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UNIT 2 ECONOMIC STRUCTURE OF INDIA The Economy of India is the ninth largest in the world by nominal GDP and

d the fourth largest by purchasing power parity (PPP). Mixed economy of India consists of public and private sector. Policy on the public sector has been guided by the Industrial Policy Resolutions 1956 and 1991which gave a strategic role in the economy. India was based agrarian economy with weak industrial base, low level savings and investments and near essence of infrastructural facilities. Public sector The public sector, sometimes referred to as the state sector, is a part of the state that deals with either the production, delivery and allocation of goods and services by and for the government or its citizens, whether national, regional or local/municipal. The object of accelerating the pace of eco-development and the political ideology, gave the public sector a dominant role in the industrial development of the nation led to rapid growth of the State Owned Enterprises (SOEs) sector in India. These enterprises came to cover a wide spectrum of activities in basic strategic industries like steel, coal, minerals and metals, petroleum, heavy engineering, chemicals, fertilizers and pharmaceuticals etc., on one hand and consumer goods, trading and marketing activities, transportation, services, contracts and consultancy services, tourist service, financial services, development of small industries etc., on the other.

Objectives: It was promoted as an instrument for implementation of the govt.s socioeco policies. 1. To help in the rapid eco growth and development and industrialization of the Country and create the necessary infrastructure for economic development. 2. To earn return on investment and thus generate resources for development. 3. To promote redistribution on income & wealth 4.To create employment opportunities 5.To promote balanced regional development 6.To assist the development of small scale and ancillary industries 7. To promote import substitution, save and earn foreign exchange for the economy.

Growth & performance of public enterprise The Industrial Policy Resolution of 1948 made it clear that the manufacture of arms and ammunitions, the production & control of atomic energy and the ownership and management of railway transport would be the exclusive monopoly of the company. After 6 months industries were coal, iron and steel, aircraft manufacture, ship building, manufacture of telephone, telegraph and wireless apparatus, excluding radio receiving sets and mineral oils. At the beginning of the 1990, public sector was dominant in many industries. Entire output in case of petroleum, lignite, copper & primary lead, about 98% of zinc with 90% of coal, more than of steel and aluminum and 1/3rdof fertilizers. PSEs as a whole have made huge profits mainly because of the enormous profits made by several public sector monopolies. Many of the loss making PSE

have been either in non-priority sectors or in the sectors where the private sector has proved to be more efficient.

Why PSE fails? Even though formulation of plan is good. 1. Huge cost, time over runs in project implementation 2. Land acquisition 3. Procurement of equipment 4.Civil work and other imponderable [not able to estimate] 5.Locational & investment decisions 6.Irrational product mix 7.Imposed marketing arrangements 8. Foreign financing 9. Technology up gradation, inadequate R & D, over manning. Why PSE? 1.PSE not only for commercialization but to generate employment, promoting balanced regional development etc. 3. Sick industries taken over by PU. 4. Promoted with long gestation period 5.Periodical wage revision.

sNew PS policy:

Policy announced on 24-7-1991 the priority areas of growth. 1. Essential infrastructure goods and services 2.Exploration & exploitation of oil and mineral resources 3. Technology development & building of manufacturing capabilities, long term development of economy 4. Manufacture of goods where strategic considerations

PSE-8 1. Arms & ammunition: defence equipment, aircraft 2. Atomic energy 3. Coal & Lignite 4. Mineral oils 5. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond. 6. Mining of copper, lead, zinc, tin, molybdenum, wolframite 7. Mineral specified in the schedule to the AE (control of production & use) order 1958. 8. Railway transport The new industrial policy also indicated that the public sector would withdraw from the following cases 1. Industries based on low technology 2.Small scale and non strategic areas 3.Inefficient and unproductive areas 4.Areas with low or zero social responsibility or public purpose 5. Areas where private sector has developed sufficient enterprise and

resources Govt. policies: 1. Bring down govt. equity in all non-strategic PSU to 26% or lower, if necessary. 2. Restructure & revive potentially viable PSUs 3.Close down PSUs which cannot be revived 4.Fully protect the interest of workers Public Sector Ratnas Govt. in 1997 July unfolded its strategy to grant autonomy to come PSUs on an experimental basis was to select some vanguard PSUs to support them in their drive to become global giants. After in-depth interministerial discussions. Nine PSUs were selected. These are Navaratnas. 1.Bharath Heavy Electricals Ltd (BHEL) 2.Bharath Petroleum Corporation Ltd (BPCL) 3.Hindustan petroleum Corporation Ltd (HPCL) 4.Indian Oil Corporation Ltd (IOC) 5.Indian Petrochemicals Corporation Ltd (IPCL) 6.National Thermal Power Corporation Ltd (NTPCL) 7.Oil & Natural Gas Corporation Ltd (ONGC) 8.Steel Authority of India Ltd (SAIL) 9.Videsh Sanchar Nigam Ltd (VSNL) GAIL & MTNL were given same status. All these were given freedom to incur. 1. Capital expenditure 2. Decide on joint venture 3.Set up subsidiaries/officers board 4.Enter into technology & strategic alliances

5.Raise funds from capital markets (international & domestic) 6.Enjoy substantial operations and managerial autonomy

Private Sector The private sector is that part of the economy, sometimes referred to as the citizen sector, which is run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the state. The Industrial Policy Resolution of 1956 has made it very clear that as an agency for planned national development, in the context of the countrys expanding economy, the private sector will have the opportunity to develop &expand. Outside the schedules of A&B would be undertaken ordinarily through the initiative and enterprise of the private sector. It was the policy of the state to encourage the development of these industries in the private sector, in accordance with the programmed formulated in successive Five Year Plans, by ensuring the development of transport, power and other services and by appropriate fiscal another measures. The IPR of 1956 has clearly stated that the private sector have necessarily to fit into the frame work of the social & economic policy of the state and will be subject to control & regulation in terms of industries (Development & regulation)Act and other relevant legislation. Private sector is dominant in the FMCG, Capital Goods Industries.

Recent Reasons To STENGTHEN Competition

To improve public finance To fund Infrastructure Growth Accountability of share holders To reduce unnecessary interference More disciplined Labour force

The main reason for increased efficiency gain as a result of privatization are attributed to (i) (i) (i) (i) Less political interference in decision making Staff remuneration is more closely linked to productivity and profitability Firm are exposed to financial market discipline as opposed to government support Firms cost reducing effort are higher under competitive private ownership

WAYS OF PRIVATIZATION DISINVESTMENT CONTRACTING FRANCHISING PREMITING PRIVATE SECTOR ENTER INTO PSU RESERVED AREA LIQUIDATION LEASING

Economic Planning in India: From Mixed to a Market economy.

These are three types of economy. These are the free enterprises/market economies or capitalist economy and at the other end are the centrally planned economy or communist countries. In between these two are the mixed economy. 1.The communist countries have a centrally planned economic system. Under this rule, the state owns all the means of production, determines the goals of production & controls the economy according to a central master plan. No consumer sovereignty. Consumption plan in a centrally planned economy is dictated by state. Ex: USSR, Chez Republic, Hungary, Poland and China. 2. In capitalist and free market economic system is the mixed economy, under which both public & private sector co-exist as in India. In many mixed economies, the strategic & other nationally very important industries are fully owned or dominated by the state. 3. In market economy a. The factors of production (labour, land, capital) are privately owned. b.Income is in monetary form from sale & profits c. Members have freedom of choice consumption, occupation, savings and investment. d. controlled and regulated by govt. This is far from real one. Ex: US, Japan, Australia and Canada

Structure of Economy The contributions of sectors like primary (agri), secondary (industrial) and tertiary sectors form structure of economy. As economy develops share of primary sectors in development, employment & GDP declines. Manufacturing also declines. The service sector is largest & fast operating sector. They contribute upto 60% of world GDP and is less in developed countries.

The share of service sector increased from 1980 39% to 46% in 2000 in India. Internationally it has increased 1990 12% This indicates decrease in price, increase in quality, increase in Competitiveness of downstream industries. Economic Planning of India The pattern of economic development in India is very significantly affected by govt. planning. The Planning commission Planning Commission was set up in 1950 March functions: (i) make resources available, (ii) Balanced and effective utilization of countrys resources. National Development Council: It is presided over by PM and is composed of UCM, CM of States and Union Territories and Members of the Planning Commission. Union State Ministers are also invited to participate in deliberations.Secretary of PC acts as secretary of NDC. Functions; i) To prescribe guidelines, ii) To consider national plan iii) To consider important question of social & economic policy iv) Review working of plans Formulation of Plans: To prepare five year plan usually spread over a period of 23 years. Review of the Plans First Five year Plan April 1st 1951 Third Five year plan 1966

Fourth got delayed due to disrupted the development process like the aggressions of China & Pakistan and severe drought in the country. 1965-66 Fall income, increase in price, decrease in savings, devaluation of rupee by 36.5% in June 1966. 4th Five Year Plan was put off by 3 years. This period had annual plans (66-67, 6869). This period is referred to as Plan Holiday. Central Change: Premature end to five year plan, Janata Party in 1977 terminated the 5th plan at the end of 4th year i.e. March 1978 instead of 1979 and formulated adraft five year plan for 1978-83. It also introduced the concept of Rolling Plan.Under this plan when one year elapses another year is added to the planning horizon so that we will always have a Five year plan. Formation of Congress Govt. in 1980 terminated 5 year plan formed by Janata Govt. within 2 years and formulated a 5 year plan for 1980-85 (6th Plan) 7th Plan April 1st 1985 8th plan 1992 9th 1997-2002 Objectives: 1. utilization of the natural resources 2.Ultimate removal of unemployment & poverty 3.Increased standard of living Five year Plan (2002-07) Should aim at an indicative target of 8% GDP Gross for 02-07. Increase in GDP, increased human well being, consumption of food, consumer goods, but also education, health, availability of drinking water and basic sanitation.

1. Decreased poverty 20% by 2007 and 10% by 2012 2.Increase in employment 3.Universal access to primary education by 200% 4.Decreased population 2001 2011 16.2% 5.Increase in literacy 72% by 2007 & 80% by 2012. 6. Decrease in Infant Mortality rate (IMR) 45%, per 1000 live births by 2007 and to 28% by 2012. 7. Decrease in Mattress Mortality Ratio (MMR) decrease 20% per 1000 live births by 2007 and to 10% by 2012. 8. Increase in forest and tree lover to 25% by 2007 and 33% by 2012. 9. Villages access to drinking water (portable) by 2012. 10. Cleaning of all major polluted river by 2007 & notified stretches by 2012. Performance Although we have failed to achieve targets & 30% still under poverty line. India is one of the largest industrial powers in the world and has the 3rd largest stock of scientific manpower. Characteristics of Industries Until 1991, the development of the private sector was under strict Govt.control, was exercised through industrial licensing. Low like the Industries(Development & Regulation) Act, the Companies Act gave enormous control over the management and control of functioning of the industries. The M.R.T.P. Act controlled merges, amalgamations and takeovers. Capital Goods Vs Consumer Goods Basic and capital goods were considered as pride of place and the consumer goods given low priority. In the process of capital accumulation, certain capital-

intensive or large scale, sectors producing non-importable commodities, transport, electricity are bound to grow. Imports cannot be expanded. In case of consumer goods, the growth of consumer non-durables was more than durables. Establishment of basic and heavy industries has been a reason for self-reliance in respect of capital goods and modern technology build defence strength. The Development of Industries 1. Private Sector 2. Public Sector 3. Joint Sector has been promoted to facilitate the utilization of the resources and talents of the private sector and function with social orientation of public sector. 4. Co-op. sector: Made progress in industries like sugar, cotton textiles and fertilizers. Growth of this sector promotes industrial democracy & discourages concentration of economic power in few hands. 5. Village & small industries Not given the deserving importance. Some units are reserved for them and the products too. Import Substitution & Export Contribution Import substitution assumed importance after the second plan. In early decades of planning, considerable import substitution took place in many important areas in capital goods, organic chemicals, pharmaceuticals, dyestuffsetc. The Export Policy Resolution of 1970 emphasized the importance of development and expansion of export oriented production. The Import Substitution Industrialization Strategy (ISI) followed in India has had adverse effects. The high protection from foreign competition, resulted in high costs, poor quality, indifference towards consumers and lack of innovativeness.

In mid 1950s Jute & cotton industries (textiles) were denied foreign exchange and with liberalization non-essential industries were given import substitution. The import restrictions, high costs and poor quality also very severely affected Indias export performance. Capacity Utilization Under utilization amounts to wastage of scarce resources, leads to cost-push inflation. Creates demand supply imbalance, affect balance of trade, employment, saving and investment. Under utilization of Industrial policy is due to factors like as planned excess capacity calculated to meet the demand in the foreseeable future, tech invisibilities which may create capacity in excess[present demand]; and initial testing troubles of new industries which is incapable in the developing economy.

Regional Disparities: Removal Third Plan Large investments were made in backward areas. Incentive system was introduced in 4th plan. The backward area development by industrialization is not given importance. Trends in Service Sector: As an economy develops the share of the primary sector in the GDP and employment declines and those of other sectors increase. The service sector is the largest and fastest growing sector. The service sector now contributes more than60% of the world GDP.

1980 1990, the average annual growth rate of value added in the service sector in the developing economics was 3.5% compared to the GDP growth rate of 3%. 1990-98 3.7% & 3.3% The service sector of India grew at 6.9% and 7.9% during the above periods, compared to the corresponding GDP growth rates of 5.8% and 5.9%. The share of services in the GDP of India increased from 39% 1980 to 46% 2000. The growing importance of services is reflected in the international trade too. Between 1970 and 1990 international trade is services increases by an average of 12% & 8% during 1990-97. The growth rate of trade in services has been faster than that of goods. Growth in services and in additions the electronic commerce has added to the new trade pattern. Exports of commercial services have been borrowing on every continent throughout the 1990s. Services are used in production of goods and other services. Due to competition in services there is reduction of prices and improvement in quality. Trends in GDP Govt. expenditure as % of GDP 10% in 20th century 20% in 1960 50% in 1995 In developing countries, the central govt. expenditure was nearly 15% of GDP. 1960 in 1990 it was double of 1960. 1997 1998 Economy growth

2001 4.4% total industrial stood at 2.7% 2002-03 4.0% 2002 03 5.7% increase consumer durables has a negative growth of 6.3%, 2003-04 8.5% industrial production by 7.0%