You are on page 1of 66

Business Environment

Domestic and International

Core Text
Indian

Economy by Ruddar Dutt and K.P.M. Sundaram Newspapers, Journals and Business Magazines and the Internet

Economic & Social Environment


Swami

Vivekananda once said There (runs) an economic struggle through every religious struggle. This animal called man has some religious influence, but he is guided by economy Man is guided by the stomach. He walks and the stomach goes first and the head afterwards. Have you not seen that ? It will take ages for the head to go first

Selected Indicators of Indian Economy


As per 2001 census and provisional estimates of the latest year, values compared between 1950-51 and 2006-07 GDP at factor cost (Rs. crores) at 1999-00 prices it was 223899 in 1950-51 and was 2845155 in 2006-07 Per capita NNP rose from 5708 to 22553 Electricity generated went up from 5.1 billion KWH to 662 Exports from Rs.606 crores went up to Rs.571779 and Imports from Rs.608 to Rs.840506 crores Population went up from 361 million to 1122 million Birth rate went down from 39.9 per thousand to 23.5 and Death rate too dropped from 27.4 to 7.5 Many other parameters are detailed in Chapter 1

India as a Developing Economy

The UN group of experts have found it difficult to define underdeveloped countries They use it to mean countries which have per capita income real income low as compared to USA, Canada, Australia and Western Europe World Bank in 2008 classified various countries on the basis of Gross National Income per capita as (a) Low Income of $ 906 and below (b) Middle Income with $ 906 11,115 and High Income which has mainly OECD countries with $ 11,115 and above India with its population of 1110 million in 2006 and with per capita income of $ 820 ranks among the poorest and accounts for 1.9 % of worlds GNI on exchange rate basis Comparisons of Real Product and Purchasing Power in 1978 the UN has developed measures of real GDP and GNI on an international scale using purchasing power parities (PPP)

The PPP basis implications


Using PPP basis the low income countries comprise of 37% of population and 10% of world income High Income countries with 16% of population accounts for 54% of worlds income Per capita GNI on exchange rate basis is $7439 for the World, $2010 for China and $ 820 for India in 2006 When compared on PPP basis this changes to $10218 for the World, $ 7740 for China and $ 3800 for India The GDP growth rate over the period 2000-05 on an annual basis has been 6.1% for Low Income countries, 5.2% for Middle Income, and 2.2% for High Income countries with China having 9.6% and India at 7%

The Indian Economy as Developing Economy

Low per capita income but since 1990 the Indian economy has grown at faster rate than developed economies In 2006 the average GNI per capita of USA was 55 times that of India and PPP was 12 times higher Occupational pattern has been primary producing in developing economies and India too in 2004 had 58% of working population engaged in agriculture which contributed 21% of national income Heavy population pressure in India because of high birth rate and falling level of death rates and rising population leads increase in labor force which leads to unemployment Prevalence of chronic unemployment and under employment Steadily improving rate of capital formation which is reflected by low per capita power consumption of electricity (in 2004 we consumed 618 KWH as compared with 14240 by USA, 8459 by Japan and 1684 in China) Also the Gross Domestic Saving and Gross Capital formation in India has risen sharply as per Central Statistical Organization in 2006-07 to 35% and 36% respectively

Weaknesses

Poor quality of human capital as a result of mass illiteracy specially in rural areas UNDP has ranked countries on the basis of life expectancy, adult literacy, combined enrollment ratio first, second and third level, real GDP for the Human Development Index (HDI) India is sadly ranked 128 and China stands at 81 Prevalence of low level technology using techniques considered inferior by modern standards Low productivity in Agriculture and Industry Low level of living of the average Indian in terms of balanced diet and malnutrition

Major Issues of Development


Low per capita income and low rate of economic growth High proportion of people below poverty line and in 2004-05 as per Planning Commission 302 million people (27.5%) were below poverty line including 81 million in urban areas Low level of productive efficiency due inadequate nutrition and malnutrition Imbalance between population size, resources and capital Problem of unemployment at 9.2% in 2001-02 is high and expansion of infrastructure and social services will create more jobs Instability of output of agriculture and related sectors since it depends heavily on the monsoons Imbalance between heavy industry and wage goods and between distribution and growing inequalities

Indian Economy prior to Independence


The structure of villages was based on simple division of labor farmers cultivated the soil and attended cattle, then there were weavers, goldsmiths, carpenters, potters, oil pressers, washermen, cobblers, barbers and surgeons, etc. The craftsmen were paid a stipend out of the crops at the time of harvest in lieu of services done Towns had come into being for 3 main reasons places of pilgrimage like Allahabad, Banaras, Gaya, Puri and Nasik ; or they were the seat of Court or the Capital of a province like Delhi, Lahore, Poona, Lucknow, Tanjore etc. ; also many were trading or commercial centers and were on important trade routes like Mirzapur, Bangalore, Hubli Industry did exist then with many products enjoying worldwide reputation like the muslin of Dacca, calicos of Bengal, the sarees of Banaras, and cotton fabrics The Egyptian mummies were wrapped in Indian muslin, and the muslin of Dacca was known to the Greeks as Gangetika A piece of muslin 20 yards long and one yard wide could be made to pass through a finger ring, required 6 months to produce. Even the shawls of Kashmir, and chintzes of Lucknow and bordered cloth from Nagpur and Murshidabad were highly artistic and famous

Indian Industries

Artistic industries like marble-work, stone-carving, jewellery, brass, copper, and wood-carvings The cast iron pillar in Delhi is a testament to the high level of metallurgy that existed in India then The Industrial Commission in 1918 recorded that At a time when the West of Europe was inhabited by uncivilised tribes, India was famous for the wealth of its rulers, and for high artistic skill of her craftsmen. And even later when merchant adventurers from the West came to India, the industrial development was not inferior to that of advanced European nations As per Jawaharlal Nehru That rule began with outright plunder, and a land revenue system which extracted the uttermost farthing not only from the living but also from dead cultivators. It was pure loot Indian exports included cotton, silk, woolen cloth and fabrics, pepper, cinnamon, opium, indigo and Europe was a major customer in the 17th and 18th century

The Economic Effect of British Rule


India had been conquered before but the invaders settled in India The British kept distance between them and the Indian people and created the distance between foreign rulers and Indian subjects The British rule had 2 epochs 1757 to 1858 when the East India Company started after the Battle of Plassey, and then the British Government in India from 1858 to 1947 With the Industrial Revolution at this time it helped British to sell machine-made goods in India in competition with Indian handicrafts This led to the new land revenue system and a process of commercialisation of agriculture and the country was consequently plagued by many famines

Decline of Handicrafts and Ruralisation of the Indian Economy


Decline in handicrafts began first with the attempts to crush and restrict Indian manufactures and the process was accelerated by development of means of transport Disappearance of Princely courts affected the demand for handicrafts and cotton and silk Hostile policies of East India Company and British Parliament in terms of unemployment, human suffering, famines, etc. using tariff to protect their woolen and silk manufactures Competition with machine-made goods but did not allow import of machinery and when Suez Canal was opened in 1869 it reduced transport costs and made exploitation of Indian market easier New forms and patterns of demand based on spread of education western dress, education, demand for foreign goods increased Textile industry was badly hit and Lord William Bentinck reported in 1834 that the misery hardly finds parallel in the history of commerce. The bones of cotton weavers are bleaching the plains of India

Back-to-the-Land Movement

Consequence of the decline of handicrafts was the compulsory back-to-land movement since the unemployed craftsmen shifted to agriculture and thus caused deindustrialization of India In the middle of 19th century 55% of population depended on agriculture, but by 1934 the share went up to 72% Commercialization of agriculture caused by Land System such as Zamindari saw a shift to industrial crops from food crops which led to shortages and famines Between 1860 and 1908 there were 20 famines in India and in 1943 there was a major famine when unofficial estimates put the deaths at 3.5 million

Industrial Transition in India


Private enterprise brought about the change in the rise of large-scale modern enterprises and decline of indigenous industries in India in the 19th century Cotton mills, Jute mills and first coal mine came up early and by end of 19th century there were 51 cotton mills, 36 jute mills and 6 million tonnes of coal production per annum In the West two principal groups were ready to set up factories : the merchants and the master craftsmen, but in India neither group took interest in the factory system but preferred lending money as they belonged to the Baniya community Indigenous business groups later on joined ranks of industrialists giving up traditional occupations and comprised mainly of Parsis, Gujaratis, Marwaris, Jains, Jews, Americans and the Chettiars First World War 1914-18 created enormous demand for factory goods in India and imports from England and other countries dropped sharply and great stimulus was given to production of iron and steel, jute, leather goods, cotton and other items for war purposes

Tariff Protection for Indian Industries

In 1923 the Government of India accepted the First Fiscal Commissions recommendation and gave protection to several industries against foreign competition Prominent industries were Iron & Steel, Cotton Textiles, Jute, Sugar, Paper & Pulp, Matches and these soon were able to capture the entire Indian market and eliminate foreign competitors During the Second World War also India suffered from want of replacements, stores and technical knowledge but existing industries expanded rapidly British controlled 43% of gross assets in Indias major industries in 1914 , 10% in 1935 and finally 3.6% in 1948

Colonial Exploitation : Forms and Consequences


Exploitation of cultivators by European planters settled in Bengal to sell indigo for exports at nominal prices, even forcing Zamindars to allocate portrion of their land, and made huge profits themselves Exploit artisans to deliver cotton and silk fabrics at much below market prices through East India Company agents called Gomastas These Indian agents would fix prices with artisans at 15-40% below the market price and if they refused the advance he was flogged or even imprisoned Manipulation of export and import duties between India and Britain instead of free trade e.g. after 1700 imports of printed Indian cotton fabrics were banned to protect British manufacturers yet craze for Indian goods were so high that some smuggling took place An English lady who possessed an Indian handkerchief was fined GBP 15 ! Heavy import duties were imposed on Indian goods other than foodstuffs and raw materials and very nominal duty on imports from Britain

Foreign Direct Investment

Economic overheads and infrastructure like railways, ports, shipping, generation of electric energy, water works, roads and communications Promoting mining of coal, gold, petroleum, and metallurgical industries Promoting investments in tea, coffee, and rubber plantations Undertake investments in consumer goods industries like cotton and jute textiles, matches, woolen textiles, paper, tobacco, sugar, etc. Investment in Banking, Insurance and trade Some investments in machine building, engineering and chemicals industries These investments were undertaken by British multi-nationals operating through subsidiaries and some of these investments took the form of loans to the British Government in India in the form of Sterling Debts

Estimate of Foreign Capital in India


Estimates of Findlay Shirras (1929) and British Associated Chambers of Commerce (1933) have given reliable estimates Pre-War British foreign investment was GBP 4000 million and of which 1/5th was made in India, and that indicates the measure of Indias importance to the British Empire During World War II India was forced to export more to Britain than the latter could pay back via its exports to India, which resulted in payment of Sterling debt and a Sterling balance emerged in the Indian account With the natural umbrella of protection at that time for Indian businessmen and industrialists they bought foreign business investments in India, which reduced the magnitude of foreign investments

Managing Agency System


The managing agency firms may be described as partnerships of companies formed by individuals with strong financial resources and business experience Their principal functions would include floating new concerns, provide funds and act as guarantors, act as agents for buying raw materials / stores / machinery, act as agents for marketing the produce, and manage affairs of business Pioneering managing agents include famous business houses like Andrew Yule, Martin Burns, Bird & Co., Duncan Brothers, Williamson Mager Managing Agency system did help to promote consumer goods industries in the initial phase but appropriated 50% of gross profits as managerial remuneration later India was forced to pay for various wars like the Mysore and Maratha Wars, the Afghan and Burmese Wars and the British made India bear the costs of their expeditions to Prussia and Africa, etc. The cost of the telegraph line from England to India was charged from India

Development Since Independence

National Income measures the volume of commodities and services turned out during a given period counted without duplication Central Statistical Organization (CSO) has revised the existing series of national accounts with 1993-94 as base year and to cover as much of the UN System of National Accounts, 1993 Net Domestic Product of Rural Income has risen from Rs.529 in 197071 to Rs.10683 in 1999-2000 and the Urban Income has risen from Rs.1294 to Rs.30183 Limitations to National Income are the output of the non-monetised sector, non-availability of data on income of small producers or household enterprises, absence of data on income distribution and unreported illegal income In services there is considerable under-estimation of value addition in education, health sector, sanitation services, etc. as Teachers, doctors, lawyers and CAs never want to reveal their income / earnings

Human Development in India

Factors such as Life Expectancy at Birth, Adult Literacy, Gross Enrolment Ratio and GDP per capita (PPP US$) decide on maximum and minimum values to compute Human Development Index In 2005 India ranked 128 in the World, where the leading countries were Norway, Canada, Japan, USA, Canada and UK GDI or Gender Development Index measures adjusts the HDI average achievement to reflect inequalities of men and women Female life expectancy, female adult literacy and gross enrolment ratio and female per capita income are used

United Nations Millennium Declaration for 2015


To halve the proportion of worlds people living on less than $ 1 per day To halve the proportion of worlds people suffering from hunger To halve the worlds people without access to safe drinking water To achieve universal completion of primary schooling To achieve gender equality in access to education To reduce maternal mortality ratios by three quarters To reduce under-five mortality rates by two-thirds To halt and begin to reverse the spread of HIV / AIDS, malaria and other major diseases

Directions of Policy

Top states in India are Kerala, Maharashtra, Punjab, Tamil Nadu and Haryana Middle range has Gujarat, Karnataka, West Bengal, Andhra and Assam with the others lagging behind (MP, Orissa, Rajasthan, UP and Bihar) Human development report (1996) warns The record of economic growth and human development over past 30 years shows no country can follow a course of lop-sided development for such a long time, where economic growth is not matched by advances in human development or vice versa The contrasts and variations among the states needs correction e.g. Kerala has high human development but lower income, Haryana has higher income and lower human development, Rajasthan has fast economic growth but slow human development, etc. At one stage, Simon Kuznets argued that in the early stages of economic growth, inequality would rise, as workers left agriculture for industry. Then inequality will fall as industrial production became wide spread

Occupational Structure
A.G.B.

Fisher said In every progressive economy, there has been a steady shift of employment and investment from the essential primary activities..to secondary activities of all kinds and to a greater extent into tertiary production Occupations are broadly divided into primary activities like agriculture, animal husbandry, forestry, fishery etc., which are essential for human existence. Secondary activities include manufacturing

Occupational Structure

Colin Clark in his work Conditions of Economic Progress argues that there is a close relation between development of an economy and occupational structure on the other Broadly we divide occupation as Primary which includes agriculture, animal husbandry, forestry, fishery, etc., and Secondary which includes manufacturing both small and large scale and sometimes includes mining, and Tertiary which activities that help both Primary and Secondary activities and includes Transport, Communications, banking, finance and services A high average level of real income per head is always associated with a high proportion of the working population engaged in tertiary industrieslow real income per head is associated with a low proportion of the working population linked to tertiary and high link with primary production

GDP & Employment shares in select Developing Countries


Republic

of Korea shows GDP shares which are very close to those of developed economy $18000 per annum (2003) with 3% share of agriculture and 62% in services Indonesia, Thailand, Philippines and Malaysia also indicate similar patterns with agriculture ranging from 10-17%, industry between 32-49% and services between 40-46% India and Pakistan have similar pattern of output with 22-23% in agriculture, 23-27% in industry and 51-53% in services

GDP, Employment and Productivity per Worker in India


Comparative data about GDP and employment growth between 197273 and 2001-02 gives us the productivity per worker at 1993-94 (mid point in time) prices Increase of growth rate of productivity for workers was 1.7% in primary, 2% in secondary and 2.9% in tertiary sectors How does one explain the growth of India becoming a post-industrial service economy without passing through major phase of industrialization through manufacturing ? Technological changes over last few decades could be one reason where at even lower levels of per capita income the demand for services have increased Also the development of communication and reduction in barriers for commodity and people movements has shifted the pattern of demand in Developing countries to becoming similar to Developed countries much faster than expected by historical experience

Work Force Participation Rates


Labor

being a primary factor of production the size of labor is important for economic activity in a country The size of labor is determined by excluding children below 15 and old people above 60 years although poverty forces people from these groups also to work for subsistence Work participation rates in advanced countries like UK, Japan and USA is between 45-50% while in India is around 33% Some important findings of the 2001 census are revealing

Main Findings of 2001 Census


Total

work participation rate (WPR) has increased from 36.7% to 39.2% between 1981 and 2001 WPR increase is more perceptible in rural than in urban areas WPR for women in rural areas has increased more than in urban areas Of population of 1025 million, 402.5 million were workers of whom 127 million are females Main workers are defined as those who have worked for 183 days in a year or more and account for 78% of the total workers

Natural Resources

Existence of natural resources facilitates economic development and includes land, water resources, fisheries, minerals, forests, marine resources, climate, rainfall, and topography Monazite sand deposits on the beaches of Kerala and Tamil Nadu had been known for several decades but recent advances in nuclear energy has made these valuable as rare earths Some resources like land, water, fisheries, and forests are renewable others like minerals and mineral oils are exhaustible and can be used only once Total geographical area of India is about 329 million hectares but statistical land classification is available for only 306 million hectares Barren land of 42 million hectares makes 14% of the reported area and includes mountains, deserts, and areas under non-agricultural uses like buildings, roads, railways, rivers, canals

Land Utilization

With rapid increase of population and urbanization the 14% of noncultivable land will increase 23% of total land is under forests whether state-owned or private 3% of land is permanent pastures or grazing lands Cultivable waste lands are those that have not been cultivated over past 5 years or more and includes land with casuarina trees, thatching grass, bamboo bushes, and other groves for fuel and account for 6% of land available Fallow Lands are cultivable but remain uncultivated or fallow in a given year for some period, because the seeding area may not be cropped in the same year or because of unremunerative nature of farming, poverty of cultivators, silting of canals and rivers, inadequate supply of water, and accounts for about 8% of the land Agricultural land accounts for 46% of 306 million hectares with some some crops and orchards being cultivated more than once during the year

Increasing Agricultural Production


With

population rising at 17 million per year the food grains production needs to go up from 200 to 250 million tonnes India can meet this challenge with better utilization : most of the land today is unirrigated, single cropped, and low-yielding B.B.Vohra as member of National Commission for Environmental Planning had pleaded for reduction of cultivated area from present level of 141-142 million hectares to 100 million hectares for economic efficiency in cultivation

Forest Resources

Important natural resource that supply timber, fuel wood, fodder and many non-wood products and also help control floods Forest Cover in India is about 69 million hectares or 23% of which 12% are dense forests and rest are open forests or degraded forests Forest products make up only 2.4% of GDP Concentration of forests are mostly in Assam, MP, Orissa and some Union Territories Forest Policy of 1952 plans to increase productivity, link up forest-development with forest-based industries, and develop as support to rural economy

Evaluation of Forest Policy

Target of 100 million hectares or 33% tree cover was fixed by the 1952 forest policy but the target was not achieved even today Ecological degradation of Western and Eastern Ghats is continuing, rich forest wealth of the Himalayas is expected to disappear in another 30 years Forest bureaucracy found a wonderful opportunity to make money by permitting illegal felling of trees and massive deforestation began Between 1854 and 1952 tree cover has come down from 40% to 22% of land area Between 1952 and 1988 this has come down to 12% and this is directly responsible for frequency and intensity of floods, soil erosion and changes in climatic conditions The National Forest Policy of 1988 has tried to overcome earlier failures by addressing role of tribals in forests, setting targets for green cover, discouragement to forest-based industries, ending system of private forest contractors, and to stop forest land being diverted to non-forest uses National Rural Employment Guarantee (NREG) programs include afforestation as one of the Panchayat activities

Water Resources

India is one of the wettest countries in the world with average annual rainfall of 1100 mm Total rainfall for 1974 and 2025 is estimated at 400 million hectare metres and this is expected to in 2025 to be distributed in three ways : 70 million hectare metres evaporate immediately, 215 million percolate into soil and help soil moisture and recharge ground water, and 115 run-off into surface water bodies like rivers and sea Water actually utilised was 38 million hectare metres in 1974 and will rise to 105 million by 2025 with 92% being for irrigation and 8% for industrial and domestic usage Indias water policy since 1950-51 has been to make huge dams and reservoirs designed to generate electric power, provide irrigation water, and drinking water in cities, and control floods

Government policy and Eleventh Plan

Most damning condemnation of our reliance on big dams was made by former Prime Minister Rajiv Gandhi in 1986 The situation today is that since 1951, 256 big surface irrigation projects have been initiated. Only 65 out of these completed, 181 are still under construction..For 16 years we have poured money out. The people have got nothing back Neglect of tanks and dug wells has been a weakness The 11th Plan (2007-12) focuses on dangerously low ground water table in 60% of unirrigated and rain-fed land Watershed management, rain water harvesting, and ground water recharge would be a priority and Rs.80000 crores has been allotted for building structures for water management and recharge

Fisheries

India has vast and diverse potential of fishing resources comprising of 2 million sq kms of Exclusive Economic Zone for deep sea fishing, 7250 kms of coastline, 29000 kms of rivers and 1.7 million hectares of reservoirs India is third largest producer of fish and second largest in inland production With 14 million fishermen India produces Rs.32060 crores (2002) which is 1.2% of GDP Less than 10% fish production is exported (Rs.7300 crores in 2006-07) India produces only 9% of total fish supply in Asia whereas Japan contributes 43% and China around 18% Marine Fishing Policy of 2004 seeks to address the development needs of this industry

Marine Fishing Policy, 2004


High priority for deep sea fishing and mechanization of fishing crafts Govt. is providing 33% subsidy on cost of vessels and permits chartering of foreign fishing vessels and joint ventures Fishing harbors for handling small and medium size fishing vessels are being developed at minor ports Reduce fishing pressure in the traditional fishing areas and promote deep sea and oceanic waters Earmarking areas in terms of depth and distance for non-mechanized craft thus providing subsistence level fishermen protection Union Territories of Lakshadweep and Andaman Nicobar to be better harvested, processed and marketed Give attention to post-harvest operations, conforming to international standards, promote welfare of fishermen and their households, and give increased attention to environmental factors like pollution Govt. is implementing Shrimp and Fish culture project for Inland fisheries with World Bank assistance. A major problem is growing river pollution

Minerals Resources and Policy


Coal and Iron are basic needs for iron and steel industry Mica, Manganese, Copper, Lead, and Zinc are other economically important minerals Mineral fuels like petroleum, coal, thorium, and uranium, nickel, cobalt, sulphur, etc. Value of mineral production in 2000-01 was Rs.55360 crores Coal is one of the primary sources of energy accounting for 67% of total energy consumption with major centres being in Bengal-Bihar region, MP, Maharashtra, Orissa and AP Fed up with policy of profit-hungry private owners of coal mines , the Govt. nationalized coal mines and Coal India Ltd.was set up in 1975 India has an estimated 1000 billion cubic meters of Coal Bed Methane (CBM) which is likely to emerge as new source of commercial energy

Oil and Natural Gas

In 2001 it was estimated that India had reserves of 734 million tonnes of oil crude and 750 million cubic meters (BCM) of natural gas Govt. went for oil exploration through ONGC and Oil India Ltd., and domestic production has increased from 7 million tonnes in 1970-71 to 33 million tonnes in 1990-91 but since then domestic production has been stagnant Gross imports of crude oil has gone up from 21 MT in 1990-91 to 112 MT in 2006-07 Some measures have been taken by Govt. to augment production, short term measures like early production systems, deepening of existing wells, adoption of improved technology. Long term measures such as development of new oil fields, participation of private capital in exploration Natural Gas is being used as domestic fuel and also as feedstock for core sector industries like power and fertilisers

Mineral Development and New Mineral Policy 1994


The Geological Survey of India and Indian Bureau of Mines made extensive surveys for mineral deposits, and since minerals are nonrenewal resource it is called as wasting assets NMDC was set up in 1958 for exploitation of minerals other than coal, oil and natural gas Throwing open mining sector to private sector including direct foreign investment Empowering states to grant prospecting/mining leases without prior approval of Central Govt. Explore and identify mineral wealth on land and off-shore Develop mineral resources taking into account national and strategic needs To promote foreign trade of minerals keeping long term needs of country in mind To minimize adverse effects of mineral development on forests, environment and ecology by taking appropriate measures

Environmental Problems from Mining


Large mining enterprises involve conversion of agricultural land into townships, roads, railway lines, stockyards, etc. Surface mining involves removal of vegetation and top soil, and mineral dust pollutes air reduces agri-productivity Underground fires in coalfields can damage land e.g. a fire in Jharia coal mine is said to have raged continuously since 1932 and over 50 million tonnes of coking coal was destroyed Mineral treatment plants and coal washeries use enormous quantities of water and when released pollute the source of water supply In USA the Federal and State laws require that reclamation plans are filed and approved before any coal mining licence is issued To control pollution the Govt. has set up Central and State Pollution Control Boards Air Pollution, Water Pollution, Solid Wastes, Industrial and Hazardous waste, Bio-Diversity, and other issues are being closely monitored and projects being implemented e.g. 88 national parks, Indian coral reefs being set up, 5 world heritage sites being declared, and Project Tiger reserves

Global Warming
We have been talking of climate changes taking place in the world and the world has moved from Little Ice Age to warm, warmer and now what next ? In a century our earth has changed temperature from 0.8 Centigrade to 1.44 Fahrenheit but in 2005 the world experienced the warmest year It is now certain that climate change is human induced and no matter how much we deny we should remember Ayn Rands words You can avoid reality, but you cannot avoid the consequences of avoiding reality Having created this catastrophic situation each one of us must make efforts to build a strong defense so that we are not swept away by giant heat waves or melting glaciers

Climate Changes
Climate changes are causing severe pressure on essential human needs like Air, Water, Food and Energy and their availability So instead of climate control technologies let us first reduce wastage in every realm Lets plant a tree Lets vouch for recycled products Lets make amendment as consumers by buying fresh food, thus saving power to store frozen foods As Mahatma Gandhi said we should spread knowledge First they fight you, then they laugh at you, and finally you win

Carbon Footprints

It represents the impact a household, individual or business builds up heat trapping green house gases in the atmosphere The average Indian family of 4 emits 83000 pounds of Carbon Dioxide per annum, the primary greenhouse gas which includes through energy use which includes transportation, home heating, electricity and waste The world average is about 1/5th of this amount The installation of solar panels, using hybrid or fuel efficient cars, walking, cycling and staying near work place are some ways to reduce carbon foot prints

Carbon Credits

The Kyoto Protocol defines one carbon credit as the permission or the allowance for the emission of one ton of carbon dioxide or equivalent gases The carbon credit and emission trading system is a trade-able permit system often referred to as cap-and trade system It is similar to the US Acid Rain program to reduce industrial pollutants In this system as conceived by Kyoto Protocol and further explained by Marrakesh accords, each country sets up the cap which is the upper limit of emissions allowed to a certain developed or developing country This cap reduces with time thus making net reduction in global emissions and it is the responsibility of the Governments to ensure the cap is followed, and in turn make industries and companies adhere to their respective limits

UNFCCC (United Nations Framework Charter on Climate Change )

The whole capping system is monitored by internal registries set up by each country and they are monitored by UNFCCC Trade portion of this system comes in the form of carbon credits Each country is allotted credits or quotas which reflect their required emission levels and the cap that has been decided for them The trading system is easily explained by the hypothetical situation where a company is allotted certain number of credits taking the incentive given by the Govt. and invests in cleaner, low-emission technologies, and hence reduces emissions and thus uses less carbon credits than allotted and is left with surplus credits This company can earn money by selling these credits through UNFCCC supervision

Carbon Offsets

In the trading market there exist middlemen companies who review the emissions of various industries and offer them investment opportunities in projects that reduce carbon emission The companies can then reduce global emission without updating its technology or methodology This process of second hand carbon emission reduction is called carbon offsets, and the middlemen companies are Offset firms This system does not exclude countries who are not signatories to Kyoto Protocol for taking part in emissions trading Countries like USA, China, and Australia are the biggest emitters of the world and yet do not follow the caps laid down in Kyoto and yet makes billions of dollars in the trading of carbon credits A major problem though is that the cost of carbon in the market lower than the price of emission technologies

Development Strategy in India


Our Five Year Plans were for development along socialist lines to secure rapid economic growth, improved employment, reduction of disparities of income and wealth Only in the Second Plan there was clear strategy as enunciated by Prof. P. C. Mahalanobis who based it on the Russian experience The core of the strategy was rapid industrialization through lumpy investment on heavy, basic and machine-building industries Karl Marx believed that capitalist economy allowed few powerful industrialists and traders to exploit the vast majority of workers and wanted the state to direct the economy, avoiding private enterprise system, private property, market forces of demand and supply Rise of communist regimes in USSR (1917), Eastern Europe, China, Vietnam, Cuba were all based on Marxist ideology The Capitalist system failed to respond to the needs of people during the great depression of 1930s and opened the eyes of economists and statesmen to its intrinsic weakness. Lord Keynes wrote in 1926 The world is not so governed from above that private and social interests always coincide..It is not correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest is generally enlightened.

Mixed Economy and India

Concept of mixed economy accepts the co-existence of private enterprise side by side with public enterprise however in matters of national and strategic importance private enterprise may not be allowed at all Some industries can be completely state-owned, and some may be jointly owned and managed by state and private enterprise Hansen used the term Dual and Lerner called this Controlled economy and in a narrow sense both capitalistic and socialistic economies can be regarded as mixed economies, but the Govt. should through legislation allow the co-existence of the two sectors as done in India By controlling insurance and banking the State can endeavor to direct investment in socially desirable channels The demarcation of industries for private and public sector was specified in the Industrial Policy Resolution of 1956

LPG Model of Development

In 1991 Dr. Manmohan Singh as the Finance Minister launched this strategy of liberalization, privatization and globalization Loss making PSU to be transferred to private sector, areas reserved for public sector would be opened to private sector and setting up industrial units without licence Abolished threshold limit of assets in respect of MRTP companies, Govt. decided to grant direct foreign investment up to 51% in high priority areas, and refer sick PSU to BIFR for rehabilitation Economy was opened to encourage more exports, reduction of import duties to facilitate import of foreign capital and technology, and was based on IMFWorld Bank prescription for stabilization and structural adjustment Inspite of this model providing a significant boost to economic growth, critics have pointed out that it focuses on corporate sector which accounts for only 10% of GDP, did not put sufficient thrust on agriculture and agro-based industries as also infrastructure needed, free entry to consumer goods MNCs has hurt local small and medium sectors, model emphasizes on capital intensive development and so the employment-potential was poor

PURA Model A Neo-Gandhian Approach


Providing Urban Amenities in Rural Areas (PURA) has been advocated by Dr A. P. J. Abdul Kalam ever since he became President in his Vision 2020 This involves integration of 5 areas Agriculture and Food Processing for 360 million tonnes by 2020, Reliable and quality electric power for all parts of the country, Development of Nuclear, Space, and Defence technology, Networking of rivers, providing urban amenities in rural areas, Second Green Revolution, Information and Communication Technology transformed into knowledge products and tourism Mahatma Gandhi wrote in Village Swaraj The British have exploited India through its cities. The latter have exploited the villages. The blood of the villages is the cement with which the edifice of cities is built. I want the blood that is inflating the arteries of the cities to run once again in the villages.

Industrial Policy and Indian Planning

Industrial Policy Resolution of 1948 conceived a mixed economy with manufacture of arms and ammunition, atomic energy, and Railways being the exclusive monopoly of the Central Govt. Second category covered coal, iron and steel, aircraft manufacture, ship-building, telephones, telegraphs and these new industries would be State Undertakings Third category would be of industries of importance to Central Govt. and it would plan and regulate these Fourth category would be those remainder of industries which would be open to Private enterprises, individuals and also cooperatives

Industrial Policy Resolution, 1956


New

classification of industries as Schedule A, B, C and yet these categories were not water-tight compartments, and private companies could be allowed into category A and Govt. also could enter C Fair and non-discriminatory treatment to private sector Encouragement to village and small-scale sector Remove regional disparities Attitude towards foreign capital became more relaxed

Industrial Policy 1977


Liberalization of licensed capacity 49% increased capacity allowed due to modernization Govt. delicensed 23 industries for MRTP and FERA companies, provided companies were in backward areas Concept of broad-banding introduced allowing flexibility to manufacturers to adjust their product mix as per market demand Raising the limit of MRTP companies from Rs.20 crores to Rs.100 crores and so 112 companies came out of the MRTP Act. Relaxation of industrial licensing by reducing compulsory licensing from 56 to 26

Industrial Policy 1991

The Congress Govt. led by Mr. Narasimha Rao announced the new industrial policy in 1991 The main features were to (a) unshackle the economy from the cobwebs of unnecessary bureaucratic control (b) to integrate with world economy through liberalization to remove restrictions on direct Foreign Investment and free domestic entrepreneur from MRTP Act (d) to shed the load of public enterprises which have low returns or incurring losses over the years Industrial Licensing was abolished except for 18 industries that related to security, strategic, social or hazardous concerns. 8 industries reserved for the Public Sector FDI of 51% would be allowed for high priority industries and they would be allowed for trading companies for access to international markets Public Sector became synonymous with mounting losses, political influence on location, delays in completion of projects, over capitalization, use of excess manpower and inefficient management forced the Govt. to set new directions to the Public Sector policy

Disinvestment of Public Enterprises


The collapse of the Soviet Union towards the end of eighties followed by other East European countries eroded the faith in the public sector further The Chinese government also pleaded for market socialism Hence the Ministry of Disinvestment outlined the primary objectives (a) releasing large amounts of public resources locked up in non-strategic PSEs for use in areas of social priority (b) reducing public debt stem the flow of funds from unviable PSEs (d) transfer commercial risk to private sector wherever they are willing (e) release the tangible and intangible resources like large manpower for high priority social sectors George Fernandes had said I believe that the objective for disinvestment should be to benefit the public, the consumer and the investor, and at the same time , to improve competitiveness and eliminate monopoly In the transfer of VSNL and IPCL we have created monopolies with Tata and Reliance. Cases of rich becoming richer with peoples money. If we pursue this strategic sale route in the aluminium and petroleum sectors it is very likely we will create monopolies within these vital sectors of the economy

Privatization of Profit-making Public Enterprises


The question of privatizing profit making PSUs and logic of disinvestment can be debated VSNL and IBP are two such companies which have been acquired by Tata group and IOC which were not well handled, and also the privatization of HPCL and BPCL is also being offered to Indian or Foreign private sector IFFCO and KRIBHCO as also GAIL, IOC and other PSUs and Co-operatives are being denied to join the open bid for HPCL and BPCL which is violating the spirit of Competition Law passed by the Parliament It may be noted that public offerings were made for disinvestment in the UK, France, Malaysia, China, Spain, South Africa and Germany but in our case the that this method would take too much time in Indian context

Valuations of PSUs slated for Disinvestment


Why do sharp discrepancies appear in valuation ? CAG of India has reported that the estimated value of Bharat Aluminium Co. was underestimated by Rs.300 crores Birla Group controlled Zuari Marco Phophates Ltd. After paying Rs.151.7 crores to government for purchasing 74% shares of Paradeep Phophates Ltd. wanted almost entire amount back on the ground that Govt. wrongly calculated the financial position of the former PSU in Orissa After paying Rs.105 crores to acquire majority stake in Modern Foods Industries in Jan 2001, HLL claimed Rs.12.6 crores from the Govt. on account of excess payment, and later put a further claim of Rs.4.8 crores In June 2001 Govt. received Rs.83 crores for sale of Centaur Hotel, near Mumbai airport, from Batra Hospitality. Four months later this hotel was sold to Sahara Group for Rs.115 crores a hike of 38.6%.The question to be asked is why the hotel under-valued and why was there no lock-in period ? This raises suspicion of the role of bureaucracy in putting quietly Govt. money into the pockets of so-called strategic partner

Valuation of IPCL Vadodara


When there was talk of IOC going in for a bid on this former PSU, KPMG valued it at Rs.1234 crores while Deloitte Harkins reckoned the asset value to be Rs.3456 crores 180% higher than KPMG ! However, Govt. permitted Reliance Petro-investments to acquire control by paying Rs.1491 crores In this way the Ambanis were able to control 70-90% of the Indian market for petrochemical products Mr. Paranjoy Guha Thakurta rightly states While views of private merchant bankers are given considerable weight, the fact is that not a single agency of the Union Govt. has taken any responsibility for valuing the assets of PSUs Most glaring drawback of the methodology of valuation of assets of PSUs has been the large land valuation and it is strange that 127 acres of land attached with VSNL in South Delhi has no intrinsic value since it does not yield income

Redefining the role of the State

While the case for economic reforms may take good note of the diagnosis that India has too much Govt. interference in some fields, it ignores the fact that India also has insufficient and ineffective govt. activity in many other fields including basic education, health care, social security, land reforms, and promotion of social exchange. Jean Dreze & Amartya Sen In our enthusiasm for expanding the public sector the Govt. nationalized the Imperial Bank of India and named it as State Bank of India and also nationalized the LIC and in 1969 we had the nationalization of 14 commercial banks Govt. also took over coal mines and created Coal India Ltd., and later 113 sick textile mills of private sector were taken over under the orphanage of the public sector Public sector provided 71% of employment in the organised sector but accounted for about 25% of NDP

Experience of Market Socialism in China


The term market socialism was first coined by Professor Oscar Lange in the 50s but Polish authorities at that time rejected it and its incorporation in the working of socialist economy Forty years later the Chinese used this concept as philosophy of liberalization market socialism connotes the use of market mechanism and the private sector within the broad parameters of socialism while maintaining the authoritarian political system During 1965-99 the average growth rate of GDP in China was 8.1% and that of per capita income was 6.4% Under new liberalized economy a new class of entrepreneurs has come up in China get-rich-quickly, and this has had some difficult side effects like high inflation, SEZs have created regional disparity, additional taxes to peasants to partly finance infrastructure costs, forced acquisition of farmlands for industrial and infrastructures

Are market economies selfregulating ?

Nobel Laureate Joseph E. Stiglitz states Some will argue for trickledown economics: dont worry about the poor, eventually everyone will benefit from growth. And some will oppose competition policy and strong corporate governance laws: let Darwinian survival work its wonders. Growth arguments will be advanced to counter strong social and environmental policies. Market economies are not self-regulating and cannot be left on autopilot, to ensure benefits are shared widely must respond to economic changes Paul Streeten has correctly said World Bank has promulgated the need for market-friendly govt. interventions. But free markets are neutral institutions which can work for good or ill. Whatever may be said for their efficiency, they are not tender-hearted towards their victims.

Privatization and Economic Reforms

Dr. A. P. J. Abdul Kalam said India will only truly shine when it shines for one and all. In India privatization will be difficult as society has no consensus in favor of market solutions and property rights. The real issues are alleviation of poverty and the upgrading of technology in a highly differentiated society Problems faced by the public sector were political interference in management decisions, pricing policies e.g. power, irrigation, public transport, milk etc., soft budgets made as their losses can be met out of general revenues, managers are procedure-oriented rather than outcome-oriented and thus play safe by sending simple decisions to top bosses Large number of countries in Asia and Africa made continued losses and that led to BOP problems, and bailing out by World Bank and IMF forced them to accept privatization