Indian Economy (GS) for IAS Prelims and Mains

Growth and Development

Economic Growth in India: National Income Determination, GDP, GNP,

NDP, NNP, Personal Income
National Income Accounting in India
National income of a country can be defined as the total market value of goods and services produced
in the economy in a year.
The three-important measure of calculating National Income of a country are:
 The sum of the value of all final goods and services produced.
 The sum of all incomes accruing to factors of production, i.e., Rent, Interest, Profit and Wages.
 The sum of consumer’s expenditure, net investment, and government expenditure on goods and
services.

Circular Flow of Income in a Three Sector Economy

 The modern economy is a monetary economy. Money changes hand from one sector to another.
 The Household sector supplies their services like labour, land, Capital and entrepreneurial abilities to
firms and receives payments in return in terms of money.
 In the first stage of the model, the Household sector provides their services of labour, land, capital and
entrepreneurial skills to the Business firms.
 In the second stage, the Business firms pay back in monetary terms to the Household sector in the
form of Wages, Rent, Interest and Profits.
 In the third stage, the money received by household is spent on the goods and services produced by
the firms in the form of consumption expenditure. At the same time, the Firms provides their goods
and services to the Household in return for the money.
 Thus, we see, that money flows from business firms to households as payments for a factor of
production (Labour, Land, Rent and Entrepreneurial skills), and then it flows from Household to firms

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 when Household purchased goods and services produced by the firms. This money flow is called
circular flow of income.

Saving and Investment in the Circular Flow

 Along with consumption, the household also saves part of their money.
 When Household saves, their expenditure on purchase of goods and services decline. The decline in
the purchase will result in a decline in money received by firms. This will result in less money flow to
the household as the firms will reduce hiring and production operations. Thus, saving act as a leakage
from the economic system.
 But the important question to ask is, where will savings go in the economy?
 The savings in the economy does not lead to any reduction in aggregate spending and income as the
savings flows back into the economic system through Financial Markets (Banks, Stock markets,
insurance etc.)
 From Financial Markets, the savings flows back to the Business firms who borrow them and invest it
into new forms of investments.
 Thus, the saving which is a leakage in the system also flows back into the system through investment
by a firm which acts as injections.

Government Sector in the Circular Flow

 Government affects the economy in a number of ways. The main components of government
intervention are in the form of taxes, spending and borrowings.
 Government purchase goods and services just as household and firms do.
 Government financed its expenditure through taxes and borrowings.
 The money flow from Household and firms to the government is in the form of taxes.
 The other form of money flow from Household and firms to government is in the form of Borrowings
through financial markets.
 The Government pay back to household and firms in the form of provision of public goods like
health, education, Policing, National Defence etc.

National Income and National Product

Gross National Product Gross Domestic Product

GNP is the total market value of all final goods GDP is the value of all final goods and services
and services produced in a year in a country. produced by the normal residents as well as non-
residents in the domestic territory of the country
but does not includes Net Factor Income from
Abroad.
The important thing to remember about GNP is The important point to remember is whatever is
that it is measured at market prices/value. produced in India, whether by an Indian or
foreign national is part of Indian GDP.
To calculate GNP, only the final goods and The key difference between GNP and GDP is the
services produced in an economy during in a exclusion of Net Factor Income Abroad from
given year must be counted. No intermediate GDP.
goods and services should be included in GNP.
GNP includes only those goods and services that GDPMP = GNPMP – Net Factor Income from
are produced by the residents of India whether Abroad.
working in India or Abroad.

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 Net Factor Income from Abroad: GDP = Consumption + Gross Private Investment
The sum of factor incomes like rent, wages, + Government Expenditure + Net Exports
interest and profits generated within the domestic Net Exports= Exports – Imports.
country is called domestic factor income. If we want to calculate Net Domestic Product
The domestic factor income includes both from the GDP, then we just have to minus
incomes earned by residents as well as non- depreciation from the Gross Private Investment.
residents/foreigners working in India. NDP= Consumption + Net Private Investment +
At the same time, Indian go abroad to work and Government Expenditure + Net Exports.
earn wages, salaries, profits and rents. Where, Net Private Investment= Gross Private
Now the Net Factor income abroad= the Investment – Depreciation.
difference between factor income received by the
residents of India working abroad and the factor
income paid to the foreign residents for working
in India.
GNP includes Net Factor Income Abroad
GNP= Consumption + Gross Private Investment
+ Government Expenditure + Net Exports + Net
Factor Income from Abroad.

Net National Product or National Income

 In the production of GNP of a year, a country uses some fixed assets or capital goods like Machinery,
Equipments and technology etc.
 The capital goods like machinery, building and equipment’s undergo regular wear and tear during the
production process, which reduces their value. This fall in the value of capital assets due to regular
wear and tear is called depreciation.
 When the Depreciation is deducted from the Gross National Product, then we get Net National
Product.
 It simply means to include all market value of goods and services produced in a year after deducting
depreciation.
 NNPMP = GNP- Depreciation.

National Income at Factor Cost

 National Income from Factor Cost is also called National Income of a country.
 National Income means the sum of all incomes earned by the citizens in the form of Rent, Wages,
Interest and Profits.
 The difference between National Income at Factor Cost and National Income at Market Price
(NNPMP) arises from the fact that indirect taxes and subsidies cause the market price to be different
from the factor income received by the citizens.
 Example, A mobile handset of Rs10,000 purchased by you includes a GST of 12%. In this case, while
the market price of RS 10,000 includes the GST. The factor of production used to produce mobile
handset will only get RS 8800. Thus, the difference between market price and factor cost is the tax.
 Similarly, a subsidy results in the market price of a product to be less than the factor cost.
 Therefore, while calculating National Income, we must deduct indirect taxes and add subsidies into
Net National Product at Market Price.
 NNPFC = NNPMP – Indirect Taxes + Subsidies.

Personal Income

 Personal Income includes the sum of all incomes actually received by all the individuals or
households during a given year.

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 The individual pays income taxes, firms pay corporate taxes, individual also contribute towards social
securities in the form of Cess etc., and some individuals receive social security benefits (transfer
payments) like pension, unemployment allowances from the government.
 In order to move from National Income to Personal Income of individuals and firms, we must deduct
all forms of direct taxes and social security contribution by the individuals and must add transfer
payment received by the individuals.
 The basic idea here is to subtract all those income from National Income that is earned by an
individual but has not been received like taxes and add all those incomes which are received by the
individuals but has not been earned like Old age Pensions.
 Personal Income= National Income – (Undistributed Corporate Profits+ Corporate Taxes + Social
Security Contribution) + (Transfer Payments).

GNP GDP NNPMP NNPFC Personal Income

GNPMP= GDPMP = NNPMP = NNPFC = Personal Income=
Consumption + GNPMP – Net GNPMP – NNPMP – National Income
Gross Private Factor Income Depreciation. Indirect Taxes + (NNPFC) –
Investment + from Abroad. Subsidies. (Undistributed
Government Corporate
Expenditure + Net Profits+
Exports + Net Corporate Taxes
Factor Income + Social Security
from Abroad. Contribution) +
(Transfer
Payments).

Economic Growth versus Economic Development

Real versus Nominal GDP

Nominal GDP is the money value of all the goods and services produced in a year. Nominal GDP is
calculated at the current market prices. However, Nominal GDP does not truly indicate the real
performance of the economy as the prices changes over time.
Back to Basics: Suppose, India as a country only produced cars in its economy. In the year 2016,
India produced 100 Cars which were sold at RS 100,000 each. India’s GDP in this case will be RS
10,00,00,00 (100*100000).
In the year 2017, supposedly due to demonetization India only produced only 90 Cars, but their price
has risen to RS 15,0000. India’s GDP in the year 2017 will be 1,35,00,000.
The Increase from RS 10,00,00,00 to RS 1,35,00,000 is the nominal GDP. The GDP of India has risen
not because we have produce more units of Car but because the prices of the car have increased.
Therefore, the Nominal GDP does not capture the changes in the real economy.

Real GDP

The real GDP is calculated as the money value of all the goods and services produced in a year using
the constant set of market prices that have prevailed in the certain chosen base year. The Real GDP is
calculated at a fixed set of prices so that only the changes in real output or real production of goods
and services is captured.
Back to Basics: Suppose, India as a country only produced cars in its economy. In the year 2016,
India produced 100 Cars which were sold at RS 100,000 each. India’s GDP in this case will be RS
10,00,00,00 (100*100000).

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 In the year 2017, supposedly due to demonetization India only produced only 90 Cars. If we take the
year 2011-12 as the base year and assumes that the price of the car in that year was RS 90,000. Then,
India’s Real GDP will be 90*90,000= 81,00,000.
The Nominal GDP is RS 1,35,00,000 whereas the Real GDP is RS 81,00,000. The difference is due to
the prices which have risen from 90,000 in the base year to RS 15,00,00 in the current year.

Limitations of the Concept of GDP/Economic Growth

Note for Students: The following examples will make it clear why GDP is not a perfect measure of
Well Being.
 Suppose, due to unemployment in the economy the youth drifts towards Crime. To overcome the
crime rate, the government decides to hire more police personnel. Due to the hiring of police
personnel, the economic activity in the economy increased as the newly employed personnel will be
paid salaries, which they will spend on purchasing goods and services. Hence Production of Goods
and services will increase. The final outcome is increase in the GDP.
Now tell me is this increase in the GDP is worth considering? The GDP has risen due to wrong
reason, i.e., increase in crime.
In the above case, the GDP fails to capture the deteriorating situation of the society.
 Suppose, the Government of India decides to mine resources from the fragile Western Ghats. The
mining of the resource leads to the production of resources which are used in the production of goods
and services. The increased production will lead to increase in the GDP. But, due to mining activity,
the population near the Ghats were disposed of or removed. At the same time, the mining activity has
made the region prone to flooding. The floods in the coming year will destroy valuable life and
property. The loss due to dispossession and flooding will not be captured in the calculation of the
GDP. Thus, in this case also GDP has risen but at the cost of negative externality in the form of loss
of livelihood and lives.

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 Economic Growth versus Economic Development

The two-argument provided above are also valid for the shortcomings of growth.
Economic Growth is a monetary concept. It only takes into account the value of goods and services
produced in the economy. It tells how much a country has progressed in terms of economic indicators
like GDP, Per Capita Income, Production, employments etc. It measures only quantifiable outcomes.

Let’s Understand Growth

The First Stage:

The story so far is very impressive a business-friendly government with pro-business policy increased
growth and employment.

The Second Stage:

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 The Third Stage

The Fourth and Final stage: The Crisis

The above model is just an easy explanation of a complex system. Is it really the pro-business policies
of the government that have led to the crisis?
The answer is no. It is the lack of balanced policy or a single point focus on the growth that has led to
the crisis.

What has the Government missed in the process?

 If at the very beginning, along with pro-business policies, the government had adopted the policies to
promote education, skill development, research and innovation, health and social empowerment, the
outcome could have been very different. A progressive education and health sector along with
technological advancement would have taken care of skilled and educated labour needed in the
production processes.
The First lesson, therefore, is “Along with the policies to promote Physical Capital the government
must promote the policies of Human Capital”. Therefore, the first difference, “Promotion of Physical

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 Capital is a growth oriented measure, but promoting the Human capital along with Physical Capital is
a development oriented measure”.
 In the above setup, the government had adopted a policy of excessive deregulation of the economy.
The problem with excessive deregulation is that it does more harm than good. If the government have
moved cautiously with the deregulation, it could have avoided the crisis.
If for example, when the first stage boom had happened, the government should have adopted the
policy of promoting new firms by encouraging competition, by providing the new firms with
opportunities in the form of lower taxes, interest-free capital. Instead, the government followed the
existence firms demand of more rebates, more deregulation which created a monopoly like the
situation with restricting enter. The new firms would have competed with the older firms, and in the
process, the poor performing firms would have thrown out of the market, and the best surviving firms
could have produced efficiently and at a much lower price.
The second lesson, therefore, is “The role of government is to promote competition and healthy
environment for the firms to operate and not to practice Crony Capitalism in nexus with old firms”.
Therefore, the policy of excessive deregulation along with creating a monopoly kind structure is a
growth oriented move, but promoting and encouraging new firms through fair competition is a
development oriented measure”.
 The government promoted a policy of Land reforms which favoured firms and Businesses. Instead,
the government must have come up with a policy which could have taken care of the poor and
farmers. The government should have provided land at the fair market price along with the provision
of forcing firms to undertake developmental activities like promoting primary health centres,
secondary schools and another social sector initiative like computer training and skilling of rural
youth who have lost their lands. This could have fastened the land reform process and makes it more
acceptable to poor.
The Third lesson, therefore, is “A balanced approach towards resource redistribution does more good
as compare to a one-sided measure of promoting business welfare”. The governments must force the
firms to provide essential services in the areas of the land takeover. Therefore, land acquisition along
with welfare of the region is a development measure.
 The last point is with respect to labour reforms. The flexibility of the labour market is the need of the
hour. But it should be done keeping in mind the welfare of the labour. The government must do
labour reforms which promote healthy employment along with bringing the labour in the social
security net. The opening up of labour markets by killing unions and bargaining power of labour will
only lead to labour exploitation and labour unrest and business loss. A better approach is to make
labour market flexible for both employer and employee so that they can move out easily from one job
to another. This can be done through proper contracts, well-functioning legal system, working social
security net for labourers and skilling and training of labourers.
Therefore, the fourth lesson “Labour Market reforms carried with the welfare of the labour is a
development oriented measure”.
The story in a nutshell, therefore, is “Growth is only a necessary condition and not a sufficient
condition for promotion of well-being and raising the standard of living of the people”.

ECONOMIC GROWTH ECONOMIC DEVELOPMENT

Economic growth refers to an increase over time Economic development implies an upward
in a country`s real output of goods and services movement of the entire social system in terms of
(GNP) or real output per capita income. income, savings and investment along with
progressive changes in socioeconomic structure
of country (institutional and technological
changes)
Economic Growth relates to a gradual increase in Development relates to the growth of human
one of the components of Gross Domestic capital indexes, a decrease in inequality figures,
Product: consumption, government spending, and structural changes that improve the general
investment, net exports. population’s quality of life.
It is a Quantitative concept. Increases in real It is a Qualitative concept. it includes HDI

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 GDP. (Human Development Index), gender- related
index (GDI), Human poverty index (HPI), infant
mortality, literacy rate etc.
It only Brings quantitative changes in the Its effect is that it Brings Qualitative changes in
economy the economy.
Economic growth is a more relevant metric for Economic development is more relevant to
progress in developed countries. But it’s widely measure progress and quality of life in
used in all countries because growth is a developing nations. like India where there is
necessary condition for development. rampant inequality in the distribution of wealth.
Growth is concerned with increase in the Concerned with structural changes in the
economy’s output economy for example generally economic
development is associated with fall in the
share of Agriculture in the total GDP, while
the increase in the share of manufacturing in
the total GDP.

Measures of Economic Development: Human Development

Index, Green GDP, Gross National Happiness Index

Measures of Economic Development

1. GREEN GDP
 Green GDP is a term used for expressing GDP after adjusting for environment degradations.
 Green GDP is an attempt to measure the growth of an economy by subtracting the costs of
environmental damages and ecological degradations from the GDP
 The concept was first initiated through a System of National Accounts.
 The System of National Accounts (SNA) is an accounting framework for measuring the economic
activities of production, consumption and accumulation of wealth in an economy during a period of
time. When information on economy’s use of the natural environment is integrated into the system of
national accounts, it becomes green national accounts or environmental accounting.
 The process of environmental accounting involves three steps viz. Physical accounting; Monetary
valuation; and integration with national Income/wealth Accounts.
 Physical accounting determines the state of the resources, types, and extent (qualitative and
quantitative) in spatial and temporal terms.
 Monetary valuation is done to determine its tangible and intangible components.
 Thereafter, the net change in natural resources in monetary terms is integrated into the Gross
Domestic Product in order to reach the value of Green GDP.

Green GDP and India

 While explicitly green GDP is not measured in India, but environmental accounting has been done in
India from last 2 decades
 A Framework for the Development of Environmental Statistics (FDES) was developed by the Central
Statistics Office (CSO) of India in the early 1990s. The Compendium of Environment Statistics is
being released since 1997.
 As per the recommendations of Technical Working Group on Natural Resource Accounting (NRA) in
the later 1990s, a pilot project on NRA in the State of Goa was initiated during 1999-2000. Thereafter,
resource accounting studies were carried out in 8 states on a different set of natural resources. Later a
Technical Advisory Committee was constituted in the year 2010 under the Chairmanship of Dr Kirit
Parikh to bring out a Synthesis Report combining the findings of all these studies. The report

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 recommended the preparation of a National Accounting Matrix that would include environmental
accounts. The High powered expert group under Partha Dasgupta was constituted subsequently in
2011 with the mandate of developing a framework for green national accounts of India and for
preparing a roadmap to implement the framework.
 Following the guidance of International Organisation of Supreme Audit Institutions (INTOSAI) on
the framework for of environmental auditing, the supreme audit institution of India (CAG) also
conducts an environmental audit in India. This process was formalised with the introduction of
specialized guidelines for the conduct of environmental audits. This laid down broad guidelines to
enable India’s auditors to examine whether the auditee institutions gave due regard to the efforts of
promulgating sustainability development and environmental concerns, where warranted.
 Thus, in India, the Environmental audit is conducted within the broad framework of Compliance
Audit and Performance Audit at the central level by the Office of Principal Director of Audit
(Scientific Departments) and by the state Accountant Generals (Audit) at the state level. Over the
years, more and more states have taken up environmental audits. This compliance as well as
performance audits have been printed in the respective state/ central audit reports and presented to
Legislature/Parliament. All these reports deal with the environmental themes of water issues, air
pollution, waste, biodiversity and environmental management systems. All the environment audits
done at the state level and at the central level since 2001 are collated in the CAG report on
environmental audit.

Gender Inequality Index

 Gender inequality remains a major barrier to human development. Girls and women have made major
strides since 1990, but they have not yet gained gender equity.
 The disadvantages facing women and girls are a major source of inequality. All too often, women and
girls are discriminated against in health, education, political representation, labour market, etc.—with
negative consequences for development of their capabilities and their freedom of choice.
 The GII is an inequality index. It measures gender inequalities in three important aspects of human
development—reproductive health, measured by maternal mortality ratio and adolescent birth rates;
empowerment, measured by proportion of parliamentary seats occupied by females and proportion of
adult females and males aged 25 years and older with at least some secondary education; and
economic status, expressed as labour market participation and measured by labour force participation
rate of female and male populations aged 15 years and older.
 The GII is built on the same framework as the IHDI—to better expose differences in the distribution
of achievements between women and men. It measures the human development costs of gender
inequality. Thus, the higher the GII value, the more disparities between females and males and the
more loss to human development.
 The GII sheds new light on the position of women in 159 countries; it yields insights in gender gaps in
major areas of human development. The component indicators highlight areas in need of critical
policy intervention, and it stimulates proactive thinking and public policy to overcome systematic
disadvantages of women.

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 Gross National Happiness Index

 Gross National Happiness is a term coined by His Majesty the Fourth King of Bhutan, Jigme Singye
Wang chuck in the 1970s. The concept implies that sustainable development should take a holistic
approach towards notions of progress and give equal importance to non-economic aspects of well-
being.
 “How are you?” We ask that question of one another often. But how are we doing – as a country, a
society? To answer that question, Bhutan uses its Gross National Happiness (GNH) Index.
 In 2015, a total of 91.2% of Bhutanese were narrowly, extensively, or deeply happy. 43.4% were
extensively or deeply happy. The aim is for all Bhutanese to be extensively or deeply happy. Bhutan
is closer to achieving that aim in 2015 than it was in 2010.
 GNH is a much richer objective than GDP or economic growth. In GNH, material well-being is
important, but it is also important to enjoy sufficient well-being in things like community, culture,
governance, knowledge and wisdom, health, spirituality and psychological welfare, a balanced use of
time, and harmony with the environment.
 The four pillars of GNH:

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 The Nine Domains of GNH

Criticism of GNH

 From an economic perspective, critics state that because GNH depends on a series
of Subjective judgments about well-being, governments may be able to define GNH in a way that
suits their interests
 Other critics say that international comparison of well-being will be difficult in this model;
proponents maintain that each country can define its own measure of GNH as it chooses and that
comparisons over time between nations will have validity. GDP provides a convenient, international
scale.
 Research demonstrates that markers of social and individual well-being are remarkably transcultural:
people generally report greater subjective life satisfaction if they have strong and frequent social ties,
live in healthy ecosystems, experience good governance, etc. Nevertheless, it remains true that
reliance on national measures of GNH would render international comparisons of relative well-being
more problematic since there is not and is not likely ever to be a common scale as “portable” as GDP
has been with other countries.
Human Development Index

 The Human Development Index (HDI) is a statistical tool used to measure a country’s overall
achievement in its social and economic dimensions. The social and economic dimensions of a country
are based on the health of people, their level of educational attainment and their standard of living.
 Pakistani economist Mahbub ul Haq created HDI in 1990 which was further used to measure the
country’s development by the United Nations Development Program (UNDP). Calculation of the
index combines four major indicators: life expectancy for health, expected years of schooling, mean
of years of schooling for education and Gross National Income per capita for the standard of living.
Why do we require HDI?
 Firstly, GDP method of calculating progress ignores non-income aspects like education and health
thus, for example, Arab countries have high GDP per-capita, but the progress in health and education
field is limited in those countries which do not get measured in GDP. Similarly, in countries like Cuba
and Sri Lanka GDP per capita is low, but the quality of life is much better than many high GDP per
capita countries of the Arab world and Latin America because of high-quality indicators in social
sectors. HDI will overcome this problem

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 Secondly, GDP per capita ignores income inequality or distribution of wealth in a country for
example in countries of Latin America have high GDP per capita but due to skewed income
distribution, the masses are excluded from growth process.
 The HDI was created to emphasize that people and their capabilities should be the ultimate criteria for
assessing the development of a country, not economic growth alone
Method of calculating HDI

 The Human Development Index (HDI) is a summary measure of average achievement in key
dimensions of human development: a long and healthy life, being knowledgeable and have a decent
standard of living. The HDI is the geometric mean of normalized indices for each of the three
dimensions.

(a) Life Expectancy Index assessment

 The minimum value for life expectancy is fixed at 20 years in the new calculation. The maximum
value for life index is kept at 83.2 years.
 Formula to calculate Life Expectancy Index (LEI) = Life Expectancy of a country -20/ 83.2-20
(b) Education Index assessment Education Index (EI) assessment is composite of two indices.
They are
1. Mean Years of Schooling Index (MYSI)
2. Expected Years of Schooling Index (EYSI)
 Formula to calculate Mean Years of Schooling Index (MYSI) = Mean years of schooling – 0/ 13.2 – 0
 Formula to calculate Expected Years of Schooling Index (EYSI) = Expected Years of Schooling – 0/
20.6 – 0
(c) Income Index assessment
 To calculate this index, goal posts are set as per observations during 1980 – 2010 in various countries.
Gross National Income per capita is taken as a measure to calculate new Income Index in new HDI.
Minimum income is set as $163, and maximum income is set as $108,211.
 Formula to calculate Income Index = Log (Country’s GNIpc) – Log ($163) / Log ($108,211) – Log
($163)

How to calculate Human Development Index as per new method?

Formula to calculate Human Development Index (HDI) = (Life Expectancy Index X Education Index
X Income Index) 1/3 New Human Development Index (HDI) is geometric mean of Life Expectancy
Index (LEI), Education Index (EI) and Income Index (II).
After this calculation total value will be between 0 and 1. As per the values gained, countries will be
placed in the list of the division of countries. They are divided into very high human development,

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 high human development, medium high human development and low high human development
countries
Global Trends in HDI

 The Scandinavian countries which include Norway, Sweden, Denmark etc. are world leaders in HDI
since most of them occupy positions within top 10 in HDI list and Norway always tops the list.
According to 2015 HDI rankings, Norway is top ranked country. The reasons why these countries are
performing so well In HDI are manifold. These countries have high per capita income, along with this
positive state interference in education and health along with a well-developed social security system
ensure that these countries maintain their dominance in HDI ranking.
 Among India’s neighbours, Bhutan and Bangladesh figure in Medium development category.
Pakistan (ranked 146) and Nepal (145) are in the ‘low development’ category, while Sri Lanka (73) is
in the ‘high development’ category.
 The five countries that made up the bottom of the list were Niger (0.348), Central African Republic
(0.350), Eritrea (0.391), Chad (0.392) and Burundi (0.400).

Strength of HDI index

 There is widespread use of HDI to compare development levels, and it does reveal clear global
patterns.
 Does not solely concentrate on economic Growth, and takes into consideration that there are other,
more social, ways to measure progress.
 Increase in education and health shows an improvement in countries progress index.
Weaknesses of HDI index

 The fact that the HDI uses GDP per capita in its calculations opens many criticisms. Here are some of
them.
 GDP per capita does not give an indication of the income distribution. Issues about Rich and poor
divide etc
 GDP does not show how the income is spent by the government. Some countries spend more on
military than on health care
 The range of variables included by the HDI is too narrow and does not include much-needed factors
such as the % of people living on under 1$ a day
 Out of the three main constituents of the HDI, some factors are more important than others. The HDI
is flawed for this reason as the score of the three is averaged out.
 When knowledge is measured it only takes into account what children learn at school not in the
family. And so maybe knowledge statistics may be distorted if the family play more of a role in
education in the home.
 Longevity can also be distorted as the life expectancy of a person does not consider how healthy the
life was led. i.e. A person aged 90 years old but has suffered serious illness in the last 30 years of their
life would have a higher HDI value compared to a 70-year-old who has led a very healthy life.
 Countries like are countries with booming economic growth. And also, it has well-developed health
and education sector. There is no religious freedom, there’s censorship on the internet, and the state is
everywhere.
 Data from some developing countries may not be very reliable and may be difficult to confirm.
 The measures chosen may seem very arbitrary to some because there are another way of measuring
relative qualities in health and education
 No indication in the education index about access to education for all groups in society.
The HDI and India
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 India’s human development index (HDI) ranking for 2015 puts Asia’s third largest economy among a
group of countries classed as “medium” in the list, as opposed to “low” in the 1990s, thanks to factors
such as an increase in life expectancy and mean years of schooling in the past 25 years.
 But the bad news from the report released on Tuesday in Stockholm is that regional disparities in
education, health and living standards within India—or inequality in human development—shave off
27% from India’s HDI score.
 As it stands, India is ranked 131 out of 188 countries in a list that is topped by Norway.

 India’s HDI value for 2015 is 0.624—which puts the country in the medium human development
category but behind fellow South Asian countries like Sri Lanka and the Maldives.
 India’s 2015 score is up from 0.428 in 1990, i.e. an increase of 45.8% between 1990-2015.
 India’s improved HDI value is second among BRICS countries, with China recording the highest
improvement—48%.
 Between 1990 and 2015, India’s life expectancy at birth increased by 10.4 years, mean years of
schooling increased by 3.3 years and expected years of schooling increased by 4.1 years,” the report
said, adding that India’s Gross National Income, or GNI, per capita, increased by about 223.4%
during the same period.
 In South Asia, countries that are close to India in HDI rank with a comparable population size are
Bangladesh and Pakistan, which are ranked 139 and 147, respectively.
 The HDI report also showed that almost 1.5 billion people in developing countries live in multi-
dimensional poverty. Of this, 54%, or 800 million people, are in South Asia while 34% are in Sub-
Saharan Africa.

Economic and Social Development in India:

Millennium Development Goals
Millennium Development Goals and India
In 2000, 189 nations made a promise to free people from extreme poverty and multiple deprivations.
This pledge became the eight Millennium Development Goals to be achieved by 2015. In September
2010, the world recommitted itself to accelerate progress towards these goals.
The MDGs consists of eight goals, and these eight goals address myriad development issues. The
eight (8) Goals are as under:

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 Eighteen (18) targets were set as quantitative benchmarks for attaining the goals. The United Nations
Development Group (UNDG) in 2003 provided a framework of 53 indicators (48 basic + 5
alternative) which are categorized according to targets, for measuring the progress towards individual
targets.
A revised indicator-framework drawn up by the Inter-Agency and Expert Group (IAEG) on MDGs
came into effect in 2008. This framework had 8 Goals, 21 targets and 60 indicators. India has not
endorsed this revised framework.

MDG and India Progress

MDG 1: Eradicate extreme poverty and hunger.

Target: Halve, between 1990 and 2015, the proportion of people whose income is less
than one dollar a day.

India’s Progress:

 The all India Poverty Head Count Ratio (PHCR) estimate was 47.8% in 1990. In order to meet the
target, the PHCR level has to be 23.9% by 2015. In 2011-12, the PHCR at all India level is 21.9%,
which shows that, India has already achieved the target well ahead of time.
 During 2004-05 to 2011-12, the Poverty Gap Ratio reduced both in rural and urban areas. While the
rural PGR declined from 9.64 in 2004-05 to 5.05 in 2011-12 in the urban areas it declined from 6.08
to 2.70 during the same period.

Target: Halve, between 1990 and 2015, the proportion of people who suffer from hunger.

India’s Progress:

 It is estimated that in 1990, the proportion of underweight children below 3 years as 52%. In order to
meet the target, the proportion of under-weight children should decrease to 26% by 2015.
 The National Family Health Survey shows that, the proportion of under-weight children below 3 years
declined from 43% in 1998-99 to 40% in 2005-06. At this rate of decline the proportion of

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 underweight children below 3 years is expected to reduce to 33% by 2015, which indicates India is
falling short of the target.
MDG 2: Achieve Universal Primary Education

Target: Ensure that by 2015, children everywhere, boys and girls alike, will be able to complete
a full course of primary education.

India’s Progress:

 The Net Enrolment Rate (NER) in primary education (age 6-10 years) was estimated at 84.5 per cent
in 2005-06 (U-DISE) and the NER has increased to 88.08 per cent in 2013-14 (U-DISE), and is
unlikely to meet the target of universal achievement.
 The youth (15-24 years) literacy rate has increased from 61.9% to 86.14 per cent during the period
1991-2011 and the trend shows India is likely to reach 93.38% which is very near to the target of
100% youth literacy by 2015. At national level, the male and female youth literacy rate is likely to be
at 94.81% and 92.47%.
MDG 3: Promote Gender Equality and Empower Women

Target: Eliminate gender disparity in primary, secondary education, preferably by 2005, and in all
levels of education, no later than 2015.
India’s Progress:

 At present, in primary education the enrolment is favourable to females as Gender Parity Index (GPI)
of Gross Enrolment Ratio (GER) is 1.03 in 2013-14.
 In Secondary education also gender parity has achieved GPI of GER is 1 in 2013-14 and in tertiary
level of education, the GPI of GER is 0.89 in 2012-13. 9
 As per Census 2011, the ratio of female youth literacy rate to male youth literacy rate is 0.91 at all
India level and is likely to reach the level of 1 by 2015.
 As in January 2015, India, the world’s largest democracy, has only 65 women representatives out of
542 members in Lok Sabha, while there are 31 female representatives in the 242-member Rajya
Sabha and hence presently the proportion of seats in National Parliament held by women is only
12.24% against the target of 50%.
MDG 4: Reduce Child Mortality

Target: Reduce by two-thirds, between 1990 and 2015, the under-five Mortality Rate.

India’s Progress:

 Under Five Mortality Ratio (U5MR) was estimated at 125 deaths per 1000 live births in 1990. In
order to achieve the target, the U5MR is to be reduced to 42 deaths per 1000 live births by 2015. As
per Sample Registration System 2013, the U5MR is at 49 deaths per 1000 live births and as per the
historical trend, it is likely to reach 48 deaths per 1000 live births, missing the target narrowly.
However, an overall reduction of nearly 60% happened during 1990 to 2013, registering a faster
decline in the recent past, and if this rate of reduction is sustained, the achievement by 2015 is likely
to be very close to the target by 2015.
 In India, Infant Mortality Rate (IMR) was estimated at 80 per 1,000 live births in 1990. As per SRS
2013, the IMR is at 40 and as per the historical trend; it is likely to reach 39 by 2015, against the
target of 27 infant deaths per 1000 live births by 2015. However, with the sharp decline in the recent
years, the gap between the likely achievement and the target is expected to be narrowed.
 The Coverage Evaluation Survey estimates the proportion of one year old children immunised against
measles at 74% in 2009. Although, there is substantial improvement in the coverage which was 42%
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 in 1992-93, yet at this rate of improvement, India is likely to achieve about 89% coverage by 2015
and thus India is likely to fall short of universal coverage.
MDG 5: Improved Mental Health

Target: Reduce by three quarters between 1990 and 2015, the Maternal Morality Ratio.
India’s Progress:

 In 1990, the estimated MMR was 437 per 1,00,000 live births. In order to meet the MDG target, the
MMR should be reduced to 109 per 1,00,000 live births by 2015. As per the latest estimates, the
MMR status at all India level is at 167 in 2011-13. As per the historical trend, MMR is likely to reach
the level of 140 maternal deaths by 2015, however, assuming the recent sharper decline is sustained,
India is likely to be slightly nearer to the MDG target.

MDG 6: Combat HIV/AIDS, Malaria and Other Diseases.

Target: Have halted by 2015 and begun to reverse the spread of HIV/AIDS.
India’s Progress:

 The prevalence of HIV among Pregnant women aged 15-24 years is showing a declining trend 8 from
0.89 % in 2005 to 0.32% in 2012-13.
 According to NFHS –III in 2005-06, Condom use rate of the contraceptive prevalence rate (Condom
use to overall contraceptive use among currently married women, 15-49 years, was only 5.2 % at all
India level.
 According to Behavioural Surveillance Survey (BSS), the national estimate for proportion of
population aged 15-24 years with comprehensive correct Knowledge of HIV/AIDS (%) in 2006 was
32.9% reporting betterment from 2001 (22.2%).

Target: Have halted by 2015 and begun to reverse the incidence of Malaria and other major diseases.
India’s Progress:

 The Annual Parasite Incidence (API) rate – Malaria has consistently come down from 2.12 per
thousand in 2001 to 0.72 per thousand in 2013, but slightly increased to 0.88 in 2014 (P) but
confirmed deaths due to malaria in 2013 was 440 and in 2014 (P), 578 malaria deaths have been
registered.
 In India, Tuberculosis prevalence per lakh population has reduced from 465 in year 1990 to 211 in
2013. TB Incidence per lakh population has reduced from 216 in year 1990 to 171 in 2013.
Tuberculosis mortality per lakh population has reduced from 38 in year 1990 to 19 in 2013.

MDG 7: Ensure Environment Sustainability.

Target: Integrate the principle of sustainable development into country policies and programmes and
reverse the loss of environmental resources.
India’s Progress:

 As per assessment in 2013, the total forest cover of the country is 697898 sq.km which is 21.23% of
the geographic area of the country.
 During 2011-2013, there is an increase of 5871 sq. km in forest cover.
 The network of Protected Areas comprising 89 National Parks and 489 Sanctuaries giving a combined
coverage of 155475.63 km2 in 2000, has grown steadily over the years. As of 2014, there are 692
Protected Areas (103 National Parks, 525 Wildlife Sanctuaries, 4 Community Reserves and 60
Conservation reserves, covering 158645.05 km2 or 5.07% of the country’s geographical area.

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 Per-capita Energy Consumption (PEC) (the ratio of the estimate of total energy consumption during
the year to the estimated mid-year population of that year) increased from 6205.25 KWh in 2011-12
to 6748.61 KWh in 2012-13, thus, the percentage annual increase of 8.76%.
 In 2010, consumption of CFC is estimated at 290.733 ODP tonnes (ODP –Ozone Depletion
Potential), down from 5614 ODP tones in 2000. From the year 2000, the CFC consumption decreased
steadily till 2008, but showed minor increase in 2010.
 As per Census 2011, 67.3% households are using solid fuels (fire wood / crop residue/cow dung cake/
coke, etc) for cooking against 74.3% in 2001. Census 2011, further reveals that, in Rural areas 86.5%
households and in Urban areas 26.1% households are using solid fuels for cooking.
TARGET: Halve, by 2015 the proportion of people without sustainable access to safe drinking water
and basic sanitation

India’s Progress:
 During 2012, at all India level, 87.8% households had access to improved source of drinking water
while 86.9% households in rural and 90.1% households in urban area had access to improved source
of drinking water.
 The target of halving the proportion of households without access to safe drinking water sources from
its 1990 level to be reached by 2015, has already been achieved in rural areas and is likely to be
achieved in urban areas. At all India level also, the target for access to improved source of drinking
water has already been achieved.
TARGET: By 2020, to have achieved a significant improvement in the lives of at least 100 million
slum dwellers

India’s Progress:

 Census 2011 reported that 17.2% of urban households are located in slums.
 The percentage of slum households to urban households (slum reported towns) is 22.17%. Census
recorded a 37.14% decadal growth in the number of slum households.
 Census further reveals that in 2011, 17.37% of the urban population lives in slums. The Percentage of
population in slum households to urban households (slum reported towns) is 22.44%.

MDG 8: Develop a Global Partnership for Development

Target: In co-operation with the private sector, make available the benefits of new technologies,
especially information and communication.
India’s Progress

 The overall tele-density in the country has shown tremendous progress and is at 76% as on 31st July
2014.
 The internet subscribers per 100 population accessing internet through wireline and wireless
connections has increased from 16.15 in June 2013 to 20.83 in June 2014.
India’s Progress in a Nutshell

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 Sustainable Development Goals and India
 The Sustainable Development Goals (SDGs), otherwise known as the Global Goals, are a universal
call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity.
 The 17 Goals build on the successes of the Millennium Development Goals, while including new
areas such as climate change, economic inequality, innovation, sustainable consumption, peace and
justice, among other priorities.
 The goals are interconnected – often the key to success on one will involve tackling issues more
commonly associated with another.
 The SDGs work in the spirit of partnership and pragmatism to make the right choices now to improve
life, in a sustainable way, for future generations.
 They provide clear guidelines and targets for all countries to adopt in accordance with their own
priorities and the environmental challenges of the world at large.
The SDGs are an inclusive agenda. They tackle the root causes of poverty and unite us together to
make a positive change for both people and planet. “Poverty eradication is at the heart of the 2030
Agenda, and so is the commitment to leave no-one behind,” UNDP Administrator Achim Steiner said.
“The Agenda offers a unique opportunity to put the whole world on a more prosperous and
sustainable development path. In many ways, it reflects what UNDP was created for.”
The Goals

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 Goal 1: No Poverty

Targets

 By 2030, reduce at least by half the proportion of men, women and children of all ages living in
poverty in all its dimensions according to national definitions.
 Implement nationally appropriate social protection systems and measures for all, including floors, and
by 2030 achieve substantial coverage of the poor and the vulnerable.
 By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights
to economic resources, as well as access to basic services, ownership and control over land and other
forms of property, inheritance, natural resources, appropriate new technology and financial services,
including microfinance.
 By 2030, build the resilience of the poor and those in vulnerable situations and reduce their exposure
and vulnerability to climate-related extreme events and other economic, social and environmental
shocks and disasters.
 Ensure significant mobilization of resources from a variety of sources, including through enhanced
development cooperation, in order to provide adequate and predictable means for developing
countries, in particular least developed countries, to implement programmes and policies to end
poverty in all its dimensions.
 Create sound policy frameworks at the national, regional and international levels, based on pro-poor
and gender-sensitive development strategies, to support accelerated investment in poverty eradication
actions.
Goal 2: Zero Hunger

Targets
 By 2030, end hunger and ensure access by all people, in particular the poor and people in vulnerable
situations, including infants, to safe, nutritious and sufficient food all year round
 By 2030, end all forms of malnutrition, including achieving, by 2025, the internationally agreed
targets on stunting and wasting in children under 5 years of age, and address the nutritional needs of
adolescent girls, pregnant and lactating women and older persons
 By 2030, double the agricultural productivity and incomes of small-scale food producers, in particular
women, indigenous peoples, family farmers, pastoralists and fishers, including through secure and
equal access to land, other productive resources and inputs, knowledge, financial services, markets
and opportunities for value addition and non-farm employment
 By 2030, ensure sustainable food production systems and implement resilient agricultural practices
that increase productivity and production, that help maintain ecosystems, that strengthen capacity for

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 adaptation to climate change, extreme weather, drought, flooding and other disasters and that
progressively improve land and soil quality
 By 2020, maintain the genetic diversity of seeds, cultivated plants and farmed and domesticated
animals and their related wild species, including through soundly managed and diversified seed and
plant banks at the national, regional and international levels, and promote access to and fair and
equitable sharing of benefits arising from the utilization of genetic resources and associated traditional
knowledge, as internationally agreed
 Increase investment, including through enhanced international cooperation, in rural infrastructure,
agricultural research and extension services, technology development and plant and livestock gene
banks in order to enhance agricultural productive capacity in developing countries, in particular least
developed countries
 Correct and prevent trade restrictions and distortions in world agricultural markets, including through
the parallel elimination of all forms of agricultural export subsidies and all export measures with
equivalent effect, in accordance with the mandate of the Doha Development Round
 Adopt measures to ensure the proper functioning of food commodity markets and their derivatives
and facilitate timely access to market information, including on food reserves, in order to help limit
extreme food price volatility.

Goal 3: Good Health and Well Being

Targets

 By 2030, reduce the global maternal mortality ratio to less than 70 per 100,000 live births
 By 2030, end preventable deaths of newborns and children under 5 years of age, with all countries
aiming to reduce neonatal mortality to at least as low as 12 per 1,000 live births and under-5 mortality
to at least as low as 25 per 1,000 live births
 By 2030, end the epidemics of AIDS, tuberculosis, malaria and neglected tropical diseases and
combat hepatitis, water-borne diseases and other communicable diseases
 By 2030, reduce by one third premature mortality from non-communicable diseases through
prevention and treatment and promote mental health and well-being
 Strengthen the prevention and treatment of substance abuse, including narcotic drug abuse and
harmful use of alcohol
 By 2020, halve the number of global deaths and injuries from road traffic accidents
 By 2030, ensure universal access to sexual and reproductive health-care services, including for family
planning, information and education, and the integration of reproductive health into national strategies
and programmes
 Achieve universal health coverage, including financial risk protection, access to quality essential
health-care services and access to safe, effective, quality and affordable essential medicines and
vaccines for all
 By 2030, substantially reduce the number of deaths and illnesses from hazardous chemicals and air,
water and soil pollution and contamination
 Strengthen the implementation of the World Health Organization Framework Convention on Tobacco
Control in all countries, as appropriate
 Support the research and development of vaccines and medicines for the communicable and
noncommunicable diseases that primarily affect developing countries, provide access to affordable
essential medicines and vaccines, in accordance with the Doha Declaration on the TRIPS Agreement
and Public Health, which affirms the right of developing countries to use to the full the provisions in
the Agreement on Trade Related Aspects of Intellectual Property Rights regarding flexibilities to
protect public health, and, in particular, provide access to medicines for all

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 Substantially increase health financing and the recruitment, development, training and retention of the
health workforce in developing countries, especially in least developed countries and small island
developing States
 Strengthen the capacity of all countries, in particular developing countries, for early warning, risk
reduction and management of national and global health risks

Goal 4: Quality Education

Targets

 By 2030, ensure that all girls and boys complete free, equitable and quality primary and secondary
education leading to relevant and Goal-4 effective learning outcomes
 By 2030, ensure that all girls and boys have access to quality early childhood development, care and
preprimary education so that they are ready for primary education
 By 2030, ensure equal access for all women and men to affordable and quality technical, vocational
and tertiary education, including university
 By 2030, substantially increase the number of youth and adults who have relevant skills, including
technical and vocational skills, for employment, decent jobs and entrepreneurship
 By 2030, eliminate gender disparities in education and ensure equal access to all levels of education
and vocational training for the vulnerable, including persons with disabilities, indigenous peoples and
children in vulnerable situations
 By 2030, ensure that all youth and a substantial proportion of adults, both men and women, achieve
literacy and numeracy
 By 2030, ensure that all learners acquire the knowledge and skills needed to promote sustainable
development, including, among others, through education for sustainable development and sustainable
lifestyles, human rights, gender equality, promotion of a culture of peace and non-violence, global
citizenship and appreciation of cultural diversity and of culture’s contribution to sustainable
development
 Build and upgrade education facilities that are child, disability and gender sensitive and provide safe,
nonviolent, inclusive and effective learning environments for all
 By 2020, substantially expand globally the number of scholarships available to developing countries,
in particular least developed countries, small island developing States and African countries, for
enrolment in higher education, including vocational training and information and communications
technology, technical, engineering and scientific programmes, in developed countries and other
developing countries
 By 2030, substantially increase the supply of qualified teachers, including through international
cooperation for teacher training in developing countries, especially least developed countries and
small island developing states
Goal 5: Gender Equality
Targets
 End all forms of discrimination against all women and girls everywhere
 Eliminate all forms of violence against all women and girls in the public and private spheres,
including trafficking and sexual and other types of exploitation
 Eliminate all harmful practices, such as child, early and forced marriage and female genital mutilation
 Recognize and value unpaid care and domestic work through the provision of public services,
infrastructure and social protection policies and the promotion of shared responsibility within the
household and the family as nationally appropriate
 Ensure women’s full and effective participation and equal opportunities for leadership at all levels of
decisionmaking in political, economic and public life

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 Ensure universal access to sexual and reproductive health and reproductive rights as agreed in
accordance with the Programme of Action of the International Conference on Population and
Development and the Beijing Platform for Action and the outcome documents of their review
conferences
 Undertake reforms to give women equal rights to economic resources, as well as access to ownership
and control over land and other forms of property, financial services, inheritance and natural
resources, in accordance with national laws
 Enhance the use of enabling technology, in particular information and communications technology, to
promote the empowerment of women
 Adopt and strengthen sound policies and enforceable legislation for the promotion of gender equality
and the empowerment of all women and girls at all levels

Goal 6: Clean Water and Sanitation

Targets
 By 2030, achieve universal and equitable access to safe and affordable drinking water for all
 By 2030, achieve access to adequate and equitable sanitation and hygiene for all and end open
defecation, paying special attention to the needs of women and girls and those in vulnerable situations
 By 2030, improve water quality by reducing pollution, eliminating dumping and minimizing release
of hazardous chemicals and materials, halving the proportion of untreated wastewater and
substantially increasing recycling and safe reuse globally
 By 2030, substantially increase water-use efficiency across all sectors and ensure sustainable
withdrawals and supply of freshwater to address water scarcity and substantially reduce the number of
people suffering from water scarcity
 By 2030, implement integrated water resources management at all levels, including through
transboundary cooperation as appropriate
 By 2020, protect and restore water-related ecosystems, including mountains, forests, wetlands, rivers,
aquifers and lakes
 By 2030, expand international cooperation and capacity-building support to developing countries in
water- and sanitation-related activities and programmes, including water harvesting, desalination,
water efficiency, wastewater treatment, recycling and reuse technologies
 Support and strengthen the participation of local communities in improving water and sanitation
management
Goal 7: Affordable and Clean Energy
Target
 By 2030, ensure universal access to affordable, reliable and modern energy services
 By 2030, increase substantially the share of renewable energy in the global energy mix
 By 2030, double the global rate of improvement in energy efficiency
 By 2030, enhance international cooperation to facilitate access to clean energy research and
technology, including renewable energy, energy efficiency and advanced and cleaner fossil-fuel
technology, and promote investment in energy infrastructure and clean energy technology
 By 2030, expand infrastructure and upgrade technology for supplying modern and sustainable energy
services for all in developing countries, in particular least developed countries, small island
developing States, and land-locked developing countries, in accordance with their respective
programmes of support
Goal 8: Decent Work and Economic Growth
Targets

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 Sustain per capita economic growth in accordance with national circumstances and, in particular, at
least 7 per cent gross domestic product growth per annum in the least developed countries
 Achieve higher levels of economic productivity through diversification, technological upgrading and
innovation, including through a focus on high-value added and labour-intensive sectors
 Promote development-oriented policies that support productive activities, decent job creation,
entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-,
small- and medium-sized enterprises, including through access to financial services
 Improve progressively, through 2030, global resource efficiency in consumption and production and
endeavour to decouple economic growth from environmental degradation, in accordance with the 10-
year framework of programmes on sustainable consumption and production, with developed countries
taking the lead
 By 2030, achieve full and productive employment and decent work for all women and men, including
for young people and persons with disabilities, and equal pay for work of equal value
 By 2020, substantially reduce the proportion of youth not in employment, education or training
 Take immediate and effective measures to eradicate forced labour, end modern slavery and human
trafficking and secure the prohibition and elimination of the worst forms of child labour, including
recruitment and use of child soldiers, and by 2025 end child labour in all its forms
 Protect labour rights and promote safe and secure working environments for all workers, including
migrant workers, in particular women migrants, and those in precarious employment
 By 2030, devise and implement policies to promote sustainable tourism that creates jobs and promotes
local culture and products
 Strengthen the capacity of domestic financial institutions to encourage and expand access to banking,
insurance and financial services for all
 Increase Aid for Trade support for developing countries, in particular least developed countries,
including through the Enhanced Integrated Framework for Trade-Related Technical Assistance to
Least Developed Countries
 By 2020, develop and operationalize a global strategy for youth employment and implement the
Global Jobs Pact of the International Labour Organization
Goal 9: Industry, Innovation and Infrastructure
Targets
 Develop quality, reliable, sustainable and resilient infrastructure, including regional and trans-border
infrastructure, to support economic development and human well-being, with a focus on affordable
and equitable access for all
 Promote inclusive and sustainable industrialization and, by 2030, significantly raise industry’s share
of employment and gross domestic product, in line with national circumstances, and double its share
in least developed countries
 Increase the access of small-scale industrial and other enterprises, in particular in developing
countries, to financial services, including affordable credit, and their integration into value chains and
markets
 By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased
resource-use efficiency and greater adoption of clean and environmentally sound technologies and
industrial processes, with all countries taking action in accordance with their respective capabilities
 Enhance scientific research, upgrade the technological capabilities of industrial sectors in all
countries, in particular developing countries, including, by 2030, encouraging innovation and
substantially increasing the number of research and development workers per 1 million people and
public and private research and development spending

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 Facilitate sustainable and resilient infrastructure development in developing countries through
enhanced financial, technological and technical support to African countries, least developed
countries, landlocked developing countries and small island developing States 18
 Support domestic technology development, research and innovation in developing countries,
including by ensuring a conducive policy environment for, inter alia, industrial diversification and
value addition to commodities
 Significantly increase access to information and communications technology and strive to provide
universal and affordable access to the Internet in least developed countries by 2020

Goal 10: Reduce Inequalities

Targets

 By 2030, progressively achieve and sustain income growth of the bottom 40 per cent of the population
at a rate higher than the national average
 By 2030, empower and promote the social, economic and political inclusion of all, irrespective of age,
sex, disability, race, ethnicity, origin, religion or economic or other status
 Ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory
laws, policies and practices and promoting appropriate legislation, policies and action in this regard
 Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve
greater equality
 Improve the regulation and monitoring of global financial markets and institutions and strengthen the
implementation of such regulations
 Ensure enhanced representation and voice for developing countries in decision-making in global
international economic and financial institutions in order to deliver more effective, credible,
accountable and legitimate institutions
 Facilitate orderly, safe, regular and responsible migration and mobility of people, including through
the implementation of planned and well-managed migration policies
 Implement the principle of special and differential treatment for developing countries, in particular
least developed countries, in accordance with World Trade Organization agreements
 Encourage official development assistance and financial flows, including foreign direct investment, to
States where the need is greatest, in particular least developed countries, African countries, small
island developing States and landlocked developing countries, in accordance with their national plans
and programmes
 By 2030, reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate
remittance corridors with costs higher than 5 per cent

Goal 11: Sustainable Cities and Communities

Targets

 By 2030, ensure access for all to adequate, safe and affordable housing and basic services and
upgrade slums
 By 2030, provide access to safe, affordable, accessible and sustainable transport systems for all,
improving road safety, notably by expanding public transport, with special attention to the needs of
those in vulnerable situations, women, children, persons with disabilities and older persons
 By 2030, enhance inclusive and sustainable urbanization and capacity for participatory, integrated and
sustainable human settlement planning and management in all countries
 Strengthen efforts to protect and safeguard the world’s cultural and natural heritage

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 By 2030, significantly reduce the number of deaths and the number of people affected and
substantially decrease the direct economic losses relative to global gross domestic product caused by
disasters, including water-related disasters, with a focus on protecting the poor and people in
vulnerable situations
 By 2030, reduce the adverse per capita environmental impact of cities, including by paying special
attention to air quality and municipal and other waste management
 By 2030, provide universal access to safe, inclusive and accessible, green and public spaces, in
particular for women and children, older persons and persons with disabilities
 Support positive economic, social and environmental links between urban, peri-urban and rural areas
by strengthening national and regional development planning
 By 2020, substantially increase the number of cities and human settlements adopting and
implementing integrated policies and plans towards inclusion, resource efficiency, mitigation and
adaptation to climate change, resilience to disasters, and develop and implement, in line with the
Sendai Framework for Disaster Risk Reduction 2015-2030, holistic disaster risk management at all
levels
 Support least developed countries, including through financial and technical assistance, in building
sustainable and resilient buildings utilizing local materials

Goal 12: Responsible Production and Consumption

Targets

 Implement the 10-year framework of programmes on sustainable consumption and production, all
countries taking action, with developed countries taking the lead, taking into account the development
and capabilities of developing countries
 By 2030, achieve the sustainable management and efficient use of natural resources
 By 2030, halve per capita global food waste at the retail and consumer levels and reduce food losses
along production and supply chains, including post-harvest losses
 By 2020, achieve the environmentally sound management of chemicals and all wastes throughout
their life cycle, in accordance with agreed international frameworks, and significantly reduce their
release to air, water and soil in order to minimize their adverse impacts on human health and the
environment
 By 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse
 Encourage companies, especially large and transnational companies, to adopt sustainable practices
and to integrate sustainability information into their reporting cycle
 Promote public procurement practices that are sustainable, in accordance with national policies and
priorities
 By 2030, ensure that people everywhere have the relevant information and awareness for sustainable
development and lifestyles in harmony with nature
 Support developing countries to strengthen their scientific and technological capacity to move
towards more sustainable patterns of consumption and production
 Develop and implement tools to monitor sustainable development impacts for sustainable tourism that
creates jobs and promotes local culture and products
 Rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market
distortions, in accordance with national circumstances, including by restructuring taxation and
phasing out those harmful subsidies, where they exist, to reflect their environmental impacts, taking
fully into account the specific needs and conditions of developing countries and minimizing the
possible adverse impacts on their development in a manner that protects the poor and the affected
communities

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 Goal 13: Climate Actions

Targets

 Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all
countries
 Integrate climate change measures into national policies, strategies and planning
 Improve education, awareness-raising and human and institutional capacity on climate change
mitigation, adaptation, impact reduction and early warning
 Implement the commitment undertaken by developed-country parties to the United Nations
Framework Convention on Climate Change to a goal of mobilizing jointly $100 billion annually by
2020 from all sources to address the needs of developing countries in the context of meaningful
mitigation actions and transparency on implementation and fully operationalize the Green Climate
Fund through its capitalization as soon as possible
 Promote mechanisms for raising capacity for effective climate change-related planning and
management in least developed countries and small island developing States, including focusing on
women, youth and local and marginalized communities

Goal 14: Life Below Water

Targets

 By 2025, prevent and significantly reduce marine pollution of all kinds, in particular from land-based
activities, including marine debris and nutrient pollution
 By 2020, sustainably manage and protect marine and coastal ecosystems to avoid significant adverse
impacts, including by strengthening their resilience, and take action for their restoration in order to
achieve healthy and productive oceans
 Minimize and address the impacts of ocean acidification, including through enhanced scientific
cooperation at all levels
 By 2020, effectively regulate harvesting and end overfishing, illegal, unreported and unregulated
fishing and destructive fishing practices and implement science-based management plans, in order to
restore fish stocks in the shortest time feasible, at least to levels that can produce maximum
sustainable yield as determined by their biological characteristics
 By 2020, conserve at least 10 per cent of coastal and marine areas, consistent with national and
international law and based on the best available scientific information
 By 2020, prohibit certain forms of fisheries subsidies which contribute to overcapacity and
overfishing, eliminate subsidies that contribute to illegal, unreported and unregulated fishing and
refrain from introducing new such subsidies, recognizing that appropriate and effective special and
differential treatment for developing and least developed countries should be an integral part of the
World Trade Organization fisheries subsidies negotiation
 By 2030, increase the economic benefits to Small Island developing States and least developed
countries from the sustainable use of marine resources, including through sustainable management of
fisheries, aquaculture and tourism
 Increase scientific knowledge, develop research capacity and transfer marine technology, taking into
account the Intergovernmental Oceanographic Commission Criteria and Guidelines on the Transfer of
Marine Technology, in order to improve ocean health and to enhance the contribution of marine
biodiversity to the development of developing countries, in particular small island developing States
and least developed countries
 Provide access for small-scale artisanal fishers to marine resources and markets
 Enhance the conservation and sustainable use of oceans and their resources by implementing
international law as reflected in UNCLOS, which provides the legal framework for the conservation

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 and sustainable use of oceans and their resources, as recalled in paragraph 158 of The Future We
Want

Goal 15: Life on land

Targets

 By 2020, ensure the conservation, restoration and sustainable use of terrestrial and inland freshwater
ecosystems and their services, in particular forests, wetlands, mountains and drylands, in line with
obligations under international agreements
 By 2020, promote the implementation of sustainable management of all types of forests, halt
deforestation, restore degraded forests and substantially increase afforestation and reforestation
globally
 By 2030, combat desertification, restore degraded land and soil, including land affected by
desertification, drought and floods, and strive to achieve a land degradation-neutral world
 By 2030, ensure the conservation of mountain ecosystems, including their biodiversity, in order to
enhance their capacity to provide benefits that are essential for sustainable development
 Take urgent and significant action to reduce the degradation of natural habitats, halt the loss of
biodiversity and, by 2020, protect and prevent the extinction of threatened species
 Promote fair and equitable sharing of the benefits arising from the utilization of genetic resources and
promote appropriate access to such resources, as internationally agreed
 Take urgent action to end poaching and trafficking of protected species of flora and fauna and address
both demand and supply of illegal wildlife products
 By 2020, introduce measures to prevent the introduction and significantly reduce the impact of
invasive alien species on land and water ecosystems and control or eradicate the priority species
 By 2020, integrate ecosystem and biodiversity values into national and local planning, development
processes, poverty reduction strategies and accounts
 Mobilize and significantly increase financial resources from all sources to conserve and sustainably
use biodiversity and ecosystems
 Mobilize significant resources from all sources and at all levels to finance sustainable forest
management and provide adequate incentives to developing countries to advance such management,
including for conservation and reforestation
 Enhance global support for efforts to combat poaching and trafficking of protected species, including
by increasing the capacity of local communities to pursue sustainable livelihood opportunities

Goal 16: Peace, Justice and Strong Institutions

Targets

 Significantly reduce all forms of violence and related death rates everywhere
 End abuse, exploitation, trafficking and all forms of violence against and torture of children
 Promote the rule of law at the national and international levels and ensure equal access to justice for
all
 By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of
stolen assets and combat all forms of organized crime
 Substantially reduce corruption and bribery in all their forms
 Develop effective, accountable and transparent institutions at all levels
 Ensure responsive, inclusive, participatory and representative decision-making at all levels

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 Broaden and strengthen the participation of developing countries in the institutions of global
governance
 By 2030, provide legal identity for all, including birth registration
 Ensure public access to information and protect fundamental freedoms, in accordance with national
legislation and international agreements
 Strengthen relevant national institutions, including through international cooperation, for building
capacity at all levels, in particular in developing countries, to prevent violence and combat terrorism
and crime
 Promote and enforce non-discriminatory laws and policies for sustainable development

Goal 17: Partnership for the Goals

Targets

Finance

 Strengthen domestic resource mobilization, including through international support to developing

countries, to improve domestic capacity for tax and other revenue collection
 Developed countries to implement fully their official development assistance commitments, including
the commitment by many developed countries to achieve the target of 0.7 per cent of ODA/GNI to
developing countries and 0.15 to 0.20 per cent of ODA/GNI to least developed countries ODA
providers are encouraged to consider setting a target to provide at least 0.20 per cent of ODA/GNI to
least developed countries
 Mobilize additional financial resources for developing countries from multiple sources
 Assist developing countries in attaining long-term debt sustainability through coordinated policies
aimed at fostering debt financing, debt relief and debt restructuring, as appropriate, and address the
external debt of highly indebted poor countries to reduce debt distress
 Adopt and implement investment promotion regimes for least developed countries
Technology
 Enhance North-South, South-South and triangular regional and international cooperation on and
access to science, technology and innovation and enhance knowledge sharing on mutually agreed
terms, including through improved coordination among existing mechanisms, in particular at the
United Nations level, and through a global technology facilitation mechanism
 Promote the development, transfer, dissemination and diffusion of environmentally sound
technologies to developing countries on favourable terms, including on concessional and preferential
terms, as mutually agreed
 Fully operationalize the technology bank and science, technology and innovation capacity-building
mechanism for least developed countries by 2017 and enhance the use of enabling technology, in
particular information and communications technology
Capacity building
 Enhance international support for implementing effective and targeted capacity-building in
developing countries to support national plans to implement all the sustainable development goals,
including through North-South, South-South and triangular cooperation
Trade
 Promote a universal, rules-based, open, non-discriminatory and equitable multilateral trading system
under the World Trade Organization, including through the conclusion of negotiations under its Doha
Development Agenda

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 Significantly increase the exports of developing countries, in particular with a view to doubling the
least developed countries’ share of global exports by 2020
 Realize timely implementation of duty-free and quota-free market access on a lasting basis for all
least developed countries, consistent with World Trade Organization decisions, including by ensuring
that preferential rules of origin applicable to imports from least developed countries are transparent
and simple, and contribute to facilitating market access
Systemic issues

 Policy and institutional coherence

 Enhance global macroeconomic stability, including through policy coordination and policy coherence
 Enhance policy coherence for sustainable development
 Respect each country’s policy space and leadership to establish and implement policies for poverty
eradication and sustainable development
 Multi-stakeholder partnerships
 Enhance the global partnership for sustainable development, complemented by multi-stakeholder
partnerships that mobilize and share knowledge, expertise, technology and financial resources, to
support the achievement of the sustainable development goals in all countries, in particular
developing countries
 Encourage and promote effective public, public-private and civil society partnerships, building on the
experience and resourcing strategies of partnerships
 Data, monitoring and accountability
 By 2020, enhance capacity-building support to developing countries, including for least developed
countries and small island developing States, to increase significantly the availability of high-quality,
timely and reliable data disaggregated by income, gender, age, race, ethnicity, migratory status,
disability, geographic location and other characteristics relevant in national contexts
 By 2030, build on existing initiatives to develop measurements of progress on sustainable
development that complement gross domestic product, and support statistical capacity-building in
developing countries

Issues related to planning

Issues related to Planning in India
Economic planning has been a central belief of India’s development strategy since independence.
Since the time of independence, India has successfully followed the path of planned development.

Understanding How Planning Worked: The Model

The Indian Situation at the time of Independence.

The Choices
The basic question’s that planners had to decide are:

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The First question:

The Second Question:

The Third Question:

The Chosen Path by the Indian Planners: Mahalanobis Model

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Centralised (Imperative) versus Capitalist Economic Planning

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Indicative versus Imperative Economic Planning

The Rationale for Planning in India

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The Feature of Indian Planning

The Key Objectives of Planning in India

The Achievements of Planning in India

India’s development strategy, commitments, and approaches towards growth and development, as
reflected in the Plans, have undergone various shifts over the years in response to the objective
conditions of the economy and challenges of the moment. Some of these changes have been strikingly
bold and original, others more modest.

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Criticism of Indian Planning: The Debate
Despite the achievement, however, in recent years Indian planning has come under attack from a
number of quarters, both within and outside the country. Countries which for long had centrally-
planned economies have abandoned planning, at least overtly. It sometimes comes as a surprise to
people abroad that India continues to preserve planning as a central pillar of its development strategy
despite having had a vibrant market economy for many years now.
The dissatisfaction with planning originates from two main directions.

The Counter Arguments

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The Relevance of Planning in the 21st Century India

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 The Way Forward
1. All this is not to say, however, that the planning methodology should not change so as to reflect the
new economic realities and the emerging requirements. It has, it must, and it will.
2. First of all, the – inter-sectoral balancing and indicative planning, at least in the sense of working out
the optimal investment programme, which has been the centre-piece of Indian planning since the
Second Plan, will continue to remain important in the foreseeable future.
3. Despite the much greater openness of the Indian economy, our very size and diversity will ensure that
imports will continue to play a relatively small role in the economy, except in a very few products.
Thus, the requirement of planning in estimating the sectoral investment needs will remain.
4. A more important conceptual issue relates to the nature of the planning problem itself. In a controlled
or directed economy, it is only necessary to work out a feasible path from the initial condition to the
target. However, in a largely market economy this is not sufficient. Although working out the
traditional feasible path continues to be necessary, it needs to be complemented by an assessment of
the path the economy is likely to take on a business-as-usual basis.
5. The planning problem then is how to move from the projected path to the desired. Thus, in addition to
the standard planning model, there is need to have two other models: (a) a projection model; and (b) a
model which adequately captures the effect of policy measures on key parameters.

Planning in India: Bombay Plan; People’s Plan;

Mahalanobis Plan; Wage-Good Model; Gandhian Plan

Planning in India
The Planning Debates

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 The Bombay Plan
1. A small group of influential business leaders in Bombay drew up and published in January 1944, a
plan for the economic development of India. The Bombay Plan, as it is now popularly called, did not
represent the opinion of the whole business community. But it claimed public attention because it set
forth the considered views of some of the front-rank businessmen and captains of Indian industry.
2. Mr. J. R. D. Tata and Mr. G. D. Birla were primarily responsible for the initiation of the study. The
other industrialists who were part of Bombay plan were P. Thakurdas, Kasturbhai Lalbhai and Sir Shri
Ram, Ardeshir Dalal, Mr. A. D. Shroff and Dr. John Matthai.
3. Toward the end of March 1944, the Federation of Indian Chambers of Commerce representing all
business organizations of the country endorsed the Bombay Plan at its annual meeting, and from then
on, the plan came to be regarded as the proposal of India’s business community, if not of India’s big
business.
4. The Bombay Plan put forward as a basis of discussion, a statement in as concrete a form as possible,
of the objectives to be kept in mind in economic planning in India, the general lines on which
development should proceed and the demands which planning is likely to make on the country’s
resources.
5. The principal objectives of the plan are to achieve a balanced economy and to raise the standard of
living of the masses of the population rapidly by doubling the present per capita income —
i.e. increasing it from $22 to about $45 — within a period of 15 years from the time the plan goes
into operation.
6. The planners have laid down minimum living standards on the basis of about 2,800 calories of well-
balanced food a day for each person, 30 yards of clothing and 100 square feet of housing; and they
also outline the minimum needs for elementary education, sanitation, water supply, village
dispensaries and hospitals. The plan points out that absolutely minimum needs require an annual
income of at least $25; and if the income of the country were equally distributed it would give each
individual only about $22.
7. The shares of agriculture, industry and services in the total production is to be changed from 53, 17
and 22 percent, respectively, to 40, 35 and 20 percent.
8. The plan emphasizes the importance of basic industries but also calls for the development of
consumption goods industries in the early years of the plan. Power heads the list of basic industries
which are to be developed, followed by mining and metallurgy, engineering, chemicals, armaments,
transport, cement and others.
9. The plan proposes doubling the present total of 300,000 miles of roads, increasing railway mileage by
50 percent from its present 41,000 miles, expanding coastal shipping and investing $150,000,000 on
improvement of harbors.

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10. The plan offers a comprehensive program of mass education, including primary, secondary and
vocational and university schooling. Provision is also made for adult education and scientific training
and research.

Sarvodaya Plan (1950)

It was drafted by Jaiprakash Narayan. The plan was mainly inspired by the Gandhian Plan provided
by S. N. Agarwal & the Idea of Sarvodaya presented by another Gandhian leader Vinoba Bhave.
The sarvodaya plan put forward and emphasized the importance of agriculture and village industries
especially small-scale textile & cottage industries in the process of economic development. The plan
also recommended the Luddite approach and was pessimistic towards the usage of foreign
technology.
The most important and well acclaimed part of the plan was its emphasis upon land reforms and
decentralized participatory people planning.

People’s Plan
The People’s Plan was Authored by M. N. Roy and drafted by the Post- War Re-Construction
Committee of the Indian Federation of Labour.
The object of the Plan is to provide for the satisfaction of the immediate basic needs of the Indian
people within a period of ten years. This objective is to be achieved by expanding production and by
ensuring an equitable distribution of the goods produced. Therefore, the Plan prescribes increased
production in every sphere of economic activity. But its main emphasis is on agricultural
development, since its authors believe that the purchasing power of the people cannot be raised unless
agriculture, which is the biggest occupation in the country, becomes a paying proposition.
Agriculture, it is argued, forms the foundation of a planned economy for India. Apart from the
nationalization of land and the compulsory scaling down of rural indebtedness, the Plan formulates
two schemes for increasing agricultural production: (a) extension of the area under cultivation and (b)
intensification of cultivation in the area which is already under cultivation.
In the field of industry, the People’s Plan gives priority to the manufacture of consumer goods. It is
argued that as a large volume of demand for essential good for the community remains perpetually
unsatisfied, the goal of planned economy in industry must be to satisfy it first.
The People’s Plan attaches great importance to railways, roads and shipping in a planned economy.
Therefore, it recommends the rapid development of the means of communication and transport to
cope with the increased movement of goods and traffic between town arid country.

The Mahalanobis Strategy

The three main aspects of the strategy of development in the earlier phase of planning was:

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The Critique of Mahalanobis Mobel :

The Wage Good Model

Prominent Economist like, C N Vakil and P R Brahmananda advocated Wage Good model for the
development of the Indian economy and Industrialisation. Vakil and Brahamanda differed from the
Mahalanobis strategy as they believe “At the low level of consumption (this was the situation in
India) the productivity of the workers depends on how much they consumed.

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According to them, if people were undernourished, they will lose their productivity and become less
efficient, at this juncture it is necessary to feed them to increase their productivity. But this is not true
for all consumer good; so they differentiated between Wage Good (whose consumption increase
worker productivity) and Non-Wage Good (whose consumption did not).
To sum up, Wage Good model says; worker’s productivity depends on not on whether they use
machines to produce goods but also on the consumption of wage goods like, food, cloth and other
basics. Therefore, the first step towards development is to mechanize agriculture and raise food
production; once this objective is reached, one should go for Mahalanobis strategy of Heavy
Industrialisation.
Anyway, Vakil and Bharmananda strategies were ignored and India launched heavy Industrialisation
in the Second plan without mechanising agriculture. The result was failure of Mahalanobis Strategy
and by 1965-66 India was hit by a severe food shortage crisis. Finally, in the wake of the crisis, the
government adopted Bharamananda strategy of mechanizing agriculture sector and engineered green
revolution.
Changing Objectives of Successive Plans.

 In the Fourth Five-year plan, the basic framework of industrialisation was

retained.
 The objective of self-reliance was not given up, but the main emphasis
was shifted to economic growth.
 The government had starting putting focus on light industries. The
Fourth Five-
agriculture sector was given due importance with adoption of new
year plan technologies, improved seeds and fertilizers.
 The biggest paradox of the industrialisation strategy was that ‘poverty has
failed to subside despite growth.
 The paradox is rightly capture by the Renowned Economist Mahbub-Ul
Haq in his famous quote “People are not going to eat tractors”.

 The Fifth plan bough the focus of poverty reduction back on the agenda
with government prioritising ‘Minimum Needs Program’. The plan had
accorded highest priority to the removal of poverty.
 The plan document mentioned “The existence of poverty in incompatible
with the vision of an advanced, prosperous, democratic, egalitarian and
just society”.
 The forthcoming periods saw turmoil in the country in general and
economy in particular. The new Janta Party government decided to
terminate the strategy of planning and put a moratorium on the fifth five
year plan.
Fifth plan
 The Janta Party presented their own draft plan (1978-83) which stated a
new development strategy. For the first time, the planning commission
acknowledge the fact that the benefits of growth had failed to reach the
poor.
 The commission further decided that there would not be undue emphasis
on numbers such as growth rates. The focus will be on raising the
standard of living of the people.
 The Janta government however could not last long and when the new
congress government come in power it terminated the fifth plan and
adopted sixth five-year plan (1980-85).

The Sixth plan puts its objective as:

Sixth plan
 To structurally transform the economy;
 To achieve sustained and high growth rate;

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  To improve standard of living of masses & Eradication of poverty and
unemployment.

Several anti-poverty programs like IRDP AND NREM was initiated with
the aim of removing poverty and unemployment.

The Seventh plan marks a departure from earlier plan strategies and spelt out new
long-term strategy.

 The plans objectives were: solving the basic problems (food, shelter,
clothing, education and health) of the people besides creating conditions
for self-sustaining growth in terms of both the capacity to finance growth
internally and the development of technology.
 The seventh plan contained key elements of change.
Seventh plan  It gave highest priority to increasing agricultural production through
adoption on new technology.
 It reversed the role of public sector and induced privatisation of industrial
activity.
 Liberalisation of external sector with the aim of increasing efficiency in
the manufacturing sector.
 The administrative procedures were changed from regulatory to
faciliatory procedures. The strategy was a variant of what is now known
as “Agricultural Development led Growth” Strategy.

The new development strategy:

 The economic growth during the 1980s was not capable of stopping the
economy from economic crisis. The reckless spending’s and fiscal
mismanagement by the government has put India on the edge of an
economic crisis.
 The full-scale crisis began in 1990-91 and the year of 1991-92 turned out
be a severely bad year for the Indian economy. The crisis was market by
an Inflation rate of 16 percent and severe shortages of foreign exchange
and Balance of payment difficulties. The severity of the crisis was such
that India had to shipped its gold to the Bank of England as collateral
against a loan of $ 600 million.
 As a response to the economic crisis, India adopted structural changes to
Eighth Five- its economy. The changes which will transform the Indian economy for
year Plan betterment and will took economy to new heights.

The new approach (Liberalisation, Privatisation and Globalisation)

adopted have major policy initiatives:

 Macroeconomic stabilisation
 Fiscal reforms
 Trade policy reforms
 Industrial Policy reforms
 Financial sector reforms

The new development strategy was a complete reversal form the earlier
strategies. The old rigidities of the command economy were dismantled and
the strategy of external pessimism was eliminated. The new strategy

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 favoured globalisation and was characterised with Export Led Growth.

The Ninth plan proposed to achieve a 7% growth rate during the plan period. It
introduced fiscal discipline and aimed to control rise in prices through controlling
money supply. It aimed at resource mobilization and attracting foreign direct
Ninth plan investment. The thrust of the plan was to achieve agricultural growth. The
proposition was to broaden the direct tax base for raising resources at the center.

Target Growth: 6.5% Actual Growth: 5.35%

The Tenth plan laid emphasis on the role of government in the new emerging
economic scenario.

The plan mentions specific areas where the state has to play a proactive
role.

 The social sector

 The infrastructure sectors.
 Equity and social justice was given priority.

Tenth plan The 10th Five Year Plan (2002-2007) targeted at a GDP growth rate of 8%
per annum. The primary aim of the 10th Five Year Plan was to renovate the
nation extensively, making it competent enough with some of the fastest
growing economies across the globe.

It intended to initiate an economic growth of 10% on an annual basis. In

fact, this decision was taken only after the nation recorded a consistent 7%
GDP growth, throughout the past decade.

GDP growth target: 8% (realized: 7.8%), savings rate target: 27% (realized:
31.4%)

The Eleventh plan emphasised on ‘faster and more inclusive economic growth’.

 The objective of inclusiveness and sustainability were accorded with

highest priority.
 The plan mentioned that the strategy must be based on sound
macroeconomic policies which establish the precondition for rapid and
inclusive growth.

Eleventh plan The eleventh plan aimed at:

 Rapid growth (more than 9%) to reduce poverty and unemployment.

 Access to health and education for all.
 Equality of opportunity
 Empowerment through skill development
 Employment opportunities underpinned by the National Rural
Employment Guarantee Act.
 Environment Sustainability
 Good Governance

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  Recognition of Women’s agency.

The Twelfth Plan seeks to achieve the growth rate of 8.2 per cent, down from 9
per cent envisaged earlier, in view of fragile global recovery.

The theme of the plan document is “Faster, Sustainable and more Inclusive
growth”.

The plan projects an average investment rate of 37 per cent of GDP in the
12th Plan. The projected gross domestic savings rate is 34.2 per cent of
GDP.

Besides other things, the 12th Plan seeks to achieve 4 per cent agriculture
sector growth during 2012-17. The growth target for manufacturing sector
has been pegged at 10 per cent. The total plan size has been estimated at
Rs.47.7 lakh crore, 135 per cent more that for the 11th Plan (2007-12).

Key Highlights:

 The target growth rate has been set at 8.2 percent.

 The priority areas are: Infrastructure, Health and Education.
 Agriculture is given its due importance and it has been documented in the
plan that agriculture should maintain a growth rate of 4%, in order to
reduce rural poverty.
Twelfth Plan  The targeted growth rate for the manufacturing sector has been pegged at
10 percent.
 Health, Education and Skill development continues to be the focus areas
for the government in the Twelfth Plan. The plan mentioned that there is a
need to ensure adequate resources to these sectors.
 Simultaneously, it also points to the need to ensure maximum efficiency
in terms of outcomes for the resources allocated to these sectors. The need
to harness private investment in these sectors has also been emphasized
by the approach.
 Poverty alleviation needs to be done at a much faster rate. The Planning
commission envisage to reduce the poverty Head count Ratio by
additional 10 percent during the plan period. At present, the poverty HCR
is 21.8 per cent of the population.
 The outlay on health, Drinking Water and Sanitation should be increased.
 It suggests the need to take steps to reduce energy intensity of production
processes, increase domestic energy supply as quickly as possible and
ensure rational energy pricing that will help achieve both objectives viz.
reduced energy intensity of production process and enhance domestic
energy supply, even though it may seem difficult to attempt.
 Generation of employment for the youth is the key challenge. The plan
targets the creation of additional 50 million jobs.
 Infrastructure investment should be increased to 9% of GDP.
 The plan document mentions of providing ‘Affordable and accessible
Banking Facility to at least 90% of the population’.

Mobilization of Resources
The Planning Commission
The Planning Commission was set up on the 15th of March 1950, through a cabinet resolution.

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 Planning Commission had evolved over time from developing a highly centralised planning system
towards indicative planning where Planning Commission concerns itself with the building of a long
term strategic vision of the future and decide on priorities for the nation.
The commission works out sectoral targets and provides promotional stimulus to the economy
(through its “plan funds allocation”) to grow in the desired direction.
Planning Commission attempted to play a system change role and provided consultancy within the
Government for developing better systems. In order to spread the gains of experience more widely,
Planning Commission also played an information dissemination role.
Thus, historically, Planning Commission’s work was three dimensional.
(a) design policy direction and suggest required schemes/ programmes;
(b) influence the resource allocation from budget; and
(c) oversee the performance and record the same on a standard framework for comparative assessment
of all the states from time to time.
In short, Planning Commission was doing the job both that of a think tank and the function of
allocation of plan resources among the Central Ministries and States in as judicious a manner as
possible, given the limitations of resources.
The announcement on setting of Planning Commission and its expected role in the economic
management was first made in the Parliament by the President, and the details were disclosed by the
Finance Minister (Shri John Mathai) through his budget sppech in the first year of the Republic
(1950-51).
Rightly, Planning Commission was anchored to India’s political history of immediate past and the
Directive Principles of State Policy as enunciated in the Constitution of India.

Functions of Planning Commission

The 1950 resolution setting up the Planning Commission outlined its functions as to:
1. Make an assessment of the material, capital and human resources of the country, including technical
personnel, and investigate the possibilities of augmenting such of these resources as are found to be
deficient in relation to the nation’s requirement;
2. Formulate a Plan for the most effective and balanced utilisation of country’s resources;
3. On a determination of priorities, define the stages in which the Plan should be carried out and propose
the allocation of resources for the due completion of each stage;
4. Indicate the factors which are tending to retard economic development, and determine the conditions
which, in view of the current social and political situation, should be established for the successful
execution of the Plan;
5. Determine the nature of the machinery which will be necessary for securing the successful
implementation of each stage of the Plan in all its aspects;
6. Appraise from time to time the progress achieved in the execution of each stage of the Plan and
recommend the adjustments of policy and measures that such appraisal may show to be necessary;
and
7. Make such interim or ancillary recommendations as appear to it to be appropriate either for
facilitating the discharge of the duties assigned to it, or on a consideration of prevailing economic
conditions, current policies, measures and development programmes or on an examination of such
specific problems as may be referred to it for advice by Central or State Governments.
Planning Commission was replaced with NITI Aayog on 1 January 2015. However, the financial
powers like setting sectoral priorities, designing the schemes and programmes, estimating the
entitlements to State development programmes (other than devolution), and influencing the annual
allocations as per the priorities etc. now come under the direct influence of the Ministry of Finance,
Budget Division.

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 NITI Aayog (National Institution for Transforming India)
The NITI Aayog (National Institution for Transforming India), is a think tank of the Government of
India established on 1 January 2015 as a replacement for the Planning Commission to provide
Governments at the central and state levels with relevant strategic, directional and technical advice
across the spectrum of key elements of policy / development process (eg. special attention to
marginalized sections who may be at risk of not benefitting adequately from economic progress, on
technology
(eg. special attention to marginalized sections who may be at risk of not benefitting adequately from
economic progress, on technology upgradation and capacity building etc.) In addition, the NITI
Aayog will monitor and evaluate the implementation of programmes.
The NITI Aayog also seeks to foster better Inter-Ministry coordination and better Centre-State
coordination. This is to help evolve a shared vision of national development priorities and to foster
cooperative federalism, as strong states make a strong nation.
To achieve this, NITI Aayog also envisages creation of regional councils comprising of chief
ministers of concerned states / central Ministries to address specific issues and contingencies
impacting more than one state or region.
National and international experts, practitioners and partners are intended to be part of the NITI
Aayog.
The shift to NITI Aayog was taken due to the changing economic landscape of India in the globalised
world with greater role for private players, technology and evolving demographic aspirations.
Since the inception of Economic reforms of 1991, it has been argued by various renowned
Economists and Policy makers (Both Inside the Government and Outside Experts) that the Planning
Commission has served India well for the past 60+ years and now it needs either to be revamped or
abolished all together because:
 India has changed with the adoption of globalisation
 India’s demography has changed
 Indian States have changed,
 India’s private sector has changed,
 the level of technology has changed, and
 India’s integration with global markets has changed,
Keeping the changes in mind, the NITI Aayog has been created to replace the Planning Commission.
It is also stated that the NITI Aayog will ‘facilitate a transition from the isolated conceptualization of
merely ‘planning’, to ‘planning for Implementation’.
Further, NITI Aayog would also be a sounding board and offers internal consultancy services to State
and Central government departments for programme design, evaluation, monitoring, capacity
building, structuring of PPPs etc. However, such services would be available ‘on-demand basis’.
Objectives
The NITI Aayog has the following objectives as outlined in the cabinet resolution forming it.
1. To evolve a shared vision of national development priorities, sectors and strategies with the active
involvement of States in the light of national objectives. The vision of the NITI Aayog will then
provide a framework national agenda for the Prime Minister and the Chief Ministers to provide
impetus to.
2. To foster cooperative federalism through structured support initiatives and mechanisms with the
States on a continuous basis, recognizing that strong States make a strong nation.
3. To develop mechanisms to formulate credible plans at the village level and aggregate these
progressively at higher levels of government.

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4. To ensure, on areas that are specifically referred to it, that the interests of national security are
incorporated in economic strategy and policy.
5. To pay special attention to the sections of our society that may be at risk of not benefitting adequately
from economic progress.
6. To design strategic and long term policy and programme frameworks and initiatives, and monitor
their progress and their efficacy. The lessons learnt through monitoring and feedback will be used for
making innovative improvements, including necessary mid-course corrections.
7. To provide advice and encourage partnerships between key stakeholders and national and
international like-minded Think Tanks, as well as educational and policy research institutions.
8. To create a knowledge, innovation and entrepreneurial support system through a collaborative
community of national and international experts, practitioners and other partners.
9. To offer a platform for resolution of inter-sectoral and inter-departmental issues in order to accelerate
the implementation of the development agenda.
10. To maintain a state-of-the-art Resource Centre, be a repository of research on good governance and
best practices in sustainable and equitable development as well as help their dissemination to stake-
holders.
11. To actively monitor and evaluate the implementation of programmes and initiatives, including the
identification of the needed resources so as to strengthen the probability of success and scope of
delivery.
12. To focus on technology upgradation and capacity building for implementation of programmes and
initiatives.
13. To undertake other activities as may be necessary in order to further the execution of the national
development agenda, and the objectives mentioned above.
NITI Aayog Vs. Planning Commission
1. NITI Aayog is Planning Commission with expanded scope but without its financial powers. The
financial powers like setting sectoral priorities, designing the schemes and programmes, estimating
the entitlements to State development programmes (other than devolution), and influencing the annual
allocations as per the priorities etc. now come under direct influence of the Ministry of Finance,
Budget Division / Department of Expenditure.
2. Good or bad, Planning Commission’s influence and impact were perceived, felt and measured through
annual plan allocations, acceptance of utilization certificates, discretionary grants in the form of
Additional Central Assistance upto autonomous organisations, Zilla Panchayats and municipalities.
3. Be it rationale or not, the influence of Planning Commission was also reflected in the accounting
protocol where budget lines are shown separately for Plan non-Plan, discussed in the CAG Reports
and in several proposals by Budget Division, where Plan funds are referred as proxy for development
expenditure. But, sans the ability to influence the annual allocations, and influence on the annual
budget proposals, the NITI Aayog needs to have a framework to prepare its own annual business
plans, to define its outputs and to put in place a framework to assess impact of its outputs and institute
an accountability mechanism.
4. There are some apprehensions as to whether NITI Aayog will be performing such allocative functions
just as the erstwhile Planning Commission. This is because the Ministry of Finance (MoF) has created
a new budget head titled ‘Special Assistance’ since 2015-16 in Demand No 37 (formerly Demand No.
36) of MoF. The Budget Estimates for 2015-16 is Rs. 20000.00 crore. Ministry of Finance has
informed the parliament standing committee that this amount shall be disbursed based on the
recommendation of NITI Aayog. (However, the Committee was not appreciative of such allocations.)
5. Like planning commission NITI sans a legal support or any constitutional foundation. Hence, like
Planning Commission, NITI Aayog needs to have its own assessment framework as relevant to its
collaborative operations with central government and the respective state governments so that its
existence is continuously accepted and respected on the basis of its performance.

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6. As per relevant Rules or Acts, Budget Manual, SC & ST Act, General Financial Rules etc., the
Planning Commission as an ‘Organization’ and its officers had ex-officio positions in the decision-
making processes or had a direct influence on the financing strategies, including sanctioning and
releasing of grants to NGOs and the State Governments, particularly the funds other than those
connected to Annual Plan process.
Composition of NITI Aayog
Like Planning Commission, NITI Aayog is chaired by the Prime Minister.
For all practical purposes a Vice Chairman in the rank of a Cabinet Minister (equivalent to Dy
Chairman, Planning Commission) and a Chief Executive Officer (equivalent to Secretary Planning
Commission) runs the affairs of the institution.
The following are the members of the current team for NITI Aayog:
Chair Person Shri Narendra Modi
Vice Chair Person DR. Rajiv Kumar
Full Time Member Prof. Ramesh Chand
Full Time Member Shri V K Saraswat
Full Time Member DR Bibek Debroy

Chief Executive Officer Shri Amitabh Kant

Mobilization of Resources: National Development Council;

Finance Commission; States Finance Commission

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 National Development Council
The National Development Council or the Rashtriya Vikas Parishad was set up on 6th August 1952 to
strengthen and mobilise the effort and resources of the nation in support of the plan, to promote
common economic policy in all vital spheres, and to ensure the balanced and rapid development of all
parts of the country.
The Council which was re-constituted on October 7, 1967 is the highest decision-making authority in
the country in the area of development matters.
It is a constitutional body with representation from both the Centre and States. The Council is
headed by the Prime Minister and all Union Cabinet Ministers, State Chief Ministers,
representatives of Union Territories; Members of Planning Commission are its members.The
Secretary/ Member-Secretary of Planning Commission functions as the Secretary of the Council
and all administrative assistance is rendered by Planning Commission.
The Secretary/ Member-Secretary of Planning Commission functions as the Secretary of the
Council and all administrative assistance is rendered by Planning Commission.
The functions of NDC are
1. to prescribe guidelines for formulation of the National Plan, including assessment of resources for the
Plan
2. to consider the National Plan as formulated by the Planning Commission
3. to consider important questions of social and economic policy affecting national development and
4. to review the working of the Plan from time to time and to recommend such measures as are
necessary for achieving the aims and targets set out in the National Plan.
5. The prime function of the Council is to act as a bridge between the Union government, Planning
Commission and the State Governments.
It is a forum not only for discussion of plans and programmes but also social and economic matters of
national importance are discussed in this forum before policy formulation. It is a very democratic
forum where the States openly express their views. No resolution is passed by the Council.
The practice is to have a complete record of the discussion and gather out of its general trends
pinpointing particular conclusions. Sub-Committees under the Chairmanship of Union Cabinet
Minister/State Chief Minister are also formed under the NDC to deliberate on policy areas requiring
wide-range of consultations.
The NDC ordinarily meets twice a year. So far 58 meetings of the NDC have been held.

Finance Commission.

Article 280 of Indian Constitution

Finance Commission:
1. The president shall, within two years of the commencement of the constitution and thereafter at the
expiration of every five years or as such earlier time as the President considers necessary, by order
constitute a finance commission which shall consist of a chairman and four other members to be
appointed by the President.
2. Parliament may by law determine the qualifications which shall ne requisite for appointment as
members of the commission and the manner in which they shall be selected.
3. It shall be the duty of the commission to make recommendations to the president as to:
4. The distribution between the Union and the States of the net proceeds of taxes which are to be, or may
be, divided between them under this chapter and the allocation between the states of the respective
share of such proceeds.
5. The principles which should govern the grants-in-aid of the revenue of the states out of the
consolidated fund of India.
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6. Any other matter referred to the commission by the President in the interest of sound finances.

Finance Commission Working

Vertical and horizontal imbalances are common features of most federations and India is no exception
to this. The Constitution assigned taxes with a nation-wide base to the Union to make the country one
common economic space unhindered by internal barriers to the extent possible.
States being closer to people and more sensitive to the local needs have been assigned functional
responsibilities involving expenditure disproportionate to their assigned sources of revenue resulting
in vertical imbalances.
Horizontal imbalances across States are on account of factors, which include historical backgrounds,
differential endowment of resources, and capacity to raise resources. Unlike in most other federations,
differences in the developmental levels in Indian States are very sharp. In an explicit recognition of
vertical and horizontal imbalances,
The Indian Constitution embodies the following enabling and mandatory provisions to address them
through the transfer of resources from the Centre to the States.
1. Levy of duties by the Centre but collected and retained by the States (Article 268)
2. Taxes and duties levied and collected by the Centre but assigned in whole to the States (Article
269).
3. Sharing of the proceeds of all Union taxes between the Centre and the States under Article 270.
(Effective from April 1, 1996, following the eightieth amendment to the Constitution replacing the
earlier provisions relating to mandatory sharing of income tax under Article 270 and permissive
sharing of Union excise duties under Article 272).
4. Statutory grants-in-aid of the revenues of States (Article 275)
5. Grants for any public purpose (Article 282).
6. Loans for any public purpose (Article 293).
In addition to provisions enabling transfer of resources from the Centre to the States, a distinguishing
feature of the Indian Constitution is that it provides for an institutional mechanism to facilitate such
transfers. The institution assigned with such a task under Article 280 of the Constitution is the Finance
Commission, which is to be appointed at the expiration of every five years or earlier. Under the
Constitution, the main responsibilities of a Finance Commission are the following.
The institution assigned with such a task under Article 280 of the Constitution is the Finance
Commission, which is to be appointed at the expiration of every five years or earlier. Under the
Constitution, the main responsibilities of a Finance Commission are the following.
1. The distribution between the Union and the States of the net proceeds of taxes which are to be
divided between them and the allocation between the States of the respective shares of such proceeds.
2. Determination of principles and quantum of grants-in-aid to States which are in need of such
assistance.
3. Measures needed to augment the Consolidated Fund of a State to supplement the resources of the
Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance
Commission of the State.
The last function was added following the 73rd and 74th amendments to the Constitution in 1992
conferring statutory status to the Panchayats and Municipalities. These Constitutionally mandated
functions are the same for all the Finance Commissions and mentioned as such in the terms of
reference (ToR) of different Finance Commissions.
To enable the Finance Commission to discharge its responsibilities in an effective manner, the
Constitution vests the Finance Commission with the power to determine its procedures.
Under the Constitution, the President shall cause every recommendation made by the Finance
Commission together with an explanatory memorandum as to the action taken thereon to be laid
before each House of Parliament.

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 So far, thirteen Finance Commissions have given their reports. The Union government has always
been accepting the recommendations of the Finance Commissions, exception being the
recommendations of the Third Commission relating to Plan grants.
There have been major changes in the public finances of the Union and the States during the period of
over 55 years covered by the Finance Commissions. A number of new matters have been referred to
the Commissions in consonance with these developments.
How the different Finance Commissions have discharged their responsibilities in the ever-changing
fiscal situation is covered in the following sections under different heads.

State Finance Commission

In India, decentralization reforms, aimed at empowering local people through local governments,
assumed significance in early 1990s. Though the Panchayats and the municipalities (rural local bodies
and the urban local bodies) existed even before the 73rd and 74th amendment of the Constitution in
the year 1993, these amendments provided an impetus to the decentralisation process through a
system of self-government for the panchayats and municipalities and devolve greater powers,
functions and authority to them.
It also envisaged the panchayats and municipalities as an institution of self-government. These
amendments also underscored the organic link in the public finances of the multi-layered federal
polity in India. The devolution of financial resources to these bodies was ensured through periodic
constitution of the State Finance Commissions (SFCs).
Articles 243 (I) and 243 (Y) of the Constitution spelt out the task of SFCs. Accordingly, SFCs are
required to recommend
1. the principles that should govern the distribution between the State on the one hand and the local
bodies on the other of the net proceeds of taxes, etc. leviable by the state and the inter-se allocation
between different panchayats and municipalities,
2. the determination of taxes, duties, tolls and fees which may be assigned to, or appropriated by the
local bodies, and
3. grants-in-aid from the consolidated fund of the State to the local bodies. SFCs are also required to
suggest the measures needed to improve the financial position of the panchayats and municipalities.
The importance of the SFCs in the scheme of fiscal decentralization is that besides arbitrating on the
claims to resources by the state government and the local bodies, their recommendations would impart
greater stability and predictability to the transfer mechanism.
So far, three SFCs have submitted their reports in most of the States. These cover different time
period. The convention established at the national level of accepting the principal recommendations of
the central finance commission without modification, is not being followed in the states.
Often, even the accepted recommendations are not fully implemented due to resource constraints.
There is no synchronization of the periods covered by the reports of SFCs with that of the central
finance commission, which affects the central finance commission in assessing the resource required
to state governments to supplement the resources of the panchayats and municipalities.

Inflation
Inflation in India: CPI, WPI, GDP Deflator, Inflation
Rate
Inflation in India
Understanding Inflation

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 Back to Basics: In 1947, when India got independence, the Indian economy was suffering from low
growth, poverty and resource shortages. The salary of an average Indian was very low. Ask your
Grand Parents ‘how much they use to earn in the 1950’s?
Today, an average Indian earns 100 times more than what his grandparents use to earn. Does it mean
that the standard of living of the people has also risen 100 times? Before reaching to such a
conclusion, one must remember that the prices of goods and services in the economy has also risen.
In 1950’s a Delhi-Mumbai air ticket cost in some hundreds, today it cost in thousand. Similarly, the
price of Wheat was in few Paisa; it cost around Rupee 50/kg. Therefore, it is not clear from income,
that whether the standard of living of people have risen or not.
To compare the salary of your grandparents to yours, we need some measure of purchasing power or
price. The meaningful measure that can perform the task is “Consumer Price Index”.

Consumer Price Index: CPI is used to monitor changes in the cost of living over time. When the CPI
rises, the average Indian family has to spend more on goods and services to maintain the same
standard of living. The economic term used to define such a rising prices of goods and services is
Inflation.
Inflation: Inflation is when the overall general price level of goods and services in an economy is
increasing. As a consequence, the purchasing power of the people are falling. For example, if the
inflation rate is 4 percent, then a basket of goods (food, clothing, footwear, tobacco, electricity etc)
that costs Rs 100 in year 2016-17 will cost Rs 104 in the year 2017-18. As more money is required to
purchase the same basket of goods and services, we say the value of money/purchasing power has
fallen.
Inflation Rate: Inflation Rate is the percentage change in the price level from the previous period. If
a normal basket of goods was priced at Rupee 100 last year and the same basket of goods now cost
Rupee 120, then the rate of inflation this year is 20%.
Inflation Rate= {(Price in year 2 – Price in year 1)/ Price in year 1} *100
Whole sale Price Index: WPI is used to monitor the cost of goods and services bought by producer
and firms rather than final consumers. The WPI inflation captures price changes at the
factory/wholesale level.
The WPI and CPI are different indices and are used for different purpose.

1. The WPI and CPI use different basket of goods to calculate the inflation.
2. The weights assigned to food, fuel, manufacturing items etc. are different. For example, the weight of
food in CPI is far higher at 46% than in WPI at 24%.
3. The WPI inflation does not capture price changes of services but the CPI does.
GDP Deflator: Another important measure of calculating standard of living of people is GDP
Deflator. GDP Deflator is the ratio of nominal GDP to real GDP. The nominal GDP is measured at
the current prices whereas the real GDP is measured at the base year prices. Therefore, GDP Deflator
reflects the current level of prices relative to prices in a base year. Example, In India the base year of
calculating deflator is 2011-12.
The Difference
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 Consumer Price Index
CPI reflects the price of goods and services
bought by the final consumers.
Example: Suppose the price of a satellite to be
launch by ISRO increases. Even though the
satellite is part of the GDP of India, but it is not a
part of normal CPI index, since we don’t
consume satellite.
Similarly, India produces some crude oil, but
most of the oil/petroleum is imported from the
West Asia, as a result, when the price of
oil/petroleum product changes, it is reflected in
CPI basket as petroleum products constitute a
larger share in CPI.
The CPI compares the price of a fixed basket of
goods and services to the price of the basket in
the base year.
GDP Deflator
GDP deflator reflects the price of all the goods
and services produced domestically.
The price rise of the ISRO satellite will be
reflected in GDP deflator.
The price change of oil products is not reflected
much in the GDP deflator since we do not
produce much crude oil.
The GDP deflator compares the price of currently
produced goods and services to the price of the
same goods and services in the base year. Thus,
the group of goods and services used to compute
the GDP deflator changes automatically over
time.

Producer Price Index

PPI measures the average change in the sale price of goods and services either as they leave the place
of production or as they enter the place of production. It estimates the change in average price that
producer receives. PPI measure the average change in the prices received by the producer and
excludes any type of indirect taxes. Moreover, PPI includes services also.
The PPI measure the price changes from the perspective of the seller and differs from CPI which
measures price changes from buyer perspective.
National Housing Banks: Residex
It is India’s first housing price index which is an initiative of the National Housing Bank undertaken
at the behest of Ministry of Finance. The index was formulated under the guidance of Technical
Advisory Committee. It was launched in 2007 and updated periodically with 2007 as base year. The
coverage of Residex expands to 26 cities.

Initially, NHB RESIDEX was computed using market data, which 2010 onwards, was shifted to
valuation data received from banks and housing finance companies (HFCs). Thereafter, data was
sourced from Central Registry of Securitisation Asset Reconstruction and Security Interest of India
(CERSAI) from 2013 to 2015.
The scope has been widened under NHB RESIDEX brand, to include housing price indices (HPI),
land price indices (LPI) and building materials price indices (BMPI), and also housing rental index
(HRI).

Types of Inflation: Demand Pull, Cost Push, Stagflation,

Structural Inflation, Deflation and Disinflation
Causes of Inflation
Inflation is mainly caused either by demand Pull factors or Cost Push factors. Apart from demand and
supply factors, Inflation sometimes is also caused by structural bottlenecks and policies of the
government and the central banks. Therefore, the major causes of Inflation are:

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 Demand Pull Factors (when Aggregate Demand exceeds Aggregate Supply at Full employment level).
 Cost Push Factors (when Aggregate supply increases due to increase in the cost of production while
Aggregate demand remains the same).
 Structural Bottlenecks (Agriculture Prices fluctuations, Weak Infrastructure etc.)
 Monetary Policy Intervention by the Central Banks.
 Expansionary Fiscal Policy by the Government.

Demand and Supply factors can be further sub divided into the following:

Demand Pull Inflation

 Demand Pull Inflation is mainly due to increase in Aggregate demand. The increase in Aggregate
demand mainly comes from either increase in Government Expenditure (Expansionary Fiscal Policy)
or by an increase in expenditure from Households and Firms.
 The root cause of demand pull inflations is- Aggregate demand > Aggregate Supply. This simply
means that the firms in the economy are not capable of producing the goods and services demanded
by the households in the present time period. The shortages of goods and services due to increase in
demand fuels inflation.
 Imagine what happened when there was an outbreak of swine flu in India. Due to the outbreak of
swine flu epidemic in India, the government notified a warning that people should wear Breathing
Masks to protect them from the infection. As a result, the demand for mask had risen to a very high
level, but the supply being limited as the producers of the mask had no anticipation of the swine flu
epidemic. Due to the high demand and limited supply of masks, the prices had risen manifold. The
case above captures the mechanism of demand pull inflation.
 The above example only captures the mechanism of Demand led inflation and that too for a particular
product. What happens at Macro level? What fuels inflation in the entire economy? Before answering
the question. Let’s understand some basic concept related to the economy:
 Full Employment Level: Full employment is an economic situation in which all the available
resources of the economy are fully utilised, and there exists no further scope of improvement in the
economy. The Full employment level represents that economy is operating at its maximum potential.
The level of unemployment is minimum, the prices in the economy are stable, resources are fully
utilised, whatever firms are producing is getting sold, and there exist no shortages in the economy.

Inflationary Gap: the Inflationary gap is a situation which arises when Aggregate demand in an
economy exceeds the Aggregate supply at the full employment level.

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 Inflation in a Demand-Pull scenario is basically caused by a situation whereby the Aggregate demand
for goods and services in the economy rises and exceeds the available supply of the goods and
services. In such a situation, the excessive pressure on demand will fuel the inflation in the economy.
Deflationary Gap: Deflationary Gap is a situation which arises when Aggregate demand in the
economy falls short of Aggregate Supply at the full employment level.

Cost Push Inflation

 There exists a situation in an economy where inflation is fuelled up, not because of increase in
Aggregate Demand but mainly due to increase in the cost of producing goods and services.
 The cost can be increased mainly due to three factors:

Wage Push Inflation Profit Push Inflation Raw Material Push Inflation

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When the employees push for
an increase in wages which are
not justifiable either on the
grounds of employee
productivity or increase in the
cost of living. In such scenarios,
an unwarranted wage increase
leads to increase in the cost of
production and hence cost push
inflation.
Wage Push Inflation generally
happens during high growth
periods. During which workers
anticipate a hike in their wages
due to rising cost of living. The
employer responds to their
demand by increasing wages in
the hope that he will pass them
on to the consumers in the form
of higher prices.
The firms sometimes decide to
increase their profit margins and
starts charging higher prices for
their product. This phenomenon
pushes the price upward and
results in Profit Push Inflation.
The Profit Push Inflation
generally happens when there
are few of single producer
producing the goods for the
entire market.
The raw material push inflation
also known as supply shock
inflation is the main and the
most important reason for cost
push inflation.
If for any reason the economy
under goes a supply shock in
the form of a rise in the price of
essential raw materials like
crude oil, it will fuel inflation
due to rise in the cost of
production.
For Example, during the 1970s,
the OPEC countries decided to
increase the price of crude oil,
this acted as a supply shock for
the entire World economy and
price of petroleum products (an
essential raw material) went up,
fuelling inflation.

Let’s understand Cost Push Inflation with an Example.

Suppose, Indian economy is operating at its maximum potential. Prices are stable, resources are fully
utilised, everyone who is willing to work is getting the work (unemployment is at its minimum). In
such a scenario people will form the expectation that the future of the economy is good and they
planned their saving and investment decision accordingly.
However, one day the USA decides to attack Iran in order to dismantle their nuclear weapons. As a
repercussion of the attack, the crude oil prices around the world start moving up. India who imports
90 percent of its oil imports suddenly find itself in trouble. The rise in crude oil price puts a break on
booming Indian economy and cost of essential products start rising (crude oil is a key input for many
industries and is a lifeline of transport economy). As a result of increase in cost of production, the
manufacturers decide to increase the price of their product. Hence fuelling first round of cost push
inflation (Raw material).
After a lag of sometime, the final consumer gets to know that the prices of the product have increased.
The consumer expectations about the future movement of prices will change as he expects prices to
rise further in future. To compensate himself against the future price rise, he starts demanding more
wages from his/her employer. This will fuel the second round of cost push inflation (wage push).

Cost Push Inflation/Supply Shock

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 Stagflation: The most important difference between the Demand Pull and Cost Push Inflation is that
while in the case of Demand Pull Inflation the overall output in the economy does not fall. Whereas,
in case of Cost Push Inflation, along with an increase in prices the output level of the economy also
falls.
The fall in output will cause employment to fall in the economy along with fall in growth. The falling
growth along with rising prices makes cost push inflation more dangerous than the demand-pull
inflation. The situation of rising prices along with falling growth and employment is called as
stagflation.
Hyperinflation: Hyperinflation is a situation when inflation rises at an extremely faster rate. The rate
of inflation can increase from 50 times to 300 times.
The effects of hyperinflation can be devastating for the economy. The situation can lead to total
collapse of the value of the currency of the economy along with economic crisis and rising external
debt and fall in purchasing power of money.
The major causes of the hyperinflation are; government issuing too much currency to finance its
deficits; wars and political instabilities and unexpected increase in people’s anticipation of future
inflation.
When people anticipate that future inflation will rise at a very fast pace, they start consuming more
goods and services due to the fear that higher inflation in the future will destroy the purchasing power
of money. As a result of this, the demand for goods and services rises and fuels further inflation. The
cycle continues and results in a hyperinflation scenario.

Structural Inflation
 Structuralist Inflation is another form of Inflation mostly prevalent in the Developing and Low-
Income Countries.
 The Structural school argues that inflation in the developing countries are mainly due to the weak
structure of their economies.
 They further argue that increase in money supply and government expenditure could explain the
inflationary scenario only partially.

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 The Structuralist argues that the economies of developing countries like, Latin America and India are
structurally underdeveloped as well as highly volatile due to the existence of weak institutions and
imperfect working of markets.
 As a result of these imperfections, some sectors of the economy like agriculture will witness shortages
of supply, whereas some sectors like consumer goods will witness excessive demand. Such economies
face the problem of both shortages of supply, under utilisation of resources as well as excessive
demand in some sectors.
 Example: In India, let’s assume that the farmer produces fruits and vegetables at 10000 per quintal.
But the final consumer gets the same at 20000 per quintal. The huge disparity between what farmer
receives and consumer pays is due to infrastructure and agriculture bottlenecks. The bottleneck arises
mainly due to lack of roads, highways, cold chains and underdeveloped agriculture markets. All these
increases the cost of transporting goods from farmers to consumers leading to inflation.
 The major bottlenecks/road blocks of developing economies that fuels Structuralist form of inflation
are:

Deflation versus Disinflation

Deflation: Deflation is when the overall price level in the economy falls for a period of time.
Disinflation: Disinflation is a situation in which the rate of inflation falls over a period of time.
Remember the difference; disinflation is when the inflation rate is falling from say 5% to 3%.
Deflation is when, for instance, the price of a basket of goods has fallen from Rs 100 to Rs 80. It’s the
reduction in overall prices of goods.

Reaganomics
Reaganomics is a popular term used to refer to the economic policies of Ronald Reagan, the 40th U.S.
president (1981–1989), which called for widespread tax cuts, decreased social spending, increased
military spending and the deregulation of domestic markets. These economic policies were introduced
in response to a prolonged period of economic stagflation that began under President Gerald Ford in
1976.
Back to Basics:
Headline versus Core Inflation

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 The headline inflation measure demonstrates overall inflation in the economy. Conversely, the core
inflation measures exclude the prices of highly volatile food and fuel components from the inflation
index.
The inflation process in India is dominated to a great extent by supply shocks. The supply shocks
(e.g., rainfall, oil price shocks, etc.) are temporary in nature and hence produce only temporary
movements in relative prices. The headline CPI inflation in India tends to increase whenever there is a
surge in food and fuel prices. Since monetary policy is a tool to manage aggregate demand pressures,
the response of the policy to such temporary shocks is least warranted according to traditional
wisdom.
Core inflation excludes the highly volatile food and fuel components and therefore represents the
underlying trend inflation. The trend inflation drives the future path of overall inflation. Hence, even
when food and fuel inflation moderates over time, persistently high inflation in non-food, non-fuel
components pose an upward risk to overall future inflation, creating challenges to monetary policy.

How to Control Inflation

Let’s understand some basic relationship before proceeding further.

Money Supply and Interest Rate

The Money supply in an economy is controlled by the Central Banks. Whenever there is a threat of
Inflation, the central bank intervenes to control the money supply to control the inflation.
The mechanism through which the central banks controls inflation depends on interest rate. Interest
Rate and Money supply moves in opposite directions. As money supply is increased the interest has
the tendency to fall and vice versa.
But why does it happen?
Suppose at any given point in time, the economy is suffering from low growth. The central bank
intervenes by using its monetary policy tools (Bank Rate, Repo Rate, Statutory Liquidity Rate). The
result of such loose monetary policy is increase in money supply in the economy.
The increased money supply means at any given point in time, there will be excess money in the
economy than what the people are willing to hold. What will happen to this excess money? People
will not want the excess money to be kept idle in their wallets. So they will try to invest it in
alternative financial instruments like Bonds.
As a result of this, the demand for financial assets (Bonds) will increase which will lead to increase in
the price of the bonds. An established relation in financial economics is, as bond price rises,
Interest will fall.
A Fall in interest rate>>> Increase in Investment>>> Increase in output/production>>> increase
in employment and national income. Hence end of slowdown.
1. Government Spending and Interest Rate.
Fiscal policy affects equilibrium income and the interest rate. An increase in government spending
(expansionary fiscal policy) to boost economic activity will lead to increase in interest rate. This
happens because, at any given point in time, the economy will have limited saving capacity. When the
government increase its spending, it competes with the private sector for these limited saving. In the
process, this tend to put upward pressure on the interest rate.
Monetary Policy and Inflation

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 Fiscal Policy and Inflation

The Relationship Between Inflation and Interest Rate.

In order to understand the relationship between Inflation and Interest Rate, it is necessary to
understand the distinction between Real interest rate and nominal Interest rate.
Back to Basics: Example, if you decide to deposit all your money (Rs 1 Lakh) in a Bank as Fixed
Deposit, Banks will pay you Interest rate @ say 10%. The rate of interest that banks pay you is
Nominal Interest Rate. Going by this logic, you will be expected to earn Rs 10,000 as interest on your
Fixed deposit in a year. In the second year, you will be having Rs 1,10,000 in your bank account.
But what about the value or purchasing power of your deposit? Is the money worth Rs 1,10,000 is
sufficient for you to buy the same basket of goods that you were purchasing last year? Will Rs
1,10,000 will buy you the same amount of goods, less amount of goods or more amount of goods will
all depend on the rate of inflation in the economy.
Let’s say, the inflation rate in the economy during the period is 20%. What will be the value of your
deposit at 20% inflation rate?
The real value in terms of goods that can be purchased from Rs 1,10,000 is actually much less than
what it used to be a year ago. The basket of goods that had cost Rs 10,0000 in the previous year is
now costing Rs 1,20,000. But the bank has paid you only Rs 1,10,000 in return. The interest rate of
the bank has failed to beat the inflation in the economy. Therefore, the real interest adjusted after
inflation that the banks have paid you on your deposit is actually negative 10%.
Real Interest Rate= Nominal Interest Rate – Inflation Rate.
-10 = 10 – 20

The Cost of Inflation

 The inflation is considered to be bad for an economy mainly because it destroys the purchasing power
of the money. When Price rise, each Rupee that you had will but less quantity of goods and services.
Therefore, inflation destroys the real income of the people and makes them worse off.
 The argument is particularly true for a country like India, which has a large informal sector and
agriculture sector. Since most of the population is employed in informal and agriculture sector where
minimum wage laws and social security benefits do not apply, the people in such sectors suffer the
most due to inflation. The wages in these sectors are not indexed for inflation. Thus, when the price
rises their wage does not rise, and they lose due to a reduction in real income on the one hand and no
rise in wages on the other.
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 There is also two associated social cost of inflation.
 The Shoe Leather Cost
Suppose in an economy the inflation is rising at the rate of 5% from the past few years. In such a case,
everybody will expect the inflation to be 5% in future also. In such a case, all the economic
transactions will be done adjusting for 5% inflation. In such an anticipated inflation scenario, the only
cost of inflation will be shoe leather cost.
The Shoe Leather Cost occurs because of the cost associated with holding money during inflation.
Since inflation destroys the real power of money, and cash holding does not pay any interest, people
will start depositing their money in banks to earn interest rate.
The less money they hold in cash, the more they have to visit banks or ATMs to withdraw money.
Since going to the bank is not free of cost both in terms of time and the transaction cost levied by
banks on ATM usage, counter withdrawals, as well as the cost of travel to banks will all add to Shoe
Leather Cost.
 Menu Cost
Menu cost is another social cost associated with anticipated inflation. The name menu cost is derived
from the restaurants business. Menu cost arises because inflation makes the business change their
listed price often. The change requires the firm to bear expense related to printing of new catalogues,
new price list etc. they also have to incur expenditure on advertisement to inform customers about
their new prices.
Effects of Inflation on Different Sections
Creditor/lender Debtor/Borrower Pensioner Producers Wealth Holders
Inflation harms Inflation benefits Inflation harms They stand to They stand to lose
creditors, as they the Debtor as they the pensioners, if gain by inflation due to inflation,
lose in real terms. gain in real terms. their pensions are since the price of as their real
A 1000 RS lent @ not indexed to goods and returns fall due to
5%, will pay an inflation, and services rise faster rise in prices.
interest rate of 50. loses money. than the cost of
If inflation rises to production as
10%, the price of wages take time
goods will be lag to react.
1100, but after
interest, the return
will only be 1050.

Monetary policy in India

Monetary Economics: Barter System, Definition, Function and Evolution of
Money
The Barter System
Money as a medium of exchange was not used in the early history of mankind. Exchange of the goods
was not very frequent as households were self-sufficient. Whatever exchange took place between the
households was in the form of barter, that is, exchange of goods for other goods.
The barter system does not provide for the direct purchase of goods since there was no common unit
of account and medium of exchange (Money).
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 Note for Students: Example, if a person grows only wheat and after his self-consumption, he wants
to exchange it for apple. He can do so only if the other person having apples wants wheat. If that is
not the case, no exchange will take place. This problem is called double coincidence of wants.
Moreover, if they both agree to trade an apple for wheat, then the next problem is how to determine
how much apple is worth one kg of wheat and vice versa. Both the individuals will argue for more of
another person commodity in return of his. Therefore, exchange of goods will be limited and most of
the time will not take place at all.
Difficulties under Barter System of Trade

To overcome the problems of Barter trade, early humans started devising a system of
payments and exchange that allows direct purchase of goods using any instrument that has
following features:

 A unit of Account (it must be measured)

 High Liquidity
 It can be stored
 It must be wanted by everyone (It should have high demand)
 It can be exchanged easily (Medium of Exchange)

Evolution of Money

Commodity Money Metallic Money Paper Money

In the very beginning, there
exist few commodities which
were needed by everyone.
Commodities like arrows, bows,
sea shells which are used
mostly in hunting become the
first form of medium of
exchange and hence acted as
money.
With further progress of
civilisation commodity money
is replaced by precious items
like Gold and Silver for
monetary use. Gold and Silver
largely formed the Metallic
Money.
The advent of State and
political structure had given rise
to a new form of money which
although has no underlying
value but has a guarantee by the
governments. The government
guaranteed money is known as
Paper Money.

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In the second stage of the
evolution, when the early
human shifted from hunting to
agriculture, animals like
cattle’s, goats, sheep become
the medium of exchange and
acted as money.
The Metallic money offered Paper money acted as money
several advantages. not because it has some value
They were easy to handle. (unlike gold which has high
They can be easily stored. value) but simply because they
They do not deteriorate. are guaranteed by the
They have the right degree of governments and are scared.
scarcity which made them With time, paper money took
valuable for all, hence acted the form of Bank Notes to be
as a perfect medium of printed by the Central Banks.
exchange.

Since commodities have certain
limitations like lack of a
standard unit of account, limited
supply and natural factors etc.
Their use limited and replaced
by other forms of money.
With time and technology, the
hard form of gold and silver
was replaced by coinage system
(gold and silver coins) which
were to widely used as money.
The last stage of evolution of
money was in the form of Bank
Deposits Especially Demand
deposits, which people hold
with the commercial banks and
that can be withdrawn at any
time. Thus, providing high
liquidity.

Money and its Functions

Definition of Money:
“Anything which is widely accepted in payment of goods or in the discharge of other
kind of payment obligations”.
“Money can be defined as anything that is generally acceptable as a medium of
exchange and at the same time act as a measure and a store of value”.
Economist has simply defined money as “Money is what Money does”. That is money is
anything which performs the function of money.
Functions of Money:
The four main functions of money are;

Standard of
Medium of Exchange Store of Value Measure of Value
Payments
A can sell goods to B Money act as a Money serves as a Money also serves as
and in return can store of value. common measure of a standard mode of
demand money for his Money being the value or a unit of Deferred payments.
sale. most liquid asset is account. If a loan is taken
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B can use the money to the most convenient As the value of all today, it will be paid
buy other goods from C. way to store wealth. goods and services back in future time
As long as the money is Thus, money can be are now measured in using the money.
accepted, the process of stored as an asset. terms of money, the The loan amount is
exchange keeps on It thus, becomes relative comparison measured in terms of
happening. very important that of goods is possible. money and is paid
This feature of money is the good chosen as Each commodity has back in money.
known as Medium of money should be its own price and
Exchange. such that can be monetary value now.
easily stored. A car is worth Rupee
The case for other 10 Lakh, and A kg of
liquid assets like apple is worth Rupee
gold or real estate is 100. One can simply
different; they first pay the price and buy
have to be sold and car or apple.
converted into
money. The money
realised from them
can be used to buy
goods and services.

Modern Monetary Systems

Convertible Paper Money/
Full Reserve System
Paper money has come to
occupy a very important place
in the modern monetary system
of almost all the countries.
The term paper money applies
only to the notes issued by the
government and the central
banks.
For quite a long time, Paper
money remained a convertible
paper money. Under this
system, money is convertible
into standard coins made of
gold and silver.
The Paper money issued by the
governments and central banks
was fully backed by the gold
and reserve of equal value.
Therefore, this paper currency
system is called ‘Full Reserve
System’.
In-convertible/ Fiat Money Minimum Reserve System
With the passage of time, the The ‘Minimum Reserve
relative scarcity of gold and System’ is the current form of
silver has increased. Therefore, currency system practised
the governments find it very World over and in India too
difficult to back all their legal since 1957.
currency with an equal value of
gold and silver. Thus,
nowadays paper currency is of
inconvertible type.
Under the Inconvertible Under this system, the central
monetary system, money is not banks are required to keep only
convertible into gold or silver a minimum amount of gold and
or other precious metals. other approved securities (In
The paper money issued by the India the RBI is required to
central banks is not backed by keep Rupee 200 Crores).
underlying precious metal. The On the basis of minimum
issuing authorities is not reserve, the central banks can
responsible to convert the issue the currency in any
paper notes into gold and number subject to the
silver. economic condition of the
Thus, the currency notes issued country.
by the Central Banks are ‘Fiat
Money’, that is, they are issued
by a ‘Fiat’ (which means
‘Order’) of the government.
Fiat Paper money is in the
form legal tender promised by
the governments. Since they
are legal tender, they can be
widely used to purchase goods
and services.

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Importance and Significance of Money

Monetary Policy in India: Inflation, deflation,

Recessionary and Inflationary Scenarios

How Monetary Policy Works

The Inflation

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The Deflation

How RBI Controls Recession

The Recessionary Scenario

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The Relationship between Interest Rate and Bond Prices.
The Bond Price and Interest Rate always have an inverse relationship with each other.

How RBI Controls Inflation

The Inflationary Scenario

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 Monetary Policy tools and Money Supply in India

RBI Tools for Controlling Credit/Money Supply

Broadly speaking, there are two types of methods of controlling credit.

Bank Rate Policy

 Bank rate is the minimum rate at which the central bank of a country provides a loan to the
commercial bank of the country.
 Bank rate is also called discount rate because the central bank provides finance to commercial banks
by rediscounting bills.
 The RBI uses bank rate to control credit in the economy.

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 For instance, in an inflationary scenario, the RBI increases the Bank Rate, which increases the cost of
borrowing for commercial banks, this would discourage the commercial bank from borrowing from
the RBI, hence lending in the economy will fall along with increase in lending rates by commercial
bank, increase in lending rate will discourage investment and hence Aggregate Demand will fall. A
fall in AD will reduce income and output in the economy. Thus, Inflation will Subside.
Open Market Operations
 OMO are another important instrument of credit control.
 OMO means the purchase and sale of securities by the RBI.
 For instance, in an inflationary scenario, the RBI will start selling government securities, the selling of
securities will reduce money supply from the system (Since the buyer of the securities will pay for
them in Rupee, hence currency from the system goes out), reduction in money supply will lead to
reduction in funds with the commercial banks, which further reduce their lending capability. A fall in
lending thus contracts credit in the economy.
 However, there are certain limitations that affect OMO viz; underdeveloped securities market, excess
reserves with commercial banks, indebtedness of commercial banks, etc.
Cash Reserve Ratio
 Banks in India are required to keep certain proportions of their deposits in the form of cash with
themselves as reserves.
 If the legal CRR is 10%, then the bank will have to keep Rs 100 as reserves against the deposit of Rs
1000.
 If at any time, the RBI decides to increase the CRR from 10 to 20%, then bank have to keep Rs 200 as
reserves against the deposit of Rs 1000. This will reduce the credit in the economy as the banks now
have less money to lend (800 in our example), less lending means less borrowing and investment and
hence reduction in income and aggregate demand.
 Similarly, a reduction in CRR from 10 to 5%, will reduce the reserve requirement and hence increases
the lending capacity of the banks. Increased lending will lead to increased investment, increase
investment will increase AD and Income.
CRR Controversy
Context: Time and again many Bankers and economists have recommended scrapping of CRR. With
Banks facing rising NPA in recent years, demand has again been raised my few experts to scrap CRR.
Why CRR should be abolished
 All banks put together maintained a cash balance of Rs3,14,900 crore with the RBI every day, and
this keeps on growing with the growth in deposits of the banking industry. This huge amount does not
earn any interest for the banks. If you calculate the interest on this amount at the average lending rate
of banks, say at 10%, the total loss to the banking industry is in excess of Rs31,000 crore per year.
 According to many Bankers, CRR policy had denied the country growth, and its abolition would
allow banks to lower the lending rate.
 Since the RBI did not pay any interest, the CRR acted like a tax on the banking system, placing the
banks at a competitive disadvantage versus non-banking financial companies and mutual funds who
do not require to pay CRR.
 According to experts, the loss to the banking sector due to CRR was Rs 21,000 crore.
 If a bank falls short of its CRR requirements, the RBI collects interest on the shortfall from the bank
at the bank rate as if the defaulting bank has borrowed that money from the central bank. While the
RBI’s action is justified, as it is the only way the central bank can enforce discipline among the banks,
this is a source of irritation to the Banks.
 Most of the central banks in developed countries have dispensed with the system of CRR and have
been using the tool for open market operations to control inflation.
Why should it not be abolished?
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 CRR system act as a hedging strategy for banks. CRR is important as it provides banks with the
immediate liquidity of their own. Since bank operates on a minimum reserve system, any bad
situation like bank run will push millions of depositors withdrawing their money at the same time. In
such a situation if banks have its liquidity reserves it will stop the banking system from total collapse.
 Till the time the crisis day doesn’t come this is just blocked fund which is not put to full use, but when
the crisis day comes CRR serves a useful purpose – surely banks and thereby customers have to bear
the cost, but it comes at the price of increased safety.
 CRR and SLR are two Safety Valves built in the system by prudent bankers to protect banks from all
types of adversities.
 If a bank falls short of its CRR requirements, the RBI collects interest on the shortfall from the bank
at the bank rate as if the defaulting bank has borrowed that money from the central bank. While the
RBI’s action is justified, as it is the only way the central bank can enforce discipline among the banks,
this is a source of irritation to the SBI.
 A few years ago RBI had ceased to pay an interest rate on CRR, which affects the commercial banks.
This is one of the main reasons why SBI chairman wanted CRR to be abolished.
Liquidity Adjustment Facility
 LAF is a monetary policy instrument which allows commercial bank and primary dealers to borrow
money through repurchasing agreement or repos/reverse repos.
 LAF is used to aid banks in adjusting day to day fluctuations in liquidity.
 RBI extends LAF facility only to commercial banks (excluding RRBs) and Primary dealers.
 LAF allowed banks to park their excess money with the RBI in case of excess liquidity or to avail
liquidity from the RBI at the time of deficit on an overnight basis against the collateral of government
securities.
 The operations of LAF are conducted by way of repos and reverse repos.
 Repos or Repurchase Agreements is an instrument which allows banks to borrow money from the
RBI to manage short term needs of liquidity against the selling of government securities with an
agreement to repurchase the same government securities at a predetermined date and rate. The rate at
which the RBI lends to the banks is called Repo Rate.
 Reverse Repo is an instrument which allows the RBI to borrow from the banks by lending
government securities. The rate at which the Banks lends to the RBI is called Reverse Repo Rate.
 Repo injects money into the system whereas Reverse Repo takes money out of the system.
 The RBI increases the Repo Rate during the time of inflation and decreases the Repo Rate during the
time of deflation and low growth.
 The important point to remember is that the window of LAF does not allow the banks to borrow the
unlimited amount from the RBI. The Banks are permitted to borrow only a limited percentage of its
Net Demand and Time Liabilities under LAF window.
Marginal Standing Facility
 MSF is a new scheme announced by the RBI in the year 2011-12.
 MSF is a penal rate at which banks can borrow money from the RBI over and above of what they can
borrow from the RBI under the LAF window.
 MSF is a penal rate and is always fixed at a higher rate than the Repo rate.
 The MSF would be a penal rate for banks, and the banks can borrow funds by pledging government
securities within the limits of the statutory liquidity ratio.
 The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight
lending rates in the inter-bank market and to enable smooth monetary transmission in the financial
system.
Statutory Liquidity Ratio
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 SLR is that percentage of the deposits which the banks have to hold with themselves in highly liquid
government securities.
 SLR is one of the many arrows in the RBI’s monetary policy quiver. These are used, sometimes in
isolation, sometimes in combination, to manage the money supply, interest rates and credit
availability in the country.
 The SLR is an important tool of monetary policy, and its primary aim is to ensure that banks always
have enough liquidity (cash and cash equivalent securities) to honour depositor’s demands and that
they don’t lend away all their funds.
 The current rate of SLR is 20%. It simply means that the bank has to invest 20 Re out of every 100
Rupee deposited with him in government securities.
 The SLR is being used by the RBI to tighten or easing money supply in the economy. For instance, a
50 BPS reduction in SLR will leave more money with the banks to lend. More lending means more
investment and hence more income and growth.
 Over the years, the use of CRR and SLR as instruments of monetary control has been reduced. From
37-38 percent in the early 1990s, the RBI has reduced the SLR to 20 percent now. But this is still
significant to influence credit and rates.
 The RBI doesn’t always prefer bringing out the big guns in its monetary tools armament for fear of
causing collateral damage — the risk of stoking inflation due to a repo rate cut.
 In such situations, SLR can be an effective pistol, so to speak. Reducing SLR can free up banks’
funds, which if deployed for lending can boost investment cycle. The RBI lowering SLR this time
was broadly seen as an attempt to revive the slack credit demand in the economy.
Bank Base Rate
 The Base Rate is the minimum interest rate of a bank below which it is not permissible to lend, except
in some cases if allowed by the RBI.
 BR is the minimum interest rate that a bank must charge because below the base rate it is not viable
for the bank to lend.
 The base rate, introduced with effect from 1st July 2011 by the Reserve Bank of India, is the new
benchmark rate for lending operations of banks.
 Thus, all categories of domestic rupee loans should be priced only with reference to the Base Rate.
 The reason for introducing Base Rate was to bring out the transparency in bank lending rates as well
as to improve monetary transmission mechanism.
 Base Rate has replaced the previous benchmark prime lending rate (BPLR) which bank charged to its
most trustworthy customers.
 The committee constituted under the than DY Governor of the RBI Deepak Mohanty recommended
the abolishment of the BPLR and establishment of more transparent Base Rate.
Qualitative Measure of the RBI
Fixing Margin Requirements
 The margin refers to the “proportion of the loan amount which is not financed by the bank”. Or in
other words, it is that part of a loan which a borrower has to raise in order to get finance for his
purpose.
 A change in a margin implies a change in the loan size. This method is used to encourage credit
supply for the needy sector and discourage it for other non-necessary sectors. This can be done by
increasing margin for the non-necessary sectors and by reducing it for other needy sectors.
 Example, If the RBI feels that more credit supply should be allocated to agriculture sector, then it will
reduce the margin and even 85-90 percent loan can be given.
Consumer Credit Regulation

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 Under this method, consumer credit supply is regulated through hire-purchase and instalment sale of
consumer goods. Under this method, the down payment, instalment amount, loan duration, etc., is
fixed in advance. This can help in checking the credit use and then inflation in a country.
Publicity
 This is yet another method of selective credit control. Through it, Central Bank (RBI) publishes
various reports stating what is good and what is bad in the system. This published information can
help commercial banks to direct credit supply in the desired sectors. Through its weekly and monthly
bulletins, the information is made public, and banks can use it for attaining goals of monetary policy.
Credit Rationing
 Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount available for
each commercial bank. This method controls even bill rediscounting. For certain purpose, the upper
limit of credit can be fixed, and banks are told to stick to this limit. This can help in lowering banks
credit exposure to unwanted sectors.
Moral Suasion
 It implies to pressure exerted by the RBI on the Indian banking system without any strict action for
compliance with the rules. It is a suggestion to banks. It helps in restraining credit during inflationary
periods. Commercial banks are informed about the expectations of the central bank through monetary
policy. Under moral suasion, central banks can issue directives, guidelines and suggestions for
commercial banks regarding reducing credit supply for speculative purposes.
Control Through Directives
 Under this method the central bank issue frequent directives to commercial banks. These directives
guide commercial banks in framing their lending policy. Through a directive, the central bank can
influence credit structures, the supply of credit to a certain limit for a specific purpose. The RBI issues
directives to commercial banks for not lending loans to the speculative sector such as securities, etc.
beyond a certain limit.
Direct Action
 Under this method, the RBI can impose an action against a bank. If certain banks are not adhering to
the RBI’s directives, the RBI may refuse to rediscount their bills and securities. Secondly, RBI may
refuse credit supply to those banks whose borrowings are in excess to their capital. The Central bank
can penalize a bank by changing some rates. At last, it can even put a ban on a particular bank if it
does not follow its directives and work against the objectives of the monetary policy.

Measure of Money Supply in India

M1 M2 M3 M4
It is also known as It is a broader It is also known as Broad M4 includes all
Narrow Money. concept of the Money. items of M3 along
money supply. with total deposits
of post office saving
accounts.
M1= C+DD+OD M2= M1 + Saving M3 = M1+ Time Deposits with M4= M3+Total
C= Currency with deposits with the the Bank. Deposits with Post
Public. post office saving Time deposits serve as a store Office Saving
DD= Demand banks. of wealth and represent a Organisations.
Deposit with the M1 is saving of the people and are M4 however,
public in the distinguished not as liquid as they cannot excludes National
Banks. from M2 because be withdrawn through Saving
OD= Other the post office cheques or ATMs as Certificates of
Deposits held by saving deposits compared to money deposited Post Offices.
the public with are not as liquid in Demand deposits.
RBI. as Bank deposits.
It is the most liquid M3 is the most popular and
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 form of the money essential measure of the money
supply. supply. The monetary
committee headed by late Prof
Sukhamoy Chakravarty
recommended its use for
monetary planning in the
economy. M3 is also called
Aggregate Monetary Resource

Monetary Policy Agreement in India

Monetary Policy Agreement
What is Monetary Policy Agreement?

 In 2015 The Government of India and Reserve Bank of India signed a Monetary Policy Framework
Agreement. The new monetary policy framework was formed following the recommendations of a
committee headed by RBI Deputy Governor Urjit Patel.
 The objective of monetary policy framework is to primarily maintain price stability while keeping in
mind the objective of growth.
 As per the agreement, RBI would set the policy interest rates and would aim to bring inflation below 6
per cent by January 2016 and within 4 per cent with a band of (+/-) 2 per cent for 2016-17 and all
subsequent years.
 The central bank will be deemed to have missed its target if consumer inflation is at more than 6
percent or at less than 2 percent for three consecutive quarters starting in the 2015/16 fiscal year.
 If the central bank misses the inflation target, it will send a report to the government citing reasons
and remedial actions.
 The central bank will also need to give an estimated time-period within which it expects to return to
the target level.

Significance of Monetary Policy Agreement

 While the agreement gives a free hand to the RBI Governor to decide on the monetary policy
measures to achieve the inflation target, it also requires the RBI to give out to the Central Government
a report in case the target is missed for a period of time. Thus, it is a fine balance between autonomy
and accountability.
 The World over, the Central banks are moving towards an inflation targeting based criteria for
managing monetary policy. The MPA is a step in that direction.
 The MPA will put India into the League of Nations that followed a rule based monetary policy
mechanism.

Monetary policy committee

What is the MPC?

 The monetary policy committee framework will replace the current system where the RBI governor
and his internal team have complete control over monetary policy decisions. While a technical
advisory committee advises the RBI on monetary policy decisions, the central bank is under no
obligation to accept its recommendations.
 The committee will have six members, with three appointed by the Reserve Bank of India (RBI) and
the remaining nominated by an external selection committee. The RBI governor will have the casting
vote in case of a tie.
 According to the Finance Bill, the committee will consist of the RBI governor, the deputy governor in
charge of monetary policy and one official nominated by the central bank.
 The other three members will be appointed by the central government through a search committee.

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 This search committee will comprise of the cabinet secretary, the secretary of the Department of
Economic Affairs, the RBI governor and three experts in the field of economics or banking as
nominated by the central government.
 The members of the MPC appointed by the search committee shall hold office for a period of four
years and shall not be eligible for re-appointment.
 The idea to set up a monetary policy committee was mooted by a RBI-appointed committee led by
deputy governor Urjit Patel in 2014.
 The current members of the MPC are:
1. Governor: DR Urijit Patel
2. DY Governor RBI: DR Viral Acharya
3. Executive Director RBI: Michael Patra
4. External Member: Prof. Pami Dua
5. External Member: Prof. Chetan Ghate
6. External Member: Prof Ravindra Dholakia

Analysis of the MPC

 There is very little to disagree about the desirability of transitioning from the current decision process
to that of an MPC, imparting as it does a greater diversity of views, specialized experience and
independence of opinion.
 With the introduction of the monetary policy committee, the RBI will follow a system similar to the
one followed by most global central banks. The US Federal Reserve sets its benchmark rate—the Fed
funds rate—through the Federal Open Market Committee (FOMC). The Bank of England’s monetary
policy committee is made up of nine members.
 Setting up of MPC would make monetary policy making more democratic since currently, the RBI
governor alone decides key interest rates. The committee will take a decision based on the majority
vote. Each member will have one vote.
 The final composition of MPC announced by the government seems to tread the middle path as it tries
to address concerns over excessive government influence over monetary policy in the country Which
the draft MPC invoked since under it proposed to strip the Governor of veto vote on the monetary
policy besides powers for the government to appoint four of the six members.. The government,
however, has reserved the right to send its views to the monetary policy committee, if needed.
 Communicating the rationale of monetary policy actions is central to both the credibility of the central
bank and to enable the incidence targets of the policy to adjust behavior appropriately.

Banks & Financial Markets

Banking in India: Definition, Functions and Types of Banks
Definition of a Bank
A bank is a financial institution which performs the deposit and lending function. A bank allows a
person with excess money (Saver) to deposit his money in the bank and earns an interest rate.
Similarly, the bank lends to a person who needs money (investor/borrower) at an interest rate. Thus,
the banks act as an intermediary between the saver and the borrower.
The bank usually takes a deposit from the public at a much lower rate called deposit rate and lends the
money to the borrower at a higher interest rate called lending rate.
The difference between the deposit and lending rate is called ‘net interest spread’, and the interest
spread constitutes the banks income.
Essential Features/functions of the Bank

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Financial Intermediation
The process of taking funds from the depositor and then lending them out to a borrower is known as
Financial Intermediation. Through the process of Financial Intermediation, banks transform assets
into liabilities. Thus, promoting economic growth by channelling funds from those who have surplus
money to those who do not have desired money to carry out productive investment.
The bank also acts as a risk mitigator by allowing savers to deposit their money safely (reducing the
risk of theft, robbery) and also earns interest on the same deposit. Bank provides services like saving
account deposits and demand deposits which allow savers to withdraw money on an immediate basis
thus, providing liquidity (which is as good as holding cash) with security.

How Banks promote economic growth?

Types/Structure of Banks in India

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 Scheduled Commercial Banks
 All the commercial banks in India- Scheduled and Non-Scheduled is regulated under Banking
Regulation Act 1949.
 By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India Act, 1934 is
considered a scheduled bank. The list includes the State Bank of India and its subsidiaries (like State
Bank of Travancore), all nationalised banks (Bank of Baroda, Bank of India etc), Private sector banks,
Foreign banks, regional rural banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank NA) and
some co-operative banks.
 Till 2017, Scheduled commercial banks in India comprised 26 Public sector banks including SBI and
its associates, and 19 Nationalised Bank and IDBI. The creation of Bhartiya Mahaila Bank has
increased the total no of Public sector SCB’s to 27, but the recent merger of the Mahaila Bank with
SBI had reduced the list back to 26.
 The scheduled private sector bank includes old private sector banks and new private sector banks.
There are 13 old private sector banks and 9 new private sector banks including the newly formed
IDFC and Bandhan Bank.
 There are also 43 Foreign National Banks operating in India.
 The Regional Rural Banks were started in India back in the 1970s due to the inability of the
commercial banks to lend to farmers/rural sectors/agriculture. The governance structure/shareholding
of RRBs is as follows:
 Central Government: 50%, State Government: 15% and Sponsor Bank: 35%.
 RBI has kept CRR (Cash Reserve Requirements) of RRBs at 3% and SLR (Statutory Liquidity
Requirement) at 25% of their total net liabilities.
Important Facts Relating to Scheduled Commercial Banks
 In terms of Business, Public sector banks dominate the Indian Banking.
 PSB accounts for close to 50% of total assets, 70% of deposits and close to 70% of the advances.
 Amongst the Public-Sector Banks, SBI and its Associates has the highest number of Branches.
 The committee on Regional Rural Bank headed by M Narasimhan recommended the setting up of
RRBs for the purpose of providing rural credit.
 An RRB is sponsored by a Public-Sector Bank which also provides a part of its share capital.
Example: Maharashtra Gramin Bank (sponsored by the Bank of Maharashtra) and the Himachal
Gramin Bank (Sponsored by Punjab National Bank). RRBs were set up to eliminate other
unorganized financial institutions like money lenders and supplement the efforts of co-operative
banks.
 The Private Commercial banks account for close to 1/4th of the assets of the total banking assets.
Why RRBs Failed to Achieve ITs Objective

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The RRB Amendment Bill, 2014

 The Regional Rural Banks (Amendment) Bill, 2014 was introduced by the Minister of
Finance, Mr Arun Jaitley, in Lok Sabha on December 18, 2014. The Bill seeks to amend the
Regional Rural Banks Act, 1976. It was passed by parliament in April 2015.
 The Regional Rural Banks Act, 1976 mainly provides for the incorporation, regulation and
winding up of Regional Rural Banks (RRBs).
 Sponsor banks: The Act provides for RRBs to be sponsored by banks. These sponsor banks
are required to (i) subscribe to the share capital of RRBs, (ii) train their personnel, and (iii)
provide managerial and financial assistance for the first five years. The Bill removes the five-
year limit, thus allowing such assistance to continue beyond this duration.
 Authorized capital: The Act provides for the authorized capital of each RRB to be Rs five
crore. It does not permit the authorized capital to be reduced below Rs 25 lakh. The Bill
seeks to raise the amount of authorized capital to Rs 2,000 crore and states that it cannot be
reduced below Rs one crore.
 Issued capital: The Act allows the central government to specify the capital issued by an
RRB, between Rs 25 lakh and Rs one crore. The Bill requires that the capital issued should
be at least Rs one crore.
 Shareholding: The Act mandates that of the capital issued by an RRB, 50% shall be held by
the central government, 15% by the concerned state government and 35% by the sponsor
bank. The Bill allows RRBs to raise their capital from sources other than the central and state
governments, and sponsor banks. In such a case, the combined shareholding of the central
government and the sponsor bank cannot be less than 51%. Additionally, if the shareholding
of the state government in the RRB is reduced below 15%, the central government would
have to consult the concerned state government.
 The Bill states that the central government may by notification raise or reduce the limit of the
shareholding of the central government, state government or the sponsor bank in the RRB. In
doing so, the central government may consult the state government and the sponsor bank.
The central government is required to consult the concerned state government when reducing
the limit of the shareholding of the state government in the RRB.
 Board of directors: The Act specifies the composition of the Board of Directors of the RRB
to include a Chairman and directors to be appointed by the central government, NABARD,
sponsor bank, Reserve Bank of India, etc. The Bill states that any person who is a director of
an RRB is not eligible to be on the Board of Directors of another RRB.
 The Bill also adds a provision for directors to be elected by shareholders based on the total
amount of equity share capital issued to such shareholders. If the equity share capital issued
to shareholders is 10% or less, one director shall be elected by such shareholders. Two
directors shall be elected by shareholders where the equity share capital issued to them is

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 from 10% to 25%. Three directors shall be elected in case of equity share capital issued being
25% or above. If required, the central government can also appoint an officer to the board of
directors to ensure the effective functioning of the RRB.
 The Act specifies the term of office of a director (excluding the Chairman) to be not more
than two years. The Bill raises this tenure to three years. The Bill also states that no director
can hold office for a total period exceeding six years.
 Closure and balancing of books: As per the Act, the books of an RRB should be closed and
balanced as on December 31 every year. The Bill changes this date to March 31 to bring the
Act in uniformity with the financial year.

Non-scheduled Banks

 Non-scheduled banks by definition are those which are not listed in the 2nd schedule of the RBI Act,
1934.
 Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks.
 Unlike scheduled banks, they are not entitled to borrow from the RBI for normal banking purposes,
except, in emergency or “abnormal circumstances.”
 Jammu & Kashmir Bank is an example of a non-scheduled commercial bank.

Cooperative Banks

 Co-operative banks operate in both urban and non-urban areas. All banks registered under the
Cooperative Societies Act, 1912 are considered co-operative banks.
 In the urban centres, they mainly finance entrepreneurs, small businesses, industries, self-employment
and cater to home buying and educational loans.
 Likewise, co-operative banks in the rural areas primarily cater to agricultural-based activities, which
include farming, livestock’s, diaries and hatcheries etc.
 They also extend loans to small scale units, cottage industries, and self-employment activities like
artisanship.
 Unlike commercial banks, who are driven by profit, cooperative banks work on a “no profit, no loss”
basis.
 Co-operative Banks are regulated by the Reserve Bank of India under the Banking Regulation Act,
1949 and Banking Laws (Application to Co-operative Societies) Act, 1965.

Development Finance Institutions: IFCI, ICICI, SIDBI, IDBI, UTI,

LIC, GIC
Development Finance Institutions

The Need of DFIs

Classification of DFIs

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 Investment Refinance State Level
All India DFIs Special DFIs
Institutions Institutions DFIs
IFCI EXIM Bank LIC National State Financial
IDBI IFCI Venture Union Trust Housing Corporation.
SIDBI Capitalist Fund of India. Board. State
ICICI Tourism Finance General NABARD. Industrial
ICICI ceased to be a DFI and Corporation of Insurance Development
converted into a Bank on 30 India. Corporation. Corporations.
March 2002. IDFC.
IDBI was converted into a Bank
on 11 October 2004.

All India Development Finance Institutions

IFCI ICICI IDBI SIDBI
IFCI was the first DFI It was setup in January 1995. The IDBI was initially SIDBI was setup as
to be setup in 1948. set up as a Subsidiary of a subsidiary of IDBI
the RBI. In February in 1989.
1976, IDBI was made
fully autonomous.
With Effect from 1 With effect from April 2002, The IDBI was designated The SIDBI was
July 1993, IFCI has ICICI has been converted as apex organisation in designated as apex
been converted into into a Bank. the field of Development organisation in the
Public Limited Financing. However, it field of Small Scale
Company. was converted in a bank Finance.
wef Oct 2004. The Union Budget
of 1998-99
proposed the
delinking of SIDBI
from IDBI.
The key function of The key functions of ICICI The key functions of The key function of
IFCI was; granting were; to provide long term IDBI were; it provides SIDBI was; to
long-term loans(25 or medium term loans or refinance against loans provide assistance
years and above); equity participation; granted to industries; it to small scale units;
Guaranteeing rupee Guaranteeing loans from subscribed to the share initiating steps for
loans floated in open other private sources; capital and bond issues technological up
markets by industries; providing consultancy of other DFIs; it also gradation and
Underwriting of shares services to industry. acted as the coordinator modernization of
and debentures; of DFIs at all India level. SSIs; expanding the
Providing guarantees marketing channel
for industries. for the Small Scale
Industries product;
promotion of
employment
creating SSIs.
IFCI was a public The ICICI differed from It was a Public sector
sector DFI. IFCI and IDBI with respect DFI.
to ownership, management
and lending operation. ICICI
was a Private sector DFI.

Investment Institutions
UTI
The UTI was setup on Nov 1963
after Parliament passed the UTI
Act.
The objective of UTI was to
channel the savings of people into
equities and corporate debts. The
flagship scheme of the UTI was
called Unit Scheme 64.
LIC
LIC was setup in 1956 after the
insurance business was
nationalised.
The objective of LIC is to
provide assistance in the form of
term loans; subscription of
shares and debentures; resource
support to financial institutions
and Life insurance coverages.
GIC
The GIC was formed by the
central government in 1971.
The GIC had four subsidiaries;
National Insurance Co; New India
Assurance; Oriental Insurance;
and United India Insurance.
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In 2002, the Union Cabinet had The General Insurance
decided to split UTI into UTI 1 and Nationalisation Amendment Act,
UTI 2 as a result of the prolonged 2002, has delinked the GIC from
crisis in UTI. its four subsidiaries.

Nationalisation of Banks
Lead Bank Scheme
After the Nationalisation of the commercial Banks, the government took the initiative for extending
banking facilities in rural areas.
Prof D. R. Gadgil, chairman of National Credit Study Group, recommended the adaptation of an “area
approach” to evolve plans and programs for the development of an adequate banking and credit
structure in rural areas.
As a sequel to this “area approach”, recommended by DR Gadgil study group, the Lead Bank Scheme
was introduced in December 1969.
The Lead Bank Scheme: Under this scheme, a particular district is allotted to every nationalized
commercial bank. The allotment of districts to the various banks was based on such criteria as the size
of the banks, the adequacy of their resources for handling the volume of work.
The lead banks initially conduct basic surveys in their respective lead districts and prepare district
credit plans designed for the purpose of estimating credit needs of the concerned district so that
physical and manpower resources available may be utilized properly.
The district credit plans are linked with the development programs and are based on the integrated
development of the concerned district with a special emphasis on the development of rural and
backward areas. Since the introduction of lead bank scheme, notable progress has been achieved by
commercial banks in respect of branch expansion, deposit mobilization and credit deployment.
Undoubtedly, the scheme is a major step towards banks fulfilling their new social objectives and
holds promise for making banks as an effective instrument for bringing about the economic
development of the allotted districts.
Objectives of Lead Bank Scheme

Why the Scheme Failed

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Nationalisation of Banks
In a Free Market economy, business houses operate as per the invisible hand of the market
(responding to demand and supply conditions) with the sole objective of profits. The case of
commercial banks is no different. In a capitalist economy, they operate only for profit and not for any
social purpose.
In a poor country like India which lacks resources and has inequitable wealth distribution the access
to credit to all is an important bottleneck. In a poor country, the Profit making Banking can lead to
following problems:

To avoid all such problems the Government decided to Nationalised Commercial Banks in 1969. The
major Rationale of Nationalisation was the following;

The Timeline of Bank Nationalisation

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 Banking Sector Reforms in India: Narasimhan Committee 1&2,
Nachiket Mor Committee, P J Nayak Committee
Banking Sector Reforms

First Narasimhan Committee Report – 1991

To promote the healthy development of the financial sector, the Narasimhan committee made
recommendations.
Recommendations of Narasimhan Committee
1. Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at
the top and at bottom rural banks engaged in agricultural activities.
2. The supervisory functions over banks and financial institutions can be assigned to a quasi-
autonomous body sponsored by RBI.
3. A phased reduction in statutory liquidity ratio.
4. Phased achievement of 8% capital adequacy ratio.
5. Abolition of branch licensing policy.
6. Proper classification of assets and full disclosure of accounts of banks and financial institutions.
7. Deregulation of Interest rates.
8. Delegation of direct lending activity of IDBI to a separate corporate body.
9. Competition among financial institutions on participating approach.
10. Setting up Asset Reconstruction fund to take over a portion of the loan portfolio of banks whose
recovery has become difficult.
Banking Reform Measures of Government: –

On the recommendations of Narasimhan Committee, following measures were undertaken by

government since 1991: –
1. Lowering SLR and CRR
 The high SLR and CRR reduced the profits of the banks. The SLR had been reduced from 38.5% in
1991 to 25% in 1997. This has left more funds with banks for allocation to agriculture, industry, trade
etc.
 The Cash Reserve Ratio (CRR) is the cash ratio of banks total deposits to be maintained with RBI.
The CRR had been brought down from 15% in 1991 to 4.1% in June 2003. The purpose is to release
the funds locked up with RBI.
2. Prudential Norms: –
 Prudential norms have been started by RBI in order to impart professionalism in commercial banks.
The purpose of prudential norms includes proper disclosure of income, classification of assets and
provision for Bad debts so as to ensure that the books of commercial banks reflect the accurate and
correct picture of financial position.

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 Prudential norms required banks to make 100% provision for all Non-performing Assets (NPAs).
Funding for this purpose was placed at Rs. 10,000 crores phased over 2 years.
3. Capital Adequacy Norms (CAN): –
 Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April 1992 RBI fixed
CAN at 8%. By March 1996, all public sector banks had attained the ratio of 8%. It was also attained
by foreign banks.
4. Deregulation of Interest Rates
 The Narasimhan Committee advocated that interest rates should be allowed to be determined by
market forces. Since 1992, interest rates have become much simpler and freer.
 Scheduled Commercial banks have now the freedom to set interest rates on their deposits subject to
minimum floor rates and maximum ceiling rates.
 The interest rate on domestic term deposits has been decontrolled.
 The prime lending rate of SBI and other banks on general advances of over Rs. 2 lakhs has been
reduced.
 The rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.
 The interest rates on deposits and advances of all Co-operative banks have been deregulated subject to
a minimum lending rate of 13%.
5. Recovery of Debts
 The Government of India passed the “Recovery of debts due to Banks and Financial Institutions Act
1993” in order to facilitate and speed up the recovery of debts due to banks and financial institutions.
Six Special Recovery Tribunals have been set up. An Appellate Tribunal has also been set up in
Mumbai.
6. Competition from New Private Sector Banks
o Banking is open to the private sector.
o New private sector banks have already started functioning. These new private sector banks
are allowed to raise capital contribution from foreign institutional investors up to 20% and
from NRIs up to 40%. This has led to increased competition.
7. Access To Capital Market
 The Banking Companies (Acquisition and Transfer of Undertakings) Act was amended to enable the
banks to raise capital through public issues. This is subject to the provision that the holding of Central
Government would not fall below 51% of paid-up-capital. SBI has already raised a substantial amount
of funds through equity and bonds.
8. Freedom of Operation
 Scheduled Commercial Banks are given freedom to open new branches and upgrade extension
counters, after attaining capital adequacy ratio and prudential accounting norms. The banks are also
permitted to close non-viable branches other than in rural areas.
9. Local Area Banks (LABs)
 In 1996, RBI issued guidelines for setting up of Local Area Banks, and it gave Its approval for setting
up of 7 LABs in private sector. LABs will help in mobilizing rural savings and in channelling them
into investment in local areas.
10. Supervision of Commercial Banks
 The RBI has set up a Board of financial Supervision with an advisory Council to strengthen the
supervision of banks and financial institutions. In 1993, RBI established a new department known as
Department of Supervision as an independent unit for supervision of commercial banks.
Narasimham Committee Report II – 1998

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 In 1998 the government appointed yet another committee under the chairmanship of Mr Narsimham.
It is better known as the Banking Sector Committee. It was told to review the banking reform progress
and design a programme for further strengthening the financial system of India. The committee
focused on various areas such as capital adequacy, bank mergers, bank legislation, etc.
It submitted its report to the Government in April 1998 with the following recommendations.
1. Strengthening Banks in India : The committee considered the stronger banking system in the
context of the Current Account Convertibility ‘CAC’. It thought that Indian banks must be capable of
handling problems regarding domestic liquidity and exchange rate management in the light of CAC.
Thus, it recommended the merger of strong banks which will have ‘multiplier effect’ on the industry.
2. Narrow Banking : Those days many public sector banks were facing a problem of the Non-
performing assets (NPAs). Some of them had NPAs were as high as 20 percent of their assets. Thus
for successful rehabilitation of these banks, it recommended ‘Narrow Banking Concept’ where weak
banks will be allowed to place their funds only in the short term and risk-free assets.
3. Capital Adequacy Ratio : In order to improve the inherent strength of the Indian banking system the
committee recommended that the Government should raise the prescribed capital adequacy norms.
This will further improve their absorption capacity also. Currently, the capital adequacy ratio for
Indian banks is at 9 percent.
4. Bank ownership : As it had earlier mentioned the freedom for banks in its working and bank
autonomy, it felt that the government control over the banks in the form of management and
ownership and bank autonomy does not go hand in hand and thus it recommended a review of
functions of boards and enabled them to adopt professional corporate strategy.
5. Review of banking laws : The committee considered that there was an urgent need for reviewing and
amending main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act, State
Bank of India Act, Bank Nationalisation Act, etc. This up gradation will bring them in line with the
present needs of the banking sector in India.
Apart from these major recommendations, the committee has also recommended faster
computerization, technology up gradation, training of staff, depoliticizing of banks, professionalism in
banking, reviewing bank recruitment, etc.
C. Nachiket Mor committee

The Committee on Comprehensive Financial Services for Small Businesses and Low-Income
Households, set up by the RBI in September 2013, was mandated with the task of framing a clear and
detailed vision for financial inclusion and financial deepening in India.
In its final report, the Committee has outlined six vision statements for full financial inclusion and
financial deepening in India:

The Committee further lays down a set of four design principles namely;

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1. Stability,
2. Transparency,
3. Neutrality, and
4. Responsibility,
 The principles will guide the development of institutional frameworks and regulation for achieving
the visions outlined. Any approach that seeks to achieve the goals of financial inclusion and
deepening must be evaluated based on its impact on overall systemic risk and stability, and at no cost
should the stability of the system be compromised.
 A well-functioning financial system must also mandate participants to build
completely transparent balance sheets that are made visible in a high-frequency manner, accurately
reflecting both the current status and the impact of stressful situations on this status.
 In addition, the treatment of each participant in the financial system must be strictly neutral and
entirely determined by the role it is expected to perform in the system and not its specific institutional
character.
 Finally, the financial system must maintain the principle that the provider is responsible for sale of
suitable financial services to customers and ensure that providers are incentivised to make every effort
to offer customers only welfare-enhancing products and not offer those that are not.
 At its core the Committee’s recommendations argue that in order to achieve the vision of full financial
inclusion and financial deepening in a manner that enhances systemic stability, there is a need to
move away from a limited focus on anyone model to an approach where multiple models and
partnerships are allowed to emerge, particularly between national full-service banks, regional banks of
various types, non-bank finance companies, and financial markets. Thus, the recommendations of the
Committee seek to encourage partnerships between specialists, instead of focussing only on the large
generalist institutions.
 In the spirit of the RBI’s approach paper on differentiated Banks, the Committee recommends that the
RBI may also seriously consider licensing, with lowered entry barriers but otherwise equivalent
treatment, more functionally focused banks like Payments Banks, Wholesale Consumer Banks, and
Wholesale Investment Banks.
 Payments Banks are envisaged as entities that would focus on ensuring rapid out-reach with respect to
payments and deposit services.
 The Wholesale Consumer Banks and Wholesale Investment Banks would not take retail deposits but
would instead focus their attention on expanding the penetration of credit services.
 The Committee also recommends that the extant Priority Sector Lending norms be modified in order
to allow and incentivize providers to specialise in one or more sectors of the economy and regions of
the country, rather than requiring each and every bank to enter all the segments.
 Finally, the Committee proposes a shift in the current approach to customer protection to one that
places a greater onus on the financial services provider to provide suitable products and services.
 The committee has suggested a fixed term of 5 years for the chairman/managing director of a bank
and a term of 3 years for a whole-time director.

PJ Nayak Committee

Key Observations

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 Specific Recommendations made by the committee.

Problem of Non Performing Assets in India

Non-Performing Assets
An NPA is a loan or advance for which the principle or interest payment remained overdue for a
period of 90 days.

Banks are further required to classify NPA into:

Key Facts about India’s NPA Problem

 The financial position of India’s Public Sector Banks has deteriorated sharply since 2011.
 Gross NPA has risen to 9.5 percent of total advances in 2015-16.
 Gross NPA has expected to rise further and touch 11.5 percent in coming years.
 At the aggregate level, PSBs reported a loss of 17672 crores in 2015-16.
 Most of the loans were made during the boom period of 2004-2008.
 The banks inspired by the boom kept on lending to business houses without inspecting the projects.

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 When Global Crisis happened, the projects become unviable, and losses started to happen.
 Healthy Banking relies on healthy debt contracts. A debt contract is an agreement between a borrower
and a lender, where the borrower promises to repay the lender principle with interest as per scheduled
timeline. If the borrower cannot repay, he is in default.
 In India, most of the defaulters in recent years are not the small retail borrowers but are large
borrowers and corporate houses.
 Across the World, when a borrower defaults irrespective of how big he is, the borrower has to make
sacrifices if he defaults. Sacrifices can be in terms of asset confiscation, taking over of firms etc.
 The biggest problem in India’s Banking system is lack of incentives the big borrower has to repay the
loans back. They do not have to make many sacrifices if they default. This is the single most major
reason of the NPAs in Public Sector Banks.
 In much of the Globe when large borrower defaults they are filled with guilt and desperate to
convince their lenders that they should continue their trust in them.
 In India, however, large borrower insists on their divine right to stay in control despite their
unwillingness to put in new money. The firms and its workers, as well as past bank loans, are taken as
hostages in this game. The promoters threaten to run the enterprise into the ground unless the
government do not bail them out.
Reasons for NPAs

How to Tackle Problem of NPAs

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 Resolving the NPA Problem

 The legacy of the NPAs must be resolved as quickly as possible so that banks can focus on resuming
lending.
 Some assets that are classified as Loss assets should be written off from banks books.
 The new Bankruptcy code can be a game changer but will take time to operationalise.
 In many cases, the projects can be turned around through a combination of fresh capital from
investors and new management.
 RBI has devised two schemes in this regard: the Strategic Debt Restructuring Scheme, which allows
the bank to convert their debts into equity, take control of the company and then induced a new
management to turn it around.
 Action has been initiated under the SDR, but no successful revival has been completed so far.
 The second RBI scheme is the Scheme for Sustainable Structuring of Stressed Assets (S4A) under
which bank can offer existing management an opportunity to rehabilitate the project by dividing the
debt into two parts: a “sustainable component” which can be serviced by the project based on some
assumption by revenue and the “excess component” which can be converted into equity or
redeemable preference shares.
 Sustainable debt must be more than 50% of the total debt.
 S4A leaves the project in the hands of existing managements and also gives the banks more flexibility
in the time taken to resolve the problem. A key issue is how large a part of the debt is deemed to be
sustainable. Management and banks are bound to differ on this issue.
 There is much talk of selling assets to privately managed asset reconstruction companies (ARCs),
which can then organize the turnaround.
 Another idea is that the proposed National Infrastructure and Investment Fund (NIIF), operating with
private partners, provide both equity and new credit to stressed infrastructure projects going through
the SDR mechanism.
 The problem could be solved by creating a government-owned “bad bank” which purchases problem
loans from the banks and concentrates on turning the projects around, possibly with the help of private
ARCs.
 Bank managements will be much more willing to sell assets at a discounted price to another public
sector company, which will then undertake the task of negotiating the best deal with potential new
owners. The terms of reference of the new entity can be sufficiently clarified to encourage it to
negotiate the best possible deal with new private managements. It could work in partnership with
ARCs to fulfil this mandate.
Improving the Quality of Lending

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 The quality of lending by PSB must be improved in future so that the same problem does not arise
again.
 To provide Public sector banks with greater autonomy the shareholding of the government can be
reduced to less than 50 percent or 33 percent.
 The P. J. Nayak committee had suggested that if the dilution of shareholding is not acceptable, it
should be possible to distance the government from the managements of the banks by creating a
public sector holding company and vesting the government’s shares in the holding company. Some
statements have been made that this may be acceptable and the newly created Banks Board Bureau is
the first step in this direction.
 There are two key elements in any effort to distance government. One is that the public sector banks
should deal with only one regulator, RBI, and the extensive quasi-regulatory control exercised by the
department of financial services should be ended. The role of the government as the owner would be
performed by the holding company, and the government would deal only with the holding company
on all issues.
 A second requirement is that public sector banks should become board-managed institutions, with the
board responsible for all appointments, including that of the chief executive officer (CEO). If the
shares of the government are actually transferred to a holding company, then decisions regarding
appointments could be taken by the board of the new company on the recommendation of the board of
the bank.
 The objective of creating a genuinely commercial environment in which public sector banks can
function and managements are made accountable can only be achieved if the government is willing to
step back from exercising direct control. Unless strong action is taken along these lines, we can
assume that things will continue as they have.

Non-Banking Financial Companies in India

Non-Banking Financial Companies
 A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but
does not include any institution whose principal business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than securities) or providing any services and
sale/purchase/construction of immovable property.
 A non-banking institution which is a company and has a principal business of receiving deposits
under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any
other manner is also a non-banking financial company (Residuary non-banking company).
NBFCs are doing functions similar to banks. What is the difference between banks & NBFCs?

NBFCs lend and make investments, and hence their activities are akin to that of banks; however, there
are a few differences as given below:
1. NBFC cannot accept demand deposits;
2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on
itself.
3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs, unlike in case of banks.
4. Unlike Banks which are regulated by the RBI, the NBFCs are regulated by multiple regulators;
Insurance Companies- IRDA, Merchant Banks- SEBI, Micro Finance Institutions- State Government,
RBI and NABARD.
5. The norm of Public Sector Lending does not apply to NBFCs.

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6. The Cash Reserve Requirement also does not apply to NBFCs.
Classification and Categorization of NBFCs

Asset Finance Company AN AFC is a company which is a financial institution whose principle
business is the financing of physical assets such as automobiles,
tractors, machines etc.
Investment Company AN IC is any company which is a financial institution carrying on
its principle business of acquisitions of securities.
Loan Company LC is a financial institution whose primary business is of
providing finance by making loans and advances.
Infrastructure Finance IFC is an NBFC which deploys 75% of its total assets in infrastructure
Company loans and has a minimum net owned fund of Re 300 Crore.

Systematically Important CIC is an NBFC carrying on the business of acquisition of shares and
Core Investment securities. CIC must satisfy the following conditions:
Company It holds not less than 90% of its Total Assets in the form of
investment in equity shares, preference shares, debt or loans in
group companies;
Its investments in the equity shares (including instruments
compulsorily convertible into equity shares within a period not
exceeding 10 years from the date of issue) in group companies
constitutes not less than 60% of its Total Assets;
(c) it does not trade in its investments in shares, debt or loans in
group companies except through block sale for the purpose of
dilution or disinvestment;
(d) it does not carry on any other financial activity referred to in
Section 45I(c) and 45I(f) of the RBI Act, 1934 except investment
in bank deposits, money market instruments, government
securities, loans to and investments in debt issuances of group
companies or guarantees issued on behalf of group companies.
(e) Its asset size is ₹ 100 crore or above and
(f) It accepts public funds
Infrastructure Debt Fund IDF NBFC primary role is to facilitate long term flow of debt into
NBFC infrastructure projects. Only Infrastructure Finance Companies can
sponsor IDF.
Micro Finance NBFC MFI NBFC is a non-deposit taking NBFC having not less than 85% of
its assets in the nature of qualifying assets which satisfy the following
criteria:
a) loan disbursed by a NBFC-MFI to a borrower with a rural
household annual income not exceeding ₹ 1,00,000 or urban and
semi-urban household income not exceeding ₹ 1,60,000;
b. loan amount does not exceed 50,000 in the first cycle and
1,00,000 in subsequent cycles;
c. total indebtedness of the borrower does not exceed 1,00,000;
d. tenure of the loan not to be less than 24 months for the loan
amount in excess of 15,000 with prepayment without penalty;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not
less than 50 per cent of the total loans given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly instalments
at the choice of the borrower

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 Financial Inclusion in India: Need and future; PMJDY; Payment
Banks and Small Banks
Financial Inclusion in India

Financial Inclusion is about

1. The broadening of financial services to those people who do not have access to financial services.
2. The deepening of financial services for people who have minimal financial services.
3. Greater financial literacy and consumer protection so that people can make appropriate choices.
4. The importance of FI is both a moral one as well as economic efficiency one.

The need for Financial Inclusion

Reasons for Limited Success

How to Take Financial Inclusion Further?

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 Pradhan Mantri Jan Dhan Yojana
Jan Dhan Yojana was launched in 2014 to bring financial inclusion in India. The important features of
Jan Dhan Yojana include
Zero Balance Account
 The accounts under PMJDY will be zero balance accounts which mean account holders do not need to
maintain any bank balance. Most regular bank accounts require that a minimum balance which might
vary from Rs 500 to Rs 5000 will have to be maintained in the bank account failing which a penalty
will have to be the customer.
 In April this year , RBI announced that banks could no longer charge a penalty for non-maintenance
of average quarterly balance, this was after it received complaints from bank account holders that
their bank balances had disappeared over several months. Keeping this in mind , banks have now
introduced zero balance accounts under Pradhan Mantri Jan Dhan Yojana.
Insurance Cover of Rs 1 Lakh along with Rupay Cards
 All account holders will receive a Rupay Debit Card so that they can withdraw money from any ATM
and also use it to make payments at merchant establishments.
 Each Rupay Card will also insure the Card Holder with accident insurance of up to Rs 1 Lakh from
HDFC Ergo and Medical Insurance of up to Rs 30,000 for sick account holders. This money could be
used for treatment and pay medical bills when the need arises.
Pass Book and Cheque Books
 Some Banks are issuing additional pass books and cheque books to some users if they make an
additional payment of Rs 100 to Rs 500. This is an additional feature and can be availed by account
holders only if they feel the need for it.
Direct Benefit Transfers
 Another valuable feature of Pradhan Mantri Jan Dhan Yojana is that bank accounts which are linked
to Aadhaar ID’s can avail government subsidies by electronic transfer directly into their accounts. For
Example, The government might transfer food subsidies, it provides to ration card holders directly
into their bank account.
Overdraft / Loan
 Overdraft facility of Rs 5000 will be provided to account holders who transact regularly using their
rupay card and maintain a good balance in their bank accounts.
Progress under PMJDY
 As many as 20.38 crore bank accounts were opened under the PMJDY as per the latest data available.
These 20.38 crore bank accounts had deposits of Rs 30,638.29 crore.

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 As per trends available, the percentage of accounts with ‘Zero Balance’ have actually shown a
significant decline. Accounts with no balance in them were as high as 76.81 per cent of the total
opened under the scheme as on September 30, 2015. They have come down to just about 32 per cent
at the end of December 2015.
 The Finance Ministry data further showed that 8.74 crores of the accounts were seeded with Aadhaar
and 17.14 crore account holders were issued RuPay cards.
 As on January 15, 2016, banks had offered 53.54 lakh account holders overdraft facility of which the
sanction was issued for 27.56 lakh cases, and 12.32 lakh account holders availed it. The total amount
availed was Rs 166.7 crore.
Payment Banks
What is the main objective of a Payments Bank?
 Let us consider an example – You pay salary to your Car driver in cash because he does not have a
bank account. Individuals like him generally send money to his family members (who might be
residing in his native place, a small village) through known people or he may use Money-order
facility to remit the cash. But, more and more people like him are becoming mobile phone savvy. The
payments Banks applicants will look to unbanked people like your car driver as low-hanging fruit to
harvest as their first customers.
 (India has around 90 crore mobile users and out of which around 70 crores are active users. The total
no of mobile subscribers in rural areas are 38 crores)
 Don’t get surprised if your neighbourhood supermarket or even your mobile phone can soon be
doubled up as a Bank.
 So, the main objective of Payments Banks is to increase financial inclusion (to get more people into
the banking system) by providing Small Savings Accounts, Payment or remittance services to low-
income households / labour, small businesses etc.,
 Payments banks will provide basic banking services to people who currently do not have a bank
account, including millions of migrant workers. Almost half of India’s population is unbanked.
 These banks will aim at providing high volume-low value transactions in deposits and Payments /
remittance services in a secured technology-enabled environment.
Why do we need Payment bank?
 As discussed above, payments bank allow you only to open savings and current accounts. But doesn’t
a normal bank allow you to do that even now? Yeah, but the difference is a payments bank can now
be your mobile service provider, supermarket chain or a non-banking finance company. (Bharti Airtel,
with 20 crore subscribers, has nearly the same number of customers as State Bank of India. The
transactions done through mobile wallets have tripled over the last two years to Rs 2,750 crore.)
 Payment banks may make handling cash a lot easier. For example, you can transfer money using your
mobile phone to another bank or to another mobile phone holder and also receive amounts through
your device. Or you can transfer the amount to point-of-sale terminals at large retailers and take out
cash.
 Payment banks will pay an interest rate on savings accounts.
 The deposits are covered by the DICGC (Deposit Insurance & Credit Guarantee Corporation), like
your Bank Fixed Deposits.
Challenges Faced by Payment bank
 The impact of these banks is not guaranteed, and they will face the same hurdles as any financial
services provider that aims to serve the country’s low-income, rural communities. If it were simple to
serve these customers, India’s previous Business Correspondent efforts – not to mention its
experience with private services like M-PESA, which captures almost every payment in countries like
Kenya and Tanzania – would have met with more resounding success.

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 A payment bank will be working on a thin margin. They are expected to go to the hinterland and tap
the consumer base there. This is a cost-heavy structure and, therefore, financial viability for a bank
will not be easy.
Small Banks
What is a small bank?
 Small finance banks are a type of niche banks in India. Banks with a small finance bank license can
provide basic banking service of acceptance of deposits and lending.
 The main purpose of the small banks will be to provide a whole suite of basic banking products such
as bank deposits and supply of credit but in a limited area of operation. The objective for these Small
Banks is to increase financial inclusion by the provision of savings vehicles to underserved and
unserved sections of the population, the supply of credit to small farmers, micro and small industries,
and other unorganized sector entities through high technology-low cost operations.
Why there is a need for small banks?

 India has seven branches per 100,000 population compared with 40 branches per 100,000 population
in developed countries.
 The financial inclusion aims to have one bank account per member of the family. But, there are many
families those have adult members without a bank account. Cent per cent financial literacy means one
bank account per adult. Small banks can tap this population.
 Independent studies have revealed that around 90 per cent of the micro and small businesses have no
access to the formal mainstream financial institutions. Since their ticket size is small, these banks can
bring micro and small entrepreneurs into their fold.
 The main purpose of the small banks will be to provide a whole suite of basic banking products such
as bank deposits and supply of credit but in a limited area of operation. The objective for these Small
Banks is to increase financial inclusion by the provision of savings vehicles to underserved and
unserved sections of the population, the supply of credit to small farmers, micro and small industries,
and other unorganized sector entities through high technology-low cost operations.
 Many people in rural areas lend or deposit their hard-earned monies with money lenders and
financiers. Chit funds are also very popular. The main reason for all these things is that they do not
have access to banks. Small Banks can change this scenario as According to the guidelines, at least
50% of a small bank’s loan portfolio should constitute loans and advances of up to Rs.25 lakh. Which
means loans will be smaller in size.
 The opening of small Banks would also increase competition in the Banking sector which could
improve Monetary transmission for example Recently; RBI had cut the key policy rates. But, bank
customers have not yet benefited from these interest rate cuts. Most of the banks have not yet passed
on the benefits to its customers as they have an informal understanding with other Banks. However,
they are fast enough to reduce deposits rates though. This situation could improve if more competition
is introduced in the banking sector
Challenges Small Banks will face

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 Nowhere in the world so far have small banks been a roaring success. In the US, where they are called
community banks, a few are doing well, such as State Bank of Texas and Prinz Bank, but overall, they
hold less than 15 per cent of the country’s total banking assets.
 Small banks, apart from extending credit, will also have the job of mobilizing deposits. This requires
inspiring immense trust. Neither MFIs nor NBFCs have experience in this aspect. “Building a retail
deposit portfolio is a big challenge where existing public and private sectors banks have an advantage
because of their strong brands.
 75% of net credits of small banks should be in the Priority Sector lending. However, the issue really is
that priority sector loans tend to become vulnerable to becoming non-performing assets (NPAs) with
the propensity being higher for them. In the past, the NPA ratio for priority sector loans has ranged
from 4-5% while that of the non-priority sector has been around 3%. Thus this can affect the financial
stability of the small banks.
 The challenge would be to control NPAs here, as an unfavourable monsoon would have an impact on
farm loans. Similarly, any slowdown in the industrial sector is first felt on the small and medium-
sized enterprises (SMEs), which have payments problems. Therefore, on both scores, they would be at
a disadvantage compared with the commercial banking system.
 Banks are able to diversify their portfolio by lending to all sectors which include retail, services and
manufacturing, while these banks would be left with dealing with the smaller ones only. Besides,
given that these accounts would be small and well dispersed, the cost of monitoring would also be
higher for them.

Indian Agriculture
(a) Historical background and current status

Land Tenure System in Pre-Independent India: Zamindari System; Mahalwari

System; Ryotwari System
Land Tenure System in Pre-Independent India
At the time of independence, there were three major types of land tenure systems prevailing in the
country. The basic difference in these systems was regarding the mode of payment of land revenue.

Zamindari System Mahalwari System Ryotwari System

Under the Zamindari system, Under the Mahalwari system, Under the Ryotwari system, the
the land revenue was collected the land revenue was collected land revenue was paid by the
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 from the farmers by the from the farmers by the village farmers directly to the state.
intermediaries known as headmen on behalf of the
Zamindars. whole village.
Zamindari system was started In this system, the entire In this system, the Individual
by the Imperialist East India village is converted into one cultivator called Ryot had full
Company in 1793. big unit called ‘Mahal’ and rights regarding sale, transfer, and
treated as one unit as far as leasing of the land. The ryots
payment of land revenue is could not be evicted from his land
concerned. as long as he pays the rent.
Lord Cornwallis entered into Mahalwari system was In this system, the responsibility of
‘Permanent Settlement’ with popularised by Lord William paying the rent lies with the
the landlords with a view to Bentinck in Agra and Awadh. individual cultivator called “Ryot”.
increase land revenue. Under It was later extended to There exist no intermediaries
this arrangement, the landlords Madhya Pradesh and Punjab. between the government and the
were declared as zamindars The responsibility of collecting individual cultivator.
with full proprietorship of the and depositing the rent lied
land. with the village headmen.
The Zamindars were made
responsible for the collection
of the rent.
The share of the government The Mahalwari system is The ryotwari system though
in the total rent collected by found to be less exploitative appears satisfactory and better than
the zamindars was kept at than the Zamindari system. Zamindari and Mahalwari, in
10/11th, and the balance going reality, the system had several
to zamindars. deficiencies. The system was
dominated by the mahajans and
moneylenders who granted loans
to cultivators by mortgaging their
land. The moneylenders exploited
the cultivators and evicted them
from their land in case of loan
default.
The system was most The system was prevalent in The system was first introduced in
prevalent in West Bengal, Agra, Awadh, Punjab, Orrisa Tamil Nadu and later extended to
Bihar, Orrisa, UP, Andhra and Madhya Pradesh. Maharashtra, Berar, East Punjab,
Pradesh and Madhya Pradesh. Coorg and Assam.
Land Reforms in India
Definition
Land Reforms usually refers to redistribution of Land from rich to poor. Land reforms include;
 Regulation of Ownership
 Operation, Leasing, sale
 Inheritance of Land
In an agrarian economy like India with massive inequalities of wealth and income, great scarcity and
an unequal distribution of land, coupled with a large mass of people living below the poverty line,
there are strong economic and political arguments for land reforms.
Due to all these compelling reasons, Land reforms had received top priority by the governments at the
time of independence. The Constitution of India left the adoption and implementation of the land
reforms to the state governments. This has led to a lot of variations in the implementation of land
reforms across states.
Economic Arguments in Favour of Land Reforms

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Given these observations, one could make an argument in favour of land reform based not only on
equity considerations but also on efficiency considerations. For example, the inverse relationship
between farm size and productivity suggests that land reform could raise productivity by breaking
(less productive) large farms into several (more productive) small farms. Also, lower productivity
under sharecropping suggests that land reform could raise productivity by converting sharecroppers
into owner-cultivators.

The Objectives of Land Reforms in India were:

After Independence, attempts had been made to alter the pattern of distribution of land
holdings on the basis of four types of experiments, namely;

The Government over the years defined the aim of land reforms to cover the following:

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 The land reforms legislations passed/undertaken by all the state governments mainly covers and
converges to the common themes/measures of the following:

Abolishment of Intermediaries

1. It was widely recognised that the main cause of stagnation in the agriculture economy was to a large
extent due to exploitative agrarian relations.
2. The Chief instrument of the exploitation were the intermediaries like Zamindars, patronised and
promoted by the British government.
3. About 60% of the area under cultivation was under the Zamindari system on the eve of the
Independence. The States took the task of abolishing the intermediaries like Zamindars by passing the
legislations.
4. The government estimates state that in total during first four Five years Plan, 173 million acres of land
was acquired from the intermediaries and two crores tenants were given land to cultivate.
5. Abolition of intermediaries is generally agreed to be one component of land reforms that have been
relatively successful. The record in terms of the other components is mixed and varies across states
and over time. Landowners naturally resisted the implementation of these reforms by directly using
their political clout and also by using various methods of evasion and coercion, which included
registering their own land under names of different relatives to bypass the ceiling, and shuffling
tenants around different plots of land, so that they would not acquire incumbency rights as stipulated
in the tenancy law.
6. The success of land reform has been driven by the political will of specific state administrations, the
notable achievers being the left-wing administrations in Kerala and West Bengal.
Tenancy Reforms
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 Tenancy reforms included the following set of measures:
 Regulation of rent
 Security of tenure
 Ownership rights of tenants
Tenants in India are classified into
 Occupancy Tenants: They enjoy permanent right over land and cannot be evicted easily.
 Tenants at will: They do not enjoy any right over land and can be evicted by the landlords anytime.
Therefore, to protect the tenants at will and subtenants, the tenancy reforms are passed by the various
state governments.
Regulation of Rents: Under the British Government, the rents charged was highly exploitative with
no sound economics behind it. These highly exploitative rents spelt high misery on the tenants and
trapped them into vicious circles of debt and poverty.
To provide relief to the tenants from exploitative rents, the Indian government after independence
passed legislations to regulate the rents (maximum limits on rent was fixed) and to reduce the miseries
of the tenants.
Security of Tenure: To protect the tenants from arbitrary evictions and to grant them permanent
rights over land, legislations had been passed in most states.
Legislations passed by the States has three essential aims; Evictions must not take place except in
accordance with the provisions of law; Land may be resumed by the owner, if at all, for the “Personal
Cultivation” only; In the event of land taken by the owner, the tenant is assured of a prescribed
minimum area.
However, the vague definitions of Tenants Personal Cultivation and landowner under the law made it
difficult to implement the tenancy reforms. The rights of resumptions provided in the law combined
with the flaws in the definitions of the personal cultivation rendered all tenancies insecure.
Ownership Rights of Tenants: It has been repeatedly emphasised by the government, that the
ownership rights of the land should be conferred to the actual cultivator. Accordingly, most states
have passed legislations to transfer ownership rights to the tenants.
However, the success of the states in conferring the rights to the tenants varied widely. Some states
like West Bengal, Kerala and Karnataka, has performed exceptionally well in this regard. In West
Bengal due to the “Operation Barga” maximum sharecroppers were given ownership of land.
Land Ceilings
Land Ceiling on agriculture land means a statutory maximum limit on the quantity of land which an
individual may hold. The imposition of the Land ceiling has two main aspects:
 Ceiling on future acquisitions.
 Ceilings on existing land holdings.
By 1961-62, ceiling legislation had been passed in all the States. The levels vary from State to State
and are different for food and cash crops. In Uttar Pradesh and West Bengal, for example, the ceiling
on existing holding is 40 acres and 25 acres. In Punjab, it ranges from 27 acres to 100 acres, in
Rajasthan 22 acres to 236 acres and in Madhya Pradesh 25 acres to 75 acres.
In order to bring about uniformity, a new policy was evolved in 1971. The main features were:
1. Lowering of ceiling to 28 acres of wetland and 54 acres of unirrigated land
2. Change over to the family rather than the individual as the unit for determining land holdings lowered
ceiling for a family of five.
3. Fewer exemptions from ceilings.
4. Retrospective application of the law for declaring Benami transactions null and void,
5. No scope to move the court on the ground of infringement of fundamental rights.
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 Why was Land Ceiling needed?

The Argument against Land Ceiling

Land Consolidation

Land Consolidation means merging of multiple consolidated farms and giving it to each farmer. The
measure is adopted to solve the problem of land fragmentation. The Land consolidation program
required granting of one consolidated land to the farmer, which is equal to the total land holdings in
different scatters under the farmer possession. It simply means instead of holding multiple small lands
in different places; the farmer will be given a single big piece of land.
Why the Program Failed?
 The programme failed to achieve its desired objective because the farmers are reluctant to exchange
their lands for the new one. The arguments given by the farmers is that there existing land is much
more fertile and productive than the new land provided under land consolidation.
 The farmers also complained about nepotism and corruption in the process of consolidation. The
farmers complained that the rich and influential often bribes and manage to get fertile and well-
situated land, whereas the poor farmers get unfertile land.
Cooperative Farming
Cooperative farming is advocated to solve the problem of sub-divisions of land holdings. The idea
was to make farming profitable for small and marginal farmers having small pieces of land.
Under Cooperative Farming setup farmers having very small holdings come together and join hands
to pool their lands for the purpose of cultivation. Pooling of farms helps in increasing production, and
the farmers can have more produce to sell in the markets after taking out their subsistence need.
Cooperative farming also helps in mechanisation of agriculture as the owner of the multiple small
farms can pool their money to buy a mechanical tractor or other equipment’s which they could not
afford otherwise.
Arguments in favour of Cooperative Farming

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 Situation of Indian Agriculture
Indian Agriculture: A brief Outlook
1. Agriculture accounted for 14% of India’s GDP in 2016-17 and provided employment to more than
half a billion people. The share of Agriculture in employment is close to 54% as on 2016-17.
2. Indian Agriculture is dominated by the small-scale farming and is characterised by low productivity.
3. The average size of land holding in Indian Agriculture is less than 2 hectares.
4. The low land holding size means that most of the Indian farmer practices subsistence farming, where
they consume the majority of what they produce and sell whatever is left.
5. The Indian Agriculture remains the largest employer of the female labour force in India. The share of
women labour force out of total women labour force employed in agriculture is close to 65%.
6. The Indian agriculture suffers from the twin problem of low productivity and excess workforce
employed in it. Due to which the per capita productivity of workforce is very low.
7. The low productivity results in depressing the wages in the agriculture sector leading to high level of
poverty.
8. Agriculture’s importance in India’s Trade is declining, but it still has a share of about 10% in India’s
total exports.
9. Compare to the high growth in other sectors of the Indian economy, the performance of the Indian
agriculture remains poor due to slow and erratic growth rates. The average growth rate of India’s
agriculture over the past decades remains low at less than 2%.
10. At such a low growth rate of the agriculture sector, it is impossible to uplift millions of rural poor out
of poverty.
11. The agriculture sector in India has undergone very limited liberalisation. The state still plays a
predominant role in the Indian agriculture.
12. Concerns about food security and poverty with respect to the second largest population in the world
lead the government to remain strongly involved in regulating India’s agriculture through fixing
prices for key agricultural products at the farm and consumer levels, high border protection, bans on
or support for exports, and massive subsidies for key inputs such as fertilisers, water and electricity.
13. The Indian agriculture remains one of highly subsidised sector of the economy.

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14. Total foodgrains production in India is estimated to be 272 million tonnes in the year 2016-17.
15. The estimated production of key cereals like wheat, rice and pulses will be 96.6 million tonnes, 106.7
million tonnes and 22.1 million tonnes respectively in the year 2016-17.
16. The other major crops grown in India are oilseeds with an estimated production of 33.6 million
tonnes, sugarcane at 309 million tonnes, cotton at 32.5 million bales.
17. As per the land use statistics 2013-14, the total geographical area of the country is 328.7 million
hectares, of which 141.4 million hectares is the reported net sown area and 200.9 million hectares is
the gross cropped area with a cropping intensity of 142 %.
18. The net sown area works out to be 43% of the total geographical area. The net irrigated area is 68.2
million hectares.
19. The sharp deceleration in the growth of the agricultural sector against the backdrop of an impressive
growth of the larger economy is widening disparities between the incomes of workers in non-
agricultural and agricultural activities.
Role of Agriculture in Indian Economy

 A growing agriculture sector is a prerequisite for the development of India.

 The growing surplus form the agriculture sector is needed to feed the millions of people who live
below poverty line and can hardly sustain themselves.
 The agriculture sector has to maintain a very high growth rate of above 4% in order to sustain the
pressure of rising population.
 A growing agriculture sector controls inflation because increased food supplies and agricultural raw
materials keep the prices down and stable.
 The agriculture sector has an important backward linkage with the industrial sector. The rural
consumers are an important source of demand for the industrial goods.
(b) Cropping Patterns
Cropping Patterns in India: Factors Affecting; Most Important Cropping Patterns
Cropping Pattern in India
Back to Basics: Cropping Pattern mean the proportion of area under different crops at a point of time,
changes in this distribution overtime and factors determining these changes.
Cropping pattern in India is determined mainly by rainfall, climate, temperature and soil type.
Technology also plays a pivotal role in determining crop pattern. Example, the adoption of High Yield
Varieties Seeds along with fertilisers in the mid 1960’s in the regions of Punjab, Haryana and Western
Uttar Pradesh increased wheat production significantly.
The multiplicity of cropping systems has been one of the main features of Indian agriculture. This
may be attributed to following two major factors:
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1. Rainfed agriculture still accounts for over 92.8 million hectares or 65 percent of the cropped area. A
large diversity of cropping systems exists under rainfed and dryland areas with an overriding practice
of intercropping, due to greater risks involved in cultivating larger area under a particular crop.
2. Due to prevailing socio-economic situations (such as; dependency of large population on agriculture,
small land-holding size, very high population pressure on land resource etc.), improving household
food security has been an issue of supreme importance to many million farmers of India, who
constitute 56.15 million marginal (<1.0 hectare), 17.92 million small (1.0-2.0 hectare) and 13.25
million semi-medium (2.0-4.0 hectare) farm holdings, making together 90 percent of 97.15 million
operational holdings.
3. An important consequence of this has been that crop production in India remained to be considered,
by and large, a subsistence rather than commercial activity.
Factors Determining Cropping Pattern in India

Cropping Pattern in India

30 most important cropping patterns in India

Specific Issues Related to the Cropping Pattern

Crop Pattern Region/State Issues Related to Crop Pattern

Rice-Wheat UP, Punjab, Haryana, Bihar, Over the years there is stagnation in
West Bengal, Madhya Pradesh. the production and productivity loses.

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Rice-Rice Irrigated and Humid coastal
system of Orrisa, Tamil Nadu,
Andhra Pradesh, Karnataka and
Kerala.
Rice- Groundnut Tamil Nadu, Andhra Pradesh,
Karnataka, Orrisa and
Maharashtra.
Rice-Pulses Chhattisgarh, Orrisa and Bihar.
Maize-Wheat UP, Rajasthan, MP and Bihar
Sugarcane-Wheat UP, Punjab and Haryana
accounts for 68% of the area
under sugarcane.
The other states which cover
the crops are; Karnataka and
MP.
The main reasons for stagnation
are:
Over Mining of Nutrients from the
soil.
Declining Ground Water Table.
Increase Pest Attacks and
Diseases.
Shortages of Labour.
Inappropriate use of Fertilizers.
The major issues in sustaining the
productivity of rice-rice system are:
Deterioration in soil physical
conditions.
Micronutrient deficiency.
Poor efficiency of nitrogen use.
Imbalance in use of nutrients.
Non-availability of appropriate
trans planter to mitigate labour
shortage during the critical period
of transplanting.
The major issues in the pattern are:
Excessive Rainfall and Water
Logging.
Non-availability of quality seeds.
Limited expansion of Rabi
Groundnut in Rice grown areas.
Factors limiting Productivity are:
Droughts and Erratic Rainfall
distribution.
Lack of Irrigation.
Low coverage under HYV Seeds.
Weed Attacks.
Little attention to pest attacks and
diseases.
Marginalisation of land and
Removal of Tribal from their own
land.
The Reason for Poor Yields are:
Sowing Timing.
Poor Weed Management.
Poor Plant Varieties.
Poor use of organic and inorganic
fertilizers.
Large area under Rain Fed
Agriculture.
Problems in Sugarcane-Wheat system
are:
Late Planting.
Imbalance and inadequate use of
nutrients.
Poor nitrogen use efficiency in
sugarcane.
Build-up of Trianthema partu
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 lacastrum and Cyprus rotundus in
sugarcane.
The stubble of sugarcane pose
tillage problem for succeeding
crops and need to be managed
properly.
Cotton-Wheat Punjab, Haryana, West UP, Problems in Cotton-Wheat system
Andhra Pradesh, Karnataka, are:
Tamil Nadu. Delay Planting.
Stubbles of cotton create the
problem of tillage operations and
poor tilth for wheat.
Cotton Pest like Boll Worm and
White Fly.
Poor nitrogen use efficiency in
cotton.
Soya bean-Wheat Maharashtra, MP and Rajasthan Constraints limiting the soybean
production and productivity are:
A relatively recent introduction of
soybean as a crop.
Limited genetic diversity.
Short growing period available in
Indian latitudes.
Hindered agronomy/availability of
inputs at the farm level.
Rainfed nature of crop and water
scarcity at critical stage of plant
growth.
Insect pests and diseases, Quality
improvement problems.
Inadequate mechanization and
partial adoption of technology by
farmers have been identified.
Legume Based Cropping MP, Gujarat, Maharashtra, The major issues in Legume based
Systems (Pulses- Andhra Pradesh and Karnataka. system are:
Oilseeds) Lack of technological
advancement.
Loses due to erratic weather and
waterlogging.
Diseases and Pests.
Low harvest index, flower drop,
indeterminate growth habit and
very poor response to fertilizers
and water in most of the grain
legumes.
Nutrient needs of the system have
to be worked out considering N-
fixation capacity of legume crops.
Horticulture Crops in India
India has made a good place for itself on the Horticulture Map of the World with a total annual
production of horticultural crops touching over 1490 million tones during 1999-00.

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The horticultural crops cover about 9 percent of the total area contributing about 24.5 percent of the
gross agricultural output in the country. However, the productivity of fruits and vegetables grown in
the country is low as compared to developed countries.

Vegetable Crops
Vegetable crops in India are grown from the sea level to the snowline. The entire country can broadly
be divided into six vegetable growing zones:

Low productivity is the main feature of vegetable cultivation in India as farm yields of most of the
vegetables in India are much lower than the average yield of the world and developed countries.
The productivity gap is more conspicuous in tomato, cabbage, onion, chilli and peas. The
preponderance of hybrid varieties and protected cultivation are mainly responsible for high
productivity in the developed countries.
Constraints in vegetable production:
1. Lack of planning in Production
2. Non-availability of seeds of improved varieties.
3. High cost of basic production elements
4. Inadequate plant protection measures and non-availability of resistant varieties.
5. Weak marketing facilities
6. Transportation limits
7. Post-harvest losses

Types of Cropping Systems: Mono cropping; Crop Rotation; Sequential

Cropping; Inter Cropping; Relay Cropping
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 Cropping Systems/ Combinations

Monocropping: Example Planting Wheat year after year in the same field. Monocropping is when
the field is used to grow only one crop season after season.
Disadvantages: it is difficult to maintain cover on the soil; it encourages pests, diseases and weeds;
and it can reduce the soil fertility and damage the soil structure.
Crop Rotation: Example Planting maize one year, and beans the next. Crop Rotation means
changing the type of crops grown in the field each season or each year (or changing from crops to
fallow).
Crop rotation is a key principle of agriculture conservation because it improves the soil structure and
fertility, and because it helps control weeds, pests and diseases.
Sequential Cropping: Example- Planting maize in the long rains, then beans during the short rains.
Sequential Cropping involves growing two crops in the same field, one after the other in the same
year.
In some places, the rainy season is long enough to grow two crops: either two main crops, or one main
crop followed by a cover crop.
Growing Crops two crops may also be possible if there are two rainy seasons, or if there is enough
moisture left in the soil to grow a second crop.
Intercropping: Examples- Planting alternating rows of maize and beans, or growing a cover crop in
between the cereal rows. Intercropping means growing two or more crops in the same field at the
same time.
Mixed Intercropping: Distribution of the seeds of both the crops, or dibbling the seeds without any
row arrangement. This process is called mixed intercropping. It is easy to do but makes weeding,
fertilization and harvesting difficult. Individual plants may compete with each other because they are
too close together.
Planting the main crop in rows and then spreading the seeds of the intercrop (such as a cover crop).
Row Intercropping: Planting both the main crop and the intercrop in rows. This is called row
intercropping. The rows make weeding and harvesting easier than with mixed intercropping.
Stir Cropping: Example Planting alternating strips of maize, soybean and finger millet. Stir Cropping
involves planting broad strips of several crops in the field. Each strip is 3–9 m wide. On slopes, the
strips can be laid out along the contour to prevent erosion. The next year, the farmer can rotate crops
by planting each strip with a different crop.
Advantages:
 It produces a variety of crops, the legume improves the soil fertility, and rotation helps reduce pest
and weed problems.
 The residues from one strip can be used as soil cover for neighbouring strips.
 At the same time, strip cropping avoids some of the disadvantages of intercropping: managing the
single crop within the strip is easy, and competition between the crops is reduced.
Relay Cropping: Example- Planting maize, then sowing beans between the maize rows four weeks
later.
Relay Cropping the process of growing one crop, then planting another crop (usually a cover crop) in
the same field before harvesting the first. This helps avoid competition between the main crop and the
intercrop. It also uses the field for a longer time, since the cover crop usually continues to grow after
the main crop is harvested.

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 (c) Issues related to direct and indirect farm subsidies and minimum support prices

Farm Subsidies in India: Definition; Working; Need; Negative Impacts

Agriculture Subsidies in India
Introduction of the HYV program in the mid-1960s necessitated a high priority to supplying quality
inputs like irrigation, water, fertilizers and electricity to the Indian farmers. These all were classified
as essential inputs for the development of the agriculture.

To ensure that these inputs are accessible to all farmers at all the times the government decided to
subsidised these inputs.

How Subsidy Works

There are two most common ways of subsidising agriculture;

1. Firstly, governments may pay much higher prices for the agricultural products than what the farmers
can obtain under free market environment, and
2. Secondly, by supplying the inputs at a price that is below the cost of supplying these inputs or below
at the price that would prevail in an open free trade environment.
 Higher prices for farm products can be provided mainly by insulating the domestic markets from the
world economy through a restrictive trade policy.
 On the other hand, vital inputs like fertilisers, irrigation water, credit, electricity used in the
agricultural sector can be supplied to the farmers at prices which are below the open market prices.
The prices of these inputs, therefore, do not reflect their true value, i.e, the real cost of supplying these
inputs.
 Of the above mentioned two alternatives, subsidies on inputs are normally preferred because it is
believed that benefits of government expenditure can be derived by the farmers only in proportion to
their use of inputs. Input subsidisation also avoids raising food and raw material prices, thus avoiding
the plausible adverse effect on growing industrial sector or a large mass of poor living in the
developing countries.

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 However, most often, it is not just a single mechanism but a combination of both higher output prices
and lower input prices which has been used to subsidise agriculture with objectives varying from the
need to raise domestic production and protect incomes of the farming community.
 India also tinkered with both input and output prices, primarily to protect the poor and/or to stimulate
the use of modern inputs.
Rationale for subsidising Agriculture

Negative Impacts of Agriculture Subsidies

However, the issue of agriculture subsidies is not to be examined only from the perspective of fiscal
imbalances, but from a much wider perspective of ensuring food and nutritional security for Billions
and ensuring that poor and marginal farmers do not get wiped out from the market.

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Direct and Indirect Farm Subsidies

Types of Farm Subsidies in Indian Agriculture: Irrigation and Power

Subsidies; Fertilizer Subsidy; Seed Subsidy; Credit Subsidy
Subsidies in Indian Agriculture

Major subsidies on Agricultural Inputs

Power and Irrigation Subsidies:

Subsidies on power and irrigation are provided by the state governments.

Power subsidy is granted on power that is used to draw on groundwater. Accordingly, it is a subsidy
to privately drawing and privately-owned means of irrigation. Power subsidy is the difference
between the price paid by the farmer for the usage of electricity and the actual cost of generating the
electricity.
The sustainability of the power subsidies has come under a lot of stress in recent years mainly because
of the bad health of State electricity boards finances. The states like Punjab and Tamil Nadu has
provided electricity to the farmers free of cost which has led to its wastage and financial losses to the
state electricity boards. Estimates further suggests that the average cost recovered by the SEB’s form
the agriculture sector is only 10 percent of the cost of generating electricity.
Irrigation subsidy is the subsidy provided on the usage of government provided canal water.
Irrigation subsidy is the difference between operating and maintenance cost of irrigation infrastructure
in the state and irrigation charges recovered from farmers. This may work through provisions of
public goods such as canals, dams which the government constructs and charges low prices or no
prices at all for their use from the farmers. It may also be through cheap private irrigation equipment
such as pump sets.
Irrigation subsidies has become unsustainable mainly because the states have failed to device a
rational pricing model for the canal water. Estimates suggest that the pricing of the canal water did not
cover more than 20 percent of the operational and maintenance expense of the canals.

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 Fertilizer Subsidies
The fertilizer subsidies are borne by the Central Government. The need for the fertilizer subsidy arises
from the nature of fertilizer pricing policy of the government. The fertilizer price policy is being
governed with the following two objectives:
 Making fertilizer available to farmers at a low and affordable price to encourage their use and increase
production.
 Ensuring fair returns on the investment made by the fertilizer industry to attract more investment in
the fertilizer industry.
To fulfil the first objective, the government has been keeping the selling prices of fertilizers static and
uniformly low throughout the country.
As far as the second objective is concerned, the government had come up with the policy of
“Retention Price Scheme” in the year 1977.
Retention Price Scheme: Under RPS, the government fixes a fair ex-factory retention price for
various fertilizers of different manufacturers. The Government pays the manufacturers their cost of
production along with a profit margin of 12 percent (post tax) if the factory utilises the 90 percent of
the installed capacity.
Calculation of Fertilizer Subsidy
Under the fertilizer pricing policy, the farmer gets the fertilizer at a pre-determined low rate called
maximum selling price. The manufacturer was paid an amount called Retention Price which is fixed
at a high level so that manufacturer can cover his cost and yet leave a 12 percent profit.

Fertilizer subsidies in the Post Reform Period

1. The mounting burden of subsidies compelled the policy planners to make a serious attempt to reform
the fertiliser price policy to rationalise the fertiliser subsidy. As part of economic reforms initiated in
the early 1990s, the government decontrolled the import of complex fertilisers such as di-ammonium
phosphate (DAP) and muriate of potash (MOP) in 1992, and extended a flat-rate concession on these
fertilisers. But, urea imports continue to be restricted and canalised.
2. Based on the recommendations of various committees including the High-Powered Fertiliser Pricing
Policy Review Committee (HPC) and the Expenditure Reforms Commission (ERC), a New Pricing
Scheme (NPS) for urea units was implemented in a phased manner from April 2003 with an objective
to bring transparency, uniformity, and efficiency, and reduce the cost of production. Similarly, based
on the recommendations of the Expert Group on P and K fertilisers, a policy for phosphatic and
potassic fertilisers has been implemented.
Nutrient Based Subsidy Scheme
The Government of India implemented a Nutrient Based Scheme with effect from 2010. Under the
NBS scheme, a fixed subsidy is announced on per KG based on nutrients annually. An additional
subsidy is also given for micronutrients.
With the objective of providing quality fertilizer to the farmers depending on the crops and soil
requirements, the government has included new grade of complex fertilizers under the NBS scheme.
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 Under the NBS, manufacturers are allowed to fix the MRP. The farmers pay only 50 percent of the
delivered cost of Phosphate (P) and Potash (K) fertilizer and the rest is borne by the government in the
form of subsidy.
Neem Coated Urea Policy, 2015:
The government has made it mandatory for domestic fertilizer firms to “Neem coat” at least 75 per
cent of their urea production (It can even go upto 100%).Earlier, there was a cap of 35% on this. The
government has also allowed manufacturers to charge a small 5 per cent premium on Neem-coated
urea
Aim:
Checking the excessive use of urea which is deteriorating the soil health and adversely impacting
overall crop yield
Benefits:
 Reduce the subsidy outgo
 Prevent diversion of urea for industrial use
Limitations:
The subsidy savings arising out of this pales beside the enormity (financially and politically) of the
fertilizer subsidy that is paid on the three major fertilizers, N, P and K
New Urea Policy, 2015:
To incentivize domestic manufacturers and free transportation of P (phosphorus) and K (potassium)
fertilizers. It will be in force from 2015 to 2019 (4 Financial years)
Need for the Policy:
 India is world’s third-largest consumer of fertilizers
 India is highly import-dependent in the case of urea. Presently, India is importing about 80 lakh
metric tonnes of urea out of total demand of 310 lakh metric tonnes
Objectives:
 Maximize indigenous Urea Production to reduce import dependency and reduce subsidy burden on
the government
 Promote energy efficiency to reduce Carbon-footprint (via energy efficiency) to make Urea
production environment-friendly. [This will be done via revised specific energy consumption norms]
 Make Urea production plant to adopt the best technology available and become globally competitive
 Rationalization of Subsidy burden
 Timely supply of Urea to farmers at the same MRP
Salient Feature:
 The government will cover the entire cost of natural gas, which is the main feedstock of urea.
 Movement plan for P&K fertilizers has also been freed to reduce monopoly of few companies in a
particular area so that any company can sell any P&K fertilizer in any part of the country. Rail freight
subsidy has been decided to be given on a lump sum basis so that the companies economize on
transport. This will help farmers and reduce pressure on the railway network
Proposed Outcome:
 Will cut the yearly subsidy bill
 Increase annual production by 2 million tonnes
Imbalance in Fertilizer Use Consumption
The government interventions in the fertilizer policy over the years has resulted in uneven pricing
structure and nutrient usage. The result of this is distorted pattern and application of the fertilizer
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 usage in India. The application of N-Nitrogen, P-Phosphate and K-Potash in the farms is distorted.
The ideal ration of N: P: K usage IN India is 4:2:1.
However, due to inaccurate price structure, the N: P: K ratio in India has become 10:3:1 in the year
1997-98. The ratio had further deteriorated in the succeeding years. The current situation is, however,
improved a little with N: P: K ratio at 8.2:3.2:1 in the year 2013-14.
The reason for such a gross mismatch is the relative cheap price of the urea (Nitrogen) as compared to
the other two nutrients Phosphate and Potash. The imbalance and excessive use of urea had also
resulted in the degradation of the environment and soil fertility.
Seed Subsidy: Seed subsidy is granted through the distribution of quality seeds at a price that is less
than the market price of the seeds.
Credit Subsidy: It is the difference between interest charged from farmers, and actual cost of
providing credit, plus other costs such as write-offs bad loans. Availability of credit is a major
problem for poor farmers. They are cash strapped and cannot approach the credit market because they
do not have the collateral needed for loans. To carry out production activities, they approach the local
money lenders.
Taking advantage of the helplessness of the poor farmers the lenders charge exorbitantly high rates of
interest. Many times, even the farmers who have some collateral cannot avail loans because banking
institutions are largely urban based and many times they do not indulge in agricultural credit
operations, which is considered to be risky. (such as collateral requirements) can be relaxed for the
poor.
Infrastructural Subsidy: Private efforts to construct basic infrastructure in many areas do not prove
to be sufficient to improve agricultural production. Good roads, storage facilities, power, information
about the market, transportation to the ports, etc. are vital for carrying out production and sale
operations. These facilities are in the domain of public goods, the costs of which are huge and whose
benefits accrue to all the cultivators in an area.
No individual farmer will come forward to provide these facilities because of their long gestation
period and inherent problems related to revenue collections (no one can be excluded from its benefit
on the ground of non-payment). Therefore, the government takes the responsibility of providing these
and given the condition of Indian farmers a lower price can be charged from the poorer farmers.
Government Intervention in Indian Agriculture
Issues Related to Government Intervention in India’s Agriculture
Background
Government intervention in food grain marketing in India began in 1960’s. The objective of the
intervention is to revamp and incentivise the agriculture sector by using HYV seeds and technological
inputs with the ultimate aim of increasing food grain production.
Increasing production alone is not sufficient; the government needs to ensure that increase in
production benefits the poor/ consumer. Several measures were undertaken to achieve the twin
objective of ensuring food security and raising food production. The key measures were:
 Price assurance to producers using the system of Minimum Support Prices.
 Maintaining Buffer Stocks.
 Distribution of food grains at a reasonable price through a network of fair price shop under Public
Distribution System.
The policy of increasing production and providing food security has been helpful to India in
several ways.

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 The biggest disadvantage of such an interventionist policy especially since the beginning of
economic reforms of 1991 are:

Why is Government intervention needed in food grain markets?

 To achieve the goal price stability at the time of bumper harvest or below normal production.
 To provide a guaranteed price to producer farmers.
 To supply food to vulnerable and poor sections at a lower price.
The government has been carrying out procurement and storage of food grains in India since 1960’s
through mainly two institutions:
 The Commission for Agriculture Cost and Prices (CACP).
 The Food Corporation of India (FCI)

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 The CACP is entrusted with the task of suggesting the Minimum Support Prices. The FCI is entrusted
the task of procurement and storage of food grains.
The critical aspect of this whole intervention is the price at which the produce is procured from
farmers. Till the beginning of economic reforms MSPs for food grains were based entirely on
domestic factors, mainly on the cost of production of crops. Though CACP was required to take into
consideration the international price situation, this aspect was never given any weight while arriving
at the level of MSPs.
The situation changed post-1991 when India embraced economic reforms.

Minimum Support Prices in Indian Agriculture: MSP definition;

Working; Issues; Drawbacks; Way Ahead; Buffer Stocks
Issues related to Minimum Support Price in India
Minimum Support Price
Definition: MSP is a part of India’s Agriculture Price Policy. MSP is the price at which the
government purchases crops from the farmers. MSP is the guaranteed ‘minimum floor price’ that
farmer must get from the government in case the market price of the crops falls below the MSP. The
Rationale behind MSP is to support the farmer from excess fall in the crop prices.
The MSP for various crops is announced by the central government at the beginning of every crop
seasons on the recommendation of CACP. The MSP is a fixed assured price that farmers gets in case
price falls heavily due to a bumper harvest. MSP in a sense work as an insurance policy for the
farmers to save them from price falls.
The most important aim of the MSP policy is to save the Indian farmer from making distress sales. In
the event of glut and bumper harvest, when market prices fall below the announced MSP, the
government through its agencies buys the entire stock offered by the farmers at the MSP.
MSP is currently announced for 24 commodities including
 Seven cereals: Paddy, Wheat, Jowar, Bajra, Barley, Maize and Ragi.
 Five Pulses: Gram, Arhar, Moong, Urad and Lentil.
 Eight Oilseeds: Groundnut, Rapseed/Mustard, Toria, Soyabean, Sunflower, Sesamum, Niger seed and
Safflower seed.

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 Cash Crops: Raw Cotton, Copra, Raw Jute and Virginia Flu Curved Tobacco.
MSP: Historical Context
The system of MSP in India was started in the mid 1960’s amid food shortages. The idea was to
create a favourable environment and incentivise farmers to increase production by adopting “High
Yield Variety” seeds and technology for cereals like Wheat and Rice.
The adoption of the MSP Policy in India was mainly due to food scarcity and price fluctuations
provoked by drought, floods and international prices for exports and imports. The policy, in general,
was directed towards ensuring reasonable food prices for consumers by providing food grains through
Public Distribution System (PDS) and inducing adoption of the new technology for increasing yield
by providing a price support mechanism through Minimum Support Price (MSP) system.
In order to provide farmers an assured price for their crops and motivating them to adopt advanced
technology to increase production the Agricultural Price Commission was setup in the year 1965
(Renamed as Commission for Agriculture Cost and Price in 1985) on the recommendation of LK JHA
Committee. The role of Agriculture Price Commission is to advise government on agriculture price
policy.
Calculation of MSP
The CACP in deciding the MSP for various crops takes into account a lot of comprehensive factors
including the supply and demand factors of each crop.

The Initial Success of the MSP Policy

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 The drawbacks of the MSP Policy

The Current situation of MSP

The most important goal of any long-term agriculture development policy in India should be to
promote agriculture growth along with regional equity and natural resource sustainability. The
regional equity and resource sustainability is a precondition for achieving nutritional security and
balanced production. However, the system of the MSP has failed to achieve this objective of
sustainability.
In order to make MSP relevant and efficient, the government have to revamp the policy.
1. MSP is announced for 24 commodities after which starts the operational part of procurement of the
commodities. The procurements are made at the MSP price and government has to ensure that farmers
do not get the price below MSP. However, it has been found that there exists no mechanism on the
ground that ensures that farmers are paid the MSP. It has been noticed that many times farmers are
forced to make distress sale at a price below the MSP.
2. For instance, it does not matter for producer of pulses or oilseeds anywhere in the country or for
paddy and wheat farmers in Chhattisgarh, Orissa, Assam, Bihar and a majority of the other states
whether the CACP recommends Rs 500 or Rs 5,000 per quintal for their crop as there is no
enforcement of the MSP in these cases. In these cases, the long exercises and recommendations made
by the CACP remain only on paper.
3. To make MSPs relevant to the country’s present situation requires changes in the criterion used by the
CACP to arrive at MSPs and ensuring that MSPs are effectively implemented where they are meant to
be implemented.
4. The CACP must consider both Demand and Supply factors while deciding the MSP. For instance,
CACP main criteria in deciding the MSP is to take into account cost of production. The CACP
completely ignores the demand side factors. When the demand for commodities are falling, and if at
that time MSP is kept high, then it will lead to excess supplies and increase in government buffers
stock which will be kept idle and will get wasted. In all such situation, it is important that MSP should
be derived based on demand and supply factors.
5. Due to distorted MSP, inefficiency builds in into the system, and the farmers do not bother if growing
a particular commodity on land that is unsuitable for its production will raise its cost and make land
non-productive in the long run.
For instance, this is exactly what has happened in the case of extension of rice cultivation to the semi-
arid regions and sandy soils in states like Punjab and Haryana, which is creating a host of
environmental and natural resources problems in addition.
1. Fixing MSP for political reasons and under the pressure of the farmer leaders leads to a total neglect
of societies preference for commodities. It also leads to serious imbalances where what is being
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 demanded is not being produced and what is not being demanded is being produced in the economy.
It would also require the government to buy produce all the time and everywhere if the MSP ignores
demand-side factors.
2. Everyone in India including political leaders are convinced that the agrarian crisis and farmer distress
are mainly because of low levels of MSP. The quick solution reached by them is therefore to increase
the MSP. However, a comprehensive analysis and correct understanding of agricultural situation
reveal that the problem lies elsewhere.
3. The Indian agriculture suffers from twin problems of lack of viability of practising agriculture due to
the small and marginal size of land holdings and high volatility in farm sector due to monsoon failures
and lack of irrigation.
4. The small size of land holdings, low productivity, increasing production costs, shrinking employment
opportunities outside agriculture, and declining growth rate in agriculture are all major serious issues
which cannot be simply resolved by increasing the MSP.
5. For instance, according to the 70th round survey of the NSSO (2014), the estimated number of
agricultural households (AHHs) in India is 90.2 million, who constitute 57.8% of the total estimated
rural households (156.14 million). Clearly, 42.2% of rural households (RHHs) are without any
agricultural land.
Among the AHHs, 2.65% have only 0.01 hectares (ha) of land and are simply notional AHHs.
Another 31.89% AHHs have land between 0.1 ha and 0.4 ha, and 34.9% have land between 0.41 ha
and 1 ha. These three categories of AHHs account for 69.44% and are classified as marginal farmers.
If we add small farmers (17.14%), the proportion of marginal and small farmers comes out to be
86.58% of the total.
The average size of the marginal holdings is only 0.41 ha (one acre), and that of smallholdings is 1.4
ha, much lower than the upper size-class limit of 2 ha. Given their economically unviable holding
size, and small quantities of marketable surplus, there will be a marginal increase in the total net
income of these farmers from agriculture even if they are given the higher MSP of over and above
50% of crops of production.
The relative economic conditions of the agricultural workforce (cultivators as well as labourers) have
gone poorer vis-à-vis their counterparts in the non-agricultural sectors. Taking into account a large
number of underemployed and those disguised unemployed workers in agriculture, MSP alone is not
going to address the agrarian crisis and farmers’ distress, especially in the case of marginal and small
AHHs, who account for 87% of AHHs.
If not MSP? Then where lies the problem?

Looking Beyond the MSP

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The long-term fundamental solutions that has the potential to solve the agrarian crisis in India lies in
the domain of.

An Alternative to MSP: Price Deficiency Payment System

The increase in the MSP irrespective of cost consideration is a second-best alternative to make
farming viable. Moreover, to make MSPs effective to the country’s present situation requires changes
in the criterion used by the CACP to arrive at MSPs.
The CACP mainly considers the cost of production as the main criterion to decide the level of MSPs.
This is justified when there is a situation of scarcity and increasing the food supply is the primary
objective. However, the country is now facing a situation where the demand is falling short of supply,
and there is an increase in surplus. In the present context, it is highly recommended that the demand
side factors should get primacy in determining the MSP.
There are several other problems related to cost of production used as a basis for MSPs. Wastefulness
gets in-built into production process, and farmers do not have to bother if growing a particular crop on
land unsuitable for its cultivation would raise cost of production
Second, fixing MSPs based on the cost of production totally neglects changes in income and society’s
preference for a commodity which adversely impacts the functioning of the markets and price
discovery. It also causes serious imbalances in what is being produced and what is required or
demanded.
Rather than debating on the cost criterion, it is much important to ensure that the farmers do not
undertake distress sale of their produce. This would require some mechanism on the ground to see that
farmers are not forced to sell their produce below the MSP.
However, there exists no such mechanism on the ground except for few crops like rice and wheat in
some states and in the case of sugarcane and cotton in states of Maharashtra and UP. Unfortunately,
nobody seems to have raised this issue in public that implementation of the MSP is more important.
The Swaminathan Commission
The National Commission on Farmer’s headed by Dr M S Swaminathan highlighted that the main
reasons of agrarian agony in India were non implementation of land reforms, water scarcity, lack of
irrigation, technology exhaustion, inadequate access and availability of institutional source of finance,
dependence on money lenders, weak market infrastructure, lack of opportunities for assured and
remunerative marketing, low investment in research and development, low levels of education and
skill, and lack of employability of surplus workforce outside agriculture.
The Swaminathan commission had recommended serval path-breaking measure to resolve agrarian
distress in India. These recommendations are of a more vital nature and in all likelihood will provide a
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long-term solution to the agrarian crisis and farmers’ distress. The National Commission on Farmer’s
recommendations are mainly in the domain of land reforms, irrigation, productivity, credit, insurance,
food security, bio-resources, and public investment in agriculture, human development, and the rural
nonfarm sector. The Swaminathan commission has thus provided solutions to the agrarian crisis and
farmers’ distress both in the domain of the agriculture sector as well as outside agriculture sector.
The Alternative
The alternative is to go for ‘deficiency price payment’ without requiring the government to purchase
undesirable quantities and undesirable commodities. Deficiency price payment must be part of the
difference between the actual price received by farmers and the MSP. In order to ensure that resale of
produce does not take place the size of deficiency payment should be kept less than the charges
involved in the first sale of produce like mandi fee, auction, labour charges, etc.
The Madhya Pradesh government has launched a ‘Price Deficiency Payment’ schemes for the farmers
called ‘Bhavantar Bhugtan Yojana’ (BBY) in October 2017. The BBY currently applies eight Kharif
crops; soybean, maize, urad, tur, lentil, moong, groundnut, ramtil. Under BBY, the state government
credits the difference between MSP and the modal price (average price prevailing in the market)
directly into the bank accounts of the beneficiaries. The farmers have to first register on a BBY portal,
after which they are asked to bring their produce to the mandis at a time specified by the government.
The quantity of the produce qualified for the price deficiency payment is determined by the state
government on the basis of average productivity and area under cultivation for the crop.
However, the scheme has very limited success, and the scheme is not inclusive as the benefits of the
BBY is limited to small number of farmers who registered under the portal. For example, only 32
percent of urad production in Madhya Pradesh got the yojana’s benefit despite the fact that ASP of
urad was 42 percent below its MSP. In other words, 68 percent of urad production was sold at prices
below MSP, without any compensation under BBY. In the case of soybean, the state’s prime Kharif
crop, the percentage of production benefiting from this scheme is even lower — only 18.5 percent,
despite its ASP being 12 percent below the MSP. And for maize, groundnut and moong, the coverage
is even poorer.
Moreover, the farmers who are not registered under the portal have to suffer big losses because traders
are suppressing the market. To conclude, BBY is not inclusive and covers only 25 percent of the
farmer’s losses and is prone to manipulation by the traders.
A similar Price Deficiency scheme is launched by the Government of Haryana for onion, tomatoes,
potatoes and cauliflower and the Government of Telangana (on a pilot basis) where the farmers are
given investment support for their working capital needs.
In addition to these expense, there may be further distortions. The Marketed surplus for all the crops is
likely to increase since farmers may find it more profitable to sell all the produce in the mandis. The
BBY scheme window is likely to be open for only a couple of months and farmers will have to sell
their produce within the short time frame to avail compensation. This will eventually led to decline in
the market price in that period because of large supply. The scheme will be worse for the unregistered
small and marginal farmers because they will be forced to sell their produce at lower prices at a lower
price and will not be compensated for their loses. The scheme will give more power to the lower
bureaucracy and traders as all the paper work for farmer registration and sale of produce in the mandi
will go through them. Therefore, the scheme may end up helping trader more than the needy farmers.
The government of Telangana ‘Input Support Scheme’ is more inclusive since it does not require
farmers to register their areas and crops. The scheme main aim is to save the farmer from the
moneylenders by providing them loans for the purchase of the inputs like seeds, fertilizer, machinery
and hired labour. Moreover, the farmers are given a choice to produce any crop and sell it anytime in
a mandi of his choice. The Telangana model is crop neutral, more reasonable and transparent. The
scheme is based on market mechanism as it does not distort the prices of the crops.
In contrast, the Government of Telangana and Government of Karnataka has plan to launch the
‘Input/Income Support Scheme’ on per hectare basis for both the Kharif and Rabi season in 2018-19.
The scheme is more inclusive since it does not require farmers to register their areas and crops. The
scheme main aim is to save the farmer from the moneylenders by providing them loans for the
purchase of the inputs like seeds, fertilizer, machinery and hired labour. Moreover, the farmers are

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 given a choice to produce any crop and sell it anytime in a mandi of his choice. The Telangana model
is crop neutral, more reasonable and transparent. The scheme is based on market mechanism as it does
not distort the prices of the crops. The Telangana government scheme will support investment at Rs
4000 per acre per farmer for the purchase of inputs like seeds; Fertilizer; Pesticides etc. The amount
will be directly paid into the bank accounts of the farmers before the beginning of the sowing season.
On similar lines, Karnataka Government also plans to implement DBT of Rs 5000 per hectre for
dryland farmers in Kharif 2018.
Pricing policy for sugarcane
The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control) Order,
1966 issued under the Essential Commodities Act (ECA), 1955. Prior to 2009-10 sugar season, the
Central Government was fixing the Statutory Minimum Price (SMP) of sugarcane and farmers were
entitled to share profits of a sugar mill on 50:50 basis. As this sharing of profits remained virtually
unimplemented, the Sugarcane (Control) Order, 1966 was amended in October 2009 and the concept
of SMP was replaced by the Fair and Remunerative Price (FRP) of sugarcane. A new clause
‘reasonable margins for growers of sugarcane on account of risk and profits’ was inserted as an
additional factor for working out FRP, and this was made effective from the 2009-10 sugar season.
Accordingly, the CACP is required to pay due regard to the statutory factors listed in the Control
Order, which are
 the cost of production of sugarcane;
 the return to the grower from alternative crops and the general trend of prices of agricultural
commodities;
 the availability of sugar to the consumers at a fair price;
 the price of sugar;
 the recovery rate of sugar from sugarcane;
 the realization made from the sale of by-products viz. molasses, bagasse and press mud or their
imputed value (inserted in December 2008) and;
 Reasonable margins for growers of sugarcane on account of risk and profits (inserted in October
2009).
States also announce a price called the State Advisory Price (SAP), which is usually higher than the
SMP.
Other Major Support Schemes of Government
Market Intervention Scheme
Similar to MSP, there is a Market Intervention Scheme (MIS), which is implemented at the request of
State Governments for procurement of perishable and horticultural commodities in the event of fall in
market prices.
The Scheme is implemented when there is at least 10% increase in production or 10% decrease in the
ruling rates over the previous normal year. Proposal of MIS is approved on the specific request of
State/UT Government, if the State/UT Government is ready to bear 50% loss (25% in case of North-
Eastern States), if any, incurred on its implementation.
Under MIS, funds are not allocated to the States. Instead, the central government share of losses as
per the guidelines of MIS is released to the State Governments/UTs, for which MIS has been
approved based on specific proposals received from them.

Price Supports Scheme (PSS)

The Department of Agriculture and Cooperation implements the PSS for procurement of oilseeds,
pulses and cotton, through NAFED which is the Central nodal agency, at the Minimum Support Price
(MSP) declared by the government.
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 NAFED undertakes procurement as and when prices fall below the MSP.
Procurement under PSS is continued till prices stabilize at or above the MSP. Losses, if any incurred
by NAFED in undertaking MSP operations are reimbursed by the central Government. Profit, if any,
earned in undertaking MSP operations is credited to the central government.
BUFFER STOCK
Buffer Stock is another main instrument of Agriculture pricing policy in India. India has a policy of
maintaining a minimum reserve of foodgrains (only for wheat and rice) so that food is available
throughout the country at affordable prices round the year.
The main supply from the government’s buffer stock goes to the public distribution system (now
TPDS) and at times goes to the open market to check the rising prices if needed.
Public sector food grain stocks are significant support of India’s food policy and food security. They
have three important societal goals.
1. To provide space for effective implementation of minimum support price for rice and wheat through
procurement mechanism.
2. To maintain price stability arising out of year to year fluctuations in output or any other exigency.
3. As a source of supply for public distribution system and various other schemes to sustain food and
nutrition security particularly of economically weaker sections.
The Food Corporation of India is the key agency for procurement, storage and distribution of food
grains. In addition to the requirements of wheat and rice under the targeted public distribution system,
the Central Pool is essential to have sufficient stocks of these in order to meet any emergencies such
as drought/failures of the crop, as well as to allow open market intervention if price increases.
Major objectives of Buffer Stocks:

However, the Buffer Stock policy has raised the questions over the storage capability of the FCI and
contaminated grains in the open godowns in the country. The issue of storage had also been
highlighted by the Supreme Court, which recommended that government should allocate the grains
free to the poor section of society. The problem is huge, but the government does not have an
immediate solution. The FCI has to increase the storage capacity to accommodate the record
procurement.

Current Buffer Stock Policy of Government:

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1. The current buffer norms were reviewed in January 2015. According to the new norms, the central
pool should have 41.1 million tonnes of rice and wheat on July 1 and 30.7 million tonnes on October
1 every year. These limits were 32 million tonnes and 21 million tonnes earlier.
2. The stocking norms for the quarters beginning January’1 and April’1 have been revised only slightly.
Main drivers for increased buffer stocks were increased offtake from the targeted public distribution
system and also the enactment of National Food Security Act.
3. It was observed that Food Corporation of India buys almost one-third of the total rice and wheat
produced in the country at minimum support prices. It does imply that denying to any farmer who
wants to sell his produce at MSP. But then it also needs to maintain an excessive, uncontrollable and
monetarily troublesome food inventory.
4. Previously, once the buffer norms were met, cabinet approval was needed to sell any part of it in the
open market. But in January 2015, it is revised.
5. The current policy is that Food Ministry is authorized to dispose the surplus stock into open market
without seeking cabinet approval. This was a major policy decision, and it was needed to resolve the
problem of burdensome inventories at Food Corporation of India and misrepresentation created in the
market.
6. The maintenance of a buffer stock is also important to ensure national food security. Stocks mainly of
rice and wheat are commonly maintained from year to year at a substantial cost in order to effectively
take care of variations in domestic food grain production. These variations occur quite regularly due
to climate and man-made factors.
7. Buffer stocks are created from the domestic food surpluses available in years of high production.
They are also built and maintained through imports as and when required. The optimum size of the
buffer stocks at any point of time is based on the proposals of expert committees appointed for the
purpose by the government from time to time.

In the context of India, buffer stocking of food grains is theoretically seen as a mechanism to deliver
strategic food and agricultural domestic support policies, but in terms of its effectiveness to
accomplish its objective, there is a growing consent, both domestically and internationally, that the
food stocking programme has been not just expensive but also indiscreetly wasteful.

In India, the prices of agricultural products such as wheat, cotton, cocoa, tea and coffee tend to alter
more than prices of manufactured products and services. This is mainly due to the volatility in the
market supply of agricultural products coupled with the fact that demand and supply are price
inelastic.

In order to manage the fluctuations in prices, it needs to operate price support schemes through the
use of buffer stocks. Buffer stock schemes stabilize the market price of agricultural products by
buying up supplies of the product when harvests are copious and selling stocks of the product onto the
market when supplies are low.

Problems with buffer stock schemes:

 Theoretically, buffer stock schemes should be lucrative, since they buy up stocks of the product when
the price is low and sell them onto the market when the price is high. Nonetheless, they do not often
work well in practice. Evidently, perishable items cannot be stored for a long time and can, therefore,
be immediately ruled out of buffer stock schemes.
 Cost of buying excess supply can cause a buffer stock scheme to run out of cash. A guaranteed
minimum price causes over-production of rice and wheat which has its economic and environmental
costs.
 There are also high administrative and storage costs to be considered.
 Open-ended Procurement policy leads to excess procurement and since FCI storage capacity of grains
is limited a large amount of grain procured under buffer stock scheme is wasted and rotten.

Public Distribution System in India: Definition; Issues; Working;

Need; Disadvantages

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 Issues Related to Public Distribution System
What is PDS?

The PDS is a part of India’s Agriculture Price Policy. The Agriculture price policy in India has a twin
objective of supporting farmers at the time of bumper harvest (when the price falls due to excess
production) and supporting poor consumers from price rise by providing them cheap foodgrains
through a network of fair price shops (Ration Shops) at a subsidised price.

The PDS makes available fixed quotas of foodgrains to poor households through ration shops at a
subsidised ration price called “Issue Price”.

The original aim of the PDS was to stabilise prices and remove fluctuations from the foodgrains
market. But, later on, PDS has assumed the role of an important and most significant anti-poverty
programme of the government.

The Cost of Running PDS

The cost of operation of the PDS consists of two major components:

 Subsidy Cost: The subsidy cost occurs because the cost at which foodgrains are procured is higher
than the price at which they are sold in the PDS.
 Administration Cost: Administration costs occurred due to storage, procurement operations and
transportation of food grains from farmers to consumers. Theft, wastages and damages in storage and
transit add to these costs.

Why PDS was Needed?

Why the Penetration of PDS is weak, and PDS has failed to Provide food security to
Poor?

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The Timeline of the PDS in India

The Working of the PDS

The existing structure of the PDS works in a Cooperative Federalist system in which both Centre and
State shares the responsibility.

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The Central Government is responsible for buying foodgrains from farmers at MSP. The Central
Government than allocates the grains to each state on the basis of a pre-determined formula.
The State Government is responsible for identifying the poor and eligible households in the states.
The Centre transports the food grains to the Central depots (FCI) in each state. After that, the state
government is responsible for delivering the food grains from the centre depots to the ration shops.
The Ration shops are the ultimate end points from where the food grains are sold to PDS
beneficiaries.

Targeted PDS in India, Antyodaya Anna Yojana (AAY), Alternative to the PDS,
Direct Benefit Transfers, National Food Security Act
Targeted PDS in India
PDS began as a Universal Programme in India due to food shortages of the mid 1960’s. But, since
1997 it has been exclusively targeted towards the poor, providing Wheat, Rice, Sugar and Kerosene at
a highly subsidised to the below poverty line households.

The objective was to help very poor families buy food grains at a reasonably low cost to enable them
to improve their nutrition standards and attain food security. The new system followed a two-tier
subsidised pricing structure: one for BPL families, and another for Above the Poverty Line (APL)
families.

How Cheap Food Grains ensure Nutritional Security?

In both the cases, whether Substitution dominates or the Income effect dominates, the end result
will be an increase in calories intake by consumer’s and reduction in nutritional deficiencies.

Note for Students:

In order to make Targeted PDS more effective the Government had launched the Antyodaya Anna
Yojana in December 2000.
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 Antyodaya Anna Yojana (AAY): The objective of the scheme was to identify the poorest
households among the BPL category and to provide each of them with the following:

 Total 25 KG of food grains per month @ fixed price of RS 2 per KG for Wheat and RS 3 Per KG for
Rice.

Individuals in the following priority groups are entitled to an AAY card, including:

1. landless agricultural labourers,

2. marginal farmers,
3. rural artisans/craftsmen such as potters and tanners,
4. slum dwellers,
5. persons earning their livelihood on a daily basis in the informal sector such as porters, rickshaw
pullers, cobblers,
6. destitute,
7. households headed by widows or terminally ill persons, disabled persons, persons aged 60 years or
more with no assured means of subsistence, and
8. all primitive tribal households.

The Food Corporation of India (FCI) is the nodal agency at the centre that is responsible for
transporting food grains to the state godowns. Specifically, FCI is responsible for:

1. procuring grains at the MSP from farmers,

2. maintaining operational and buffer stocks of grains to ensure food security,
3. allocating grains to states,
4. distributing and transporting grains to the state depots,
5. selling the grains to states at the central issue price to be eventually passed on to the beneficiaries.

Important Prices Related to the PDS

How to Strengthen the Public Distribution System.

Aadhaar Based Enrolment.

The key problem in the efficient functioning of the PDS is the inclusion errors and the exclusion
errors. Aadhaar cards could be used to identify the real poor households, thereby eliminating the

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inclusion errors. The use of Aadhar would also help in eliminating the duplicate and ghost
beneficiaries.

Use of E-Technology and ICT.

Technology based reforms would help in reducing the leakages. The current system of manual
recording the beneficiary is prone to corruption and tampering. The computerisation of records will
resolve this problem. The end-to-end computerisation could curb large-scale diversion of grains to the
open markets and help track the delivery of food grains from state depots to beneficiaries.

Technology based reforms undertaken by States:

Removing the Urban Bias.

It has been found that most of the Ration shops are situated in the urban areas of cities rather than the
backward areas and slums, where most of the people poor live. The poor often have to travel miles to
procure their quota of grains. The situation of Ration shops in the Urban centres also increase the risk
of inclusion errors as urban middle class have a strong incentive to enrol themselves in the local
Ration shops. If the ration shops are restricted to slums than the urban middle class will find it
difficult to travel to slums to buy grains. Thereby eliminating the wrongful inclusions.

Choice of Commodities sold.

The PDS in India provides cereals like Wheat and Rice to the poor. However, various studies have
found that the poor generally prefers coarse grains like ragi, maize, Jowar and Bajra. These cereals are
not only rich in carbohydrates and protein but are also less consumed by the rich and urban middle
class. If coarse cereals are sold in the PDS shops, then the rich will automatically stop using ration
shops. Thereby eliminating the inclusion problem.

Decentralisation of the PDS.

The current system of centralised PDS where the centre procures the grain and then distribute it to
each state is highly inefficient. The centralised PDS further adds to the unbearable administrative cost
of transporting the grains from FCI to the state depots. It would be better if the states are given the
power to procure and distribute grains on their own at the MSP and CIP decided by the centre.

Alternative to the PDS

Universal PDS:

Under the Universal PDS the grains are provided to every household of the state irrespective of the
income level. The non-classification of the households eliminates the risk of inclusion and exclusion
errors. It also reduced the cost of running the scheme as it reduced the administrative cost of
identifying the poor and cost of monitoring the scheme.

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 Food Coupons:

Food Coupons are another alternative to PDS. Beneficiary are provided with food coupons which are
equivalent to money. The food coupons are used to buy grains from local markets and grocery stores.

Retailers or grocery shop owners take these coupons to the local bank and are reimbursed with
money. According to the Economic Survey 2009-10 reports, such a system will reduce administrative
costs. Food coupons also decrease the scope for corruption since the store owner gets the same price
from all buyers and has no incentive to turn the poor buyers away. Moreover, BPL customers have
more choice; they can avoid stores that try to sell them poor-quality grain.

Direct Benefit Transfer:

DBT provides for cash transfers to the poor. Under DBT, beneficiaries will be given money by the
government in their respective bank accounts which can be used to but grains from the open markets.
Under the DBT system the government will provide money directly to the target group usually poor
households. The identification of the poor households are much easier under the DBT system, since
the bank accounts are linked with Aadhaar and can be easily monitored.

Some of the potential advantages of these programmes include: (i) reduced administrative costs, (ii)
expanded choices for beneficiaries, and (iii) competitive pricing among grocery stores.

 In PDS leakage arises due to ghost ration cards. Under DBT “the identity of a person is known and
ration cards will be Aadhaar-verified, due to which, only the right beneficiaries will get the subsidy.

 The savings from DBT on food subsidy is expected to be much larger than that for LPG. According to
budget estimates, India’s food subsidies for the 2015-16 will be Rs.1.24 trillion. So, if government
manages to save 40% of the subsidy, it will be around Rs.50,000 crore annually.

 The saved money could be invested by Government in Infrastructure, health or education where social
returns would be much higher.

 Usually the PDS grains are of inferior quality. DBT would ensure that the poor families will buy good
quality grain from the open market. This would certainly improve the nutritional outcome for the
people and will be a step towards equality.

 Currently More than 40% of the foodgrains in PDS are diverted to open markets. High diversion of
PDS items, pilferage, transport cost ,administration cost and graft issues would be avoided under
DBT.

 Providing subsidies directly to the poor would both bypass brokers as well as reduce the waste and
holding costs of storing grains in government silos.

 Cash transfers would help reduce fiscal deficit by curbing expenditures earmarked for the PDS that
are siphoned off through corruption, as well as avoiding substantially higher costs of transferring food
rather than cash.

 DBT system Respects the autonomy of beneficiaries and ensures that the person has choice in terms
of spending the money in-accordance with his priorities and cultural preferences.

 DBT will ensure that Ensures that the inefficient and corruption-prone procurement regime of
government is done away.

Some issues with the DBT:

 Cash transfers may expose recipients to price fluctuation, if they are not frequently adjusted for
inflation.

 Additionally, since cash transfers include the transfer of money directly to the beneficiary, poor
access to banks and post offices in some areas may reduce their effectiveness.

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 It is also possible for people to spend cash transfers not on more nutritious food, as proponents
suggest, but instead on non-food items, which would decrease the amount of household money left for
buying food.

Advantages of PDS and DBT: A Comparison

Disadvantage of PDS and DBT: A Comparison

The National Food Security Act

The NFSA was passed in the Parliament in the year 2013, the NFSA seeks to provide the food to all
individuals by making it a statutory right.

A comparison of existing TDPS and NFSA

Scope TPDS NFSA

Legal Status An Anti-Poverty Programme Passed by the Parliament with
with no legal backing. the statutory backing for “Right
to Food”.
Coverage Restricted to the Poor BPL Up to 75% of the rural
Households. APL families can population and 50% of the
get grains from ration shops but Urban population are included.
not at subsidised prices. Total coverage is 67.5% of all
Population.
Categorisation AAY households, BPL Families AAY Households, Priority
and APL families. Households and Excluded

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 Households.
Entitlements BPL and AAY: 35 Priority HHs: 5
KG/FAMILY/MONTH. KG/Person/Month
APL: 15-35 KG/Family/Month AAY HHs: 35
KG/Family/Month
Prices AAY HHs: RS 3/KG of Rice All Categories:
RS 2/KG of Wheat RS 3/KG of Rice
RS 1/KG of Coarse Grains RS 2/KG of Wheat
RS 1/KG of Coarse Grains
Identification Cooperative Structure with Cooperative Structure with
Centre creating identifying Centre realising the state wise
criteria for the poor household estimates of the household to be
using poverty and consumption covered under the NFSA.
estimates. States are responsible for
States are responsible for creating criteria and identifying
identifying eligible households. eligible households.
Role of Centre and State Centre: Procurement at MSP Centre & State: Some
and Distribution and provisions are same as with
Transportation through FCI. TPDS. Except that centre will
State: Delivery of grains to final provide food security
beneficiaries through ration allowances to states to pass on
shops. to the beneficiaries.
State and Centre are not
responsible to supply food
grains during the time of natural
calamities like flood and
drought.
Grievances States are responsible for District grievances redressal
monitoring and vigilance at officers will be appointed;
district and block level. Establishment of the State Food
Commissioners; Vigilance
committees at district and block
levels.

(d) Agriculture Marketing

Marketing of Agricultural Produce in India: Definition; Role; APMC Act, Model APMC Act, 2003

Agricultural Marketing in India

Definition:

In a very narrow sense, Agriculture marketing means delivering farm product from farmers to the
final consumers. The National Commission on Agriculture defined agricultural marketing as a process
which starts with a decision to produce a saleable farm commodity, and it involves all aspects of
market structure of system, both functional and institutional, based on technical and economic
considerations and includes pre- and post-harvest operations, assembling, grading, storage,
transportation and distribution.

The Broader role of Agriculture Marketing in India.

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The prerequisites to attain these goals are:

These conditions cannot come up on their own, particularly in a developing country like India.
Therefore, agricultural market policies are treated as an integral part of development policies and their
functioning has remained an important part of public policy in India.

Government Intervention in Agriculture Markets

Policy interventions in agricultural markets in India have a long history. Till the mid-1960s, it was
mainly meant to facilitate the smooth functioning of markets and to keep a check on hoarding
activities that were considered unfriendly to producers and/or consumers.

Subsequently, the country opted for a package of direct and indirect interventions in agricultural
markets and prices, initially targeted at procuring and distributing wheat and paddy. This gradually
expanded to cover several other crops/products and aspects of domestic trade in agriculture.

The present policy framework for intervention in agricultural markets and prices can be broadly
grouped under three categories –

(a) regulatory measures;

(b) market infrastructure and institutions; and

(c) agricultural price policy.

Regulatory Measures

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 Regulatory measures include development and regulation of wholesale markets in Indian; and,
adoption of legal instruments for regulation of agriculture marketing and trade.

Agriculture Produce Marketing Committee Regulation (APMC) Act.

All wholesale markets for agricultural produce in states that have adopted the Agricultural Produce
Market Regulation Act (APMRA) are termed as “regulated markets”. With the exception of Kerala, J
& K, and Manipur, all other states have enacted APMC Act.

The working of the APMC

The Act is implemented and enforced by APMCs established under it.

1. It mandates that the sale/purchase of agricultural commodities notified under it are to be carried out in
specified market areas, yards or sub-yards. These markets are required to have the proper
infrastructure for sale of farmers’ produce.

2. Prices in them are to be determined by open auction, conducted in a transparent manner in the
presence of an official of the market committee.

3. Market charges for various agencies, such as commissions for commission agents (arhtiyas); statutory
charges, such as market fees and taxes; and produce-handling charges, such as for cleaning of
produce, and loading and unloading, are clearly defined, and no other deduction can be made from the
sale proceeds of farmers. Market charges, costs, and taxes vary across states and commodities.

The Advantages of APMC Act

Besides improving the way markets functioned, the Acts created an environment that freed producers-
sellers from exploitation by traders and mercantile capital.

The APMC act in recent years have developed certain inefficiencies, and the opponents have strongly
argued to revamp the act as per the needs of the current situations. The main argument for the changes
are:

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 Because of all this, the Inter-Ministerial Task Force on Agricultural Marketing Reforms (2002)
recommended that the APMC Acts be amended to allow for direct marketing and the establishment of
agricultural markets in the private and cooperative sectors.

The rationale behind direct marketing is that farmers should have the option to sell their produce
directly to agribusiness firms, such as processors or bulk buyers, at a lower transaction cost and in the
quality/form required by the buyers.

On the recommendation of the committee, the government had come up with a Model APMC Act in
2003.

Model APMC Act, 2003

1. Under the model APMC Act, the private sector and cooperatives can be licensed to set up markets.

2. The model act also provides for contract farming and direct marketing by the private players.

3. Except for few states, all the States and UTs have either fully or partly adopted the model APMC Act.

4. As a result of the model act, the proportion of private trade and contract farming had increased
manifold in some part of the country.

5. However, The Model Act, so far, has not succeeded in persuading the private sector or cooperatives to
set up agricultural marketing infrastructure as an alternative to the state-owned mandi system.

How the APMC act started benefiting Middleman

Initial situation: When the APMC Act was enacted by various states in the mid-1960s, the country
was facing a serious food shortage and desperately seeking to achieve a breakthrough in food
production. It was strongly felt that it would not be possible to attain and sustain food security without
incentivising farmers to adopt new technology and make investments in modern inputs.

Therefore, high priority was attached to enabling farmers to realise a reasonable price for their
produce by eradicating malpractices from markets, protecting them from exploitation by middlemen,
and creating a competitive pricing environment. Simultaneously, the hold traders and commission
agents had over them by providing credit was diluted by increasing the supply of institutional credit.
This, along with technology-led output growth, resulted in increased farm incomes, making farmers
less dependent on the trading class for credit and cash requirements. It also gave farmers the freedom
to choose markets and buyers for their produce.

The Green Revolution Era: The spread and success of the green revolution during the 1970s and
1980s led to an increase in the political power of the farming class and their clout in policymaking.
This was reflected in the creation and strengthening of farmer-friendly institutions and a policy
environment favourable to farmers.

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 Marketing institutions like market committees, state-level agricultural marketing boards and many
others in the public and cooperative sectors served the interests of the farming community.

The entry of Middlemen’s Post 1991: Over time, as the country moved closer to food self-
sufficiency, public policy began losing its focus. The marketing system and marketing institutions
were plagued by inefficiencies, bureaucratic control, and politicisation.

The growth in market facilities did not keep pace with the growth in market arrivals, forcing
producers to seek the help of middlemen in the market, which, in turn, led to dependence on them.

There was also a reversal of the credit situation after 1991, making farmers more dependent on
commission agents and traders for loans. The trading class quickly regained its marketing power over
farmers by meeting their credit requirements with interlocked transactions, robbing producers of the
freedom to decide where they would sell and whom they would sell to. Taking advantage of the lax
attitude of state governments towards marketing, the trading class consolidated their power in mandis.

Middlemen successfully turned marketing policies to their benefit, dictating terms to producers, and
thwarting modern capital from entering agricultural marketing.

Some examples of this are:

1. increasing the commission rates of arhtiyas without any justification;

2. Rejecting direct payment to producers, which would bypass commission agents; and

3. Determining prices through non-transparent methods.

The various problems facing the agricultural marketing system were summarised by the
Twelfth Plan Working Group on Agricultural Marketing (Planning Commission 2011).

 Too many intermediaries, resulting in high cost of goods and services;

 Inadequate infrastructure for storage, sorting, grading, and post-harvest management;

 Private sector unwilling to invest in logistics or infrastructure under prevailing conditions;

 Price-setting mechanism not transparent;

 Ill-equipped and untrained mandi staff;

 Market information not easily accessible; and

 Essential Commodities Act (ECA) impedes free movement, storage and transport of produce.

Laws regulating agriculture marketing in India

Essential Commodity Act: Almost all agricultural commodities, such as cereals, pulses, edible
oilseeds, oilcakes, edible oils, raw cotton, sugar, gur, and jute, are included in the list of essential
commodities.

The Act provides for instruments like licences, permits, regulations and orders for

(a) price control,

(b) storage,

(c) stocking limits,

(d) movement of produce,

(e) distribution,

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 (f) disposal,

(g) sale,

(h) compulsory purchase by the government, and

(i) sale (levy) to the government.

Agriculture Produce Grading and Marketing Act: The act defines standards of quality and
prescribes grade specifications for a number of products. The Act authorises an agricultural marketing
adviser in each state to grant a certificate of authorisation to persons or corporate bodies who agree to
grade agricultural produces as prescribed by it.

There are AGMARK grade specifications for 212 agricultural products, but the use and awareness of
it have remained low despite a better understanding of quality attributes among consumers.

Private and Co-operative Sector in Marketing of Agriculture Produce in India, Crop Insurance in India

The entry of private sector in Agriculture Marketing

1. As a step towards liberalisation of agricultural trade, the union government issued an order on 15
February 2002, which removed licensing requirements and all restrictions on buying, stocking and
transporting specified commodities, including wheat, rice, oilseeds and sugar. They were further
decontrolled after this.

2. Similarly, the dairy sector was liberalised through various amendments to the Milk and Milk Product
Order, beginning in 1992. The main purpose of these changes was to allow increased participation by
the private sector in marketing agricultural commodities.

3. In response, private-sector investments in the dairy sector have increased, and it has a healthy
competition between cooperatives and the private sector.

4. However, the experience of liberalising grain trade has not been very encouraging. The 2002 change
in the ECA attracted big domestic and multinational players like ITC, Cargill, Australian Wheat
Board, Britannia, Agricore, Delhi Floor Mills and Adani Enterprises to the grain trade.

5. This came after the government had accumulated excessive foodgrain during 2001-03. But soon, the
domestic foodgrain demand and supply balance, particularly for wheat, turned adverse and India had
to import more than 6 million tonnes of wheat in 2006-07.

Successful Alternative Models of Agriculture Marketing in India

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 Some other Innovative Marketing Mechanisms
Some innovative marketing mechanisms have been developed in some states, which involve the direct
sale of farm produce to consumers, the sale of produce to buyers without routing it through mandis,
and group marketing. Many states have attempted to promote direct contact between producers and
consumers by making arrangements for sale at designated places in urban areas.

Farm producers’ organisations (FPOs) of various kinds are emerging as a new model for organised
marketing and farm business. Such models include informal farmers’ groups or associations,
marketing cooperatives and formal organisations like producers’ companies. Producers can benefit
from getting together to sell their produce through economies of scale in the use of transport and other
services, and raise their bargaining power in sales transactions, while marketing expenses get
distributed. This results in a better share of net returns. Such models are particularly required for small
farmers to overcome their constraints of both small size and modest marketable quantities.

Organised Retail Outlets: The direct purchase of farm produce by retailers has been steadily
increasing with the growth of organised retailing in India. This is expected to accelerate if the entry of
foreign direct investment (FDI) to the field is allowed further.

Food World (of the RPG group) is the leader among organised food retail chains, and there are many
more such as Fab Mall, Monday to Sunday, Family Mart, More for You, Heritage, Reliance Fresh and
Big Bazaar.

Most food chains are regional in nature, having one or two outlets in the main cities, but no big
presence outside their states. Rapid urbanisation, urban population growth, increase in incomes and
consumer spending, changing lifestyles, and access to technology have been the important factors
behind the expansion of food retail chains in India. Despite several factors favouring organised retail
trade, it is still in a nascent stage in the country.

Crop Insurance in India

PM Fasal Bima Yojana: An Analysis
The PMFBY is in line with the concept of the ‘one nation one scheme’ theme. The purpose of
PMFBY is to remove the shortcomings of the previous agriculture insurance schemes and
incorporates the best features of previous insurance schemes. The PMFBY has replaced the National
Agricultural Insurance Scheme and Modified National Agricultural Scheme. The PMFBY has been
introduced with the following objectives:

1. To provide insurance coverage and financial support to the farmer in the event of crop failure or any
natural calamity

2. To stabilise the income of the farmers

3. To encourage farmers to undertake innovative and modern agricultural practices

4. To ensure flow of credit to farmers

Features of the scheme

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1. The Scheme covers all Food & Oilseeds crops and Annual Commercial/Horticultural Crops.

2. The scheme is compulsory for loanee farmers obtaining Crop Loan /KCC account for notified crops.
However, it is voluntary for other/non loanee farmers who have insurable interest in the insured crop.

3. The scheme provisions have been simplified for easy understanding and the Maximum Premium
payable by the farmers will be 2% for all Kharif Food & Oilseeds crops, 1.5% for Rabi Food &
Oilseeds crops and 5% for Annual Commercial/Horticultural Crops.

4. The difference between premium and the rate of insurance charges payable by farmers shall be shared
equally by the Centre and State.

5. The Scheme shall be implemented on an ‘Area Approach basis’. The unit of insurance shall be
Village/Village Panchayat level for major crops and for other crops it may be a unit of size above the
level of Village/Village Panchayat.

6. Claims for wide spread calamities are being calculated on area approach. However, losses due to
localised perils (hailstorm, landslide & inundation) and Post-Harvest losses due to specified perils,
(cyclone/cyclonic rain & unseasonal rains) shall be assessed at the affected insured field of the
individual insured farmer.

7. There is no upper limit on government subsidy. Even if balance premium is 90%, it will be borne by
the Government.

8. Earlier, there was a provision of capping the premium rate which resulted in low claims being paid to
farmers. This capping was done to limit Government outgo on the premium subsidy. This capping has
now been removed and farmers will get claims against full sum insured without any reduction.

9. The use of technology will be encouraged to a great extent. Smart phones will be used to capture and
upload data of crop cutting to reduce the delays in claim payment to farmers. Remote sensing will be
used to reduce the number of crop cutting experiments.

Table 1: A Comparison of PMFBY and other Insurance Schemes

Parameters NAIS MNAIS PMFBY Improvements,
if any.
Farmers All farmers including Same as NAIS Same as NAIS The coverage of
Covered sharecroppers and farmers has
tenant farmers remained the
growing the notified same.
crops in the notified
areas were eligible
for coverage.
Scheme was
compulsory for
farmers availing crop
loans and voluntary
for others
Risks All yield risk All yield risk plus Same as MNAIS No
Covered sowing failure improvement
covers (localised over MNAIS
risk like pest
diseases etc)
Crops Food crops, Same as NAIS Same as NAIS The crops
Covered Commercial crops, covered has
Horticulture crops remained the
same.
Insurance Unit area of Unit area to be Ordinarily insurance A combination
Unit insurance may be a reduced to village / unit to be village / of both NAIS

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 gram panchayat, village panchayat village panchayat and MNAIS is
mandal, hobli, circle, or other equivalent for major crops and used for
phirka, block, taluka, unit for all crops. higher than insurance unit.
etc. village/village
panchayat like
block, taluka for
other crops.
Threshold Average of last three Average of last Same as MNAIS No
Yield years for wheat and seven years improvement
rice and five years excluding over MNAIS
for other crops maximum two
multiply by calamities years for
indemnity level all crops multiply
by indemnity level
Sum Loanee farmers – In case of loanee Same as MNAIS No
Insured Equivalent to the farmers-Equivalent improvement
amount of loan to the ‘cost of over MNAIS
availed. cultivation’. Sum
Non-loanee farmers insured will be at
–Upto value of 150 least equal to
per cent of average amount of crop
yield. loan
sanctioned/advance
d. Non-loanee
farmers -Equivalent
to sum insured upto
value of 150 per
cent value of
average yield.
Premium Kharif season 3.5 per Actuarial premium Maximum premium The premiums
Rate cent – Oilseeds and as well as net of 2 per cent of sum to be paid by the
bajra 2.5 per cent – premium rates insured for Kharif farmers are
Cereals, millets & (premium rates (food & oilseed) significantly
pulses actually payable by crops. lower than the
Rabi season 1.5 per farmers after 1.5 per cent of sum previous two
cent- Wheat 2 per premium subsidy) insured for Rabi schemes.
cent –Other food and for each notified (food and oilseed)
oilseeds crops crop through crops; and
Actuarial premium standard actuarial 5 per cent of sum
for Annual methodology in insured for Annual
commercial/ conformity with commercial/
horticultural crops provisions of horticultural crops.
IRDA.
Subsidy 10 per cent to small Actual premium The difference Significant
and marginal farmers with subsidy upto between the improvement in
only, to be shared 75 per cent to all Actuarial Premium subsidy offered
equally between farmers, to be Rate (APR) and over previous
Centre and states. shared equally insurance charges schemes.
between Centre and payable by farmers
states. shall be provided by
Governments as
subsidy and shall be
shared equally by
the Centre and
states.
Indemnity Three level of The minimum 70 per cent, 80 per
Level indemnity – 90 per Indemnity level cent and 90 per cent

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 cent, 80 per cent and increased to 70 per based on the risks
60 per cent cent from 60 per experiences and
(low/medium/high cent from NAIS coefficient of
risk areas) were variation in the past
available for all 10 years.
crops. The insured
farmers may opt for
higher level of
Indemnity on
payment of
additional premium
Claims In case of food crops All claims were to All claim liabilities
Liability and oilseeds, claim be borne by the on insurer and claim
liability of upto 100 Implementing liability beyond 350
per cent of premium Agencies. To per cent of premium
collected was to be protect IAs, against collected or 35 per
borne by the AIC. overall loss cent of sum insured
Thereafter, the exceeding 500 per at national level to
Centre and state cent of gross be shared equally by
governments shared premium, a the Centre and state
the liability equally. Catastrophe Fund governments.
In the case of Annual at national level
commercial/horticult was to be set up
ural crops, claim with contribution of
liability beyond 150 Centre and state
per cent of premium governments
in the first three or
five years and
beyond 200 per cent
thereafter, equally
shared by Centre and
state governments.
Technology Yield estimation Pilot studies for Provision for The much-
through traditional yield estimation adoption of RST, needed
CCEs. through use of drone and other technology
Remote Sensing technologies in yield element is added
Technology (RST). estimation and in the PMFBY.
categorization of
number of CCEs
after validation by
pilot studies. Use of
Smartphone apps for
accurate and fast
transmission of CCE
data to facilitate
early settlement of
claims.

Source: Report of CAG on Performance Audit of Agricultural Crop Insurance Scheme, 2017

Table 2: Challenges faced by the MNAIS/NAIS and PMFBY

Parameter NAIS/MNAIS PMFBY Challenge Faced
Farmers Loanee and Non- Loanee and Non- Both the PMFBY and MNAIS fails to
covered loanee farmers, share loanee farmers, cover sharecroppers and tenants,
croppers and tenants share croppers despite government claiming that
and tenants their coverage will be increased.

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Risk covered Yield risk and Yield and Yield loses cover under the MNAIS
localised risk localised risk and PMFBY are same.
Both the scheme faced the challenge
of assessing loses due to localised
calamity and the insurance companies
are reluctant to investigate the crop
losses due to these calamities and
refuse to pay claims. This is making
farmer losing interest in the scheme.
Insurance Unit Village Panchayats, Village The PMFBY is an improvement over
Blocks, Talukas panchayats for previous scheme. However, it fails to
major crops and provide relief to the farmers as it does
Blocks for other not cover losses arising out of a
crops localised risk like wild animal attacks
on individual farms.
Premium Premiums was 2% of sum In the PMFBY, the premiums for the
Rates calculated on insured for kharif. farmers are kept low in order to
actuarial basis 1.5% for rabi and attract more farmers. Despite this the
(MNAIS). 5% for farmers are not opting for the scheme.
horticulture crops.
Delay in claims settlement is one of
the major reason for it. The reason for
delays in claim settlement are states
unwillingness to pay high premiums.
In the previous schemes, the farmers
are not opting for the insurance due to
higher burden of premiums.
Now the same problem has been
transferred to the states. It’s the
exchequer who is facing the financial
burden of high premium now.
Crop Cutting Crop Cutting Crop Cutting Although the methodology to assess
Experiments Experiments are used Experiment are loses is same, the PMFBY has shifted
to assess yield losses. used to assess the unit area from district/block level
yield losses. to village level.
As per rule, 24 CCE have to take
place in a district and 16 CCE in a
block for assessing the damage.
Under the old schemes, there was a
requirement of 1 million people to
carry out CCE. However, after the
new changes were made in PMFBY, a
gram panchayat/village requires at
least 4-5 such experiments to assess
the crop damage. The process will
require 4 million CCE and the same
number people.
Due to this there are delays in
collecting CCE data and delays in
claim settlement.
Sum Insured Sum insured will be Same as MNAIS It has been observed in both the
at least equal to the schemes that farmers are opting for
crop loans sum insured equivalent to the loan
sanctioned. amount only. In all such cases the
Non-loanee farmers - insurance scheme is reduced to loan
Equivalent to sum insurance scheme rather than a crop
insured upto value of insurance scheme.

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 150 per cent value of
average yield.
(e) Technology missions and e-technology in the aid of farmers

Technology Missions in India

The technological missions in India was initiated in 1987 by the Rajiv Gandhi led Congress
government. Rajiv Gandhi had chosen his close aid Sam Pitroda to lead the Mission. The mission had
the task to cover five critical area which were considered very important for the development of the
Indian economy and society.

The Core Focus areas were:

The sixth goal of Dairy Production was added in the succeeding years.

The Specific Goals of the Technology mission was

The Progress Made

Drinking Water: The drinking water mission identified 100,000 problem villages. Research was
done, using geohydrological mapping, to determine where to drill new wells, increasing water
sources.
Many villages had some water, but did not have access to clean water. Water was tested in labs, and
official standards of quality and quantity were established.

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The mission also included an effort to educate people how to repair broken pumps when they broke.
Before, when pumps broke, they usually stayed broken due to lack of local knowhow. Easy to
understand repair manuals were distributed in each of India’s fifteen languages, and later made
available online.
Immunization: In 1987, India had the highest amount of polio in the world. The mission met with top
immunization experts decided to begin immunizing the country using an oral vaccine. As a live virus
vaccine, the oral version had to be refrigerated. They developed a cold chain for handling the vaccines
with industrialists to get refrigeration to all parts of India.
The mission also launched India’s polio vaccine production capacity. In 1987, India had zero
production capacity. With government backing, they began to study France and Russia’s methods.
Several years later, India was producing all of their own vaccines.
25 years later, in 2013, India was declared polio-free.
Literacy: When the Technology Missions began, India’s literacy rate was around 50%. Several
hundred million adults were illiterate, most of them women.
The mission had the dual focus of motivating people (adults in particular) to learn, and providing
materials and teachers.
Oilseeds: India was importing one billion dollars of cooking oils each year, when large portions of
Indian land are well suited to growing oil crops. Farmers did not grow these crops because they found
other crops were more profitable. This was causing India costly economic situation.
Their goal was to make farmers see the benefits of planting oilseeds.
Kurian, who handled buffer stocks, described his plan as such: “We move into areas where there is
gross exploitation and try to restructure the marketing system so that the small producer is not fleeced
by middlemen or the oil kings.”
Once the intervention on oil was complete, India was exporting oil cakes at the rate of 600 million per
year.
Telecommunication: The official goal of the telecom mission was to improve service, dependability,
and accessibility of telecommunications across the county, including rural areas. This was through
indigenous development, local young talent, rural telecom, digital switching networks, local
manufacturing and privatization.
Today, India has made maximum progress in providing accessible and cheap telecom services to 924
Million people.
Dairy Farming: The goal of the dairy mission was to develop and implement technologies to
improve breeding, animal health, and fodder and milk production.
Today, India is the number one producer of milk in the world.
After the Defeat of Rajiv Gandhi led Congress Government at the centre, the successive governments
have transferred the responsibility of each of the core areas to the respective parent ministries.
Technology Missions in Agriculture and Horticulture
National Mission for Integrated Development of Horticulture
A Centrally Sponsored Scheme of MIDH has been launched for the holistic development of
horticulture in the country during XII Plan. The Scheme, which took off from 2014-15, integrates the
ongoing schemes of National Horticulture Mission, Horticulture Mission for North East & Himalayan
States, National Bamboo Mission, National Horticulture Board, Coconut Development Board &
Central Institute for Horticulture, Nagaland.
Horticulture Mission for North East and Himalayan States
HMNEH is a part of Mission for Integrated Development of Horticulture (MIDH), being implemented
for overall development of horticulture in NE and Himalayan states. The Mission covers all NE states
including Sikkim and Jammu & Kashmir, Himachal Pradesh & Uttarakhand. The Mission addresses

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 the entire spectrum of horticulture from production to consumption through backward & forward
linkages.
National Horticulture Mission
A National Horticulture Mission was launched in 2005-06 as a Centrally Sponsored Scheme to
promote holistic growth of the horticulture sector through an area based regionally differentiated
strategies.The Scheme has been subsumed as a part of Mission for Integration Development of
Horticulture (MIDH) during 2014-15.
National Mission on Oilseeds and Palm Oil
NMOOP envisages increase in production of vegetable oils sourced from oilseeds, oil palm & tree
borne oilseeds. The Mission is implemented through three Mini Missions (Oilseeds, Oil Palm &
TBOs) with specific targets.
The strategy includes increasing Seed Replacement Ratio with focus on varietal replacement;
increasing irrigation coverage; diversification of area from low yielding cereals; intercropping; use of
fallow land; expansion of cultivation in watersheds & wastelands; increasing availability of quality
planting materials; enhancing procurement of oilseeds and collection & processing of TBOs.
Technology Mission on Coconut
The Mission was launched to converge & synergize all the efforts through integration of existing
programs & address the problems and bridge the gaps through appropriate programs in mission mode
to ensure adequate, appropriate, timely & concurrent action to make coconut farming competitive &
to ensures reasonable returns.
Technology Mission on Oilseeds, Pulses and Pulses
The Mission was launched 1986 to increase the production of oilseeds to reduce import and achieve
self-sufficiency in edible oils. Subsequently, pulses, oil palm & maize were also brought within the
purview of the Mission.
Schemes under TMOP are:
 Oilseeds Production Program
 National Pulses Development Project
 Accelerated Maize Development Program
 Post-Harvest Technology
 Oil Palm Development Program
 National Oilseeds and Vegetable Oil Development Board
National Livestock Mission
The Mission covers all activities required to ensure improvement in livestock production systems &
capacity building of all stakeholders. It covers everything for improvement of livestock productivity
& support projects & initiatives subject to condition that such initiatives cannot be funded under other
Centrally Sponsored Schemes
It has 4 Sub-Missions:
1. Livestock Development;
2. Pig Development in NE Region;
3. Feed & Fodder Development; and
4. Skill Development, Technology Transfer & Extension
5. Technology Mission on Cotton.
The aims of the Mission are: to improve the yield and quality of cotton; to increase the income of
cotton growers by reducing the cost of cultivation & by increasing the yield; to improve the quality of
processing of cotton.

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It had four Mini Missions-
I: Cotton Research and Technology Generation;
II: Transfer of Technology and Development;
III: Development of Market Infrastructure;
IV: Modernization / Setting up of new G&P factories
Technology Mission on Literacy
National Digital Literacy Mission

The Digital Saksharta Abhiyan (DISHA) or National Digital Literacy Mission (NDLM) Scheme has
been formulated to impart IT training to 52.5 lakh persons, including Anganwadi & ASHA workers
and authorised ration dealers in all the States/UTs so that non-IT literate citizens become IT literate so
as to enable them to actively & effectively participate in the democratic and developmental process
and also enhance their livelihood.
National Mission on Education through Information and Communication Technology
NMEICT has been envisaged as a Centrally Sponsored Scheme to leverage the potential of ICT in
teaching and learning process for the benefit of all the learners in higher education institutions in any
time anywhere mode. It has two major components: providing connectivity, along with provision for
access devices to institutions & learners; & content generation.
Nano Technology Mission
The Government of India, in 2007, approved the launch of a Mission on Nano Science & Technology
(Nano Mission) with an allocation of Rs. 1000 crore for 5 years.
The Department of Science and Technology is the nodal agency for implementing the Nano Mission.
Capacity-building in this area of research will be of utmost importance for the Nano Mission so that
India emerges as a global knowledge-hub in this field.
Other important Technological Missions
Technology Missions on Indian Railways
TMIR is a consortium of Ministry of Railways, Ministry of Human Resource Development, Ministry
of Science and Technology and Department of Heavy Industry on an investment sharing model for
taking up identified railway projects for applied research and use on Indian Railways.
It will also monitor progress of research projects of the existing Railway Research Centre, Kharagpur
& other 4 upcoming Railway Research Centres sanctioned in Budget 2015-16. Thus, Railways’
investment in applied research activities will be fruitfully converted to technology development for
actual use in railway working.
Technology Mission on Railway Safety
A Technology Mission has been launched to focus attention and drive modern technologies of
monitoring, control, communications, design, electronics and materials for railway safety. It will help
to initiate and incubate design & development projects of significant national importance.
Its objective is to develop & adopt state-of-the-art safety, control and design technologies defined by
needs related to Indian conditions. It will formulate and implement projects aimed towards achieving
higher throughput, lower cost of transmission per unit & safer train movement.
Technology Mission on Technical Textiles
The Mission was announced in 2007 to address the “major constraints for improving production &
consumption of technical textiles”.
In 2008-09, 4 Centres of Excellence were set up to catalyse industry support & build capacity in the
area of Geotech (geotextiles used in civil engineering applications), Protech (personal & property
protective clothing), Meditech (medical textiles) and Agrotech (specialized agriculture use).

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 Technology Mission on Water and Clean Energy
Water Technology Initiative Program
It was initiated in August 2007 aims to promote R&D activities aimed at providing safe drinking
water at affordable cost and in adequate quantity using appropriate Science and Technology
interventions evolved through indigenous efforts.
Since quality is the main consideration of safe drinking water, processes which imply nano-material
and filtration technologies have been focused.
The initiative also includes the pilot testing of credible number of products and referencing of selected
technologies to the social context of the application region. In pursuance of directives of Hon’ble
Supreme Court, Technology Mission on Winning, Augmentation and Renovation (WAR) for Water
has been launched in August 2009 to undertake research-led solutions, through a coordinated
approach, to come out with technological options for various water challenges in different parts of the
country.
Aims and Objectives
This pro-active India – centric ‘solution science’ endeavour aims to strengthen the R&D capacity and
capability to develop the technological solutions for existing and emerging water challenges facing
the country.
1. Promote national and collaborative developmental Research to address prevalent and emerging water
challenges
2. Capacity building of research professionals and water managers
3. Evolve methodology for development of customised solutions suited to social context
4. Develop synergies with line departments at Central/ State level for last mile connectivity of the
research findings
5. Evolve S&T based sustainable models with industry and recommend appropriate policy inputs
6. Conduct techno- economic-social analysis of technologies and their suitability in specific context
7. Support Impact Assessment Studies/ development of Research Packages/ Technology Status Reports
and other documentation required by different users/ agencies
8. Upscaling and Replication of technologies/ solutions to credible scale.
Scope and Thrust Areas
This demand oriented user centric initiative includes development research in laboratories as well as
application research in field.
The scope of initiative covers the entire value chain of R&D right from water oriented basic and
applied research, pre competitive technology development , technology based classification &
assessment of technology options, pilot-demonstration of technology leads from laboratories and
academic institutions assessment of available technology options to evolve a basket of technology
options and mounting of technically, socially, environmentally and eventually affordable convergent
solutions based on evolving, novel as well as known technologies suited to socio-economic context.
It also envisages to nurture enabling activities such as human and institutional capacity building such
as fellowships for researchers, training of water managers to enable identify and select most
appropriate technology option, promoting centers of excellence for water research and nurturing
nascent water technologies for last mile connectivity etc.
The thrust areas for initiative dynamically evolve based on need for technology based solution from
the users, requirement of R&D inputs by stakeholders, assessment of S&T requirements to enable
achieve technology prowess in water sector etc. The thrust areas specific to call for proposals are
articulated in call document uploaded on DST website periodically.
Clean Energy Research Initiative

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 It was initiated in January, 2009 the initiative aims to develop national research competence to drive
down the cost of clean energy through pre-competitive translational research, oriented research led
disruptive innovations & human and institutional capacity development.
Aims and Objectives
CERI has been envisaged to –
1. Support upstream end of research, where knowledge, more advanced than the current practice in the
industry must have a space.
2. Develop India centric innovations developed around user needs and forge collaboration between
industry and academics as much as possible and gain value for such collaborations.
3. To develop critical mass of researchers to meet requirement of R&D professionals for clean energy.
Scope and Thrust Areas
The scope of initiative includes support for solar oriented fundamental research for solar devices, sub-
systems and systems. The initiative supports feasibility assessment of fresh ideas/ concepts, including
various emerging and disruptive technologies, for their potential conversion into useful technology/
product.
The envisaged thrust areas are –
 Solar energy materials
 Solar energy devices (for user direct load applications)
 Storage devices
 Power electronics for grid synchronization
 Capacity building to create critical mass for solar energy research
 Development of systems/ subsystems for solar photovoltaic, solar thermal, storage smart energy grid
and building energy efficiency.
 Convergent Solar thermal technology solutions (25 kw to 1 MW)
 Convergent Solar Photo Voltaic Technology solutions
 Any other topic, considered to be of relevance to country needs.
E-Technology in Indian Agriculture to Aid the Farmers
E-Technology in Agriculture
E-Platform for Agriculture Markets in India.
The electronic trading portal for national agricultural market is an attempt to use modern technology
for transforming the system of agricultural marketing.
National Agriculture Market
 The National Agriculture Market (NAM) is envisaged as a pan-India electronic trading portal which
seeks to network the existing APMC and other market yards to create a unified national market for
agricultural commodities. NAM is a “virtual” market, but it has a physical market at the backend.
 NAM was announced during the Budget of 2014-15 and is proposed to be achieved through the
setting up of a common e-platform to which initially 585 APMCs selected by the states are linked.
NAM was launched on 14 April 2016 with 21 mandis from 8 States joining it and the first phase of
connecting 250 mandis was over on 6 October 2016.
 NAM will be implemented as a Centrally Sponsored Scheme through Agri-Tech Infrastructure Fund
(ATIF). The Department of Agriculture & Cooperation (DAC), Ministry of Agriculture will set it up
through the Small Farmers Agribusiness Consortium (SFAC).
 The Central Government will provide the software free of cost to the states, and in addition, a grant of
up to Rs. 30 lakhs per mandi /market will be given as a onetime measure for related equipment and

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 infrastructure requirements. In order to promote genuine price discovery, it is proposed to provide the
private mandis also with access to the software, but they would not have any monetary support from
Government.
Benefits of NAM
NAM is said to have the following advantages:
 For the farmers, NAM promises more options for sale. It would increase his access to markets through
warehouse based sales and thus obviate the need to transport his produce to the mandi.
 For the local trader in the mandi / market, NAM offers the opportunity to access a larger national
market for secondary trading.
 Bulk buyers, processors, exporters etc. benefit from being able to participate directly in trading at the
local mandi / market level through the NAM platform, thereby reducing their intermediation costs.
 The gradual integration of all the major mandis in the States into NAM will ensure common
procedures for issue of licences, levy of fee and movement of produce. In a period of 5-7 years Union
Cabinet expects significant benefits through higher returns to farmers, lower transaction costs to
buyers and stable prices and availability to consumers.
 The NAM will also facilitate the emergence of value chains in major agricultural commodities across
the country and help to promote scientific storage and movement of agriculture goods.
1. Karnataka Agriculture Marketing Model
 Among various states of the country, Karnataka has been the forerunner in market reforms and in
devising innovative practices to improve agricultural markets and competitiveness.
 In order to take advantage of modern technology to improve agricultural marketing, the state prepared
a plan in 2012–13 with the assistance of NCDEX (National Commodity and Derivatives Exchange)
Spot Exchange for automation of auction process in mandis (primary agricultural markets where
producers sell their agricultural produce).
 The plan involves the creation of transparent, integrated e-trading mechanism coupled with facilities
for grading and standardisation to facilitate seamless trading across mandis (APMCs). The approach
was to integrate all such APMCs with major consumption market to fetch remunerative prices to
farmers.
 The plan has been implemented through Rashtriya e-Market Services (ReMS) Private Limited
Company, which is a joint venture created by the state government and NCDEX Spot Exchange.
 ReMS offers automated auction and post-auction facilities (weighing, invoicing, market fee
collection, accounting), assaying facilities in the markets, facilitation of warehouse-based sale of
produce, commodity funding and price dissemination. NCDEX is also implementing a unified market
platform, whereby all mandis in the state are being unified for single trading.
 The unified online agricultural market initiative was launched in Karnataka on 22 February 2014. A
total of 105 markets spread across 27 districts have been brought under the Unifi ed Market Platform
(UMP) as of March 2016.
 Under this initiative, every farmer who brings produce to the APMC market is given an identified
cation number for the lot brought into the mandi.
 The farmer has a choice to use the common platform or the platform of commission agent for the
auction of the produce. These lots are then assayed, and information about quantity and quality is put
on the portal of ReMS.
Agriculture Marketing Information Network (AGMARKNET).
 Agricultural Marketing Information Network (AGMARKNET) was launched in March 2000 by the
Union Ministry of Agriculture.
 The Directorate of Marketing and Inspection (DMI), under the Ministry, links around 7,000
agricultural wholesale markets in India with the State Agricultural Marketing Boards and Directorates
for effective information exchange.

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 This e-governance portal AGMARKNET, implemented by National Informatics Centre (NIC),
facilitates generation and transmission of prices, commodity arrival information from agricultural
produce markets, and web-based dissemination to producers, consumers, traders, and policymakers
transparently and quickly.
 The e-governance portal caters to the needs of various stakeholders such as farmers, industry,
policymakers and academic institutions by providing agricultural marketing related information from
a single window.
 The portal has helped to reach farmers who do not have sufficient resources to get adequate market
information. It facilitates web-based information flow, of the daily arrivals and prices of commodities
in the agricultural produce markets spread across the country.
 The data transmitted from all the markets is available on the AGMARKNET portal in 8 regional
languages and English.
 It displays Commodity-wise, Variety-wise daily prices and arrivals information from all wholesale
markets. Various types of reports can be viewed including trend reports for prices and arrivals for
important commodities.
 Currently, about 1,800 markets are connected, and work is in progress for another 700 markets. The
AGMARKNET portal now has a database of about 300 commodities and 2,000 varieties.
The information being disseminated through the AGMARKNET portal includes:
 Prices and Arrivals (Daily Max, Min, Modal, MSP; Weekly/ monthly prices/arrivals trends; Future
prices from 3 National commodity exchanges)
 Grades and Standards
 Commodity Profiles (Paddy/Rice, Bengal Gram, Mustard-Rapeseed, Red Gram, Soybean, Wheat,
Groundnut, Sunflower, Black Gram, Sesame, Green Gram, Potato, Maize, Jowar, Cotton, Grapes,
Chilies, Mandarin Orange etc.)
 Market Profiles (Contact details, rail/road connectivity, market charges, infrastructure facilities,
revenue etc.)
 Other Reports (Best Marketing Practices, Market Directory, Scheme Guidelines, DPRs of Terminal
Markets etc.)
 Research Studies
 Companies involved in Contract Farming
 Schemes of DMI for strengthening Agricultural Marketing Infrastructure
Schemes and Projects of Government and its agencies in e-technology for farmers.
Agricultural Technology Management Agency (A T M A)
 ATMA is a society of key stakeholders involved in agricultural activities for sustainable agriculture
development in the district. It is a focal point for integrating Research and Extension activities.
 It is a registered society responsible for technology dissemination at the district level. As a whole, the
ATMA would be a facilitating agency rather than implementing Agency.
 The scheme is supported by the Central Government. The funding pattern is 90% by the central
Government and 10% by the state government. The 10% state’s share shall consist of cash
contribution of the State, beneficiary contribution or the contribution of other non-governmental
organizations.
The objectives of ATMA are
 To strengthen research – extension – farmer linkages.
 To provide an effective mechanism for co-ordination and management of activities of different
agencies involved in technology adaptation / validation and dissemination at the district level and
below.

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 To increase the quality and type of technologies being disseminated.
 To move towards shared ownership of the agricultural technology system by key shareholders.
 To develop new partnerships with the private institutions including NGOs.
National Mission on Agricultural Extension and Technology (NMAET)
National Mission on Agricultural Extension and Technology (NMAET) is being implemented during
the 12th Plan period.
NMAET consists of 4 Sub Missions:
1. Sub Mission on Agricultural Extension (SMAE)
2. Sub-Mission on Seed and Planting Material (SMSP)
3. Sub Mission on Agricultural Mechanization (SMAM)
4. Sub Mission on Plant Protection and Plant Quarantine (SMPP)
 Agricultural Technology, including the adoption/ promotion of critical inputs, and improved
agronomic practices were being disseminated under 17 different schemes of the Department of
Agriculture & Cooperation during the 11th Plan. The Modified Extension Reforms Scheme was
introduced in 2010 with the objective of strengthening extension machinery and utilizing it for
synergizing interventions under these schemes under the umbrella of the Agriculture Technology
Management Agency (ATMA).
 The NMAET has been envisaged as the next step towards this objective through the amalgamation of
these schemes.
 The common threads running across all 4 Sub-Missions in NMAET are Extension and Technology.
Therefore, while 4 separate Sub-Missions are being proposed for administrative convenience, these
are inextricably linked to each other at the field level, and most components thereof have to be
disseminated among farmers and other stakeholders through a strong extension network.
 The aim of the mission is: to restructure and strengthen agricultural extension to enable delivery of
appropriate technology and improved agronomic practices to farmers.
This aim is envisaged to be achieved by a judicious mix of:
1. extensive physical outreach and interactive methods of information dissemination,
2. use of ICT,
3. popularisation of modern and appropriate technologies,
4. capacity building and institution strengthening to promote mechanisation, availability of quality seeds,
plant protection etc. and
5. encourage aggregation of Farmers into Interest Groups (FIGs) to form Farmer Producer Organisations
(FPOs).
 In order to overcome systemic challenges being faced by the Extension System, there is a need for a
focused approach in mission mode to disseminate appropriate technologies and relevant information
to larger number of farmer households through interpersonal and innovative methods of technology
dissemination including ICT.

M-Kisan SMS Portal

 Though there are about 38 crore mobile telephone connections in rural areas, internet penetration in
the countryside is still abysmally low. Therefore, mobile messaging is the most effective tool so far
having pervasive outreach to nearly 8.93 crore farm families.
 M-Kisan SMS Portal for farmers enables all Central and State government organizations in
agriculture and allied sectors to give information/services/advisories to farmers by SMS in their
language, preference of agricultural practices and location.

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 These messages are specific to farmers’ specific needs & relevance at a particular point of time and
generate heavy inflow of calls in the Kisan Call Centres where people call up to get supplementary
information.
 As part of agricultural extension (extending research from the lab to the field), under the National e-
Governance Plan – Agriculture (NeGP-A), various modes of delivery of services have been
envisaged. These include internet, touch screen kiosks, agri-clinics, private kiosks, mass media,
Common Service Centres, Kisan Call Centres, and integrated platforms in the departmental offices
coupled with physical outreach of extension personnel equipped with pico-projectors and handheld
devices. However, mobile telephony (with or without internet) is the most potent and omnipresent
tool of agricultural extension.
 USSD (Unstructured Supplementary Service Data), IVRS (Interactive Voice Response System) and
Pull SMS are value added services which have enabled farmers and other stakeholders not only to
receive broadcast messages but also to get web based services on their mobile without having internet.
Semi-literate and illiterate farmers have also been targeted to be reached through voice messages.
Kisan Call Centres
 In order to harness the potential of ICT in Agriculture, Ministry of Agriculture launched the scheme
“Kisan Call Centres (KCCs)” on January 21, 2004. The main aim of the project is to answer farmers’
queries on a telephone call in their own dialect. These call Centres are working in 14 different
locations covering all the States and UTs. A countrywide common eleven-digit Toll-Free number
1800-180-1551 has been allotted for Kisan Call Centre.
 Replies to the farmers’ queries are given in 22 local languages. Call centre services are available from
6.00 am to 10.00 pm on all seven days of the week at each KCC location.
 A Kisan Knowledge Management System (KKMS) to facilitate correct, consistent and quick replies
to the queries of farmers and capture all the details of their calls, has been developed. The Kisan Call
Centre (KCC) Agents working at various KCC locations throughout the country have access to it.
Sandesh Pathak
 The Sandesh Pathak application developed jointly by C-DAC Mumbai, IIT-Madras, IIIT Hyderabad,
IIT Kharagpur, and C-DAC Thiruvananthapuram will enable SMS messages to be read out loud, for
the benefit of farmers who may have difficulty in reading.
 It is usable by people who cannot read. A large population of farmers belongs to this category. So,
when they receive an SMS message either containing agriculture-related advice or some other thing,
this app will read aloud the content.
 It uses the text-to-speech synthesis systems developed by the Indian Language TTS Consortium. To
make it especially useful for farmers, the TTS engines of all these languages have been tested on the
agriculture domain-related texts and fine-tuned accordingly.
 The app which is available for download from the App store of Mobile Seva Project of the
government of India.
Kisan credit card
 Kisan credit card uses the ICT to provide affordable credit for farmers in India. It was started by
the Government of India, Reserve Bank of India (RBI), and National Bank for Agriculture and Rural
Development (NABARD) in 1998 to help farmers access timely and adequate credit.
 The aim of Kisan Credit Card Scheme is to provide adequate and timely support from the banking
system to the farmers for their short-term credit needs during their cultivation for purchase of inputs
etc., during the cropping season.
 Kisan Credit Card has emerged as an innovative credit delivery mechanism to meet the production
credit requirements of the farmers in a timely and hassle-free manner.
 The scheme is under implementation in the entire country by the vast institutional credit framework
involving Commercial Banks, RRBs and Cooperatives and has received wide acceptability amongst
bankers and farmers.

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 Sanchar Shakti scheme
 The Sanchar Shakti scheme for Mobile Value Added Services (VAS) provisioning envisages
development of content/information customized to the requirements of women SHG members
engaged in diverse activities in rural areas across India. The scheme entails innovative application of
technology in designing & delivering the VAS content so as to ensure its easier accessibility &
effective assimilation among the targeted women beneficiaries.
 Sanchar Shakti scheme has been initiated by the Universal Service Obligation Fund(USOF) which
launched wireless broadband Scheme in 2009. USOF is funding the National Optic Fibre Network
which is being managed by Bharat Broadband Network Limited. Bandwidth from NOFN will be
eligible to give wide range of services to rural India.
Agropedia –ICAR initiative
Content availability and its intelligent organization continues to be a serious challenge in agriculture.
This prevents offer of meaningful and efficient advisory and allied services to farmers and other
stakeholders. Agropedia is an attempt to infuse semantic and social networking technologies into
agriculture information management to alleviate this problem.
Voice Krishi Vigyan Kendra
 KVK places a special emphasis on training and education of farmers, entrepreneurs, farm women,
rural youth, financial institutions extension functionaries as well as voluntary organizations.
 The centre plays a First Line Extension role- A linkage between research and the field in augmenting
the socio-economic conditions of farmers, farm women and livestock owners since 1985 – 86.
 Total 631 Krishi Vigyan Kendras-KVKs have been established across the country at the district level
with a team of multidisciplinary team of experts. The KVKs aim at technology assessment and
refinement and work as knowledge and resource centre in the district.
 A voice KVK (VKVK) is a set of advisors (KVK experts) and peers (lead smallholder farmers)
connected through mobile and internet technologies. In the VKVK, the interaction between the two
parties can be entirely electronic.
 The agropedia platform acts as ‘middle ware’ for this interaction providing amplification (one-to-
many and many-to-one), persistence (messages are stored and can be searched, retrieved), monitoring
and other utilities which are possible when the content is electronically stored and semantically
indexed.
E-NAM
In April 2016 Union Government launched the pilot of e-NAM – the e-trading platform for the
National Agriculture Market.
Key features of E-portal
 The e-NAM is a pan India e-trading portal to network existing APMC and other market yards to
create a unified national market for agri commodities.
 The portal will provide a single window service for all APMC related information and services.
 The portal will connect e-mandis in several states and is aimed at ushering in much needed agri
marketing reforms to enable farmers to get better price of their produce and double their income.
 It is designed to create a combined national market for agricultural commodities. Farmers can display
case their crop online from their adjacent market and dealers can costing price from anywhere.
 Online trade will be allowed within the state and inter-state trade will be likely once all states and
mandis are integrated at the primarily stage. 25 possessions including onion, potato, apple, wheat,
pulses, coarse grains and cotton, have been recognized for online trading.
 To mix a wholesale mandis from corner to corner from the country with the online platform, the state
governments have to amend their Agriculture Produce Market Committee (APMC) Act.

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 eNAM will be realized in different phases with an aim to assimilate 585 controlled markets across the
country with the common e-market platform by March 2018. So far 365 mandis from 12 states have
been established approval.
Significance of E-NAM
 A major objective of the common market is to iron out the price differentials that exist across the
country, by curbing the tendency to hoard, which could lead to moderation of food inflation.
 The initiative will usher in transparency that will greatly benefit the farmers. Farmers are often forced
to sell at a distress prices in the closest mandi (market) and the e-NAM platform will allow them to
sell their produce anywhere in the country.while farmers will earn more, traders will have a wider
choice and consumers can expect lower prices
 The current state-level APMC laws permit the first sale of crops — after harvesting by farmers — to
take place only in regulated market yards or mandis. It, thus, restricts the farmer’s universe of buyers
to just the traders licensed to operate in the mandi under the concerned APMC’s jurisdiction.
 Even traders have to procure separate licenses to operate in different mandis within the same state.
NAM would essentially be a common electronic platform allowing farmers to sell their crops to
buyers anywhere in the country and vice versa. The benefits to buyers — be it large retailers,
processors or exporters — are obvious, as they can log into the platform and source from any mandi
in India connected to it. They don’t need to be physically present or depend on intermediaries with
trading licenses in those mandis.
 Horticultural crops such as onions and potatoes are often sold at varying rates in different states and a
unified market can help bring a parity in prices.
 A farmer in north India can sell his produce on the NAM to a trader in the west or south based on
price. This will make a significant difference because there is no state or national price.
Challenges/Criticism
 While buyers would definitely gain from this portal same could not be clearly said about the Farmers
as Most farmers do not take their crop to the mandis; they sell off to the local arhatiya or produce
aggregator even before that. Even the ones who take would offer a trolley load or two at most —
hardly enough to excite distant buyers bidding online.
 The National Sample Survey Office’s (NSSO) recently released ‘Some Aspects of Farming in India’
report shows almost 85 per cent of coconut growers selling their produce to retailers and dealers in
their immediate neighbourhood. These ratios are well above 50 per cent in most crops.
 The survey data also provides a possible reason why most farmers lack the flexibility to even take
their crop to the mandis. The survey data indicates that Farmers procure most of their Fertilizers,
Fodder, and credit for seasonal agricultural operations from the local Bania and the credit and other
inputs are given to the farmers on the condition that they will have to sell their goods to the local
bania.
 The biggest challenge will be to bring in uniformity and rationalization in taxes as agriculture and the
marketing is a state subject.
 Essentially the farmers cannot do away with the procurement agents whom the government wants to
cut off from the ecosystem by having a transparent system.” Even APMC is only a “political platform
of powerful and connected traders”. These traders own large tracts of land themselves. This nexus
needs to be knocked off.
Way Forward
 eNAM may become a game changer for agriculture but States need to deliver by amending there age
old APMC laws. The government should have centralized APMCs and put a cabinet rank minister to
cater to commerce part of agriculture.
 Farmers can greatly benefit if they were to find ways for aggregating produce on their own, bypassing
the arhatiya, Local Bania and even the local mandi in the process. This is where farmer producer
organisations and cooperatives can play a role, by facilitating aggregation and creation of volumes
that is intrinsic to the success of any ambitious virtual marketplace experiment.
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 In order to reduce the role of Village Bania in the life of Farmer, we need to improve the structure of
formal source of credit, Fertilizers and other Agriculture inputs.
 While e-NAM Can bring together both Buyers and sellers at a virtual space however in order of have
adequate physical connectivity between the Farmer and retailer (which is a necessity if virtual deal
needs to be transformed into actual deal )rural infrastructure like roads, warehouses and cold storage
Infrastructure need to be improved simultaneously.

Poverty, Inequality, and Unemployment

(a) Poverty

Poverty in India: Types of Poverty, Causes of Poverty, Vicious Circle of Poverty

Poverty in India
People living in poverty are often socially excluded and marginalized. Their right to effectively
participate in public affairs is frequently ignored, and thus elimination of poverty is much more than a
humanitarian issue, as it is more of a human rights issue. Thus, eradication of poverty and hunger is
the basis of all development process.
During the last two decades, India has lifted more than 100 million of its citizens from extreme
poverty; still, it is home to a very large number of people living in abject poverty.

Common Cited Causes of Poverty in India

The above-mentioned reasons are at best half-truths. In reality causes of poverty are much
more complex.
The True causes of poverty in India are:

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 Poverty as Lack of Freedom and Capabilities.

Note for Students:

 Why are People Poor?
People are poor because they lack choices both economic and social.
 Why do they lack Choices?
They lack choices because they do not have basic freedoms and capabilities.
 What are basic Freedoms and capabilities?
The freedoms through which people can empower themselves, the capabilities through which poor
can take their decisions. The broad freedoms that poor lacks are: Freedom of Choice; Freedom of
Justice etc.
 Why do the poor lack Freedoms and Capabilities?
They lack it because of the following reasons:
 The government is not willing to provide them.
 The Institutions of empowerment are weak.
 Ours is an Entitlement based system, in which the political parties and the government prefer to take
short-term measures of the distribution of freebies to attract voters.
 The Political system does not believe in Empowering people through long-term measures of
Education, awareness, Justice, Health and Productivity.
 Huge presence of Inequality.
 Lack of understanding of the nature of poverty.
 What are the solutions?
Empowerment of people through social development and education.
Providing to the poor all sorts of Choices, from which he can choose the best. In short making the
poor of the country capable.
The Vicious Circle of Poverty.

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The Vicious Circle of Poverty
Poverty Head Count Ratio versus Poverty Gap Ratio
Poverty Head Count Ratio
The Poverty Head Count ratio measures the
proportion of population whose per capita
income/ consumption expenditure is below the
official Poverty line or in simple terms is
measures the total number of people living below
the poverty line.
The number of people living below poverty line
has decreased from 74.5 Million in the year 1993-
94 to 52.8 Million in the year 2011-12.
Head Count Ratio is a simpler measure. It is
widely used and represents the cut-off point
Poverty Gap Ratio
The Poverty Gap Ratio is the gap by which mean
consumption of the poor below poverty line falls
short of the poverty line.
It indicates the depth of poverty; the more the
PGR, the worse is the condition of the poor.
While the number of poor people indicates spread
of poverty, PGR indicates the depth.
During 2004-05 to 2011-12, PGR also reduced in
both rural and urban areas. While the rural PGR
declined from 9.64 in 2004-05 to 5.05 in 2011-12
in the urban areas, it declined from 6.08 to 2.70
during the same period. A nearly 50% decline in
PGR both in rural and urban areas during 2004-
05 to 2011-12, reflects that the conditions of poor
have improved both in urban and rural areas.
The poverty gap index can be interpreted as the
average percentage shortfall in income for the
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 below which people are considered as poor. population, from the poverty line
HeadCount ration does not reflect the severity of A higher poverty gap index means that poverty is
poverty. more severe.

Absolute versus Relative Poverty

Absolute Poverty
Absolute poverty is when we consider every poor
person as equal. The general definition of poverty
which is valid at all times and for all economies
is called absolute poverty.
Absolute poverty approach considers a poor in
India as equal to a poor in the USA.
The simplest definition of being poor is ‘being
unable to subsistence’ that is, being unable to eat,
drink, have shelter and clothing.
A common monetary measure of absolute
poverty is ‘receiving less than $1 a day…’’. (In
2008, the World Bank revised this figure to $1.25
a day, and then again to $1.90 a day in 2015.)
Relative Poverty
The difficulties involved in the application of the
concept of “absolute poverty”, made some
researchers to abandon the concept altogether. In
place of absolute standards, they have developed
the idea of relative standards that is, standards
which are relative to particular time and place. In
this way, the idea of absolute poverty has been
replaced by the idea of relative poverty.
Just as conventions change from time to time,
and place to place, so will definitions of poverty.
In a rapidly changing world, definitions of
poverty based on relative standards will be
constantly changing. Hence, Peter Townsend has
suggested that any definition of poverty must be
“related to the needs and demands of a changing
society.
It can be argued that poverty is best understood in
a relative way – what is poor in New York is not
the same as what is poor in Mumbai (where over
50% of the population live in slums.

Poverty Lines in India: Estimations and Committees

Poverty Lines in India

 The poverty line defines a threshold income. Households earning below this threshold are considered
poor. Different countries have different methods of defining the threshold income depending on local
socio-economic needs.
 Poverty is measured based on consumer expenditure surveys of the National Sample Survey
Organisation. A poor household is defined as one with an expenditure level below a specific poverty
line.
 The erstwhile Planning Commission was the nodal agency in the Government of India for estimation
of poverty. It estimates the incidence of poverty at the national and state level separately in rural and
urban areas.
 The incidence of poverty is measured by the poverty ratio, which is the ratio of number of poor to the
total population expressed as a percentage. It is also known as head-count ratio.

Time Line of Poverty Estimation in India

The first Poverty line was created in India by the Erstwhile Planning Commission in the mid 1970s. It
was based on a minimum daily requirement of 2400 and 2100 calories for an adult in Rural and Urban
area respectively.

YK 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.

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 Table 3 shows the nutritional requirements and related consumption expenditure based on 1973-74
price levels recommended by the task force. Poverty estimates for subsequent years were to be
calculated by adjusting the price level for inflation.
Poverty Estimation Committees in India
Lakdawala Committee
The committee was constituted
in the year 1993.
The criteria suggested by the
committee was Calorie intake
based on consumption
expenditure.
The committee recommended
for state-specific poverty lines.
As per Ladkawala committee
the percentage of population
living below poverty line in the
year 2004-05 was:
Rural: 28.3%
Urban: 25.7%
All India: 27.5%
Tendulkar Committee
The Committee was constituted
in the year 2004-05
The committee estimated
poverty by using basic
requirement of the poor such as
housing, clothing, shelter,
education, sanitation, travel
expense and health etc., to make
poverty estimation realistic.
The committee suggested to do
away with the calorie-based
criteria.
The committee also suggested
to have a uniform poverty line
across rural and urban India.
The Tendulkar committee
stipulated a benchmark daily
per capita expenditure of RS 27
and RS 33 in rural and urban
areas, respectively, and arrived
at a cut-off of about 22% of the
population below poverty line.
As per Tendulkar report, the
percentage of people living
below poverty line in the year
2004-05 were as follows:
Rural:41.8
Urban: 25.7
Total 37.2
In the year 2011-12,
Rural:25.7
Rangarajan Committee
The Committee was constituted
in the year 2012.
The Rangarajan Committee
goes back to the idea of
Lakdawala committee method
of calculating Rural and Urban
Poverty Separately.
The Rangarajan group took the
view that the consumption
basket should contain a food
component that satisfied certain
minimum nutrition
requirements, as well as
consumption expenditure on
essential non-food item groups
(education, clothing,
conveyance and house rent)
besides a residual set of
behaviourally determined non-
food expenditure.
C Rangarajan expert group
report, recommended a monthly
per capita consumption
expenditure of RS 972 in rural
areas and RS 1,407 in urban
areas as the poverty line at the
all-India level.
Assuming five members for a
family, this will imply a
monthly per household
expenditure of RS 4,860 in rural
areas and RS 7,035 in urban
areas.
The Rangarajan committee
estimated a daily per capita
expenditure of RS 32 and RS
47, in rural and urban areas
respectively as the poverty line,
and worked out poverty line at
close to 29.5%.
The Rangarajan expert group
estimates that 30.9 percent of
the rural population and 26.4
percent of the urban population
were below the poverty line in
2011-12.
The all-India ratio was 29.5
percent.
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 Urban: 13.7
Total: 21.9

Poverty in India: Trickle Down Approach, Inclusive Growth and Multi-

Dimensional Poverty Index
Trickle Down Approach to Poverty
Back to Basics: The Theory
It is often said that a rising tide lifts all boats. Experience tells us that the same is not necessarily true
of a growing economy. In both developed and developing economies, the benefits of growth are
seldom evenly distributed.
The proponents of trickle-down economics, argues that rising incomes at the top end of the spectrum
would lead to more jobs, more output, more income and less poverty as the growth and higher
incomes at the top end will move at the lower end and to the poor. According to this thesis, as long as
an economy is growing, the benefits will eventually reach the poor and make their way through the
system that will make everyone better off.
The theory of Trickle Down represents an unhealthy obsession with GDP and Growth as the most
reliable measure of economic success. The theory believes in the saying ‘One size fits all’. The theory
argues that to eradicate poverty, the only thing that matters is growth. A growing economy will take
care of everything. As growth happens, the fruits of growth will eventually flow to the poorest and the
lower section of the society and ultimately lifting them up.
The Critique of Trickle Down Economics
 The IMF and the World Bank in their various reports debunked the idea of trickle-down economics.
They found out that the benefits of growth within an economy are rarely spread evenly, but also that
an unequal rise in incomes can actually slow the rate of economic growth altogether.
 According to the report, a 1% rise in income for the wealthiest 20% of a society alone is likely to
shrink annual growth by 0.1% within five years. By contrast, raising the income of the poorest 20%
by a single percentage point increases annual growth by 0.4% over the same time frame.
 When it comes to eliminating poverty, the degree to which the benefits of growth are shared can have
a significant impact on outcomes.
 According to Martin Ravallion, the former head of research at the World Bank, as cited in The
Economist, a 1% increase in incomes in the most unequal countries produces a mere 0.6% reduction
in poverty; however, in the most equal countries, it yields a 4.3% cut. In other words, societies can get
much more ‘bang from a boom’ if they ensure benefits are more widely shared.
 This brings us to the point at which trickle-down theory ends and inclusive growth begins.
According to the Organisation for Economic Cooperation and Development (OECD), Inclusive
growth is “a new approach to economic growth that aims to improve living standards and share the
benefits of increased prosperity more evenly across social groups”.
Inclusive Growth in India
Note for Students: Inclusive growth refers to both the pace and pattern of growth, which are
considered interlinked and therefore need to be addressed together. Inclusiveness represents equality
of opportunity in terms of access to markets, resources and an unbiased regulatory environment for
businesses and individuals. In a nutshell, it is not just about the quantity of growth within our
economies and societies, but also about its quality.
Inclusive Growth matters because widening inequality have been shown to lead to a range of social
and economic challenges for societies over time. These include both social and political instability,
not to mention the sheer waste of potential that occurs when large swathes of populations do not have
the opportunity to improve their situation.
Features of Inclusive Growth

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 The Multi-Dimensional Poverty Index
 The Multidimensional Poverty Index (MPI), published for the first time in the 2010 Report,
complements monetary measures of poverty by considering overlapping deprivations suffered by
individuals at the same time.

 The index identifies deprivations across the same three dimensions as the HDI and shows the number
of people who are multidimensionally poor (suffering deprivations in 33% or more of the weighted
indicators) and the number of weighted deprivations with which poor households typically contend
with.

 It can be deconstructed by region, ethnicity and other groupings as well as by dimension and
indicator, making it a useful tool for policymakers.

 The MPI can help the effective allocation of resources by making possible the targeting of those with
the greatest intensity of poverty; it can help address some SDGs strategically and monitor impacts of
policy intervention.

 The MPI can be adapted to the national level using indicators and weights that make sense for the
region or the country, it can also be adopted for national poverty eradication programs, and it can be
used to study changes over time.

 About 1.5 billion people in the 102 developing countries currently covered by the MPI—about 29
percent of their population — live in multidimensional poverty — that is, with at least 33 percent of
the indicators reflecting acute deprivation in health, education and standard of living. And close to
900 million people are at risk (vulnerable) to fall into poverty if setbacks occur – financial, natural or
otherwise.

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 Addressing Poverty in India/Poverty Eradication Schemes
Mahatma Gandhi Rural Guarantee Employment Act (MGNREGA)

 The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) with its legal
framework and rights-based approach was notified on September 5, 2005, and came into force with
effect from 2nd February 2006.
 It aims at enhancing livelihood security by providing at least one hundred days of guaranteed wage
employment in a financial year to every rural household whose adult members volunteer to do
unskilled manual work.
 The Act covered 200 districts in its first phase and was extended to all the rural districts of the country
in phases.
 MGNREGA is the first ever law, internationally, that guarantees wage employment at an
unprecedented scale.
 The primary objective of the Act is meeting demand for wage employment in rural areas. The works
permitted under the Act address causes of chronic poverty like drought, deforestation and soil erosion
so that the employment generation is sustainable.
 The women workforce participation under the Scheme has surpassed the statutory minimum
requirement of 33 percent, since inception, every year women participation has been around 48%.

The major goals of MGNREGA are to:

 Enhance livelihood security of the rural poor by generating wage employment opportunities in works
that develop the infrastructure base of the area concerned.
 Rejuvenate the natural resource base of the area concerned.
 Create a productive rural asset base.
 Stimulate the local economy by providing a safety net to rural poor.
 Ensure empowerment to women.
 Strengthen grass-roots democratic institutions.
Key Achievements of MGNREGA
 Since its inception in 2006, around Rs.1,63,754.41 crores have been disbursed directly as wage
payments to rural worker households.
 1,657.45 crore person-days of wage employment has been generated. On an average, five crore rural
households have been provided with wage employment each year since 2008.
 Scheduled Castes and Scheduled Tribes participation has been 48 percent till 31st March 2014.
 Women have accounted for 48 percent of the total person-days generated. This is well above the
mandatory 33 percent as required under the Act.
 Since the beginning of the programme, 260 lakh works have been taken up under the Act.

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 Average wage per person-day has gone up by 81 percent since the inception of the programme. The
notified wage today varies from a minimum of Rs.153 in Meghalaya to Rs.236 in Haryana.
National Rural Livelihood Mission
 The NRLM is one of the important programs of the government of India, in terms of allocation and
coverage, and it seeks to reach out to 8–10 crore rural poor households and organize them into SHGs
and federations at the village and at higher levels by 2021-22.
 While doing so, NRLM ensures adequate coverage of poor and vulnerable sections of the society
identified through Participatory processes and approved by Gram Sabha.
 A strong convergence with Panchayati Raj Institutions (P.R.I) is an important feature of the
programme.
 During the year 2013-14, Aajeevika-NRLM has focused on supporting the State Missions in transiting
to NRLM by fulfilling all the requirements, setting up implementation architecture, strengthening
them by providing comprehensive induction training and capacity building support.
 As of March 2014, 27 States and the Union Territory of Puducherry have transited to NRLM.
 The Resource blocks initiated during the year 2012-13 have shown impressive results in terms of
quality of community institutions and generation of social capital.
 NRLM has focused on creating special strategies and initiating pilots to reach out to the most
marginalized and vulnerable communities – Persons with Disabilities (PwDs), the elderly, Particularly
Vulnerable Tribal Groups (PVTGs), bonded labour, manual scavengers, victims of human trafficking,
etc.
 During the year emphasis was also placed on strengthening the institutional systems in terms of
adopting Human Resource Manual, Financial Management manual and roll out of interest subvention
programme.
 Around 1.58 lakh youths have set up their own enterprises with the help of Aajeevika. 24.5 lakh
Mahila Kisans have also been provided support.
Pradhan Mantri Gram Sadak Yojana
 Rural roads constitute about 80% of the country’s road network and are a lifeline for the vast majority
of the population that lives in the villages.
 Roads form a critical link for rural communities to access markets, education, health and other
facilities.
 They also enhance opportunities for employment in the non-farm sector and facilitate setting up of
shops and small businesses.
 The government of India, as part of poverty reduction strategy, launched the Pradhan Mantri Gram
Sadak Yojana (PMGSY) on 25th December 2000 as a Centrally Sponsored Scheme to assist States.
 The primary objective of the programme is to provide good all-weather connectivity to all
eligible unconnected habitations in the core network with a population of 500 (Census-2001)
and above.
 In respect of the Hill States (North-East, Sikkim, Himachal Pradesh, Jammu & Kashmir and
Uttarakhand), Desert areas (as identified in the Desert Development Programme), and Tribal
(Schedule V) Areas and Selected Tribal and Backward Districts (as identified by the Ministry of
Home Affairs and Planning Commission), the objective is to connect habitations with a
population of 250 (Census-2001) and above.
 The programme envisages single all-weather connectivity.
 The country has now a network of about 3,99,979 km of such roads. With a view to ensuring full
farm-to-market connectivity, the programme also provides for the up gradation of the existing
‘Through Routes’ and Major Rural Links to prescribed standards, though it is not central to the
programme. Under PMGSY-II, 10,725 projects have been cleared out of eligible 50,000 projects. As

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 on March 31, 2014, 97,838 habitations have been connected. New connectivity of 2,48,919 km has
been achieved.
Indira Awaas Yojana
 As part of a larger strategy of the Ministry’s poverty eradication effort, Indira Awaas Yojana (IAY), a
flagship scheme of the Ministry of Rural Development, has since inception been providing assistance
to the BPL families who are either houseless or having inadequate housing facilities, for constructing
a safe and durable shelter.
 The Government has been implementing IAY as part of the enabling approach to ‘shelter for all’,
taking cognizance of the fact that rural housing is one of the major anti-poverty measures for the
marginalized.
 The house is recognized not merely as a shelter and a dwelling place but also as an asset which
supports the livelihood, symbolizes social position and is also a cultural expression.
 A good home would be in harmony with the natural environment protecting the household from
extreme weather conditions, and it would have the required connectivity for mobility and facilities for
economic activities.
 In the year 2013-14, 13.73 lakh houses have been constructed.
Pradhan Mantri Awaas Yojana
 PMAY was launched in June 2015. The Government envisages building affordable pucca houses with
water facility, sanitation and electricity supply round-the-clock.
 The scheme originally was meant to cover people in the EWS (annual income not exceeding ₹3 lakh)
and LIG (annual income not exceeding ₹6 lakh) sections, but now covers the mid-income group
(MIG) as well.
 PMAY scheme comprises of four key aspects.
 One, it aims to transform slum areas by building homes for slum dwellers in collaboration with
private developers.
 Two, it plans to give a credit-linked subsidy to weaker and mid-income sections on loans taken for
new construction or renovation of existing homes.
 An interest subsidy of 3 percent to 6.5 per cent has been announced for loans ranging between ₹6 lakh
and ₹12 lakh. For those in the EWS and LIG category who wish to take a loan of up to ₹6 lakh, there
is an interest subsidy (concession) of 6.5 percent for the tenure of 15 years.
 So far around 20,000 people have availed of loans under this scheme. The Government increased the
loan amount to ₹12 lakh, targeting the mid-income category. The interest subsidy on loans up to ₹12
lakh will be 3 percent. In rural areas, interest subvention of 3 percent is offered on loans up to ₹2 lakh
for constructing new homes or extension of old homes.
 Three, the Government will chip in with financial assistance for affordable housing projects done in
partnership with States/ Union Territories for the EWS.
 Four, it will extend direct financial assistance of ₹1.5 lakh to EWS.
 Today, while developers in India’s metropolitan cities are sitting on lakhs of unsold residences costing
upwards of ₹50 lakh, the country is estimated to have a shortage of nearly 20 million housing units
needed by the rural and urban poor, at far lower price points of ₹5-15 lakh.
 The PMAY aims to address this shortfall. With the increase in subsidised loan amount to ₹12 lakh, the
scheme is expected to cover a higher proportion of the urban poor.
 The PMAY will hopefully incentivise India’s construction and realty sector to reduce its traditional
obsession with affluent home buyers in the cities.
National Urban Livelihoods Mission

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 Ministry of Housing & Urban Poverty Alleviation has launched “National Urban Livelihoods Mission
(NULM)” in the 12th Five-Year Plan w.e.f. 24th September 2013 replacing the existing Swarna
Jayanti Shahari Rozgar Yojana (SJSRY).
 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.
 The Mission aims at providing shelter equipped with essential services to the urban homeless in a
phased manner. In addition, the Mission will also address livelihood concerns of the urban street
vendors.
The primary target of NULM is the urban poor, including the urban homeless. The NULM has six
major components:
I. Social Mobilizations and Institution Development (SM&ID): NULM envisages mobilisation of
urban poor households into thrift and credit-based Self-Help Groups (SHGs) and their federations/
collectives.
II. Capacity Building and Training (CB&T): A multi-pronged approach is planned under NULM for
continuous capacity building of SHGs and their federations/collectives, government functionaries at
Central, State and City/Town levels, bankers, NGOs, CBOs and other stakeholders. NULM will also
create national and state-level mission management units to support the implementation of the
programme for the poor.
III. Employment through Skills Training and Placement (EST&P): NULM will focus on providing
assistance for skill development / upgrading of the urban poor to enhance their capacity for self-
employment or better-salaried employment.
IV. Self-Employment Programme (SEP): Self-Employment Programme (SEP): This component will
focus on financial assistance to individuals/groups of urban poor for setting up gainful self-
employment ventures/ micro-enterprises, suited to their skills, training, aptitude and local conditions.
V. Support for Urban Street Vendors: This component will cover the development of vendors market,
credit enablement of vendors, a socio-economic survey of street vendors, skill development and micro
enterprises development and convergence with social assistance under various schemes of the
Government.
VI. Shelter for Urban Homeless (SUH): Under this component, the construction of permanent shelters
for the urban homeless equipped with essential services will be supported.
National Food Security Mission
 The Government of India in 2007 adopted a resolution to launch a Food Security Mission comprising
rice, wheat and pulses to increase the production of rice by 10 million tons, wheat by 8 million tons
and pulses by 2 million tons by the end of the Eleventh Plan (2011-12).
 Accordingly, a Centrally Sponsored Scheme, ‘National Food Security Mission’ (NFSM), was
launched in October 2007.
 The Mission is being continued during 12th Five Year Plan with new targets of additional production
of food grains of 25 million tons of food grains comprising of 10 million tons rice, 8 million tons of
wheat, 4 million tons of pulses and 3 million tons of coarse cereals by the end of 12th Five Year Plan.
 The National Food Security Mission (NFSM) during the 12th Five Year Plan is having five
components (i) NFSM- Rice; (ii) NFSM-Wheat; (iii) NFSM-Pulses, (iv) NFSM-Coarse cereals and
(v) NFSM Commercial Crops.
The objectives of NFSM are
 Increasing production of rice, wheat, pulses and coarse cereals through area expansion and
productivity enhancement in a sustainable manner in the identified districts of the country
 Restoring soil fertility and productivity at the individual farm level; and
 Enhancing farm level economy (i.e. farm profits) to restore confidence amongst the farmers

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 The Mission is adopting the following strategies:
1. Focus on low productivity and high potential districts including cultivation of food grain crops in
rainfed areas.
2. Implementation of cropping system-centric interventions in a Mission mode approach through active
engagement of all the stakeholders at various levels.
3. Agro-climatic zone wise planning and cluster approach for crop productivity enhancement.
4. Focus on pulse production through utilization of rice fallow, rice bunds and intercropping of pulses
with coarse cereals, oilseeds and commercial crops (sugarcane, cotton, jute).
5. Promotion and extension of improved technologies, i.e., seed, integrated nutrient management (INM)
including micronutrients, soil amendments, integrated pest management (IPM), input use efficiency
and resource conservation technologies along with capacity building of the farmers/ extension
functionaries.
6. Close monitoring of the flow of funds to ensure the timely reach of interventions to the target
beneficiaries.
7. Integration of various proposed interventions and targets with the district plan of each identified
district.
8. Constant monitoring and concurrent evaluation by the implementing agencies for assessing the impact
of the interventions for a result oriented approach.
Integrated Child Development Services
 The ICDS Scheme implemented by Government of India is one of the world’s largest and unique
programmes for early childhood care and development.
 It is the foremost symbol of the Country’s commitment to its children and nursing mothers, as a
response to the challenge of providing pre-school nonformal education on the one hand and breaking
the vicious cycle of malnutrition, morbidity, reduced learning capacity and mortality on the other.
 The beneficiaries under this scheme are children in the age group of 0-6 years, pregnant women and
lactating mothers.
 To improve the nutritional and health status of children in the age group 0-6 years, reduce the
incidence of mortality, morbidity and malnutrition of children, and nutritional supplements to
pregnant women and lactating mothers are some important objectives of ICDS.
 The ICDS Scheme is universal for all categories of beneficiaries.
 The ICDS Scheme was launched in 1975 in 33 Blocks (Projects) with 4891 Anganwadi Centres
(AWC).
 As on 31/12/2013, under ICDS, 7067 projects 13.41 lakhs AWCs are operational covering 1026.03
lakh beneficiaries under supplementary nutrition.
(b) Inequality
Inequality in India: Definition and Measures; Lorenz Curve, Gini Coefficient, Income held by Top 10%
Inequality in India
Back to Basics: Income Inequality
Income inequality is the unequal distribution of household or individual income across the various
participants in an economy. Income inequality is often presented as the percentage of income to a
percentage of the population. The simplest way to understand inequality is by analysing the
population by dividing it into quintiles (fifth) from poorest to richest and reporting the proportions of
income held by them.
Example: if the bottom 20% of the population held 20% of the economy’s income and the top 20%
held 20% of the economy’s income, then we can call the society highly equal. But it is hardly the
case, as the bottom 20% of the population hardly owns more than 3% of the total wealth of the
economy.
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 How to Measure Income Inequality.
Gini Coefficient Gini is the most popular measure of income inequality. The Gini coefficient is
derived from the Lorenz Curve.
Note for Students: Lorenz Curve
 The Lorenz curve shows the percentage of total income earned by cumulative percentage of the
population.
 In a perfectly equal society, the “poorest” 25% of the population would earn 25% of the total income,
the “poorest” 50% of the population would earn 50% of the total income and the Lorenz curve would
follow the path of the 45° line of equality.
 As inequality increases, the Lorenz curve deviates from the line of equality; the “poorest” 25% of the
population may earn 10% of the total income; the “poorest” 50% of the population may earn 20% of
the total income and so on.
To construct the Gini coefficient, graph the cumulative percentage of households (from poor to rich)
on the horizontal axis and the cumulative percentage of expenditure (or income) on the vertical axis.
The Lorenz curve is shown in the figure. The diagonal line represents perfect equality.
The Gini coefficient is defined as A/(A+B), where A and B are the areas shown on the graph. If A=0
the Gini coefficient becomes 0 which means perfect equality, whereas if B=0 the Gini coefficient
becomes 1 which means complete inequality. In this example, the Gini coefficient is about 0.35.

Income Inequality: A Comparison

SOURCE: WORLD BANK, 2011.

The above graph represents the Gini Coefficient of the selected Countries for the year 2011.
The Gini index of 0 represents the perfect equality, whereas the Gini index of 100 represents perfect
inequality.
India has one of the lowest inequality among the BRICS Countries with Gini Index of 35.15.
Income Inequality: Percentage of Income held by top 10% of the Population

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 SOURCE: WORLD BANK, 2011
The graph represents the percentage of the income held by the top 10% of the population in the
selected countries.
The percentage of the income held by the top 10% in India is close to 30 percent.
Income Inequality: Percentage of Income held by the poorest 10% of the population.
The graph below represents the percentage of the income held by the poorest 10% of the population in
the selected countries.
The percentage of the income held by the poorest 10% in India is close to 3 percent.

SOURCE: WORLD BANK, 2011

The Common measures of Inequality

Income Inequality in India: Causes, Remedies and Consequences

Analysis of Income Inequality in India

 In the recent years, India has joined the club of most unequal countries.
 Based on the new India Human Development Survey (IHDS), which provides data on income
inequality for the first time, India scores a level of income equality lower than Russia, the United
States, China and Brazil, and more egalitarian than only South Africa.
 According to a report by the Johannesburg-based company New World Wealth, India is the second-
most unequal country globally, with millionaires controlling 54% of its wealth.

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 In India, the richest 1% own 53% of the country’s wealth, according to the latest data from Credit
Suisse.
 The richest 5% own 68.6%, while the top 10% have 76.3%.
 At the other end of the pyramid, the poorer half held a mere 4.1% of national wealth.
 The Credit Suisse data shows that India’s richest 1% owned just 36.8% of the country’s wealth in
2000, while the share of the top 10% was 65.9%. Since then they have steadily increased their share
of the pie. The share of the top 1% now exceeds 50%.
 The most obvious conclusion to be drawn is that economic reforms have relatively benefited a tiny
group at the top of the Indian income pyramid.
 The increase in income inequality coincides with the sharp rise in Indian economic growth after 1980.
 This points to the famous hypothesis put forth by Simon Kuznets—that inequality tends to rise during
periods of rapid growth thanks to the uneven pace at which people move from low productivity to
high productivity activities.
 The big difference between India and China is in the fact that the middle 40% in India got 23% of the
increase in national income since 1980 while the same group in China got 43%—a massive gap of 20
percentage points. This difference of 20 percentage points was largely captured by the top 1% in
India.
 The Indian top 1% has done extremely well, the Chinese middle has benefited far more than the
Indian middle, and the bottom half in both countries has had broadly similar experiences.
Causes of Income Inequality in India.

How to reduce Inequalities

Promotion of Labour Intensive Manufacturing: The failure to promote labour-intensive

manufacturing like; Construction, Textile, Clothing, Footwear etc. is the single most reason of rising
inequalities. The Labour-intensive manufacturing has the potential to absorb millions of people who
are leaving farming.
The proportion of the labour force in agriculture has come down, but the workers who have left farms
have not got jobs in modern factories or offices. Most are stuck in tiny informal enterprises with
abysmal productivity levels. If India could somehow reverse this trend and promote labour-intensive
manufacturing than inequality could fall.
More Inclusive Growth: The promotion and adoption of an Inclusive Growth Agenda is the only
solution to rising inequality problem. Economic growth which is not inclusive will only exacerbate
inequality.
Skill Development: The development of advanced skills among the youth is a prerequisite if India
wants to make use of its demographic dividend. The skilling of youth by increasing investment in
education is the only way we can reduce inequality. India needs to become a Skill-led economy.

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Progressive Taxation: Higher taxes on the Rich and the luxuries will help reduce income
inequalities.
Equal Opportunity for all: The Government may devise and set up some sort of machinery which
may provide equal opportunities to all rich and poor in getting employment or getting a start in trade
and industry. In other words, something may be done to eliminate the family influence in the matter of
choice of a profession. For example, the government may institute a system of liberal stipends and
scholarships, so that even the poorest in the land can acquire the highest education and technical skill.
Consequences of Inequality

(c) Unemployment

Unemployment in India: Types, Causes and Measures

Unemployment in India

Back to Basics. What is Unemployment?

Unemployment is a phenomenon that occurs when a person who is capable of working and is actively
searching for the work is unable to find work.
People who are either unfit for work due to physical reason or do not want to work are excluded from
the category of unemployed.
The most frequent measure of unemployment is unemployment rate. The unemployment rate is
defined as a number of unemployed people divided by the number of people in the labour force.
Labour Force: Persons who are either working (or employed) or seeking or available for work (or
unemployed) during the reference period together constitute the labour force.
Measure of Unemployment in India

Usual Status Approach Weekly Status Approach Daily Status Approach

Usual Status approach records only those
persons as unemployed who had no
gainful work for a major time during the
365 days preceding the date of survey
and are seeking or are available for work.
The status of activity on which a person
has spent the relatively long time of the
preceding 365 days prior to the date of
survey is considered to be the usual
principal activity status of the person.
The Usual Status captures long-term
unemployment in the economy.
The weekly status approach
records only those persons
as unemployed who had no
gainful work for a major
time during the seven days
preceding the date of
survey.
The weekly status approach
captures both the long-term
open chronic
unemployment and the
seasonal unemployment.
In the Daily status
approach, current activity
status of the person with
regard to whether
employed or unemployed
or outside labour force is
recorded for each day in
the reference week. The
measure adopts half day as
a unit of measurement for
estimating employment or
unemployment.
The approach is most
inclusive than the other
two. Since it also captures
the days of unemployment
of those who are recorded

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The Usual Principal Activity status
(UPS), written as Usual Status (PS), is
determined using the majority time
criterion and refers to the activity status
on which h/she spent longer part of the
year.
Principal usual activity status is further
used to classify him in/out the labour
force.
For instance, if an individual was
‘working’ and/or was ‘seeking or
available for work’ for a major part of the
year preceding the date of the survey then
h/she is considered as being part of the
‘Labour Force’.
For example, if an individual reports as
having worked and sought/available for
work for seven months during the year or
having sought or available for work for
seven months then h/she is classified as
being in the Labour Force.
A person is considered to
be employed if he or she
pursues any one or more of
the gainful activities for at
least one-hour on any day
of the reference week. On
the other hand, if a person
does not pursue any gainful
activity, but has been
seeking or available for
work, the person is
considered as unemployed.
as employed on the weekly
status approach.
A person who works for 4
hours or more but up to 8
hours on a day is recorded
as employed for the full
day.
A person who works for 1
hour or more but less than
4 hours is recorded as
employed for the half day.
Accordingly, a person
having no gainful work
even for 1 hour in a day is
described as unemployed
for a full day.

Types of Unemployment

Frictional Unemployment Cyclical Unemployment

The minimum amount of unemployment that
prevails in an economy due to workers quitting
their previous jobs and are searching for the new
jobs is called Frictional Unemployment.
The major reasons for frictional unemployment
are lack of information about the availability of
jobs and lack of mobility on the part of workers
(it means workers are not willing to travel to a
distant place or a new state for employment).
Frictionally unemployed person remains
unemployed for a very short period of time.
This type of unemployment is of voluntary
nature.
Cyclical unemployment is due to deficiency or
fall in effective demand from consumers which
leads to fall in production and low demand for
labour.
Cyclical unemployment is a type of
unemployment which is related to the cyclical
trends of booms and recessions called as the
business cycle.
If an economy is doing good, cyclical
unemployment will be at its lowest and will be
the highest if the economy faces recession.
The major reason for this type of unemployment
is lack of demand in the economy and slowdown
of economic activity.
When the demand for goods and services is low,
then the firms stop the production due to rise in
the unsold stock. As a result of stopping
production, the firms lay off workers and
unemployment rises.
This type of unemployment is for a long period
of time and worker remains unemployed during
the entire phase of slow down or recession.
This type of unemployment is of involuntary
nature.

Voluntary Unemployment Involuntary Unemployment

Voluntary unemployment refers to a situation
where workers are either not seeking for work or
are in transition from one job to another (quitting
one job in search of another better job).
Involuntary unemployment refers to a situation
where workers are seeking work and are willing
to work but are unable to get work.
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 Voluntary unemployment remains in an economy Involuntary unemployment happens in an
during all the time. As there will always be some economy during the time of depression and fall in
workers, who quit their previous jobs in search of aggregate demand for goods and services.
new ones.

Structural Unemployment Seasonal Unemployment

Structural unemployment refers to a situation
which arises due to change in the structure of the
economy. Example: An economy transforms
itself from a Labour intensive economy to a
Capital intensive economy.
Structural unemployment usually occurs due to
the mismatch of skills.
Example, due to advance technological progress,
the production of cars is done through robotic
machines rather than traditional Machines. As a
result, those workers who do know how to
operate the new and advanced machines will be
removed.
The unemployment happened because the current
workers do not have the required skills as wanted
by their employers.
Technological Advancement, Robotics, Artificial
Intelligence, Mechanisation and Automation are
the main causes of Structural unemployment.
Seasonal unemployment occurs during certain
seasons of the year. In some industries and
occupations like agriculture, holiday resorts etc.,
production activities take place only in some
seasons.
Therefore, they offer employment for only a
certain period of time in a year.
People engaged in such type of activities may
remain unemployed during the off-season.
Seasonal unemployment mainly occurs in
Agricultural sector, Tourism sector and in
factories producing seasonal goods.

Back to Basics: Disguised Unemployment

 Disguised unemployment is a situation especially prevalent in poor and developing countries.

 Disguised unemployment is when too many people are employed than what is required to produce
efficiently. This kind of employment is not at all productive.
 It is not productive in a sense that production does not suffer even if some of the employed people are
withdrawn.
 The key point to remember is that the marginal productivity of labourers under disguised
unemployment is zero. The labourers are employed physically, but not economically.
Example: In a piece of 5 Acres land, 5 family members are employed to grow 100 Kgs of rice. The
maximum rice that can be grown on the land is 100 Kg only. Now, the family decides to employ
additional two members of its family on the same land. In such a scenario, the additional two
members will not contribute anything in production since maximum production has already been
reached. The additional two members will only end up congesting the farm land. Hence, they both are
disguisedly unemployed.
Member 1 20 Kg
Member 2 20 Kg
Member 3 20 Kg
Member 4 20 Kg
Member 5 20 Kg
Since maximum output of 100 Kg is already reached.
Member 6 & 7 contribution will be 0 Kg.
The situation of disguised unemployment is most prevalent in the agriculture sector of the
underdeveloped countries. The key idea is that the amount of population in agriculture which can be

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removed from it without any change in the method of cultivation, without leading to any reduction in
output.
Back to Basics: Under Employment.
Underemployment is the most dangerous kind of unemployment in an economy. Underemployment is
a situation under which People with a higher level of skills are employed in less productive jobs. It
simply means that the Labour force of the economy is not fully utilised as per their skills and
experience.
Example: an individual with an engineering or management degree working as a clerk or accountant
in a firm or a social science graduate working as a pizza delivery boy.
The consequence of Underemployment.

Unemployment in India: Causes and Consequences

Unemployment in India: Causes

Consequences of Unemployment.

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Jobless Growth in India: Reasons and Consequences

The Consequences of Jobless Growth in India

(d) Other important issues

Economics of Animal Rearing in India

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 Economics of Animal Rearing

India’s Position in Global Livestock Economy.

Importance of Livestock sector in the Indian Economy.

Importance of Livestock sector in achieving Inclusive Growth in India

 Distribution of livestock is more equitable than that of land. In 2003 marginal farm households (≤1.0h
hectare of land) who comprised 48% of the rural households controlled more than half of country’s
cattle and buffalo and two-thirds of small animals and poultry as against 24% of land. Between 1991-
92 and 2002-03 their share in land area increased by 9 percentage points and in different livestock
species by 10-25 percentage points.
 Livestock has been an important source of livelihood for small farmers. They contributed about 16%
to their income, more so in states like Gujarat (24.4%), Haryana (24.2%), Punjab (20.2%) and Bihar
(18.7%).
 The agricultural sector engages about 57% of the total working population and about 73% of the rural
labour force. Livestock employed 8.8% of the agricultural work force albeit it varied widely from 3%
in North-Eastern states to 40-48% in Punjab and Haryana. Animal husbandry promotes gender equity.
More than three-fourth of the labour demand in livestock production is met by women. The share of
women employment in livestock sector is around 90% in Punjab and Haryana where dairying is a
prominent activity and animals are stallfed.
 The distribution patterns of income and employment show that small farm households hold more
opportunities in livestock production. The growth in livestock sector is demand-driven, inclusive and
pro-poor. Incidence of rural poverty is less in states like Punjab, Haryana, Jammu & Kashmir,
Himachal Pradesh, Kerala, Gujarat, and Rajasthan where livestock accounts for a sizeable share of
agricultural income as well as employment. Empirical evidence from India as well as from many

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other developing countries suggests that livestock development has been an important route for the
poor households to escape poverty.

Livestock population (2012 Livestock census)

Sl. No Species Number (in millions) Ranking in the

world population
01 Cattle 190.9 Second
02 Buffaloes 108.7 First
Total (including Mithun and Yak) 300 First
03 Sheep 65.0 Third
04 Goats 135.2 Second
05 Pigs 10.3 –
06 Others 1.7 –
Total livestock 512.3
Total poultry 729.2 Seventh
07 Duck –
Fifth

08 Chicken –
09 Camel – Tenth

Schemes/Policies Launched for Livestock Sector by the Government

National Livestock Mission
The National Livestock Mission (NLM) has commenced from 2014-15. The Mission is designed to
cover all the activities required to ensure quantitative and qualitative improvement in livestock
production systems and capacity building of all stakeholders. The Mission will cover everything
germane to improvement of livestock productivity and support projects and initiatives required for
that purpose subject. This Mission is formulated with the objective of sustainable development of
livestock sector, focusing on improving availability of quality feed and fodder. NLM is implemented
in all States including Sikkim.
NLM has 4 submissions as follows:
The Sub-Mission on Fodder and Feed Development will address the problems of scarcity of animal
feed resources, in order to give a push to the livestock sector making it a competitive enterprise for
India, and also to harness its export potential. The major objective is to reduce the deficit to nil.
Under Sub-Mission on Livestock Development, there are provisions for productivity enhancement,
entrepreneurship development and employment generation (bankable projects), strengthening of
infrastructure of state farms with respect to modernization, automation and biosecurity, conservation
of threatened breeds, minor livestock development, rural slaughter houses, fallen animals and
livestock insurance.
Sub-Mission on Pig Development in North-Eastern Region: There has been persistent demand
from the North Eastern States seeking support for all round development of piggery in the region. For
the first time, under NLM a Sub-Mission on Pig Development in North-Eastern Region is provided
wherein Government of India would support the State Piggery Farms, and importation of germplasm
so that eventually the masses get the benefit as it is linked to livelihood and contributes in providing
protein-rich food in 8 States of the NER.
Sub-Mission on Skill Development, Technology Transfer and Extension: The extension
machinery at field level for livestock activities is very weak. As a result, farmers are not able to adopt
the technologies developed by research institutions. The emergence of new technologies and practices
require linkages between stakeholders and this sub-mission will enable a wider outreach to the
farmers. All the States, including NER States may avail the benefits of the multiple components and
the flexibility of choosing them under NLM for a sustainable livestock development.

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 Rashtriya Gokul Mission
Key features of the mission
 The Mission aims to conserve and develop indigenous breeds in a focused and scientific manner and
for that breeding facilities will be set up for varieties with high-genetic pedigree”. Indigenous cattle
are largely ignored in India despite the fact that they are better adapted to the country’s climate”.
 The aim of the mission is to protect Indigenous cow from being cross-bred into different varieties.
 Focus will be largely to give a push to local breeding programme on the line of elite local breeds like
Gir, Sahiwal, Rathi to enhance milk production.
 The local cow breed will be protected through traditional-style “gaushalas” or cattle-care centres. •
The scheme has provision to acknowledge those farmers who works rigorously in the direction. • The
“Gopal Ratna” awards will be conferred to them. • The scheme also makes a point about upkeep of
cattle after their milk producing phase gets over and then they often used for the purpose of meat.
Official reaction.
 An amount of Rs 500 crore has been earmarked for Bovine Breeding and Dairy Development
programme and out of which Rs 150 crore will be specially allocated for the protection of indigenous
cow breeds.
Idea behind the Mission?
 The idea is to increase milk production which is dismal in comparison to US, UK, and Israel.
 Though India has attained the numero uno position in milk production but that is only because the
country is home of world’s largest livestock population.
 Through the programme, the aim is to increase high yield per cow which is very low in comparison to
the European countries like US. Low yield per cow in India
 The average daily milk yield for crossbred cattle in India is at 7.1 kg per day while it is at 25.6 in UK,
US (32.8) and Israel (38.6).
 The reason behind the low yield in India is because of intrinsic and extrinsic factors both.
 The intrinsic factor is low genetic potential while extrinsic is related with number of reasons like poor
nutrition and feed management, inferior farm management practices and inefficient implementation of
breed improvement programs.
 At present, India is largely using Jersey, a native of Netherlands and British origin Holstein for cross-
breeding purposes.
Operation flood/ White Revolution in India:
‘Operation flood’ a program started by National Dairy Development Board (NDDB) in 1970 made
India the largest producer of the milk in the world. This program with its whopping success was
called as ‘The White Revolution’. The main architect of this successful project was Dr. Verghese
Kurien, also called the father of White Revolution.
In 1949 Mr. Kurien joined Kaira District Co-operative Milk Producers’ Union (KDCMPUL), now
famous as Amul.
Kurien has since then built this organization into one of the largest and most successful institutions in
India. The Amul pattern of cooperatives had been so successful, in 1965, then Prime Minister of
India, Shri Lal Bahadur Shastri, created the National Dairy Development Board (NDDB) to replicate
the program on a nationwide basis citing Kurien’s “extraordinary and dynamic leadership” upon
naming him chairman.
Operation Flood Phases
The Operation Flood was completed in three phases:
Phase I (1970-79):- During this phase 18 of the country’s main milk sheds were connected to the
consumers of the four metros viz. Mumbai, Delhi, Chennai and Kolkata. The total cost of this phase

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 was Rs.116crores. The main objectives were, commanding share of milk market and speed up
development of dairy animals respectively hinter- lands of rural areas.
Phase II (1981–1985):- The management increased the milk sheds from 18 to 136; 290 urban markets
expanded the outlets for milk. By the end of 1985, a self-sustaining system of 43,000 village
cooperatives with 42.5 lakh milk producers were covered. Domestic milk powder production
increased from 22,000 tons in the pre-project year to 140,000 tons by 1989, all of the increase coming
from dairies set up under Operation Flood.
Phase III (1985–1996):- The dairy cooperatives were enabled to expand and strengthen the
infrastructure required to procure and market increasing volumes of milk. Veterinary first-aid health
care services, feed and artificial insemination services for cooperative members were extended, along
with intensified member education. It went with adding 30,000 new dairy cooperatives to the 42,000
existing societies organized during Phase II. Milk sheds peaked to 173 in 1988-89 with the numbers
of women members and Women’s Dairy Cooperative Societies increasing significantly.
Amul: (“priceless” in Sanskrit. The brand name “Amul,” from the Sanskrit “Amoolya,” formed in
1946, is a dairy cooperative in India.
It is a brand name managed by an apex cooperative organization, Gujarat Co-operative Milk
Marketing Federation Ltd. (GCMMF), which today is jointly owned by some 2.8 million milk
producers in Gujarat, India. The White Revolution’s model dairy board was that of Amul. The whole
program of NDDB was largely based the working of this dairy board. The three-tier ‘Amul Model’
has been instrumental in bringing about the White Revolution in the country.
Achievements of the White Revolution
 The phenomenal growth of milk production in India – from 20 million MT to 100 million MT in a
span of just 40 years – has been made possible only because of the dairy cooperative movement. This
has propelled India to emerge as the largest milk producing country in the World today.
 The dairy cooperative movement has also encouraged Indian dairy farmers to keep more animals,
which has resulted in the 500 million cattle & buffalo population in the country – the largest in the
World.
 The dairy cooperative movement has spread across the length and breadth of the country, covering
more than 125,000 villages of 180 Districts in 22 States.
 The movement has been successful because of a well-developed procurement system & supportive
federal structures at District & State levels.
Blue Revolution in India
Realizing the immense scope for development of fisheries and aquaculture, the Government of India
has restructured the Central Plan Scheme under an umbrella of Blue Revolution.
The restructured Central Sector Scheme on Blue Revolution: Integrated Development and
Management of Fisheries (CSS) approved by the Government provides for a focused development
and management of the fisheries sector to increase both fish production and fish productivity from
aquaculture and fisheries resources of the inland and marine fisheries sector including deep sea
fishing.
The scheme has the following components:
i. National Fisheries Development Board (NFDB) and its activities.
ii. Development of Inland Fisheries and Aquaculture.
iii. Development of Marine Fisheries, Infrastructure and Post-Harvest Operations.
iv. Strengthening of Database & Geographical Information System of the Fisheries Sector.
v. Institutional Arrangement for Fisheries Sector.
vi. Monitoring, Control and Surveillance (MCS) and other need-based Interventions.
vii. National Scheme on Welfare of Fishermen.

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 The Scheme Blue Revolution: Integrated Development and Management of Fisheries is being
implemented in consultation with all States & UTs. Besides the activities undertaken under both the
marine and inland sectors, no specific role for the coastal states has been defined.
The Blue Revolution is being implemented to achieve economic prosperity of fishermen and fish
farmers and to contribute towards food and nutritional security through optimum utilization of water
resources for fisheries development in a sustainable manner, keeping in view the bio-security and
environmental concerns.
Under the scheme, it has been targeted to enhance the fish production from 107.95 lakh tonnes in
2015-16 to about 150 lakh tonnes by the end of the financial year 2019-20. It is also expected to
augment the export earnings with a focus on increased benefit flow to the fishers and fish farmers to
attain the target of doubling their income.
The Department has prepared a detailed National Fisheries Action Plan-2020(NFAP) for the next 5
years with an aim of enhancing fish production and productivity and to achieve the concept of Blue
Revolution. The approach was initiated considering the various fisheries resources available in the
country like ponds & tanks, wetlands, brackish water, cold water, lakes & reservoirs, rivers and canals
and the marine sector.
Challenges faced by the fisheries sector
 Shortage of quality and healthy fish seeds and other critical inputs.
 Lack of resource-specific fishing vessels and reliable resource and updated data.
 Inadequate awareness about nutritional and economic benefits of fish.
 Inadequate extension staff for fisheries and training for fishers and fisheries personnel.
 Absence of standardization and branding of fish products.
The Way Forward
 Schemes of integrated approach for enhancing inland fish production and productivity with forward
and backward linkages.
 Large scale adoption of culture-based capture fisheries and cage culture in reservoirs and larger water
bodies are to be taken up.
 Sustainable exploitation of marine fishery resources especially deep sea resources and enhancement
of marine fish production through sea farming, mariculture.
Poultry Sector in India
Growth of India’s Poultry sector in Recent years
 Indian Poultry Industry is one of the fastest growing segments of the agricultural sector today in India.
As the production of agricultural crops has been rising at a rate of 1.5 to 2% per annum while the
production of eggs and broilers has been rising at a rate of 8 to 10% per annum. Today India is
world’s fifth largest egg producer in the world. Indian broiler production at 3.8 million tons is the
fourth largest in the world after US, Brazil and China.
 The broiler growing companies are becoming bigger and the feed mills are getting larger. More than
60 per cent of the feed is being processed. The layer farming with 220 million layers is growing at six
to eight per cent and the egg prices are at record high.
 The 67,000-crore Indian poultry industry is expected to report higher margins in the years to come.
 The Indian Poultry Industry has undergone a paradigm shift in structure and operation. A very
significant feature of India’s poultry industry is its transformation from a mere backyard activity into
a major commercial activity in just about four decades which seems to be really fast. The kind of
transformation has involved sizeable investments in breeding, hatching, rearing and processing.
Indian farmers have moved from rearing non-descript birds to today’s rearing hybrids such as
Hyaline, Shaver, and Babcock which ensure faster growth, good livability, excellent feed conversion
and high profits to the rearers.

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 The organized sector of Indian Poultry Industry is contributing nearly 70% of the total output and the
rest 30% in the unorganized sector.
 Due to the demand for poultry increasing and production reaching 37 billion eggs and 1 billion
broilers, the Poultry Industry today employs around 1.6 million people. At least 80% of employment
in Indian Poultry Industry generates directly by the farmers, while 20 % is engaged in feed,
pharmaceuticals, equipment and other services according to the requirement. Additionally, there
might be similar number of people roughly 1.6 million who are engaged in marketing and other
channels servicing the poultry sector.
Reason Behind this growth
 The contributing factors behind this growth are – growth in per capita income, a growing urban
population and falling poultry prices.
 The Indian Poultry Industry has grown largely due to the initiative of private enterprises, minimal
government intervention, and very considerable indigenous poultry genetics capabilities, and support
from the complementary veterinary health, poultry feed, poultry equipment, and poultry processing
sectors. India is one of the few countries in the world that has put into place a sustained Specific
Pathogen Free (SPF) egg production project.
Challenges the Poultry sector is facing
 In last 2 years the Poultry sector is facing distress due to number of factors
 There is disparity between states and hence an impairment in growth of the sector. About 60% of the
egg production comes from Andhra Pradesh. Commercial poultry farming yet to make a mark in
states like Odisha, Bihar, MP, Rajasthan. This disparity has resulted in uncertainty in sector.
 Recent heatwaves in Andhra Pradesh and Telangana region has resulted in high chicken prices due to
killing of birds. As a result, poultry feed demand has fallen.
 Avian influenza was another issue which has resulted which has devastating effect on Indian poultry,
and it still continues to haunt the sector due to low demand and less exports
 Shortage of raw material is another issue. Price of soybean meal, the major and only source of protein
has increased about 75%, which has forced the feed manufacturers to comprise in terms of diet given
to birds.
 Shortage of human resources is another problem because of the absence of veterinarians, researchers,
in areas where expertise knowledge is required.
 Indian poultry sector is still unable to tap the benefit of international market. Lack of adequate cold
storage, warehouses is the major factor affecting poultry sector in India.
 Majority of the production is by unorganized which is another threat faced by sector.
 Usually, summer sees a production drop of five to 10 per cent; this year, with the heat and drought,
there is a 25-30 per cent drop. The drought has hit water supply for the birds and the latter’s mortality
rate has risen in recent months, pushing up prices for broilers and eggs.
Way Forward
The Following measures should be taken by the Government to improve the situation.
 Strong marketing network to set the industry free from the clutches of middlemen.
 Government support to public poultry educational and R&D institutions.
 Building infrastructure to meet the growing manpower demand of the poultry sector.
 Promote both mass production as well as production by masses.
 Support and promotion of the processing sector.
 Insurance against losses.
 Provision of subsidies, and credit

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 Government Policies towards Women Empowerment: Beti Bachao Beti Padhao,
SSA, Kasturba Gandhi Balika Vidyalaya, Saakshar Bharat, SABLA, STEP
Government Policies towards Women Empowerment
Sarva Shiksha Abhiyaan
 The principal programme for universalisation of primary education is the Sarva Shiksha Abhiyan
(SSA), a Centrally-sponsored scheme being implemented in partnership with State/UT Governments.
 The programme has been in operation since 2000-01.
 The overall goals of the SSA are: (i) all children in schools; (ii) bridge all gender and social category
gaps at primary and upper primary stages of education (iii) universal retention; and (iv) elementary
education of satisfactory quality.
 The SSA is the primary vehicle for implementing the aims and objectives of the RTE.
 In addition to programmatic interventions to promote girls’ education within the mainstream
elementary education system, girls’ education is pursued through two special schemes for girls, which
are supported under SSA. These are (i) National Programme for Education of Girls at Elementary
Level (NPEGEL), and (ii) Kasturba Gandhi Balika Vidyalaya (KGBV).
Key programmatic thrusts under SSA for promoting girls’ education are:
 Ensuring the availability of primary schools within one kilometre of the habitation of residence of
children and upper primary schools within three kilometres of the habitation;
 Provision of separate toilets for girls;
 Recruitment of 50 % of women teachers;
 Early childhood care and education centres in or near schools in convergence with Integrated Child
Development Services (ICDS) scheme to free girls from sibling care responsibilities;
 Special training for mainstreaming out-of-school girls;
 Teachers’ sensitization programmes to promote equitable learning opportunities for girls;
 Gender-sensitive teaching-learning materials, including text books;
 Intensive community mobilization efforts;
 “Innovation fund’ for need-based interventions for ensuring girls’ attendance and retention.
 National Programme for Girls Education at Elementary Level (NPEGEL);
 Residential programme for education of disadvantaged girls in educationally backward Blocks -
Kasturba Gandhi Balika Vidyalaya (KGBV).
National Programme for Education of Girls at Elementary Level (NPEGEL)
 The National Programme for Education of Girls at Elementary Level (NPEGEL) launched in 2003 is
implemented in Educationally Backward Blocks (EBB) and addresses the needs of girls who are ‘in’
and ‘out’ of school.
 Since many girls become vulnerable to leaving school when they are not able to cope with the pace of
learning in the class or feel neglected by teachers/peers in class, the NPEGEL emphasises the
responsibility of teachers to recognize such girls and pay special attention to bring them out of their
state of vulnerability and prevent them from dropping out.
 Recognising the need for support services to help girls with responsibilities with regard to fuel,
fodder, water, sibling care and paid and unpaid work, provisions have been made for incentives that
are decided locally based on needs, and through the provision of ECCE services in non-ICDS areas to
help free girls from sibling-care responsibilities and attend schools.
 An important aspect of the programme is the effort to ensure a supportive and gender sensitive
classroom environment in the school. By the end of 2012-13, under NPEGEL, 41.2 million girls have

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 been covered in 3,353 Educationally Backward Blocks in 442 districts. Under the NPEGEL 41,779
Model School Clusters have been established.
 At the cluster level, one school is developed into a resource hub for schools within the cluster.
 The model cluster school functions as a repository of supplementary reading materials, books,
equipment materials for games and vocational training, a centre for teacher training on gender issues
and for organizing classes on additional subjects like self-defence and life skills.
 The model cluster school serves to motivate other schools in the cluster, to build a gender sensitive
school and classroom environment.
 The NPEGEL follows up on girls’ enrolment, attendance and learning achievement by involving
village level women’s and community groups.
Kasturba Gandhi Balika Vidyalaya (KGBV) scheme
 The Kasturba Gandhi Balika Vidyalayas (KGBVs) are residential upper primary schools for girls
from Scheduled Caste (SC), Scheduled Tribe (ST), Other Backward Classes (OBC) and Muslim
communities.
 KGBVs are set up in educationally backward blocks where schools are at great distances and are a
challenge to the security of girls and often compel them to discontinue their education.
 The KGBVs reach out to adolescent girls who are unable to go to regular schools, out-of-school girls
in the 10+ age group unable to complete primary school, younger girls of migratory populations in
difficult areas of scattered populations that do not qualify for primary/upper primary schools.
 The Scheme is being implemented in 27 States/UTs. Up to the year 2012-13, 3,609 KGBVs have been
sanctioned and 366,500 girls were enrolled in these KGBVs during the year 2012-13 as against the
targeted enrolment of 373,000 girls.
Rashtriya Madhyamik Shiksha Abhiyan (RMSA)
 The Rashtriya Madhyamik Shiksha Abhiyan is a flagship scheme of Government of India, launched in
March, 2009, to enhance access to secondary education and improve its quality.
 The implementation of the scheme started from 2009-10 to generate human capital and provide
sufficient conditions for accelerating growth and development and equity as also quality of life for
everyone in India.
 Largely built upon the successes of SSA and, like SSA, RMSA leverages support from a wide range
of stakeholders including multilateral organisations, NGOs, advisors and consultants, research
agencies and institutions.
 The scheme involves multidimensional research, technical consulting, implementation and funding
support. In 2013, in its fourth year of implementation, RMSA covers 50,000 government and local
body secondary schools. Besides this, an additional of 30,000 aided secondary schools can also access
the benefits of RMSA; but not infrastructure and support in core areas.
The objectives of the Scheme are:
 To achieve a gross enrolment ratio of 75% from 52.26% in 2005-06 for classes IX-X within 5 years of
its implementation, by providing a secondary school within reasonable distance of any habitation.
 Improve the quality of education imparted at secondary level by making all secondary schools
conform to prescribed norms.
 Remove gender, socio-economic and disability barriers.
 Provide universal access to secondary level education by 2017, i.e. by the end of the 12th Five Year
Plan
 Enhance and universalize retention by 2020
The Rashtriya Madhyamik Shiksha Abhiyan (RMSA), revised in 2013, has integrated among others,
the Girls Hostel Scheme and National Incentive to Girls specially to encourage girls in secondary
level of education.

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 A sum of Rs. 3,000/- is deposited in the name of eligible girls as fixed deposit. The girls are entitled to
withdraw the sum along with interest thereon on reaching 18 years of age and on passing 10th class
examination.
Rashtriya Uchchatar Shiksha Abhiyan (RUSA)
 The Rashtriya Uchchatar Shiksha Abhiyan (RUSA) is a Centrally Sponsored Scheme (CSS), launched
in 2013, aims at providing strategic funding to eligible State higher educational institutions.
 The central funding in the scheme is in the ratio of 65:35 for general category States and 90:10 for
special category states would be norm based and outcome dependent.
 The funding would flow from the central ministry through the State governments/Union Territories to
the State Higher Education Councils before reaching the identified institutions.
 The funding to States would be made on the basis of critical appraisal of State Higher Education
Plans, which would describe each State’s strategy to address issues of equity, access and excellence in
higher education.
 One of the objectives of RUSA is to improve equity in higher education by providing adequate
opportunities of higher education to SC/STs and socially and educationally backward classes;
promote inclusion of women, minorities, and differently abled persons.
Mahila Samakhya (MS) Programme
 The National Policy on Education (NPE), 1986 recognised that the empowerment of women is
possibly the most critical pre-condition for the participation of girls and women in the educational
process.
 The NPE, 1986, says, “Education will be used as an agent of basic change in the status of woman. In
order to neutralise the accumulated distortions of the past, there will be a well-conceived edge in
favour of women.
 The National Education System will play a positive, interventionist role in the empowerment of
women. It will foster the development of new values through redesigned curricula, textbooks, the
training and orientation of teachers, decision-makers and administrators, and the active involvement
of educational institutions. This will be an act of faith and social engineering…
 ” The Mahila Samakhya programme was launched in 1988 to pursue the objectives of the National
Policy on Education, 1986.
 It recognised that education can be an effective tool for women’s empowerment, the parameters of
which are:
 Enhancing self-esteem and self-confidence of women;
 Building a positive image of women by recognizing their contribution to the society, polity and the
economy;
 Developing ability to think critically;
 Fostering decision making and action through collective processes;
 Enabling women to make informed choices in areas like education, employment and health
(especially reproductive health);
 Ensuring equal participation in developmental processes;
 Providing information, knowledge and skill for economic independence;
 Enhancing access to legal literacy and information relating to their rights and entitlements in society
with a view to enhance their participation on an equal footing in all areas.
 The main focus of the programmatic interventions under the MS programme has been on developing
capacities of poor women to address gender and social barriers to education and for the realisation of
women’s rights at the family and community levels.

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 The core activities of the MS programme are centred around issues of health, education of women and
girls, accessing public services, addressing issues of violence and social practices, which discriminate
against women and girls, gaining entry into local governance and seeking sustainable livelihoods.
Saakshar Bharat
 Saakshar Bharat is a Centrally Sponsored Scheme of Adult Education & Skill Development being
implemented by Adult Education Bureau of Department of School Education & Literacy, Ministry of
Human Resource Development to raise literacy level to 80% and reduce gender gap in literacy to 10%
points by 2017. The target group of this Scheme is 15 + year old, which includes youth also.
 The Saakshar Bharat Scheme was launched in 2009 and has been extended upto 31.03.2017.
 It is being executed by National Literacy Mission Authority at National Level, State Literacy Mission
Authority at State level, Zila Lok Shiksha Samiti, Block Lok Shiksha Samiti and Gram Panchayat Lok
Shiksha Samiti at District, Block and Gram Panchayat levels respectively.
 The principal target of the scheme is to impart Functional Literacy to 70 million non-literates adults
(15+ age group) with prime focus on women having the target of 60 million out of 70 million.
 The emphasis is also on disadvantaged group comprising of SCs-14 million, STs-8 Million, Muslim-
12 million and Others-36 million including 60 million women.
 The auxiliary target of the scheme is to cover 1.5 million adults under Basic Education Programme
(Equivalency Programme) and equal number under Vocational (Skill Development) programme.
 Under the Mission by end of September, 2014, 388 districts in 26 States and one in UT are covered.
About 3.92 crore learners appeared for biannual basic literacy assessment tests conducted so far.
About 2.86 crore learners (including 2.05 crore females), comprising 0.67 crore SCs, 0.36 crore STs
& 0.23 crore Minorities have successfully passed the Assessment Tests under Basic Literacy
conducted by National Institute of Open Schooling (NIOS), upto March, 2014.
 In addition, about 41 lakh learners have taken up the assessment test held in August, 2014 and 1.53
lakh Adult Education Centres are functioning as of now. 2.5 million persons have been mobilised as
Voluntary Teachers; 35 million Primers in 13 Indian languages and 26 local dialects have been
produced and distributed.
 Around 29 lakh learners have been benefited under Vocational Training programme through Jan
Shikshan Sansthan between 2009 to 2014 out of which the women beneficiaries were 25.02 lakhs.
Kishori Shakti Yojna and Rajiv Gandhi Scheme for Empowerment of Adolescent Girls
(RGSEAG) SABLA
 The Ministry of Women and Child Development, Government of India, in the year 2000 came up
with scheme called “Kishori Shakti Yojna (KSY) using the infrastructure of Integrated Child
Development Services(ICDS).
 The objectives of the Scheme were to improve the nutritional and health status of girls in the age
group of 11-18 years as well as to equip them to improve and upgrade their homebased and vocational
skills; and to promote their overall development including awareness about their health, personal
hygiene, nutrition, family welfare and management.
 Kishori Shakti Yojana (KSY) seeks to empower adolescent girls, so as to enable them to keep charge
of their lives. Thereafter, Nutrition Programme for Adolescent Girls (NPAG) was initiated as a pilot
project in the year 2002-03 in 51 identified districts across the country to address the problem of
under-nutrition among adolescent girls.
 Under the programme, 6 kg of free food grains per beneficiary per month are given to underweight
adolescent girls. The above two schemes have influenced the lives of Adolescent Girls (AGs) to some
extent, but have not shown the desired impact.
 Moreover, the above two schemes had limited financial assistance and coverage besides having
similar interventions and catered to more or less the same target groups.

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 A new comprehensive scheme with richer content, merging the erstwhile two schemes addressing the
multi-dimensional problems of Adult Girls, called Rajiv Gandhi Scheme for Empowerment of
Adolescent Girls (RGSEAG) –‘SABLA’ replaced KSY and NPAG in the selected districts.
 KSY would be continued (where operational) in remaining districts. Rajiv Gandhi Scheme for
Empowerment of Adolescent Girls – SABLA is implemented using the platform of ICDS Scheme
through Anganwadi Centers (AWCs).
 SABLA aims at empowering Adult Girls of 11 to 18 years by improving their nutritional and health
status, upgradation of home skills, life skills and vocational skills. The scheme also aims to
mainstream out –of –school children to formal education or non –formal education.
Support to Training and Employment Programme (STEP)
 The STEP Scheme was launched as a central sector Scheme in 1986 -87.
 The scheme aims to make a significant impact on women by upgrading skills for employment on a
self- sustainable basis and income generation for marginalised and asset-less rural and urban women
especially those in SC/ ST households and families below poverty line.
 The key strategies include training for skill development, mobilising women in viable groups,
arranging for marketing linkages and access to credit.
 The scheme also provides for support services in the form of health check –ups, child care, legal &
health literacy and gender sensitisation.
 The scheme covers 10 sectors of employment Ie. Agriculture, Animal husbandry, Dairying, Fisheries,
Handlooms, Handicrafts, Khadi and Village Industries, Sericulture, Waste land development and
Social Forestry.
 The scope and coverage of the scheme has been enlarged with the introduction of locally appropriate
sectors.
Beti Bachao Beti Padhao (BBBP)
 The new scheme Beti Bachao Beti Padhao was launched on 22/1/2015 with the overall goal of the
scheme is to celebrate the girl child and enable her education.
The objectives are:
1. Prevent gender biased sex selection elimination.
2. Ensure survival and protection of the girl child.
3. Ensure education of the girl child.
 The BBBP is an initiative to arrest and reverse the decline in Child Sex Ratio. Through this process,
efforts to empower women, provide them dignity and opportunities will be enhanced.
 Implementation is through a national campaign and focussed multi sectoral action in 100 selected
districts, covering all States and UTs. This is a joint initiative of the Ministry of Women and Child
Development, Ministry of Health and Family Welfare and Ministry of Human Resource
Development.
The commitments proclaimed under BBBP are
 Celebrate the birth of girl child
 Take pride in daughters and oppose the mentality of ‘Paraya Dhan’
 Find ways to promote equality between boys and girls
 Secure admission to & retention of girl child in schools
 Engage men and boys to challenge gender stereotypes and roles
 Report any incident of sex determination test
 Strive to make neighbourhood safe & violence free for women and girls
 Oppose dowry and child marriage
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 Advocate simple weddings
 Support women’s right to inherit and own property.

Education in India: Role and Channels in Promoting Economic Growth

Education in India
Role of Education in Promoting Economic Growth and Development

Positive Externalities from Education

1. More educated individuals are usually more productive workers.
2. Educated citizens are more informed and usually translates into more active voters.
3. It is been observed that Educated Families have access to financial assistance through education
grants and loans.
4. Public education helps in redistribution of Income. All Child in households, no matter what their
parents income level are, must be provided with education. This will ensure fair income distribution in
the future.
5. The well governed Government public schools that provide free education, gives every child (rich or
poor) the chance to learn and develop his/her skills.
6. “A stable and democratic society is impossible without a minimum degree of literacy and knowledge
on the part of most citizens and without widespread acceptance of some common set of values.
Education can contribute to both. In consequence, the gain from the education of a child accrues not
only to the child but also to other members of the society”
How Education Promote Economic Growth

Channel One: Economic Channel

Channel 2: Technological Channel

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 Channel 3: Societal and Institutional Channel

Government Budgeting
The Role of the Government in the Economy

 India embraced an economic model which has the features of both free market capitalism and
socialism. The policy makers called this a model of ‘Mixed Economy’.

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 The reason for adopting such a hybrid model was to raise people’s standard of living and reduce
income inequality.
 India embraced an economic model that uniquely combined free market capitalism with that of State
intervention in essential sectors of the economy.
 The record of India’s successive governments in providing social welfare is at best mediocre.
 The Government must build a comprehensive welfare state with a strong emphasis on redistribution
of resources to poor along with provisions of social services (Public Health, Education, Equitable
Institutions, Un-Employment Benefits, Old Age Pensions etc.) financed through taxation.
 In today’s changing World of high technology, the Government must do a lot of public spending on
investment in human capital and research and development.
 On Jobs creation front, the government must adopt a judicious mix of labour market institution that
includes a fairly flexible labour market allowing easy hiring and firing of employees along with strong
labour associations to safeguard the interest of employees.
 On the External front, the government must embrace globalisation, openness to trade and investment
but with risk sharing approach. The government should share the risk arising out of globalisation, by
training and skilling those who have suffered from the negative impact of globalisation. The process
of risk sharing will make globalisation acceptable to all.
 Adopting the above features will allow India to achieve high growth along with high social
ambitions/indicators.
 Therefore, in a nutshell, the future of India’s rapid and sustainable development lies in the following:

Functions of Government

Allocation Function

 The government provides certain public goods and services which the private sector fails to provide
because there exists no market for them.
 Example: National Defence, Public Parks and National Highways etc.
 The reason of government providing such goods is the nature of public goods. The public goods are
by nature non-rival and non-excludable.
 Non-Rivalry means, the consumption of the good by one individual does not stop another individual
from consuming the same good. The goods remain available to all the citizens.
 Non-Excludability means the government cannot exclude any person from enjoying the benefit of the
good whether they pay or not. The goods are non-excludable in nature.
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 Private Goods
They are Rival in nature. Rivalry means if
one person consumes a good, then it will
not be available for the consumption of
another individual. Example- Any private
good like a car, a pen, a mobile handset
etc. if I own a car, then that particular car
is not available to any other person.
They are excludable in nature.
Excludability means that exclusion is
possible. If someone does not buy a metro
ticket, then he/she can be excluded from
riding on the metro train.
The market for private goods exist. The
existence of market helps in their price
discovery, and hence prices for private
goods exist which makes exclusion
possible.
Property Rights of private goods are well
determined. If I own a house, then I have
exclusive property rights over its usage.
The house is in my name; it belongs to
me.
Free Ridership is not possible. Free
ridership is a situation when someone
who has not paid for it started using it.
Public Goods
They are non-rival in nature. Consumption by one
individual does not affect consumption of another
individual. Example: National Defence or Public
Highway- if I am driving a car on the highway that does
not stop any other individual from driving his/her car on
the same highway.
They are non-excludable in nature. It means exclusion is
not possible. If a public park is constructed, then no
person can be excluded from using it, whether he pay
tax/price or not.
The market for public goods does not exist. Hence price
discovery is not possible. With no price available private
sector will never supply such goods. Thus, Government
must provide such goods.
Property Rights are not determined. No person owns the
Highway or a public park. They are common goods to be
shared by all. No single person can claim that it belongs
to them.
Free ridership is possible. Example- Government comes
up with a provision that all houses must contribute Re
100 towards spreading of medicine for Dengue
prevention. Despite this, some houses refuse to pay. The
government simply does not let its prevention program
fail because some houses are not paying. Since the issue
involves public health threat, the government decides to
provide it anyway. Thus, the houses that had not paid Re
100 will also enjoy the benefit of dengue prevention
program.

Distribution Function
 The government through its tax and expenditure policies attempts to bring out income redistribution
in the society that is fair to all.
 The government transfer payments from one citizen to other through taxation policy.
 Example: Old age pensions, Social sector initiatives for the poor. Through these programs, the
government provides income support to those individuals who do not have any source of earnings.
The funds for running these programs comes from progressive taxation. Those with higher income
paying higher taxes.
 The idea of distribution is not to rob the rich by forcing them to pay high taxes or to discourage
people from earning more but to make just redistribution which will be equitable for all.
 Think like this, the per capita consumption of common resources will be higher for rich individuals as
compared to the poorer individual (who survives on bare necessities). Thus they must pay a higher
price for its provision. Space taken by an SUV or Sedan on the road is much higher than the space
taken by Bicycle. Thus, the SUV owner must pay a higher price/ tax for the construction of the road
as compared to bicycle owner. The above example explained the concept Progressive taxation.
 Similarly, the old age pensions are not grants by the government but are right of those individuals
who have worked endlessly during their productive years. Thus, the government must take care of
them by providing them old age benefits.

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 Stabilisation Function
 The economy tends to undergo periods of instability and fluctuations. The periods of fluctuations
require the government to play an active role in removing it.
 The year of 2008-09 witnessed the Global Financial Crisis. The GFC led to a decline in GDP growth
rate along with employment. To help recover economy from the GFC, the government provided
Fiscal Stimulus package for the industry.
 Let’s understand the channel

 Similarly, the economy may at times overshoot when expenditure becomes greater than output. In
such a situation when consumers are spending more than what producer are willing to supply.
Inflation happens. To remove inflationary pressure from the economy, the government intervenes
through tight fiscal policy.

The Government Budget: Revenue Budget, Capital Budget, Government Deficits

Revenue Account

 The revenue account shows the current receipts of the government and the expenditure that can be
met from these receipts.
 Revenue Receipts: RR are receipts of the government incomes which cannot be reclaimed back by the
citizens from the government.

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 Revenue Expenditure

 The expenditure incurred by the government that neither creates any physical/financial asset nor
reduces the liability of the government. The Revenue expenditure relates to the day today functioning
of the government.
 Revenue expenditure is expenditure for normal running of the government department and various
services, interest charges on debt incurred by government, subsidies and so on.
 Example: Salaries of employees, Interest payments on past debts, grants given to state governments
etc.

The Expenditure under Budget is divided into two subheads.

 With the demise of Planning Commission, the Central Government has decided to do away with the
classification of plan and non-plan expenditure. The 2018-19 Budget will not contain any such
classification.

The Capital Account

 The capital budget is an account of assets as well as liabilities of the central government.
 Capital Receipts: All those receipts of the government which either creates liability or reduces
financial asset are capital receipts.
 Examples: Market borrowings by the government from the public, Borrowings from the RBI,
Borrowings from commercial banks or financial institutions through the sale of T-BILLS, loans
received from foreign governments or international financial institutions, post office savings, post
office saving certificates and PSU’s Disinvestment.
 Capital Expenditure: All those expenditures of the government which either result in the creation of
physical/financial assets or reduction in financial liabilities.
 Examples: Purchase of land, machinery, building and equipment’s; investment in shares; loans and
advances by the central government to state governments and UTs.
 Capital Expenditure is also classified as plan and non-plan capital expenditure. Plan expenditure
relates to central Five-year Plan and Non-Plan relates to expenditure not covered under the Five-year
The Distinction in a Nutshell

Revenue Expenditure Capital Expenditure Capital Receipts

Neither Creates Any Assets Either Creates Assets or Reduces Either creates liabilities or
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 nor reduces any liability for
the government
The revenue deficit happens
when revenue receipts falls
short of revenue expenditure.
RD = Revenue Expenditure –
Revenue Receipts
Liabilities reduces assets.
The fiscal deficit is the difference
between the government’s total
expenditure (both revenue and capital)
and its total receipts excluding
borrowings.
FD= Total Expenditure- (Revenue
Receipts+ Non-Debt Creating Capital
Receipts)

Measuring Government Deficits

When a government spends more than it collects by way of revenues, it incurs deficits. There are
various kinds of deficits incurred by the government, and each has its own implications.

Let’s understand the concepts of deficits through a simple hypothetical household example of
Robinson Crusoe.

The Revenue Side of Robinson Crusoe HHs:

Robinson Crusoe HHs has 5 members with a monthly family income of $1000. The family pays a rent
0f $2000, buys grocery worth of $3000, pays interest of student education loan $2000 and other
expenses of $4000. Now examine the expenditure and receipts side of HHs of Robinson Crusoe. The
monthly salary of the HH is $10000 (Revenue Receipts). The monthly expenditure of the HH is
$11000. The expenditure of the HH is recurring expenditure and the salary also come every month.
This means the HH is neither creating any assets or reducing its liabilities. But since the HH
expenditure is more that its receipts; its running a deficit of $1000. Which is known as revenue deficit.
1. Deficits on Revenue Account or Revenue Deficit
 The revenue deficit happens when revenue receipts fall short of revenue expenditure.
 RD = Revenue Expenditure – Revenue Receipts
 Implications: When a government incurs revenue deficit, it implies that the government is not able to
cover its day today expenses from its current receipts.
 It also implies that the government is using its past saving to finance its current consumption
expenditure.
 The implication is the government will have to borrow in future to finance its current consumption
expenditure. This will lead to building up of government debt and rising interest payments in future.
 Increase in interest payment obligations will again lead to increase in revenue expenditure and hence
revenue deficits.
 The vicious circle of RD will continue until government start cutting on its wasteful expenditures.

The Capital Side of Robinson Crusoe HH.

Let’s assume now, the Crusoe family, owns an ancestral land worth $5000. The ancestral land is an
asset. The family decides to sold this land, the proceeds from the selling of land is a capital receipt.
Also, the selling of the land is a onetime process, thus it’s a onetime receipt. Since, the selling of the
land has nor created any debt, it is also called Non-Debt Creating Capital Receipt(NDCR).
The family has also taken an education loan worth $2000. The loan is a liability since they have to
return it. It’s a debt on the family. Since the loan is creating debt it is known as debt creating capital
receipt. Together they both constitute Capital Receipts of the Robinson HH.
The Robinson family decides to buy a small shop ($5000) to supplement its family income. The
buying of shop is leading to creation of an asset (the family can sale it latter or derive monthly income
out of it by renting it out). This constitute the capital expenditure side of the HH.
The Fiscal deficit of the Robinson family will be:
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 {$11000(Revenue Exp) + $5000 (capital exp)} minus {$10000 (revenue rec) +$5000(NDCR)}
= $1000

1. Fiscal Deficit

The fiscal deficit is the difference between the government’s total expenditure (both revenue and
capital) and its total receipts excluding borrowings.
 FD= Total Expenditure- (Revenue Receipts+ Non-Debt Creating Capital Receipts)
 Non-Debt Creating Receipts are those receipts which are not classified as borrowings and do not give
rise to debt.
 Examples Disinvestment proceeds from Public Sector Undertakings and recovery of loans by the
central government.
 Implications: Fiscal deficits has to be financed through borrowings, thus indicating total borrowing
requirements of the government.
 Alternatively, FD can be seen as FD= Net borrowing at home+ Net borrowing from RBI+ Net
borrowing from Abroad.
 Fiscal Deficit reflects the health of the economy; A large FD indicates the economy is under stress.
 A large FD can create inflation in the economy.
 A large FD makes the country unattractive to foreigners.
 A large FD can lead to outflow of capital from the country.
 A large FD crowd out/reduces private investment from the economy.
If a large part of FD is due to revenue deficit, it implies the government is borrowing to finance its
consumption requirement. This is a dangerous situation, and soon thegovernment will go bankrupt.
2. Primary Deficit
 The borrowing requirement of the government includes interest obligations on accumulated debt.
 The goal of measuring primary deficit is to focus on present fiscal imbalances.
 To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need
to calculate what has been called the primary deficit.
 It is simply the fiscal deficit minus the interest payments
 Gross primary deficit = Gross fiscal deficit – Net interest liabilities

The Capital Account

 The capital budget is an account of assets as well as liabilities of the central government.
 Capital Receipts: All those receipts of the government which either creates liability or reduces
financial asset are capital receipts.
 Examples: Market borrowings by the government from the public, Borrowings from the RBI,
Borrowings from commercial banks or financial institutions through the sale of T-BILLS, loans
received from foreign governments or international financial institutions, post office savings, post
office saving certificates and PSU’s Disinvestment.
 Capital Expenditure: All those expenditures of the government which either result in the creation of
physical/financial assets or reduction in financial liabilities.
 Examples: Purchase of land, machinery, building and equipment’s; investment in shares; loans and
advances by the central government to state governments and UTs.
 Capital Expenditure is also classified as plan and non-plan capital expenditure. Plan expenditure
relates to central Five-year Plan and Non-Plan relates to expenditure not covered under the Five-year
The Distinction in a Nutshell
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 Revenue Expenditure
Neither Creates Any Assets
nor reduces any liability for
the government
The revenue deficit
happens when revenue
receipts falls short of
revenue expenditure.
RD = Revenue Expenditure
– Revenue Receipts
Capital Expenditure Capital Receipts
Either Creates Assets or Reduces Either creates liabilities or
Liabilities reduces assets.
The fiscal deficit is the difference between
the government’s total expenditure (both
revenue and capital) and its total receipts
excluding borrowings.
FD= Total Expenditure- (Revenue
Receipts+ Non-Debt Creating Capital
Receipts)

Measuring Government Deficits

When a government spends more than it collects by way of revenues, it incurs deficits. There are
various kinds of deficits incurred by the government, and each has its own implications.
Deficits on Revenue Account or Revenue Deficit
 The revenue deficit happens when revenue receipts fall short of revenue expenditure.
 RD = Revenue Expenditure – Revenue Receipts
 Implications: When a government incurs revenue deficit, it implies that the government is not able to
cover its day to day expenses from its current receipts.
 It also implies that the government is using its past saving to finance its current consumption
expenditure.
 The implication is the government will have to borrow in future to finance its current consumption
expenditure. This will lead to building up of government debt and rising interest payments in future.
 Increase in interest payment obligations will again lead to increase in revenue expenditure and hence
revenue deficits.
 The vicious circle of RD will continue until government start cutting on its wasteful expenditures.
Budgetary procedure in India
The budgetary procedure in India involves four different operations that are
 Preparation of the budget
 Enactment of the budget
 Execution of the budget
 Parliamentary control over finance
Preparation of the budget
The exercise of the preparation of the budget by the ministry of finance starts sometimes around in the
month of September every year. There is a budget Division of the Department of Economic affair of
the ministry of finance for this purpose.
The ministry of finance compiles and coordinates the estimates of the expenditure of different
ministers and departments and prepare an estimate or a plan outlay.
Estimates of plan outlay are scrutinized by the Planning Commission. The budget proposals of finance
ministers are examined by the finance ministry who has the power of making changes in them with
the consultation of the prime minister.
Enactment of the budget
Once the budget is prepared, it goes to the parliament for enactment and legislation. The budget has to
pass through the following stages:

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 The finance minister presents the budget in the Lok Sabha. He makes his budget in the Lok Sabha.
Simultaneously, the copy of the budget is laid on the table of the Rajya Sabha. Printed copies of the
budget are distributed among the members of the parliament to go through the details of the budgetary
provisions.
 The finance bill is presented to the parliament immediately after the presentation of the budget.
Finance Bill relates to the proposals regarding the imposition of new taxes, modification on the
existing taxes or the abolition of the old taxes.
 The proposals on revenue and expenditure are discussed in the Parliament. Members of the Parliament
actively take part in the discussion.
 Demands for grants are presented to the Parliament along with the budget These demands for grants
show that the estimates of the expenditure for various departments and they need to be voted by the
Parliament.
 After the demands for grants are voted by the parliament, the Appropriation Bill is introduced,
considered and passed by the appropriation of the Parliament. It provides the legal authority for
withdrawal of funds of what is known as the Consolidated Fund of India.
 After the passing of the appropriation bill, finance bill is discussed and passed. At this stage, the
members of the parliament can suggest and make some amendments which the finance minister can
approve or reject.
 Appropriation bill and Finance bill are sent to Rajya Sabha. The Rajya Sabha is required to send back
these bills to the Lok Sabha within fourteen days with or without amendments. However, Lok Sabha
may or may not accept the bill.
 Finance Bill is sent to the President for his assent. The bill becomes the statue after presidents’ sign.
The president does not have the power to reject the bill.
Execution of the budget
 Once the finance and appropriation bill is passed, execution of the budget starts. The executive
department gets a green signal to collect the revenue and start spending money on approved schemes.
 Revenue Department of the ministry of finance is entrusted with the responsibility of collection of
revenue. Various ministries are authorized to draw the necessary amounts and spend them.
 For this purpose, the Secretary of minister’s acts as the chief accounting authority.
 The accounts of the various ministers are prepared as per the laid down procedures in this regard.
These accounts are audited by the Comptroller and Auditor General of India.
Parliament Control over Finance
 There is a prescribed procedure by which the Finance Bill and the Appropriation Bill are presented,
debated and passed.
 The Parliament being sovereign gives grants to the executive, which makes demands. These demands
can be of varieties like the demands for grants, supplementary grants, additional grants, etc.
 The estimates of expenditure, other than those specified for the Consolidated Fund of India, are
presented to the Lok Sabha in the form of demands for grants.
 The Lok Sabha has the power to assent to or to reject, any demand, or to assent to any demand,
subject to a reduction of the amount specified. After the conclusion of the general debate on the
budget, the demands for grants of various ministries are presented to the Lok Sabha.
 Formerly, all demands were introduced by the finance minister; but, now, they are formally
introduced by the ministers of the concerned departments. These demands are not presented to the
Rajya Sabha, though a general debate on the budget takes place there too.
 The Constitution provides that the Parliament may make a grant for meeting an unexpected demand
upon the nation’s resources, when, on account of the magnitude or the indefinite character of the
service, the demand cannot be stated with the details ordinarily given in the annual financial
statement.
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 An Appropriation Act is again essential for passing such a grant. It is intended to meet specific
purposes, such as for meeting war needs.
Merging Railway budget into Union budget – Pros and Cons
After 92 years of seeing them separately, the year 2017 witnessed the Railway budget being merged
into Union budget. This move is being lauded for it will be beneficial for the economy at large and
there will be positive influence in the development in railways.

During the British reign, having a separate Railway budget made sense because a larger part of the
country’s GDP depended on railway revenue. The tradition of having the budgets separately
continued when India gained freedom even though the revenue from railway continued to go lower
than most of the organizations in the public and private sector.

Pros
1. The scores: During the British rule Railways took up to 85 percent of the yearly budget while now
it has gone down to about 15 percent only. Having separate railway budget stopped making sense long
ago but the old tradition was not done away with. Scrapping the old for the renewed and better is
always a positive change to look upon.
2. Better policies: Now that the Railway budget will be introduced along with the union budget, there
will be less wastage of time when a new policy is to be initiated and implemented. Keeping them
separate resulted in a lot of drawbacks and hindrances that had to be faced by the railway ministry
before it could decide upon a solution.
3. Party politics: Minority parties fighting to meet their intentions and ministers of certain states
arguing new railways and trains for their region has always been known to result in an everlasting
brawl. There will be less of political pressure on the Railway budget and the centre will have the
ultimate hold of the decision making.
4. Goodbye to annual dividend: When Rail budget had to be introduced separately, the railways
needed to pay an annual dividend to render its budgetary support to the government. The railways will
be free of this now and the same fund could now be used in better ways for development the
conditions of Indian railways.
5. The huge loss: Our railways are running on loss. There are lesser funds for development plans and
most of them are wasted in wrongful manner when there emerges a demand from the regional MLA
who promised new trains and stoppages for their location during the time of election. When it goes
into the hands of finance ministry, it would mean and absolute end to this and a more commercialized
distribution of resources.
Cons
1. The rise and fall: Henceforth, the distribution and allocation of funds to various departments will
all go under the finance ministry, which will take decisions according to rise and fall of budget. A fall
in the annual budget will mean a similar cut in the railway and other budgets. This will be something
unusual for the railways and they might not react supportively to that.
2. Conditions of government departments: The depleting conditions of the various departments
under the government have always been prominent. There is lesser attention paid to the
responsibilities and everyone is busy sorting out their own means. Railways might see drastic
disadvantage if the merging doesn’t reap the desired result.
3. Goodbye to privatization: There have previously been talks of privatization of Indian railways in
order to improve and develop them with world class facilities and cleanliness. It was not well received
earlier and after the merging, there will a complete end to any future chances of privatization. At the
efficient hands of government employees, nothing big could be expected.
4. Loss for the railways: We know how much our parties love making promises and then reducing
price to earn the favor of the voters. Not in their wildest dreams would they want to hike the railway

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 prices and lose the vote bank that flows from commuters. Lesser hikes in price might pose loss for the
railways department.
There have been mismanagement of the highest order in Indian railways and if there are chances of
seeing it improve, merging it with the Union budget is just the solution that could help. The falling
revenue and more projects for new trains and stoppages have been a difficult project for the railway
ministry which took the right step by merging the two budgets.

Budget advancement:
The objective behind this move is to have the Budget constitutionally approved by Parliament and
assented to by the President, and all allocations at different tiers disseminated to budget-holders,
before the financial year begins on April 1.
 The proposal for a change in the budget presentation date was first mooted by some of the
government’s senior most bureaucrats as part of a ‘Transforming India’ initiative in January 2016.
Presenting the budget earlier comes with both advantages and disadvantages.
Advantages:
 In the existing system, the Lok Sabha passes a vote on account for the April-June quarter, under
which departments are provided a sixth of their total allocation for the year. This is done by March.
The Finance Bill is not passed before late April or early May. If the Budget is read in January and
passed by February-March, it would enable the government to do away with a vote on account for the
first three months of a financial year.
 Retired and serving officials say the biggest plus would be that the Finance Bill, incorporating the
Budget proposals, could be passed by February or March. So, government departments, agencies and
state-owned companies would know their allocations right from April 1, when the financial year
begins.
 It would also help the private sector to anticipate government procurement trends and evolve their
business plans. And, civil society could deliberate on and give feedback in time for the parliamentary
discussions.
Disadvantages:
 One big disadvantage of advancing the Budget preparations is lack of comprehensive revenue and
expenditure data. Currently, work on the Budget begins in earnest by December. By the time it is
finalised in mid-February, data on revenue collections and expenditure trends is available for the first
nine months of the financial year, i.e April-December. Based on which, projections for the full year
can be made.
 To read the Budget in January, the centre will have to start preparing it by early October. To go by
less than six months of data and making projections for the full year and the next year, based on such
an incomplete picture, will be an impossible task.
 Advancing the Budget dates would be fraught with practical difficulties. Effective Budget planning
also depends on the monsoon forecasts for the coming year, making the advancing the whole exercise
even more difficult.
 Besides, whether the chambers of Parliament and its standing committees will get adequate time to
deliberate on the budget is a moot point. The standing committees of Parliament, whose charter is to
examine the justification of the ministry-wise allocations and funding needs of concomitant
programmes included in the Budget, undertake their scrutiny during a two to three-week gap within
the budget session period, when the houses are adjourned. This scrutiny is an essential element in the
parliamentary budget approval system.
Way ahead:
Advancing the presentation of the Budget, so as to allow Parliament to vote on tax and spending
proposals before the beginning of the new financial year on April 1, is a good idea. It would do away
with the need for a vote on account and allow new direct tax measures to have a full year’s play.
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Members of Parliament now will have to work hard over two months to vet Budget proposals, for this
to work.
Conclusion:
These reforms make sense, but Budget reform has to go further, to incorporate a multi-year time
horizon and shift to outcome-linked expenditure management, as had been recommended by a
committee headed by C Rangarajan in 2011.

Types of Budgets in India

Balance Budget versus Unbalanced Budget
Balanced Budget Unbalanced Budget
A balanced budget is a situation, in The budget in which income & expenditure are not equal to
which estimated revenue of the each other is known as Unbalanced Budget.
government during the year is equal to
its anticipated expenditure.

The government’s estimated Unbalanced budget is of two types:

Revenue = Government’s proposed Surplus Budget
Expenditure. Deficit Budget

Surplus Budget
The budget is a surplus budget when the estimated revenues
of the year are greater than anticipated expenditures.
The government expected revenue > Government proposed
Expenditure.
The surplus budget shows the financial soundness of the
government. When there is too much inflation, the
government can adopt the policy of surplus budget as it will
reduce aggregate demand.

Deficit Budget
Deficit budget is one where the estimated government
expenditure is more than expected revenue. Government’s
estimated Revenue is less than Government’s proposed
Expenditure.
If over a period of time expenditure exceeds revenue, the
budget is said to be unbalanced
Such deficit amount is generally covered through public
borrowings or withdrawing resources from the accumulated
reserve surplus. A way a deficit budget is a liability of the
government as it creates a burden of debt or it reduces the
stock of reserves of the government.
In developing countries like India, where huge resources are
needed for the purpose of economic growth & development
it is not possible to raise such resources through taxation,
deficit budgeting is the only option.
In Underdeveloped countries, deficit budget is used for
financing planned development & in advanced countries, it
is used as stability tool to control business & economic
fluctuations.
Zero Based Budgeting versus Traditional Budgeting
Zero Based Budgeting Traditional Budgeting
Zero based budgeting is a method of budgeting in Traditional budgeting calls for incremental
which all expenses are evaluated each time a budget increases over previous budgets, such as 2%
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 is made and expenses must be justified for each new increase in spending.
period.
Traditional budgeting analyses only new
Zero budgeting starts from the zero base and every expenditures, while zero based budgeting
function of the government is analysed for its needs starts from zero and calls for justification of
and cost. Budget are then made based on the needs. old recurring expenses in addition to new
expenditures.
Outcome Budget
If was first introduced in the year 2005. Outcome budget analyses the progress of each ministry and
department and what the respected ministry has done with its budget outlay.
The Outcome Budget will comprise scheme or project wise outlays for all central ministries,
departments and organizations during an annual year listed against corresponding outcomes
(measurable physical targets) to be achieved during the year.
It measures the development outcomes of all government programs. Which means that if you want to
find out whether some money allocated for, say, the building of a school or a health center has
actually been given, you might be able to. It will also tell you if the money has been spent for the
purpose it was sanctioned and the outcome of the fund-usage.
Gender Budgeting
 Gender Budgeting is a powerful tool for achieving gender mainstreaming so as to ensure that benefits
of development reach women as much as men.
 It is not an accounting exercise but an ongoing process of keeping a gender perspective in policy/
programme formulation, its implementation and review.
 Gender Budgeting entails dissection of the Government budgets to establish its gender differential
impacts and to ensure that gender commitments are translated in to budgetary commitments.
 Experts defines Gender Budgeting as “Gender budget initiatives. To analyse how governments raise
and spend public money, with the aim of securing gender equality in decision-making about public
resource allocation; and gender equality in the distribution of the impact of government budgets, both
in their benefits and in their burdens.
 The impact of government budgets on the most disadvantaged groups of women is a focus of special
attention.
 The rationale for gender budgeting arises from recognition of the fact that national budgets impact
men and women differently through the pattern of resource allocation.
 Women, constitute 48% of India’s population, but they lag behind men on many social indicators like
health, education, economic opportunities, etc. Hence, they warrant special attention due to their
vulnerability and lack of access to resources.
 The way Government budgets allocate resources, has the potential to transform these gender
inequalities. In view of this, Gender Budgeting, as a tool for achieving gender mainstreaming, has
been propagated.

Taxation in India
Taxation in India: Classification, Types, Direct tax, Indirect tax
Taxation in India
The India Constitution is quasi-federal in nature, and the country has three tier government structure.
To avoid any disputes between the centre and state the Constitution envisage following provisions
regarding taxation:
 Division of powers to levy taxes between centre and state is clearly defined.

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 There are certain taxes which are levied by the centre, but their proceeds are distributed between both
centre and the state. Example- Union Excise Duty.
 There are certain taxes which are levied by the centre, but their proceeds are transferred to the states.
Example-Estate duty on property other than agriculture income.
 There are certain taxes which are levied by the central government, but the responsibility to collect
them is vested with the states. Example- Stamp Duty other than included in the Union List.
 There are certain taxes which are levied by the states, and their proceeds are also kept by states.
Example: Erstwhile VAT
Classification of Taxes
What is a Tax?
Taxes are generally an involuntary fee levied on individuals and corporations by the government in
order to finance government activities. Taxes are essentially of quid pro quo in nature. It means a
favour or advantage granted in return for something.
Direct Tax versus Indirect Tax

Basis Direct Tax Indirect Tax

Meaning The tax that is levied by the The tax that is levied by the
government directly on the government on one entity
individuals or corporations are (Manufacturer of goods), but is
called Direct Taxes. passed on to the final consumer
by the manufacturer.
Incidence The incidence and impact of the The incidence and impact of the
direct tax fall on the same tax fall on different persons.
person.
Examples Income Tax, Corporation Tax VAT, Service tax, GST, Excise
and Wealth Tax. duty, entertainment tax and
Customs Duty.
Nature They are progressive in nature. They are regressive in nature.
Objective Both Social and Economical. Only Economical. When an
Social objective of direct tax is indirect tax is levied on a
the distribution of income. A product, both rich and poor
person earning more should must pay at the same rate. A
contribute more in the provision person earning 10 lakh a month
of public service by paying pays the same tax on the Wheat
more tax. This provision is also purchase as the person earning
known as progressive taxation. 3000 Re a month. This principle
is called regressive taxation.
Impact Not at all Inflationary. Is inflationary.
Understanding Regressive Nature of Indirect Taxes.
Government Levies a tax of 5 percent on a pack of 5KG Rice worth Re1000.
Tax Burden on the Pack: 5/100*1000= 50 Re
 Rich Individual Case (Monthly Earning 1 Lakh)
He buys the rice pack and pays a tax of 50 Re.
The proportion of his income that went on paying tax on Rice is 0.05 Percent (50/100000) of his total
earning.
 Poor Individual Case (Monthly income 1000 Re)
He buys Rice pack and pays a tax of Re 50.
The proportion of his income that went on paying tax on rice is 5 percent (50/1000) of his total
earning.
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 As you can clearly see, a poor individual is paying a higher proportion of his income as indirect tax as
compared to the richer individual.
Ad valorem versus Specific Tax

Ad Valorem Specific
Ad valorem tax is based on the assessed value of
Specific tax is a fixed amount tax based on the
the product. In Fact, ‘Ad Valorem’ is a Latin
quantity of unit sold.
word meaning ‘According to Value’.
Most Ad valorem taxes are levied based on the Specific tax is levied based on the volume of the
value of the item purchased. item purchased.
The tax is usually expressed in percentage.
The tax is usually expressed in specific sums.
Example GST in India has 5 tax rate slabs- 0, 5.
Example: Excise Duty on Petrol.
12, 18 and 28 percent.
Example: Excise duty on petrol and liquor
Example: GST, Property tax, sales tax.
products.
They are progressive in nature. They are regressive in nature.
Taxes in India
In India, Taxes are levied on income and wealth. The most important direct tax from the point of view
of revenue is personal income tax and corporation tax.
Income Tax:
 Income tax is levied on the income of individuals, Hindu undivided families, unregistered firms and
other association of people.
 In India, the nature of income tax is progressive.
 For taxation purpose income from all sources is added and taxed as per the income tax slabs of the
individual.
 The budget of 2017-18 proposed the following slab structure:
Income Slab (less than 60 years) Tax Rate
Up to 2,50,000 No Tax
Up to 2,50,000 to 5,00,000 5%
Up to 5,00,000 to 10,00,000 20%
Excess of 10,00,000 30%
Surcharge of 10% of income tax where the total income exceeds Rs 50 lakh up to Rs 1 Crore.
Surcharge of 15% of income tax, where the total income exceeds Rs 1 Crore.
Corporation Tax
 Corporation tax levied on the income of corporate firms and corporations.
 For taxation purpose, a company is treated as a separate entity and thus must pay a separate tax
different from personal income tax of its owner.
 Companies both public and private which are registered in India under the companies act 1956 are
liable to pay corporate tax.
 The Budget 2017-18 proposed following tax structure for domestic corporate firms:
 For the Assessment Year 2017-18 and 2018-19, a domestic company is taxable at 30%.
 For Assessment Year 2017-18, the tax rate would be 29% where turnover or gross receipt of the
company does not exceed Rs. 5 crores in the previous year 2014-15.
 However, for Assessment year 2018-19, the tax rate would be 25% where turnover or gross receipt of
the company does not exceed Rs. 50 crores in the previous year 2015-16.
Tax on Wealth and Capital

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 Estate Duty: First introduced in 1953. It was levied on the total property passing on the death of a
person. The whole property of the deceased person constituted his wealth and is liable for the tax. The
tax now stands abolish w.e.f 1985.
Wealth Tax: First introduced in 1957. It was levied on the excess of net wealth (over 30,00,00,0 @ 1
percent) of individuals, joint Hindu families and companies. Wealth tax has been a minor source of
revenue. The tax now stands abolish wef 2015.
Gift Tax: First introduced in 1958. The gift tax was levied on all donations except the one given by
the charitable institution’s government companies and private companies. The tax now stands
abolished wef 1998.
Capital Gain Tax: Ay profit or gain that arises from the sale of the capital asset is a capital gain. The
profit from the sale of capital is taxed. Capital Asset includes land, building, house, jewellery, patents,
copyrights etc.
 Short-term capital asset – An asset which is held for not more than 36 months or less is a short-term
capital asset.
 Long-term capital asset – An asset that is held for more than 36 months is a long-term capital asset.
From FY 2017-18 onwards – The criteria of 36 months has been reduced to 24 months in the case of
immovable property being land, building, and house property.
 For instance, if you sell house property after holding it for a period of 24 months, any income arising
will be treated as long-term capital gain provided that property is sold after 31st March 2017.
But this change is not applicable to movable property such as jewellery, debt oriented mutual funds
etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.
 Tax on long-term capital gain: the Long-term capital gain is taxable at 20% + surcharge and
education cess.
 Tax on the short-term capital gain when securities transaction tax is not applicable: If securities
transaction tax is not applicable, the short-term capital gain is added to your income tax return, and
the taxpayer is taxed according to his income tax slab.
 Tax on the short-term capital gain if securities transaction tax is applicable: If securities
transaction tax is applicable, the short-term capital gain is taxable at the rate of 15% +surcharge and
education cess.

Indirect Taxes in India

Custom Duty:
 It is a duty levied on exports and imports of goods.
 Import duty is not only a source of revenue from the government but also have also been employed to
regulate trade.
 Import duties in India is levied on ad valorem basis.
 Example: if an Indian plan to buy a Mercedes from abroad. He must pay the customs duty levied on it.
 The purpose of the customs duty is to ensure that all the goods entering the country are taxed and paid
for.
 Just as customs duty ensures that goods for other countries are taxed, octroi is meant to ensure that
goods crossing state borders within India are taxed appropriately.
 It is levied by the state government and functions in much the same way as customs duty does.
Excise Duty
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 An excise duty is in the true sense is a commodity tax because it is levied on production of goods in
India and not on the sale of the product.
 Excise duty is explicitly levied by the central government except for alcoholic liquor and narcotics.
 It is different from customs duty because it is applicable only to things produced in India and is also
known as the Central Value Added Tax or CENVAT.
Service Tax
 Service tax is levied on the services provided in India.
 Service tax was first introduced in 1994-95 on three services telephone services, general insurance
and share broking.
 Since then, every year the service net has been widened by including more and more services. We
now have an exclusion criterion based on ‘negative list’, where some services are excluded out of tax
net.
 The current rate of service tax in India was 15% before being replaced by Goods and Service tax.
Value Added Tax
 The India’s indirect tax structure is weak and produces cascading effects.
 The structure was by, and large uncertain and complex and its administration was difficult.
 As a result, various committees on taxation recommended ‘Value Added Tax’. The Indirect Taxation
enquiry committee argued for VAT.
 The VAT has a self-monitoring mechanism which makes tax administration easier.
 The VAT is properly structured removes distortions.
 Accordingly, VAT has been introduced in India by all states and UTs (except UTs of Andaman
Nicobar and Lakshadweep).
 The State VAT being implemented till 1 July 2017, had replaced erstwhile Sales Tax of States.
 The tax is levied on various goods sold in the state, and the amount of the tax is decided by the state
itself.
Indirect Taxes in a nutshell

Tax Who Levies Revenue goes Nature Incidence Levied on

to
Custom Duty Central Centre Govt Progressive Shifts to Final Export and
Government Consumer Import
Excise Central Both Centre progressive Shifts to Final Domestically
Duty/CENVAT Government and State Consumer Manufactured
Goods
Service Tax Central Centre Govt Regressive Shifts to Final All Services
Government Consumer
VAT State State Govt Regressive Shifts to Final Sale of Goods
Government Consumer in the States

Goods and Services Tax

Goods and Services Tax
The Goods and Services Tax (GST), the biggest reform in India’s indirect tax structure since the
economy began to be opened up 25 years ago, at last, becomes a reality.
The Working of GST
The Manufacturing Stage:

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Step 1) Imagine a Producer of Shoe. He buys raw materials like leather, cloth, thread etc., worth Re
1000. The Re 1000 includes a tax of Re 100. He manufactures a pair shoe using these raw materials.
Step 2) The manufacturer by converting raw material into a finished good (Shoe) has added value to
the product. The raw leather is being converted into the wearable shoe.
Step 3) Let us assume that the value added by the manufacturer is Re 300 (After conversion the shoe
is sold in the market at Re 1300). The gross value added of the shoe will be now Re 1300 (1000+300).
Step 4) Prior to GST, assuming an excise duty of 10%, the tax that the manufacturer has paid would
be Re 130 (10/100*1300).
But under GST, the manufacturer could set off Re 130 as input credit as the tax already paid by him
on inputs Re 100(SEE Step 1)
The effective tax paid by the manufacturer under GST regime is thus, Re 30 (130-100) only.
The Wholesale Stage:
Step 1) The Wholesaler purchases the shoe from the manufacturer at Re 1300. The Wholesaler adds
value to the shoe (his profit margin) of Re 200. The gross value of the shoe has now become Re 1500
(1300+200).
Step 2) Assuming a tax of 10% on purchase of shoe, the tax that the wholesaler has paid prior to GST
regime would be Re 150 (10/100*1500).
But under GST, the wholesaler also could set off Re 150 as input credit as the tax already paid on the
purchase of shoe from the manufacturer Re 130.
Thus, the effective GST paid by the Wholesaler under GST regime is Re 20(150-130) only.
The Retail Stage
Step 1) The Retailer buys the shoe from the wholesaler at Re 1500. The Retailer adds value to the
shoe (his profit margin) of Re 500. The gross value of the shoe has now become Re 2000 (1500+500).
Step 2) Assuming a tax of 10% on the sale of the shoe, the tax that the retailer has paid prior to GST
regime would be Re 200 (10/100*2000).
But under GST, the retailer also could set off Re 200 as input credit as the tax already paid by him on
the previous stage Re 150.
Thus, the effective GST paid by the retailer under GST regime is Re 50 (200-150) only.
Step 3) Thus, the total GST on the entire value chain from the raw material/input suppliers
(who can claim no tax credit since they haven’t purchased anything themselves) through the
manufacturer, wholesaler and retailer is, Rs 100+30+20+50= 200 only.

Pre and Post GST a comparison

Pre-GST Scenario
Input Stage Rs 1000 (Initial Price) including
10% tax
Manufacturing Stage Rs 1300 (value added) at tax 0f
10%, tax=130, Final price
including tax (1300+130) =1430
Wholesale Stage Rs 1630 (1430+200) after value
added.
Tax at 10%, tax=163.
Final price including tax
1630+163= 1793
Retail Stage Rs 1793+500) =2293, after value
added.
Post GST Scenario
Rs 1000 (Initial Price) including
10% tax
Rs 1300 (value added) at tax 0f
10%, tax=130, Final price
including tax under GST
(1300+30) =1330
Rs 1500 after value added.
Tax at 10%, tax=150.
Final price including GST
1500+20= 1520.
Rs 2000 after value added.
Tax at 10%, tax=200.

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 Tax at 10%, tax= 229.3 Final price including GST
Final Price including tax 2000+50=2050.
2293+229.3= 2522.3
The Difference Total Tax= Total Tax
100+130+163+229.3= 622.3 100+30+20+50= 200
Final Price Rs. 2522.3 Rs. 2050

Taxes to be subsumed under GST

Central Taxes State Taxes
Central Excise duty State VAT
Service Tax Central Sales Tax
Duties of Excise (Medicinal and Toilet Purchase Tax
Preparations)
Additional Duties of Excise (Goods of Special Luxury Tax
Importance)
Additional Duties of Excise (Textile) Octroy Tax
Counter Vailing Duties Entertainment Tax
Additional duty on Customs Taxes on advertisement, Lottery, Betting, Gambling
The Three Tier Structure of GST
The Parliament and the state legislatures will have the power to levy GST. There will be complete
separation of power between Centre and State.

The centre will have the power to levy GST when it comes to interstate trade and exports, imports.
The sharing of IGST between centre and state will be based on the views of GST Council.
Suppose a trader in Maharashtra sells goods to another trader in Maharashtra itself. In this case, the
trade is of intrastate in nature. If the applicable GST rate is 18%, then 9% will go to the centre as
CGST, and 9% will go to the Maharashtra as SGST.
Now, suppose the same trader in Maharashtra sells goods to a trader in Tamil Nadu. In this case, the
trade is off interstate nature. If the applicable GST rate is 18%, then the entire 18% GST will be
charged as IGST.
The GST Council
The Council will have the representation of both Centre and State.
 The council will be headed by Union Finance Minister.
 The Minister of State for Revenue (Central Government) will be a member.
 The Minister of Finance from each State or Minister nominated by the States will be its member.
 The decision will be made by the majority of 3/4th members.
 The Centre government will have a 1/3rd voting share in the council.
 The State government will have a 2/3rd voting share in the council.

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Advantages of GST

Limitation of GST

Tax Reforms in India

The Summary of India’s Tax Reforms
In 1973-74, there were 11 income tax slabs,
ranging from 10 per cent to 85 per cent.
With a sur charge of additional 15%, the
implication of which is high earning
individuals paying an effective tax of 97% of
their incomes.
The Wealth tax further makes a hole further
hole in their pockets. As a result, people start
evading taxes.
The tax reforms of 1986-87 reduced the tax
Income Tax slabs from 8 to 4 and brought the marginal
tax rate down from 60 to 50 percent.
The major tax reforms took place in 1991-92
and 1996-97, lowering the marginal tax rate
to 35 percent.
The reforms further eliminated the Wealth
tax.
The Kelkar Task force recommendations for
simplification of tax structure was accepted
with certain modifications by Government in
2005-06.
The rate of taxation varied highly for different
Corporation Tax types of Corporations until Two decades ago.
Tax effective rate of taxation for corporates
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 was 45 to 65 percent.
The tax reforms of 1991-92 and 1996-97
reduced the marginal tax rates to 40% and
further to 35% respectively.
The subsequent budgets have further reduced
the marginal tax rates, and the tax rate
currently stands at 30%, with a plan
commitment to reduce it to 25% in the
coming years.
India followed an import substitution model after
independence for its growth. The result of which
is the need for saving foreign exchange reserve.
As a result, India started levying high customs
duties on its imports.
Throughout the 1970s and 1980s, India had a
very complex and regressive custom duty
structure.
India also maintains a huge negative list of
imports along with quantitative restrictions.
Custom Duty Things started to change post-1991 Crisis,
and with liberalization and opening up of the
Indian economy, the peak rates of customs
duty were slashed from 300% to 30% in the
successive budgets.
The peak rate was further lowered after
Setting up of the WTO and reduced to 25%,
20% and 12.5% in 2003-04, 2005-06 and
2006-07 respectively.
The lower bound of current average customs
duty is 10%.
India’s excise duty structure dis-incentivize the
manufacturers. The Excise duty had a cascading
effect (tax on tax) as the manufacturer gets no
input credit (Tax already paid by him on the
previous round of purchase). As a result, both
production and manufacturing suffered heavily.
To revamp India’s manufacturing, GOI
decided to make fundamental changes in
Excise duty structure.
Excise Duty As a first step, India introduced the
MODVAT in 1986, which was further
simplified and renamed as CENVAT in the
year 2000.
The CENVAT contained the provisions of
input credit, if a manufacturer purchased an
input for which duty has been paid, he could
avail back the duty already paid by him as
input credit.
The indirect taxation enquiry committee was
constituted in 1976 for suggesting reforms in
India’s indirect tax structure.
Sales Tax/VAT
The committee recommended the imposition
of ad valorem type of tax due to their high-
income elasticity. The committee further
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 recommended that excise duty and sales tax
should be replaced by a single commodity
tax or VAT.
The empowered committee of state finance
ministers on June 2004, arrived at the broad
consensus to introduce VAT from April
2005.
As a result, the sales tax was replaced by
VAT.
A key drawback of India’s tax system was that it
was discriminatory towards Goods.
In India, except for a few services assigned to
states such as entertainment, electricity no
other service is assigned either to the centre
of the states.
The discrimination between goods and
services when it comes to taxation violated
the concept of neutrality of taxation. This is
especially so when the services are more
income elastic and consider to be a
progressive form of taxation.
To remove the biased ness towards services,
the GOI introduced the service tax in 1994-
Service Tax
95 initially on three services- telephone
services, insurance and share broking.
Since 1994-95, every year the service net has
been widened.
The government has over the years increased
the service tax from 10% in 2012-13 to 15%
in 2017-18.
The Tax reforms committee of 1991, headed
by Raja J Chelliah and Committee on Service
taxation headed by M Govind Rao are all in
favour of imposing the Service tax.
The same is also recommended by Vijay
Kelkar committee on direct and indirect
taxes.

Concept Related to Taxation: Tax Incidence, Tax Evasion,

Laffer Curve, CESS and Surcharge
Key Concepts Relating to Taxation
Tax Incidence
The key to imposing the tax is who bears its burden. If the person on whom the tax is imposed have
the flexibility to transfer it on to the other person, then we say tax incidence has shifted. The shifting
of tax form one person to the other is known as tax incidence.
All indirect tax comes under this category. For all direct tax, the incidence of tax and burden lies with
the same person.
The incidence of tax mainly depends on its elasticity. Elasticity is nothing but the responsiveness.
Example: If you are walking on the road and suddenly a car comes towards you, you respond quickly
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to get out of the way. This is your responsiveness towards the speed of the car. The faster you get out
the way, the higher is your responsiveness. The same concept is applied to income, demand and taxes.
If due to a change in prices, the demand responds at a much faster rate, then we say demand is highly
elastic vis-à-vis prices.
Consumer Demand Producer Burden/Incidence

Elastic Inelastic Consumer

Inelastic Elastic Producer

Tax Avoidance
It refers to minimising the tax liabilities using an available source of exemptions and tax laws. It is by
means of taking advantage of shortcomings of tax structure. It usually happens at the tax planning
stage.
Tax Evasion
It refers to reducing the tax liabilities using illegal measures. Tax evasion is a clear case of forgery of
accounts as it uses measures which are unforbidden in law.
Cascading Effect in Taxation
A Cascading tax is one, which is not just on final product value but also on the raw materials used as
input. The tax is levied at every stage of production and distribution. It is a tax on tax.
For example, resin, rubber and carbon black are necessary for manufacturing tyres. All the three
inputs paid tax and the final products namely the tyres also paid tax. So, these three inputs are taxed
twice. Then again, the tyre is used in a car, which also is taxed. These three inputs are now taxed
thrice. So, the tax element on these inputs goes on increasing with every production and distribution
chain. The cascading effect of tax makes the tax rate much higher than the original rate.
Laffer Curve
Laffer curve is named after noted economist Arthur Laffer. Laffer curve shows the relationship
between Government tax revenue and tax rates.
The curve is inversely U Shape, representing as the tax rate increases, the government revenue also
increases up to an optimum level. Post which, if the government tries to increase taxes, the
government revenue will start falling. Thus, a government must maintain an optimum balance
between tax rate and revenue.
Tax Buoyancy
Tax buoyancy is a measure of the responsiveness of the tax receipts with respect to GDP.
A tax is considered buoyant when revenue increase by more than one percent if the GDP has
increased by 1 percent.
Fiscal drag
Fiscal drag is a concept where inflation and earnings growth may push more tax payers into higher tax
brackets. Therefore, fiscal drag has the effect of raising government tax revenue without explicitly
raising tax rates.
An example of this would be if a person earns Rs 10 000 per year, and has to pay 20% tax on earnings
above Rs 5000 for year one. he would then pay (10 000 – 5000) *0.2, which equals 1000 or 10% of
her income.
If the person pay goes up by 10% to R11000 to compensate for inflation, and the government
increases the tax threshold by 2% in year two to 5 200, he would pay (11 000 – 5200) multiplied by
0.2 which equals 1160 or 10.54% of her income in taxes.
The proportion of Rahul’s income in taxes has increased. This is fiscal drag or bracket creep. This
illustrates that when there is inflation, taxes rise unless the tax rates or tax accordingly.

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CESS VS Surcharge
Cess
A cess is imposed over and above the tax for a
specific predetermined purpose.
For example a cess on financing primary
education as education cess or a cess for the
cleaning and sanitation as Swach Bharat Cess.
A cess is levied as an addition to the proposed
taxes. Like a 3% education cess on Income tax.
The revenue from cess is not kept under
Consolidated Fund of India.
Cess is not to be shared with States.
Surcharge
A surcharge is a charge levied on any tax. It is an
additional charge on tax.
The main surcharge levied on income and
corporation taxes beyond a certain threshold.
A sur charge of 10% in addition to the income tax
of 30% for high net worth individuals earning
more than 50 Lakhs.
The revenue from the sur charge is kept under
Consolidated Fund of India.
Sur Charge is also not to be shared with states.

External sector
India’s Balance of Payments: Current Account, Capital Account,
Goods and Services Account
India’s Balance of Payment’s
Balance of Payment Account
Bop is the oldest and the most important statistical statement for any country. In a nutshell BOP of a
country is “a systematic record of all economic transactions between the residents of one country with
the residents of the other country in a financial year”.
Economic Transactions include all the foreign receipts and payments made by a country during a
given financial year.
The Foreign receipts include all the earnings and borrowings by a country from the other countries.

Source of Earnings (Inflows) Source of Borrowings (Inflows)

 Merchandise Exports
 Services Exports
 Interest, Profits, Dividends and Royalties
received from Foreign countries.
 Gifts, Grants and Aids received from
Foreign Countries.
 Private Transfers such as Remittances.
 Foreign Direct Investments
 Foreign Portfolio Investments
 Government Loans from Foreign
Governments.
 Short Term deposits by NRIs and
Foreigners.

The accumulation of foreign receipts (net of payments) over the years becomes Foreign Exchange
Reserves of a Country.
The Payments include all the spending and lending by a country from the countries of the rest of the
World.

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 Spending’s (Outflows) Lending’s (Outflows)
 Merchandise Imports  Outward Foreign Direct Investment by
 Services Imports Indian Firms
 Interests, Profits, Dividends and  Outward Foreign Portfolio Investment by
Royalties paid to foreign countries Indian Citizens
 Gifts, Grants and Aids given to foreign  Indian Governments Lending’s/Loans to
countries Foreign Governments
 Remittances paid.  Short Term Deposits by country residents
into foreign countries.

All the foreign receipts are financial inflows, and all the foreign payments are financial outflows in a
given year.
The Balance of Payments Accounts of any Country includes Six Major accounts which are as
follows:
 Goods Account
 Services Account
 Unilateral Transfer Account
 Long-term Capital Account
 Short-term Capital Account
 International Liquidity Account.
The six major accounts are clubbed together into two most important accounts.

Goods Account versus Services Account

Goods Account Services Account

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  It includes the value of Merchandise
Exports and Merchandise Imports
 They are called ‘Visible items’ in the BOP
account.
 If Export of Goods= Import of Goods. We
call it ‘Goods Balance’.
 Positive Goods Balance= Export of Goods>
Import of Goods.
 Negative Goods Balance= Export of
Goods< Import of Goods.
 The services account records all the
services exported and imported by a
country in a year.
 Unlike goods which are tangible or visible,
services are intangible. Hence are called
‘invisible items in the BOP.
 The services transactions include:
 Transportation, Banking and Insurance.
 Tourism, Travel and Tourist purchases of
domestic goods and services.
 Foreign Students studying in Host countries
and Domestic Students studying in Foreign.
 Expenses of Diplomatic personnel stationed
overseas as well as income from diplomatic
personnel who are stationed in host
countries.
 Investment Income: Interests, Profits,
Dividends and Royalties received from
foreign countries and paid out to foreign
countries.

Unilateral Transfer Account

 The account includes gifts, grants, remittances received from foreign countries and paid to foreign
countries.
 Unilateral transfers are of two types:
Private Transfer Government Transfer
 Foreign economic aid and Foreign military
 Private Transfers are person to person
aid by one country government to another
transfers.
country government constitute Government
 These are money/funds received from or
to Government transfer.
paid to a citizen of one country to a citizen
 Example: The United States Military Aid to
of another country.
Pakistan is a Government transfer
 Example: An Indian (Keralite) working in
constituting a receipt/Credit item in
UAE remitting Rs 15000 to his aged
Pakistan’s BOP (But a payment/debit item
parents in Kerala, India.
from USA’s BOP).

Why are they called Unilateral Transfers?

Unilateral receipts and payments are also called ‘Unrequited Transfers’. They are called so because
the flow of transfer is unidirectional or in one direction. There is no liability for an automatic reverse
flow or repayment obligation in other direction since they are not lending’s and borrowings. These
items are simply gifts, and grants exchanged between governments and people of one country with
that of others.

Long Term Capital Account versus Short Term Capital Account

Long Term Capital Account Short Term Capital Account

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  It includes the amount of Capital that has  The Capital that moves in or out of a
moved in or out of the country in a year. country for a period of less than one-year
 The Capital that has moved in or out for a short-term capital movement.
period of one or year or more is called  Bank deposits and other short-term
Long term capital movement. payments and credit arrangements fall
 The Long-term capital account includes under this category.
the following:  These short-term payments are
 Foreign Direct Investment: Investments sometimes included under the term
done by home country citizens and firms ‘Errors and Omissions’ in BOP account.
in foreign countries and by foreigners in
the host country. These movements are
induced by different rate of profits
between the home and foreign country.
 Foreign Portfolio Investment:
Investments done by home country
citizens and firms in stock markets
(shares and securities) or debt markets
(Bonds) of Foreign countries and by
Foreigners in host countries shares and
securities. These movements are induced
by differences in interest rates, returns or
dividends on capital between home and a
foreign country.
 Government Loans: Loan given by the
home country government to foreign
country government and Foreign country
government to home country
government.

Note for Student Box: Is FDI necessarily Good for Host Economies?
When a Japanese MNC invests in India, India receives a capital inflow in the form of long term
capital (FDI). It has a favourable effect on our BOP account. But when the Japanese MNC in India,
starts repatriating profits/ sending profits back to their home countries(Japan), there will be a capital
outflow from India to Japan.
The outflow will be recorded in our Services part of Current account as outflow of Income. India,
therefore will experience a temporary surplus in its Capital account. But when MNCs starts to send
out profits in their home countries, India will experience a permanent outflow from its current
account.
The understanding of this treatment effect of FDI is very important, since it is always assumed that
FDI inflow is good for a host country economy.
Note: I will return to the topic in much detail when I discuss Current account deficit part.
International Liquidity Account
International Liquidity Account simply records net changes in Foreign Exchange Reserves. Following
table represents an example of how International liquidity account works.
Case 1) BOP Surplus: When Receipts are Greater than Payments in a BOP Account
Major Accounts Receipts(Credits) Payments(Debits)
A. Goods Account 2000 1000
B. Services Account 1000 500
C. Unilateral Transfers 200 100
D. Long-Term Capital Account 1500 500
E. Errors and Omissions/Short Term Capital Account 200 300
F. International Liquidity Account 2500 (G-(A+B+C+D+E+F)
G. Balance of Payments 4900 4900

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 Total Receipts are 4900 Million, and Total Payments are 2400 Million.
 There is a BOP Surplus of 2500 Million.
The surplus of 2500 Million will enter into International Liquidity Account as payment item. The
economic logic of 2500 Million entering as the debit item is:
1. The sum represents accumulation of foreign exchange reserves of 2500 Million; or
2. Purchase of Gold or other currencies by surplus country in order to increase their Foreign Exchange
Reserves; or
3. The surplus country might lend 2500 Million to other countries.
In all the above cases, the amount is spent on either buying gold, other country currencies or lending.
Hence treated as payments.
Case 2) BOP Deficit: When Payments are Greater than Receipts in a BOP Account
Major Accounts Receipts(Credits) Payments(Debits)
A. Goods Account 1000 2000
B. Services Account 500 1000
C. Unilateral Transfers 100 200
D. Long Term Capital Account 500 1500
E. Errors and Omissions/Short Term Capital Account 300 200
F. International Liquidity Account 2500 (G-(A+B+C+D+E+F)
G. Balance of Payments 4900 4900

 Total Receipts are 2400 Million, and Total Payments are 4900 Million.
 There is a BOP Deficit of 2500 Million.
 The important point to ask is how a country will finance its deficit of 2500 Million?

1. The sum will be spent by drain of past accumulated foreign exchange reserves of 2500 Million; or
2. Sale of Gold or other currencies held as foreign exchange reserves by deficit country; or
3. The deficit country might borrow 2500 Million from other countries.

In all the above cases, the amount is financed by either selling gold, other country currencies or
borrowings. Hence treated as receipts. In this case, a deficit country is receiving a payment to finance
its deficit, Hence receipts. Whereas, in a surplus case, a surplus country is siphoning off its surplus
amount to invest in Gold or Other currencies, Hence payments.

India’s BOP Performance: Balance of Payment versus Balance of Trade, Current Account
versus Capital Account
BOP on Current Account Versus BOP on Capital Account
Current Account Capital Account
BOP on current account includes the sum of three BOP on capital account includes the sum of two
balances. balances
 Goods Balance  Long Term Capital Account
 Services Balance  Short Term Capital Account
 Unilateral Transfers
BOP on Current Account is also called Net BOP on capital account includes all inward and
Foreign Investment because it represents the outward moving capital and investments both
contribution of foreign trade to Gross national Long term and short term).
product.  Foreign Direct Investment
 Foreign Portfolio Investment
 Government Investments/loans
BOP on current account covers only earnings and It only includes borrowings and lending by a
spending. It totally excludes any borrowings and country.
lending.

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Balance of Payment versus Balance of Trade
Balance of Payment Balance of Trade
It is a Broad Concept It is a narrower Concept.
It includes the sum of both Capital and Current It is defined as the difference between the value
account put together. It includes all international of exports of goods and services and value of
transactions between a host/domestic country and imports of goods and services between countries.
Rest of the World.
It includes items of goods account, services BOT= Value of Exports – Value of Imports.
account, unilateral transfers and capital accounts.  Trade Balance>> Value of Exports =
Value of Imports.
 Trade Surplus>> Value of Exports is
greater than Value of Imports.
 Trade Deficit>> Value of Exports is
smaller than Value of Imports.
 Can an overall BOP surplus is a good A positive trade balance(Surplus) is always better
sign? And BOP deficit is a bad sign? and good for a country since it represents an
 The above is not always true, and we increase in national income.
have to dig deeper to understand the
nature of surplus and deficits in overall
BOP.
 If the overall BOP deficit is caused by
Current account deficits (Excess of
imports over exports), as opposed to
capital account deficits, then BOP
deficits are bad for countries.
 If the overall BOP surplus is caused by
current account surplus (Excess of
exports over imports), as opposed to
capital account surplus, then the surplus
may be good for economies.
Note for Students
There is a difference between the terminologies of Balance of Trade and Goods Balance. Goods or
Merchandise Balance is defined as difference between the value of merchandise or goods exports and
the value of merchandise or goods imports.
The Balance of Trade on the other hand includes both goods balance (Visible) and services
(Invisibles) balance.
Should a negative trade balance (excess of imports over exports) be treated as undesirable for an
economy?
The answer is No, because, a developing country needs to import vast quantities of capital goods and
technologies to build a strong industrial base. Developing country hardly possess resources needed for
industrialisation. They have to import all these resources and in the course of doing so, they have to
experience a negative trade balance. Therefore, a negative trade balance cannot be described as
undesirable in such a situation. Moreover, once the industrial base is setup, a country can reverse its
negative trade balance into a positive trade balance by developing export oriented industries.
BOP Account of a Country

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 The items 1 to 7 show the total receipts from all sources. These receipts amount to Rs. 1000 Crores.
The items 1(a) to 7(a) Show the total payments on all accounts. These payments amount to Rs. 990
Crores. When item 8 included, the total payment is Rs. 1000 Crores, hence the total credit is equal to
the total debit.
Thus, the current account and capital account Balance each other. Thus, the surplus in the current
account is equal to the deficit in the capital account. A deficit in the current account is equal to the
surplus in the capital account.
In the above-given table, the balance of current account shows a deficit of Rs. 200 crores but there is a
corresponding surplus of Rs. 200 crores in the balance of the capital account.
Hence the credit and debit sides balance & the balance of payments is in equilibrium.
The balance of trade of a country may not balance. For instance, if exports exceed imports, there is a
surplus and a favourable balance of trade and vice-versa. Only if the value of exports is equal to the
value of imports, the balance of trade is said to be in equilibrium.
But the balance of payments always balances because every transaction must be settled. Hence total
debits must be equal to the total credits.
Current Account Balance: An Evaluation
The very basic point is to understand what a current account deficit or surplus really means and how it
is measured?
 It can be measured as the difference between the value of exports of goods and services and the value
of imports of goods and services.
 A deficit simply means that a country is importing more goods and services than it is exporting.
 The current account also includes net incomes such as interests, dividends and unilateral transfers
such as Foreign aids.
 Alternatively, Current Account can also be expressed as the difference between national savings and
national investments.
 A current account deficit reflects a low level of national savings relative to investments (S<I).
whereas, a Current account surplus reflects a high level of domestic savings relative to investments
(S>I).
 Current Account = Saving – Investment.
Whether CAD is Necessarily Bad for an Economy or Not?
 In theory, a developing country running a CAD is not necessarily a bad thing. A deficit in current
account can increase growth and economic development. Although recent examples and research
show that developing countries that run a deficit may not grow faster mainly due to less developed
financial markets and inefficient use of foreign capital (Foreign capital used to finance consumptions
and interest payments).
 If a current account deficit is financed by borrowing, it is said to be more unsustainable. This is
because borrowing is unsustainable in the long term and countries will be burdened with high-interest
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 payments. E.g. Russia was unable to pay its foreign debt back in 1998. Other developing countries
have experienced similar repayment problems Brazil, African countries (3rd World debt) Countries
with large interest payments have little left over to spend on investment.
 A factor behind the Asian crisis of 1997 was that countries had run up large current account deficits
by attracting capital flows (hot money) to finance the deficit. But, when confidence fell, these hot
money flows dried up, leading to a rapid devaluation and crisis of confidence.
A Case for India’s Current Account Deficit
 A developing country like India will have more investment opportunities due to its huge domestic
market size, but due to its low level of domestic savings, India will not be able to undertake all such
opportunities on its own. Thus, a Current account deficit is quite natural.
 When India runs a CAD, it is increasingly getting dependent on foreign capital to finance it. It will
lead to building up of liabilities to the rest of the World. Eventually, these liabilities need to be paid
back. Common sense suggests that if India uses its borrowed foreign funds in unproductive
spending’s that yields no long term productivity gains, then its ability to repay will be affected and
will result in insolvency or Bankruptcy. This is what exactly happened in India during 1980’s and
1990’s leading to full-fledged Balance of Payment Crisis.
 During 1980’s and 1990’s, India was not able to generate enough surplus in its capital and current
accounts to repay what it had borrowed leading to BOP crisis in 1991.
 Therefore, whether a country should run Current Account Deficit or not will depends on its
borrowings from Abroad and on how the country uses its borrowings; if the borrowings/Foreign
capital is used efficiently and in productive work then it will generate future revenues and profits that
will be greater than the cost of borrowings; but if the borrowings/foreign capital is used inefficiently,
and in unproductive works then profits will be less than the cost of borrowings. Hence losses.
Therefore, the key points to remember regarding CAD is as follows:
1. If the deficit reflects the excess of imports over exports for a very long time, it may indicate problems
and loss of domestic firms’ competitiveness.
2. The deficit also reflects the excess of investment over savings, which could reflect a highly productive
and growing economy. However, if the deficit is due to low savings rather than high investments, it
could be due to unproductive consumption or badly manage government finances (Excess subsidies,
high government expenditures, public debt etc.)
3. If the foreign capital supporting investment is used productively to generate more output, jobs and
exports, then CAD is not at all bad.
4. If the foreign capital supporting investment is used unproductively to pay for earlier debt obligations
or for consumption purposes, then CAD is bad for an economy.
Evaluation of CAD in India
Period one: 1956 to 1976
The period comprised the second, third, fourth and initial years of Fifth five-year plans. The period
saw heavy deficits in the current account. The main reasons for high deficits were three wars with
China (1962) and Pakistan (1965 and 1971), severe droughts and food crisis of 1965-66 and first oil
price shock of 1973.
Period Two: 1976 to 1979
The period is considered as a golden period for India’s Current Account. The comfortable position
was due to increase in private remittances (people working abroad and sending money to their
families in home countries) from Gulf countries. The second reason was India witnessing a very
strong growth in exports and a reduction in oil imports bill mainly due to fall in oil prices. Efforts
were made towards export promotion instead of import substitution. Export subsidies were increased
from 20% in 1979-80 to 25% in 1987-88 as a proportion of exports.
Period Three: 1980 to 1991

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 The period covered roughly the sixth and seventh five-year plan and was marked by a severe balance
of payments difficulties. The earnings from private remittances started to fall during the seventh five-
year plan. The gulf crisis of 1990-91 further worsened the current account problem.
Period Four: Situation since 1991
The situation since 1991 has been distinctly different from the situation that prevailed earlier. The
current account deficit started to improve after 1993. The export performance of Indian industries
improves considerably after 1993. The most significant years in India when it comes to current
account were; 2001-02, 2002-03 and 2003-04. In all these years, the current account saw a surplus. It
is the first time since independence that India witnessed a surplus in its current account. The period
also saw strong capital inflows due to strong macroeconomic variables.
The reasons for satisfactory Balance of Payments situation was as follows:
1. High Earnings from invisible (Private remittances from abroad and software exports). Earnings from
invisible exceeded the deficits on trade account. India was the largest recipient of private remittances
(70 Billion US $) in the World in 2012.
2. Rise in external commercial borrowings. In addition to external commercial borrowings, the period
also witnessed an increase in Non-Resident deposits.
3. Role of Foreign Investments. The liberalized policy was put into place. FDI can happen in more
markets, ownership structures.
Automatic routes were provided in many sectors where the investor merely has to notify RBI 30 days
in advance from bringing the funds. Dividend balancing requirements have been removed.
Role of FIPB: In normal cases, it has to process in 6 months. It can even meet the investor in person to
expedite the process. It is empowered to approve 100% FDI in cases of high technology transfers.
As per 2004-05, apart from a negative list, the automatic route within prescribed limits is to be
followed by others. Procedures for FDI were also simplified and included things such as conversion
of CBs and preference shares into equity.

Source: World Bank, World Development Indicators

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SOURCE: WORLD BANK, WORLD DEVELOPMENT INDICATORS
The Problem: New RBI data on India’s Balance of Payments (BoP) for 2017-18 show current
account deficit (CAD) at $48.72 bn, the highest since the record $88.16 bn of 2012-13. With CAD
expected to widen to $75 bn during this fiscal due to rising crude oil prices. India BOP situation can
become vulnerable.
Forex as cushion: India’s forex reserves, at $424.55 billion as on March 2018, are actually the eighth
largest in the world. Also, they can finance 10.9 months of imports, compared to 7.8 months in March
2014, 7 months in March 2013 (when there was a mini-BoP crisis, with the current account deficit
hitting a peak), and 2.5 months in March 1991 (which forced the country to seek International
Monetary Fund assistance).
Therefore, India is not on the verge of any severe BOP crisis as witnessed in 1991. The allusion to a
“crisis” from that Balance of Payment standpoint is highly misplaced; the RBI’s current forex war
chest is clearly sufficient, both to meet immediate import needs and to stave off a run on the rupee of
the kind that was seen during May-August 2013.
How Countries accumulates Reserves:
In standard trade theory, Countries generally accumulate reserves by exporting more than what they
import. However, India always had deficits on its merchandise trade account, with the value of its
imports of goods far in excess of that of exports. At the same time, the country has traditionally
enjoyed a surplus on its ‘invisibles’ account. Invisibles accounts basically cover receipts from export
of software services, inward remittances by migrant workers, and tourism and — on the other side —
payments towards interest, dividend and royalty on foreign loans, investments and technology/brands,
besides on banking, insurance and shipping services.
But with the invisible account surpluses not exceeding trade deficits — it has resulted in the country
consistently registering Current Account Deficits.
A country gets foreign exchange not only from exporting goods and services, but also from capital
inflows (FDI, ECB and FPI), whether by way of foreign investment, commercial borrowings or
external assistance. In India, for most years, net capital inflows have been more than CAD. The
surplus capital flows have, then, gone into building foreign exchange reserves. The most extreme
instance was in 2007-08, when net foreign capital inflows, at $107.90 billion, vastly exceeded the
CAD of $15.74 billion, leading to reserve accretion of $92.16 billion during a single year. However,
there have also been years, such as 2008-09 and 2011-12, which saw reserves depletion due to net
capital inflows not being adequate to fund even the CAD.

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India and Brazil Case Study: They both represent unique cases of emerging economies that have
built foreign exchange reserves largely on the strength of their capital account by attracting inflows of
foreign funds (FDI, FPI ECB) rather than current account of the BoP.
India is even more unique because its currency, unlike the Brazilian real, is relatively stable, and not
under frequent speculative attacks. In theory, a country can keep attracting capital flows to fund
CADs so long as its growth prospects are seen to be good, and the investment environment is equally
welcoming. It would help, though, if such foreign investment also goes towards augmenting the
economy’s manufacturing and services export capacities, as opposed to simply producing or even
importing for the domestic market. In the long run, that can help narrow the CAD to more sustainable
levels.
The Present Situation: The CAD fell sharply from $88.16 billion in 2012-13 to $15.30 billion in
2016-17, mainly because of India’s oil import bill nearly halving from $164.04 billion to $86.87
billion. However, in 2017-18, the CAD rose to $48.72 billion, courtesy resurgent global crude
prices, and is expected to cross $75 billion this fiscal.
There are signs of capital flows slowing down as well. Foreign portfolio investors have, since April
1, made $7.9 billion worth of net sales in Indian equity and debt markets. This is part of a larger
sell-off pattern across emerging market economies, in response to rising interest rates in the US,
and the European Central Bank’s plans to end its monetary stimulus programme by the end of
2018.
The Swiss investment bank Credit Suisse has forecast net capital flows to India for 2018-19 at $55
billion, which will be lower than the projected CAD of $75 billion. In the event, forex reserves may
decline for the first time since 2011-12. The RBI’s data already show the total official reserves as on
June 8 at $413.11 billion, a dip of $ 11.43 billion over the level of end-March 2018.
Solving Exports Paradox: Solutions
The factors affecting exports are both domestic and global. External factors consist of global
economic conditions, tariff barriers imposed by partner countries, lack of market access, lack of
export diversification, Trade wars, Volatility in international currency markets, geopolitical risks,
regional trading agreements etc. Domestic factors include macroeconomy management, price
elasticity of exports (if price of an exported good is increased by one percent, by how much
percentage will the demand fall), exchange rate competency, inflation risk in the economy,
government trade policies.
A combination of these factors determines the productivity and overall competitiveness of exports.
Therefore, the current decline in India’s exports must be analysed by taking into account the state of
play of these external and internal factors.
Many policy thinkers argue that an overvalued rupee is partially responsible for the recent decline in
India’s exports. To understand the relationship between exports and exchange rate, we need to look at
the growth of India’s exports and real effective exchange rate (REER) between 2002 and 2015.
Till 2013, the relationship between export growth and REER was mixed ( See chart). After this
period, it exhibits a clear trend that an overvalued rupee has affected the growth of India’s exports.
This corroborates a well-tested hypothesis that “a stronger currency is not good for export outlook”.
Many countries in East Asia including China pursued the strategy of relatively undervalued currency
to make their exports competitive in global market under their export led industrialisation.
Therefore, in a highly complex and competitive world, where countries are competing for their export
interest, the value of currency must be fairly placed vis-à-vis competing currencies to make one’s
export competitive.
Another factor behind the steep decline in India’s exports could be over-dependence on a few markets
such as the US and European Union countries which together account for 40 per cent share in India’s
total exports. It is particularly important in view of falling demand, stagnant growth and resultant
aggregate demand in these countries.
While, India is extensively diversifying its exports market towards Asia through regional and bilateral
trading agreements. It has made limited progress in terms of diversifying its exports to non-traditional

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 markets such as South America, Africa and Central and Eastern European countries. Therefore, the
diversification of India’s exports market is essential for long term export strategy.
Exchange rate management and competitiveness of Rupee will help in revival of India’s exports.
However, exchange rate alone will not resolve India’s export challenge.
India should make continuous efforts in alleviating supply-side bottlenecks to boost sectoral
productivity and export competitiveness.
India should adopt a calibrated approach towards structural reforms (connectivity, labour laws, ease of
doing, MSME promotion etc) to address cyclical as well as structural factors at the external and
internal fronts, which are adversely affecting our export performance.
On the external front, India should engage with likeminded countries and sign free trade agreements
which would help us in securing better market access, diversifying our exports and provide greater
space for our producers to participate in global production networks.
On the internal front, India should emphasise on reforming domestic policies and institutions dealing
with macroeconomic management (exchange rate, inflation and interest rates), standards, intellectual
property rights, trade facilitation, and organisations vis-à-vis operational aspects of trade and
investment rules and regulations.
FDI and FPI in India, External Commercial Borrowings, Foreign Exchange Reserves in India
Note4Students: External Commercial Borrowings
 An external commercial borrowing(ECB) is an instrument used in India to facilitate the access to
foreign money by Indian corporations and PSUs (public sector undertakings). ECBs include
commercial banks loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate
notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings
from the private sector window of multilateral financial institutions such as International Finance
Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for investment in Stock
Market or speculation in real estate.
 The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with
Reserve Bank of India, monitors and regulates ECB guidelines and policies. For infrastructure and
greenfield projects, funding up to 50% (through ECB) is allowed. In telecom sector too, up to 50%
funding through ECBs is allowed. Recently Government of India allowed borrowings in Chinese
currency yuan. Corporate sectors can mobilize USD 750 million via automatic route, whereas service
sectors and NGO’s for microfinance can mobilize USD 200 million and 10 million respectively.
 Borrowers can use 25 per cent of the ECB to repay rupee debt and the remaining 75 per cent should
be used for new projects. A borrower can not refinance its entire existing rupee loan through ECB.
The money raised through ECB is cheaper given near-zero interest rates in the US and Europe, Indian
companies can repay part of their existing expensive loans from that.
Exports and Imports Performance of India

Source: World Bank, World Development Indicators

The data table highlights the following facts about India’s Exports since 1990’s:
 There has been a consistent growth in exports as a percentage of GDP since 1990. The exports
witnessed highest growth rate during 2000 to 2008.
 The decline from 2008 onwards is mainly due to Global Financial crisis that hit the World in 2008.
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 Since 2009, exports recovered and reached a peak in the year 2013.
 Following 2013, exports as a percentage of GDP declined mainly due to a slow recovery in India’s
Key European markets.

Source: World Bank, World Development Indicators

The data table highlights the following facts about India’s imports since 1990’s:
 There has been a consistent rise in imports as a percentage of GDP since 1990. The imports witnessed
highest growth rate during 2000 to 2008.
 The decline from 2009 onwards is mainly due to Global Financial crisis that hit the World in 2008
which had resulted in fall of commodity prices (Metals, Minerals, Agricultural Commodities) in the
World markets.
 Since 2009, imports started to rise and reached its peak in the year 2012.
 Following 2012, imports as a percentage of GDP declined mainly due to fall in crude oil prices and
slow recovery in the prices of key commodities.

Source: World Bank, World Development Indicators

 One of the important impacts of favourable exports and managed Current account is reflected in
India’s increasing Foreign exchange reserves.
 Foreign exchange reserves after falling to an all-time low of less than USD 5 Billion recovered and
increased to USD 41 Billion in the year 2000. The increase in Foreign exchange reserves is due to
favourable exports earnings and Foreign investments. They both are the byproduct of India’s opened
up economy.
 The Foreign exchange reserves have risen steadily thereafter. The reserves were USD 250 Billion in
the year 2008, USD 300 Billion in the year 2010 and more than USD 360 Billion in the year 2016.
What Caused the fall in India’s Exports in Recent Years

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 India’s goods exports had remained stagnant over the years. After recovering from Global Financial
Crisis of 2008, India’s exports had reached a peak of USD 310 billion in the year 2011.
The successive years have shown stagnant exports till the year 2014. Post-2014, India’s goods exports
have collapsed sharply and reached at USD 267 billion and USD 264 billion in the year 2015 and
2016 respectively.
The reason for the collapse of India’s exports are as follows:
1. The Global economic situation has remained difficult and the Economies of the Developed World
especially US, Europe and Japan are recovering very slow from the Global Financial Crisis of 2008.
Due to their slow recovery, their capacity to imports has remained limited, as a result, India losing its
important export destinations.
2. The price of crude oil has collapsed since 2014. Due to fall in crude prices, the economies of Arab
nations and oil exporting countries have suffered a lot and are growing at a dismal rate. The low
growth rate had resulted in a slowdown in their imports as well. The countries of Arab nations like
UAE, Saudi Arabia are key trading partners of India. Their slowdown has led to decline in India’s
exports to these regions.
3. The most important reason for India’s declining exports lies in domestic factors. The main culprit of
which above all is India’s exchange rate. The exchange rate is the price of one country currency in
terms of another country currency. In the Indian context, it simply determines ‘The amount of dollar
or euro or any currency that can be bought using Indian Rupee’.
4. The Indian Rupee has been overvalued for quite some time. The overvalued rupee simply means that
rupee is very expensive for the other nations to buy. Consider the example now.

1. The other underlying domestic factors that resulted in slow export performance are infrastructure
bottlenecks. The health of India’s Roads, Highways, Ports and power sector remains poor and dismal.
They all contribute in making export costly and uncompetitive. The poor quality of infrastructure
simply increases the cost of transporting goods from factories to main destinations. The increase in
cost results to increase in the prices, thereby making goods expensive and uncompetitive.
Foreign Direct Investment and Foreign Portfolio Investment in India
Foreign Direct Investment Foreign Portfolio Investment
FDI is an investment made by a company or FPI is an investment made by a company or an
individual in the business of another country in individual in the stock markets or debt markets of
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the form of either establishing a new business or another country. FPI investors merely purchase
acquiring the existing business.
FDIs are mainly made in Open Economies as
opposed to tightly controlled closed economies.
FDIs are made for a longer period as the foreign FPIs are made for shorter periods as the foreign
investor’s controls and owns the companies in
which they have invested.
FDIs are much Stable.
As per Organisation of Economic Cooperation
and Development (OECD), the threshold for an
investment to be considered as FDI is 10 percent than 10 percent in foreign companies is treated as
or more ownership stake.
FDIs are normally categorised as being
Horizontal or Vertical in nature.
 A Horizontal investment refers to the
foreign firms establishing the same type
of Business operations in the host
country as it operates in his home
country.
Example; Apple opening up Apple manufacturing
unit in India.
 A Vertical investment refers to the
foreign firms establishing different but
related business in host countries.
Example: Hyundai Motors acquiring or
establishing a company in India that
supplies car spare parts/raw materials
required for manufacturing Cars by
Hyundai.
equities/shares/bonds/debentures of foreign based
countries.
FPIs are mainly made with the objective of
making quick profits by buying and selling
shares, bonds and debentures.
investor do not own the companies and only
invest in shares of the existing companies.
FPIs are highly volatile.
As per Organisation of Economic Cooperation
and Development (OECD), investment of less
FPIs. All FPI taken together cannot acquire more
than 24 per cent of the paid-up capital of an
Indian Company.
FPI investor includes Foreign Institutional
Investors (FIIs), Foreign Qualified Investors
(FQIs).
 Institutional investors are big institutions
like Asset Management Companies,
Mutual Funds, Insurance Houses etc. RBI
has mandated such big institutions to
established to make investments in
India’s security markets.
 FQIs are individual investors or
associations residing in Foreign
countries. FQIs are small individual
investors who invest in foreign countries
securities.

FDI Policy in India and Sectoral Limits

FDI in India is allowed under two major routes; Automatic Route (Without the approval of
Government or RBI) and Government Route (requiring Government approval).
FDI in Sectors where Government approval is Required Cap/Limit Government Approval
Mining and mineral separation of titanium-bearing minerals 100% upto 100%
and ores
Food Product Retail Trading 100% upto 100%
Defense 100% beyond 49%
Publishing Printing of Scientific abd Technical Magazines 100% upto 100%
Publication of Foreign Editions Newspaper 100% upto 100%
Print Media- Publishing of newspaper 26% upto 26%
Print Media – Publication of Indian editions of foreign 26% upto 26%
magazines dealing with news and current affairs
Air Transport Service – Scheduled, and Regional Air 100% beyond 49%
Transport Service
Investment by Foreign Airlines 49% upto 49%
Satellites- establishment and operation 100% upto 100%
Telecom Services 100% beyond 49%
Trading SBRT 100% beyond 49%
Pharma- Brownfield 100% beyond 74%
Banking Private Sector 74% beyond 49%

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 Banking Public Sector 20% upto 20%
Private Security Agencies 74% beyond 49%
FM Radio Broad Casting 49% upto 49%
Trading MBRT 51% upto 51%
Source: Ministry of Commerce
FDI POLICY Limits under Automatic Routes with Conditions Cap/Limits
Agriculture 100%
Plantation Sectors 100%
Mining of Metals and Non-Metal Ores 100%
Mining Coal and Lignites 100%
Manufacturing 100%
Food Retail Trading 100%
Broadcasting Carriage Services ( Teleports, DTH, Cable Networks, Mobile 100%
TV, HITS)
Broadcasting Content Service – Up-linking of Non-‘News & Current 100%
Affairs’ TV Channels/ Downlinking of TV Channels
Airport Greenfield 100%
Airport Brownfield 100%
Air Transport Service – Non-Scheduled 100%
Air Transport Service – Helicopter Services/ Seaplane Services 100%
Ground Handling Services 100%
Maintenance and Repair organizations; flying training institutes; and 100%
technical training institutions
Construction Development 100%
Industrial Parks 100%
Trading Wholesale 100%
Trading B2B E-commerce 100%
Duty Free Shops 100%
Railways Infrastructure 100%
Credit Information Companies 100%
White Label ATMS 100%
Non-Banking Finance Corporations 100%
Pharma Greenfield 100%
Petroleum & Natural Gas – Exploration activities of oil and natural gas 100%
fields
Petroleum refining by PSUs 49%
Infrastructure Company in the Securities Market 49%
Commodity Exchanges 49%
Insurance 49%
Pension 49%
Power Exchanges 49%

Source: Ministry of Commerce

How Beneficial is FDI for Developing Countries like India?
FDI has proved to be a stable and important source of capital for the developing countries like India.
FDI flows were quite consistent and stable in East Asian Countries even during the Asian Financial
Crisis of 1997-98. In sharp contrast to FDI, the other forms of foreign investment like Portfolio
Investments, equity flows and debt flows were subject to huge reversals during the same period. The
consistency of FDI was also evident during the Latin American Crisis of 1980s.
1. The stability of FDI even during the crisis period led many developing countries to favour FDI over
other forms of Short-term inflows. Developing countries favour FDI because it allows them (capital
deficit countries) to access scarce capital and invest them in the domestic economy, which can lead to
the generation of output and employment.
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2. The Foreign Countries Investors are willing to invest in Developing countries because it allows them
to seek highest returns. It also reduces the risk faced by the owner of capital by allowing them to
diversify their investment. Example: Imagine the havoc that Global Financial Crisis could have
created if all the US and European money was invested only in Developed Countries. They must have
lost all their money, had they not invested in developing countries, which were not affected so badly
from Global Crisis. FDI thus provides a cushion to Foreign Investors.
3. The easy movement of capital flows in order to seek high returns also contributes to Developing
countries adopting a very high and competitive corporate governance standards, efficient legal
institutions and integrated Financial markets. These high standards and integrated markets also help
the domestic investors and firms as their money is also secure due to the efficient functioning of legal
institutions.
4. The pressure to attract FDI also improves the functioning of Governments in Developing Countries.
The Governments in Developing Countries restricts themselves from pursuing bad economic policies
due to the fear of reversal of Foreign Capital.
5. The gains to the Developing Countries from FDI can also take the form of:
 FDI allows transfer of technologies that cannot be achieved through other forms of short-term
financial investments like FPIs.
 FDI recipient’s countries also gain in the form of increased employment opportunities due to the
investment made by Foreign Firms.
 The Governments of the host countries also stands to gain due to increase in their corporate tax
revenues.
Note for Students
The short-term capital or hot money flows poses many risks in developing countries as they are
driven mainly by speculative actions based on interest rate or exchange rate differentials. there
movements are only for short-term and leaves the host country as the first signs of trouble
appears, thus can damage the host economy, thus they are considered as ‘Bad Cholesterol’.
In contrast FDI is considered as “Good Cholesterol” because it offers a lot of benefits as
mentioned above. FDI cannot leave so easily at the first time of trouble, instead it provides a
cushion to absorb the shock.
Reasons for Caution in Dealing with FDI
Despite the above-mentioned arguments developing countries should be a little cautious about taking
a too uncritical attitude towards FDI.
1. A very high level of FDI in total capital inflows may indicate a sign of weakness for the host country.
2. It is found that FDI tends to flow in those developing countries which are a lot riskier and lacks proper
legal institutions. What can explain these paradoxical findings? One reason could be that FDI is more
likely to take place in countries with inefficient markets as Foreign investors can operate more
aggressively and directly extracting much more than what they invest. Example: What East India
Company have done to India or The US exploitation of Latin America in 20th Century or What
Chinese Firms are Currently doing in African Nations.
3. FDI not only leads to transfer of ownership from domestic to foreign residents but also a mechanism
that makes foreign investor to take control of host country firms and their management.
4. The foreign corporations take over the control of domestic firm not because they have some special
competence regarding the operation of companies but simply because they have huge cash that
domestic firm’s do not have.
5. FDI allows Foreign investors to gain crucial inside information about firms they control. This gives
them an information advantage over domestic investors who are investing in such firms.
6. FDI tends to come only in those sectors where returns are high and are beneficial to foreign firms.
FDIs has a long tendency to avoid crucial sectors of developing countries like Primary Health and
Primary Education.

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7. FDI tends to make domestic firms indebted. The rising debt leads to rising interest burden and
reparations of money from domestic firms to parent firms.
8. Thus, developing countries should follow caution while accepting FDI and should give much more
importance on improving the domestic environment for investment and functioning of markets.
Indian FDI Recent Trends

Source: Ministry of Commerce and RBI Statistics

 India received $51 billion in foreign direct investment (FDI), the highest-ever FDI inflow in a fiscal,
during April-February FY16. According to data from the DIPP, the previous highest FDI inflow was
in FY12 when the country received $46.55 billion, which was a 34 percent increase over $34.8 billion
it got in FY11 However, India recorded its largest-ever percentage increase in FDI when it received
$22.8 billion in FY07, representing a 155 percent increase over the $8.9 billion in FY06.
Sectors witnessing Highest FDI inflow
 Among the sectors, computer hardware and software segment attracted the highest FDI of $5.30
billion (Rs 36,426.9 crore) during the period
 Followed by services sector ($4.25 billion, or Rs 29,210.25 crores) and trading business ($2.71
billion, or Rs 18,625.8 crore).
 Automobile industry attracted FDI of $1.78 billion (Rs 12,233.9 crore), while chemicals sector
cornered $1.19 billion (Rs 8,178.87 crore) foreign equity investment in April-December 2015.
Sources of FDI inflow
 Singapore replaced Mauritius as the top FDI source for India during the period.
 India received $10.98 billion (Rs 75,465.5 crore) overseas inflows from Singapore, followed by
Mauritius ($6.10 billion, or Rs 41,925.3 crore), the US ($3.51 billion or Rs 24,124.2 crore), the
Netherlands ($2.14 billion, or Rs 14,708.22 crore), and Japan ($1.08 billion, or Rs 7,422.8 crore).
Destination of FDI inflow
 A state-wise analysis of FDI inflows by the economic survey shows that Delhi, Haryana, Maharashtra,
Karnataka, Tamil Nadu, Gujarat and Andhra Pradesh together attracted more than 70% of total FDI
inflows to India during the last 15 years.
 States with vast natural resources like Jharkhand, Bihar, Madhya Pradesh, Chhattisgarh and Odisha
have lagged behind.
Foreign Exchange Rate Determination in India and Types of Exchange Rate
Foreign Exchange Rate Determination
Foreign Exchange Rate is the amount of domestic currency that must be paid in order to get a unit of
foreign currency. According to Purchasing Power Parity theory, the foreign exchange rate is
determined by the relative purchasing powers of the two currencies.
Example: If a Mac Donald Burger costs $20 in the USA and Re 100 in India, then the exchange rate
between India and the USA will be (100/20=5), 1 $ = 5 Re.
Forces Behind Exchange Rate Determination

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 Foreign Exchange is a price of one country currency in relation to other country currency, which like
the price of any other commodity is determined by the demand and supply factors. The demand and
supply of the foreign exchange rate come from the residents of the respective countries.
Demand for Foreign Exchange (Foreign Supply of Foreign Exchange (Foreign Money
Money goes out) Comes in)
Foreign Currency is needed to carry out The source of foreign currency available to the
transactions in foreign countries or for the domestic country are foreigners purchasing our
purchase of foreign goods and services goods and services (Exports).
(IMPORTS).
Foreign currency is needed to invest in foreign Foreigners investing in Indian Stock markets,
country assets/shares/bonds etc. Assets, Bonds etc. (FPIs and FDIs)
Foreign currency is needed to make transfer Transfer payments. Example: Indian working in
payments. Example: Indian Parents sending the USA, sending money to his/her old aged
Money to his/her son/daughter studying in the parents.
USA.
Indians holding money in overseas Banks Foreigners holding assets in Indian Banks.
Indians Travelling abroad for Tourism Purpose. Foreigners travelling to India.

 The DD curve represents the demand for foreign exchange by India. The SS curve represents the
supply of foreign exchange to India.
 The point where both DD and SS curves intersect is the point of equilibrium. At this point demand for
foreign exchange is exactly equal to the supply of foreign exchange.
 At equilibrium point E0, the exchange rate is 1 $ equal to 5 Re.
 In normal day to day functioning of markets, the exchange rate may fluctuate. If at any point in time,
the exchange rate is at E1, then the demand for foreign exchange falls short of supply of foreign
exchange, as a result at this point Indians are demanding less foreign currency due to which Re will
appreciate vis-à-vis foreign currency. The appreciation mainly occurs due to a favourable balance of
payment situation (Surplus).
 By the same token at point E2, demand for foreign exchange is greater than the supply of foreign
exchange, at this point Indians are demanding excess foreign exchange than what the foreigners are
willing to supply, as a result, at E2 Re will depreciate vis-à-vis foreign currency. The depreciation
mainly occurs due to the unfavourable balance of payments situation(Deficits).
Types of Exchange Rate Regimes
 Fixed Exchange Rate versus Floating Exchange Rate
Fixed Exchange Rate Floating Exchange Rate
Under this system, there is complete government Under this system, the market is allowed to
intervention in the foreign exchange markets. determine the value of exchange rate freely.
The government or central bank determines the
official exchange rate by linking exchange rate to The exchange rate is determined by the forces of
the price of gold or major currencies like US demand and supply.
dollar.
If due to any reason, the exchange rate fluctuates, If due to any reason exchange rate fluctuates, the
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 government intervenes and make sure that government never intervenes and allows the
equilibrium pre-determined level is maintained. market to function and determine the true value
of exchange rate.
The only merit of fixed exchange rate system is
The only demerit of floating exchange rate
that it assures the stability of exchange rate. It
system is that exchange rate fluctuates a lot on
prevents both currency appreciation and
day to day basis.
depreciation.
The advantages of such a system are: the
The many disadvantages of such a system are: It
exchange rate is determined in well-functioning
puts a heavy burden on governments to maintain
foreign exchange markets with no government
exchange rate. This especially happens during the
interference.
time of deficits, as the governments need to
The exchange rate reflects the true value of the
infuse a lot of money to maintain exchange rate.
domestic currency which helps in establishing the
The foreign investors avoid investing in such
trust among foreign investor.
countries as they fear to lose their investments
A country can easily access funds/ loans from
because they believe that exchange rate does not
IMF and other international institutions if the
reflect the true value of the economy.
exchange rate is market determined.
 Managed Floating Exchange rate
Manage Floating exchange rate lies in between of the two extremes of fixed and floating exchange
rate. Under such a system, the exchange is allowed to move freely and determined by the forces of the
market (Demand and Supply). But when a difficult situation arises, the central banks of the country
can intervene to stabilise the exchange rate.
There are mainly three sub categories under managed floating exchange rate:
1. Adjusted Peg System: In this system, a country should try to hold on to a fixed exchange rate system
for as long as it can, i.e. until the country’s foreign exchange reserves got exhausted. Once the
country’s foreign exchange reserves got exhausted, the country should undergo devaluation of
currency and move to another equilibrium exchange rate.
2. Crawling Peg System: In this system, a country keeps on adjusting its exchange rate to new demand
and supply conditions. The system requires that instead of devaluing currency at the time of crisis, a
country should follow regular checks at the exchange rate and when require must undertake small
devaluations.
3. Clean Floating: In the clean float system, the exchange rate is determined by market forces of demand
and supply. The exchange rate appreciates or depreciates as per market forces and with no
government intervention. It is identical to floating exchange rate.
4. Dirty Floating: In the dirty float system, the exchange rate is to a very large extent is determined by
the market forces of demand and supply (so far identical to clean floating), but occasionally the
central banks of the countries intervene in foreign exchange markets to smoothen or remove excessive
fluctuations from the foreign exchange markets.
Note for Students
The Bretton Woods system of exchange rate which was in operation from 1944 till 1971, was one of
relative fixed exchange rate as opposed to rigid fixed exchange rate. As a matter of fact, rigid fixed
exchange rate as defined above, is never been used in history. Even under the system of Gold
Standard 1870-1941, the exchange was relatively fixed and not rigidly fixed.
Exchange Rate Management in India
Over the last six decades since independence the exchange rate system in India has transited from
fixed exchange rate regime where the Indian Rupee was pegged to the UK Pound to a basket of
currencies during the 1970s and 1980s and eventually to the present form of market determined
exchange rate regime since 1993.
 Par Value System (1974-1971): After Independence Indian followed the ‘Par Value System’ whereby
the rupee’s external par value was fixed with gold and UK pound sterling. This system was followed
up to 1966 when the rupee was devalued by 36 percent.

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 Pegged Regime (1971-1992): India pegged its currency to the US dollar (1971-1991) and to pound
(1971-75). Following the breakdown of Breton Woods system, the value of pound collapsed, and
India witnessed misalignment of the rupee. To overcome the pressure of devaluation India pegged its
currency to a basket of currencies. During this period, the exchange rate was officially determined by
the RBI within a nominal band of +/- 5 percent of the weighted average of a basket of currencies of
India’s major trading partners.
 The period since 1991: The transition to market-based exchange rate was in response to the BOP
crisis of 1991. As a first step towards transition, India introduces partial convertibility of rupee in
1992-93 under LERMS.
 Liberalised Exchange Rate Management System (LERMS): The LERMS involved partial
convertibility of rupee. Under this system, India followed a dual exchange rate policy, where 40
percent of the exchange rate were to be converted at the official exchange rate and the remaining 60
percent were to be converted at the market-based exchange rate. The exchange rate converted at the
official rate were to be used for essential imports like crude, oil, fertilizers, life savings drugs etc. All
other imports should be financed at the market-based exchange rate.
 Market-Based Exchange rate Regime (1993- till present): The LERMS was a transitional mechanism
to provide stability during the crisis period. Once the stability is achieved, India transited from
LERMS to a full flash market exchange rate system. As a result, since 1993, exchange rate
fluctuations are marker determined. In the 1994 budget, 60:40 ratio was removed, and 100 percent
conversion at market-based rate was allowed for all goods and capital movements.

Capital and Current Account Convertibility in India

Convertibility in India
“My hope is that we will get to full capital account convertibility in a short number of years,” said
Raghuram. G. Rajan, ex-governor of the Reserve Bank of India (RBI) on 10 April 2015.
The International movement of capital is not always free; countries restrict flows of capital as and
when needed to safeguard their markets from erratic flows of capital. In India, for example, there are
restrictions on the movement of foreign capital and the rupee is not fully convertible on capital
account.
What does Capital Account Convertibility mean?
CAC means the freedom to convert rupee into any foreign currency (Euro, Dollar, Yen, Renminbi
etc.) and foreign currency back into rupee for capital account transactions. In very simple terms it
means, Indian’s having the freedom to convert their local financial assets into foreign ones at market
determined exchange rate. CAC will lead to a free exchange of currency at a lower rate and an
unrestricted movement of capital.

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 How is Capital Account Convertibility different from Current Account Convertibility?
Current Account Convertibility allows free inflows and outflows of foreign currency for all purpose
including resident Indians buying foreign goods and services (imports), Indians selling foreign goods
and services (exports), Indians receiving and sending remittances, accessing foreign currency for
travel, study abroad, medical tourism purpose etc.
On the other hand, Capital Account Convertibility is widely regarded as the hallmark of developed
countries. It is also seen as the major comfort factor for foreign investors since it allows them to
reconvert local currency back into their own currency and move out from India.
To attract foreign investment, many developing countries went in for CAC in the 1980s, not realising
that free mobility of capital leaves countries open to both sudden and huge inflows and outflows, both
of which can be potentially destabilising. More important, unless you have the institutions,
particularly financial institutions capable of dealing with such huge flows, countries may not be able
to cope as was demonstrated by the East Asian crisis of the late 90s.
Present Situation in India
In India, the Tarapore committee had laid down a three-year road-map, ending 1999-2000, for CAC.
It also cautioned that this time-frame could be speeded up, or delayed, depending on the success
achieved in establishing the pre-conditions primarily fiscal consolidation, strengthening of the
financial system and low rate of inflation. With the exception of the last, the other two preconditions
have not been achieved. The Capital Account Convertibility in India will depend on how fast the
country meets the preconditions put forward by Tarapore Committee such as fiscal consolidation,
inflation control, low level of Non-Performing Assets, low Current account deficit and strengthen
financial markets. Sound policies, robust regulatory framework promoting a strong and efficient
financial sector, and effective systems and procedures for controlling capital flow greatly enhanced
the chances of ensuring that such flows fostered sustainable growth and did not lead to disruption and
crisis.
 Current Account Convertibility: Current account is today fully convertible (operationalized on August
19, 1994). It means that the full amount of the foreign exchange required by someone for current
purposes will be made available to him at the official exchange rate and there could be an
unprohibited outflow of foreign exchange (earlier it was partially convertible). India was obliged to do
so as per Article VIII of the IMF which prohibits any exchange restrictions on current international
transactions (keep in mind that India was under pre-conditions of the IMF since 1991).
 Capital Account Convertibility: After the recommendations of the S.S. Tarapore Committee (1997) on
Capital Account Convertibility, India has been moving in the direction of allowing full convertibility

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 in this account, but with required precautions. India is still a country of partial convertibility (40:60)
in the capital account, but inside this overall policy, enough reforms have been made, and to certain
levels of foreign exchange requirements, it is an economy allowing full capital account convertibility.
Following steps have been taken in the direction of capital account convertibility.
1. Indian corporate is allowed full convertibility in the automatic route up to $ 500 million overseas
ventures (investment by Ltd. companies in foreign countries allowed).
2. Indian corporate is allowed to prepay their external commercial borrowings (ECBs) via automatic
route if the loan is above $ 500 million.
3. Individuals are allowed to invest in foreign assets, shares, etc., up to the level of $ 2,50,000 per
annum.
4. Unlimited amount of gold is allowed to be imported (this is equal to allowing full convertibility in the
capital account via current account route, but not feasible for everybody) which is not allowed now.
The Second Committee on the Capital Account Convertibility (CAC)— again chaired by S.S.
Tarapore— handed over its report in September 2006 on which the RBI/the government is having
consultations.
Pros and cons of Capital account Convertibility

Advantages
Availability of large funds by improved access to
international financial markets.
Reduction in cost of capital.
The incentive for Indians to acquire and hold
international securities and assets.
Greater financial competitiveness.
Will help Indian corporate to use External
commercial borrowing route without RBI or Govt
approval.
Indian residents can hold and transact foreign
currency denominated deposits with Indian
banks.
A Certain class of financial institutions and later
NBFCs can access global financial market.
Banks and financial institutions can trade in Gold
globally and issue loans.
Disadvantages
Market determined exchange rates being higher
than officially fixed exchange rates can raise
import prices and cause Cost-push inflation.
Improper management of CAC can lead to
currency depreciation and affect trade and capital
flows.
The advantages have been found to be short lived
as per studies, and also International financial
institutions are skeptical about CAC post-2008
crisis.
Speculative activity can lead to capital flight from
the country as in case of some South East Asian
economies during 1997-98.
Imposing control would become difficult in a
globalized environment once CAC is introduced.

International Economic Organizations

International Economic Institution’s: The Breton Woods Twins-
World Bank and IMF
International Economic Institution’s
World Bank and Associated Institutions

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 The World Bank Group (WBG) is a family of five international organisations that make leveraged
loans to developing countries. It is the largest and most famous development bank in the world and is
an observer at the United Nation Development Group.

The World Bank

The International Bank for Reconstruction and Development (IBRD), better known as the World
Bank, was established under the Bretton Woods System along with the International Monetary Fund.
The role of IMF was to provide the international liquidity in the International Economy which was
hampered due to World War 2. The aim of IMF was to correct Balance of Payment difficulties.
In the similar vein, the aim of the World Bank was to provide long term development assistance to
and loans in reasonable terms to the nations.
The World Bank or IBRD is a multilateral level inter-governmental Institution. All the member
countries have their shares in the capital stock of the World Bank.
Key Functions of the World Bank as per Article 1 of the Agreement

Organisation Structure of the World Bank

The World Bank works on a cooperative structure and currently has 189-member countries. These
member countries are represented by a ‘Board of Governor’ are the ultimate policy makers of the
World Bank. The Boards of Governors consist of one Governor and one Alternate Governor
appointed by each member country. The office is usually held by the country’s minister of finance,
governor of its central bank, or a senior official of similar rank.
The governors delegate specific duties to Executive directors, who works at the Bank premises. The
five largest shareholders appoint an executive director, while other member countries are represented
by elected executive directors.
 World Bank Group Current President is Jim Yong Kim who chairs the meetings of the Boards of
Directors and is responsible for overall management of the Bank. The President is selected by the
Board of Executive Directors for a five-year, renewable term.
 The Executive Directors make up the Board of Directors of the World Bank. They normally meet at
least twice a week to oversee the Bank’s business, including approval of loans and guarantees, new
policies, the administrative budget, country assistance strategies and borrowing and financial
decisions.

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 Is World Bank Biased Towards Developed Countries?
 It has been a complaint of many developing countries that the bank provides developmental loans at
discretionary high-interest rates. For example, some of the loans which India has received in recent
years bear an interest of 53.4 per cent including the commission at 1 per cent which is credited to the
Bank’s special reserves.
 The financial aids given by the Bank accounts for a minuscule part of financial requirement essential
for various development projects in developing countries.
 The bank usually asks for the collateral from the under developed countries which are difficult to
provide by such countries due to their low level of income and development. The logical question is
‘if the poor and underdeveloped countries have an asset to provide as collateral, why would they
approach institutions like the World Bank for loans at a concessional rate?
 The working, structure and operations of the World Bank are dominated by the Western countries led
by the USA, who are also one of the highest stakeholders at the Bank. The bank has often been
criticized for not being multilateral in the true sense and works more like a unilateral institution of the
Western countries with the main aim of providing profits to them.
 With the World Bank, there are concerns about the types of development projects funded. Many
infrastructure projects financed by the World Bank Group have social and environmental implications
for the populations in the affected areas, and the criticism has centred on the ethical issues of funding
such projects. For example, World Bank-funded construction of hydroelectric dams in various
countries has resulted in the displacement of indigenous peoples of the area.
 The approach adopted by the bank is not suitable for all the countries. The bank follows ‘One Size
Fits All’ strategy while providing development assistance and policies. Such strategies cannot work
effectively in a real-life World since problems and situations vary country wise, and a common
solution to all of them is not possible and utopian in nature. For example, The problem of Stunting
(low height of Children as per their age) for an Indian child can’t be compared with that of an African
child. The African child will be much longer in height as compared to its Indian counterpart in same
age group. Thus, they both need different types of calories intake as per their geography.
International Development Assistance
 The International Development Association (IDA) is the part of the World Bank group that helps the
world’s poorest countries. Overseen by 173 shareholder nations, IDA aims to reduce poverty by
providing loans (called “credits”) and grants for programs that boost economic growth, reduce
inequalities, and improve people’s living conditions.
 IDA complements the World Bank’s original lending arm—the International Bank for Reconstruction
and Development (IBRD). IBRD was established to function as a self-sustaining business and
provides loans and advice to middle-income and credit-worthy poor countries. IBRD and IDA share
the same staff and headquarters and evaluate projects with the same rigorous standards.
 IDA is one of the largest sources of assistance for the world’s 75 poorest countries, 39 of which are in
Africa, and is the single largest source of donor funds for basic social services in these countries.
 IDA lends money on concessional terms. This means that IDA credits have a zero or very low-interest
charge and repayments are stretched over 25 to 40 years, including a 5- to 10-year grace period. IDA
also provides grants to countries at risk of debt distress.
 In addition to concessional loans and grants, IDA provides significant levels of debt relief through the
Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative.
 IDA is a multi-issue institution, supporting a range of development activities, such as primary
education, basic health services, clean water and sanitation, agriculture, business climate
improvements, infrastructure, and institutional reforms. These interventions pave the way toward
equality, economic growth, job creation, higher incomes, and better living conditions. For the period
July 1, 2014–June 30, 2017 (IDA17), IDA operations are placing a special emphasis on four thematic
areas: climate change, fragile and conflict affected countries, gender equality, and inclusive growth.
 IDA17 financing is expected to provide, among other things, electricity for an estimated 15-20 million
people, life-saving vaccines for 200 million children, microfinance loans for more than 1 million
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 women, and basic health services for 65 million people. Some 32 million people will benefit from
access to clean water and another 5.6 million from better sanitation facilities.
 Many of the issues developing countries face do not respect borders. By helping address these
problems, IDA supports security, environmental and health concerns, and works to prevent these
threats from becoming global issues.
International Finance Corporation
 The IFC was established in 1956 to support the growth of the private sector in the developing world.
IFC, a member of the World Bank Group, is the largest global development institution focused
exclusively on the private sector in developing countries.
 The IFC’s stated mission is “to promote sustainable private sector investment in developing countries,
helping to reduce poverty and improve people’s lives.”
 While the World Bank (IBRD and IDA) provides credit and non-lending assistance to governments,
the IFC provides loans and equity financing, advice, and technical services to the private sector. The
IFC also plays a catalytic role, by mobilizing additional capital through loan syndication and by
lessening the political risk for investors, enabling their participation in a given project. The IFC has
worked with more than 3319 companies in 140 countries since its inception in 1956.
 It is a public entity, although its clientele consists of transnational, national, and local private sector
companies, operating in a competitive and fast-moving business environment.
Multilateral Investment Guarantee Agency
 MIGA is a member of the World Bank Group. Its mission is to promote FDI into developing countries
to help support economic growth, reduce poverty and improves people’s lives.
 At the centre of MIGA’s new FY18-20 strategy are three elements:
1. A re-affirmed focus on the poorest through support for projects in IDA countries
2. A continuing emphasis on Fragile and Conflict-affected States, where MIGA has opportunity to have
impact where private PRI insurers are unwilling to go, and
3. An expanded commitment to climate change mitigation and adaptation, targeting 28% of new
issuance related to climate change mitigation or adaptation in 2020.
To deliver on these targets, MIGA’s FY18-20 strategy has four pillars:
1. Grow core business: MIGA will enable new investments across sectors and regions through building
on past efforts to improve operations and delivery in current segments.
2. Innovate applications: MIGA will continue to create new ways of using its suite of products to create
impact, especially through the use of new vehicles, including the IDA 18 Private Sector Window.
3. Create projects for impact: MIGA will develop, structure and launch new projects by playing a
proactive role early in the pipeline through working with governments, state-owned enterprises, and
investors.
4. Create markets: MIGA will drive comprehensive country solutions and spur private sector investment
and development by working as part of the WBG’s Cascade Approach.
 MIGA is owned and governed by its member states, but has its own executive leadership and staff
which carry out its daily operations. Its shareholders are member governments which provide paid-in-
capital and have the right to vote on its matters. It insures long-term debt and equity investments as
well as other assets and contracts with long-term periods. The agency is assessed by the World Bank’s
Independent Evaluation Group each year.
International Monetary Fund
The IMF is an organization of 189-member countries, working to foster global monetary cooperation,
secure financial stability, facilitates international trade, promote high employment and sustainable
economic growth along with poverty reduction.

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 The IMF was conceived at a United Nation Conference in Bretton Woods, New Hemisphere, United
States in July 1944 along with the World Bank. The initial 44-member countries at the conference
sought to build a framework for economic cooperation and to avoid a repetition of competitive
devaluation of currency which has contributed to ‘Great Depression of the 1930s’.
The IMF’s primary responsibility is to ensure the stability of international monetary system remains
safe, to safeguard the system of the exchange rate and international payments so that countries could
transact with each other freely.
The IMF’s mandate was updated in the year 2012, to include all macroeconomic and financial sector
issues that can affect global financial stability.

IMF at Glance
Total Member 189 Countries
Headquarter Washington DC, USA
Executive Board 24 Directors each representing a single or group of countries
Total Resources US $668 Billion
Special Drawings Rights (SDR consists of 5 Key World currencies: US
Currency
Dollar, Euro, Japanese Yen, UK Pound and Chinese Renminbi.
Biggest Borrowers Portugal, Greece, Ukraine and Pakistan (as on 31/08/2016)

Role of IMF in promoting Global Economic Stability

The IMF advises member countries on economic and financial matters that promote stability, reduce
vulnerability to crises, and encourages sustained growth and high living standards. It also monitors
global economic trends and developments that affect the health of the international monetary and
financial system.
Economic stability implies avoiding economic and financial crises, volatility in economic activity,
high inflation and excessive volatility in foreign exchange and financial markets. Economic instability
can increase uncertainty, discourage investment, obstruct economic growth and living standards. The
biggest challenge for policy makers is to minimize instability in their own country and abroad without
reducing the economy’s ability to improve living standards through rising productivity, employment
and sustainable growth.
How Does IMF help in achieving stability?
The IMF help countries achieve stability through Surveillance, Assistance and Lending.
 Surveillance: Every country joining IMF accepts the obligation to subject its economic and financial
policies to the scrutiny of the international community. The IMF oversees the international monetary
system and monitors the economic and financial developments of its 189-member countries. The
surveillance takes place at the global and individual country level. The IMF assesses the domestic
policies and risk associated with domestic and balance of payment stability and advises for the same.
 The IMF produces periodic report known as “World Economic Outlook” and the “Global Financial
Stability Report” regarding the same. The report’s analyses global and regional macroeconomic and
financial developments.
 Technical Assistance: The IMF helps countries strengthen their capacity to design and implement
sound economic policies. It provides advice and training in areas of core expertise—including fiscal,

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 monetary, and exchange rate policies; the regulation and supervision of financial systems; statistics;
and legal frameworks.
 Lending: Even the best economic policies cannot completely eradicate instability or avert crises. If a
member country faces a balance of payment crisis, the IMF can provide financial assistance to support
policy programs that will correct underlying macro economic problems, limit disruption to both the
domestic and the global economy, and help restore confidence, stability, and growth. The IMF also
offers precautionary credit lines for countries with sound economic fundamentals for crisis
prevention.
IMF’s Special Drawing Rights
The SDR is an international reserve asset created by IMF in 1969 to supplement its member countries
official reserves. The value of SDR is based on a basket of five major currencies- the US Dollar, the
Euro, the Japanese Yen, the UK Pound and the Chinese Renminbi.
The Creation of SDR: A country participating in foreign exchange market needs official foreign
exchange reserves. The domestic governments hold these foreign exchange reserves in the form of
Gold and widely accepted foreign currencies like the US dollar or the Euro. The domestic countries
use their foreign exchange reserves during the crisis period or when they need to provide support to
their respective currencies and exchange rate. The countries do so by buying their currency in the
foreign exchange rate markets by paying through dollar or gold. But the supply of two key
international reserve assets- the US dollar and the gold is inadequate for supporting the needs and
expansion of the financial flows. Therefore, the international community decided to create a new
international reserve asset called ‘SDR’ under the leadership of the IMF.
IMF Quota System
Quotas are central to IMF’s financial resource. Each member country of the IMF is assigned a quota
of resources based broadly on its relative position in the World Economy. A member country’s quota
determines its maximum financial commitment to the IMF, its voting rights and its access to IMF
lending’s.
When a country joins the IMF, it is assigned an initial quota based on its size of the economy. The
current quota formula is a weighted average of:
 Country’s GDP (50 percent weight)
 Openness of the economy (30 percent weight)
 Economic variability (15 percent)
 International/Foreign reserves (5 percent)
1. Quotas are determined in SDR terms. The largest member of the IMF is the United States, with a
current quota of SDR 82.99 Billion and the smallest member is Tuvalu, with a quota of SDR 2.5
Million. India’s current quota is SDR 13.1 Billion.
2. The quota plays a key role in determining a country’s financial and organisational relationship with
the IMF. A member’s quota subscription determines the maximum amount of financial resources the
member is obliged to provide to the IMF. The quota determines the member voting power inside the
IMF decision making. A number of finances a member can access from the IMF is also based on its
share of quota.
3. The 14th General Quota review which met on January 2016 decided to increase the quota of each of
the IMF 189 members to a combined SDR of 477 Billion from about SDR 238.5 Billion. With the
move, the IMF has implemented its long pending quota reforms (under pressure from the emerging
economies) which will give more voting rights to emerging economies such as India and China in the
functioning of the IMF.
4. With these reforms, India’s quota in the IMF would rise to 2.7 percent, from the existing 2.44 percent.
The voting share of Indian in IMF would also increase to 2.6 percent from 2.34 percent. The reforms
reflected the increasing role of dynamic emerging and developing countries in the World economy.
For the first-time key emerging countries of the BRIC bloc (Brazil, India, China and Russia) will be
among the 10 largest members of the IMF. China has become the third largest country in the IMF.
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5. Other top 10 countries include the US, Japan, Germany, France, UK and Italy. Also for the first time,
the IMF board will consist entirely of elected executive directors, ending the past tradition of having
appointed executive directors.
6. The reforms shifted more than 6 percent of quota shares from over represented to under-represented
countries. the reforms also shifted more than 6 percent quota shares to emerging and developing
countries.
International Economic Institution’s: ADB, BRICS Bank, AIIB
Asian Development Bank
 The Asian Development Bank was conceived in the early 1960s as a financial institution that would
be Asian in character and foster economic growth and cooperation in one of the poorest region on the
Earth.
 A resolution passed at the first Ministerial Conference on Asian Economic Cooperation held by the
United Nations Economic Commission for Asia and the Far East in 1963 set that vision on the way to
becoming reality.
 The Philippines capital of Manila was chosen to host the new institution, which opened on 19
December 1966, with 31 members that came together to serve a predominantly agricultural region.
Takeshi Watanabe was ADB’s first President.
Role and Aim of ADB
 The ADB aims for an Asia and Pacific free from poverty. Its mission is to help developing member
countries reduce poverty and improve the quality of life of their people. Despite the region’s many
successes, it remains home to a large share of the world’s poor: 330 million living on less than $1.90 a
day and 1.2 billion on less than $3.10 a day.
 ADB in partnership with member governments, independent specialists and other financial
institutions is focused on delivering projects in developing member countries that create economic
and development impact.
 As a multilateral development finance institution, ADB provides loans; technical assistance and
grants. ADB also provides development assistance, policy advisory and financial resources through
co-financing operations.
 ADB operations are designed to support the three complementary agendas of inclusive economic
growth, environmentally sustainable growth and regional integration.
 ADB employs its resources in the core areas of infrastructure, environment, regional cooperation and
integration, education and financial sector development.
New Development Bank
At the fourth BRICS Summit in New Delhi (2012), the leaders of Brazil, Russia, India, China and
South Africa first proposed the possibility of setting up a New Development Bank to mobilize
resources of infrastructure and sustainable projects in BRICS and other emerging countries and
developing countries.
At the fifth BRICS Summit in Durban (2013), the leaders of BRICS countries agreed on establishing
NDB. It was also decided that the initial contribution to the bank should be used to finance
infrastructure in BRICS.
At the sixth BRICS Summit in Fortaleza (2014), the leaders of BRICS signed the agreement to
establish NDB. In the Fortaleza declaration, the leaders stressed that the NDB would strengthen
cooperation among BRICS and will supplement the efforts of other global multilateral institutions like
World Bank for global development and collectively work for achieving the goal of strong,
sustainable and balanced growth.
The Fortaleza Declaration further said:
“The Bank shall have an initial authorized capital of US$ 100 billion. The initial subscribed capital
shall be US$ 50 billion, equally shared among founding members. The first chair of the Board of

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 Governors shall be from Russia. The first chair of the Board of Directors shall be from Brazil. The
first President of the Bank shall be from India. The headquarters of the Bank shall be located in
Shanghai. The New Development Bank Africa Regional Centre shall be established in South Africa
concurrently with the headquarters.”

Need and Significance of New Development Bank

 The creation of NDB was felt because of the discriminatory attitude of the West towards the
developing countries. The BRICS member countries accounting for almost half of the world’s
population and about one-fifth of global economic output have only 11 per cent of the votes at
international financial institution like the IMF. Both the WB and the IMF are based on the weighted
voting system, which provides the rich countries with a big say in the management. There are
informal arrangements whereby the American is always at the top in the WB; while the European is in
top position in IMF. In those monetary institutions, the developing countries don’t have enough
voting rights.
 The expectation is that the NDB with its total capital of $100 billion would meet short term liquidity
requirement of the member countries. An effort has been made to avoid China’s dominance on the
bank; for which India is made the president of the bank for the first six years and after this Brazil and
Russia would have turns with five years each.
 The New Development Bank is not just about setting up yet another bank. It represents a new political
will among new and emerging powers in the world to challenge the old architecture of growth.
 Over the last 20 years, it has been obvious that the growth impetus has
shifted to Asia and also Africa. The World Bank and the IMF, dominated by the US and Europe,
cannot function with limited voting powers for the new tigers. BRICS seeks to challenge their
power structure.
 The setting up of the New Development Bank and the $100 billion currency stabilization fund will
signal the emergence of new international currencies to challenge the US dollar’s hegemony.
 In the initial years, the Chinese yuan will get internationalized first, followed by the Indian rupee after
about a decade of strong growth in India’s economic and trade shares. Even though the dollar will
continue to remain the biggest international currency for the foreseeable future, its share will start
falling as the yuan rises. The world will have the dollar, euro, the yen and the yuan as it main
currencies over the next decade. The dollar will not remain the only option for the settlement of
global trades, especially when intra-Asian, African and Latin American shares of global trade start
picking up in the decades ahead.
Asian Infrastructure and Investment Bank
Asian Infrastructure and Investment Bank is a new multilateral financial institution founded to bring
countries together to address the need of deficient infrastructure across Asia. AIIB is a brain child of
China. The prime aim of the AIIB is infrastructure development. By establishing interconnectivity
across the Asia through advancement in the construction of infrastructure and other productive
services, the AIIB can stimulate growth and economic development in the Asian Region.
Focus Areas of AIIB
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The AIIB And the China
China has been growing rapidly for a long time, but an important shift in its growth pattern
occurred at the time of Global Financial Crisis of 2008.
During the years preceding GFC, China’s GDP grew at an average rate of 11 percent. The
Current Account Surplus was 10 percent of the GDP during all these years. In the six years
since the GFC, the external surplus has fallen sharply into the range of 2-3 percent of the
GDP.
China’s growth rate is no doubt impressive as compared to the Rest of the World, but has lost
its upward trajectory and has fallen to a new normal of 7-8 percent post-GFC. The reason for
fall in China’s growth are; overdependence on exports which lost its momentum post GFC,
falling productivity of Chinese investment (for example; if earlier, an investment of 20
percent by Chinese firm produced an 1 percent increase in GDP, but now an investment of 20
percent by Chinese firm only produces 0.7 percent increase in GDP).
China’s response to these growth changes are partly internal and partly external. On the
external side, China is coming up with multilateral investment institutions like AIIB and
NDB to finance its falling growth. The plan is to develop infrastructure in and out of China
which has the potential to create more jobs, increase the productivity of investment and
increase exports of China. The AIIB and NDB are the institutions that will finance China’s
new infrastructure projects.
AIIB and Emerging Economies
The AIIB is largely welcomed by China’s Asian neighbours as they believe it has the
potential to integrate Asia further through the construction of roads, highways, pipelines and
railways.
The allies of China in Asia are also seeing AIIB and other Chinese initiatives as a set back to
the United States. They believe that the US has for long dominated the Asia-Pacific and now
it’s time for the US to recede its influence from Asia-Pacific. They see the rise of China as a
game changer in the region. The Chinese allies follow the erstwhile dream of ‘Asia for
Asians’.
Although, the US has been pressurizing its key allies in Asia, not to join the AIIB, but had
received a major setback when its key allies like South Korea, Australia, Japan and Even the
United Kingdom joined the initiative.
The most important reason of many Emerging Countries joining the AIIB is their long-term
dissatisfaction with the working of the Western Dominated Multilateral Institutions like
World Bank and the IMF.
The EMEs believes that the governance structure of the existing international financial
institutions was biased towards the Western Countries and doesn’t take care of their needs.
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 They further argue that the existing structure is evolving too slowly and doesn’t capture the
realities of the 21st century in which the main drivers of global growth and investment are
Emerging economies like China, India, Turkey, Indonesia, Brazil and Nigeria etc.
Their arguments get weight when one sees how slowly reforms are being done in IMF. The
US CONGRESS still holds the veto power in the functioning of the IMF.
The EMEs frustration with the World Bank and IMF is not just about the governance
structure and the United States weight in them, but also comes from the fact that the
international institution has long ignored the demands of EMEs regarding the construction of
infrastructure in their regions. Over the years, the key recommendations of the EMEs
regarding growth and development has been rejected by the World Bank and IMF.
The AIIB and the NDB, therefore, gives much-needed leverage to the EMEs to break the
dominance of the US and Europe dominated International Institutions.
Bilateral, Regional and Global Groupings and Agreements involving India
India’s Regional Trading Agreements
1. Indian trade policy has made an important shift in the year 1991, when we have gone for
globalisation, trade liberalisation and other market reforms. Thus year 1991, stands as a
benchmark year for India’s trade policy.
2. The next big event in World trade is setting of WTO in 1995, the successor of erstwhile
GATT. WTO’s multilateral approach towards trade and as an institution of trade ombudsman
is remarkable. It acts as platform between developed and developing countries to negotiate
with each other.
3. The successive rounds of WTO have made rules of trade game much transparent and nearly
equal for all. But things have started to change after famous ‘Doha Round’ of 2001 gets
staled.
4. In the initial year differentiation between developed and developing countries was taken as
basic principle, with larger responsibility lying on developed World. However since Uruguay
round focus has shifted towards reciprocity. This has resulted in conflict between developed
and developing countries over trade negotiations and subsequent staling of conferences.
5. All these have lead to development of what is known as Regional groupings, RTAs and
FTAs.
6. Countries were signing these agreements earlier also, but they were concentrated on some
part of world. These agreements give easy market access and tariff benefits to member
countries.
There are many form of integration in world. Economist Jacob Viner has given his theory of
‘Custom Union’ followed by work of J.E Meade. To summarise followings are the ways of
integration;
Preferential trade union; two or more countries can form a trading union and reduce tariffs
on imports of each other. They maintain their individual tariffs against Rest of world.
Free trade area; two or more countries come together and abolish all tariff duties on their
trade but retains individual tariffs against ROW.
Custom union; two or more countries abolish all tariff among themselves and adopts a
common tariff barrier against imports of ROW.
Common market; common market is formed, when two or more countries form a custom
union and in addition allows free movement of factor of production among member
countries.

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Economic union; it is the highest form of integration where two or more countries forms a
common market and in addition proceeds to harmonise and unify their monetary, fiscal and
exchange rate policies.
All of the above forms of integration have trade creation as well as trade diversion effects. To
check for such diversion effects WTO has come up with most favoured nation clause, which
states that,
“Any advantage, favour, privilege or immunity granted by any contacting party to any
product originating in or destined for any other country shall be accorded immediately and
unconditionally to the like product originating in or destined for territories of all other
parties”.
India’s Regional and Free Trade Agreements
Agreement Member Total Type of Start Date Coverage
Countries Members Agreement Area
Asia Pacific Trade Bangladesh, 5 Preferential 1976 All Goods
Agreement (APTA) China, South Trading
Korea, India, Sri Agreement
Lanka
India-ASEAN Trade Brunei, 11 Free Trade 2010 All Goods
in Goods Agreement Cambodia, Agreement
Indonesia, Laos,
Malaysia,
Myanmar,
Philippines,
Singapore,
Thailand,
Vietnam and
India
BIMSTEC- Bay of Bangladesh, 7 Under Under
Bengal Initiative for India, Thailand, Negotiations Negotiation
Multi Sectoral Myanmar, Sri
Technical Economic Lanka, Bhutan
Cooperation and Nepal
IBSA- India, Brazil India, Brazil and 3 Under Under
and South Africa South Africa Negotiations Negotiation
Agreement
SAFTA- South Asian India, Pakistan, 7 Free Trade 2006 All Goods
Free Trade Nepal, Bhutan, Agreement
Agreement Bangladesh,
Afghanistan and
Maldives
India-Sri Lanka FTA India and Sri 2 Free Trade 2001 All Goods
Lanka Agreement
India-Malaysia India and 2 Free Trade 2011 Goods and
Comprehensive Malaysia Agreement Services
Economic
Cooperation
Agreement
India-Singapore India and 2 Free Trade 2005 Goods and
Comprehensive Singapore Agreement Services
Economic
Cooperation
Agreement
India-Japan India and Japan 2 Free Trade 2011 Goods and
Comprehensive Agreement Services
Economic Partnership
Agreement

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India-Korea India and South 2 Free Trade 2010 Goods and
Comprehensive Korea Agreement Services
Economic Partnership
Agreement
India Chile FTA India and Chile 2 Free Trade 2007 All Goods
Agreement
India-Afghanistan India and 2 Free Trade 2003 All Goods
FTA Afghanistan Agreement
India-Bhutan FTA India and Bhutan 2 Free Trade 2006 All Goods
Agreement
India- Nepal FTA India and Nepal 2 Free Trade 2009 All Goods
Agreement
European Union and EU member Under Under
India FTA countries Negotiations Negotiation
MERCOSUR India Argentina, 5 Free Trade 2009 All Goods
FTA Brazil, Paraguay, Agreement
Uruguay
India-ASEAN Trade Brunei, 11 Free Trade 2015 Services
in Services Cambodia, Agreement
Agreement Indonesia, Laos,
Malaysia,
Myanmar,
Philippines,
Singapore,
Thailand,
Vietnam and
India
India-Thailand FTA India and 2 Free Trade 2004 All Goods
Thailand Agreement
SOURCE: MINISTRY OF COMMERCE AND WTO
The World Trade Organisation (WTO) and India
 No Comments on The World Trade Organisation (WTO) and India

The Shortcomings of GATT

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As a result of these shortcoming’s the WTO was established as an international organization that will
oversee the operation of rule based multilateral trading system. The WTO is based on series of trade
agreements negotiated during the Uruguay Round (1986-1994). The Marrakesh treaty established the
WTO at the end of Uruguay round.
The Uruguay Round (1986-1995)

Guiding Principles of The WTO

Major Agreement of the WTO

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 Export Subsidies under AOA
 Developed countries needs to reduce the value and volume of export subsidies by 36 percent and 24
percent respectively over a 6-year period.
 Developing countries had a milder commitment of 24 percent and 10 percent respectively over 10
years period.
 The export subsidies in the AOA (Part V, Article 9) that are subject to reduction commitments
include:
 Direct subsidies to agricultural producer’s contingent on export performance;
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 Subsidies on agricultural products contingent on their incorporation in exported products;
 Provision on favorable terms of internal transport and freight charges on export shipments
(developing countries are exempt from commitments on this form of subsidy provided that it is not
used to circumvent reduction commitments),
 Subsidies to reduce the cost of marketing exports of agricultural products excluding export promotion
and advisory services (here again, developing countries are conditionally exempt from reduction
commitments);
 Sale or disposal for export of non-commercial stocks of agricultural products by the government or its
agencies at a price lower than the comparable price charged for a like product by buyers in the
domestic market
 Payments on the export of an agricultural product that are financed by virtue of governmental action
whether or not a charge on the public account is involved, including payments that are financed from
the proceeds of a levy imposed on the agricultural product concerned or on an agricultural product
from which the exported product is derived.
Domestic Support under WTO
Domestic support was divided into three kinds of boxes, each representing a different kind of
subsidies.

Green Box:
 Green box subsidies are considered to be minimum trade distorting in terms of production and trade.
 Direct income support schemes unlinked to production are examples of the green box. Research and
Development support, Providing extra income to farmers etc falls under this category
 Subsidies under green box does not have any reduction commitments under AOA.
 The subsidies provided by Rich nations mostly comes under green box.
Blue Box:
 Blue box subsidies are considered somewhat less trade distorting, while they directly link production
to subsidies, they also set limits on production by imposing quotas.
 Blue Box subsidies are also exempt form reduction commitments.
Amber Box:
 Amber box subsidies constitute all form of domestic support that is considered trade distorting by
encouraging excess production.
 Under WTO principles, “amber box” subsidies create trade distortions because they encourage
excessive production through farm subsidies to fertilizers, seeds, electricity and irrigation.
 Within the amber box, de minimus is the minimal amount of subsidy WTO permits at 1986-88 prices.
The de minimus figures for developed and developing countries are at five and 10 per cent of their
agricultural production respectively.
General Agreement on Trade in Services
 For the first time, trade in services like banking, insurance, travel, transportation, movement of labour
was brought within the ambit of negotiations in the Uruguay round.
 The GATS provide multilateral framework of principles and services under condition of transparency
and progressive liberalisation.
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 Negotiations is services under GATS are classified in 4 modes, interests of different countries depend
upon this classification:
Trade Related Intellectual Property Rights
 TRIPS is an international agreement administered by the World Trade Organization (WTO) that sets
down minimum standards for many forms of intellectual property (IP) regulation as applied to
nationals of other WTO Members.
 Prior to the TRIPS agreement the IPR concerning the trade including patent, trademarks, copyrights
and industrial designs were governed by the Paris Convention of 1863.
 The Paris convention was fairly liberal and left the subject matter of patents and IPR on the respective
governments.
 Under these lose laws the commercial interests of the Developed countries were adversely affected.
 Therefore, TRIPS was concluded during Uruguay Round.
Trade Related Investment Measures
 The Agreement on Trade-Related Investment Measures (TRIMS) recognizes that certain investment
measures can restrict and distort trade.
 It states that WTO members may not apply any measure that discriminates against foreign products or
that leads to quantitative restrictions, both of which violate basic WTO principles.
 A list of prohibited TRIMS, such as local content requirements, is part of the Agreement. Recently
India was dragged to WTO by U.S. over former’s specification of Domestic Content Requirement in
relation to the procurement of Solar Energy cells and equipment.
India and the WTO
Indian was one of the 23 founding members of erstwhile GATT. India is also a leader of groups like
G 33 and G 77 representing least developed countries. India in initial years due to its policies of
import substitution and protecting infant industry was never very active in negotiations.
India at the WTO meetings

Ministerial Place Outcome India’s Role

conference
1 Singapore
2 Geneva
3 Seattle
4 DOHA
5 Cancun
6 Geneva
7 Hong Kong
8 Bali
ITA agreement signed Mere Presence.
Trade and investment, competition policy,
government procurement and Trade
facilitation discussed.
Global e commerce agreement signed. Mere Presence
Negotiations failed as developed countries Was vocal in
wanted to incorporate environment and labor protesting against
related issues under WTO. developed
countries.
A new round was launched and concerned of Mostly singled out
developing countries related to TRIPS and in its protest.
Health issues were listened. Market access However made its
issues were also taken. presence and
Members could not arrive at common position felt for
viewpoint regarding Doha development the very first time.
agenda. Actively protested
Countries came forward to create an against EU-USA
atmosphere for initiating multilateral draft on
negotiations once again. agriculture with
It was considered vital if the four-year- other developing
old DDA negotiations were to move forward countries.
sufficiently to conclude the round in 2006. In Played a

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 this meeting, countries agreed to phase out all constructive role
their agricultural export subsidies by the end in the process.
of 2013, and terminate any cotton export Vocal in protesting
subsidies by the end of 2006. Further against developed
concessions to developing countries included countries.
an agreement to introduce duty-free, tariff- India argued for
free access for goods from the Least settlement of Food
Developed Countries, following the stockholding
Everything But Arms initiative of the under AMS. Has
European Union — but with up to 3% of to settle with
tariff lines exempted. Other major issues Peace clause.
were left for further negotiation to be
completed by the end of 2006
Famous for Trade facilitation agreement and
Peace clause
Source: Compiled from WTO website, Ministerial document and other sources.
Recent WTO negotiations and India
 Doha round of trade negotiations has been under way since 2001.
 The negotiations cover several areas such as agriculture, market access, Trips, dumping and anti-
dumping and trade facilitation.
 The conduct, conclusion and entry into force of the outcome of the negotiations are part of ‘Single
undertaking’ that is nothing is agreed until everything is agreed.
 The Doha round has made very little progress. The subject of DDA featured in almost every round of
talks, but nothing substantive has come out.
 In October 2011, efforts were made by some of the developed countries to use the G 20 summit to
advance the agenda for eight ministerial conference scheduled to be held in Geneva in 2011.
 They wanted to set the stage for plurilateral agreements on selected issues in the WTO negotiations
rather than multilateral negotiations. Also, they wanted to introduce new issues for negotiation,
namely climate change, energy security and food security.
 These proposals are however strongly objected by various members including India.
 At the Geneva conference, during 15-17 December 2011, ministers adopted a number of decisions on
IPR, electronic commerce, small economies, LDC’S accession and trade policy reviews.
 A number of members expressed strong reservations against PLURILATERAL approaches. Members
including India stressed that any different approaches in work ahead should conform to the Doha
mandate, respect the single undertaking and should be multilateral, transparent and inclusive.
 Many members highlighted the importance of agriculture negotiations, trade facilitation, special and
differential treatment and NTMs.
 Developing countries, including India, China, Brazil and South Africa met on the sidelines of the
conference and issued a declaration emphasizing the development agenda.
India at the Bali Conference
 The Bali ministerial conferences of WTO ended in encompass.
 The two most important issues among many taken at Bali conference are agreement on trade
facilitation and public stockholding for food security purpose.
 The former relates to removing red tapes, reduction of administrative barriers to trade, documentation
and transparency, latter deals with the procurement and distribution by government agencies for food
security purpose.
 At the meeting, India maintained its stand that any agreement on trade facilitation must not be taken
until a permanent solution is granted for public stockholding issues for food security.

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 Despite intense pressure from the USA, India refused to abide and has allowed the deadline of TFA to
pass.
 The important development during the conference was that India not being able to gather the support
of other Developing and LDCs countries despite the fact the LDCs have generally backed the issue of
food security.
 Only three countries Cuba, Bolivia and Venezuela backed India. This signifies that developing
countries are divided on the issue of Trade facilitation as it is most likely to benefit the developing
countries.

Food Processing & Related Industries

Food Processing Industry: Definition and Dimensions; Channels of
Transitions; Inter linkages between Agriculture and Industry.
Food Processing Industry in India

Food Processing Industry: Definition and Dimensions

Understanding the Channels of Transitions

Food Economy and Industrial sector have traditionally been viewed as two separate sectors of the
economy. They differ both in terms of their characteristics (role in economic growth, share in GDP,
share in total output, role in poverty reduction etc.) and potential to generate employment.
The Food sector or Agriculture is considered to be a traditional sector of the economy. Agriculture has
been considered the hallmark of First stage development with features like:

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 The Industrial sector is considered to be a modern sector of the economy and represents the second
and most important stage of development. The Industrial sector has modern features like:

The Transition from Agriculture to Industry:

1. Over the years, with the development of the economy, the traditional agriculture sector becomes less
and less productive due to disguised employment (large no of people working on a small land without
contributing to production increase).
2. At this Juncture, the agriculture sector with excess supply of labour will start supplying labour force
to the Industries and manufacturing sector.
3. The disguised labour employed in the agriculture sector will become more productive in the factories,
where they will contribute in Increasing production.
4. At the same time, the remaining labour force in the agriculture sector will also become more
productive (no of people are working is equal to no of people required) and their wages will increase.
5. This is how a standard economy makes transition from low productive agriculture sector to high
productive industrial sector. The degree of this transition and Industrialisation has been taken to be the
most important indicator of a country’s progress along the development path.
The New literature on Changing Role & Interlinkages between Agriculture and
Industry

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 Food Processing Industry: Food Based Industry versus Non- Food
Based; Location, Upstream, Downstream Requirements.
Food Processing Industry: Location, Upstream, Downstream Requirements

Food Based Agro-processing Industry versus Non- Food Based Agro-

Processing Industry

Upstream versus Downstream Food Processing Industries.

Potential for Food Processing Industry in India

Advantages of the Food Processing Industries

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 Factors Determining Location of Food Processing Industries

There are, however, few exceptions:

 For most grains (cereals), shipment of the raw material in bulk is frequently easier, while many
bakery products are highly perishable and thus require production to be located close to the market.
 Oilseeds (except for the more perishable ones such as olives and palm fruit) are also an exception and
can be transported equally easily and cheaply in raw form or as oil, cake or meal, so there is more
technical freedom of choice in the location of processing.
 The same is true for the later stages of processing of some commodities. For example, while raw
cotton loses weight in ginning, which is consequently carried out in the producing area, yarn, textiles
and clothing can all be transported equally easily and cheaply.
Technical and Exports Considerations in deciding location
 Where there is a high degree of technical freedom in the choice of location, industries have frequently
tended to be located in proximity to the markets because of the more efficient labour supply, better
infrastructure and lower distribution costs in the large market centres.
 With production for export, this factor has often tended to favour the location of processing in the
importing country. This tendency has been reinforced by other factors, including the need for
additional raw materials and auxiliary materials (particularly chemicals) that may not be readily
available in the raw material-producing country; the greater flexibility in deciding the type of
processing according to the end use for which the product is required; and the greater regularity of

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 supply and continuity of operations that are possible when raw materials are drawn from several
different parts of the world.
 However, with improved infrastructure, enhanced labour efficiency and growing domestic markets in
the developing countries, there is increased potential for expanding such processing in the countries
where the raw materials are produced.
 In addition, with growing liberalization of world trade, more developing countries will be able to take
advantage of lower labour costs to expand their exports of agro-industrial products.

Food Processing Industry: Forward, Backward Linkages;

Food Processing Industry and Economic Development

Food Processing Industry: Scope, Importance & Significance in Economic Development

The Economic Linkage Effects of Food Processing Industry
Linkages is a phenomenon which measures the capability of an industry to generate demand for the
products of the other industries. Form the point of view of development strategy, linkages are one of
the essential feature of an industry. Linkages are of three types: Forward, Backward and sideways.
Forward Linkage: It is when, the establishment of a processing industry can lead to the development
and establishment of the number of advanced stage industries. Example, Forest Industry, when
established as a base industry, results in establishment of vast number of advanced processing
industries like: manufacturing of paper, paper bags, stationary, boxes made of paper, cartons, wooden
boxes etc.
There are many other examples: products such as vegetable oils and rubber are used in a wide variety
of manufacturing industries; based on the preparation of hides and skins, tanning operations can be
started, as can the manufacture of footwear and other leather goods.
Backward Linkage: The feedback effects generated by a base industry on the development of the
base sector is called backward linkage. The development of the food processing industry has many
feed back effects on the agriculture sector itself.
For Example, once a food processing industry is established, it results in increasing the demand of
raw materials provided by the agriculture sector. The establishment of processing facilities is itself an
essential first step towards stimulating both consumer demand for the processed product and an
adequate supply of the raw material.
The provision of transport, power and other infra-structural facilities required for agro-industries also
benefits agricultural production. The development of these and other industries provides a more
favourable atmosphere for technical progress and the acceptance of new ideas in farming itself.
Sideways Linkage: Sideways linkages are mostly derived from the use of by products and waste
products of the main base industrial activity. For example: many food processing industries using
agriculture raw materials produce waste that can be used further in production of fuel, bio-fuels, paper
pulp and fertilizer. The production of sugar results in production of molasses as a waste product,
which is used by the Alcohol Brewing industry in the production of ethanol.
The capacity of Food Processing industry to generate demand and employment in other industries is
the important aspect of the processing industry. It works because of processing industry growing
potential for activating backward, forward and sideway linkages.
The Food Processing Industry and Economic Development
Backward Channel

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Forward Channel

The growth of Food Processing Industry at different stages of Development.

The Initial Stage/Less Developed Countries

The Intermediate Stage/Middle Income Countries

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The More Advanced Middle-Income Stage

The Final Stage/Developed Countries

Food Processing Industry in India: Growth Drivers, FDI Policy,

Investment Opportunities; Schemes Related to Food Processing Sector
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 Food Processing Industry in India:
A Snapshot
 The Indian food industry is poised for huge growth, increasing its contribution to world food trade
every year.
 In India, the food sector has emerged as a high-growth and high-profit sector due to its immense
potential for value addition, particularly within the food processing industry.
 Accounting for about 32 per cent of the country’s total food market, The Government of India has
been instrumental in the growth and development of the food processing industry.
 The government through the Ministry of Food Processing Industries (MoFPI) is making all efforts to
encourage investments in the business.
 It has approved proposals for joint ventures (JV), foreign collaborations, industrial licenses, and 100
per cent export oriented units.
 Food processing industry in India is a sunrise sector that has gained prominence in the recent years.
Availability of raw materials, changing lifestyles and appropriate fiscal policies has given a
considerable push to the industry’s growth.
 This sector serves as a vital link between the agriculture and industrial segments of the economy.
Strengthening this link is of critical importance to reduce waste of agricultural raw materials, improve
the value of agricultural produce by increasing shelf-life as well as by fortifying the nutritive capacity
of the food products; ensure remunerative prices to farmers as well as affordable prices to consumers.
 Adequate focus on this sector could greatly alleviate our concerns on food security and food inflation.
 India already is a leading exporter of several food products. To ensure that this sector gets the
stimulus it deserves, Ministry of Food Processing Industries is implementing a number of schemes for
Infrastructure development, technology up-gradation & modernization, human resources development
and R&D in the Food Processing Sector.
The Ministry of Food Processing Industry defines Food Processing to include under food
processing industries, items pertaining to these two processes viz
(a) Manufactured Processes: If any raw product of agriculture, animal husbandry or fisheries is
transformed through a process [involving employees, power, machines or money] in such a way that
its original physical properties undergo a change and if the transformed product is edible and has
commercial value, then it comes within the domain of Food Processing Industries.
(b) Other Value-Added Processes: Hence, if there is significant value addition (increased shelf life,
shelled and ready for consumption etc.) such produce also comes under food processing, even if it
does not undergo manufacturing processes.
The Growth of Food Processing Industry in India

As seen in the graph above, the contribution of food processing sector to GDP has been growing
faster than that of the agriculture sector.

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If the contribution to GDP of both agricultural sector and food processing sector were growing at the
same rate, then it would mean that the growth in food processing sector is only due to increased
agricultural raw material supply.
However, what this graph indicates is that more and more agricultural products are being converted
(in value terms) to food products. This means that the level of processing in value terms has been
increasing in India.
Person Employed by the Food Processing Industries

Food Processing Industry is one of the major employment intensive segments constituting 12.13 per
cent of employment generated in all Registered Factory sector in 2011- 12.
According to the latest Annual Survey of Industries (ASI) for 2011-12, the total number of persons
engaged in registered food processing sector is 17.77 lakhs.
During the last 5 years ending 2011-12, employment in registered food processing sector has been
increasing at an Annual Average Growth Rate of 3.79 per cent. Unregistered food processing sector
supports employment to 47.9 lakh workers as per the NSSO 67thRound, 2010-11.
Export Performance of the Food Processing Sector

All agricultural produce when exported undergo an element of processing. Hence all edible
agricultural commodities exported are included in the export data. The value of exports in the sector
has been showing an increasing trend with Average Annual Growth Rate (AAGR) of 20.53 per cent
for five years ending 2013-14.
The value of processed food exports during 2013-14 was of the order of US $ 37.79 Billion (total
exports US $ 312 Billion) constituting 12.1 per cent of India’s total exports.
Food Processing Industry in India: Growth Drivers, FDI Policy, Investment Opportunities
Growth Drivers

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 Factors Contributing to Growth of the Food Processing Sector.

FDI Policy

Schemes Related to Food Processing Sector in India

Pradhan Mantri Kisan Sampada Yojana
 PM Kisan SAMPADA Yojana is a comprehensive package which will result in creation of modern
infrastructure with efficient supply chain management from farm gate to retail outlet.
 It will not only provide a big boost to the growth of food processing sector in the country but also help
in providing better process to farmers and is a big step towards doubling of farmers income, creating

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 huge employment opportunities especially in the rural areas, reducing wastage of agricultural
produce, increasing the processing level and enhancing the export of the processed foods.
Mega Food Parks
 The Scheme of Mega Food Park aims at providing a mechanism to link agricultural production to the
market by bringing together farmers, processors and retailers so as to ensure maximizing value
addition, minimizing wastage, increasing farmers’ income and creating employment opportunities
particularly in rural sector.
 The Mega Food Park Scheme is based on “Cluster” approach and envisages creation of state of art
support infrastructure in a well-defined agri/ horticultural zone for setting up of modern food
processing units along with well-established supply chain.
 Mega food park typically consists of supply chain infrastructure including collection centers, primary
processing centers, central processing centers, cold chain and around 30-35 fully developed plots for
entrepreneurs to set up food processing units.
 The Mega Food Park project is implemented by a Special Purpose Vehicle (SPV) which is a Body
Corporate registered under the Companies Act. However, State Government, State Government
entities and Cooperatives are not required to form a separate SPV for implementation of Mega Food
Park project. Subject to fulfillment of the conditions of the Scheme Guidelines, the funds are released
to the SPVs.
 So far Nine Mega Food Parks, namely, Patanjali Food and Herbal Park, Haridwar, Srini Food Park,
Chittoor, North East Mega Food Park, Nalbari, International Mega Food Park, Fazilka, Integrated
Food Park,Tumkur, Jharkhand Mega Food Park, Ranchi, Indus Mega Food Park, Khargoan, Jangipur
Bengal Mega Food Park, Murshidabad and MITS Mega Food Park Pvt Ltd, Rayagada are functional .

Integrated Cold Chains and Value Addition Infrastructure

 The objective of the Scheme of Cold Chain, Value Addition and Preservation Infrastructure is to
provide integrated cold chain and preservation infrastructure facilities, without any break, from the
farm gate to the consumer.
 It covers pre-cooling facilities at production sites, reefer vans, mobile cooling units as well as value
addition centres which include infrastructural facilities like Processing/ Multi-line Processing/
Collection Centres, etc. for horticulture, organic produce, marine, dairy, meat and poultry etc.
 The integrated cold chain project is set up by Partnership/ Proprietorship Firms, Companies,
Corporations, Cooperatives, Self Help Groups (SHGs), Farmer Producer Organizations (FPOs),
NGOs, Central/ State PSUs, etc. subject to fulfilment of eligibility conditions of scheme guidelines.
Schemes for Creation/Expansion of Food Processing/Processing Facilities
 The main objective of the Scheme is creation of processing and preservation capacities and
modernisation/ expansion of existing food processing units with a view to increasing the level of
processing, value addition leading to reduction of wastage.

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 The setting up of new units and modernization/ expansion of existing units are covered under the
scheme. The processing units undertake a wide range of processing activities depending on the
processing sectors which results in value addition and/ or enhancing shelf life of the processed
products.
 Scheme is implemented through organizations such as Central & State PSUs/ Joint Ventures/ Farmer
Producers Organization (FPOs)/ NGOs/ Cooperatives/ SHG’s/ Pvt. Ltd companies/ individuals
proprietorship firms engaged in establishment/ upgradation/ modernization of food processing units.
Proposals under the scheme are invited through Expression of Interest (EOI) and Project Management
Agencies (PMA) are engaged by MOFPI to assist in the implementation of the scheme.
Agro Processing Clusters:
 The scheme aims at development of modern infrastructure and common facilities to encourage group
of entrepreneurs to set up food processing units based on cluster approach. Under the scheme,
effective backward and forward linkages are created by linking groups of producers/ farmers to the
processors and markets through well-equipped supply chain consisting of modern infrastructure for
food processing closer to production areas and provision of integrated/ complete preservation
infrastructure facilities from the farm gate to the consumer.
 Each clusters have two basic components i.e. Basic Enabling Infrastructure (roads, water supply,
power supply, drainage, ETP etc.), Core Infrastructure/ Common facilities (ware houses, cold
storages, IQF, tetra pack, sorting, grading etc) and at least 5 food processing units with a minimum
investment of Rs. 25 crore. The units are set up simultaneous along with creation of common
infrastructure.
 The Project Execution Agency (PEA) which is responsible for overall implementation of the projects
undertakes various activities including formulation of the Detailed Project Report (DPR),
procurement/ purchase of land, arranging finance, creating infrastructure, ensuring external
infrastructure linkages for the project etc. PEA may sell/ lease plots in agro-processing cluster to other
food processing units but the common facilities in the cluster cannot be sold or leased out.
Scheme for Creation of Backward and Forward Linkages
 The objective of the scheme is to provide effective and seamless backward and forward integration for
processed food industry by plugging the gaps in supply chain in terms of availability of raw material
and linkages with the market. Under the scheme, financial assistance is provided for setting up of
primary processing centers/ collection centers at farm gate and modern retail outlets at the front end
along with connectivity through insulated/ refrigerated transport.
 The Scheme is applicable to perishable horticulture and non-horticulture produce such as, fruits,
vegetables, dairy products, meat, poultry, fish, Ready to Cook Food Products, Honey, Coconut,
Spices, Mushroom, Retails Shops for Perishable Food Products etc.
 The Scheme would enable linking of farmers to processors and the market for ensuring remunerative
prices for agri produce.
Food Safety and Quality Assurance Infrastructure
 Quality and Food Safety have become competitive edge in the global market for food products. For
the all-around development of the food processing sector in the country, various aspect of Total
Quality Management (TQM) such as quality control, quality system and quality assurance should
operate in a horizontal fashion.
 Apart from this, in the interest of consumer safety and public health, there is a need to ensure that the
quality food products manufactured and sold in the market meet the stringent parameters prescribed
by the food safety regulator.
 Keeping in view the aforesaid objectives, government has been extending financial assistance under
the scheme under the following components:
 Setting up and upgradation of quality control/Food Testing Laboratories.
 HACCP/ISO Standards/Food Safety/Quality Management System

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 National Mission on food processing:
 Ministry of Food Processing Industries (MOFPI) implemented a new Centrally Sponsored Scheme
(CSS) National Mission on Food Processing (NMFP) on 1st April 2012 for implementation through
States/UTs.
 The NMFP visualizes establishment of a National Mission as well as corresponding Missions in the
State and District level. The major objectives of this schemes are as follows:
1. To augment the capacity of food processors working to upscale their operations through capital
infusion, technology transfer, skill up gradation and handholding support.
2. To support established self-help groups working in food processing sector to facilitate them to achieve
SME status.
3. Capacity development and skill upgradation through institutional training to ensure sustainable
employment opportunities to the people and also to reduce the gap in requirement and availability of
skilled manpower in food processing sector.
4. To raise the standards of food safety and hygiene to the globally accepted norms.
5. To facilitate food processing industries to adopt HACCP and ISO certification norms
6. To augment farm gate infrastructure, supply chain logistic, storage and processing capacity.
7. To provide better support system to organized food processing sector
Major Programs / Schemes to be covered under NMFP during 2012-13 are;

Supply Chain Management in Indian Agriculture

Definition:
“Supply chain means flow & movement of goods from the producers to the final consumers”.
Supply Chain is a sequence of flows that aim to meet final customer requirements, that take place
within and between different stages along a continuum, from production to final consumption.
The Supply Chain not only includes the producer and its suppliers, but also, depending on the logistic
flows, transporters, warehouses, retailers, and consumers themselves. In a broader sense, supply
chains also includes, new product development, marketing, operations, distribution, finance and
customer service.

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 A Graphical Presentation of Supply Chain

Supply Chain Management: The term ‘Supply Chain Management’ is relatively new. It first
appeared in logistics literature in the 1980s, as an inventory management approach with emphasis on
the supply of raw materials. Logistics managers in retail, grocery, and other high inventory industries
began to realize that a significant competitive advantage could be derived through the management of
materials that flow in their ‘inbound’ and ‘outbound’ channels.
Supply Chain Management involves following processes:
 Integrated Planning
 Implementation
 Coordination
 Control
Therefore, SCM is the integrated planning, implementation, coordination and control of all Agri-
business processes and activities necessary to produce and deliver, as efficiently as possible, products
that satisfies consumer preferences and requirements.
Contrasting Supply Chain Management with Traditional Management Chain
Element Traditional Management Supply Chain Management
Inventory management Joint reduction in channel
Independent Efforts.
approach inventories.
Total cost approach Minimize firm costs Channel-wide cost efficiencies
Time horizon Short-term Long-term
Amount of information Limited to needs of own As required for planning and
sharing and monitoring current transactions monitoring purposes
Single contact for the
Amount of coordination of Multiple contacts between levels
transaction between channel
multiple levels in the channel in firms and levels of channel
pairs
Joint planning Transaction-based On-going
Large to increase competition
Breadth of supplier base Small to increase coordination
and spread risk
Channel leadership Not needed Needed for coordination focus
‘Warehouse’ orientation ‘Distribution Centre’ orientation
Speed of operations, (storage, safety stock). (focus on turnover speed).
information and inventory Interrupted by barriers to Interconnecting flows; JIT,
flows flows. Localized to channel Quick Response across the
pairs channel

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 Agriculture Supply Chain Networks

An agriculture supply chain system comprises organizations/cooperatives that are responsible for the
production and distribution of vegetable/Fruits/Cereals/Pulses or animal-based products. In general,
we distinguish two main types:
1. ‘Agriculture food supply chains for fresh agricultural products’ (such as fresh vegetables, flowers,
fruit). In general, these chains may comprise growers, auctions, wholesalers, importers and exporters,
retailers and speciality shops and their input and service suppliers. Basically, all of these stages leave
the intrinsic characteristics of the product grown or produced untouched. The main processes are the
handling, conditioned storing, packing, transportation and especially trading of these goods.
2. ‘Agriculture food supply chains for processed food products’ (such as portioned meats, snacks, juices,
desserts, canned food products). In these chains, agricultural products are used as raw materials for
producing consumer products with higher added value. In most cases, conservation and conditioning
processes extend the shelf-life of the products.
Issues Related to Agriculture Supply Chains
Participants in Agriculture supply chains, e.g. farmers, traders, processors, retailers, etc, understand
that original good quality products can be subject to quality decay because of an inadequate action of
another participant.
For example, when a farm leaves a can of milk for pick-up on a roadside, under the sun, without any
cover, there will be a loss of quality that may even render the raw material unfit for processing.
Similarly, if processors, on the other hand, use packaging items and/or technologies that do not
maintain freshness and nutritional characteristics of their products as much as possible, retailers will
be likely to face customer complaints.
Characteristics of Agriculture Supply Chains and its impact on Logistics

Supply Chain Stage Issues with Product & Process
Characteristics
Shelf-life constraints for raw materials,
intermediates and finished products and
changes in product quality level while
Overall
progressing the supply chain (decay).
Recycling of Materials Required.
• Long production times (producing
new or additional agro-products takes a
Growers / Producers lot of time)
• Seasonality in production • Variability
of quality and quantity of supply
• High volume, low variety (although
the variety is increasing) production
Food processing
systems
industry
• Highly sophisticated capital-intensive
machinery leading to the need to
Impact on Logistic/Flow of
goods.
• Timing constraints (goods
have to be supplied quickly to
avoid decay).
• Information requirements
(correct information of goods is
essential).
• Responsiveness
• Flexibility in process and
planning
• Importance of production
planning and scheduling
focusing on high capacity
utilization
• Flexibility of recipes

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 maintain capacity utilization • Timing constraints, ICT
• Variable process yield in quantity and possibility to confine products
quality due to biological variations, • Flexible production planning
seasonality, random factors connected that can handle this complexity
with weather, pests, other biological • Need for configurations that
hazards facilitate tracking and tracing
• A possible necessity to wait for the
results of quality tests
• Alternative installations, alternative
recipes, product-dependent cleaning and
processing times, carryover of raw
materials between successive product
lots, etc.
• Storage buffer capacity is restricted,
when material, intermediates or finished
products can only be kept in special
tanks or containers
• Necessity to value all parts because of
the complementary nature of
agricultural inputs (for example, beef
cannot be produced without the co-
product hides)
• Necessity for lot traceability of work
in process due to quality and
environmental requirements and
product responsibility
• Variability of quality and quantity of • Pricing issues
supply of farm-based inputs • Timing constraints
Auctions / Wholesalers/ • Seasonal supply of products requires • Need for conditioning
Retailers global (year-round) sourcing • Pre-information on quality
• Requirements for conditioned status of products
transportation and storage means
Issues Related to Supply Chain Management in India

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 Industrial Sector
Industrial development in India
Phases of Industrial Development in India

Industrialisation during the British Rule

Indian Industry had a global presence before the advent of Britishers in India. Before the advent of
British in India, India accounted for a quarter of World’s Industrial output.
The exports from India consisted of manufacturers goods like cotton, silk, artistic ware, silk and
woollen cloth.
The impact of British Policies and the Industrial Revolution led to the decay of Indian handicraft
industry. Post-Industrial revolution in Britain, machine-made goods starting flooding into the Indian
markets.
The decline of traditional handicraft was not followed by the rise of modern Industrialisation in India
due to the British policy of encouraging the imports of British made goods and exports of raw
materials from India.
The First Phase (1950-1965): Industrial Sector at the Time of Independence
The main features of the Indian Industrial sector on the eve of the Independence were:
1. There were majority of consumer goods industries vis-à-vis producer goods/capital goods industries
resulting in lopsided industrial development. The ratio of consumer goods industries to producer
good/capital goods industry was 62:38 during the early 1950s.
2. The Industrial sector was extremely underdeveloped with very weak infrastructure.
3. The lack of government support to the industrial sector was considered as an important cause of
underdevelopment.
4. The structure and concentration of ownership of the industries were in few hands.
5. Technical and Managerial skills were in short supply.
As a result of these shortcomings, the national leadership reached on a consensus that economic
sovereignty and economic independence lay in the rapid industrialisation including the development
of Industrial Infrastructure.
The First Five-year Plan did not envisage any large-scale programs for industrialisation. The plan
rather made an attempt to give a practical shape to the Indian economy by providing for the
development of both private and public sector. A number of industries were set up in the public
sector. Important among those were Hindustan Shipyard, Hindustan Tools, Integral Coach Factory
etc.
The Second Five-Year plan accorded highest priority to Industrialisation. The plan was based on
famous Mahalanobis Model. Mahalanobis model set out the task of establishing basic and capital
goods industries on a large scale to create a strong base for the industrial development. The plan

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includes substantial investment in the Iron and Steel, Coal, Heavy engineering, Machine building,
Heavy Chemicals and Cement Industries of basic importance.
The Third Plan followed the strategy of the Second plan by establishing basic capital and producer
good industries with the special emphasis on machine building industries. As a result, the second and
the third plan placed great emphasis on building up the capital goods industries. Most of the capital
good industries are built under the Public Sector.
The First Three-Five Year Plans are important because their aim was to build a strong Industrial base
in India. This first phase of Industrial development in India laid the foundation for strong Industrial
Phase.
As a result, the first Three Plans witnessed a strong acceleration in the growth rate of the Industrial
production. The period witnessed an increase in growth rate from 5.7% to 7.2% and ultimately 9.0%
in the first, second and third plans respectively.
The most important observation of the period was that the rate of growth of capital good industry
considered as the backbone of modern industrialisation grew at 9.8%, 13.1% and 19% during the first,
second and third plan respectively.

SOURCE: GOVERNMENT OF INDIA, HANDBOOK OF INDUSTRIAL STATISTICS

The Second Phase (1965-1980): The Period of Industrial Deceleration
The first three five-year plans mostly focused on the development of the Capital Good sector. As a
result, the consumer goods sector was left neglected. The consumer goods sector also known as wage
good sector is considered to be the backbone of the rural economy and its complete neglect had
resulted in fall in the growth rate of industrial production as well as of the overall economy.
Note 4 Student
The Wage Good Model: Prominent Economist like, C N Vakil and P R Brahmananda advocated
Wage Good model for the development of the Indian economy and Industrialisation. Vakil and
Brahamanda differed from the Mahalanobis strategy as they believe “At the low level of consumption
(this was the situation in India) the productivity of the workers depends on how much they consumed.
According to them, if people were undernourished, they will lose their productivity and become less
efficient, at this juncture it is necessary to feed them to increase their productivity. But this is not true
for all consumer good; so they differentiated between Wage Good (whose consumption increase
worker productivity) and Non-Wage Good (whose consumption did not).
To sum up, Wage Good model says; worker’s productivity depends on not on whether they use
machines to produce goods but also on the consumption of wage goods like, food, cloth and other
basics. Therefore, the first step towards development is to mechanize agriculture and raise food
production; once this objective is reached, one should go for Mahalanobis strategy of Heavy
Industrialisation.
Anyway, Vakil and Bharmananda strategies were ignored and India launched heavy Industrialisation
in the Second plan without mechanising agriculture. The result was failure of Mahalanobis Strategy
and by 1965-66 India was hit by a severe food shortage crisis. Finally, in the wake of the crisis, the
government adopted Bharamananda strategy of mechanizing agriculture sector and engineered green
revolution.

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The period between 1965 to 1975 was marked by a sharp fall in the industrial growth rate. The rate of
growth fell from 9.0% during the third plan to a mere 4.1% during the period of 1965-75. The growth
rate fell to 5.3% in 1965-66, 0.6% in 1966-67, then recovering a little in the succeeding years.

SOURCE: MINISTRY OF COMMERCE, GOI.

SOURCE: MINISTRY OF COMMERCE, GOI.

The deceleration it the growth rate is evident during the fourth and fifth plan. The industrial growth
rate fell from 5.6% in the year 1971-72 to 0.8% in the year 1973-74. At the end of the fifth plan in
1979-80, the industrial growth rate fell to negative 1.6%.
The period of 1965-80 is also marked as the period of structural retrogression, where the growth rate
of the capital good sector and basic industries also fell.
Causes of Deceleration and Retrogression.

Phase Three (1980-1991): Industrial Recovery

The period of the 1980s can be considered as the period of the Industrial recovery. The period saw a
revival in the industrial growth rates. The period witnessed an industrial growth rate of more than 6
percent during the sixth plan and 8.5 percent during the seventh plan. The period was also marked by
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 a significant recovery in the manufacturing and capital good sector. The most important observation
from the revival of industrial sector was that the revival is closely associated with the increase in the
productivity of Indian Industries.

SOURCE: MINISTRY OF COMMERCE, GOI.

Causes of Industrial Recovery

Phase Four (Post Reform Period)

The year 1991 ushered a new era of economic liberalisation. India took major liberalisation decision
to improve the performance of the industrial sector.
1. Abolishment of the Industrial Licensing.
2. Simplification of the procedures and regulatory requirement to start a business.
3. Reduction in the sector exclusively reserved for the Public sector.
4. Disinvestment of the selected Public-sector undertakings.
5. Foreign investors were allowed to invest in the Indian firms.
6. Liberalisation of the trade and exchange rate policies.
7. Rationalisation and massive reduction in the structure of Customs Duties.
8. Reduction in the excise duties.
9. Reduction in the Income and Corporate taxes to promote Business.
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 To analyse the impact of these reforms measures on the industrial growth, it is better to divide the
period into two.
The period of the 1990s
1. The average annual growth rate of the industry which was close to 8% in the post-reform period fell
to 6% in the 1990s.
2. The growth rate in the Eighth Plan was 7.3 percent which was same as the targeted growth rate.
3. The growth rate in the Ninth Plan was 6.0 percent which was significantly less than the targeted rate
of 8.2 percent.
4. Further, the sector witnessed its worst ever performance in the last few years of the Ninth plan with
growth collapsing to just 2 percent.

Source: Ministry of Commerce, GOI.

Causes of Slow Industrial Performance.

The Period since 2002-03:

The period since the new millennium witnessed a sharp recovery and revival of the industrial sector.
The tenth and eleventh plan witnessed a high growth rate of industrial production.
The rate of growth of the industrial sector was 5 percent during the initial years of the Tenth Plan. The
growth picked in the following years and reached 7% in 2003-04, 8% in 2004-05 and 11% in 2006-
07. For the plan as a whole, the growth rate was 8.2 percent.

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 Source: Ministry of Commerce, GOI.
The growth in the Tenth plan was mainly driven by the manufacturing sector. The significant
acceleration in the capital good sector was the significant contributor to the overall economic growth.
During the Eleventh Plan, the industrial growth witnessed a considerable degree of fluctuations. After
growing at more than 8 percent, the growth collapsed to 2.8 percent in the year 2008-09. The main
reason for the collapse was the Global Financial crisis that hit the World in the year 2008.
The industrial growth started recovering in the year 2009-10 and touched a high of 10 percent. The
industrial growth after some setbacks again recovered in the year 2010-11 to reach 8.2 percent.

SOURCE: MINISTRY OF COMMERCE, GOI.

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 too.
1. Weak Demand for exports from the Developed Western Countries due to Global Financial Crisis.
2. The slowdown in the Domestic Demand.
3. High Interest in India maintained by the RBI, due to persistently high Inflation.
4. The slowdown in the Private Investment by the private sector due to weak returns on the investments.
5. Rising NPAs of the Public-Sector banks has led to weak credit and lending offered by them.
6. Failure of past projects of the private sector.
7. Government reluctance to increase Public investment due to the stand of maintaining a low fiscal
deficit.
8. Uncertain Global Recovery.
9. European Debt Crisis.
10. 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.

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Source: Ministry of Commerce, GOI.
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.
Trends of Plan-Wise Industrial Growth Rate.

Industrial Policy in India and its effects on growth

Industrial Policy in India: Pre 1991 Era
Industrial Policy in India
A brief outline of Industrial Policy.
After Independence, the Government of India adopted an approach to develop Industrial sector of
India. India adopted several Industrial Policy resolution to develop the Industrial sector.

Industrial Policy Prior to 1991.

Industrial Policy Resolution, 1948.
The resolution was issued on April 6, 1948. The resolution accepted the importance of both private
and public sectors for the development of the industrial sector.
The 1948 Resolution also accepted the importance of the small and cottage industries as they are
suited for the utilisation of local resources and are highly labour intensive.
The 1948 Resolution divided the Industries into following four categories.
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 Industrial Policy Resolution, 1956.
The Policy Resolution of 1956, laid the following objectives for the growth of the Industrial sector:
1. To accelerate the rate of growth and to speed up the pace of Industrialisation.
2. To develop heavy industries and machine making industries.
3. Expansion of Public Sector.
4. To reduce disparities in Income and Wealth.
5. Development of a competitive Cooperative Sector.
6. To Prevent concentration of Business in few hands and Restriction in Creation of Monopolies.
The objectives were chosen carefully with the aim of creating employment and reducing poverty.
The 1956 Resolution further divided the Industries into three Categories.

To sum up, the 1956 Resolution, emphasised on the mutual dependence and existence of the public
and private sectors. The only 4 industries in which private sector are not allowed were Arms &
Ammunition, Railways, Air Transport and Atomic Energy. In all other sector, either private sector
was allowed to operate freely or will provide help to the government sector as and when needed.
Industries (Development & Regulation) Act, 1951.
The Industries Act was passed by the Parliament on October 1951 to control and regulate the process
of Industrial development in the country. The Acts main task was to regulate the Industrial sector.
The specific objectives of the Act were:
1. Regulation of Industrial Investment and Production according to Five Year Plans.
2. Protection of small-scale enterprises from giant enterprises.
3. Prevention of Monopolies and concentration of ownership of industries in few hands.

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4. Balanced Growth and Equitable development of all the regions.
5. It was also believed that the State is best suited to promote balanced growth by; channelizing
investment in the most important sectors; Correlate supply and demand; eliminate competition; ensure
optimum utilisation of social capital.
Major Provisions of the Act
Restrictive Provisions: It contains all measure provision to curb unfair trade practices.
Registration: The provisions make registration of industries mandatory irrespective of whether they
are private or public in nature. The expansion of the existing business also required licencing and
permission.
Examination and Monitoring of the Industries: After granting of license, it is the responsibility of
the state to monitor the performance of the industries. If at any point in time, the industrial unit was
found not up to the mark, underutilising its resources or charging excessive prices, the government
could set up an enquiry against the unit.
Cancellation of the Licence: The government has the power to cancel the licence granted to the
industrial unit if found, engaging in wrongful behaviour.
Reformative Provisions:
The category involved following provisions.
Direct Control by the Government: Under this provision, the government could set up an enquiry
against the industrial unit and can order reform process, if it was not being run properly.
Control on Price, Distribution and Supply: The Government was empowered by the act to control
and regulate the prices, supply and distribution of the goods produced.
Problems of the Excessive Restrictions imposed by the Government.

Liberalisation measures adopted in the 1980s

1. Exemption from Licensing.
2. Relaxation to MRTP Act and FERA guidelines.
3. Delicensing of large range of industries.
4. Re-endorsed of capacity: Benefits were granted under this scheme to industries who successfully
achieve capacity utilisation of 90 percent.
5. Broad Banding of Industries: Under this, the government branded the industries into broad categories.
For example; cars, jeeps, tractors, light and heavy commercial vehicles are branded as Four-Wheelers.
6. Promotion of Economies of scale in production processes to reduce cost by allowing firms to expand.
7. Development of Backward Areas.
8. Incentives were provided to the Exporters.
9. Promotion of Small Scale Industries by increasing their Investment limits.
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10. New Industrial Policy, 1991.
Industrial Policy in India: Post 1991 Period; New Industrial Policy-1991, National
Manufacturing Policy, Make in India.
Industrial Policy in India: Post 1991 Reforms, Period
New Industrial Policy, 1991
In the backdrop of severe Balance of Payment Crisis of 1991, the Government in continuation of the
measured announced during the 1980s announced a New Industrial Policy on July 24, 1991.
The new industrial policy was a major structural break for the Indian economy. The policy has
deregulated the Industrial sector in a substantial manner. The major aims of the new policy were; to
carry forward the gains already made in the industrial sector; Correct the existing market distortion
from the industrial sector; to provide gainful and productive employment; to attain global
competitiveness.
The Government announced series of Initiative in respect of the following areas:
Abolishment of Industrial Licensing

Role of Public Sector Reduced Substantially

Entry of Foreign Firms and Investments

Other Important Liberalisation Measures

National Manufacturing Policy, 2011

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 The success of India’s economic story has mainly been due to service’s sector growth. Despite strong
policy measures, the industrial sector (especially manufacturing) has stagnated. The maximum
contribution of the sector in the overall GDP is close to 15%, which is far less than that of other
emerging economies like China (whose share is close to 45%). As a result of which, India has failed
to provide gainful employment to its massive labour force.
Lack of employment in the manufacturing sector has put excessive pressure on the agriculture sector
to provide employment, which is not possible under any economic model. The result of this is the
phenomenon called “Jobless Growth”, which is specific to India.
The Government recognising this fact and in order to promote manufacturing sector launched
National Manufacturing Policy on November 2011.
Objectives of the National Manufacturing Policy

Government Policy support under NMP

1. The manufacturing policy proposes to create an enabling environment for the growth of
manufacturing in India.
2. The NMP envisages simplification of business regulations significantly.
3. The NMP proposes the development of the MSMEs sector. The proposal includes technological
upgradations of the MSMEs; adoption of business-friendly policies; equity investments.
4. Skill Development of the youth is the most important part of the NMP.
5. Setting up of National Investment and Manufacturing Zones(NIMZ) with significant incentives like
easy land acquisitions, integrated industrial township development, world-class physical
infrastructure.
6. 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).
Make in India Program
Make in India is a campaign launched by the government of India on 25 September 2015. The aim of
the Make in India program is to project India as an efficient and competitive powerhouse of global
manufacturing. The program aims to convert India into “World’s Factory” by promoting and
developing India as a leading manufacturing destination and a Hub for the production of
manufacturing goods.
Make in India is essentially an invitation to the foreign companies to come and invest in India on the
back of the Government promise to create an environment easy for doing business. But contrary to
public perception, no specific concessions have been offered to foreign investors under this scheme
till date.
The government since the launch of the program is trying to make India an attractive destination for
global Multinationals by focussing on ease of doing business, liberal FDI regime, improving the
quality of Infrastructure and Business-friendly policies.

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 The need for the program
1. 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%.
2. 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.
3. 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).
4. 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).
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. Having said that, the success of the Make in India programme lies in India building capabilities to
manufacture world-class products at competitive prices. In today’s dynamic world, achieving the
same is far more complex as the variables which impact business are extremely fluid and require
businesses to be extremely flexible and adaptive to changes in the environment and technology.
How Government is supporting the Program
• 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
• 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:
a) Industrial Corridors
Cities/regions have been identified to be developed as investment centres in the Delhi-Mumbai
Industrial Corridor in partnership with the State Governments.
(i) Ahmedabad-Dholera Investment Region, Gujarat;
(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;
(iii) Manesar-Bawal Investment Region, Haryana;
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(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;
(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;
(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and
(vii) Dighi Port Industrial Area, Maharashtra.
b) Foreign Direct Investment
Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100% FDI under
automatic route has been permitted in construction, operation and maintenance in specified Rail
Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases of modernization of
state-of-art proposals, FDI can go up to 100%; the norms for FDI in the Construction Development
sector are being eased.
c) Easing of Laws, Rules and Regulations
Major changes have been proposed in various laws and rules to overcome regulatory hurdles
d) Investment Security and Stable and Conducive Government Policies
The Government is committed to chart out a new path wherein business entities are extended red
carpet welcome in a spirit of active cooperation. Invest India will act as the first reference point for
guiding foreign investors on all aspects of regulatory and policy issues and to assist them in obtaining
regulatory clearances. The Government is closely looking into all regulatory processes with a view to
making them simple and reducing the burden of compliance on investors. An Investor Facilitation
Centre has been created under Invest India to provide guidance, assistance, handholding and
facilitation to investor during the entire circle of the business.
What more should be done to make India an attractive destination for Global Firms?

The Sectors:

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Public sector undertakings in India

The Role of Public Sector Enterprises in the Indian Economy.

Public Sector in the India Economy
What is Public Sector: A Brief Profile
The public sector in India is composed of a number of segments

The Importance/Presence of the Public Sector in the Indian Economy

Role of the Public Sector in the Indian Economy

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 Problems Associated with Public Sector

Public Sector Reforms in India, 1991

The Statement on Industrial Policy, of July 24, 1991, recognised the many problems that have
manifested themselves in many of the public enterprises and sought to rectify these problems. It noted
that many public enterprises have become a burden rather than being an asset to the Government. The
statement proposed “it is time therefore that the Government adopt a new approach to public
enterprises”.
1. The areas reserved for the public sector were reduced drastically from 17 to 8(and later to 6). In
manufacturing, the only areas which continue to be reserved for the public sector are those related to
defence, strategic concerns and petroleum. Even, here there is no bar to the Government inviting the
private sector to participate.
2. Specific attention was given to the issue of industrial sickness in public enterprises and a commitment
was made to refer all sick public enterprises to the Board of Industrial and Financial Reconstruction
(BIFR) or similar body so that appropriate decisions could be taken on the rehabilitation of these
enterprises after examination on a case by case basis.
3. A commitment was made to provide greater autonomy to remaining public enterprises through the
strengthening of the MOU (Memorandum of Understanding) system and by providing greater
professional expertise in the Boards of these enterprises.
4. The decision to dis-invest equity in the public sector enterprises was also announced in the Statement
on Industrial Policy.
5. To sum up, the intention behind the announcements made in the Statement of Industrial Policy was to
undertake a wide ranging public sector reform. The objective was to induce greater efficiency,
productivity and competitiveness in the public sector. The enterprises currently in the public sector
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 were to be strengthened so that they are enabled to participate profitably in the new competitive
environment that now exists in both the domestic and international economy. If this involves
disinvestment or privatisation, it must be accomplished purposively and quickly.
The Reforms Done so far
1. De-reservation:
 In the manufacturing sector, the reserved areas for the public sector now only include defence
production and mineral oils.
 In the case of mineral oils (petroleum exploration, petroleum refining, etc.), however, private
investment including foreign investment is being actively invited, but on a discretionary basis.
 The other reserved areas are in respect of atomic energy, minerals related to atomic energy, coal and
lignite, and railway transport. Mining of iron ore, manganese ore, chrome ore, etc., and mining of
non-ferrous metals, which was earlier reserved for the public sector was further dereserved in 1993.
 Thus, from the original list of 17 (see Annex III) now only 6 areas still remain reserved for the public
sector.
 The public sector enterprises are now open to competition from new entry in all areas of
manufacturing except in defence production.
Revamping of SICK PSU’s
 The Sick Industrial Companies Act (SICA) has been amended to make mandatory the referral of sick
public sector enterprises to the BIFR.
 Hence, all sick (bankrupt) public sector industrial firms now have to be restructured through revival,
rehabilitation, or closure if found to be unviable. Once the bankrupt public sector firms are referred to
the BIFR, the government has, by necessity, to make decisions that result from the orders of this
Board.
 After referral to the BIFR the Board first has to decide whether a firm has been correctly referred to
them in terms of the definition of sickness (a firm is defined as sick if its net worth has been totally
eroded, if it has made losses for two consecutive years and if it has been in existence for more than
five years).
 Once a firm is accepted by the Board for further enquiry, the firm itself is usually asked to put
forward its own proposal for a restructuring programme. If this is not found to be satisfactory an
operating agency (OA) is usually appointed in order to examine its viability or otherwise.
Establishment of the National Renewal Fund.
The National Renewal Fund was established in 1992 to provide a social safety net for workers
affected by industrial restructuring. As various enterprises (in both the public and private sectors)
undertake a restructuring process, workers would need focused assistance for re-training,
re-deployment, skill upgradation and other kinds of employment counselling.
The intention behind the NRF was
1. to provide compensation to workers who would be affected by industrial restructuring;
2. to assist such workers in re-training and re-deployment;
3. to provide resources for employment generation in areas affected by industrial restructuring. It also
had provision for compensating workers who opt to take voluntary retirement from existing public
sector enterprises.
Greater Autonomy to Public Enterprises
In the statement on Industrial Policy, a commitment had been made to provide greater autonomy to
remaining public enterprises through the strengthening of the Memorandum of Understanding (MOU)
system and by providing greater professional expertise in the boards of these enterprises.

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 Disinvestment Policy in India
The Disinvestment Program in India
Disinvestment of the Shares/Equity of Public Sector Enterprises
 The government of India has decided to withdraw from the Industrial sector, and in accordance with
this decision, it decided to privatize the Public sector enterprises in a gradual and phased manner.
 The approach adopted by the government in this regard is to bring down its equity shares in all non-
strategic Public sector enterprises to 26 percent or lower.
 For the purpose of privatization, the government has adopted route of disinvestment which involves
the sale of the public sector equity to the private sector.
 In the first round of dis-investment it was decided to (a) offer a randomly structured portfolio of
shares each with notional reserve price based on a complex valuation procedure and (b) to off-load the
shares to institutional investors as a buffer between the Government and the stock market.
 Financial institutions and mutual funds were offered the opportunity to bid for the bundles. Later, the
bidding process was opened up to foreign institutional investors and to the public at large with the
stipulation of a certain minimum bid. Almost all the bidding so far has been done by financial
institutions or mutual funds.
 There have been the inevitable controversies about the prices at which some of the initial shares were
sold, even though all the disinvestment has been done through an auction process.
 The Government has decided to permit up to 49% disinvestment of equity so that the government
would continue to hold 51%. A firm is legally regarded as a public sector firm in India if the
Government holds more than 50% of equity. A company so classified is then subject to all the rules,
regulations, procedures etc. connected with government ownership. Thus, a firm in which government
ownership goes below 50% can be effectively regarded as being in the private sector even if the
government has a dominant share holding.
 One criticism of this disinvestment process has been that it has essentially been seen as resource
raising exercise by the government.
 A second and, perhaps, more valid criticism is that the valuation of shares is affected by the decision
not to reduce government holdings to less than 51 per cent. With the continuing majority ownership of
the government the disinvested public enterprises would continue to operate within the constraints of
the public sector. Thus, there is a lack of clarity on future corporate plans and prospects of these
enterprises. Consequently, it is expected that share bids would be lower than they would otherwise be
if there was a clear announcement of eventual disinvestment of greater than 51 per cent.
Types of Disinvestment Methods in India
The method is followed in India from time to time. The method involves the sale of the Public sector
equity to the private sector and the public at large.
Methods of Disinvestment
There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s
perspective)
Minority Disinvestment
A minority disinvestment is one such that, at the end of it, the government retains a majority stake in
the company, typically greater than 51%, thus ensuring management control.
Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to
the public by way of an Offer for Sale. The present government has made a policy statement that all
disinvestments would only be minority disinvestments via Public Offers.
Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of
them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale

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include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd.,
NHPC Ltd. etc.
Majority Disinvestment
A majority disinvestment is one in which the government, post disinvestment, retains a minority stake
in the company i.e. it sells off a majority stake. It is also called Strategic Disinvestment.
Historically, majority disinvestments have been typically made to strategic partners. These partners
could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to
BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever,
BALCO to Sterlite, CMC to TCS etc.
Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer
for Sale, separately or in conjunction with a sale to a strategic partner.
Complete Privatisation
Complete privatisation is a form of majority disinvestment wherein 100% control of the company is
passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of
HCI.
Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital
difference between the two. Disinvestment may or may not result in Privatisation. When the
Government retains 26% of the shares carrying voting powers while selling the remaining to a
strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can
still stall vital decisions for which generally a special resolution (three-fourths majority) is required.
The Way Ahead: What should be the Objectives of Public Sector Enterprises Disinvestment and
Restructuring?

The means of achieving these objectives involve considerations such as the injection of greater
competition into the industrial economy in order to foster a healthier market structure.

Categories of Public Sector Enterprises:

Maharatnas; Navratnas; Miniratnas
Navratnas, Maharatnas and Miniratnas
The Public Sector Enterprises are run by the Government under the Department of Public Enterprises
of Ministry of Heavy Industries and Public Enterprises. The government grants the status of Navratna,
Miniratna and Maharatna to Central Public Sector Enterprises based upon the profit made by these
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 CPSEs. The Maharatna category has been the most recent one since 2009, other two have been in
function since 1997.
The Maharatna Status
The Maharatna PSUs are chosen from those PSUs who holds the status of Navratnas and must be
listed on the Indian stock exchange fulfilling the minimum prescribed public shareholding according
to the SEBI regulations. The following conditions must be satisfied in order to get Maharatna status:
 The Average annual turnover of the PSU during the last 3 years is more than Rs. 25,000 crore.
 The Average annual net worth during the last 3 years is more than Rs. 15,000 crore.
 The Average annual net profit after tax during the last 3 years is more than Rs. 5,000 crore.
 The company should have the significant global presence or international operations.

There are 7 Maharatna CPSEs currently, namely:

1. Bharat Heavy Electricals Limited
2. Coal India Limited
3. GAIL (India) Limited
4. Indian Oil Corporation Limited
5. NTPC Limited
6. Oil & Natural Gas Corporation Limited
7. Steel Authority of India Limited
The Navratne Status
 The company must have ‘Miniratna Category – I‘ status along with a Schedule ‘A’ listing.
 It should have at least 3 ‘Excellent’ or ‘Very Good’ Memorandum of Understanding (MoU) during
the last five years.
 Along with the above, it should also have a composite score of 60 or above out of possible 100 marks
in the 6 selected performance parameters:-
1. Net Profit to Net Worth (Maximum: 25)
2. Manpower cost to cost of production or services (Maximum: 15)
3. Gross margin as capital employed (Maximum: 15)
4. Gross profit as Turnover (Maximum: 15)
5. Earnings per Share (Maximum: 10)
6. Inter-Sectoral comparison based on Net profit to net worth (Maximum: 20)
7. There are 17 Navratna CPSEs in the country
The Miniratnas Status

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 The CPSEs that have shown profits in the last continuous three years and have positive net worth can
be considered eligible for grant of Miniratna status.
 Presently, there are 71 Miniratnas in total.
 The Miniratnas are divided into two categories (I and II).
Category One: The PSUs that have made profits in the previous three years or have generated a profit
RS 30 crore or more in one of the preceding three years.
Category Two: The PSUs that have made profits in the preceding three years and have a positive net
worth in all three preceding years.
Privatisation of Public Sector Enterprises in India
Privatisation is a process by which the government transfers the productive activity from the public
sector to the private sector.
Privatisation offers many advantages.

Methods of Privatisation adopted in India.

Initial Public Offers (IPO).
IPOs are the most favoured method of privatisation followed in the developed countries of Europe and
OECD. Under this method, the shares/equity holdings of the PSUs are sold to the private retail
investors and institutions like Mutual Fund houses, Pension Funds and Insurance Companies etc.
The prerequisite for the IPOs to be successful is that a country must have a well-developed and well-
functioning Capital Market.
The main advantages of the IPO method are:
 It ensures wide participation of retail investors.
 It is likely to face less resistance from the PSUs stakeholders like employees, as the method involves
only selling of PSUs shares without any change in the management and policies.
 It can be used to offer shares to the employees.
 The method is best suited when the government wanted to raise financial resources without losing on
the management and control of the PSU.
Strategic Sale.
Strategic Sale is a method in which the government decides to sell PSU shares to a strategic partner.
The management in all such cases passes to the strategic buyer.
The various advantages of the method are:
 The performance of the PSU is expected to improve as the private player selected will already have an
expertise in the management and operation of the PSU.
 The strategic partner will be willing to pay a better price for the PSU as his business interest lies in
combining his own business with that of PSU.
 The method helps in infusion of capital and modernisation of the PSUs.
 The method also helps the government in transferring the loss making PSU which could not have
been attractive to retail buyers otherwise. The strategic partner will acquire such business as he has
the prerequisite skills to turnaround the PSU.
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 The method is very important for countries having less developed capital market.
Disadvantages:

Sale to Foreign Firms.

The method is a variant of the strategic sales method where the government decides to sell the PSUs
to the foreign firms.
Management and Employees Buy outs.
In this route, management and employees come forward to but the shares and equities of the PSUs.
Disinvestment.
The method is followed in India from time to time. The method involves the sale of the Public sector
equity to the private sector and the public at large.
Methods of Disinvestment
There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s
perspective)
 Minority Disinvestment
 Majority Disinvestment
 Complete Privatisation

Infrastructure
Infrastructure Sector in India: Definitions; Growth and
Infrastructure Linkage
Infrastructure Sector
Definitions:
Infrastructure is a key driver of the overall development of Indian economy. Infrastructure sector
focuses on major infrastructure sectors such as power, roads and bridges, dams and urban
infrastructure.
“Infrastructure is generally understood as the basic building blocks required for an economy to
function efficiently”.
The National Statistical Commission headed by Dr. C. Rangarajan, attempted to identify
infrastructure based on some characteristics. The Rangarajan Commission indicated six characteristics
of infrastructure sectors:

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Based on these features (except b, d, and e), the Commission recommended inclusion of following in
infrastructure in the first stage:

Dr. Rakesh Mohan Committee in “The India Infrastructure Report” included:

The World Bank treats power, water supply, sewerage, communication, roads & bridges, ports,
airports, railways, housing, urban services, oil/ gas production and mining sectors as infrastructure.
The Economic Survey considers power, urban services, telecommunications, posts, roads, ports, civil
aviation, and railways under infrastructure sector.
Why do Infrastructure Matter for Growth & Development?
There is, indeed, a plethora of anecdotal and more technical evidence that suggests development of
infrastructure can lead to growth and development of an economy.
The argument is particularly true for the developing countries which lack adequate infrastructure
facilities. Intuitively, it should make sense to assume that the more developed a country is, the higher
its infrastructure facilities and hence the lower the return from additional investment in roads,
railways, ports etc. However, the less developed a country is, the more likely the infrastructure is to
matter, because the returns from the Infrastructure development will be much more than the cost of
the projects.
Example: A massive road-building exercise in a poorly developed state can offer a one-time boost
production activity and productivity of workers in the state.

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Infrastructure Sectors & Growth
Any modern textbook on industrial economics or industrial organization will point out that for
industries that enjoy network externalities (positive spill over effects/benefits to other
sectors/industries), the social rate of return has to be higher than the private rate of return in these
projects—assuming that the regulation does not allow the network externality to be turned into a
private rent. In other words, their impact on GDP and its growth should be high. This explains for
instance why the growth impact of the telecoms sector so often come out to be high. But for specific
countries or regions, this could also be true for transport or electricity.
In general, however, all infrastructure subsectors can be good examples of sectors in which such
network externalities can matter. This section reviews the main lessons available on each subsector on
the growth impact of each infrastructure subsector.
Energy Sector
The importance of energy sector especially electricity in promoting growth and development via
human development and physical development is well known. The single most reason obstructing the
growth of the industrial sector in general and manufacturing in particular in India is deficiency of
continuous power supply (electricity/electrification) to run factories.
Various studies have found out that, there exist a positive impact on energy infrastructure on the
growth of an economy. Therefore, investing in the energy sector may be the safest bet to achieve a
high growth. This should not be a surprise, energy is indeed an input into any of the other
infrastructure subsectors—for instance, water for irrigation purpose is often pumped through the
electric pumps.
Telecommunication
The impact of telecommunication on the growth is found to be maximum. The availability of fixed
line phones and mobile phone penetration have effectively transformed the Indian economy and has
given boost to Businesses like BPOs and KPOs (Knowledge Processing Outsourcing).
The recent growing research on the importance of the access to internet to increase competition in the
private and public sector and from increasing competition to the higher social return and growth of
industries is well documented.
Transport
For developing countries like India, the estimated growth effects of transport investments have been
very strong. This has been a common finding in research over the last 20 years or so. This is not
surprising since the transport facilities in India are weak. The main impact of improved transportation
facilities on the development has to come from quality, from addressing bottlenecks or from capturing
new network or suprational effects which have not been internalized in older designs of the transport
networks.
In fact, studies have found, that for most of the developing countries, the construction of Roads,
Railways, Highways, Airports and Sea Ports have contributed positively towards increasing growth.

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For instance, roads are needed in Africa, if Africa wanted to match the growth rate of the rest of the
world. Construction of Roads & Highways are essential to reduce differences across regions in India.
Ports are needed in India, if India, wants to increase its exports and become a major player in the
Global Economy.

Infrastructure Development in India

Infrastructure Development in India
Historical Timeline

Infrastructure Sector: Recent Developments

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FDI Flows in the Infrastructure Sector

Infrastructure Projects Completed during 12th Five-Year

Plan

Expansion of Roads: Recent Trends

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 Revenue growth of Indian Railways

Power Generation Capacity

 Installed capacity increased steadily over the years, posting a CAGR of 10.57 per cent in FY09–17
and stood at 326.84 (GW).
 As of June 2017, energy generation from conventional sources stood at 307.7 billion units (BU).

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Performance of Eight Core Infrastructure Sector

Infrastructure Sector in India: Growth Drivers; Government

Policy Initiatives
Growth Drivers for Infrastructure Sector in India

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Recent Government Initiatives

Construction Sector

Affordable Housing Scheme

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Infrastructure Development in North Eastern States

Metro Rail and Mono Rails

Mono Rail

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 Road Transport in India
Classifications of Roads
Roads are mainly classified into following Categories:

Road Network in India

Importance of Road Transport

Road Development in India

The major initiative undertaken by the government for the development of road sector are:
 The National Highway Development Project (NHDP).
 Pradhan Mantri Bharat Jodo Pariyojana (PMBJP): linking of major cities to National
Highways.
 Pradhan Mantri Gram Sadak Yojana (PMGSY): Construction of Rural roads.
National Highway Development Project
NHDP deal with the development of high quality highways. NHDP is the largest highway project
undertaken in the country. It has been implemented by the National Highway Authority of India
(NHAI).
Initially, The National Highway Development Project (NHDP) consists of two major components:
The “Golden Quadrilateral”: The Golden Quadrilateral” project will connect the four major
metropolitan cities (Delhi. Mumbai, Chennai & Kolkata) with 4-6 lane highways, with a total length
of about 5,850 km.

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 The “North South – East West” projects: The “North South – East West” project will connect the
Northern most point of the country to the Southernmost, and similarly from East to West, with a total
length of about 7,300 km
The NHDP was expected to cost Rs 540 billion, when started in 1998. The financing pattern of this
project indicates that private sector participation in the form of investment amounts to only Rs 40
billion (7.4 per cent of the total).
Over the course of the project, institutions like the World Bank, Asian Development Bank (ADB) and
Japanese Bank for International Cooperation (JBIC) are expected to finance about Rs 200 billion;
another Rs 200 billion of investment would be financed from the cess.
NHDP consists of following Phases:
1. Phase 1 and Phase 2: The phase envisages construction of 4 & 6 lane highways of about 14000 KMs.
The two phases comprise construction of “Golden Quadrilateral” and North South (Sri Nagar to
KanyaKumari) – East West (Silichair to Porbandar) Projects.
2. Phase 3: The phase consists of construction of 4-6 lane National highways of 12100 KMs connecting
state capitals, tourist places, industrial centres.
3. Phase 4: The phase involved upgradation and strengthening of 20000 KMs of single/two lane national
highways.
4. Phase 5: The phase involved construction of 6 lane national highways of 6500 KMs.
5. Phase 6 & 7: The phase 6 & 7, involved construction of 1000 KMs of expressways and construction
of 700 KMs of ring roads of major towns and bypasses and other elevated roads, tunnels, underpasses
on national highways respectively.
Problems of the Road Sector

Road Sector in India Recent Developments

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Expansion of Roadways:

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Road Development Program for North East Region
The Special Accelerated Road Development Programme for the North-Eastern region (SARDP-NE) is
aimed at developing road connectivity between remote areas in the North East with state capitals and
district headquarters
SARDP-NE is vested with the development of double-/four-lane national highways of about 7,530
kms and double-laning improving about 2,611 kms of state roads, as on FY16
Implementation of the road development programme would facilitate connectivity of 88 district
headquarters in North Eastern states to the nearest National Highways
The project would be undertaken in following 3 phases:

Policy Initiatives by the Government

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Civil Aviation Sector in India
In India, a beginning in the air transport was made in the year 1920, when the government first
decided to prepare air routes between Mumbai and Kolkata. The civil aviation work actually started in
in 1924-25, but the progress was slow until the outbreak of the second World War.
Hindustan Aeronautics Limited: The Hindustan Aircraft (now Hindustan Aeronautics Limited), was
founded in 1940. It was started at Bangalore (now Bengaluru) as a repair, overhauling and
assemblage depot, has now grown into an important manufacturing plant. It has designed and
manufactured trainer air-crafts. It belongs to the aerospace and defence industry. It is managed by
Ministry of Defence.

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Civil Aviation Recent Developments: A Snapshot

India is the 9th largest civil aviation market in the world, In FY17, domestic passenger traffic
witnessed a growth rate of 21.5 per cent
In FY17, airports in India witnessed a domestic passenger traffic of about 205 million people.
Investments worth US$ 6 billion are expected in the country’s airport sector in 5 years
India’s civil aviation market is set to become the world’s 3rd* largest by 2020 and expected to be the
largest by 2030
Growth Potential & Drivers of Indian Aviation Industry

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 Airport Authority of India

Airports & Airstrips in India

Major Airline Operator in India

Private Sector Participation in Airport Development

Until 2013, AAI was the only major player involved in developing and upgrading airports in India.
Post liberalisation, private sector participation in the sector has been increasing.
Private sector investment increased to US$9.3 billion during the 12th Five Year Plan from US$ 5.5
billion in the previous plan.

1. Recourse to the Public Private Partnership (PPP) model has boosted private sector investments in
airports
2. PPP route for five international airports (Delhi, Mumbai, Cochin, Hyderabad, Bengaluru) most
noteworthy
3. In Union Budget 2017, Government of India has decided to develop select airports in tier 2 cities
under PPP model in order to attract investments from private players.
4. Increasing share of private sector in equity component of major airports:

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 74 per cent private shareholding in IGI Airport (Delhi) – owned majorly by GMR (54 per cent),
Fraport AG (10 per cent), Eraman Malaysia (10 per cent); rest of the shares owned by AAI
 74 per cent private shareholding in CSI Airport (Mumbai) – owned majorly by GVK (50.5 per cent),
Bid Services Division (Mauritius) Ltd. (13.5 per cent), ACSA Global (10 per cent); rest of the shares
owned by AAI
 74 per cent private shareholding in RGI Airport (Hyderabad) – owned majorly by GMR (63 per cent),
Malaysia Airports Holdings Berhad (11 per cent); rest of the shares owned by Government of India
(13 per cent) and Government of Andhra Pradesh (13 per cent)
 74 per cent shareholding in Kempagowda International Airport (Bengaluru) – owned majorly by
Siemens Project Ventures, Germany (40 per cent), Unique (Flughafen Zurich AG) Zurich Airport,
Switzerland (17 per cent), L&T, India (17 per cent); rest of the shares owned by AAI (13 per cent)
and KSIIDC, which is an agency owned by the state of Karnataka, India (13 per cent).
In March 2017, by selling off 2 offshore bonds, GMR plans to raise US$250-300 million for
refinancing their debt. In June 2017, GMR announced plans to refinance loans and divest assets in
road and power sectors to cut debt so as to invest up to Rs. 7,400 (US$ 1.15 billion) crore to expand
Delhi and Hyderabad airports.
Successful PPP Model Airports in India
Presently India has 5 PPP airports each at Mumbai, Delhi, Cochin, Hyderabad and Bengaluru, which
together handle over 55 per cent of country’s air traffic.
Government of India has approved 15 greenfield PPP projects which are expected to increase the air
traffic in India. These projects would be setup in Goa, Navi Mumbai, Maharashtra, Bijapur, Gulbarga,
Karnataka, Kerala, West Bengal, Madhya Pradesh, Sikkim, Puducherry and Uttar Pradesh.

Government Initiatives in Civil Aviation Sector

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 Railway Sector in India
Indian Railways (IR) have been the prime movers to the nation and have the distinction of being the
second largest railway system in the world under single management. IR has historically played an
important integrating role in the socio-economic development of the country. Its role in economic
development assumes importance due to its innate advantage as a mode of surface transport being
more energy efficient and environment friendly than other transport modes.
Indian Railways: Segments

Railway Segments

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Importance of Railways

Railways Development in India: A Snapshot

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Growth Drivers for Railways

Revenue Growth for Indian Railways

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Revenue Breakup for Railways

Subsidiaries of Indian Railways

Public Private Partnership in Indian Railways

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Recent Initiatives by the Railways

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Announcement Made in Railway Budget

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Dedicated Freight Corridor

DFC Objectives

Dedicated Freight Corridor: Projections

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Modernisation of Railways

Policy Support by the Government

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Automobile Freight Train Operator Scheme 2013:

Wagon investment scheme

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 Participative models for rail connectivity and capacity augmented projects

Key modernisation initiatives

1. Introduced ‘Operation 5 minutes’ scheme for passengers travelling unreserved, which provides the
passengers the time to purchase tickets within 5 minutes
2. Installing Bio–toilets by 2016. So far (till October 2016), Indian Railways have installed more 49,000
Bio–toilets in passenger coaches, extension of built-in dustbin facility has been approved for non-AC
coaches. Setting up of 5-year safety plan
3. Introducing 24/7 All – India helpline number through which passengers could address their problems
on a real – time basis. Toll free number, 138 has been launched as 24/7 All-India helpline number and
availability of Toll – free number, 182, for security related complaints
4. Moving towards paperless ticketing and charting by development of multi–lingual E–ticketing portal.
In the coming years, SMS on mobiles would be taken as proof instead of tickets promoting paperless
tickets throughout India.
5. Train protection warning system and train collision avoidance system have been installed on selective
routes
6. Setting up a new department that would ensure the railway stations and trains are kept clean.
Improving North-East and J&K connectivity.
7. In an initiative to decarbonize rail transport, Indian Railways will be collaborating with various
public-sector enterprises to speed up the process of electrification of railway tracks
8. As of June 2017, the Indian Railways is preparing to acquire 25 E5 Shinkasen series bullet trains from
Japan for an estimated cost of US$743.71 million. The high speed corridor will have urinals, western
style toilets with hot water and washing closet seat facility, separate washrooms for men and women
equipped with triple mirrors for make-up and many other facilities.

Telecommunication Sector in India

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 Telecommunication Sector
The substantial progress made in telecommunications since the early 1990s is a success story. The
number of telephone lines has grown by 25-30 per cent each year throughout the 1990s.
The telecommunication sector witnessed revolutionary change in the recent years and the Indian
Telecom network is now the second largest in the World after China. From only 76 million
subscribers in 2004, the number has increased to more than 1200 million in 2016. The increased has
been entirely due to spectacular increase in wireless connections or mobile phones. The number of
mobile connections rose from 35 million in 2004 to 1150 million in 2016. Tele density an important
indicator of telecom penetration increased from 7 percent in 2004 to 93 percent in 2016.
Telecommunication Reforms
1. Reform in the telecommunications sector began in 1992-93 with the opening of value added services
to the private sector. Subsequently, after intensive deliberation within the Government and outside,
the National Telecom Policy (NTP 1994) announced the opening of basic telecom services to
competition, and the initiation of cellular mobile services.
2. Private initiative was to complement public sector efforts to raise additional resources through
increased internal generation and the adoption of innovative means like leasing, deferred payments,
build-operate transfer, and the like.
3. The NTP 1994 also envisaged the provision of a public telephone becoming available for every 500
persons in urban areas and at least one in every village.
4. The method employed for inducing the private sector into both basic and cellular services was through
the auction of licence fees, consistent with what has been followed by many other countries. The
consequence was that the auction process elicited excessively high bids, even from bidders who had
no previous history of substantive telecom experience, or even any other experience. Once the
licences had been awarded, and operations had begun, inevitable complaints arose about the licence
fees being too high and uneconomic.
5. Since various developments had taken place in the telecom sector and new issues had arisen, a New
Telecom Policy (NTP 1999) was announced. The issues that had arisen during this period related to:
 Perception of the original licence fee bids having been excessive
 Inadequate competition resulting from the existence of only two operators in each circle
 Continuing changes in technology
 The emergence of India as a significant player in the IT industry
1. Under the NTP 1999, a package for migration from fixed licence fee to revenue sharing was offered
in July 1999 to the existing cellular and basic service providers.
2. The MTNL was allowed as a third operator to provide cellular services to promote competition.
Government opened national long-distance services to private operators without any restriction on the
number of operators and with moderate entry fees.
3. International Long Distance Services were then opened in 2001, also with no limit on the number of
operators and moderate entry fees. Both are subject to licence fees being paid as revenue sharing.
Thus significant competition was introduced in the Indian telecom market starting in 2000-2001.
4. The consequence has been dramatic: cellular mobile tariffs have fallen by about 90 per cent since
1999, and long distance tariffs, both domestic and international, fell by 75 per cent between 2000 and
the end of 2012.
5. Corresponding organisational changes also took place during 2000-01. The two service providing
departments of the telecom sector were corporatised, viz., Department of Telecom Services (DTS)
and Department of Telecom Operations (DTO).
6. A new public sector company ‘Bharat Sanchar Nigam Limited’ (BSNL) was given all service
providing functions of these two departments with effect from October 2000. A fourth cellular
operator in all the circles was permitted.

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7. With the introduction of effective competition in the cellular mobile services sector, the Telecom
Regulatory Authority of India (TRAI) made cellular mobile tariffs free from regulation while
reserving the right to intervene in the case of any malpractice such as the offer of predatory tariffs.

Telecommunication in India: Recent Developments

The Telecom Market Segments

Telecom subscriber base expansion

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Wireless Subscription dominates the Indian Markets

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Market Share of Wireless Service Providers

Fixed Line/Land Line Segment

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Internet Subscription is on the Rise

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 Notable Initiatives of Indian Telecom Sector

Policy Support by Government to the Telecom Sector

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National Telecom Policy, 2012

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Mobile Application Market in India

Port sector in India

Ports in India
A common characteristic of the fast-growing East and South East Asian countries has been the rapid
growth of trade during their high growth period. A higher share of trade in the economy contributes to
the attainment of higher efficiency. A country improves its resource allocation by exporting those
goods where it exhibits competitive advantage and imports those where it does not. As its
comparative advantage changes, so does the composition of its exports and imports.
Thus, in order to achieve higher economic growth and higher efficiency levels, the trade-GDP ratio
needs to increase substantially. Improvement in the efficiency of ports and expansion of their capacity
is essential for promoting the growth of trade and export competitiveness.

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Ports in India: A brief Profile

Categorisation of Indian Ports

Major Ports of India

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Capacity of Major Ports

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Recent Development & Strategies for Port Sector

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Growing External Trade and Ports Expansion

National Maritime Agenda, 2010-2020

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Sagar Mala Project

Need for such a project

Objectives of the project

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Suggested recommendations under the project

National Sagarmala Apex Committee (NSAC)

Six megaports are planned under Sagarmala project

Energy and Power Sector

Executive Summary

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India’s Power Sector: Evolution

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World’s Leading Electricity Producer’s

Sources of Power in India’s Installed Capacity

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Energy Security in India: Recent Developments

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Government Policy Support for the Energy Sector

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 Renewable Energy: A rising Source
1. Wind energy is the largest source of renewable energy in India; it accounts for an estimated 64.77 per
cent of total installed capacity (24.7 GW). There are plans to double wind power generation capacity
to 20 GW by 2022.
2. Biomass is the 2nd largest source of renewable energy, accounting for ~12 per cent of total installed
capacity in renewable energy. There is a strong upside potential in biomass in the coming years.
3. In May 2017, India’s solar power tariffs fell to a new low of US$ 0.038 per unit during the auction of
a 250-megawatt capacity at Bhadla in Rajasthan. This bid was placed by South Africa’s Phelan
Energy Group and Avaada Power to win contracts to build capacities of 50MW and 100MW,
respectively, at Adani Renewable Energy Park Rajasthan Ltd.
4. In February 2017, low solar tariffs tendered in India at auction, is expected to catalyse green
investments and help in reducing the dependency on fossils fuels.
5. On account of anticipated decline in solar panel prices, due to supply glut in international market,
solar power prices in India are estimated to fall by 2018.
6. In March 2017, the Power Ministry has launched an application named – GARV-II, to provide real
time data related to rural electrification regarding all un-electrified villages in India.
7. Declining solar power prices as compared to thermal power has prompted the government to switch to
the renewable energy resources. Three coal power projects have been shelved in Odisha, Gujarat and
Uttar Pradesh due to low rate of renewable solar energy at US$0.038 / kWh.

Nuclear Energy in India: Recent Trends

1. Currently, the country has net installed capacity of 5.8 GW, using nuclear fuels, across 20 reactors. Of
the 20 reactors, 18 are Pressurised Heavy Water Reactors (PHWR) and 2 are Boiling Water Reactors
(BWR)
2. The government aims to quadruple India’s nuclear power generation capacity to 20 GW by 2020;
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3. Nuclear Power Corporation of India Limited (NPCIL) plans to construct 5 nuclear energy parks with a
capacity of 10,000 Mwe
4. The Kudankulam Atomic power project, Tamil Nadu, by NPCIL is expected to start operating by
2016-17 with an installed capacity of 1000 MW.
5. Unit II of Kudankulam plant has started functioning in May 2016 with an installed capacity of 1000
MW. The Kudankulam nuclear power plant’s 2nd unit attained criticality on 10th July, 2016.

Investment Model
Investment Models: Public Sector Led Investment Model; Private
Sector Led Investment Model
Investment Models
Public Sector Led Investment Model

Advantages of Public Investment Model

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Private Investment Model
The Supply Side:

The Demand Side:

Public-Private Partnership Model: Definitions;

Need for PPP; Prerequisites

Public-Private Partnership Model

Definitions:

A PPP Project means a project based on a contract or concession agreement, between a Government
or statutory entity on the one side and a private sector company on the other side, for delivering a
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service on payment of user charges. The rights and obligations of all stakeholders including the
government, users and the concessionaire flow primarily out of the respective PPP contracts.
Unlike private projects where prices are generally determined competitively and Government
resources are not involved, PPP projects typically involve transfer of public assets, delegation of
governmental authority for recovery of user charges, private control of monopolistic services and
sharing of risks and contingent liabilities by the Government.
The justification for promoting PPP lies in its potential to improve the quality of service at lower
costs, besides attracting private capital to fund public projects. For creating a transparent, fair and
competitive environment, the Government of India has been relying increasingly on standardising the
documents and processes for award and implementation of PPP projects.
A poorly structured PPP contract can easily compromise user interests by recovery of higher charges
and provision of low quality services.
It can also compromise the public exchequer in the form of costlier or uncompetitive bids as well as
subsequent claims for additional payments or compensation.
The process of structuring PPPs is complex and it is, therefore, necessary to rely on experienced
consultants for procuring financial, legal and technical advice in formulating project proposals and bid
documents for award and implementation of PPP projects in an efficient, transparent and fair manner.
Model Concession Agreement (MCA) forms the core of public private partnership (PPP) projects in
India. The MCA spells out the policy and regulatory framework for implementation of a PPP project.
It addresses a gamut of critical issues pertaining to a PPP framework like mitigation and unbundling
of risks; allocation of risks and returns; symmetry of obligations between the principal parties;
precision and predictability of costs & obligations; reduction of transaction costs and termination. The
MCA allocates risk to parties best suited to manage them.
Planning Commission developed the first version of the Model Concession Agreement (MCA). This
was done considering the need to standardize documents and processes for the PPP framework in the
country for ensuring uniformity, transparency and quality in development of large-scale infrastructure
projects.
Subsequently, the Planning Commission had developed various other versions of the MCA
considering the different PPP modes like Built Operate Transfer (BOT) (Toll), BOT (Annuity),
Design, Build, Operate and Transfer (DBOT) and Operate Maintain and Transfer (OMT) addressing
to a significant extent, the changing needs of the sector.
Why Governments Prefers PPP?

Advantage of PPP: Graphical Analysis

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Prerequisites of PPP Models

Public Private Partnership Models: Contracting, Build Operate

Transfer, Design Build Finance Operate (DBFO), Concessions, Build
Operate Transfer, EPC Model, Swiss Challenge Model, HAM Model
Public Private Partnership Models

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PPP Model: Contracting

PPP Model: Build Operate Transfer

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PPP Model: Design Build Finance Operate (DBFO) Concessions

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PPP Model: Concessions

PPP Model: Private ownership of Asset

The private sector remains responsible for design, construction and operation of an infrastructure
facility and in some cases the public sector may relinquish the right of ownership of assets to the
private sector.
Three main types of PPP models with private ownership of assets:

Model: Build Operate Transfer.

The private sector builds, owns and operates a facility, and sells the product/service to its users or
beneficiaries. This is the most common form of private participation in the power sector in many
countries (examples are numerous).
For a BOO power project, the Government (or a power distribution company) may or may not have a
long-term power purchase agreement (commonly known as off-take agreement) at an agreed price
from the project operator.

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 In many respects, licensing may be considered as a variant of the BOO model of private participation.
The Government grants licences to private undertakings to provide services such as fixed line and
mobile telephony, Internet service, television and radio broadcast, public transport, and catering
services on the railways. However, licensing may also be considered as a form of “concession” with
private ownership of assets. Licensing allows competitive pressure in the market by allowing multiple
operators, such as in mobile telephony, to provide competing services.
Why BOO may be beneficial?
 It is argued that by aggregating design, construction and operation of infrastructure services into one
contract, important benefits could be achieved through creation of synergies.
 As the same entity builds and operates the services, and is only paid for the successful supply of
services at a pre-defined standard, it has no incentive to reduce the quality or quantity of services.
 Compared with the traditional public sector procurement model, where design, construction and
operation aspects are usually separated, this form of contractual agreement reduces the risks of cost
overruns during the design and construction phases or of choosing an inefficient technology, since the
operator’s future earnings depend on controlling costs.
 The public sector’s main advantages lie in the relief from bearing the costs of design and construction,
the transfer of certain risks to the private sector and the promise of better project design, construction
and operation.

Private Finance Initiative (PFI) model:

In this model, the private sector similar to the BOO model builds, owns and operates a facility.
However, the public sector (unlike the users in a BOO model) purchases the services from the private
sector through a long-term agreement.
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 PFI projects therefore, bear direct financial obligations to the government in any event. In addition,
explicit and implicit contingent liabilities may also arise due to loan guarantees provided to lenders
and default of a public or private entity on non-guaranteed loans.
In the PFI model, asset ownership at the end of the contract period may or may not be transferred to
the public sector. The PFI model also has many variants.
Divestiture Model:
In this form a private entity buys an equity stake in a state-owned enterprise. However, the private
stake may or may not imply private management of the enterprise. True privatization, however,
involves a transfer of deed of title from the public sector to a private undertaking. This may be done
either through outright sale or through public floatation of shares of a previously corporatized state
enterprise.
Major Issues in PPP Development.
Risk is inherent in all PPP projects as in any other infrastructure projects. The main types of
risks include:

Recent Advancements in PPP Models

EPC MODEL: Engineering, Procurement and Construction.
EPC is a popular model being adopted globally in many projects like road construction, roof-top solar
projects, etc. Before government chose EPC over PPP in 2014, road construction rate had dwindled
significantly to around just 3km per day.
Problems faced by private Players under PPP(BOT) leading to inefficient
implementation:
1. Delay in land acquisition by the govt and institutional clearances like forest clearance, defence land
handovers hampered pace of construction.
2. Under PPP, capital completely or partly was to be raised by private player through issuing private
equity bonds and borrowing from banks. But –
3. Due to delayed implementation, private players weren’t able to pay back loan in time adding to NPA
in banks, eventually instigating many banks to stop lending loans
4. Delayed implementation also affected fund raising through private equities as they couldn’t find
investors for new ventures
5. Another area where private players faced difficulty was in assessing the traffic on roads and
subsequent designing of roads.
6. Due to Above mentioned problems the balance sheets of builders were over stretched and thus forced
them to exit projects.
Highway sector in India is responsible for job creation for millions of people and has a multiplier
effect on the economy. Hence government took immediate measures to boost the sector by
adopting EPC Model and the acronym stands for Engineering, Procurement and Construction.

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 How is EPC different and better than PPP?
1. Govt here bears the entire financial burden and funds the project. Capital is either raised by issuing
bonds like NHAI bonds or by taking steps to secure road toll receivables post construction. Note that
the fund here is not raised through banks.
2. Govt now takes care of clearances, acquiring land and estimating the traffic a very huge exercise that
had to be done by private parties earlier.
3. With decreased risk on private builders and increased incentives for early road construction, it creates
comfortable base to lure investors to carry on the EPC work i.e. the contractor now designs the
installation, procures the necessary materials and builds the project, either directly or by
subcontracting part of the work.
4. Timeline required to construct reduces remarkably.
5. In a nutshell, while the government takes responsibility of raising capital, procuring clearances and
such, the private builder constructs roads. Thus, significant surge in road construction pace is
expected.
Recent decision of NDA govt in Mar 2016 to develop, operate and maintain the wayside amenities
alongside National highways across India through EPC model is another example for an EPC project.

HAM MODEL

What is Hybrid annuity model?

 HAM is a Combination of EPC model and BOT-Annuity model. Under this model. The government
will provide 40 percent of the project cost to the developer to start work while the remaining
investment has to be made by the developer.
Why do we require HAM?
 Most of the earliest highway projects allocated through PPP mode were implemented through BOT –
TOLL MODE. under this model the private party is selected to build, maintain and operate the road
based on the fact that which private bidder offered maximum sharing of toll revenue to the
government. Here, all the risks- land acquisition and compensation risk, construction risk (i.e risk
associated with cost of project), traffic risk and commercial risk lies with the private party. The
private party is dependent on toll for its revenues. The government is only responsible for regulatory
clearances.
 To reduce the risk for private player, and to attract private players, The second model of PPP i.e.
BOT-ANNUITY model was introduced under which the private player would built, maintain and
operate the Project and government would pay the private player annually fixed amount of annuity.
Though it was a better model than BOT-TOLL because it reduced traffic and commercial risk
however cost risk remained as private player was solely responsible for the cost incurred in the
project.
 In last few years many of the highway projects were stuck due to various reasons like Loss of
promoter’s interest, Land acquisition issue, environmental reasons, excessive and unrealistic bidding
by the private players and Lack of fund availability for private players due to high NPAs of the banks
and lack of long term financing options in India.
 To counter this and to remove the deficiencies of government brought in EPC model. EPC stands for
engineering, procurement and construction. It is a model of contract b/w the government and private
contractor. The EPC entails the contractor build the project by designing, installing and procuring
necessary labour and land to construct the infrastructure, either directly or by subcontracting. Under
this system the entire project is funded by the government rather than the PPP model where there is
cost sharing. The project is awarded via bidding. Thus, it shifts all the risk from the private players to
the government and is the other extreme of BOT model where all risk was borne by the private player

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 Key features of Ham Model

 Under this the government will pay 40 per cent of the project cost to the concessionaire during the
construction phase in five equal installments of 8 per cent each.
 . Revenue collection would be the responsibility of the National Highways Authority of India
(NHAI); developers will be paid in annual instilments over a specified period of time.
 An important feature of the hybrid annuity model is allocation of risks between the partners—the
government and the developer/investor. While the private partner continues to bear the construction
and maintenance risks as in BOT (toll) projects, it is required only to partly bear the financing risk.
The developer is insulated from revenue/traffic risk and inflation risk, which are not within its control.
 In the hybrid annuity model, one need not bring 100 per cent of finance upfront and since 40 per cent
is available during the construction period, only 60 per cent is required to be arranged for the long
term. This makes it attractive and viable for the private player to invest in Highway projects. It also
reduces burden on the Government as unlike EPC, the government has to provide only 40% of the
project cost.
Conclusion
 By adopting the Model as the mode of delivery, all major stakeholders in the PPP arrangement – the
Authority, lender and the developer, concessionaire would have an increased comfort level resulting
in revival of the sector through renewed interest of private developers/investors in highway projects
and this will bring relief thereby to citizens / travelers in the area of a respective project.It will
facilitate uplifting the socio-economic condition of the entire nation due to increased connectivity
across the length and breadth of the country leading to enhanced economic activity.
Swiss Challenge Model
What is Swiss Challenge model?
A ‘Swiss Challenge’ is a way to award a project to a private player on an unsolicited proposal. Such
projects may not be in the bouquet of projects planned by the state or a state-owned agency, but are
considered given the gaps in physical or social infrastructure that they propose to fill, and the
innovation and enterprise that private players bring.
The government may enter into direct negotiations with a private player who submits a proposal and,
if they cannot agree on the terms of the project, consider calling for bids from other interested players.
In one variant of the Challenge, the government awards bonus points to the project’s ideate; in
another, it calls for comparative bids, but gives the first right of refusal to the original player. All this
is generally disclosed upfront.
Swiss Challenge model in India
At least half-a-dozen states have used the Swiss Challenge to award projects in sectors including IT,
ports, power and health. Gujarat included it in the Gujarat Infrastructure Development Act, 1999, and
in 2006, amended the Act to provide for direct negotiation. It was subsequently made part of the
Andhra Pradesh Infrastructure Development Enabling Act and Punjab Infrastructure (Development &
Regulation) Act. Rajasthan and Madhya Pradesh have included it in their guidelines for infra projects.
At the central level, the Draft Public Private Partnership Rules, 2011, allow the Swiss Challenge only
in exceptional circumstances — that too in projects that provide facilities to predominantly rural areas
or to BPL populations.
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What are the advantages?
Globally, there aren’t too many good examples of Swiss Challenge projects. South Africa, Chile,
Korea, Indonesia, the Philippines and Taiwan have seriously considered, awarded and implemented
unsolicited projects. The obvious advantages are that it cuts red tape and shortens timelines, and
promotes enterprise by rewarding the private sector for its ideas. The private sector brings innovation,
technology and uniqueness to a project, and an element of competition can be introduced by
modifying the Challenge.
And what are the problems?
The biggest concerns are the lack of transparency and competition while dealing with unsolicited
proposals. Governments need to have a strong legal and regulatory framework to award projects under
the Swiss Challenge method. It can potentially foster crony capitalism, and allow companies space to
employ dubious means to bag projects. Given that governments sometimes lack an understanding of
risks involved in a project, direct negotiations with private players can be fraught with downsides. In
general, competitive bidding is the best method to get the most value on public-private partnership
projects. The government might also end up granting significant concessions in the nature of viability
gap funding, commercial exploitation of real estate, etc., without necessarily deriving durable and
long-term social or economic benefits.
Is the Swiss Challenge suited to India?
The jury is still out on the success of public-private partnership (PPP) in infra projects. There have
been several controversies around large scale PPP projects. Construction costs jumped significantly in
the case of the Mumbai Metro, and then Chief Minister Prithviraj Chavan did some loud thinking on
whether the government should take over the company promoted by Anil Ambani after it sought a
threefold increase in fares just before commencement last year. There were serious issues related to
the international airport and the Airport Metro line in Delhi. The government has now brought PPP
projects under the ambit of the CAG, so there is some scrutiny of projects where significant
concessions including land at subsidised rates, real estate space, viability gap funding, etc. are granted
by the government. But there is still no strong legal framework at the national level, and such projects
may be challenged in case of a lack of transparency or poor disclosures. Bureaucrats, who ultimately
sign off on such projects, continue to be afraid to take calls that might face an investigation later. In
the absence of transparency, and a strong element of competition, such projects may be prone to legal
challenges. Smaller projects are better off in this respect.
Government of India Initiatives for Revamping of PPP Models.
Viability Gap Funding.
Viability Gap Funding (VGF) Means a grant one-time or deferred, provided to support
infrastructure projects that are economically justified but fall short of financial viability. The lack of
financial viability usually arises from long gestation periods and the inability to increase user charges
to commercial levels. Infrastructure projects also involve externalities that are not adequately captured
in direct financial returns to the project sponsor. Through the provision of a catalytic grant assistance
of the capital costs, several projects may become bankable and help mobilise private investment in
infrastructure.
Government of India has notified a scheme for Viability Gap Funding to infrastructure projects that
are to be undertaken through Public Private Partnerships. It will be a Plan Scheme to be administered
by the Ministry of Finance with suitable budgetary provisions to be made in the Annual Plans on a
year-to- year basis.
The quantum of VGF provided under this scheme is in the form of a capital grant at the stage of
project construction. The amount of VGF will be equivalent to the lowest bid for capital subsidy, but
subject to a maximum of 20% of the total project cost. In case the sponsoring Ministry/State
Government/ statutory entity propose to provide any assistance over and above the said VGF, it will
be restricted to a further 20% of the total project cost.
Support under this scheme is available only for infrastructure projects where private sector sponsors
are selected through a process of competitive bidding. The project agreements must also adhere to
best practices that would secure value for public money and safeguard user interests. The lead
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 financial institution for the project is responsible for regular monitoring and periodic evaluation of
project compliance with agreed milestones and performance levels, particularly for the purpose of
grant disbursement. VGF is disbursed only after the private sector company has subscribed and
expended the equity contribution required for the project.
India Infrastructure Finance Company Limited.
IIFCL was set up in 2006 to provide long term debt for infrastructure projects. Infrastructure projects
are typically long gestation projects and require debt of longer maturity. The provision of long term
funds from commercial banks is restricted due to their asset-liability mismatch. IIFCL tries to address
the above constraints in long term debt financing of infrastructure.
IIFCL provides financial assistance to commercially viable projects, which includes projects
implemented by a public sector company; a private sector company; or a private sector company
selected under a Public Private Partnership (PPP) initiative. Priority is given to those PPP projects
awarded to private companies, which are selected through competitive bidding process.
Only projects pertaining to following sectors are eligible for financing from IIFCL:
1. Road and bridges, railways, seaports, airports, inland waterways and other transportation projects;
2. Power;
3. Urban transport, water supply, sewage, solid waste management and other physical infrastructure in
urban areas;
4. Gas pipelines;
5. Infrastructure projects in Special Economic Zones;
6. International convention centres and other tourism infrastructure projects;
7. Cold storage chains;
8. Warehouses;
9. Fertilizer Manufacturing Industry
IIFCL raises funds from domestic as well as external markets on the strength of government
guarantees. The mode of lending is either long term debt; refinance to banks and financial institutions
for loans granted by them to infrastructure companies; takes out finance; subordinate debt and any
other mode approved by Government from time to time. The total lending by IIFCL is limited to 20%
of the Total Project Cost.
In 2008, a wholly owned subsidiary of IIFCL, IIFCL (UK) Ltd, was established in London with the
objective of utilising the foreign exchange reserves of RBI to fund off-shore capital expenditure of
Indian companies implementing infrastructure projects in India.
Infrastructure Debt Funds.
The term Debt Fund is generally understood as an investment pool which invests in debt securities of
companies. However, an Infrastructure Debt Fund(IDF) registered in India refers to a company or a
Trust constituted for the purpose of investing in the debt securities of infrastructure companies
or Public Private Partnership Projects. Thus, in contrast to the general understanding of the term, IDF
does not refer to a Scheme floated by a mutual fund or such other organizations but to the Company
or Trust who is investing in debt securities. An IDF can float various Schemes for financing
infrastructure projects.
Purpose
IDF is a distinctive attempt to address the issue of sourcing long term debt for infrastructure projects
in India. Union Finance Minister in his Budget Speech of 2011-12 had announced setting up of IDFs
to accelerate and enhance the flow of long term debt in infrastructure projects. IDFs are meant to
1. supplement lending for infrastructure projects
2. provide a vehicle for refinancing the existing debt of infrastructure projects presently funded mostly
by commercial banks

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Structure& Regulation
These Funds can be established by Banks, Financial Institutions and Non- Banking Financial
Companies (NBFCs).
IDFs can be set up either as a company or as a trust. A trust based IDF would normally be a Mutual
Fund (MF) that would issue units while a company based IDF would normally be a form of NBFC
that would issue bonds. Further, a trust based IDF (MF) would be regulated by SEBI; and an IDF set
up as a company (NBFC) would be regulated by RBI.
IDF –MF can be sponsored (sponsor is akin to a promoter) by any NBFC which includes an
Infrastructure Finance Company(IFC). However, IDF-NBFC can be sponsored only by an IFC.
Investors
The investors in IDFs would primarily be domestic and off-shore institutional investors, especially
Insurance and Pension Funds who have long term resources. Banks and Financial Institutions would
only be allowed to invest as sponsors / promoters of an IDF subject to certain conditions. The foreign
investors eligible to invest in IDFs include FIIs/Sub-accounts, NRIs, HNIs, QFIs and long term
foreign investors such as Sovereign Wealth Funds, Multilateral Agencies, Pension Funds, Insurance
Funds and Endowment Funds. To attract funds, an exemption from income tax for IDF has been
provided and also the withholding tax has been reduced to 5% from 20% on the interest payment on
the borrowings of IDFs.
An IDF-MF would raise resources through issue of rupee denominated units of minimum 5-year
maturity, which would be listed in a recognized stock exchange and tradable among investors. It
would have to invest minimum 90% of its assets in the debt securities of infrastructure companies or
SPVs across all infrastructure sectors, project stages and project types. The returns on assets of the
IDF will pass through to the investors directly, less the management fee. The credit risks associated
with the underlying projects will be borne by the investors and not by the IDF. This structure is
focused on investors who can afford to take risk. An existing mutual fund can also launch an IDF
Scheme.
An IDF-NBFC would raise resources through issue of either rupee or dollar denominated bonds of
minimum 5-year maturity, which would be tradable among investors. It would invest in debt
securities of only Public Private Partnership projects which have a buyout guarantee and have
completed at least one year of commercial operation.
Buyout guarantee implies compulsory buyout by the Project Authority (which refers to the
government agency who is awarding the contract or who is entering into a concession agreement with
the private party) in the event of termination of concession agreement.
Refinance (essentially means replacing an older loan issued by a financial institution with a new loan
offering better terms) by IDF would be up to 85% of the total debt covered by the concession
agreement. Senior lenders would retain the remaining 15% for which they could charge a premium
from the infrastructure company. Here, the credit risks associated with the underlying projects will be
borne by the IDF. This structure is focused on investors who are risk-averse.

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