.
• Special Liquidity Facility for mutual funds for Rs 50,000 crore; and
• Refinance facility worth Rs 75,000 crore for all India financial institutions i.e., NABARD, NHB, SIDBI
and EXIM Bank.
1.1.4 Public Debt Functions

The Parliament of India enacted the Government Securities Act, 2006 (‘GS Act’) with an objective “to
consolidate and amend the law relating to Government securities and its management by the Reserve
Bank of India”. The GS Act applies to Government securities created and issued by the Central
Government or a State Government. The GS Act prescribes the procedure and modalities to be followed
by the RBI in the management of the public debt and also confers various powers on the RBI, including
the power to determine the title to a Government security, if there exists any doubt in the opinion of
the RBI. Further, Section 18 of the GS Act provides that no order made by the RBI under that Act shall be
called in question by any Court for the reasons stated therein. Prior to the enactment of the GS Act, the
said public debt functions of the RBI have been governed by the provisions of the Public Debt Act, 1944.
The enactment of the GS Act has not fully repealed the Public Debt Act, 1944. This is evident from Section
31 of the GS Act which states that the Public Debt Act, 1944, shall cease to apply to the Government
securities to which that Act applies and to all matters for which provisions have been made under the GS
Act.
1.1.5 Foreign Exchange Management

The powers and responsibilities with respect to external trades and payments, development and
maintenance of foreign exchange market in India are conferred on the RBI under the provisions of the
Foreign Exchange Management Act, 1999 (‘FEMA"). Section 10 of the FEMA empowers the RBI to
authorize any person to be known as authorized person to deal in foreign exchange or in foreign
securities, as an authorized dealer, money changer or off-shore banking unit or in any other manner as
it deems fit. Similarly, it empowers the RBI to revoke an authorization issued to an authorized dealer in
public interest, or the authorized person has failed to comply with the conditions subject to which the

authorization was granted or has contravened any of the provisions of the FEMA or any rule, regulation,
notification, direction or order issued by the RBI. However, the revocation of an authorization may be
done by the RBI after following the prescribed procedure in the FEMA or the Regulations made there
under. Section 13 of the FEMA details out the contraventions and penalties, and the RBI has been
empowered to compound certain contraventions under Section 15 of the FEMA.
1.1.6 Banking Regulation & Supervision

India has a variety of banks viz., banking companies (banks which are companies and regulated by the
Banking Regulation Act, 1949), State Bank of India (constituted by the State Bank of India Act, 1955),
Nationalised Banks (constituted by the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970/ 1980), Regional Rural Banks (constituted under the Regional Rural Banks Act, 1976) and co-
operative banks (constituted either under the Multi-State Co-operative Societies Act, 2002 or State Co-
operative Societies Acts). Although RBI is entrusted with the task of regulating and supervising all types
of banks in the country, the powers exercisable by it towards different banks are not uniform.
The power to regulate and supervise banking companies has been provided by the provisions of the
Banking Regulation Act, 1949 (BR Act, 1949) to the RBI. Although, the preamble to the BR Act, 1949,
states that it is an Act to consolidate and amend the law relating to banking. The powers of RBI to
formulate banking policy, regulate and supervise banking business etc., are scattered across the BR Act,
1949. Section 5(ca) of the BR Act, 1949, states that banking policy means any policy, which is specified
from time to time by the RBI, in the interest of the banking system or in the interest of monetary stability
or sound economic growth, having due regard to the interests of the depositors, the volume of deposits
and other resources of the bank and the need for equitable allocation and the efficient use of these
deposits and resources. The appointment of chairman and whole-time directors of a banking company
shall not have effect, unless done with the previous approval of the Reserve Bank. Similarly, as a part of
control over management, Section 36-AB of BR Act, 1949, empowers RBI to appoint additional directors
on the boards of banking companies. Section 36-AA of the BR Act, 1949 enables RBI to remove
executives, officers and employees of a banking company under certain conditions. Moreover, the RBI
has been empowered under BR Act, 1949, to supersede the boards of banking companies.
Though it is not the role of the Reserve Bank to micro-manage the affairs of banks, it has powers to control
advances by banking companies. Section 22 of the BR Act, 1949 confers on RBI the power to issue
licenses and also to cancel licenses of banking companies. Another important regulatory power that has
been vested in the RBI is the power to issue directions to banking companies. Under Section 35-A of the
BR Act, 1949, RBI has the power to issue directions to banking companies in public interest or in the
interest of banking policy or to prevent the affairs of any banking company being conducted in a manner

detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking
company or to secure the proper management of any banking company.
The Banking Regulation (Amendment) Act, 2017 has provided powers to RBI to issue directions to banking
companies in relation to resolution of stressed assets. As part of the supervisory powers, RBI has been
empowered to inspect banking companies on its own or at the instance of Central Government under
the provisions of the BR Act, 194928. “Thus an overall responsibility to find out the well-being of a
banking company, in improving monetary stability and economic growth as well as keeping in view the
interests of depositors”, has been left with the Reserve Bank of India.
Only a few provisions which are mentioned in section 51 of the BR Act will apply to State Bank of India,
Nationalised Banks and Regional Rural Banks. In the case of co-operative banks, the application of the
provisions of the BR Act will be subject to the modifications mentioned in section 56 of the very same Act.
1.1.7 Regulation and Supervision of NBFCs

The regulation and supervision of non-banks is one of the critical functions that the RBI has been
entrusted with. Section 45-IA of the RBI Act mandates every non-banking financial company to obtain a
certificate of registration from the RBI and to have a net owned fund as may be specified by the RBI in
the Official Gazette, before commencing such nonbanking financial business. Further, as a part of
regulation and supervision of non-banks, the RBI has been conferred with the statutory powers to
regulate or prohibit issue of prospectus or advertisements soliciting deposits of money by non-banking
financial companies, power to determine policy and issue directions to non-banking financial companies,
etc. Further, the RBI has been empowered under Section 45-L of the RBI Act to call for information and
issue directions to non-banking financial companies for the reasons stated therein. As a part of the
supervisory control over the non-banking financial companies, the RBI has the power to inspect them
under Section 45-N of the RBI Act, 1934.
1.1.8 Regulation & Supervision of Co-operative banks

In terms of Article 246 of the Constitution of India, the legislative powers of the Union and the State are
given in three Lists, viz., the Union List the State List and the Concurrent List respectively of Schedule VII
to the Constitution. The entry relating to incorporation, regulation and winding-up of Cooperative
Societies fall in State List whereas the entry relating to banking fall in the Union List. This results in the
duality of jurisdiction over cooperative banks - by the Reserve Bank of India and the Registrar of
Cooperative Societies. In Janata Sahakari Bank Ltd. v. State of Maharashtra, the Bombay High Court has
held that “though the control over management of Co-operative Society where it is Co-operative Banking
Society or otherwise is vested in the Registrar of Co-operative Societies, but insofar as banking is

concerned, by virtue of S.56 of the Banking Regulation Act, 1949, read with S.35A of the Banking
Regulation Act, 1949, it will be a subject with which the Reserve Bank of India has full power”.
The Banking Regulation (Amendment) Ordinance, 2020 that was promulgated on June 27, 2020 seeks to
amend the Banking Regulation Act, 1949, with regard to cooperative banks. The Ordinance states that the
BR Act will not apply to primary agricultural credit societies and cooperative societies whose principal
business is long term financing for agricultural development. Further, these societies shall not use the
words ‘bank’, ‘banker’ or ‘banking’ in their name or in connection with their business, and act as an
entity that clears cheques. The Ordinance provides that a cooperative bank may issue equity shares,
preference shares, or special shares on face value or at a premium to its members or to any other person
residing within its area of operation. Further, it may issue unsecured debentures or bonds or similar
securities with maturity of ten or more years to such persons subject to the prior approval of the Reserve
Bank of India (RBI), and any other conditions as may be specified by RBI. The Ordinance adds that in case
of a co-operative bank registered with the Registrar of Cooperative Societies of a state, the RBI will
supersede the Board of Directors after consultation with the concerned state government, and within
such period as specified by it. However, RBI may exempt a cooperative bank or a class of cooperative
banks from certain provisions of the Act through notification for such time period and under such
conditions as may be specified by the RBI.
1.1.9 Regulation of Derivatives and Money Market Instruments

Chapter III-D was inserted in the RBI Act with effect from 9th January 2007 by way of an amendment to
the RBI Act, 1934. In the said chapter, the Parliament of India thought it as appropriate to introduce
provisions relating to regulation of transactions relating to derivatives, money market instruments,
securities, etc. by the RBI. Sub-section (a) of Section 45U of the RBI Act defines derivative as an instrument
to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate,
credit rating or credit index, price of securities (also called ‘underlying’), or a combination of more than
one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign
currency-rupee swaps, foreign currency options, foreign currency rupee options or such other
instruments as may be specified by the RBI from time to time. Similarly, money market instruments have
been defined to include call or notice money, term money, repo, reverse repo, certificate of deposit,
commercial usance bill, commercial paper and such other debt instrument of original or initial maturity
up to one year as the RBI may specify from time to time. The power of RBI to regulate these money market
instruments have been provided under Section 45W of the RBI Act, which states that the RBI may, in
public interest or to regulate the financial system of the country to its advantage, determine the policy
relating to interest rates or interest rate products and give directions in that behalf to all agencies or any
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of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other
instruments of like nature as the RBI may specify from time to time.
1.1.10 Payment and Settlement Functions

The Parliament of India enacted the Payment and Settlement Systems Act, 2007 (‘PSS Act, 2007’) with an
objective to provide for the regulation and supervision of payment systems in India and to designate the
Reserve Bank of India as the authority for that purpose and for matters connected therewith or
incidental thereto. Under Section 4 of the PSS Act, 2007, no person shall commence or operate a payment
system except with an authorization issued by the RBI. Similarly, under Section 8 of the PSS Act, 2007,
RBI has the power to revoke the authorization granted to any person if it contravenes any of the
provisions of the PSS Act or does not comply with regulations or fails to comply with the orders or
directions issued by the RBI or operates the payment system contrary to the conditions subject to which
the authorization was issued. The regulation and supervision of payment systems has been conferred on
the RBI by virtue of provisions of Chapter IV of the PSS Act, 2007. The regulatory and supervisory controls
include power to determine standards for the functioning of payment systems, power to call for returns,
documents or other information, power to enter and inspect payment systems, power to carry out audit
and inspections, power to issue directions, etc.
1.1.11 Credit Information Companies Regulation Functions

Reserve Bank has been entrusted with the task of regulation and supervision of Credit Information
Companies under the Credit Information Companies (Regulation) Act, 2005. Three institutions form the
essential pillars of the Act, viz. the Credit Information Companies, the Credit Institutions and Specified
Users. The Act empowers the Reserve Bank to issue directions to Credit Information Companies and also
to inspect them. The Reserve Bank is also authorised by the statute to determine policy in relation to
functioning of credit information companies.
1.1.12 Consumer Protection and promotion Functions

Protection of the interests of the depositors is one of the vital mandates of the RBI. The various provisions
in the RBI Act, 1934, BR Act, 1949, etc., are replete with the phrases like “in the interests of depositors”
wherever it entrusts powers to the RBI. Apart from depositors, the resolution of grievances of customers
who deal with its regulated entities is also important for the Reserve Bank of India. Reserve Bank of India
has formulated three Ombudsman Schemes for covering operations of banks, NBFCs and payment
systems.
Reserve Bank of India attaches high importance to its promotional and developmental roles. Clause (8AA)
of section 17 of the RBI Act states that the promoting, establishing, supporting or aiding in the
promotion, establishment and support of any financial institution - whether as its subsidiary or
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otherwise - is a business which can be transacted by the Reserve Bank. Section 54 of that Act points to
the developmental role of RBI in matters of rural development. It provides that the Reserve Bank may
maintain expert staff to study various aspects of rural credit and development and in particular it may
(i) tender expert guidance and assistance to the National Bank; and (ii) conduct special studies in such
areas as it may consider necessary to do so for promoting integrated rural development.
1.1.13 Financial Inclusion and Development

“Financial inclusion may be defined as the process of ensuring access to financial services and timely and
adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at
an affordable cost”
Financial Inclusion and Financial Literacy are considered as twin pillars, where Financial Inclusion acts
on the supply side i.e. for creating access and Financial Literacy acts from the demand side i.e. creating
a demand for the financial products and services. Consumer protection is the third pillar of sustainable
and inclusive financial growth.
1.1.13.1 Need for Financial Inclusion

• Financial Inclusion broadens the resource base of the financial system by developing a culture of
savings among large segment of the population and plays its own role in the process of economic
development.
• Further, by bringing low-income groups within the perimeter of formal banking sector, financial
inclusion protects their financial wealth and other resources in exigent circumstances.
• It also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating
easy access to formal credit.
1.1.13.2 Brief Background

The thrust towards inclusive growth of banking can probably be traced to the first phase of bank
nationalization in 1969 & subsequently in 1980. In 1969, the Lead Bank Scheme was launched and priority
sector lending guidelines were issued in 1972. By 1975, there was a focus on building new infrastructure
at the grassroots level for rural banking and the Regional Rural Banks (RRBs) were set up. In 1977, RBI
mandated banks to open at least 25% of their branches in unbanked rural areas. The establishment of
National Bank for Agriculture and Rural Development (NABARD) was established as an apex agency for
agricultural and rural lending in 1982 has paid rich dividends. In 1988, banks were encouraged to adopt
the service area approach. The 1990s witnessed the setup of Local Area Banks (LAB) and the launch of
SHG linkage scheme. The turn of the century saw many initiatives including a focus on Financial Inclusion
(FI) as a mainstream banking objective and the Business Correspondent (BC) model. Co-terminus with
the above efforts, RBI also encouraged banks to adopt a structured and planned approach to financial
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inclusion with commitment at the highest levels through preparation of Board approved Financial
Inclusion Plans (FIPs). The first two phases of FIPs implemented over 2010-13 and 2013-16 were
interspersed with the implementation of PMJDY by the Government of India during 2014-15, whereby
the supply side efforts received an adequate impetus. To sustain the momentum of achieving the financial
inclusion objectives by setting FIP targets for banks, the third phase of Financial Inclusion Plans for the
three years 2016-19 focuses on more granular monitoring of the progress made by banks under FIPs at
district level.
Within the RBI too, the function has evolved to mirror the requirements of the external environment and
stated public policy objectives. The Agricultural Credit Department (ACD) evolved into the Rural Planning
and Credit Department (RPCD) in 1982 after NABARD was formed. Reflecting the focus of the Bank, the
department has been rechristened as Financial Inclusion and Development Department (FIDD) in 2014.
The major role and functions of RBI under this role are summarized as under:
• Policy formulation relating to rural credit and priority sector lending with special emphasis on
increasing credit flow to agriculture, micro and small enterprises and the weaker sections.
• Assessment of quantitative and qualitative performance of commercial banks in priority sector
lending.
• Dealing with policies relating to penalties on commercial banks on account of nonachievement of
priority sector lending targets.
• Financial Inclusion initiatives and monitoring of Financial Inclusion Programmes
• Implementation and monitoring of Lead Bank Scheme
• Forming policies and guiding the flow of credit to the MSME sector
• Dealing with NABARD, based on various statutory provisions
• Promoting financial literacy
Institutional Mechanism for promotion of Financial Inclusion
The strength lies in a robust institutional mechanism to support the roll out of banking services across the
country. This is essential considering the enormity of the task in terms of the number of excluded people
and the geographical size of the country. The institutional architecture includes:
• The Financial Stability and Development Council (FSDC) chaired by the Union Finance Minister and
involving heads of all financial sector regulators that has financial inclusion and financial literacy as
one of its important mandates.
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• A technical group on financial inclusion and financial literacy under the FSDC involving not just the
financial sector regulators, but also the education boards and curriculum developers.
• A high level Financial Inclusion Advisory Committee (FIAC) set up by RBI to focus on providing
strategic direction to FI initiatives across various stakeholders.
• A strong institutional mechanism at the level of banks through State Level Bankers’ Committees
(SLBC) in all the States, District Consultative Committees (DCC) and District Level Review Committee
(DLRC) in all the Districts, Block Level Bankers’ Committee (BLBC) in all the Blocks in the country and
more than 120 thousand bank branches
• Many Financial Literacy Centres (FLC) and Rural Self Employment Training Institutes (RSETIs)
imparting financial literacy to complement the financial inclusion measures.
1.1.13.3 National Strategy for Financial Inclusion (NSFI)

RBI, under the aegis of the FIAC and with due approval from the FSDC has launched the National Strategy
for Financial Inclusion (NSFI) 2019-2024, which sets forth the vision and key objectives of the financial
inclusion policies in India to help expand and sustain the financial inclusion process at the national level
through a broad convergence of action involving all the stakeholders in the financial sector. The strategy
aims to provide access to formal financial services in an affordable manner, broadening & deepening
financial inclusion and promoting financial literacy & consumer protection. Further, to achieve the vision
of ensuring access to an array of basic formal financial services, NSFI Document impresses upon leveraging
technology and adopting a multi-stakeholder approach for sustainable financial inclusion.
1.1.13.4 Priority Sector Lending

The description of the priority sectors was formalized in 1972 on the basis of the report submitted by an
Informal Study Group on Statistics relating to advances to the Priority Sectors constituted by the Reserve
Bank in May 1971. Although initially there was no specific target fixed in respect of priority sector lending,
the banks were advised in November 1974 to raise the share of advances to these sectors in their
aggregate advances to the level of 33 1/3 percent by March 1979. Subsequently, all commercial banks
were advised to achieve the target of priority sector lending at 40 percent of aggregate bank advances
by 1985.
The objective of priority sector lending (PSL) has been to ensure that vulnerable sections of society get
access to credit and there is adequate flow of resources to those segments of the economy which have
higher employment potential and help in making an impact on poverty alleviation. Thus, the sectors that
impact large sections of the population, the weaker sections and the sectors which are employment-
intensive such as agriculture and micro and small enterprises were included in priority sector.
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There are economic reasons why some sectors/borrowers do not receive adequate finance. At any given
point of time, the lendable resources of institutions are limited and there is always a trade-off between
how much time and effort can be put in and what kind of top line and bottom line the new businesses
would generate. Given this sort of business dynamics, it is possible that the sectors which rightly deserve
bank credit get excluded. This is precisely the motive behind the institution of priority sector lending
norms. These guidelines are reviewed periodically to realign it with the national priorities and financial
inclusion goals of the country.
The present priority sector guidelines have been in force since April 2015 incorporating many
recommendations of the Internal Working Group set up in July 2014 to revisit the existing priority sector
lending guidelines. The emphasis now, over and above lending to vulnerable sections, is to increase
employability, create basic infrastructure and improve competitiveness of the economy, thus creating
more jobs. Hence, the categories of Medium enterprises, Social infrastructure and renewable energy
have been added. The present categories under priority sector are as follows:
i. Agriculture
ii. Micro, Small and Medium Enterprises
iii. Export Credit
iv. Education
v. Housing
vi. Social Infrastructure
vii. Renewable Energy
viii. Others
Reserve Bank stipulates the overall priority sector target and the sub-targets for certain categories of
priority sector to Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Small Finance Banks
(SFBs) and Urban Co-operative Banks (UCBs).
1.1.13.5 Interest Subvention Schemes

With the approval of Government of India, RBI announces Interest Subvention Schemes related to
Agriculture and MSME sectors. Such subvention schemes are thus aimed at bringing certain sections of
society into formal banking channels thereby promoting financial inclusion.
The Govt. of India under the Ministry of Agriculture & Farmers’ Welfare implements 2% interest
subvention for production loans pertaining to short term crops upto ₹ 3 lakhs (since 2006-07) and for
working capital loans to animal husbandry farmers and fisheries (since 2019). Within the scheme a 3%
prompt repayment incentive is also available if the loan is repaid on time, thereby bringing down the
lending at the ground level to 4%.
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1.1.13.6 Relief Measures in areas affected by Natural Calamity
Currently, the National Disaster Management Framework of the Government of India covers 12 types of
natural calamities under its ambit, viz., cyclone, drought, earthquake, fire, flood, tsunami, hailstorm,
landslide, avalanche, cloud burst, pest attack and cold wave/frost. Accordingly, the Reserve Bank has
mandated banks to provide relief measures, where the crop loss assessed was 33 per cent or more, in
the areas affected by natural calamities. The relief measures by banks, inter alia, include restructuring/
rescheduling existing loans and sanctioning fresh loans as per the emerging requirement of the
borrowers.
1.1.13.7 Kisan Credit Card

The Kisan Credit Card (KCC) has emerged as an innovative credit delivery mechanism to provide adequate
and timely bank credit to farmers under a single window for their cultivation and other needs, including
consumption, investment and insurance. The KCC Scheme has now been extended to farmers involved
in animal husbandry and fishery to enable them to meet their working capital requirements.
1.1.13.8 New Banking Entities

RBI has granted approval to some entities to set up differentiated banks namely “Small Finance Banks”
(SFBs) and “Payments Banks” (PBs) to further the cause of financial inclusion in the country. Other than
serving as vehicles for savings, SFBs and PBs are expected to enhance the supply of credit to small
business units, small and marginal farmers, micro and small industries and other entities in the
unorganized sector and enable provisions for cost-efficient remittance services in a secured technology
driven environment respectively. Small Finance Banks were allowed to participate in various fora under
the Lead Bank Scheme i.e., SLBC, DCC/ DLRC and BLBC in their respective locations as regular members
from Financial Year 2018-19 with also being part of the credit planning exercise whereas Payments
Banks, due to their differentiated and limited mandate (viz. lending is not permitted by virtue of the
licensing conditions), were included under the Lead Bank Scheme since May 2019 to give a further
impetus to financial inclusion also financial literacy related initiatives without participation in the Annual
Credit Plan (ACP) exercise under the Lead Bank Scheme. Also, considering the strong linkage between
financial inclusion and the payment systems, RBI has taken several steps. Some of these include
encouraging use of Mobile Banking, pre-paid instruments in the form of digital wallets and mobile
wallets, operationalization of the Aadhaar Bridge Payment System (ABPS) and Aadhaar-Enabled
Payment system (AEPS) etc.
1.1.13.9 Financial Literacy

OECD defines Financial Literacy as a combination of financial awareness, knowledge, skills, attitude and
behaviour necessary to make sound financial decisions and ultimately achieve individual financial
wellbeing. People achieve financial literacy through a process of financial education. OECD also defines
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Financial Education as “the process by which financial consumers/investors improve their understanding
of financial products, concepts and risks and, through information, instruction and/or objective advice,
develop the skills andconfidence to become more aware of financial risks and opportunities, to make
informed choices, to know where to go for help, and to take other effective actions to improve their
financial well-being”.
Financial Literacy is important to enable consumers of financial services to make informed choices and
thereby enhance their financial well-being. Recognizing this, the Technical Group on Financial Inclusion
and Financial Literacy (TGFIFL) of the FSDC subcommittee was set up to co-ordinate the efforts on
financial inclusion and literacy at the policy level. The group is chaired by the Deputy Governor, Reserve
Bank of India and has representatives from all regulators and the Finance Ministry. The Reserve Bank of
India has come up with various policies to strengthen Financial Literacy in the country.
A snapshot of the important initiatives that have been undertaken by RBI are as under:
• Instructions have been issued to banks to open and operationalize Financial Literacy Centres (FLCs)
and also undertake financial education through the rural bank branches across the country. Financial
Support for the same is also made available from the Financial Inclusion Fund managed by NABARD.
• Financial Education outreach through the Regional Offices of RBI through the Financial Literacy
Architecture for Regional Environment- Unified Programme (FLARE-UP) guidelines
• Creation of financial education literature which has been uploaded on the Financial Education
website of RBI. The content is available in 13 languages which can be downloaded by banks and other
stakeholders to create awareness about financial products and services, good financial practices,
going digital and consumer protection. In addition, content has also been prepared for certain target
group specific content for School Children, SHGs, Farmers, Small Entrepreneurs and Senior Citizens.
• Undertaking capacity building of officials of RBI ROs and officials looking after Financial Literacy
Policy in Scheduled Commercial Banks. The trained officials are in turn expected to impart training to
the Financial Literacy Counsellors.
• Pursuing with Ministry of Human Resources Development, Government of India and various State
Government’s Education Departments to integrate financial education in school curriculum.
• Mass Media awareness of matters related to Financial Literacy in co-ordination with Department of
Communication.
• Observing Financial Literacy Week (FLW) every year since 2016 to propagate financial education
messages on a particular theme across the country. FLW 2018 and FLW 2019 were focused on
“Consumer Protection” and “Farmers” respectively. The theme selected for 2020 was “Micro, Small
and Medium Enterprises (MSMEs),” which was observed from February 10 to February 14, 2020.
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During the Financial Literacy Week, banks were advised to disseminate the information and create
awareness among its customers and general public on the theme of MSMEs. Further, RBI also
undertook a centralized mass media campaign during the month of February 2020 to broadcast
essential financial awareness messages to MSME Entrepreneurs.
• Involving NGOs to partner with banks in the pilot Centre for Financial Literacy project to bring
together innovative and participative approaches to improve financial awareness in the country.
Currently, banks have partnered with six NGOs in setting up CFLs across 100 blocks of the country
(including 20 tribal blocks from three states of Jharkhand, Madhya Pradesh and Rajasthan). The
experiences gathered from the CFLs are being evaluated through an impact assessment exercise which
would be used during scaling up of the CFLs in the country.
In addition to the above, the Reserve Bank of India is a full member of the OECD-INFE which is a global
forum to bring together policy makers from across the globe to guide on strengthening financial
education. The experiences gathered by our participation in these forums (viz. the working groups on
Implementation and Standards; the working group on Financial Education at Workplace; Working Group
on Financial Education for Elderly population; Working Group on Digital Financial Literacy) is useful in
helping us shape our policies in line with global best practices. Further, sharing of our experiences in this
forum is also helping other policy makers to strengthen financial education measures in their territories.
1.1.13.10 National Centre for Financial Education (NCFE)

According to OECD, framework of National Strategy for Financial Education (NSFE) promotes a smoother
and more sustainable co-operation between regulators and stakeholders, avoids duplication of
resources and allows development of articulated and tailored roadmaps with measurable and realistic
objectives, based on dedicated national assessments. Globally, countries like Czech Republic,
Netherlands, New Zealand, Spain, and UK have already implemented National Strategy of Financial
Education (NSFE), while many other countries are in the process of formulation and implementation.
In India, the mission of National Strategy of Financial Education (NSFE) is to undertake campaigns to help
people manage money more effectively to achieve financial well-being by accessing appropriate
financial products and services through regulated entities with fair and transparent machinery for
consumer protection and grievance redressal. To achieve this mission, the National Centre for Financial
Education (NCFE) has been incorporated as a Section 8 (Not for Profit) Company promoted by all
regulators, viz., Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance
Regulatory and Development Authority of India (IRDAI) and Pension Fund Regulatory and Development
Authority (PFRDA). It has two main objectives as detailed below:
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• To promote Financial Education across India for all sections of the population as per the National
Strategy for Financial Education (NSFE) of Financial Stability and Development Council (FSDC).
• To create financial awareness and empowerment through financial education campaigns across the
country for all sections of the population through seminars, workshops, conclaves, trainings,
programmes, campaigns, discussion forums with/without fees by itself or with help of institutions,
organisations and provide training in financial education and create financial education material in
electronic or non-electronic formats, workbooks, worksheets, literature, pamphlets, booklets, fliers,
technical aids and to prepare appropriate financial literature for target based audience on financial
markets and financial digital modes for improving financial literacy so as to improve their knowledge,
understanding, skills and competence in finance.
2 Role of Other Indian Banks

A bank is a type of financial intermediary as it mediates between the savers and borrowers. It does so
by accepting deposits from the public and lending money to businesses and consumers. Its primary
liabilities are deposits and primary assets are loans.
There are many types of banks in India. These are as follows:
1. Commercial banks
a. Domestic public sector banks
b. Domestic private sector banks
c. Foreign banks
d. Regional rural banks
e. Payments banks
f. Small finance banks
2. Co-operative banks
3. Land Development banks
4. Investment banks/Merchant banks
5. Development banks
Commercial banks and cooperative banks takes demand deposits, current account and savings account
from people. But the nature of cooperative banks is different. The customers are the owners of the
Cooperative banks and it follows the cooperative principle of one person, one vote. The Cooperative
banks are registered under the Cooperative Societies Act, 1912, and are regulated by the Reserve Bank
of India under the Banking Regulation Act, 1949 and Banking Laws (Application to Cooperative
Societies) Act, 1965.
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Land Development Banks were originally called Land Mortgage Banks. Presently, they are called State
Co-operative Agriculture and Rural Development Banks (SCARDBs). They provide long-term finance
required by the agriculturists for the purchase of agricultural machinery like tractors for land
improvement, etc. Such a credit need is generally not met by commercial banks and co-operative banks
because of their short-term deposits.
Investment banks deal with firms primarily, and so, they are called merchant banks.
Development banks provide long-term finance and support to the sectors of the economy where the
risks may be higher and these sectors and subsectors cannot access loans from commercial banks
adequately. Examples are Small Industries and Development Bank of India (SIDBI), MUDRA Bank or Micro
Units Development and Refinance Agency Bank, National Housing Bank (NHB), etc. Except commercial
and cooperative banks, no other bank mentioned above accepts demand deposits (chequable deposits,
that is, deposits from where money can be withdrawn through cheques).
2.1 Commercial Banks

Commercial banks in India include:
1. Scheduled commercial banks

2. Non-scheduled commercial banks
Scheduled commercial banks are those which are included under the second Schedule of the Reserve
Bank of India Act, 1934. They are regulated under the Banking Regulation Act, 1949, and satisfy two
conditions under the Reserve Bank of India Act:
• Paid-up capital and reserves of an aggregate value of not less than Rs 5 lakh.
• It must satisfy RBI that its affairs are not conducted in a manner detrimental to the depositors.
There are certain benefits that are enjoyed by the scheduled commercial banks like approaching RBI for
financial assistance, and similarly they have certain obligations like maintaining certain reserves as per
the RBI guidelines, and so on.
There are only three non-scheduled commercial banks operating in the country with a total of nine
branches. Local Area Banks are the non-scheduled commercial banks in India.
Scheduled banks comprise both-scheduled commercial banks and scheduled co-operative banks.
India had 21 public sector banks that included the IDBI Bank till 2018. But Life Insurance Corporation
(LIC) acquired 51 per cent, controlling stake in IDBI Bank and thus it falls in a different category now. In
2019 August, GOI decided to merge 10 public sector banks into 4 as part of plans to create fewer and
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stronger global-sized lenders to boost economic growth. The merger reduced the number of public
sector banks to 12. Public sector banks hold over 70 per cent of total assets of the banking sector. Share
of public sector banks in total deposits is at 76.6 per cent.
2.2 State Bank of India

State Bank of India had its roots in the 19th century, when the Bank of Calcutta later renamed as the
Bank of Bengal, was established in 1806. The Bank of Bengal was one of three Presidency banks, the other
two being the Bank of Bombay and the Bank of Madras. All three Presidency banks were amalgamated
in 1921 and became the Imperial Bank of India. GOI nationalized the Imperial Bank of India in 1955 and
the new bank was named as the State Bank of India.
There were seven regional banks of former Indian princely states. SBI acquired the control of all seven
banks in 1960. They were renamed, with the prefix ‘State Bank of’. These seven banks were State Bank
of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore (SBN), State Bank of
Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashtra (SBS) and State Bank of Travancore
(SBT). All of them and Bharatiya Mahila Bank were merged with SBI with effect from 1 April 2017.
After the acquisition of subsidiary banks by the SBI, subsidiary banks have ceased to exist. Therefore, the
parliament passed the State Banks (Repeal and Amendment) Act of 2017 to amend the SBI Act of 1955
to remove references related to subsidiary banks. It makes SBI one of the top 50 banks in the world.
The combined entity is expected to enhance the productivity, mitigate geographical risks, increase
operational efficiency and drive synergies across multiple dimensions while ensuring increased customer
satisfaction.
Post merger, the bank will rationalize its branch network by relocating some of the branches to maximise
reach. This will help the bank optimise its operations and improve profitability. Integration of treasuries
of the associate banks with the treasury of SBI will bring in substantial cost saving and synergy in treasury
operations.
2.3 Bank Nationalisation

The next major nationalization of banks took place in 1969 when the GOI nationalized an additional 14
major banks and again in 1980 GOI nationalized 6 banks. The objectives behind nationalization were:
• To break the ownership and control of banks by a few business families and thus to prevent the
concentration of wealth and economic power.
• To make banks a part of socio-economic planning
• To extend banks to rural and unbanked areas.
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• To mobilize savings from masses from all parts of the country.
• To cater to the needs of the priority sector, like weaker sections and poverty alleviation, agriculture,
MSMEs, etc.
• Shift from class banking to mass banking.
Government nationalized the 14 largest commercial banks in 1969 accounting for 85 per cent of bank
deposits in the country. A second round of nationalization of 6 more commercial banks followed in 1980.
The aims were:
• Use them for five-year plans

• Make Progress towards mass banking from class banking
• Lend to the poor
• Take banking to the unbanked areas
• Reduce inequality
• Reduce rural-urban gaps, etc.
It has achieved most of these goals and more:
• Reduction of regional imbalances

• Expansion of bank deposits
• Boost household savings
• Credit expansion
• Green revolution
• Expand the network of self-help groups
• Shield the banking system from global financial crisis as Indian public sector banks were not allowed
to have high levels of foreign direct investment.
However, PSBs suffered some problems:
• Profitability
• Managerial inefficiency as working conditions are not comparable to the private banks.
• Lack of transparency in loan disbursal.
To improve the performance of PSBs, the following was done:
• Private banks have been allowed to create competition.

• FDI is being permitted.
• Bank consolidation is taking place (SBI).
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• Technology is being upgraded.
• Banks are getting connected with differentiated Banks like Payments Banks and so on, and thus better
results are expected.
2.4 Banking Sector Reforms from 1991

The banking sector occupied a central place in the economic reforms and structural reforms that India
conducted from 1991. The need arose due to deteriorating bank performance that was visible in:
• Lack of profitability.
• High Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR).
• No credit discipline as there were loan melas when loans were liberally given without any merit.
• Lack of competition as there were hardly any private domestic and foreign banks.
• Directed and concessional lending for populist reasons.
• Administered interest rates set by the RBI.
The reforms to set the above problems right were:
• Interest rates were deregulated to make banks respond dynamically to the market conditions. Even
savings bank deposit rates were deregulated in 2011.
• Voluntary Retirement Scheme (VRS) for better work culture and productivity.
• Floor and cap on CRR were removed and floor on SLR was removed in 2006.
• Near level playing field for public, private and foreign banks in entry.
• Basel norms adopted for safe banking.
• FDI up to 74 per cent was permitted in private banks.
• Differentiated banking so as to cater to the unbanked and also leverage technology to reach the
unreached–for the last mile access to the remotely located.
• Bank consolidation through merger.
• Indradhanush comprising banking sector reforms for professionalization and strength.
The above reforms are meant to achieve the following objectives:
• To make banks competitive and profitable.

• To strengthen the sector to face global challenges.
• Sound and safe banking.
• To help banks technologically modernize for customer benefit.
• Make global expertise and capital available by relaxing FDI norms.
• Inclusive banking.
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2.5 Narasimhan Committee
Banking sector reforms in India were conducted on the basis of Narasimham Committee reports I and II
(1991 and 1998 respectively), on the first report primarily.
The recommendations of Narasimham committee 1991 are:
• No more nationalization as we need to give confidence to domestic private and foreign investors.
• Create a level playing field between the public sector, private sector and foreign sector banks.
• Select few banks like SBI for global operations.
• Reduce Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) as that will leave more resources
with banks for lending.
• Rationalize and better target priority sector lending as a sizeable portion of it is wasted and also much
of it is turning into non-performing assets (NPAs).
• Introduce prudential norms for better risk management and transparency in operations.
• Deregulate interest rates.
• Set up Asset Reconstruction Company (ARC) that can take over some of the bad debts off the banks
and financial institutions and restructure them on profitable lines.
Most of these reforms are implemented:
• SLR and CRR are drastically reduced.

• Divestment in public sector banks led to their listing on the stock exchanges and their performance
has improved.
• Private banks have been given licenses.
• SBI’s associate banks have merged with SBI to scale up the operations.
• ARCs are functioning.
2.6 Differentiated Banking

It means there are different types of banks with different aims, clients and modes of working. Banking
sector catering to different segments—general public, firms and companies, farmers, rural, microfinance,
MSMEs, etc.—offering specialised services and unique products is crucial for economic growth and
financial inclusion.
There has been movement towards differentiated banking in the country. We had cooperative banks,
RRBs, development banks like IDBI for a long time. The current wave of differentiated banking started
with the Nachiket Mor Committee in 2013.
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Differentiated banks are distinct from universal banks (offer all financial products) as they function in a
specific segment. The differentiation may be based on capital requirement, scope of activities or area of
operations. They offer a limited range of services/products or function under a different regulatory
framework.
RBI in recent years pursued it to widen sources of funding in the economy. For example, RBI, since 2014,
gave in-principle approval to small finance banks (SFBs) and payments banks. Wholesale and long-term
finance (WLTF) banks are under discussion. WLTF banks will focus primarily on lending to infrastructure
sector and small, medium and corporate businesses. They may have negligible retail sector exposure on
asset side.
2.6.1 Small Finance Banks

Small finance banks are scheduled commercial banks that are a part of differentiated banking in India
focused on lending for financial inclusion to small business units, small and marginal farmers, micro and
small industries and unorganized sector entities, but not exclusively so.
They can be promoted either by individuals, corporates, trusts or societies. They are established as
public limited companies in the private sector under the Companies Act, 1956, licensed under the
Banking Regulation Act, 1949 and are governed by the provisions of RBI Act, 1934, Banking Regulation
Act, 1949 and other relevant statutes.
SFB is a private financial institution that can operate without any restriction in the area unlike regional
rural banks (RRBs) or local area banks. The minimum capital for SFBs is prescribed at Rs 100 crores.
Foreign investment is permitted, as in the case of other private sector commercial banks. SFBs are subject
to all prudential norms and regulations of RBI as applicable to existing commercial banks like
maintenance of cash reserve ratio (CRR) and statutory liquidity ratio (SLR). SFBs are required to extend
75 per cent of credit to the sectors eligible for classification as priority sector lending (PSL) by the
Reserve Bank. At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs
25 lakhs. It is mandatory that at least 25 per cent of its branches be in unbanked rural centres.
SFBs can undertake other non-risk sharing financial services activities, not requiring any commitment of
own fund, such as distribution of mutual fund units, insurance products, pension products, etc. SFBs can
set up dealership in foreign exchange business. SFBs cannot set up subsidiaries to undertake non-
banking financial services activities.
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There will not be any restriction in the area of operations of small finance banks; however, preference
will be given to those applicants, who, in the initial phase set up the bank in a cluster of under-banked
states/districts.
Existing non-banking finance companies (NBFCs), micro finance institutions (MFIs), and local area banks
(LABs) can opt for conversion into small finance banks. In 2019, RBI announced the process of òn tap’
licensing of Small Finance Banks. ‘On-tap’ facility allows the RBI to accept applications and grant licence
for SFBs throughout the year.
The concept of small finance banks was one of the recommendations in the 2009 report, ‘A Hundred
Small Steps’ of the Committee on Financial Sector Reforms headed by Dr. Raghuram Rajan. Many SFBs
started operations.
2.6.2 Payments Bank

In 2013, Committee on Comprehensive Financial Services for Small Businesses and Low Income
Households, headed by Nachiket Mor, recommended that payments banks be allowed. They are a new
type of bank that can accept a limited amount as deposit, which is currently limited to Rs 1 lakh per
customer.
The payments bank is set up as a differentiated bank. Payments bank is permitted to undertake only
certain restricted activities permitted to banks under the Banking Regulation Act, 1949 as given below:
• Acceptance of demand deposits, i.e., current deposits, and savings bank deposits is permitted.
• No NRI deposits should be accepted.
• The eligible deposits mobilised by the payments bank would be covered under the deposit insurance
scheme of the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). Given their
primary role is providing payments and remittance services and demand deposit products to small
businesses and low-income households, payments bank will initially be restricted to holding a
maximum balance of Rs 1,00,000 per individual customer. However, payments bank can accept a large
pool of money to be remitted to a number of accounts provided at the end of the day the balance
does not exceed Rs 1,00,000. Money deposited in the bank gets interest.
• Cannot accept fixed deposits (FDs), term deposits and recurring deposits (RDs).
• Cannot undertake lending activities.
• Allowed issuance of ATM/ Debit Cards. Payments banks, however, cannot issue credit cards.
• Apart from amounts maintained as Cash Reserve Ratio (CRR) with RBI, it will be required to invest
minimum 75 per cent of its deposits in government securities/treasury bills with maturity up to one
year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR)
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and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial
banks for operational purposes and liquidity management.
• Since payments banks are exposed to operational risks (not credit or market risk), they have to
conform to capital adequacy ratio (CAR) norms which are different from banks.
• They are permitted to handle cross-border remittance transactions.
• They can provide mutual funds and other financial products, net-banking and mobile banking.
The bank should be fully networked from the beginning. The bank can accept utility bills. It cannot form
subsidiaries to undertake non-banking activities. A total of 25 per cent of its branches must be in the
unbanked rural area. The banks are licensed as payments banks under Banking Regulation Act, 1949, and
will be registered as public limited company under the Companies Act, 2013. The minimum capital
requirement is Rs 100 crores.
2.7 India Post Payments Bank

In 2014, a task force was formed by GOI to study ways in which the existing postal network could be used
more, headed by T.S.R. Subramanian. It said that more services should be provided in the field of banking,
insurance and e-commerce.
India Post Payments Bank (IPPB) is a public limited company under the Department of Posts, Ministry
of Communications, with 100 per cent government equity.
It aims to utilize all of India’s 1,55,000 post offices and 3,00,000 postal service workers to provide house
to house banking services. The first phase of the bank with 650 branches and 3250 post offices as access
points was inaugurated in 2018.
A total of 90 per cent of post offices are in rural areas. There is one post office for every 7200 people in
India. Crores of people already receive their National Rural Employment Guarantee Act (NREGA)
payments by post offices. After State Bank of India, India Post has the largest deposits.
The four key features of IPPB are:
1. Financial Literacy: IPPB aims to make India prosperous by ensuring that everyone has equal access to
financial information and services.
2. Streamlining Payments: Beneficiaries can access income from government’s DBT programs like
MNREGA wages, social security pensions and scholarships, directly from their IPPB bank account. They
can also pay their utility bills, fees for educational institutions and many more from the same IPPB
account.
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3. Financial Inclusion: Hundreds of millions of Indians who do not have access to banking facilities cannot
avail government benefits, loans and insurance, and even interest on savings. IPPB will reach the
unbanked and the under-banked across all cross-sections of society and geographies.
4. Easy Access: With over 1.54 lakhs post offices across the country, postal delivery system will make
IPPB an accessible banking network. IPPB also offers services through internet and mobile banking
and prepaid instruments like mobile wallets, debit cards, ATMs, PoS and MPoS terminals, etc.
2.8 Regional Rural Banks

RRBs were set up by Regional Rural Banks Act, 1976. They are Scheduled Commercial Banks (government
banks) operating at regional level in different states of India. They have been created with the view to
serve primarily the rural areas of India with basic banking and financial services. However, RRBs may
have branches set up for urban operations and their area of operation may include urban areas too.
The area of operation of RRBs is limited to the areas notified by GOI, covering one or more districts in
the state. RRBs also perform a variety of different functions. RRBs perform various functions in following
heads:
• Providing banking facilities to rural and semi-urban areas.

• Carrying out government operations like disbursement of wages of MGNREGA workers, distribution
of pensions, etc.
• Providing para-banking facilities like debit and credit cards, mobile banking, internet banking, UPI,
etc.
The Regional Rural Banks are owned by Central Government, State Government and the Sponsor Bank
(any commercial bank can sponsor the regional rural banks) who hold shares in the ratio of 50 :15 :35
respectively. There are 56 RRBs functioning in the country, and State Bank of India is the biggest sponsor
with 14 RRBs. Government wants to consolidate them into much fewer number so that they can enjoy
the benefit of economies of scale. An RRB can function within a single state.
Consolidation/Amalgamation of RRBs within a state has been carried out with the view to enable RRBs:
1. to minimise their overhead expenses,

2. optimise the use of technology,
3. enhance the capital base and area of operation, and
4. increase their exposure.
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RRB Act, 1976 was amended in 2015, whereby such banks were permitted to raise capital by floating
shares to wider public. Thus, it allows the government equity stake dilution but the ownership and
control would remain with the government as its equity will not come down below 51%.
Budget 2019–2020 provided Rs 235 crore towards the recapitalization of RRBs. Recapitalization support
is provided to RRBs to augment their capital so as to comply with regulatory capital requirements.
As per the current scheme for recapitalization of RRBs, the recapitalization support is provided to RRBs
by the centre, concerned state governments and the sponsor banks in the ratio 50:15:35 respectively
to enable them to meet the regulatory requirement of capital to risk weighted assets ratio (CRAR) of 9
per cent.
Problems & Challenges of RRB:

• RRB’s are facing the problem of inadequate finance. They are dependent on NABARD to collect
finance for their further operation. Poor rural people are unable to save anything due to poverty
and low per capita income. The low level of saving of these customer create obstacle for RRB’s to
collect sufficient deposits.
• High overdues and poor recovery of loan is one of the biggest concern affecting the functioning of
RRB’s. Reasons being poor access of granting loan, insufficient and untrained staff, unproductive or
less productive use of credit, inadequate production, poor marketing facilities and improper
channel of recovery system.
• There is also a problem of regional imbalance in banking facilities provided by RRB’s. They are
creating this problem by concentrating their branches in some specific states and districts & loose
other prospective group of customers.
• Many RRB’s are suffering from the problem of heavy loans because of low repaying capacity of their
customer, untrained staff, low level of deposits and heavy sanction of loan without checking the
creditworthiness of their customers.
• These banks have still not played a significant role in poverty alleviation of the country. Although
various efforts have been made in this regard but lack of economic infrastructure, poor marketing
strategies, poor knowledge of customers, low production, low awareness about savings have
created many hurdles for RRB’s.
• Lack of proper co-ordination between RRB’s and other financial institution like commercial banks,
NABARD and other co-operative bank has badly affected the performance of these banks.
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2.9 MUDRA Bank
Pradhan Mantri Mudra Yojana (PMMY) is a scheme to extend collateral free loans by Banks, Non-Banking
Financial Companies (NBFCs) and Micro Finance Institutions (MFIs) to small/micro business enterprises
and individuals in the non-agricultural sector to enable them to set up or expand their business activities
and generate self-employment. While launching PMMY, Mudra Bank was also launched.
Micro Units Development and Refinance Agency Ltd. (MUDRA) is an NBFC supporting development of
micro enterprise sector in the country. MUDRA is a wholly-owned subsidiary of Small Industries
Development bank of India (SIDBI) with 100 per cent capital contributed by it. Presently, the authorized
capital of MUDRA is Rs 1000 crores and paid up capital is `750 crores, fully subscribed by SIDBI.
This agency would be responsible for developing and refinancing all micro enterprise sector by
supporting the financial institutions which are in the business of lending to micro/small business entities
engaged in manufacturing, trading and service activities. MUDRA would partner with banks, MFIs and
other lending institutions at state level/regional level to provide micro finance support to the micro
enterprise sector in the country.
GOI decided that MUDRA will provide refinance support, monitor the PMMY data by managing the web
portal and facilitate offering guarantees for loans granted under PMMY.
It aims to provide funding to the non-corporate small business sector. MUDRA is conceived not only as a
refinance institution but also as a regulator for the micro finance institutions (MFIs).
The MUDRA bank is primarily responsible for:
• Laying down policy guidelines for micro/small enterprise financing business.

• Registration and regulation of MFI entities
• Accreditation/rating of MFI entities
• Promoting right technology solutions for the last mile.
• Formulating and running a credit guarantee scheme for providing guarantees to the loans which are
being extended to micro enterprises.
• Creating a good architecture of Last Mile Credit Delivery to micro businesses under the scheme of
Pradhan Mantri Mudra Yojana.
Union Budget 2015–2016 proposed creating MUDRA with a corpus of Rs 20,000 crores made available
from the shortfalls of priority sector lending. There is a credit guarantee corpus of Rs 3,000 crores for
guaranteeing loans being provided to micro enterprises.
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MUDRA Bank operates through financing institutions, which, in turn, connect with last mile lenders such
as Micro Finance Institutions (MFIs), Primary Credit Cooperative Societies, Self-Help Groups (SHGs),
NBFC (other than MFI) and such other lending institutions.
In lending, MUDRA gives priority to enterprises set up by the under-privileged sections of the society
particularly those from the scheduled caste/tribe (SC/ST) groups, first generation entrepreneurs and
existing small businesses. Micro finance is an economic development tool whose objective is to provide
income generating opportunities to the people at the bottom of the pyramid. It covers a range of
services which include, in addition to the provision of credit, many other credit plus services, financial
literacy and other social support services.
Thus, the financial resources of MUDRA come from priority sector shortfalls; capital provided by the
parent SIDBI; and its own earnings, if any.
2.10 Development Banks

Development banks are financial institutions which provide long-term capital for industries and
agriculture: Industrial Finance Corporation of India (IFCI); Industrial Development Bank of India (IDBI)
which became a universal bank, IDBI Bank, Industrial Credit and Investment Corporation of India (ICICI)
that was merged with ICICI Bank in 2000, Industrial Investment Bank of India (IIBI), Small Industries
Development Bank of India (SIDBI), National Bank for Agriculture and Rural Development (NABARD),
Export Import Bank of India, National Housing Bank (NHB).
The commercial banking network addressed the needs of general banking mainly and for meeting the
short-term working capital requirements of industry and agriculture. Specialized development financial
institutions (DFIs) such as the IDBI, NABARD, NHB and SIDBI, etc., were set up to meet the long-term
financing requirements of industry and agriculture. To facilitate the growth of these institutions, a
mechanism to provide concessional financing to these institutions was also put in place by the Reserve
Bank.
The first development bank in India, IFCI, was incorporated immediately after Independence in 1948
under the Industrial Finance Corporation Act as a statutory corporation to pioneer institutional credit to
medium and large-scale. New and different development financial institutions were set up by GOI.
The S.H. Khan committee appointed by RBI (1997) recommended transforming the development finance
institution (DFI) into universal banks that can provide a menu of financial services and leverage on their
assets and talent. The result was IDBI Bank and ICICI Bank.
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2.11 Cooperative Banks
Co-operative banks are organized and managed on the principle of co-operation, self-help and mutual
help. They function under the rule of ‘one member, one vote’ and on ‘no profit, no loss’ basis. Co-
operative banks, as a principle, do not pursue the goal of profit maximization. Co-operative bank
performs all the main banking functions of deposit mobilization, supply of credit and provision of
remittance facilities.
Co-operative banks provide limited banking products and are functionally specialists in agriculture
related products. However, co-operative banks now provide housing loans also.
Urban Co-Operative Banks (UCBs) are located in urban and semi-urban areas. These banks were originally
allowed to lend money only for non-agricultural purposes. This distinction does not hold today. Earlier,
they essentially lent to small borrowers and businesses. Today, their scope of operations has widened
considerably.
Co-operative banks get financial and other help from the RBI, NABARD, central government and state
governments. RBI provides financial resources in the form of contribution to the initial capital (through
state governments), working capital, refinance.
Co-operative banks belong to the money market as well as to the capital market—they offer short-term
and long-term loans. Land Development Banks (LDBs) provide long-term loans.
The sources of their funds (resources) are:
• ownership funds
• deposits or debenture issues
• central and state government
• RBI
• NABARD
• other co-operative institutions.
Some co-operative banks are scheduled banks, while others are non-scheduled banks. For instance, SCBs
and some UCBs are scheduled banks (included in the Second Schedule of the Reserve Bank of India Act).
Co-operative banks are subject to CRR and SLR requirements as other banks. However, their requirements
are less than commercial banks.
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2.12 Evolution of Banking Sector in India
No discussion of the financial system can even hope to be meaningful without a clear analysis of the
nature and health of the country’s banking system. However, we shall restrict ourselves to only pointing
out a few key aspects of the Indian banking system.
Broadly speaking, India has a stable, fragmented, largely protected, public-sector-dominated banking
system monitored closely by the RBI that has performed very well in terms of stability, especially during
turbulent phases of the world financial system but has featured less well in matters of inclusion and
innovation. With risk-weighted capital adequacy in the range of 13–14 per cent, well above the Basel
norms, Indian banks are among the safest in the world.
India’s banks are also extremely fragmented. State Bank of India, India’s largest bank by far, does not
even make it to the top 50 of the world’s largest banks (in contrast to China that has three of the world’s
10 largest banks). This is not necessarily a problem as the USA has an even more fragmented banking
sector than India though its larger banks are among the largest in the world. But over time, the size of
India’s banks has fallen relative to India’s large companies and individual banks are running into balance
sheet constraints to serve big client businesses. There is therefore a view that consolidation may add
value in a business sense.
With more than three-quarters of India’s banking deposits and advances, public-sector banks (in most
cases listed and partially privatized) clearly dominate the banking landscape in the country. The state’s
role in commercial banking in India started in 1955 with the nationalization of the erstwhile Imperial
Bank and the creation of the State Bank of India through an eponymous act of the parliament and the
two rounds of nationalization in 1969 and 1980. Liberalization saw a shift in direction with licenses for
new banks being issued after a long time and these new private banks—dominated by the ICICI Bank
that quickly became the nation’s second largest bank—have raised the standards of banking services,
particularly among the urban affluent class as well as in corporate banking. Public-sector banks, after
lagging behind, slowly adapted to the changing environment in the mid-2000s with the adoption of CORE
banking technology and the associated benefits that such technology makes possible. Nevertheless, a
joint report commissioned by the Indian Banks Association (IBA) and executed by McKinsey found several
managerial gaps between the incumbents (public-sector banks) and the attackers (new private-sector
banks and foreign banks), particularly in terms of service quality and attracting and retaining human
resource.
While Indian banks have fared well through the storms of financial crises—whether during the Asian
crisis or the global crisis—detractors have often pointed out that this is because of the RBI’s ultra-
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conservative policy stance of not allowing banks to get into any activity that could be potentially
destabilizing. So the cost of stability has been a slow progress in innovation and inclusion. Whether that
cost has been commensurate with benefit remains a matter of debate.
2.13 Way Forward for the Banking Sector

It is Time for Banks to Look Deeply Within: Reorienting Banking Post-Covid. Just like boosting immunity
of the population is the key to tackle pandemics, the key to long term financial stability would be to foster
tangible improvement in the inherent ability of the banks to withstand the exogenous shocks like the
current pandemic.
The causes of weak banks can usually be traced to one or more of the following conditions:
• an inappropriate business model given the business environment;

• quality or the lack of governance and decision making;
• misalignment of internal incentive structures with external shareholder/stakeholder interests
and other factors.
Accordingly, the core of resilient banks is made up of good governance, effective risk management and
robust internal controls. This is not to say that Indian banks do not have sound governance and risk
management systems in place. There is always scope for improvement and these are the areas which
need greater attention going forward.
In recent years, the business landscape of banks has undergone significant change. Today the banks need
to look out for ‘sunrise’ sectors while supporting those which have the potential to bounce back. For
instance, Banks need to look at prospective business opportunities in the rural sector which remain
unexplored despite efforts to support it. They need to look at start-ups, renewables, logistics, value
chains and other such potential areas. The banking sector has a responsible role to play not only as a
facilitator of growth of the economy but also to earn its own bread. Thus, a complete relook at the
business strategy and orientation is the immediate need of the hour.
Scale ignites the volume effect in business turnover; but that presupposes bigger size of the banks.
Despite several reforms in the banking sector since its nationalisation, lot more needs to be done. With
change in time, the nature of reforms needs to be reconfigured. The current steps towards consolidation
of public sector banks in line with the Narasimham Committee recommendation is a step in the right
direction. Indian banks this way can reap the benefits of scale, and become partners in the newer
business opportunities across the globe. Larger and more efficient banks, both in public and private
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sector, can compete shoulder to shoulder with the global banks to get a decent space in the global value
chains.
Size is essential, but efficiency is even more important. Efficiency, however, is a much broader concept
and requires several other factors to evolve and act along its side. The prerequisite will be use of
technology. The quality and ingenuity of technology should match our aspirations of acquiring scale and
diversion of business across the globe. The focus of use of technology should shift from ‘transactions-
based’ to ‘business-oriented’. We have a pocket full of technological tools like big-data, artificial
intelligence, machine learning to leverage upon , in order to be able to compete with the global players
in reaping the benefits of ‘creativity’ looming large all over.
While introspecting on newer ideas to improve the health of banks and quality of banking, it is
fundamental to reform the culture of governance and risk management systems. These two areas lend
inherent strength to the business of banking and good amount of work has been done in this direction
over the years. The RBI has issued a discussion paper on ‘Governance in Commercial Banks’, for
comments from various stakeholders. Ideally, efficiency should be ownership-neutral. While it is natural
that the capital-providers or investors would like to remain alive to the aspects of how exactly a bank is
run, it is worthwhile to allow sufficient leeway to the Board and management of a bank to run the affairs
of a bank in a professional and autonomous manner. A decent distance between the owner and the
professionally sound management and Board would promote robustness of banking institutions.
There will be newer risks with newer business models. More so, when banks get bigger and more
connected across diverse jurisdictions. High growth by virtue of newer business models can be achieved
with clear understanding of one’s own strengths and weakness. Remaining overly risk-averse may seem
to be a measure of self-immunisation; but will be self-defeating as it would affect the bottom lines
adversely. Risk propensity should be in alignment with the individual bank’s measured risk-appetite.
The risk management system should be sophisticated enough to smell vulnerabilities brewing within the
various businesses well in advance and should be dynamic enough to capture looming risks in sync with
the changes in external environment and best practices.
One visible area of concern in the arena of risk management is the inability to manage the operational
risk/s, more particularly controlling the incidence of frauds, both cyber-related and otherwise. The
higher incidence of frauds which have come to light in the recent times have their origins in not so
efficient risk management capacity of the banks, both at the time of sanctioning of loans as well as in
post sanction credit monitoring. It is observed that it takes many months after a fraud is committed
before it comes to light. Banks need to tighten their underwriting and credit monitoring standards and
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ensure that incidences of frauds are reduced by early detection and are followed up by initiating
appropriate legal action against the fraudsters. Here too, the need is to leverage on technology, namely,
artificial intelligence, to study the patterns of such incidences and the root cause behind their recurrence.
An effective early warning system and forward-looking stress testing framework should be an integral
part of the risk management framework of the banks. Banks should be able to pick-up incipient signals
of stress faced by their borrowers, and take proactive remedial action, which may include a viable
resolution of the credit facilities aimed at preserving the value of the assets and not just aimed at
reducing the short term burden on the balance sheet of the banks.
In addition to a strong risk culture, banks should also have appropriate compliance culture. Cost of
compliance should be perceived as an investment, as inadequacy of the same will prove to be very costly.
The compliance culture of banks should ensure adherence to laws, rules, regulations and various codes
of conduct. Compliance should go beyond what is legally binding and attempt to embrace broader
standards of integrity and ethical conduct. The essential features of the compliance culture are broadly
similar to the essential features of risk culture. All these will also help to maintain a high degree of market
reputation which is imperative for retaining customers and commanding a higher valuation amongst the
investors.
A good governance framework and effective risk and compliance culture should be complemented by a
robust assurance mechanism by way of internal audit function. This is an integral part of sound
corporate governance which should provide an independent assurance to the Board of the bank as well
as to external stakeholders that the operations of the entity are performed in accordance with the set
policies and procedures.
The competition in the Indian banking system has been increasing over the years and unless banks meet
the expectations of their target customers, even a well thought out business model may not succeed. In
this context, quality of customer service and redress of customer grievances assume high importance.
We have to recognize that banks exist for customers viz. both depositors and borrowers.
India’s banking and financial system has displayed tremendous operational resilience in the face of Covid
and lockdowns. Going ahead, financial institutions in India have to walk a tightrope of nurturing the
recovery within the overarching objective of preserving long-term stability of the financial system. The
current pandemic related shock is likely to place greater pressure on the balance sheets of banks leading
to erosion of their capital. Proactive building of buffers and raising capital will be crucial not only to
ensure credit flow but also to build resilience in the financial system - resilience of individual banks and
financial entities as well as resilience of the financial sector as a whole. All banks, large non-deposit taking
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NBFCs and all deposit-taking NBFCs have been advised to assess the impact of COVID-19 on their balance
sheet, asset quality, liquidity, profitability and capital adequacy. Based on the outcome of such stress
testing, banks and NBFCs should work out possible mitigation measures including capital planning,
capital raising, and contingency liquidity planning, among others. Upfront capital infusion would also
improve the sentiment of investors and other stakeholders alike for the sector to continue remaining
attractive for investors, both domestic and foreign, over the medium to long-term. Some of the banks
have already either raised or announced capital raising. This process needs to be carried forward
vigorously by Banks and NBFCs, both in the public and private sector.
Covid-19 poses several challenges for banks and the financial sector. Proactive action on various fronts
will enable us to deal with these challenges effectively and maintain the soundness of Indian banking
system. A quote from Leo Tolstoy in War and Peace is appropriate to end: “a battle is won by those who
firmly resolve to win it!”
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SERVICES SECTOR IN INDIA
FODDER MATERIAL

Contents
1 Introduction ............................................................................................................................................2
2 Services Sector: Concept & Meaning .....................................................................................................3
2.1 Composition of GDP ........................................................................................................................4
2.2 Composition of Services Sector in India..........................................................................................4
3 Performance of Service Sector in India ..................................................................................................5
3.1 Sectoral Composition of GDP Growth.............................................................................................5
3.2 Employment Contribution of the Service Sector ............................................................................6
3.3 Productivity Growth in Service Sector ............................................................................................6
3.4 Causes of Rapid Increase in Tertiary Sector ....................................................................................7
3.5 Prospects & Opportunities ..............................................................................................................8
3.5.1 Domestic Factors .....................................................................................................................8
3.5.2 International Factors ...............................................................................................................9
3.6 Is Growth led by Service Sector Sustainable? ...............................................................................10
3.7 Is a New Paradigm of Services led Growth Emerging Globally? ...................................................11
3.8 Understanding the Importance of Services Sector in India ..........................................................13
3.9 How India treats its Services Sector? ............................................................................................15
3.10 Way Forward .................................................................................................................................16
1 Introduction
We have come a long way from the days of physiocrats and mercantilists when agriculture and trade in
goods respectively were the engines of growth of economies. Production and trade in services have come
to the forefront. In modern economies, service sector performs many important roles. First, it represents
a major share of the developed economies and is increasingly integrated in the overall production
system. Second, it plays an active role in market integration and globalisation. Third, the creation of
employment, value added, income and exports is increasingly related to the good performance of the
services.
In India, the service sector has evolved continually over the past thirty years, modifying the structure of
employment and the composition of value added. It constitutes a large part of the Indian economy both
in terms of employment potential and its contribution to national income. The sector covers a wide
range of activities from the most sophisticated in the field of Information and Communication
Technology to simple services pursued by the informal sector workers, for example, vegetable sellers,
hawkers, rickshaw pullers, etc. Currently, this sector accounts for over 50 per cent of the value added.
However, despite its growing weight, the share of the working-age population employed in services
remains low.
2 Services Sector: Concept & Meaning

The economy has basically three sectors. First, the primary sector comprising of agriculture, fishing, and
extraction such as mining. Second sector is the secondary sector comprising of manufacturing. Third
sector is the tertiary sector also referred to as service sector.
The basic characteristic of service sector is the production of services rather than end-products. Services
are intangible goods which include attention, advice, experience, and discussion. These are used to
enhance productivity, performance, potential and sustainability. The production of information is also
regarded as a service. However, some economists like to classify services relating to the information
service in a fourth sector, now known as the quaternary sector i.e., the sector that comes after the third
and just before the fifth in position.
The tertiary sector involves the provision of services to other businesses. Services may involve the
transport, distribution and sale of goods from producer to a consumer, pest control, entertainment or
hotel industry. The goods are transformed in the process of providing the service. However, the focus is
on people interacting with people and serving the customer rather than transforming physical goods.
The composition of GDP of an economy explains the relative significance of the different producing
sectors. When a country is in a state of underdevelopment, primary sector makes the largest
contribution to the national income. As the country grows and gets developed, the contribution of the
industrial and service sectors gradually increases.
The explanation for this shift is as follows:
Income elasticity of demand for agricultural products is relatively low; as a result, with rising levels of
income, the demand for agricultural products relatively declines and that for industrial goods increases
and, after reaching a reasonably high level of income, demand for services increases sharply.
Accordingly, the shares of different sectors in the national product get determined by the changes in the
pattern of demand. On the supply side, agriculture, being mainly dependent on a fixed factor of
production, namely land, faces a limit on its growth and is subject to early operation of the law of
diminishing returns. Industry, specially manufacturing, on the other hand, offers large scope for use of
capital and technology, which could be augmented almost without limit with human effort. The same
applies to services where application of technologies seems to offer much larger scope.

2.1 Composition of GDP
For the past few decades, there has been a considerable shift from the primary and secondary sectors
to the tertiary sector in the Indian Economy. The tertiary sector is now the largest sector of the economy
and is also the fastest-growing sector. Examples of service sector employment include: Government,
hospitals, public health, waste disposal, education, banking, insurance, financial services, legal services,
consulting, news media, hospitality industry (e.g. restaurants, hotels, casinos), tourism, retail sales,
franchising, real estate, and sales.
2.2 Composition of Services Sector in India

In the National Income Accounting in India, service sector includes the following:
1) Trade, Hotels and Restaurants (THR)

o Trade
o Hotels and Restaurants
2) Transport, Storage and Communication
o Railways
o Transport by other Means
o Storage
o Communication
3) Financing, Insurance, Real Estate and Business Services
o Banking and Insurance
o Real Estate, Ownership of Dwellings and Business Services
4) Community, Social and Personal Services
o Public Administration and Defense (PA & D) 4.2 Other Services
The services sector has been the most dynamic sector of the Indian economy. Following table shows
the changes that have been taking place in the composition of GDP over the last few decades.
From a low level of 27.5 per cent of GDP in 1950-51, the share of services increased to about 60.0 per
cent in 2011-12. Between 1950-51 and 1990-91, the share of Services Sector in GDP rose by only 13.1
percentage points, which is an increase of about 0.3 percentage points per annum. However, between
1990-91 and 1999-2000, the share had increased by 7.3 percentage points, which is an increase of 0.8
percentage points per annum. Clearly, the rate of growth was significantly higher in the 1990s.
3 Performance of Service Sector in India
3.1 Sectoral Composition of GDP Growth
The share of each of the Primary, Secondary and Tertiary Sector in India’s GDP and their relative rate of
growth is shown in following table.
It would be seen that over the period, the primary sector’s share has fallen by 40 per cent, while those
of the secondary and tertiary sectors have increased. This trend is projected to go further in wake of
liberalisation of the economy. This may happen primarily because of the following factors:
(a) reduced restrictions on private sector involvement in areas like software development and
information services
(b) technological advances
(c) lower fixed capital requirements.
The rate of growth of the secondary and tertiary sectors has been more than double than that of the
primary sector, with the secondary sector having an edge over the tertiary sector during the first two
decades.
In the subsequent decade, the tertiary sector grew faster than either of the other two sectors. During
the 1980s, when all the three sectors were growing at a faster rate, the secondary sector was the fastest.
Subsequently, the tertiary sector has been growing the fastest. (To an extent the growth of the services
sector may have been overstated as new technologies and competitive pressures have led to widespread
outsourcing of non-core activities by manufacturing firms, which then show up a services growth. Also,
one suspects that in the system of National Accounts, services are a residual category that ends up
including some household and cottage sector production activity. Nevertheless, there is no denying the
importance of the growth momentum generated by the services sector).
As a result, the service sector has become the growth-driver in the Indian economy.
Presently, about two-thirds of the incremental growth in the Indian economy can be attributed to the
tertiary sector.

This pattern of structural change in Indian economy has deviated from the development pattern of
Western and South East Asian economies. Those economies experienced first a shift from primary to
secondary sector and only in their advanced stage did they experience a significant shift in favour of
tertiary sector. That pattern of development enabled them to transfer growing labour force from
primary to secondary sector.
In India, this has not been possible because secondary sector has not expanded fast enough to absorb
growing labour force. The unskilled and uneducated rural masses have continued to struggle in the
primary sector and those who have been forced out by economic, social and political factors have joined
the urban slum sector. Moreover, the sharp increase in the share of tertiary sector in GDP in India has
occurred at a much lower level of per capita income than that in the developed countries when they
experienced a similar expansion. This pattern of growth underlines the link between the growing poverty
and unemployment and the inadequate growth of manufacturing and building activity in the country
3.2 Employment Contribution of the Service Sector

The sectoral distribution of workforce in India during the period 1983 to 2009-10 reveals that the
structural changes in terms of employment have been slow in India as the primary sector continued to
absorb 54.9 per cent of the total workforce even in 2009-10, followed by tertiary and industrial sectors
(25.5 per cent and 19.6 per cent) respectively.
There has been disproportionate growth of tertiary sector, as its share in employment has been far less
when compared to its contribution to GDP. It is important to understand that, within the services sector
employment growth rate is highest in finance, insurance, and business services, followed by trade, hotels
and restaurants, and transport etc. The community, social and personal services occupy the last rank in
growth rates of employment. Further, there was a sharp drop in labour absorptive capacity of growth in
the economy (employment elasticity of growth) from 0.40 to 0.15 during post-reform period (1993-94 to
1999-2000) initially, reflecting the phenomenon of jobless growth. However, during 1999-2000 to 2009-
10 period the employment elasticity of growth registered an increase from 0.15 to 0.51. With the
exception of one subsector of tertiary sector i.e. transport, storage, communication all other sub-sectors
of services sector exhibited an increasing trend in employment elasticities and thereby overall elasticity
of employment increased from 0.15 to 0.51.
3.3 Productivity Growth in Service Sector

The process of acceleration in growth started in 1980s rather than in 1990s. Of the 2.4 percentage point
increase in the rate of economic growth that took place in the post-1980 period, about 40 per cent is
accounted for by a faster growth in TFP in services. The three sectors viz. agriculture, industry and
services have witnessed acceleration in the growth rates of output, output per worker and total factor

productivity (TFP) in the post-1980 period. However, the increase is more marked in case of services.
Partially, the spurt in growth rate is attributable to productivity growth in certain sub-sectors of services
sector. It has been noticed that growth rate in output per man is highest in case of PA &D and other
community social and personal services (4.2 per cent p.a.), followed by transport, storage, communication
(3.3 per cent p.a.), trade , hotels, restaurants (2.9 per cent p.a.) and banking, insurance, real estate and
business services. The acceleration in growth rate of output per worker in PA &D and other community,
social and personal services might have resulted from the downsizing of the public sector because of
privatisation and hikes in the salaries of the central and state government employees from time to time
(i.e due to accounting reasons). Whereas productivity growth in THR has derived stimuli from surge in
demand for such services with a subsequent expansion in these activities. Part of the productivity growth
in the services sector might be an outcome of application of IT services. Despite increase in growth rate
of labour productivity in service sector, measurement of service sector output and productivity are still
debatable issues.
3.4 Causes of Rapid Increase in Tertiary Sector

The tertiary, i.e., the non-commodity sector, has been growing at a much faster rate than the
commodity sector. This in essence means that income generated in the process of circulation grew at a
much faster pace than that in the directly productive process, and thereby resulting in an increase in the
share of the non-commodity sector. This trend can be attributed to a number of factors, among which,
the more important are as follows:
• A very important factor has been the advent of information technology and the knowledge economy.
This has enhanced the growth of the high productivity segment of the services sector as well as a
variety of service activities involving low productivity activities catering to a large mass of people.
• A large part of the service sector consists of infrastructure such as banking, insurance, finance,
transport and communication and social and community services such as educational and medical
facilities. An urgent requirement of development is the proper expansion of infrastructure to cater
to the needs of other sectors of the economy and the expansion of the social and community services
for the well-being of the people.
• Public services grow more rapidly where national Governments have significant role in planning and
production in the economy as a whole. In fact, the ‘visible hands’ of the modern governments as
reflected in the government policies and in the expansion patterns of the national and international
authorities during the last few decades are directed towards the creation of fast economic and social
infrastructures.

• Operation of the demonstration effect as a consequence of the growing mobility due to expanding
foreign trade, tourism and cultural and educational tours is another important factor.
• Increasing urbanisation may be regarded as another cause of expansion of the service sector in the
economy. In fact, urbanisation is closely associated with a rise in demands for infrastructure services
such as communications, public utilities and distribution services. A substantial change in the private
consumption pattern of the economy is observed with increasing urbanisation. Many new goods and
services enter into the consumption basket.
• Tourism is becoming more and more international as knowledge is being spread through television
and Internet, and modern technology has made air transport and hotel accommodations quite
comfortable. Tourism, in turn, has promoted all types of services.
• With the increasing complexities of modern industrial organisation, manufacturing industries have
become service oriented. This has been reflected in the increasing functions of accounting, finance,
legal services, advertisement, marketing, public relations etc. Because of the prevalent labour laws,
these services are being increasingly outsourced, so that growth in industry is actually being counted
as growth in services.
In addition to the above factors, an increase in the share of the non-commodity sector in the GDP can
also be attributed to slow growth in the commodity producing sector. While a part of this is explained
by difficulties inherent in bringing about a fast rate of growth in the primary sector, a part is undoubtedly
due to the failure of the secondary sector and its major component, which is manufacturing and
construction, to grow at the much faster rate that was necessary to give the commodity sector a
comparable status with the non-commodity sector in the growth rate.
3.5 Prospects & Opportunities

Both domestic and international factors augur well for the growth of services sector in India.
3.5.1 Domestic Factors

Some of the important factors can be briefly stated as follows:
• As real per capita GDP grows, demand for services increases more than proportionately and this, in
turn, reinforces GDP growth itself.
• Within the services sector, demand for producer and government services, which constitute mainly
intermediate consumption, have strong multipliers effects on real GDP.
• The growth of such dynamic service activities, which are intensive users of communication and
information technology, will generate employment opportunities on a rising scale.

• The process of economic growth has itself led to the emergence and expansion of new series such as
advertising, publicity, marketing, etc. These sub-sectors provide essential service inputs to other
sectors in the economy, thereby developing strong linkages with the rest of the economy.
• Efficient delivery of services increases the productivity of both labour and capital in the economy as
a whole. In general, services sector appears to be highly growth inducing with positive externalities
for other services making service a catalytic agent of growth.
3.5.2 International Factors

Some of the recent global developments which provide opportunities for substantial growth are as
follows:
• The fastest growing segment of services is the rapid expansion of knowledge-based services, such as,
professional and technical services. India has a tremendous advantage in the supply of such services
because of a developed structure of technological and educational institutions and lower labour
costs.
• Progress in IT is making it increasingly possible to unbundle the production and consumption of
information-intensive service activities. These activities – research and development, computing,
inventory management, quality control, accounting, personnel administration, secretarial,
marketing, advertising distribution and legal services — are performed in all economic sectors.
• Unlike most other prices, world prices of transport and communication services have fallen
dramatically. The cost of communication is becoming independent of distance. India’s geographical
distance from several important industrial markets is no longer an important element in the cost-
structure of skill-based activities.
• India does not necessarily have a low-cost producer of certain types of goods (e.g., computers or discs)
before it can become an efficient supplier of services embodied in them (e.g., software or music). It is
possible now to provide value added services without waiting to ‘catch up’ in technology for
production of sophisticated equipment or products.
• The decline in the share of manufacturing in the output of rich countries implies a relative decline in
their demand for industrial raw materials and fuels. It means that growth in exports of developing
countries in the future will depend less on natural resources endowments and more on efficiency
in providing services and service-intensive goods.
• The aging of population in the developed world implies that the demand for services will continue
to grow.
As a result of the above developments, the sources of comparative advantage of nations are vastly
different now from what they were 50 or even 20 years ago. And, there are very few developing countries

which are as well placed as India to take advantage of the phenomenal changes that have occurred in
production technologies, international trade, capital movement and deployment of skilled manpower.
It is now possible for India to take advantage of a virtuous circle of higher growth, higher capital inflows
and higher domestic incomes and savings, which in sum can lead to further growth.
3.6 Is Growth led by Service Sector Sustainable?

Now we put forward the question that weather the role played by services in the growth process
sustainable in India.
Many argue that income generated in service sector is in excess of the demand created for services in
the commodity market. This may have implications on inflation. In addition to this, the income generated
might grow faster than employment in the organized sector so that the distribution of income may also
get affected adversely. Thus, it is asserted that this kind of growth is not sustainable in the future.
Banga and Goldar (2004) addressed this issue by empirically studying the impact of services input on
productivity growth of manufacturing sector. Their results showed that the increase in use of services has
favorably affected productivity in the manufacturing sector. Their study concludes India’s service sector
will be successful in creating its own demand.
Further it is interesting to note that service sector has the strongest impact on GDP compared to the
other two sectors. With a unit increase in services, GDP increases by 0.634 units while the increase in GDP
is 0.084 units for a unit increase in industry and 0.202 units for a unit increase in agriculture. We can also
rely on services for a sustainable growth because the average share of services in GDP during 1990s was
almost the same as the global level for a country with similar per capita GDP. This emphasizes that India
is not an outlier in the growth process. Further, the annual growth rate in services in India was
maintained at 10% even during the global economic crisis when the total GDP growth rate fell from
9.3% in 2007-08 to 6.8% in 2008-09.
Sustainability issue can also be seen in terms of environment. Per capita CO2 emission in India has
remained constant since 1980s though there have been increase in GDP per capita. This shows that India
is growing with lesser pollution. With evolving technologies, services are tradable without any harm to
environment and they can be easily transported via satellite without any CO2 emissions.
In our view growth process can be led by service sector only if the service sector contributes to the
productivity and efficiency of other sectors which requires less skilled laborers. India being an agrarian
economy cannot ignore the agriculture sector as half of the population is still employed in it so it is
essential for agriculture to prosper in order to have inclusive growth. Now, how significantly does service
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sector benefit the agriculture sector is a matter of further research. If the growth in service sector can
form linkages with the other sectors and channelize their growth as well then we can have a compelling
theory where ‘service led growth’ can be justified as an alternative growth process.
3.7 Is a New Paradigm of Services led Growth Emerging Globally?

The new industrial revolution and digital technological changes have changed the growth drivers in
developing and developed countries. These technological changes have enabled services to be the new
driver of growth. The digital revolution, by lowering transaction costs in services and overcoming
problems of asymmetric information, has made services more dynamic than in the past. The emergence
of e-commerce platforms is an example of how digital revolution can lower transaction costs, increase
productivity as well as make it more inclusive. For many internet-based businesses or services, fixed up-
front costs can be high initially, but once the physical infrastructure is in place, each additional customer,
user, or transaction incurs very little extra cost.
There is mounting empirical evidence that developing countries are relying more on services and less on
manufacturing as drivers of growth and job creation.
Drivers of structural transformation and growth, either services-led growth or manufacturing-led

growth, are similar but also changing. These include trade policy, urbanization, and investments in
physical and human infrastructure, and are country-specific. But some global trends have started to
change.
Global trade in goods has never fully recovered since the global financial crisis of 2007-08. But this is not
the case with global trade in services, which has exploded. These are structural and not cyclical changes.
Globalization of services is the tip of the iceberg. Services, which account for more than 70% of global
output, are still in their infancy. The long-held view that services are non-transportable, non-tradable,
and non-scalable no longer holds for a host of services that can be digitized.
The globalization of services provides new opportunities for India to find niches beyond manufacturing,
where it can specialize, scale up, and achieve explosive growth. As the services produced and traded
across the world expand with globalization, the possibilities to develop based on services will continue
to expand. This pace of change will be rapid in line with the digital revolution. Global internet usage has
grown globally. But this growth is much faster in developing countries. India alone adds one million new
users every month to a booming mobile phone market.
Some policy experts have rightly argued that India is on the “brink" of a techno-institutional revolution.
Take the example of mobile technology and examine its role in banking. Banking is currently concentrated
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in the urban areas, but cities are saturated with bank branches. On the other hand, 300 million rural
people across 300 districts in India have no access to banking. Expansion of digital technology can play a
big role in improving rural access to banking. Financial inclusion can be achieved through last-mile
connectivity. Services are spatially more neutral compared to manufacturing. So financial inclusion could
in turn help medium-size cities, small towns and villages to become new drivers of growth.
India’s experience offers hope to other latecomers to development. The process of globalization in the
late 20th century led to a sharp divergence of incomes between those who industrialized and broke into
global markets and the “bottom billion" in some 60 low-income countries, where incomes stagnated. It
seemed as if the “bottom billion" would have to wait their turn for development, until giant
industrializers like China became rich and uncompetitive in labour-intensive manufacturing. This is no
longer the case.
Global Bias Against the Service Sector

• Unlike other sectors of economy, there is a paucity of literature on services not just in India but
globally, reflecting poor faith of economists in its ability to drive growth.
• A World Bank's working paper released in 2014, "Can Service Be a Growth Escalator in Low Income
Countries?", tried to explain this while endorsing its role as the main growth engine. It said: "It has
been argued for more than 200 years that economic growth is associated with the manufacturing
sector. Services have been considered non-tradable, menial, low productivity, and low-innovation."
• It sought to impress that the conventional path of manufacturing-led growth and development
seems to have hit a roadblock in many parts of the world, especially in low income countries in
Africa and South Asia. Some of these countries, like the Lions of Africa (Tanzania and Ethiopia) and
India have witnessed growth driven by services, unlike the East Asian Tigers or the western
developed economies.
• The working paper does not argue that services is superior to manufacturing in driving growth, or
the other way round, but that the latecomers to development now have more levers to pull
because of globalisation and the Third Industrial Revolution that brought information technology
(IT) and information communications technology (ITC).
• It argued that the Third Revolution led by services can upset five long-held tenets of economic
development:
o traditional thinking that the services sector is a product of growth and can't drive growth
on its own is no longer valid; services can be produced and traded just like manufacturing
goods and is contributing more than manufacturing to growth and jobs in both low and
high-income countries
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o global trade in services has exploded and is growing faster than trade in goods
o technology, trade, and supply chains have changed services from being lower in
productivity than manufacturing; innovation in communication and transport have
contributed to global supply chain in services just like in manufacturing
o it is no longer true, in both low and high-income countries, that goods jobs are created only
in manufacturing and
o services-led growth is also compatible with greener, inclusive and more gender-friendly
growth.
3.8 Understanding the Importance of Services Sector in India

• The following graph maps the GDP share of services and manufacturing since 1950-51 using the 2004-
05 and 2011-12 GDP series at constant prices.
• The remarkable element of the above graph is the huge gap in the contribution of services and
manufacturing to the GDP. In the 2004-05 GDP series (constant prices) the services' share was four
times more in 1950-51 and increased to 4.3 times in 2013-14. After the new series (2011-12) was
introduced and some sub-components of 'Trade, Hotels, Transport and Communication (THTC)' were
shifted from services to manufacturing, raising the latter's share, the services' share of the GDP was
still 3.6 times more than manufacturing's in 2019-20.
• When it comes to sectoral contributions to the GDP growth, the services sector provides the
maximum thrust.
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• Between 1950-51 and 2013-14, its annual average contribution to the GDP growth was 54.4% (2004-
05 series at constant prices). Between 2011-12 and 2019-20, its contribution to the growth increased
to 67.7% (2011-12 series at constant prices). In sharp contrast, the manufacturing sector's
contribution was 13.1% and 18.1% for the corresponding periods.
• In 2019 (closest to India's FY20), services surpassed agriculture for the first time as the largest
employer, according to the ILO's projections, which even the RBI and Economic Surveys use in their
reports because no government agency provided such estimates after the Planning Commission was
dismantled in 2014. According to the ILO database, services provided employment to 44.2% of the
total employment in 2019 as against agriculture's 43.2%. In contrast, manufacturing's share was just
11.4%.
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3.9 How India treats its Services Sector?
• India belatedly recognised the services' sector's contributions and is yet to devote time or energy to
develop it.
• The earliest recognition perhaps came with the working paper published by the Asian Development
Bank (ADB) in 2013, which is well reflected in its title, "The Service Sector in India".
• It said: "The service sector is the largest and fastest growing sector in India and has the highest labour
productivity, but employment has not kept pace with the share of the sector in gross domestic
product and has not produced the number or quality of jobs needed. There is no policy leading to
inclusive growth, and multiple, uncoordinated governing bodies adversely affect the growth of the
sector...
• Most of the poor in India do not have access to basic services such as healthcare and education and
infrastructure is weak so the cost of service delivery is high. Although India wants to be a knowledge
hub, there is no uniformity in the quality and standards of education and formal education does not
guarantee employability. Policy measures are suggested for inclusive growth that will also enhance
India's global competitiveness in services."
• The 12th Five-Year Plan's Volume II (also published in 2013) was devoted to "Economic Sectors", but
did not even have a chapter on services. Various components of the service sector were treated as
adjuncts to eight sectors, each of which had a dedicated chapter: Agriculture, industry, energy,
transport, communication, rural development, urban development, and other priority sectors.
• The Economic Survey of 2019-20 devoted an entire chapter to services and said, among others: (a)
the services sector's significance in the Indian economy has continued to increase with it contributing
around 55% of the total size of the economy and GVA growth (b) its share exceeds 50% of Gross
State Value Added in 15 out of 33 states and UTs and more than 80% in Delhi and Chandigarh (c) it
accounts for two-thirds of total FDI inflows and 38% of total export and (d) services' exports have
outperformed goods export in recent years, raising India's share in world's commercial services
exports to 3.5% in 2018, twice that of merchandise export at 1.7%.
o It also recorded that high-frequency data and other economic statistics suggested "a
moderation in services sector activity during 2019-20" with bank credit to the sector, air
passenger traffic, and rail freight traffic witnessing "a deceleration".
o It offered no solution, devoting the entire chapter to analysing the data for different
components, other than expressing optimism for improvement.
• The pandemic hit and the AatmaNirbhar Bharat packages of more than Rs 20 lakh crore also ignored
it, in keeping with the traditional approach to the sector. In August 2020, Geetanjali Nataraj, director
of a central government body, Services Export Promotion Council (SEPC), wrote in a national daily
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with an apt sub-head "An Unserviced Sector". In it, she wrote how the AatmaNirbhar Bharat packages
had overlooked the plight of the services sector even though it was the main driver of India's growth
and was "struggling hard to keep its head above water".
o She issued a warning: "From tourism, aviation, shipping, space to call centres and delivery
services, the standstill in activities is bound to have a knock-out effect on employment,
production, and the economy as a whole. The big picture suggests that the current relief
provisions for the primary and secondary sectors would also be nullified as a consequence of
neglecting the tertiary sector (services)."
o She also pointed out that due to this neglect, the services sector contracted for the fifth
successive month in July 2020.
3.10 Way Forward

There is now a need to make services growth more inclusive and less lopsided by identifying services that
have a potential to trade and generate more direct and indirect employment.
Trade in services is hindered not only by external constraints in terms of trade barriers (mainly in the
form of limits on foreign equity participation) but also by domestic constraints. To make services-led
growth more widespread and sustainable, it is important to systematically and simultaneously remove
these constraints.
A coherent integrated services policy, in line with the agricultural and industrial policies, needs to be
developed.
Reforms in services in India have evolved in an ad hoc manner rather than as part of an overall strategy.
Consequently, the depth and pace of reforms lack uniformity across sectors. Given the strong inter-
linkages between different services, opening a particular service sector may not yield results if not
backed by corresponding reforms in other complementary services. Such an integrated services policy
should also define the sequence as well as the pace of reforms to be undertaken simultaneously in
different services. Liberalisation should be followed in a phased manner accompanied by social policies
in sectors that have surplus labour so as to avoid creating unemployment and social unrest. This will go
a long way in sustaining the dynamism of services-led growth.
Investments in both physical and human infrastructure matter greatly for attracting new enterprises in
both manufacturing and service industries. But unlike in the manufacturing sector, investments in human
infrastructure, education and skills, matter much more. Given its stage of development, India needs
accelerated investments in both physical and human infrastructure to support new drivers of growth and
job creation.
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A young population is generally more connected with technological changes. So, India’s demographic
dividend should be an asset for the digital revolution and services-led growth.
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CHANGES IN INDUSTRIAL & LABOUR

POLICY, INDUSTRIAL DEVELOPMENT IN

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We shall be studying these policies in detail.

1.2 Evolution of India’s Industrial Policy

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1.3.1 India’s Economic Activity before Independence

1.3.2 Situation of India during the Colonial Period

1.4 Industrial Policies of India after Independence up to 1990

1.4.1 Industrial Policy Resolution, 1948

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• IPR, 1948 gave public sector vast area to operate.

1.4.2 Industries (Development and Regulation) Act (IDRA), 1951

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1.4.3 Industrial Policy Resolution, 1956

1.4.4 Monopolies Commission

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1.4.5 Industrial Policy Statement, 1973

1.4.6 Industrial Policy Statement, 1977

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✓ Development of Small-Scale Sector:

✓ Restrictive Approach towards Large Business Houses

1.4.7 Industrial Policy, 1980

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✓ Liberalization of Industrial licensing:

1.4.8 Industrial Policy Resolution, 1985 & 1986

1.4.9 New Industrial Policy of 1991

Economic Background of New Industrial Policy, 1991:

1.4.9.1 Objectives of New Industrial Policy

The broad objectives of New Industrial Policy are as follows:

Abolition of the MRTP Limit

Promotion to Foreign Investment

FERA Replaced by FEMA

• Non-polluting industries might be set up anywhere.

Compulsion of Phased Production Abolished

Compulsion to Convert Loans into Shares Abolished

1.4.10 National Manufacturing Policy 2011

1.4.10.1 Objectives of the Policy

▪ Increase share of manufacturing in the GDP to 25 per cent by 2022.

▪ Create 100 million additional jobs in the manufacturing sector by 2022.

▪ Increase domestic value addition and technological advancement in the manufacturing.

▪ Increase global competitiveness of Indian manufacturing firms.

1.4.10.2 Government’s Policy Support

▪ The NMP envisages simplification of business regulations significantly.

1.4.11 Make in India

1.4.11.1 Achievable Targets

▪ To create 100 million additional jobs by 2022 in manufacturing sector.

▪ An increase in domestic value addition and technological depth in manufacturing.

▪ Enhancing the global competitiveness of the Indian manufacturing sector.

▪ Ensuring sustainability of growth, particularly with regard to environment.

1.4.11.2 Favourable Milestones

▪ The cost of manpower is relatively low as compared to other countries.

▪ Responsible business houses operating with credibility and professionalism.

▪ Strong consumerism in the domestic market.

▪ Well-regulated and stable financial markets open to foreign investors.

1. Aerospace and Defence

1.4.11.4 Importance of Make in India

1.4.11.5 Steps taken to support Make in India

▪ Development of Industrial Corridors

2 Phases of Industrial Growth

2.1 The First Phase of Rapid Growth (1950-51 to 1965-66)

2.1.1 Government’s Key Role