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1 Economic reforms:
Though economic liberalization in India can be traced back to the late 1970s, economic reforms began in earnest only in July 1991. A balance of payments crisis at the time opened the way for an International Monetary Fund (IMF) program that led to the adoption of a major reform package. Though the foreign-exchange reserve recovered quickly and ended effectively the temporary clout of the IMF and World Bank, reforms continued in a stop-go fashion. What has been accomplished and what remains to be done? Is the glass half full or half empty? The Good News: Achievements Thus Far Indias reforms have been piecemeal and incremental, giving the casual observer the impression that nothing has been happening. If one takes the totality of reforms over the last decade, however, the change is unmistakable. The analogy is with the hour hand of the clock, which looks completely static, and yet completes a full circle every 12 hours. To get an idea of the accomplishments, begin with the industrial policy prevailing prior to the launching of the reforms. The heavy industry was a state monopoly. Other industries were either subject to strict industrial licensing or reserved for the small-scale sector. The tight control of the government on industry was aptly captured by a leading cartoonist in a 1980s comic strip showing the industry minister tell his staff, We shouldnt encourage big industrythat is our policy, I know. But I say we shouldnt encourage small industries either. If we do, they are bound to become big. The reforms of the last 10 years have gone a long way toward freeing up the domestic economy from state control. State monopoly has been abolished in virtually all sectors, which have been opened to the private sector. The License Raj is a thing of the past. The small-scale industry reservation still persists but even here progress has been made. Apparel, with its large export potential, was recently opened to all investors. In the area of international trade, in 1991, import licensing was pervasive with goods divided into banned, restricted, limited permissible, and subject to open general licensing (OGL). The OGL category was the most liberal but it covered only 30 percent of imports. Moreover, certain conditions had still to be fulfilled before the permission to import was granted under the OGL system. Imports were also subject to excessively high tariffs. The top rate was 400 percent. As much as 60 percent of tariff lines were subject to rates ranging from 110 to 150 percent and only 4 percent of the tariff rates were below 60 percent. The exchange rate was highly over-valued. Strict exchange controls applied to not just capital account but also current account transactions. Foreign investment was subject to stringent restrictions. Companies were not permitted more

than 40 percent foreign equity unless they were in the high-tech sector or were export-oriented. As a result, foreign investment amounted to a paltry $100-200 million annually. Today, import licensing has been completely abolished. This includes textiles and clothing, which remain protected in developed countries through the multi-fiber arrangement. The highest tariff rate has come down to 45 percent (including the tariff surcharge and the so-called Special Additional Duty) with the average tariff rate declining to less than 25 percent. The foreign investment regime is as liberal as in other developing Asian countries. Ten years ago, telecommunications services were a state monopoly and constituted a major bottleneck on the conduct of business activity. So callous was the attitude of the government that when a Member of Parliament complained about poor telephone service in Delhi during the early 1980s, the then telecommunications minister went on to remind him that in a poor country like India, the telephone was a luxury. The minister then added that if the Member was unhappy with the service, he could return his phone since many customers had queued up for it for years! Today, the private sector has become an active participant in the telecommunications sector, and the New Telecom Policy issued in 1999 sets the target of providing telephones on demand by the year 2002. In many cities, this goal has already been achieved. The provision of cellular mobile as well as fixed service is now open to the private sector including foreign investors. As a result, the telecommunications services in India are mushrooming. Progress has also been made in many areas that were previously off limits to reforms. Insurance has been opened to private investors, both domestic and foreign. Diesel oil and gas prices have undergone some increases. At least symbolic reductions have also been made in fertilizer and food subsidies. The value added tax has undergone substantial rationalization. These reforms have paid handsomely. The economy has grown at more than 6 percent coupled with full macroeconomic stability. This compares with a growth rate of 3.5 percent during 1950-1980. The rate of inflation has been low and foreign exchange reserves are sufficient to finance imports for more than eight months. Rising incomes have helped bring down poverty. According to official figures, the proportion of poor in total population has declined from 40 percent in 1993-1994 to 26 percent in 2000. But, perhaps, the greatest change in the last 10 years has been in the attitude toward reforms. Whereas the vocal supporters of reforms within India were rare during the 1980s, virtually every political party today recognizes the need for continued reforms. Differences on which reforms to undertake first and at what pace still exist, but few disagree that reforms must continue. Initial

fears that changes in governments will bring the reform process to a halt or even reverse it have proven to be without foundation. The Bad News: Still a Long Way to Go The accomplishments of the past decade are dwarfed only by what remains to be done. To begin with, the fiscal deficit is in a dire state. The combined deficit at the center and states exceeds 10 percent of GDP. Given an already high debt-to-GDP ratio of nearly 60 percent, this deficit is unsustainable; it is also crowding out private investment. From the viewpoint of long-run growth, the old economy must be further unshackled. A key deficiency of Indias growth process has been the failure of the conventional industry to pull workers out of agriculture into gainful employment. Today, in contrast to virtually all successful developing economies, approximately 60 percent of Indias workforce still remains in agriculture. The revival of conventional industry requires reforms in four key areas. First, a large number of highly labor-intensive products remain reserved for small-scale producers. As a result, the labor-intensive industry has been scuttled in India and, with trade liberalization, will find it almost impossible to survive. This reservation must end with small-scale producers given assistance through alternative measures rather than a total ban on large-scale entry. Second, labor laws must be reformed so as to restore the employers right to layoff workers upon adequate compensation to them. At present, firms with 100 or more workers have no legal way to exit since they cannot lay off their workers. This works as a major barrier to entry of new firms on a large scale: they hesitate to enter into a world that has no exit doors. Third, privatization of public sector enterprises needs to be speeded up. With almost two thirds of the industrial output of the organized sector in these enterprises, it will be difficult to stimulate industrial growth in the short to medium run without faster privatization. Finally, trade liberalization must proceed apace with all tariffs brought down to 15 percent or less in the next three years. Again, this is necessary to reallocate production toward labor-intensive products in which India has comparative advantage. It will also be salutary for poverty reduction. Infrastructure is another important area of reforms. Roads, railways, and ports all need expansion as well as improvement in the quality of service. The government has recently taken steps in this direction, particularly in the area of roads, but the pace remains slow. The most important area of reforms is perhaps Indias power sector. Virtually no sector of the economyindustry, agriculture, or servicescan achieve successful transformation without adequate supply of power. The power sector has been a government monopoly at the state level and suffers from proverbial inefficiency including large-scale thefts of electricity in almost every state. Reforms

involving privatization of power generation and distribution have been undertaken in several states recently but no spectacular successes have emerged as yet. This is the area with highest payoffs for imaginative reforms. Fertilizer and food subsidies pose yet another challenge. As much as 0.7 percent of GDP goes into fertilizer subsidies. Contrary to popular impression, much of this subsidy goes to support the inefficient domestic fertilizer industry rather than farmers. In the last five years, the prices for fertilizer paid by farmers have been close to the world price. Guaranteed rates of return to fertilizer manufacturers have allowed firms with costs two to three times the price in the world market to stay in business. Likewise, the bulk of the food subsidy has failed to reach the poor. Between food and fertilizer subsidies, there is scope for generating savings worth more than 1 percent of GDP. Economic reforms of the last decade have virtually bypassed agriculture. Besides fertilizers among others, farmers need adequate supply of water and electricity. Currently, these are provided free of charge but their supply is highly unreliable. Farmers must also be able to reap the full market price for their product rather than be subject to a procurement price below the market price. Further, export restrictions must be phased out. The need for the expansion of primary education is well recognized. But needed as well are reforms in the area of higher education. Universities in India also remain a state monopoly. With the need to cut the fiscal deficit, the state has no resources to spare. Therefore, like most other countries including Bangladesh and Peoples Republic of China, India must allow the entry of private universities. Financial sector reforms, particularly the reform of banking, remain a distant goal. While foreign banks are now allowed freely to open branches in India, they have not yet moved in aggressively. Banking sector privatization will take time but large efficiency gains could be achieved if labor laws are reformed to restore the hire and fire policy. Layoffs in banks have been very difficult, and voluntary retirement schemes extremely costly. Finally, the reform of bureaucracy is essential. The problem of a bloated bureaucracy and the need for downsizing it is well recognized. But with policy making becoming an increasingly sophisticated and specialized activity, it is necessary to open the top bureaucracy to outside specialists. One proposal, made by the present author, is to open the positions at the level of Joint Secretary and above to outsiders rather than limiting competition to the existing bureaucracy as is the current practice.

Conclusion If India grows at 6 percent per annum on a sustained basis, it will take 14 years to reach the current level of per capita income of Peoples Republic of China, 36 years to reach Thailands, and 104 years to reach that of the United States. Thus, the need for accelerated growth can hardly be overemphasized. At the same time, the task of implementing reforms in a democracy is complex. Therefore, those wishing for rapid reforms will need to be patient. The good news, however, is that the experience of the past decade shows that change can occur. Moreover, the success of the reforms in delivering growth and poverty reduction must make the road to future reforms less bumpy. The support for reforms today, though far from universal, is fortunately much stronger than it was 10 years ago.

Q.2 Trade reform:

The strategic objective of Indian policy makers at the outset of independence was the creation of a self-reliant economy and the reduction of the high levels of poverty that existed, all within a democratic political framework. In order to achieve these objectives, the authorities steadfastly pursued a Socialist strategy of state-directed, heavy industry based industrialization complemented by an across-the-board import substitution policy, financial repression and complex industrial requirements. Notwithstanding some notable successes, the highly statist and interventionist development policies adhered to during this period of insulation led to a severely distorted production structure. While growth did pick up in the latter half of the 1970s, the Indian economy was generally mired in a vicious circle of low productivity/product obsolescence and slow growth. Not only was the performance of the Indian economy well below the targets set by the planning authorities, the country was left lagging in terms of economic growth and development relative to its East Asian neighbours such as China and Korea, which had broadly similar levels of per capita income at the time of Indias independence (Kelkar, 2001). Although some tentative steps were taken in 1985 to liberalise and unshackle the economy by delicensing a few industries, these partial and rather ad hoc measures contributed to the creation of severe and unsustainable macroeconomic imbalances in the Indian economy, particularly with regard to escalating fiscal deficits. The imbalances corresponded to a period of severe political instability and uncertainty following three successive minority governments during 198991. While the fragilities in the Indian economy were largely homemade, the shock of the 1990 Gulf war was

the single factor which broke the camels back as India was brought to the brink of an international default, something that had never occurred in its post-independence history. Faced with a severe balance of payments crisis as foreign exchange reserves plummeted to US$1 billion in late June 1991, barely sufficient to cover a fortnights worth of imports, India entered into an IMF structural adjustment program. In addition to the conventional expenditure switching and reducing policies, as part of the IMF agreement, a range of far-reaching economic policy reforms was launched in July 1991 in the external, industrial, financial and public sectors. These reforms appear to have paid significant dividends at the macroeconomic level. The Indian economy recovered smartly from the crisis, real GDP growing at an annual average rate of 6.4 percent between 1992 and 1998 (Table 1). Not only was this a marked improvement from Indias own past, it was the second highest rate of growth in the world behind China. Of equal importance to the pace of growth is the quality of growth. As Desai (2000) has noted, the Indian economy appears to besound Something has changed; we are no longer in the boom-and bust mode of the 1960s, 1970s or 1980s (p.4). This in turn may be partly attributable to the fact that post-1991 growth was driven principally by an expansion of private investment while national savings simultaneously rose, thus ensuring that there was no significant pressure on the balance of payments position (compared with the consumption-led growth of the mid to late 1980s). Prior to 1991, India was the archetypical import substituting regime with one of the most complicated and protectionist regimes in the world (IMF, 1998). However, following steps towards the unshackling of its trade regime, Indias simple average tariff rate has come down significantly from 128 percent in 1991 to about 34 percent in 2000. The tradeweighted tariffs declined from 87 percent in 1991 to around 30 percent by 2000, while the maximum tariff rate fell to 45 percent in 1997, having hovered at 355 percent in 1991. More precisely, Indias trade liberalisation efforts can be broadly divided into two periods. The first five years from 1991 to 1996 was a period of intense liberalisation as tariffs fell dramatically. The second half of the 1990s can at best be characterised as a period of consolidation of, but definite deceleration in, the pace of tariff compression in general; the average tariff rate remained largely unchanged. In fact, while the simple average tariff rate remained more or less constant, there was a slight increase in the trade-weighted tariffs from a low of 25 percent in 1996 to 30 percent by 2000. Without attributing causation, it is interesting to note that this corresponds to the decelerating trend in economic growth in the latter half of the 1990s compared with the first

five years since the crisis of 1991 (IMF, 1998).While being fully cognizant of the fact that the recently announced reforms will take time to fully come into effect, it is fair to ask if and to what extent the decade long reforms have been successful in integrating India with the global market economy.

Q.3 Industrial reforms:

India is the 7th largest and 2nd most populous country in the world. It is also the 4th largest economy in the world in terms of PPP. A series of ambitious economic reforms aimed at deregulating the economy and stimulating foreign investment has moved India firmly into the front runners of the rapidly growing Asia Pacific Region and unleashed the latent strength of a complex and rapidly changing nation. Today India is one of the most exciting emerging markets in the world. Skilled managerial and technical manpower that matches the best available in the world and a middle class whose size exceeds the population of the USA or the European Union, provide India with a distinct cutting edge in global competition. Indias time tested institutions offer foreign investors a transparent environment that guarantees the security of their long term investments. These include a free and vibrant press, a well established judiciary, a sophisticated legal and accounting system and a user friendly intellectual infrastructure. Indias dynamic and highly competitive private sector has long been the backbone of its economic activity and offers considerable scope for foreign direct investment, joint ventures and collaborations. Reforms in Industrial Sectors in India:

Industrial Sector was among the first sectors to be liberalized in India in a series of measures. Industrial licensing has been abolished except in a small number of sectors where it has been retained on strategic considerations. Industrial Policy The Governments liberalization and economic reforms programme was initiated in July 1991, under the new Industrial Policy Resolution. The industrial policy reforms have substantially reduced the industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment. Foreign Direct Investment Policy

Foreign Direct Investment in India is allowed on automatic route in almost all sectors except Proposals that require an industrial licence and cases where foreign investment is more than 24% in the equity capital of units manufacturing items reserved for the small scale industries. Proposals in which the foreign collaborator has a previous venture/tie-up in India. Proposals relating to acquisition of shares in an existing Indian company in favour of a Foreign/NonResident Indian (NRI)/Overseas Corporate Body (OCB) investor; and Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the Foreign Investment Promotion Board and not to avail of the automatic route. [Top] Foreign Investment Promotion Board (FIPB)

Foreign Investment Promotion Board (FIPB) is a competent body to consider and recommend foreign direct investment (FDI), which do not come under the automatic route. With the shifting of the FIPB to the Department of Economic Affairs, Ministry of Finance, the FIPB has been reconstituted as under:

- Secretary, Department of Economic Affairs Chairman - Secretary, Department of Industrial Policy Promotion Member - Secretary, Department of Commerce Member - Secretary, (Economic Relation), Ministry of External Affairs Member

The Board would be able to co-opt Secretaries to the Govt. of India and other top officials of financial institutions, banks and professional experts of industry and commerce, as and when necessary Entry Strategies and setting up a company

(i) Entry Into India Foreign nationals (except citizens of Nepal and Bhutan) entering into India are required to carry a valid passport/travel documents and a valid visa. Visas for the purpose of tourism, entry,

transit, conferences, business and employment in India re issued to foreign nationals by Indian Embassies and Consulates abroad. Business visas may be issued for upto 5 years, with multiple entry provision. While a business visa is issued by an Indian Embassy abroad, it can be renewed/extended within India if the applicant so desires. Foreign nationals who wish to work in India must obtain a Residential Permit from the Foreigners Regional Registration Office (FRRO) that are located in all major cities, or, in the case of smaller cities, from the principal police station. A foreign national, holding a visa (other than a tourist visa) valid for a period exceeding 180 days, is required to be registered with the FRRO within 15 days of arrival in India. Change of purpose or type of visa is a not permitted. Further, visa other than employment, student and entry are normally not considered for extension. The transfer of residence scheme applies to foreign nationals visiting India for long durations. Under this scheme, foreign nationals can import certain personal effects without paying customs duty. A bank guarantee has to be provided for this purpose, which is returnable after the individual has stayed in India for a year. To avail of this scheme, the goods have to be shipped within two months before the entry into India or one month after entry into India. The goods brought into India under the transfer of residence scheme have to be owned by the importer or his family for at least one year. (ii). Setting up of a company The principal forms of business organisation in India are:

Companies both public and private Partnerships Sole proprietorships

Companies incorporated in India and branches of foreign corporations are regulated by the Companies Act, 1956 (the Act). The Act, which has been enacted to oversee the functioning of companies in India, draws heavily from the United Kingdoms Companies Acts and although

similar, is more comprehensive. The Registrar of Companies (ROC) and the Company Law Board (CLB), both working under the Department of Company Affairs, ensure compliance with the Act. [Top] (a) Types of Companies A company can be a public or a private company and could have limited or unlimited liability. A company can be limited by shares or by guarantee. In the former, the personal liability of members is limited to the amount unpaid on their shares while in the latter, the personal liability is limited by a pre-decided nominated amount. For a company with unlimited liability, the liability of its members is unlimited. Apart from statutory government owned concerns, the most prevalent form of large business enterprises is a company incorporated with limited liability. Companies limited by guarantee and unlimited companies are relatively uncommon. (i) Private Companies A private company incorporated under the Act has the following characteristics:

The right to transfer shares is restricted. The maximum number of its shareholders is limited to 50 (excluding employees). No offer can be made to the public to subscribe to its shares and debentures. Private companies are relatively less regulated than public companies as they deal with the relatively smaller amounts of public money. A private company is deemed to be a public company in the following situations:

When 25 percent or more of the private companys paid-up capital is held by one or more public company.

The private company holds 25 percent or more of the paid-up share capital of a public company.

The private company accepts or renews deposits from the public.

The private companys average annual turnover exceeds Rs. 250 million during a period of 3 consecutive financial years.

(ii) Public Companies A public company is defined as one which is not a private company. In other words, a public company is one on which the above restrictions do not apply. Regarding the necessary procedures to be followed for registering the company, a flow chart presents the summary of the steps involved in formation of a company with Registrar of Companies. (iii) Foreign Companies Foreign investors can enter into the business in India either as a foreign company in the form of a liaison office/representative office, a project office and a branch office by registering themselves with Registrar of Companies (ROC), New Delhi within 30 days of setting up a place of business in India or as an Indian company in the form of a Joint Venture and wholly owned subsidiary. For opening of the foreign company specific approval of Reserve Bank of India is also required. Approvals/Clearances required for new projects For starting a new project, a number of approvals/clearances are required from different authorities such as Pollution Control Board, Chief Inspector of Factories, Electricity Board, Municipal Corporations, etc. [Top] Foreign Exchange Management Act (FEMA) The Parliament has enacted the Foreign Exchange Management Act, 1999 to replace the Foreign Exchange Regulation Act, 1973. This Act came into force on the 1st day of June 2000. The object of the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

This Act extends to the whole of India and will also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India. It will also be applicable to any contravention committed outside India by any person to whom this Act is applicable. Taxation in India

Since the onset of liberalization in the country, tax structure of the country is also being rationalized keeping in view the national priorities and practices followed in other countries. Foreign nationals working in India are generally taxed only on their Indian income. Income received from sources outside India is not taxable unless it is received in India. The Indian tax laws provide for exemption of tax on certain kinds of income earned for services rendered in India. Further, foreign nationals have the option of being taxed under the tax treaties that India may have signed with their country of residence. Remuneration for work done in India is taxable irrespective of the place of receipt. Remuneration includes salaries and wages, pensions, fees, commissions, profits in lieu of or in addition to salary, advance salary and perquisites. Taxable payments include all allowances and tax equalisation payments unless specifically excluded. The stock options granted by the employer are taxable as capital gains at the time of sale of shares acquired due to exercise of options. Repatriation of Earnings

A foreign national may open bank accounts in India and receive funds from abroad. A foreign national is allowed to repatriate 75 percent of his net after-tax earnings after his employment is approved by the government and the exchange control authorities. If employment is for a short duration, such approvals are not necessary, provided the amount of remittance is within approved limits. Ready Reckoner for NRI Investment

The Ready Reckoner for Non-Resident Indians (NRIs) Investment provides information, at a glance, about investment opportunities available to Non Resident Indians (NRIs)/Persons of Indian Origin (PIO)/Overseas Corporate Bodies (OCBs). Labour Rules/Regulations

Under the Constitution of India, Labour is a subject in the Concurrent List where both the

Central & State Governments are competent to enact legislation subject to certain matters being reserved for the Centre. Some of the important Labour Acts, which are applicable for carrying out business in India are: Employees Provident Fund and Miscellaneous Provisions Act, 1952 | Employees State Insurance Act, 1948 Workmens Compensation Act, 1923 | Maternity Benefit Act, 1961 | Payment of Gratuity Act, 1972 | Factories Act, 1948 Dock Workers (Safety, Health & Welfare) Act, 1986 | Mines Act, 1972 | Minimum Wages Act | Payment of Bonus Act 1965 Contract Labour [Ragulation & Abolition] Act 1970 |Payment of Wages Act, 1936 | [Top] Intellectual Property India is a signatory to the agreement concluding the Uruguay Round of GATT negotiations and establishing the World Trade Organisation (WTO). This Agreement, inter-alia, contains an Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which came into force from 1st January 1995. It lays down minimum standards for protection and enforcement of Intellectual Property Rights in member countries, which are required to promote effective and adequate protection of Intellectual Property Rights with a view to reducing distortions and impediments to international trade. The obligations under the TRIPS Agreement relate to provision of minimum standards of protection within the member country's legal systems and practices. As regards the status of various Intellectual Property laws in India and standards in respect of various areas of intellectual property, a law on Trade Marks has been passed by Parliament and notified in the gazette on 30.12.1999. This law repeals and replaces the earlier Trade & Merchandise Act, 1958. A new law for the protection of Geographical Indications, viz., the Geographical Indications of Goods (Registration and the Protection) Act, 1999 has also been passed by the Parliament and notified on 30.12.1999. A law called the Designs Act,2000 relating to Industrial Designs which repeals and replaces the earliar Designs Act, 1911 has also been passed by Parliament in its Budget Session, 2000. The Act has been brought into force from

11.05.2001. A Bill on Patents to amend the Patents Act, 1970 was introduced in Rajya Sabha on 20.12.1999 and the Bill was passed by Parliament on 14.05.2002.

Incentives offered by States India is a federal country consisting of States and Union Territories. States are also partners in the economic reforms being undertaken in the country. Most of the States are making serious efforts for simplifying the rules and procedures for setting up and operating the industrial units. Single Window System is now in existence in most of the States for granting approval for setting up industrial units. Moreover, with a view to attract foreign investors in their states, many of them are offering incentive packages in the form of various tax concessions, capital and interest subsidies, reduced power tariff, etc. The specific website addresses containing the incentive packages offered by various states/UTs are given in the List. Foreign Investment Implementation Authority (FIIA) Government of India has set up Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation by providing a pro-active one stop after care service to foreign investors, help them obtain necessary approvals and by sorting their operational problems. FIIA is assisted by Fast Track Committee (FTC), which have been established in 30 Ministries/Departments of Government of India for monitoring and resolution of difficulties for sector specific projects. Senior officers of the Department have been designated Nodal Officers for specific states for follow up of FDI cases and to bring to notice of FIIA any difficulties in implementation. In case of any difficulties, nodal officers can be contacted.

Q.4 Trade off between growth and inflation:

Sustained growth caused by rising aggregate demand can lead to acceleration in inflation as the economy uses up scarce resources and short run aggregate supply becomes inelastic. When SRAS is elastic, an outward shift of aggregate demand can easily be met by a rise in real GDP (there is plenty of spare capacity and supply responds elastically to the higher level of AD). But when SRAS becomes inelastic, the trade-off between growth and inflation worsens an increase in AD tends to lead to higher prices rather than increased output and employment. The trade off between growth and inflation can be avoided if an economy is able to increase potential output by improving their supply-side performance. For example, LRAS can be increased by achieving sustained improvements in productivity, advances in technology and the benefits that come from product and process innovations. Potential output is also increased by expanding the stock of capital goods (via higher investment) and through an increase in the available labour supply. An outward shift in LRAS means that the economy can meet a higher level of aggregate demand without putting upward pressure on the general price level Now we realize that if we had a few hundred extra basis points to rely on, that would have helped. We would have had to rely less on fiscal policy. So it would have been good to start with a higher nominal rate. The only way to get there is higher inflation. Policy makers have generally chosen a 2% (inflation rate target). But there was no very good reason to use 2% rather than 4%. Two percent doesnt mean price stability. Between 2% and 4%, there isnt much cost from inflation. As expected, this proposal was thrashed by most central banks/economists and some even called it the worst suggestion they have heard. Anyways, this growth-inflation trade-off is always an interesting empirical question. How much inflation can an economy tolerate? After what level of inflation does growth start to decline? Another set of IMF economists have released a paper looking at this relationship. Research on the inflation-growth nexus have addressed three key questions: (i) is there a robust negative relationship between inflation and growth? (ii) is there a kink in the relationship such

that at very low levels of inflation the relationship is positive (perhaps due to Phillips curve effects), but at higher levels of inflation the relationship is negative? and (iii) does inflation have to reach some minimum threshold before the growth effects become serious? A starting point to answering these questions is the identification of the threshold optimal, tolerable) beyond which inflation has a negative effect on growth. Empirical studies have found a significant statistical relationship between inflation and growth, even after controlling for fiscal performance, wars, droughts, population growth, openness, and even human and physical capital, and allowing for simultaneity bias. Measuring the threshold level of inflation in a cross-country framework runs the risk of being influenced by extreme values since samples typically include countries with inflation as low as 1 per cent and as high as 200 per cent. Ideally, inflation thresholds should be estimated for each country separately, allowing the incorporation of country specific characteristics. Nevertheless, since the relationship between inflation and growth is likely to be stronger at low frequencies, and the data rarely cover more than 40 years, the literature has mostly relied on panel techniques. The authors point to number of empirical studies. For India some studies have shown it is around 5-7%. In this paper authors increase the number of countries. The findings are: Using a panel of 165 countries covering the period 19602007, we estimate that for emerging market economies inflation above a threshold of about 10 percent quickly becomes harmful to growth, suggesting the need for a prompt policy response to inflation at or above that threshold. For the advanced economies, the threshold is much lower. For oil exporting countries, the estimates are less robust (there are two potential modes for the bootstrapping distribution, reflecting some heterogeneity among oil producers), but we estimate the threshold to be again about 10 percent. The effect of higher inflation for oil producers is also stronger than for the rest of the countries.

Q.5 Difference between a global, transnational, international and multinational company:

* International companies are importers and exporters, they have no investment outside of their home country. * Multinational companies have investment in other countries, but do not have coordinated product offerings in each country. More focused on adapting their products and service to each individual local market. * Global companies have invested and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets. Generally one corporate office that is responsible for global strategy. Emphasis on volume, cost management and efficiency. * Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market.