BUSINESS ENVIRONMENT SYLLABUS CHAPTER I

Business environment- Dynamic factors of environment- Importance of scanning the environment-Fundamental issues-Economics environment of business - Sock) - cultural environment- Political !egal environment -"ultural environment# CHAPTER II Political economy - $overnment and business -#Public control% of business -&rends and structure of Indian economy - Socio - economic problems of India CHAPTER III $overnment controls and regulations -% 'egulating economic and industrial activities - Industrial !icensing policy - "ontrol of monopolies -% "apital issues control $overnment control over FDI and collaboration - Distribution and price control - (e) E*I+ policy Foreign e,change flo) regulation -&echnology transfer# CHAPTER IV +onetary and fiscal system - Banking and credit structure in India Financial institution - Fiscal system - theory and practice# CHAPTER V Economic planning and development - $overnment and planning India.s eight five year plan and structural reforms - Industrial policies and promotion schemes - $overnment policy and SSI - Interface bet)een $overnment and public sector# CHAPTER VI (e) Economic Policy Environment in India Privati/ation and issues !iberali/ation and $lobali/ation E,periences

Environmental assessment and evaluation#

REFERENCES 0

+ohinder 1umar Shartna - Business Environment in India 2dhikary +% Economic environment of business 2marchand% D# $overnment and Business Francis "heunilam 0 Business and $overnment +ahes)ari 3 $upta 0 $overnment% Business and Society 1uchal% S#" 0 Industrial economy of India Fredrick Davis 0 Business and society#

Business environment

1 2 3 4 5 6

Environment - Introduction Business Environment & Economy Control of Business Environment Monetary & Fiscal System Planning & Development Li erali!ation & "lo ali!ation

CHAPTER I Business environment - Dynamic factors of environment - Importance of scanning the environment - Fundamental issues - Economic

environment of business - Socio - cultural environment - Political / Legal environment - ultural environment &his chapter focuses on the follo)ing aspects of Business environment0 Definition business of business% the meaning of business of environment% the the classification of business environment% need to study environment in decisions% various methods of scanning that business business environment% issues that are to be addressed )hile scanning the environment% decisions# &o highlight the importance of the Business environment% three case studies have been appended at the end of this lesson# Definition of usiness types factors influence environment% non-economic environment and its impact on business

&he term business is understood and e,plained in different )ays by different people# For some% business is an activity% for some it is a method of transacting% for sonic others% it is a method of money making and some people argue that business is an organi/ed activity to achieve certain pre-determined goals or ob4ectives# Dictionary meaning of business is0 the act of buying and selling of goods and services% commerce and trade# Based on all these meanings of 4ustness% )e may define business as0 gainful activity through )hich various elements of society conduct e,changes of the desirable things# In the olden days% the people engaged in different activities in a society )ere classified into four groups 0 Brahmnas% Shatriyas% 5ysyas and Sudras% 6f these our fold classification of social activities% the activities of vysyas included basically% facilitating e,change# 7ence% business as an e,change activity remained since the days of e,change

started# It could also be recalled that business as a social activity became popular only )hen the )ants of different people in a society )ere to be met )ith the available resources# In other )ords% )henever there )as a scope for producing something% )hich is )anted% then business activity automatically emerged# But no) a days% business is vie)ed more as a profession or occupation# From the days of family o)ned business% )e have reached a stage of professionals and e,perts starting and running business# It could also be noted that business administration and business management have emerged as the most prospective field of study and occupation# Persons )ith educational background in business% enter business or 4oin business organi/ations to make them successfully function# 8nlike the olden days% a number of interests are involved in business today% vi/# o)ners% investors in business% suppliers% customers% employees% government% stake holders% administrators% managers% strategists% e,ecutives% and so many others# 7ence% every business activity has to meet the goals or aims or ob4ectives of these various groups of people# &hat in fact% has made business a most complicated activity# +odern business has a number of features# 8nderstanding of these )ould help to appreciate and organi/e business activities in a highly professional )ay#

!"

Business is #n e$onomi$ #$tivit% &

Business involves organi/ing activities to satisfy human plants# &hese activities may result in the manufacture or production of a commodity or e,tension of a service# 9hen a good or service is produced% resources are involved# 'esources like human resources% physical resources and financial resources are all re:uired to reali/e output to meet human needs# &hese resources are limited in supply% and so business involves identification of resources% evaluation of resource :ualities% buying these resources and utili/ing these resources# &hese resources being scarce in relation to their demand% the resources carry some value ;i#e#% price<# &hey cannot be procured at any cost to produce anything to meet human )ants# So automatically selection among various resources come up )hich is made on the basis of re:uirement and cost# 6nce they are procured% then they are used in a very 4udicious manner so that there is no )aste# &hat is optimal utili/ation-of resources is to be achieved# In this conte,t% several decisions like resource selection% resource procurement% resource mi,% resource utili/ation% etc# are all involved# 2s in all these stages% choice among alternatives is involved% every business activity is to be treated as economic in nature# Depending upon the business activity% the approach to selection among alternatives )ould differ# For e,ample% in a manufacturing business% the choice is about input selection to supply :uality output% in a service organi/ation the choice is about-inputs and delivery process% in a government organi/ation it is about production and e:uitable distribution of output% in an institution like bank% provision of various investment opportunities of short term and long term to the public% etc#

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usiness or(#ni)#tion is #n e$onomi$ unit

Every business organi/ation is engaged in transforming inputs into output to meet the re:uirements of the people# &he selection of input and si/e of procurement )ill depend upon% the si/e of the organi/ation# &his )ould also depend upon the nature or product or service e,tended by the business unit# 2ll these are attended )ith the ob4ective of making profit or surplus# 6nly )hen there is surplus achieved% can the business units gro)# 7ence creation of surplus in a business becomes the focal point and this is best achieved through optimal utili/ation of resources# &hat )ay% all business units have to achieve the ma,imum output )ith minimum inputs )hich in other )ords is the effort to achieve economic efficiency# 6nly economic efficiency can enable firms to be efficient in every other sense# &herefore% business organi/ations are only economic units in nature# *" Business +e$isions m#,in( is essenti#--% #n e$onomi$ .ro$ess 2ll business decisions involve selection from alternatives# In other )ords% the rational choice of inputs is implied in every business decision# 7ence% to be rational% a business unit goes through the process of 0 determining ob4ectives% identifying opportunities% generating alternatives% classifying these alternatives as feasible and infeasible alternatives% then rank the feasible alternatives on some criteria and then select those alternatives fulfilling the constraints# For e,ample% if the ob4ective of a business unit is to ma,imi/e profits% then this )ould call for minimi/ing cost and ma,imi/ing revenue# 6n the cost side% the business unit have to identify% procure and utili/e resources in the optimal )ay and on the revenue side% the business unit should determine the price )hich )ould facilitate ma,imi/ation of revenue# Price determination again )ould depend on various factors

like demand% supply% competitive scenario% government interference% statutory compulsions% conflicting interests of the stake holders of the business% etc# &herefore% every decision made in a business )ould automatically depend on the economic process# C/#n(in( $on$e.t of usiness

It has been stated already that the concept of business has undergone a vast change# From a producer driven stage business has become consumer centered and driven stage# 9hile the earliest concept )as = sell )hat is produced. the modern concept is .produce )hat is )anted. So every business depends on consumers and their ever changing needs# 2ny business unit )hich has successfully understood its customers and offer the product or service meeting their re:uirements alone is successful# But in this process% business units have to manage pressures from its o)ners and other stake holders# It should take into account the re:uirements of the )orkers and the trade unions# It should abide by the rules and regulations of a number of government agencies and institutions# It should meet the challenges and threats from competitors# +ost important% it has to fulfill its social obligations# &o survive every business unit has to also consider0 the revolutionary changes in technology% market e,pansion% information e,plosion% competitor strategies# &hese are days )hen the consumers are better informed and so no business unit can afford to ignore consumer a)areness and preferences# &echnological development has brought )ith it the compulsion to use modern methods and techni:ues# Social obligations have made business units to meet pollution norms% etc# &rade union pressures have made them to design satisfactory service conditions for the )ork force# &hen there is compulsion to provide for development of human resources in the organi/ation to achieve organi/ational development# 2ll these have made modern business >tight rope )alking#?

BUSINESS ENVIRONMENT Business involves activities% )hich links an organi/ation )ith outside )orld# 9ithin an organi/ation% a business is governed by the behaviour of its employees% management or decision makers# But e,ternally a business is influenced by a score of factors% )hich range from customers to competitors and government# &herefore% a business cannot be independent of @he influence of these e,ternal factors# It should also be noted that a business has absolute control over all the internal factors% it has no control over the e,ternal factors# So often it becomes necessary for business houses to modify their internal decisions and policies% on the basis of the pressure from e,ternal factors &his highlights the need to be ever- cogni/ant of changes and influences of e,ternal factors so as to conduct business on healthy lines# It is in this conte,t that business environment assumes all significance# Business environment therefore refers to the influences and pressures e,erted by e,ternal factors on the business# &he follo)ing Figure )ould help to understand the various factors )hich constitute the business environment# From the Figure0 A% it )ould be clear that business organi/ations function in an environment sub4ect to the influence of various constituents# Earh one of the constituents have in turn a number of factors influencing them# For e,ample% economic environment has micro and macro environmental factors affecting it# &o develop a right perspective about business environment% let us discuss briefly about each one of the e,ternal environment constituents#

A# Demographic environment 0 &his refers to the si/e and behaviour of population in a country# Suppose a country has a huge si/e of population% then% the country )ould provide e,tensive business or marketing opportunities for all types of business organi/ations# 6n the other hand% a country )ith lo) si/e of population )ould force the business organi/ations to seek e,ternal market for their products or services# Similarly% if the population in a country is )ell - tuned to .use and thro) concept? ;like most of the 9estern countries< then there )ould be limited scope for repair shops and employment scope in that segment )ould be almost nil# But alternatively this )ould give )ide marketing opportunities for manufacturing organi/ations# 6n the other hand% if the population is averse to .use and thro). concept% then the business opportunities )ould be limited for manufacturing organi/ations but the repair shops% self-employed technical persons and spares manufacturers% )ould have roaring business# 7ence% the si/e and :uality of population emerges as a vital factor influencing business environment# B# Economic environment0 Economic environment refers to the overall economic factors like economic philosophy of the country% economic structure% planning% economic policies% controls and regulations% etc# 2ll these have a serious impact on the functioning of business organi/ations in a country# For e,ample% in a "apitalistic economic system% business organi/ations )ould be sub4ected to limited government regulations and controls#

&hey )ould be more governed by market forces ;demand and supply< rather than by other factors# 6n the other hand% in a Socialist system% the government )ould determine everything on behalf of the country# In a "ommunist set up% the government has absolute control over every aspect over production that private enterprises may not e,ist at all# In a +i,ed economic system% government )ould be selective in allo)ing die presence of private enterprises in certain activities% reserving some spheres completely for governmental operations# 7ence% the economic philosophy of the country directly determines the scope and functions of business organi/ations in that country# C# $eographical and ecological environment0 $eographical

environment refers to climatic conditions and natural resources% )hich determines flu manufacturing scope and the nature of the products that could be marketed# For e,ample% a country like 1enya has to manufacture more of products based on forest resources% )hile the $ulf countries can produce only crude% Dapan can have business in fish% fruits% etc#% "ountries in the tropical region )ould have organi/ations speciali/ing in products from geographical resources available in abundant in that region% )hile organi/ations in +editerranean countries have a Different business scope% Scandinavian countries have scope for dairy product manufacturing% etc# Similarly ecological imbalance is taking place at an alarming rate in the )orld today% that deforestation and hunting of rare species of animals for food are all prohibited no)# 7ence% )hile identifying the business have to be conscious of opportunities% business organi/ations considerations#

the limitations posed by the geographical and ecological

E# !egal environment0 It is )ell kno)n that every country has a number of legal regulations to ensure that the interests of business organi/ations do not run counter to national interests# 'ight from the stage of incorporation of organi/ations% their listing in stock e,change% reprisal of customer complaints% payment of ta, to government% manufacturing practices% human resources development to pricing of products and services% a number of legal regulations have to be fulfilled# For e,ample% in 8S2 and several )estern countries% consumer protection is very active% that even a medical practitioner is sub4ected to huge liabilities in limes of deficiency in services# hunting sanctions# of rare In species% that any to In India and other organi/ation% )hich issued% countries% very rigorous legal provisions arc in place to prevent manufactures products based on such species% have lo get legal case of failure honor che:ues organi/ations are no) a days made to pay hefty compensations# 7ence% the deterrence in terms of legal provisions has become the order of the day# 2ll organi/ations have to first of all address these provisions become coming in to steam# F# &echnological environment0 factor determining Supported organi/ations have the &his is a very significant e,ternal of business in organi/ations# customers%

destiny

by computeri/e operations% modem business succeeded analy/ing

minimi/ing the defects in products% ensuring service at the right time and place% etc# 9hile communications use to take unduly long time in those days% have business recogni/ed communications that research are and instantaneous these days% thanks to modem satellite technology# +odern stability# organi/ations development alone can ensure organi/ational gro)th and &hey have become more and more pro-active and

remain as change agents of the economy# $overnments have also become more technology conscious that right from police controls to registration of title deeds% computeri/ations has been adopted# "ustomer servicing through call centers is the latest necessity of organi/ations# +anufacturing activities have become more and more technically sophisticated# &herefore business environment has become highly dynamic# G# Social environment0 Social environment today has brought compulsions on business organi/ations to adhere to certain business ethics and morals# Social responsibility of business is an important force that modern business organi/ations cannot )riggle out of their duties and responsibilities to)ards the society# For e,ample% every leather manufacturing or process unit is made to install pollution prevention system# Similarly% the e,pectations of various interests in the society have undergone a sea of change# &he shareholders% promoters and o)ners e,pect a reasonable return on their investments# &he )orkers e,pect $overnment security of service% terminal benefits% accident relief and various other compensations from the organi/ations# social improvement# e,pects the business units to pay ta, regularly and participate in &he distributors and agents e,pect the organi/ations to ensure smooth delivery process and demand more commission and compensation# Suppliers e,pect the organi/ations to give them continuous business and prompt payment of bills# &herefore each social group has a specific interest% the combination of all these% e,erts enormous pressure on the business unit# 2 business unit )hich succeeds in meeting the interests of all these groups remains successful and gro)s#

H# Educational and cultural environment0 Educational environment in a country determines the :uality of population# 2 country )ith very high illiterate population )ould al)ays e,perience political and economic instability# Similarly% lack of education may also give scope for the e,istence of superstitious beliefs% fatalistic attitude% etc# People.s choice of goods and services )ould be more governed% by their religious faiths and beliefs# For instance% in the colonial days% the Indian population )as a victim of the Britisher.s divide and rule tactics# &he economic development of a country completely depends on the literacy level )hich alone can pave the )ay for improvement in science and technology% moderni/ation% industriali/ation% etc# In such a country% the business opportunities are plenty# "ultural environment refers to the values% norms% customs% ethics% goals and other accepted behaviour pattern of people in a country# In olden days% religion )as the basis of all activities in a society# &he religious leaders and institutions determined )hat business should do and )hat people must consume# In India% the e,istence of caste system has done more damage than any good# "aste based politics has become the order of the day# 8nder the prete,t of )orking for back)ard and do)ntrodden people% several persons have amassed fortune# &his is )orsened by political support and policies# 2 modern organi/ation does not have the liberty to recruit people on merit but it has to follo) strictly die reservation policy of the government# 2nother serious aspect of the cultural environment is the attitude and behaviour of the people in urban and rural areas# &he urban - rural divide has created enormous problems for administrators and specifically business organi/ations prefer urban educated person to persons from rural areas#

I# Political environment0 Political stability is one important factor )inch determines the business gro)th or do)nfall# 2 country )ith relative political stability )ould )itness inflo) of foreign capital and collaboration# By political stability )e mean that the policies of government remaining consistent# 2s the business decisions arc based on government policies% fre:uent changes in these policies )ould force business organi/ations to change their policies too )hich% makes functioning very difficult# Sometimes% )hen the policies determined by a party in po)er are reversed by the succeeding party forming the government% there )ould be far reaching changes in business environment For e,ample% India )as follo)ing a policy of protectionism till lateJ AKLI.s# 7ence% the industrial development and economic development could not take place at a rapid rate# In the absence of competition% the business organi/ations% made people to accept inferior :uality goods and services# 6nce% the liberali/ation policy is adopted% the scene has completely changed# &oday% no business can survive unless it provides :uality goods or services on par )ith the multinational corporations# 2nother aspect of political environment is the political ideology )ith )hich a party is )edded to% )ould make the government to) the lines of countries )ith similar ideologies# 8ntil the disintegration of 8SS'% India )as simply follo)ing 8SS'.s lines% but after the disintegration% India has to literally fend for itself# 9ith the pressures mounted by the 9estern countries% India had to accept various trade and monetary policies# &his has brought about a complete change in business environment#

NEED TO SCAN ENVIRONMENT

7aving discussed very briefly the features of each one of the constituents of business environment% let us discuss )hy the environment should be analy/ed by the business organi/ations# It is )ell kno)n that business enterprises cannot remain independent of the society and the institutions# So )hatever decision they take as to be in tune )ith the re:uirements of society and the dictums of the institutions# 2 business organi/ation has to continuously monitor the environment so as to identify the business opportunities and threats# By e,ploring its strengths and minimi/ing its )eaknesses% if the organi/ations can capitali/e these opportunities and effectively th)art the threats% then it )ould be able to gro)# !et us elaborate this )ith an e,ample# Suppose an organi/ation )ants to introduce a ne) consumer durable product in the market# &hen it )ould study )hether there )ould be demand for this product and the product )ould be accepted by the society# 2t the outset% the organi/ation )ould e,amine )hether the product )ould suit the culture in the society# Suppose the product is .use and thro). type# &hen people )ould certainly be influenced by this feature of the product )hile evaluating the price of the product# In India% such a product )ould never be accepted as the culture here is to lengthen the life of every product by repairing it# Similarly suppose the product re:uires some critical component from abroad# &hen unless the government policy is favourable the component has to be imported at a very high cost% )hich in turn )ould drive the price up# #Suppose the product is only one of its types% the organi/ation )ould then emerge as a monopoly supplying the product# &his may not be tolerated by the government# Suppose the manufacturing of the product involves advanced technology% then the type of human resources re:uired )ould be )ell educated and trained# 6bviously this

)ill rule out the 4ob .opportunities for persons educated in rural areas# Further% if the manufacturing process involves scope for pollution% then the organi/ation has to address it in relation to the provisions of the pollution control norms# 7ence% in every decision of the organi/ation% the e,ternal environment has an important role to play# 2ny future plans of e,pansion and forecasting of demand )ill depend upon the changes in the business environment# &hese changes may include both the current and e,pected changes# 8nless these changes are also foreseen% decisions taken )ould turn out to be suicidal# In the case of organi/ations )hich have been pro-active% the changes in the environment do not affect them much# But those )hich fail to understand from their o)n e,perience or that of the other changes )ould remain challenges for ever# 2mong the various constituents of business environment discussed above briefly% )e )ill focus on the follo)ing constituents and discuss them in greater detail# &he constituents no) elaborated are0 Economic environment% political environment and cultural environment# !" E$onomi$ environment economic system% strategy of economic gro)th and

&he economic environment is composed of various set of economic policies% development% resource endo)ment% si/e of market and status of infrastructural facilities in a country# 2ll these affect the business environment one )ay or the other# &o understand the impact of these on business environment% let us discuss each one of these components in detail# E$onomi$ .o-i$ies& Economic policies include fiscal policy% monetary policy% foreign trade policy% licensing policy% technology policy% price

policy% etc# &hese policies lay the frame)ork )ithin )hich every organi/ation has to function# 2< By fiscal policy )e mean% the government.s ta, efforts% public

e,penditure and public borro)ing# &hrough these the government can effectively encourage consumption% investment and savings habits and also restrict them# For e,ample% suppose there is inflation in a country# Inflation implies that the people have high purchasing po)er and so they demand goods# &o curb this% the government may raise the personal ta, and also the corporate ta,# "onse:uently% individuals )ill be left )ith lesser disposable income and to minimi/e ta,% they may start saving through various ta, -saving schemes# 2s far as the corporate are concerned% they have to part )ith more by )ay of ta, to the government and this )ould bring do)n the rate of profit and dividend declared# 2s a result the corporate )ould resort to up)ard price revision% )hich might lead to further fall in demand for their products and services# During deflationary period% the government )ould reduce the ta, so as to encourage more spending and investment# Even in ta, policy% the government can be selective in ta,ing more of rich and e,empting the poor completely# &his )ould facilitate income re-distribution and improve the conditions of poor# Similarly% by altering its e,penditure on various public pro4ects% the government )ould be able to influence the prevailing economic condition# $overnment e,penditures are incurred on infrastructural development% public utility services like hospitals% ne) industrial units of very huge si/e% etc# For instance% suppose there is inflation in a country# &he government )ould reduce its level of e,penditure% thereby reducing the income of the people# 9ith lesser income% the demand )ould% go do)n and so the price# 2t the time of deflation% the government )ould e,pand its public e,penditure by investing in a

number of public pro4ects% so that there )ill be income generation find demand generation )hich )ill revive the economy#

Public borro)ing is one more instrument in the hands of the government to influence the economic condition in a country# &his involves government issuing bonds and encouraging common public and other institutions to buy them# By this% the government )ould be able to bring do)n the level of purchasing po)er in the economy and control the inflation# During deflation% the government )ould redeem the bonds and so )ith more purchasing po)er% the economy )ould be able to revive# B< +onetary policy refers to the set of policies determined and

implemented by the central bank of a country to control the economic condition# &he central bank of a country has the basic responsibility to maintain the price level and money supply in a country# &his is possible only )hen the central bank has certain instruments# &hese instruments available )ith the central bank to control the money supply and price level are called monetary policy instruments# &hey are called "redit control policy# "redit controls can be of t)o types0 Muantitative credit controls and Mualitative credit controls# &he former aims at limiting the money supply% )hile the latter is used to channeli/e the available credit in the country# Muantitative credit control policy includes three tools0 bank rate% open market operations and variable reserve ratio# Bank rate refers to the rate at )hich the central bank )ould re-discount the eligible bills already discounted by the commercial- banks# By revising the bank &his )ould rate up)ards% the central bank )ould be able to make the discounting by business organi/ations )ith commercial banks costly# discourage discounting and thereby money supply in the economy% )ould come do)n# 2lternatively% by lo)ering the bank rate% the central bank makes credit available at a cheaper rate% and so the business

organi/ations )ould go for a larger discounting of eligible bills )ith commercial banks# &his liberal credit policy )ould have e,pansionary effects on the economy# Similarly% using open market operations% the central bank )ould buy or sell the securities in the open market and through that increase or contract money supply in the economy# e,ample% suppose there is inflation in an economy# For &o bring do)n the In this

money supply% the central bank )ould sell the securities it has )hich )ill be bought by the commercial banks and other institutions# off% there by they have to restrict credit# process the e,cess money )ith these institutions )ould be siphoned 2lternatively )hen there is deflation% the central bank )ould buy the securities and the money e:uivalent transferred to the banking system )ould facilitate adoption of liberal credit# 5ariable reserve ratio refers to the increase or decrease in the :uantum of Statutory li:uidity ratio and the "ash reserve ratio )hich the commercial banks have to maintain as a proportion of their total deposits# By increasing the ratios% the commercial banks )ould be left )ith lesser volume of funds and so they can lend less# By reducing the ratio% the commercial banks )ould be left )ith more funds )ith )hich they can make lending liberal# 2ll these policies )ould have a direct impact on the business organi/ations and their operations# &hrough :ualitative credit controls% the central bank can 0 regulate consumer credit% alter the margin re:uirements% resort to persuasive efforts% take direct action on erring commercial banks% etc# &hrough these policies% the central bank )ould be able to regulate and direct the available credit to the priority sector and discourage credit for less priority or no priority sector# 7ence% business organi/ations% )hich fall under priority sector% )ould be able to e,pand their business )ith cheap funds and assistance

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Foreign trade policy0 &he foreign trade policy determines the

scope for trade bet)een countries# It )ould directly affect the business prospects of the business organi/ations# 2 liberal policy )ould e,tend the scope for e,ports and imports% )hile a restrictive policy )ould narro) the scope# Similarly% if protectionism is favored% then the business organi/ations )ill have lesser market threats from multinational corporations# 2lternatively if liberali/ation is the policy% then every domestic business organi/ation has to tune itself to every type of challenge posed by the business giants from abroad# Foreign trade policy also includes the e,change rate policy and e,change controls and customs duties# 2ll these are fundamental to the gro)th of a business organi/ation# For e,ample% suppose there is fullJ convertibility% then the business organi/ations )ould be able to e,port and import and make payments )ith lesser restrictions# 6n the other hand% if there is only partial convertibility% the scope for trade is correspondingly less and the business organi/ations have to go through a sickening process of getting licenses for e,port or import and route all their payments through proper channel# "ustoms duties also play a vital role in determining the volume of e,ternal trade# 2 rise in customs duties )ould discourage domestic demand because the price of imported goods and services )ould go up find remain at a high level compared to the domestically produced goods and services% 2 reduction in customs duties )ould encourage imports and be favourable to the domestic manufacturers# $overnment fre:uently changes the foreign trade policy% keeping in vie) the re:uirements of the country and the economic condition# &o tide over the $lance of payments difficulties% government may resort to various policy measures like devaluation% e,change clearing agreements% tariffs and duties% e,change control regulations% etc# &hese tools )ould be suitably modified to achieve the desired goals#

For e,ample% to encourage e,ports and discourage imports% the government may devalue the currency% by )hich the imports of Indian goods abroad become cheaper and the imports of foreign goods in India become costlier# 7ence the business organi/ations have to continuously monitor the changes in the trade policies so as to position themselves accordingly# D< !icensing policy0 In the pre-liberali/ation days% India adopted licensing policy in regulate the gro)th of industries in India# Since the days of independence% India adopted licensing policy% )hich in effect made the government control the gro)th of independence in accordance )ith the national priorities# For e,ample% in India% till AKIF% the industries in India )ere classified into four categories0 industries completely o)ned by public sector% industries )here both public and private sector participation )as permitted% small scale industries and collage industries# E,cept the first category in all the other categories% private sector presence )as permitted through licensing# &his )as resulted in several adverse effects% )hich )ere all e,plained in detail by the Dutt committee report# But till AKIF% liberali/ation )as never accepted as a part of gro)th strategy# But after AKIF% the situation slo)ly changed that by AKKA India adopted a policy of liberali/ation# "onse:uently% the business scope and prospects of the Indian business organi/ation changed since AKKA! they )ere e,posed to market 2s has been already pointed out competition and threats after

liberali/ation# Performance has become a necessity for survival# By about the end of BLth century% the government also proceeded to disinvest several public sector units thereby opening up the challenges all the more for Indian industries# &herefore% the licensing policy and its direction have a lot of impact on the business organi/ations# E< &echnology policy0 6ne of the most important economic policies

is the technology policy# Improvement in technology is a condition for

gro)th and survival in any organi/ation# From a stage of mandependent environment% the becoming business organi/ations are all fast machine-dependent ;computer dependent<# 'ight from the

stage of en:uiries do)n up to planning the logistics% computers are )idely used# 6nly from the mid -AKKL.s the government started adopting a favourable technology policy# 2part from permitting free imports of computers and components as )ell as telecommunication e:uipments% the government has devised a number of schemes like Soft)are &echnology Park% to give a Phillip to the technology in India# "omputeri/ation has come to stay in telecommunication% rail)ays% road)ays% postal services% educational services% medical services% engineering% financial services% etc# &his liberal technology policy has resulted in the gro)th of ne) industrial segment% vi/#% and information technology# +illions of youngsters get trained and are gainfully employed# Indian soft)are engineers are considered as the best in the )orld and several of the multinational corporations depend on Indian supply of trained soft)are and hard)are professionals# &he business environment has completely transformed over the past five to si, years that unless organi/ations also accordingly change themselves% their survival )ill become a serious :uestion# F< Price policy0 &his refers to the controls that government has on

the price in a country# &his is necessary% because% unless price is controlled% there is bound to be inflation and then economic instability# Further in Indian conte,t% nearly CFN of the population is living belo) the poverty line# &hey do not have any permanent employment# Especially the rural poverty is very serious# &o overcome this situation% the government resorts to price control policy# 2ll the essential and basic necessary goods are sub4ected to price control# 9hile the poor and do)ntrodden are provided the essential goods at a controlled and subsidi/ed rate through public distribution% the others are e,pected to

meet their re:uirements through open market# &hrough demand and supply management% the government makes all the efforts to keep the prices under--control# For instance% by building up buffer stocks% the government overcomes the shortage of food commodities during adverse period# Similarly% specific concessions are given to industrial units located in back)ard regions and rural areas# &his helps them to run on sound basis# 2s regards the manufactured products% the government adopts the administered price mechanism to control the prices# For e,ample% the cooking gas is supplied to the public at one &his price% to the commercial establishments at a different price# media# Similarly till 2pril% BLLB%

helps to minimi/e the strain of the population using !P$ as cooking petrol and diesel )ere sub4ected to administered price controls# Sugar% cement% etc#% are also sub4ected to administered price# 7ence% through price policy the government protects the interests of the people and this policy has a direct impact on the functioning of the business organi/ation in our country# '" much Po-iti$#- environment interlinked )ith the political environment# &he political

It is )ell kno)n that the business environment in a country is very environment simply means the political ideology )hich is adopted by the government# In a democratic country like India% this political ideology changes as and )hen there is a change in the party ruling the country at the "entre and the State level# business environment of the country# Before independence% under the guidance of +ahatma $andhi% India 2 number of e,amples could be cited to prove ho) the political ideology has influenced the

)as )edded to the policy of >S)adeshi?# &hat is% $andhi advocated the use of only Indian made goods and to completely abstain from imported goods% specifically British goods# 2s a result immediately

after independence% Indian government follo)ed a restrictive% trade policy imposing very heavy customs duty on imported goods# &his )as thought that such a policy )ould help to achieve both the political commitment as )ell as protection of domestic producers from the invasion of foreign-manufacture-s and traders# 2 deeper look into such a policy )ould reveal that India never )anted to entertain a policy of allo)ing foreign trading activities on Indian soil as this )ould lead to coloni/ation# 2fter all the British East India "ompany entered the Indian shores under the prete,t of trading )ith India in AGLL 2D and the country had to pay a heavy price for the ne,t CFL years being a colony# 7ence% a restrictive trade policy )as very much favored by every one and in such an environment the business environment )as such the domestic producers could operate under the umbrella protection of the government# &his is also evident from the Industrial policy of the government in AKEI% )hich clearly posed a threat to foreign interests in India# 2t the same time% the Indian government )as very much influenced by the 'ussian type of planning# Being a declared democratic socialist country% India adopted &he First planning Five as the plan strategy )as of economic and development# Oear formulated

implemented )ithout relying much on industrial development% )hen at the end of the I Plan it )as reali/ed that gro)th is impossible )ithout industrial development% a shift focus )as necessitated that the government gave emphasis on industrial development# again% the government approached the issue )ith caution# results than a free unrestricted through industrial But here It felt that &he )ith 9hen

a controlled and guided industrial development )ould yield better development# efforts conse:uence )as the !icensing policy# &hough imports )ere permitted% industrial development collaborative entrepreneurs abroad )as sub4ected to a very critical scrutiny#

the !icensing policy led only to concentration of economic po)er in the hands of a fe) private sector units like &2&2% Birla% and government brought in the +onopolies Practices 2ct% in AKHL# others% the 'estrictive &rade

&his has on the one hand put a check on &he seeds for

gro)th of monopolies in India% on the other hand the industrial development )as not taking place at a desired pace# liberali/ation )ere so)n in AKIF% )hen the government felt that India could achieve miraculous gro)th through this liberali/ation course% it proceeded in that direction# &his culminated in the introduction of !iberali/ation policy in lKKl# &his resulted in a peculiar scenario in )hich >democratic socialism )ith capitalistic ideologies? e,isted# &hroughout the four decades after independence% India.s policies )ere more governed by the political factors rather than economic necessities or compulsions# 7ence% at the beginning Indian government adopted a purely socialistic pattern of development strategy )hile by AKKL?s development by subscribing to capitalistic pattern has become the reality# &his shift has a great impact on the business environment that domestic business today has to realign itself to survive and gro)% in a competitive atmosphere# 7aving discussed the effect of political environment on business environment let us e,amine ho) far the economic system is an important factor influencing business environment# Economic system refers to the organi/ations and institutions created for the purpose of satisfying the )ants of human beings# In a country% available resources have to be utili/ed to manufacture and distribute goods and services% )hich )ould meet the needs of the people so that they are satisfied# &hese institutions and organi/ations function )ith their o)n rules and regulations# &he economic system has certain broad characteristic#

A#

&he economic system al)ays functions )ith scarcity of resources# 7o) the system effectively and efficiently uses the resources )ill determine the e,tent to )hich the needs of the people are met#

B#

2n economic system comprises people# &hat is% a society of human beings alone can constitute economic system#

C#

2 set of institutions are created and used for the purpose of smooth functioning of an economic system# For e,ample% banks% money% technology% government% price mechanism% planning etc#% are all institutions through )hich the systems operate#

E#

&he basic ob4ective )ith )hich an economic system functions is to satisfy the )ants of the people# 8nless there is )ant for a commodity or service% nothing can be produced# 7ence% the economic system allocates the resources in such a )ay that the )ants of the people are satisfied#

F#

6n the basis of the above characteristics of an economic system% it should be clear that the economic system is very dynamic in nature# &hat is% the economic system undergoes changes )ith every change in the institutions% though the rate of change )ould differ from institution to institution#

&he economic system functions to ans)er three vital :uestions0 a< )hat to produce b<ho) to produce and c< for )hom to produce# 2ns)ering these :uestions assumes enormous significance as that )ould determine every activity )ithin a country#

&he first :uestion .9hat to produce. depends on )hat is )anted# &he economic system )ould thro) signals through )hich the re:uirements of the people could be understood# But not all )ants could be satisfied# &his is becauseP a country may not be gifted )ith all the necessary resources to produce all the goods# 7ence% depending upon the resource endo)ment a country )ould decide )hat it could produce# &hen there is a problem of prioriti/ing the available resources among the goods to be produced# 'esources should not be used for the production of un)arranted goods# &he production of goods% )hich are harmful to human beings% like narcotic drugs% should be prevented# 7ence% considering the availability of resources% the economic system should opt to produce only goods that )ould satisfy the )ants of human beings# In this conte,t it is also necessary to )eigh the individual re:uirements and the national re:uirements for goods# &he latter should be given preference over the former# &he second :uestion >7o) to produce? addresses basically% issues relating to selection of right strategy% technology and investment# For e,ample% a country like India% )ith very huge population should not prefer capital -intensive technology% as that )ould lead to more unemployment of human resources# Similarly% )hile selecting the technology% a country should )eigh a number of considerations like relevance of technology% cost of technology% support in case of failures% conse:uences of the technology used% etc# 2nother vital aspect is the investment that a country has to make )hile selecting the strategy and the technology# 2 very important :uestion is )hether the available funds should be invested in sophisticated research and development or meeting the basic needs of the people# 7ence% the second :uestion )ould ultimately determine the efficiency )ith the available resources are utili/ed#

>For )hom to produce? implies that based on the resource utili/ation% the country as a )hole should benefit and not a fe) segments# 7ence% having produced the goods and services% ho) they could be e:uitably distributed is an important aspect# &he distribution of national product )ould differ from country to country depending upon the economic system in vogue# It has been already pointed out that the )ay in )hich the above three :uestions are ans)ered depends on the economic system )hich functions in a country# &o understand ho) these ans)ers differ among the economic systems% )e should understand the different types of economic systems# In the ne,t section% the details of different types of economic systems are discussed# T%.es of E$onomi$ s%stem Economic systems may broadly be classified into three categories0 "apitalism% Socialism and +i,ed economy# 2 number of other types also emerged but all of them came close to any one of the above three types of systems# Such systems include0 communism and +ar,ism !et us no) discuss the features% strengths and )eaknesses of each one of these systems# !" C#.it#-ism

"apitalism is an economic system based on the principle of free enterprise# Individual o)nership of resources is an important feature# 9ith control and command over resources% individuals can conduct any type of business# &he ob4ect in such a system is to ma,imi/e private gains# 2ny type of enterprise or production of any commodity or service is permitted% so long it is )anted by the society# In such a system the market forces determine the resource allocation and price#

&hat is% the demand and supply forces together determine )hat to produce% ho) to produce and for )hom to produce# Price mechanism is the nucleus of the capitalistic society# reflects the )ants of the people# great demand# &he price mechanism clearly 6nce this is kno)n% the producers

)ould allocate the resources to manufacture and sell the products in 9hile doing so% there is no control or regulation over production# In other )ords% oligopoly environment prevails# But each producer differentiates his product that he )ould be able to stay in the market# &echnology and innovation ensure the stability and gro)th of organi/ations# 2s a result only efficient organi/ation )ould survive# &he resources )ould be fully utili/ed# &he system is so fle,ible that it can ad4ust itself for any economic condition# &he )orkers get e:ual opportunities and those )ith skills )ould be able to command better )ages and salaries# 6n the )hole capitalism offers scope for gro)th of efficient individuals and organi/ations# But capitalism has a number of )eaknesses# &he important ones are discussed belo)# A# Economic ine:uality is invariably found in capitalistic societies# Individuals and organi/ations )ith o)nership of resources and hold over the market for @heir product or service% )ould be able to ma,imi/e their gains# &hose )ho have no such property )ould remain poor and become poorer# So it is said that under capitalism% rich becomes richer and poor becomes poorer# &he ine:uality in )ealth and income )idens over a period under capitalism# B# &he scope for the emergence of monopolies in capitalistic societies is very high# 6rgani/ations by virtue of their economic po)er )ould be able to easily eliminate rivals and competitors in

the market# &here is also possibility of such monopolies influencing the government in policy making and intervention# C# &hough it is said that capitalism )ould al)ays lead to ideal allocation of resources and fuller utili/ation of resources% in reality the e,perience is that resources are held by individuals and organi/ations and under utili/ation is the result# Sometimes% products )hich are not really national priority are produced and forced on the public% through advertisements and sales promotion techni:ues# E# &hough it is e,pected that in capitalistic societies the output )ould increase to optimal level% in# practice this is never found# Producers al)ays restrict output to maintain a high price and also ma,imi/e profit# So e,cess capacity )ould e,ist in many industries# F# In a capitalistic society the divide bet)een the haves and havenots )iden that over a period# E,istence of poverty among the sophisticated sections of people is also seen# &his results in built up of frustration in the society# 6ver a period this might lead to revolution and social upheaval# '" So$i#-ism Socialism refers to an economic system ir )hich the follo)ing features predominant0 &he resources are o)ned by the State or state o)ned institutions# Production takes place in the interest of the society and not for ma,imi/ing profits of individuals or organi/ations# $overnment decides the type of productive efforts to be

permitted# In other )ords% in a socialist country% government can adopt licensing system and other types of regulations to prevent the emergence of monopolist and e,ploitative tendencies# +a,imi/ation of "ommunity )elfare is the ob4ective than profit ma,imi/ation# 2nother very important feature is the government ensures e:uitable distribution of national product# Public distribution system assumes enormous significance in such an economic system# 6n the )hole% the socialistic society differs from capitalist society in every sense# In the broad spectrum of economic systems% socialism and capitalism occupy t)o e,tremes# In the )orld today% pure capitalistic society is not seen in any country# Even in 8S2% government interference in various economic activities is found# For e,ample% in the field of national defense% atomic energy% space technology% social security% etc#% the presence of government is almost complete# $overnment also retains the right to interfere in the market system% )henever there is deliberate and intentional attempt to monopoli/e the resource o)nership or the market# Similarly% in the erst)hile Soviet 8nion% socialistic principles )ere follo)ed# But even here% there )ere instances of private o)nership of property% enterprises% etc#% )ere reported# Q &hat is )hy it is very difficult to come across pure capitalistic or socialistic societies# &he merits of socialism includes0 A# "ollective o)nership eliminate emergence and e,istence of monopolies# B% 'esources utili/ation is planned and achieved in the interest of the society# C# $overnment )ith its control over the resources is able to use resources fully utili/ed and avoid )astage and production of unnecessary goods# E# 2s e:uality in distribution is the fundamental feature of socialism% there is no scope for )idening

ine:ualities rind the government takes steps to narro) the gap bet)een the rich and the poor through various measures# 7o)ever% socialistic states suffer from the follo)ing limitations0 A# E,cessive dependence on government decisions often result in delay in offering any public service# B# Bureaucratic control becomes an integral part of the socialistic principles# 2s a result the benefits and its direction of flo) is determined by the bureaucrats# C# $overnment by undertaking e,cessive responsibility on its shoulders% abets inefficiency and corruption in the society# E# (o incentive and motivation for individual e,cellence or achievements is possible in such a society and so innovations and inventions do not really lake place in large scale in such a society# F# 9ith governmental presence in every )alk of life% efficiency and productivity suffer# "! !ack of support for individual liberty kills initiative# *" Mi0e+ e$onom%

Evolution of the concept of +i,ed economy0 &here )as no reference to the mi,ed economic system in Economic literature in the past# Economists )ere mainly familiar and advocated the !aisse/ faire or free enterprise system% as several countries could develop fast follo)ing the free enterprise system% in )hich there )as no or little government intervention# &he entire economic system operated )ith the price mechanism at its center point# &he producers produced )hat the consumers )anted and this provided very little scope for the government to intervene in the system# &he "lassical economists and their ardent supporters believed that the invisible hand )ill direct the economy and )ith private initiative and enterprise%

every country should be able to record a faster gro)th as proved in the case of 81% 8S2% Europe% 2ustralia% and other countries# But over a period under the leadership of 1arl +ar,% a ne) economic system )as developed called socialism% in )hich there is no scope for any private enterprise as everything o)ned and controlled by the government# &he government decided the type of developmental activities and me re:uirements of the society and used the available resources in the provision of these re:uirements# Several countries like 8SS'% "ommunist "hina% 5ietnam% "uba and others preferred this socialist system in )hich government is made the custodian of the society# &he main reason for Die emergence of this ne) economic system )as the failure of capitalism during the AKBK depression to revive every economy from depression# 1eynes himself thought that capitalism )ithout some of its evils could certainly help economic recovery# 7ence% a time came )hen economists felt that cent per cent free enterprise or cent per cent government governed economic development cannot )ork satisfactorily# 2 compromise bet)een these e,tremes )as thought of as an ideal economic system# &he ne) system called .mi,ed economic system. contained the merits of both the capitalism and socialism and appeared to be full of promise# &his mi,ed economic system is adopted by India as indicated by the First Industrial Policy 'esolution AKEI# C/#r#$teristi$s of mi0e+ e$onom%& i" Co1e0isten$e of .u -i$ #n+ .riv#te se$tors&

In a mi,ed economy% one )ill find the e,istence of both the private and public sectors# In such a system% the government )ill undertake the responsibility to build and develop certain sector activities and leave the other activities for the private initiative# In India% the government

announced the adoption of the mi,ed economy system through its AKEI Industrial Policy 'esolution# &he government clearly earmarked the industries to be completely under the state control% the industries )hich are to o)ned and controlled by the state as )ell as the private sector and industries )hich are completely left for the private sector# In this )ay the 'esolution provided for the simultaneous e,istence of both private and public sectors# ii" St#te .#rti$i.#tion in e$onomi$ +eve-o.ment&

&his is the second feature of mi,ed economy% according% to )hich the state reserves its right to design and decide the type of development to be achieved# In such a set up% the government strives to promote the )elfare of the country by ensuring social order% social 4ustice and establishing all the necessary institutions )hich are re:uired to achieve the desired pattern of gro)th and development# iii" Distri ution of o2ners/i. #n+ $ontro- of resour$es&

&his is the ne,t feature of mi,ed economy# In this system% the government itself enters the field of production so that the available resources are fully utili/ed# &his )ill also help to avoid concentration of )ealth in the hands of a fe) and enable distribution of o)nership and control of productive activities# 2s a result there is no scope for e,ploitation of any group% say labor% by any other group# In this )ay the )eaker section of the community is )ell protected and taken care of# 6nly the mi,ed economy )ill enable the government to attain the ob4ectives of the Directive Principles of the Indian "onstitution# iv" Dire$tin( t/e investment in so$i#--% +esir# -e .ro3e$ts #n+ $/#nne-s0

+i,ed economy facilitates the flo) of investment into channels )hich confers the society )ith several benefits# For e,ample% the Indian government has invested huge amount in several pro4ects to develop the infrastructural facilities# &his forms the basis for the development of other sectors# &he investment in these infrastructural areas )ill not come forth from the private sector as the return is nil# 7ence% the government in a mi,ed economic set up provides the thrust by developing the necessary background and strength )hich )ill encourage the private sector to invest in profitable opportunities# In this )ay the government plays a key role in a mi,ed economic system# v" S$o.e for #$/ievin( #-#n$e+ e$onomi$ +eve-o.ment&

I !eft to itself% the private sector )ould establish its enterprises only in urban or sub-urban areas and that too in already )ell developed states# &his )ill mean other areas )ill have no scope for development# But in a mi,ed economy% the government )ill itself undertake the initiative to set up industries in back)ard areas and encourage the private initiative to set up industries in such areas by offering several concessions and e,emptions# In the absence of ni,ed economy% several states in India )ould have remained industrially back)ard# vi" U-tim#te $ontro#n+ re(u-#tion in t/e /#n+s of

(overnment& &his feature of mi,ed economy clearly spells out that in every activity affecting the economy% the government )ill be the ultimate authority# &hough the private sector is assigned its role to perform% the government )ill still monitor and control the )ay in )hich the private initiative is performing its role# Infact% according to the AKEI Industrial

Policy 'esolution% the government made it clear that the industries already established by the private sector belonging to that category in )hich ne) industries )ill be established by the government alone% the government )ould undertake the revie) of the )orking of these industries in private sector after a period of ten years and if found not satisfactory% they )ould be taken over by the government# &hough this )as critici/ed as a threat of nationali/ation% yet through such a provision the government underlines its authority# Similarly in the banking and insurance sectors% the government nationali/ed banks emphasi/ing its po)ers to control and regulate any sector# vii" Co1o.er#tion in t/e fie-+ of e$onomi$ +eve-o.ment&

2ccording to this feature of mi,ed economy% the government formulates the design for development and invites the private sector to participate in the development# It clearly spells out the guidelines )hich )ould govern such cooperative efforts and the limits of freedom granted to the private sector# In Indian case% the government prepares the plans for development and spells out the areas left for the private initiative and the areas that )ill be under state control# 7ence% there is scope for the development of private sector% though only according to the design developed by the government# P-#nnin( .ro$ess un+er mi0e+ e$onom%& 2s has been already stated% in a mi,ed economy there is a need to achieve a compromise bet)een self-interest and social interest &his is a very difficult task as the government has to carefully foresee the type of development it )ants to achieve and closely monitor the activities of the private sector to ensure that the social interest is never at stake# 6bviously% planning is a very difficult e,ercise in a mi,ed economy set up# &he success of planning )ill depend uponP i)

the e,tent to )hich the public sector is able to rise to achieve the social gains aimed for% ii) the success of the state in guiding and regulating the private sector activities to)ards social goals and iii) the e,tent lo )hich @lie state is able @o check the distortions taking place in investment by private sector affecting @he interest of the public sector# 7ence in the planning process the state has taken up the follo)ing steps to ensure the accomplishment of the ob4ectives of the mi,ed economy% a# By holding complete o)nership of defense and heavy industries% the government has provided an industrial base )ith )hich the private sector is e,pected to plan its investment activities# b# &he state also has made huge investments in economic infrastructures so as to help the e,tension of market for goods% raising the productivity in agricultural and industrial sectors% encouragement of further productive investment c# &he government has complete control of the financial

institutions including banks so that it can ensure that the banks and other institutions play a key role in the development activities of the state# &he government could also reali/e the e,pected gains by encouraging the priority activities in every sector# &he economic institutions are made to support the )eaker sections of the community# d# &hrough po)erful legislations like +'&P 2ct% FE'2% etc#% the government could ensure that there is no scope for e,ploitation of the common people by the private enterprise# Such a legal frame)ork lays do)n the rules of the game and ensures fair play in a mi,ed economic set up#

e#

2s a method of protecting the )eaker and do)ntrodden people% the government has policies like rationing% price controls% etc# Such regulations are built in the planning mechanism itself% so that the private sector cannot e,ploit the community#

f#

&o)ards the improvement of )elfare in the economy% the state has undertaken several specific programs aimed at specific target groups# For e,ample schemes aimed at the back)ard and schedule tribe providing them reservation in educational% employment and other opportunities% rural oriented schemes for the rural folks% health for all schemes% provision of free educational and medical facilities up to a certain level% etc# 2ll these schemes aim at improving the social )elfare# In all these activities the private sector is also )elcome to play its role#

g#

&he government makes effective use of the tools of fiscal policy vi/# ta,ation and public e,penditure% so as to achieve the ob4ectives of economic planning#

Distortions in t/e .-#nnin( .ro$ess & 9e have e,plained above that the fundamental ob4ective of the mi,ed economy is to subordinate the self-interest for the national-interest )hether this has been achieved in Indian situation is a moot :uestion# In spite of various types of regulations and controls% the fruits of mi,ed economy have not appeared to have reached the common men# Even after four decades after the adoption of mi,ed economy principle% )e come across glaring distortions )hich go to prove that mi,ed economy

in practice has not been very effective# &his is mainly because of the influence influence% e,ercised corruptive by the private enterprise through political po)erful activities% dishonest bureaucrats%

national and international lobbying% etc# &he e,tent of distortions could be understood if )e study the follo)ing points0 A# 6ne of the basic ob4ectives of Indian planning is to eradicate poverty% but five decades after the adoption of planning strategy% the proportion of population belo) the poverty line has not significantly changed# B# &he planning mechanism has failed to check the rise in price level# Inflation has come to stay in India )ith no policy being effective# 9hen double digit inflation is controlled and results in single digit inflation% the country boasts of having achieved something very great# C# &he emergence and e,istence of black money is yet another yardstick to prove the failure of the mi,ed economy# &he high level of ta,ation has only resulted in effective ta, evasion and ta, avoidance# 2s a result the distance bet)een the rich and the poor remains )ide# E# &ill date there has been no effective method to prevent the concentration of economic po)er in the hands of a fe)# &he rich becomes richer and the poor% the poorer# F# In spite of five decades of planning% unemployment is very much on the increase and the backlog in every plan is assuming dangerous proportions# &his is mainly because of the failure to control fee gro)th of population of capital intensive production techni:ues# and the adoption

G#

&he failure to achieve re-distribution of income is yet another glaring distortion# 2ll the efforts to bridge the gap bet)een the )ages of rural and urban )orkers or increase the real )age of the )orking class has not succeeded#

9hen )e study the above points% it is clear% that mi,ed economy has not carried us in the desired direction# &his is mainly because of the inability of the government as it is fre:uently yielding to the pressure e,erted by the vested interests# Even the recent liberali/ation measure could be vie)ed from this angle# But a country cannot remain independent of the international pressures% especially )hen India is depending upon the I+F and EB'D% all its internal policies are indirectly governed by these lending agencies0 9hether this is right or )rong is a :uestion that could be ans)ered only after )e evaluate the gains of liberali/ation policy# But on the )hole% the e,pected benefits of mi,ed economy have not been reali/ed as is clearly proved by the distortions discussed above# 4" M#r0ism

+ar,ism is essentially socialism in different garb# &he pure socialism is proved to be impractical and it made role of government the center point# +ost of the government could not fit in this role effectively# Further capitalism )ith its e,plicit goals threatened the success of socialism# It )as at this 4uncture that 1arl +ar, came up )ith his ideology% )hich led to the evolution of +ar,ian socialism# +ar, succeeded through his logical reasoning that economics dominates every activity of a society# &his leads to class struggle# 9hen one struggle is tackled another one crop up# &he continued onslaught of the capitalist on the society )ould result in the creation of haves and

have-nots# &his

division

of

the society )ould

)iden )ith the

continuance of capitalism% )hich ultimately )ill result in class struggle# +ar, e,plained through his theory of value that every product should be valued in accordance )ith the value of labor contained in it# But the laborers are re)arded at a very much lesser rate than )hat they create# &hat is%% every laborer contribute more by )ay of his )ork to produce the product but he is paid a very lo) )ages# &he difference is the gain reali/ed by the capitalists# &he capitalists )ould accumulate profits this )ay at the cost of )orsening labor condition# 6ver a period the divide bet)een the proprietary class and the labor class )ould )iden that much% that there )ould be social upheaval# 1arl +ar, predicted class )ar and argued that unless the capitalist class reali/es this% there )ould be severe impact on production and economic condition of a country# 7is argument came true in the case of France that the French revolution broke out in AHIK# ;Scissor.s crisis<% and "hina# &here )ere similar problems in different parts of the globe% like in erst)hile 8SS' "hina% especially remained a closed economy till early IKKL.s# But in "hina% the +ar,ism led to the emergence of communism# &his is discussed in detail belo)# &hough +ar,ism held s)ay over a number of countries for some time% yet it has inherent defects# Firstly% +ar,.s vie) that all activities in all countries are basically economic in nature is not true# Secondly% his argument that class struggle continuously takes place in every country did not hold )ater# 2 number of other reasons of economic% social and cultural nature led to the struggle and not the )ay +ar, predicted# &hirdly% the theory of surplus value could not be applied in practice in service industry# Fourthly% +ar, never took into the interference that a government could make in case of e,ploitation of society by the capitalists#

5"

Communism

"ommunism is +ar,.s prediction at the fall of capitalism# +ar, argued that the )idening ine:ualities in a society coupled )ith class struggle should ultimately sound the death knell of capitalism# 7e is of the vie) that )hen capitalism falls% the communism )ill emerge in )hich% the laborers )ill lead the country# &he government )ill o)n all the resources and determine the needs of the society# It )ill also decide various other issues of macro and micro importance# $overnment )ill turn out to be the custodian of the society and in a pure communistic societyP people )ill lead a life )here basic necessities are provided by the government# 8nemployment )ill be very lo) as every one is occupied in some avocation or other# But the )ay in )hich communism )as practiced in "hina created an impression that the government )ould be oppressive in its approach that the people )ill lead a life of slavery# 6ne has to )ork to earn his bread# +ilitary type of regimentation )as enforced that common people )ere sub4ected to absolute control and regulation by government# &he economy remained closed )ithout any international relations% both economic and social# &here )ere no t)o party systems that the nominated representatives of the "ommunist party attended to all the governmental responsibilities# +arket mechanism is completely absent in such a system% as government determined everything on behalf of the country# 2s has been already pointed out depending upon the economic system% the business environment )ill change# In a capitalist system% the environment provides opportunities for every one )ho )ants to ma,imi/e gains# In a socialist system% the government undertakes the responsibility of providing everything to the citi/ens# In a +ar,ist

economy% it is ultimately the laborers )ho )ill hold the reins# In a "ommunist economy% it is the group of administrators )ho run the economy in the interest of the economy# 4" Cu-tur#- environment

"ulture refers to the behaviour% attitude% )ay of living% belief% faith% la) and custom of people in a country# ItP could be immediately understood that these aspects )ould differ from country to country and also in different regions of the same country# It is al)ays said mat the culture determines the people.s preferences% )hich directly determines the success or failure of business# 7ence% cultural% environment has a direct impact on business# 2 number of e,amples could be cited to prove this# In olden days% eating in hotels )as considered unhygienic and ma4ority of the people never used to accept food from outside# But today% even the orthodo, people freely take their re:uirements from fast food restaurant# &his change has come about% because of the changing culture in the society# For instance% )ith the presence of a large of multi national corporations% the e,ecutives )orking in such organi/ations are very )ell paid that they rarely find time to spend on food# Such e,ecutives prefer )orking lunch rather than lunch# So provision of such )orking lunch should not take time and if food is made available readily )ithout any time loss% then the e,ecutives )ould be able to save their time# Further )hen e,ecutives leave home very early% it is impossible for them to prepare some food and get for their lunch# So )hen their )orking lunch re:uirement is met nearby by their )ork Spot in am ambient atmosphere it )ould be )elcome# &his has given a fillip to the gro)th of Fast food restaurants# In this manner% certain ne) cultural practices are transmitted to the society# Similarly%

regarding the re:uirement of clothes% people are slo)ly s)itching on to ready made garments of different varieties and design# Sensing this% several international brands in ready garments are entering the market# &his is ho) the business adapts itself to the cultural environment in a country# Business also conducts research continuously for the purpose of innovating and inventing ne) products and uses for the e,isting products# It is through this process that several consumer durable products like )et grinder% mi,er% )ashing machine% geysers% etc#% have been introduced in the market# 7aving created them% the business impress upon the people to use them as time saving devices# 7ence% cultural environment can create business opportunities# 2ny organi/ation )hich is able to sense the business opportunity and capitali/e it% )ould be able to succeed and gro)# But it should be noted that changes in culture do not affect every part of the country or people in the same )ay or at the same time# It is possible to observe certainR regions people lag in adopting a particular culture# &his is )hat is referred to as >cultural lag#? For e,ample% even to day in rural areas% certain practices like untouchability is found% though it is a crime# Such cultural lag is found mainly because of illiteracy% ignorance% conservatism% sentimental factors% political factors and vested interests# Business should be a)are of this )hile addressing the re:uirements of people in different regions and nations# 6ne more aspect of cultural is the change# 9hile some of the changes are accepted very fast the others are resisted# 9hile in some families divorce is accepted as a common feature% in others% divorce is vie)ed very seriously and e,treme efforts are taken to pacify the parties in conflict# 2nother important e,ample is the )omen.s employment# 9hile in olden days )omen )ere destined to domestic )orks% today )omen entrepreneur lead several fields# 2ttitude to)ards )ork is yet

another area )hen Indian culture lags much behind the 9estern and Dapanese culture# In the light of the above discussion% the follo)ing case studies )ould make sense and prove ho) business environment can either give a boost to an organi/ation or cause a doom#

CASE STUDY& ! 6ILLIAM HENRY 7ATES8 III AND THE MICROSOFT MONEY MACHINE Several years ago% )hen his fortune )as a mere several hundred million dollars% a )eekly maga/ine labeled Bill $ates as >2merica?s richest nerd#. In AKKB% at age CG% he had passed Donald &rump% 'oss Perot and others to be listed as 2merica.s )ealthiest person by Forbes maga/ineP the value of his holdings had gro)n to an estimated S G#C billion# 7o) did the free enterprise system help him to attain such phenomenal )ealthT 2fter graduating from high school in Seattle in AKHC% $ates )ent to 7arvard# 9hile there% he learned that the personal computer ;P"< )as in the development stage# 7e dropped out of school and thre) himself completely into designing an operating system ;the program that coordinates the hard)are and soft)are of the computer< for the P"# 7is system% ;S - D6S the +icrosoft Disk 6pening System< )as so good that IB+ agreed to use it in their line of% personal computers# 9ith IB+ setting the industry standard% other computer manufacturers :uickly adopted +S D6S as )ell# &oday it is estimated that more than IL per cent of all personal computers in the )orld use this system0 $ate.s firm% +icrosoft% Inc#% makes money on every computer sold )ith +SD6S as the operating system#. In the AKKB% the firm recorded SB#I billion in revenue and S HLI million in net profit# It ranks third in si/e in the industry% behind IB+ and 7e)lett - Packard# $ate.s personal holdings of some KL million shares of common stock represent about CC per cent o)nership share of the company#

+icrosoft also produces programs for )ord processing% spreadsheets% and a variety of other applications# 6ne of $ate.s latest ventures has been to purchase the electronic reproduction rights to thousands of art and photographic )orks from museums and libraries around the )orld# &hese )ill be used as a part of his plan for interactive home entertainment systems# 9ith e,tremely hard )ork% a creative mind% and a )illingness to take risks% $ates has demonstrated ho) the market re)ards the successful entrepreneur# 7e )as able to produce )hat consumers )anted at a price they )ere )illing to pay the result )as that both and they are better off U &his is the essence of free market economic system# From the above case study% it )ould be clear ho) a pro-active% imaginative and innovative entrepreneur can% carry the business )ith him# &hough a school drop out# $ates has climbed the pinnacle of business )orld% merely by his ability to anticipate the changes% in the personal computer industry# Failure to read the business environment and initiate appropriate steps to protect the business% can lead to a serious threat to e,istence itself# &his )ould-be clsar from the follo)ing case on +aruti 8dyog of India and Doordarshan# C#se stu+% & '

MARUTI UDYO7 LTD"8

9hen Indian car market )as opened for ne) private players% +aruti 8dyog limited% )hich had till then en4oyed an enviable position in the market% suddenly faced severe market erosion# Even though +aruti is the market leader and has the largest range of products% cheaper cars%

good service net)ork and better cost structures% it has been steadily losing its market share for the last three years and the valuation of the company has halved in E years time from 's# IL bn in AKKG to 's# EL bn in BLLL# 2 +ar4ti udyog rival0 9hat +8! did to Premier 2utomobiles and 7industan motors is no) being done lo it# Em.ire un+er sie(e Dagdish 1hattar% +D +8! )as a man in trouble# 7e )as facing )hat )as the biggest setback ever for the company# backfiring% he seemed to be fighting a losing battle# Problems )ere aplenty - the +aruti ILL segment )as facing demand erosion% Ven and its arch-rival Santro )ere very close in terms of volumes% Esteem )as losing ground% Baleno% 9agon ' and 2lto )ere yet to prove themselves% )hile $ypsy )as snugly ensconced in its niche# ;$ypsy )as not generating many volumes needed for +8!< Despite the fact the fact that +8! had the biggest range of products% the cheapest cars in the market and a service net)ork and cost structures that )ere better than anyone else% it had steadily lost market share - do)n from IB#GB percent in AKKI to FB per cent in BLLL# 9ith the impending disinvestments% ;$overnment.s# policy of disinvestments in Public sector units includes +8E! also along )ith other profit making PS8s#< +D )as facing flak from the government as )ell# 9ith market share declining% +8!?s valuation had also come do)n drastically# 9hile it )as valued at 's# IL bn in AKKG% by December% BLLL% the figure had touched 's# EL bn# 9ith all strategies

T/e

ui-+in(

-o$,s

+8! )as the largest car manufacturer in India )ith a market share of over FB per cent# It )as a 4oint sector corporation set up by the government of India and Su/uki +otor "orporation% Dapan# +8! )as incorporated in AKIA to take over the assets of the erst)hile +8! set up in Dune AKHA and )ound up by a 7igh "ourt order in AKHI# &he assets of +8! )ere then ac:uired buy the $overnment under +8! 2c:uisition and &ransfer of 8ndertakings 2ct% AKIL# In AKIB% the $overnment signed a 4oint venture agreement )ith Su/uki of Dapan# Su/uki.s stake increased from BG to ELN in AKIH% and to FL#BFN in AKKB# &he company )as a significant e,porter )ith e,ports to over FL countries# &he company manufactured passenger cars at its factor in $urgaon% 7aryana% )ith an installed capacity of CFL%LLL vehicles# &he first product% +aruti ILL )as launched in AKIE% follo)ed by the all-terrain vehicle $ypsy in AKIF# 6ver the years% +8! e,panded its portfolio )ith the launch of the +aruti ALLL ;AKKL<P the Ven and the Esteem ;AKKC<P Ven Diesel ;AKKI<p Baleno% 9agon ' and the 2lto ;BLLL<# +8! )as kno)n for its >value for money pricing? strategy% )hich had been made possible due to the high levels of indigeni/ation of its vehicles# 9hile the +aruti ILL% Ven% Esteem% and 6mni )ere indigeni/ed to the e,tent of over KLN% the $ypsy )as indigeni/ed to the e,tent of IBN and the 2lto to the e,tent of HGN# &he company had a net)ork of about CHF vendors and had several 4oint ventures )ith some of them to source its ra) material re:uirements It.s sales ;comprising AAB dealers and sales outlets in IG# locations< and service ;comprising ALAL service )orkshops covering EAB locations< net)ork )as one of the largest in the country#

T/e Stum -in(

-o$,s

&ill 6ctober AKKI% +8! en4oyed a market share of IC#GN reacting to the increasing number% of players% its-+D commented% W6bviously% our market share )ill decline )ith the entry of ne) manufacturers and models in percentage terms% but not in actual volumes#X

9ith cars ranging from 's# L#BA mn to s# L#GH mn% problems associated )ith an ever-e,panding product portfolio >constantly plagued +8!# Besides the declining market share% cannibali/ation )as another issue the company could ill-afford to ignore# Forced to take stock of )hat )ent )rong% +8! reali/ed that it )as dependent to a large e,tent on a single product - the +aruti ILL# &he ILL% along )ith the 6mrii ;build on the same platform accounted for HFN of units sales in the car# market in AKKIP it had al)ays been the .bread)inner. for +8!# 6ne of the biggest success sagas in Indian automobile history% the ILL started losing its sheen in the AKKL?s as ne)er players emerged in the market# &he entry-level segment ceased to be the center of action as easy car finance availability and the lure of ne) cars made the 's# L#C inn to 's# L#E mn segment the most attractive one# &he fact that +8! made only minor changes in the models over the years led to the perception that +8! )as selling old models# &o tackle these problems% +8! adopted a t)o-pronged strategy# 6ne% to introduce ne) modelsP t)o% it decided to increase the number of variants rapidly% offering a ne) model )ith every increase of 's# BFLLL# +8! also revamped its engines and took the ILL to semi-urban

and rural areas% to compensate for the declining urban sales# &he company )as aiming to move entry-level prices up )ithout losing out on volumes by launching cars in the segment 4ust above the ILL# 2s part of this% Baleno% 9agon ' and 2lto )ere launched in :uick succession# ;2lto )as launched in the same league as the ILL# Industry observers contended that 2lto.s launch in the ILL-cc category signaled the beginning of a gradual phasing out of the ILL# 7o)ever% +8! sources )ere :uick to deny this- and-asserted that the ILL )ould be retained0< 7o)ever% despite favourable revie)s% these cars did not go on to become the saviors of +8! )as hoping for#

&he engine-revamp e,ercise for the ILL had pushed its price close the base model of rival Dae)oo.s +ati/% eroding the price advantage on )hich the model survived# 2s a final resort% +8! decided to play )hat it thought )as its trump card - price reduction# &he move )as also 4ustified on the gorunds that the company )as follo)ing Product Pyramid Profit model# ;&he Product Pyramid incorporated the distinct customer segments and their varied purchase -behaviour in terms of style% colour% feature and price preferences# &he base of the Pyramid )as occupied by lo) price% high volume product s# like the ILL% )here the margins )ere slim# &he ape, of the Pyramid )as occupied by highprice% lo) volume products such as the +aruti Esteem 5*# 2lthough -profits )ere concentrated near the top% the base played a crucial role as it created an entry-barrier for competitors% and insulated the profitable area near the top from competition# In the specific case of cars% the most common model )as the ne) product profits model# &hus% the profits associated )ith a car follo)ed the JsJ curve of its life cycle% and declined as the product neared the end of the maturity# phase# +8!.s decision to drop the prices of all the versions of the +aruti ILL came at this stage<#

+8! reduced the prices of +aruti ILL and Ven by about 's# BELLL and 's# FALLL respectively in December% AKKI% &his resulted in a drop of 's# C bn in net profit for the year AKKI-KK# &he +D 4ustified die price cuts% saying that +8! )anted to make up for the increase in the ILL?s price due to higher sales ta, figures for the period# &he move )as described as an attempt to Jredefine the price-value e:uation#J +8! sources claimed that they e,pected lo)er prices to bring an incremental gro)th of BFN over the ne,t AB months# 7o)ever% despite the price cuts% by +arch AKKK% the company.s market share decreased to FE#FHN In early BLLL% +8! announced that it )ould pass on the cost of installing Euro-II compliant engines )ith +ulti-point fuel In4ection ;+PFI< to its customers# &here )as a rush in the market for the ILL# as many first-time consumers )ho did not )ant to bear the hike% hastened their purchase# +8! had to increase the price of the ILL from# 's# L%AI mn to 's# L#BB mn# 2round the same time% +8! decided to meet the competition head-on by having a model or variant )ith every increase of 's# BFLLL# &he idea )as to give the customer the )idest choice possible# By mid-BLLL% the company offered EC models in a market% )hich had only ABH models# In Dune BLLL% sales of the ILL stood at FBKG cars compared to the AALLL plus cars it had been selling per month for the previous fe) years# +8! had no option but to again slash prices of various models by 's# BFLLL to 's# CLLLL% to bring back the sales to normal levels# 6ther changes initiated by the.-company included a transformation in its customer - interface and a revamped branding strategy )ith the ne) cars ;9agon ' and Baleno< coming )ith the Su/uki prefi,# &he price cuts% ho)ever% only added to the declining bottom line problem#

+8! reported a loss of 's# GHKB# II on every car sold bet)een 2pril and 6ctober BLLL# +8! sources% ho)ever% attributed this to the fact that +8! had not passed on the cost of up-gradation to meet the Euro PI and Euro II emission norms to its customers# . T/e in+ustr% stri,es #$,

&he Indian car market of the early BA sA century )as a burgeoning one )ith over ABH models on the roads% and many more in the pipeline# Increased manifested competition clearly in had radically transformed pricing the market% overhaul# carmaker.s strategy

+anufacturers )ere breaking the conventional rules of auto pricing by moving from cost-based to value-based pricing and the market soon% became a buyer.s market# 9hen the ne) players entered the market% there )ere no doubts that the main artillery for the companies in the car-)ars )ould be the pricing strategies# It )as not 4ust a case of competition forcing a do)n)ard revisionP the players )ere even ready to forego profits in the short run# Brand building and technology feature driven campaign )ere to be add-ons to the above plan# Industry observers )ere :uick to point out that +8! )ould have to get entangled in the price reducing game# 2 Business India report pointed 0 (o one is better e:uipped to fight a price )ar than +aruti# Its phenomenal profitability% cash reserves and efficiency in manufacturing )ill allo) it to slash prices on all its models )ithout feeling the pinch as much as others# 7o)ever% 7yundai )as the first company to introduce )hat came to be kno)n as% pricing based on customer.s value perceptions# It introduced

the base model of Santro at 's# L#BK mn% )hile t)o other versions )ere priced at 's# L#CE and 's# L#CH mn# &he basic version )as targeted at buyers of the ILL% and the other at the Ven# &hereafter% hunches in the 's# L#B mn to 's# L#G mn segment by Ford and 7yundai sho)ed highly innovative pricing strategies being adopted# Soon after% Ind 2uto dropped the price of the Fiat 8no Diesel by 's# GEIGH and Premier 2utomobiles !td lo)ered the prices of the four versions of the Premier Padmini by 's# FLLL to make it 's# FCLLL# +8! had adopted a skimming strategy for Esteem# !aunched in AKKC% it )as positioned as a lu,ury car# &his continued till the arrival of Dae)oo.s "ielo in AKKG% )hich started eating into Esteem.s share# In AKKK% the segment sa) the arrival of Fiat Siena% 6pc-A "orsa% Ford lko#n and the 7yundai 2ccent# +8! resorted to price slashing and brought the prices do)n# 9hile the top end version.s price )as reduced to 's# L#FB mn% from 's# L#FK mn% the basic version )as brought do)n to 's# L#EE mn from L#EG mn# 7o)ever% this )as possible only because it en4oyed substantial margins over costs% being the first mover in the market# +8! also follo)ed the- same modus operandi for Ven% albeit in a different manner# &he company increased the number of Ven variants to AL% )ith prices ranging hom 's# L#C mn to 's# L#EC mn# &he price stood reduced for the 's# L#C mn variant in terms of stripping do)n the model?s features# &he competition responded )ith similar moves# Dae)oo offered pricevariants for +ati/% Ind 2uto offered seven variants of Fiat 8no% ranging from 's# L#BH mn to 's# L#EA mn# 7yundai.s Santro offered si, variants bet)een 's# L#BK mn and 's# L#CH mnP &elco.s Indica came in the range of 's# L#BF mn to 's# L#CI mn )ith four models# (1 $oila% 5F

7onda - Sicl cars% aptly summed up the situation 0 It is important to be present )ith grade - variation and a range to cover the range of potential customers being targeted# &he price - points in the car market )ere replaced by price Y bands# &he )idth of a price band )as a function of the si/e of the segment being targeted besides the intensity of competition# &he thumb rule being% the higher the intensity% the )ider the price-band# Ford?s research% before the launch of the Ikon% a car made for the Indian market% revealed that over the previous t)o three years% the ILL segment had graduated to the ne,t level of Ven% Santro% +ati/% 8no and Indica# Ford.s research on the e,isting market segments and the consumer response to ne) cars revealed that beyond the Ven segment% the choice of the consumer )as limited# +odels like the Esteem and "ielo had had a long innings outside the country and )ere not e,actly contemporary# &he other options )ere Escort% !ancer and 7onda% )hich )ere priced above 's# L#H mn Bet)een them and the 's# L#EF - L#F run range of the Esteem and "ielo% thee )as a vacuum# &he gap )as identified by $eneral +otors. "orsa and Fiat.s Siena as )ell# 2ll three competitors plugged the gap by offering several versions at various price points# Ford first launched Ikon A#G but later came up )ith a lo)er engine capacity Ikon I#C"!*I at a lo)er price# $+ and Fiat also follo)ed the same approach# A out .ri$e re+u$tion &he fact that IBN of the Indian market )as accounted for cars priced belo) 's# L#EC mn% proved ho) strongly price influenced volumes# +oreover% )ith domestic car sales dropping by AF#LAN in (ovember AKKI over (ovember% AKKH manufacturers had to turn to)ards price to resuscitate demand#

In the prevailing conditions% the .Second P of aulo marketing. price reduction% seemed to be @he only factor able to re4uvenate the stagnant demand# 7o)ever% not every player had the financial-muscle to play the price card# Instead of cutting the price of +ati/% Dae)oo +otors introduced an enhanced version )ith product features like po)er steering% and product-plus features like better service and customer-care# Players like 7yundai and &elco did not opt for price reduction% as they simply did not have the economies of scale to profit from such moves# Such strategies )orked best for companies )ith offering in several segments of the market# 7igher volumes from the combined sales of products across segments enabled them to drive harder bargains )ith their suppliersP unit marketing and distribution costs decreasedP and the higher margins on products positioned near the top compensated for the pared margins on the basic product# &he players )ho chose to stay out of the race to cut prices had to convince their customers that the higher prices they charged )ere 4ustified by the greater value they offered# 2 product and promotional mi, had to be specifically designed to convey the above message# +ost manufacturers of mid-si/e cars% including $eneral +otors% Ford% 7onda-Siel% adopted this strategy rather than cut costs to increase sales# &hey argued that because of the .snob-value. of a costlier car% buyers in this segment )ere not that susceptible to be s)ayed by price cuts# &hey cited the "ielo price reduction fiasco as an e,ample# 9hen sales of Dae)oo.s "ielo )ent do)n from a peak of BBGL cars in September AKFG to CAE in December AKKH% the company slashed the price of its

base model 's# L#AC inn in Danuary% AKKI# Dae)oo also introduced /ero-interet finance schemes and its dealers gave unofficial discounts ranging from 's# L#LI mn to 's# L#AL mn% Sales increased by CLLN to KLG and AALB by +arch% AKKI# 7o)ever% this )as far belo) the company.s capacity of GLLL ears per month# Dae)oo launched an upper end version% "ielo E,ecutive and an upgraded versions% (e,ia at higher price points# 7o)ever% the market had discounted Dae)oo by then and sales did not pick up further% falling to a lo) of AEI by February% AKKK# "ompanies reali/ed that only )hen competing brands )ere perceived to be e:ual in all other aspects% )ould price be a deciding issue# 2s the target segment became more affluent% upgrades as )ell as first time buyers did not necessarily start at the lo)est price level# 2pplied as a brand level strategy% price helped the auto marketers )in over only the entry level customer# &he biggest price a manufacturer )ould have to pay for playing the price game continuously )as undoubtedly the loss of customer loyalty# &he )orld over% automobile brands succeed on the basis of their relationship )ith fiercely loyal customer communities% built around sharp brand images and uni:ue value proportions# By choosing to shift the focus to price% +8! risked the loss of damaging its customer relations and brand valuation% as it ended up antagoni/ing the buyers )ho had bought +8! cars 4ust before the price reduction# &his led to a feeling of betrayal among +8! loyalist# 9hen these customers replaced their cars% it )as doubtful )hether they )ould turn back to +8! or go in for a rival car )ith a vengeance# Mu$/ #+o # out not/in( 9

2s the Indian automobile market moved from monopoly to free competition% market share comparisons from the old era seemed to have lost relevance# &he alarm over +8!.s declining market share someho) did not seem fully 4ustified# In its heyday% huge )aiting lists for its products ensured that +aruti?s market share )as directly linked to the supply side of the e:uation# In other )ords% if +8! had an ILN share of the market% that )as also its share of the total industry capacity# By the late AKKL?s% things changed radically )ith over AB car manufacturers having a presence in the country% )ith a total capacity of about A%BFL%LLL cars% of )hich +8! produced about ELL%LLL ;CCN<# 1hattar commented tell me% if )e have market share of FLN out of a capacity that is CCN ;of the industry<% are )e doing badlyT 9hy don.t you ask the others )ho together have a capacity of ILL%LLL% but cannot match our salesT 2ll said and done% +8! )as still the leader in early -BLLA# It still had its early mover advantages# Provided 1hattar plays his cards right% +8! can still rule the roost for years to come# 9hether this )ill happen for real% is a :uestion too early to be ans)ered#

C#se stu+%& !"* DOORDARHSAN& BROADCASTIN7 BLUES ;DD India.s national television net)ork is one of the )orld.s largest

broadcasting organi/ations )ith respect to the infrastructure it possesses# It present telecasts programs on AK channels# 6ver the years% DD has been losing its advertising revenues to its competitors ;private channels<# &he continuously falling &elevision 5ie)ers 'ating

added to the problem# DD has also been facing many problems regarding its managements% right from the time )hen Prasar Bharati )as created# In mid-KL.s% cable television reached many Indian homes and several private channels% )ere launched# 2ll of a sudden DD had to content )ith a host of channels )hose programs )ere better produced# Poor :uality of transmission and program content prompted vie)ers% to s)itch to private channels# &he case provides an overvie) of the problems faced by DD due to mismanagement and competition from private channels#< JDD needs an o)nerJ - "E6% "arat +edia Services India# IS DD DEAD9 2fter years of falling revenues% in AKKK-BLLL DD had a revenue gro)th of FLN# In AKKK-BLLL% DD earned revenues of 's% G#A bn compared to 's# C#KK bn in AKKI-KK# DD sho)ed signs of revival )ith the launch of DD 9orlds ;a channel for ('Is< and had a certain measure of success )ith some of its regional channels ;&able-A DD "hannels0 2 snapshot<# 7o)ever% by the end of BLLL-LA% DD.s revenues )ere pro4ected to gro) at G - AF N )hile private channels such as Vee & 5% Star and Sony had a pro4ected EL -FL N revenue gro)th# 2ccording to some analysts% DD.s sagging revenues )ere only the tip of the iceberg# DD )as plagued by several problems# By the late AKKL.s% most private producers and advertisers and a good part of the audience had deserted DD# (ot even one car company advertised on DD and even t)o )heeler manufacturers kept a)ay# 2dvertisements of Pepsi and "oca - "ola )ere found only during sports telecasts# 6nly F+"$ companies stuck to DD% because its terrestrial net)ork )ould help them to reach the rural and semi urban audience# Despite having

over BALLL employees% DD outsourced FL N of its programs from private producers# In the late IKKL.s% DD faced allegations of large scale scams and irregularities# 8nder-utili/ed infrastructure% improper investments and poor financial management adversely affected DD.s performance# In AKKB% )hen the $overnment opened the air)aves to private players% 7D had to face competition from private satellite channels# In "able and Satellite ;" 3 S< homes it )as found that DD programs had hardly any vie)ers# &he depleting &elevision 5ie)er 'atings ;&5's< of the DD programs )as also a cause of concern as advertisers deserted due to its lo) vie)er ratings# 2ccording to analysts% DD )ould need a budgetary support of 's# F bn during fiscal BLLL-LA to sustain itself% as its revenues )ould not cover its e,penditure# +any analysts felt that privati/ation )ould be the only solution# DD & THE INSIDE STORY DD )as launched in AKFK as the (ational &elevision (et)ork )ith a modest BA community sets in Delhi# In the year AKIB% )ith the introduction of regular satellite link bet)een Delhi and different transmitters% DD began the transmission of national programs# In the same year% DD s)itched to colour transmission# Soon it had penetrated every nook and corner of the country% cutting across demographic and geographic barriers# DD had a three-tier program service - national% regional and local# &he national programs focused on the national culture and included ne)s% programs on current affairs% and science% cultural maga/ines% serials% music and dance recitals% plays and feature films# 2t the regional level

the programs )ere similar to the ones broadcast at the national level% the only difference being that they )ere broadcast in the regional language# In AKIE% DD introduced a second channel ;DDB< in cities like Delhi% +umbai% 1olkata and "hennai# DDB )as targeted at urban vie)ers% particularly the young vie)ers# In AKKF% DD launched DD - India% its international channel to cater to the ('I population# &his service covered S22'" countries## $ulf countries% 9est 2sia% "entral 2sia% (orth 2frica and Europe# In the same year% DD entered into an agreement )ith the "able (e)s (et)ork ;"((< and launched a BE - hours ne)s and current affairs channel 0 DD (e)s# In AKKK% DD launched a separate channel for sports# In the early AKKLs% about EHK mn people in Indian homes vie)ed DD and an additional A#F mn )atched DD on community sets# DD )as ahead of the private channels in terms of vie)ership )ith a KLN reach# 7o)ever% in the late AKKLs% it could not maintain the lead and phase channels )ere catching up in terms of revenue even though they lagged behind in vie)ership and reach# C# -e ons-#u(/t In AKSE% cable television entered India# For local entrepreneurs% cable television provided a good business opportunity% as investments re:uired to install a cable net)ork )ere lo)# In the early AKKLs% manyprivate television channels )ere launched# Vee &5 launched in AKKB led the pack# During AKKB-KE% there )as rapid increase in the number of cable connection in 9estern and (orthern India# In &amil (adu and

2ndhra Pradesh% a number of &amil and &elugu channels came up in the mid-AKKL?s# &hough by BLLL% DD had an incredible reach of HL mn homes% in comparison to " 3 S?s reach of only CL mn homes# It could not turn this net)ork into an advantage ;&able II for gro)th of cable and satellite penetration in India<# In urban households% DD programs had hardly any vie)ers# DD )as also behind the private channels in terms of ad revenues% as its &5's )ere very lo) compared to the &5's of programs on private channels# F#--in( Revenues During AKKG-KK% the &5 advertisement market gre) by HGN% but DD.s revenue from advertisement registered a negative gro)th ;&able III for fall in revenues of DD<# &hough DD continued to be number one in overall audience share% it lost out on vie)ership segments that had the highest purchasing po)er# In AKKI-KK% DD.s revenue from advertisements )as 's# E bn ;BF#IN of the market<% Vee &5 )as close )ith 's# C#IF bn% Sony had 's# B#FC bn and Star channels grossed 's# B bn# But the ad revenues of private channels have gro)n significantly% )hen compared to those of DD# During the period AKKG-KK% Vee registered a gro)th of ABBN in ad revenues% Sony BKKN and Star channels BLGN# During the same period% DD.s ad revenues )ent do)n by HL#AH N# DD.s falling &5's )ere a matter of concern for clients like 7industan !ever - DD.s largest advertiser# Said 2shutosh Srivastava% 5P% 7&2-Fulcrum% the mediabuying arm of 7!!% W6ur only source of reaching ELN of this country is going do)n#X &ill AKKI-KK% HLN of 7!!?s ad spend )ent to DD but by

BLLL-LA% due to tailing &5's 7!!.s ad spend to DD had gone do)n to FLN# During AKKK-BLLL% producers and distributors stopped giving films to DD )hen it began to demand a minimum guarantee of 's# AL mn to broadcast a film# &his forced DD to repeat the same old films that it had aired several times% and the '5's )ent do)n further# 2ccording to some analysts% DD.s revenues )ere going do)n because advertisers considered it a do)n market channel% )hich catered only to the lo)est socio-economic groups% )hose purchasing po)er )as limited# &he revenues earned by DD sho)ed a negative gro)th during AKKH-KK# In AKKK-BLLL% DD sa) its revenue gro) by FB#IN% but in BLLL-LA% it )as pro4ected to gro) only at "# ;&able III< I+entit% Crisis DD.s problems )ere largely attributed to )hat 1iran 1arnik% former "E6% Discovery "ommunicationsP India called .its loss of identity# Said 1arnik% &he channel has lost its identity% 9hat is Doordharshan 0 Is it a public broadcaster or a commercial entityT Initially% DD officials had envisaged that the national channel )ould play the role of public broadcaster% )hile DD +etro )ould be the commercial channel# Private producers and advertisers pointed out that this attitude increased the confusion# &hey argued that no other net)ork had t)o channels competing against each other# 9ith the launch of the Star (e)s "hannel% ;the first independent ne)s channel< in AKKI% DD (e)s lost its vie)ers to Star ne)s# &he in-depth analysis of ne)s itemsZby Star (e)s caught the imagination of the vie)ers ;&able I5 "omparative study of different ne)s channel<# DD.s

image of being the propaganda machinery of the $overnment also )ent against it#

Some analysts said politica A interference and corruption )ere another reason for DD.s poor performance# In AKKH% &he Indian Broadcasting Bill )as introduced in Parliament# &he Bill )as not passed% but it )as enforced through an ordinance nearly a decade after it )as enacted# DD )as brought under a holding company called the Prasar Bharati# In AKKI% the $overnment sacked Prasar Bharali "E6 SS $ill and the $overnment made DD ans)erable to a parliamentary committee# Political interference at the top level made matters )orse for DD# &here )ere allegations that members of the "entral "ommissioning 8nit of DD look bribes from producers to air their programs# In AKKI% the "BI arrested t)o DD officials for taking bribes from a serial producer# &his% incident focused attention on the rampant corruption in the organi/ation and forced management to issue guidelines regarding acceptance of gifts by employees# DD had a poor track record in both payments to and collections-from private players# 6ver FL companies o)ed 's# AI#B mn to DD% EF on Duly BLLA% 2mitabh Bachchan "orporation !imited )as DD.s highest debtor )ith outstanding dues of 's# CCL mn# 2nother allegation that DD faced )as that it had allo)ed International "ricket "ouncil.s ;I""< e,-chief Dagmohan Dalmiya and 9orld &el.s +ark +ascarenhas to defraud it of 's# AGL mn over the telecast of AKKI tournament in Dhaka#

&he e,orbitant prices that DD charged for advertisements slots also contributed to its poor performance# DD charged the producers around 's# A lakh for AL seconds% )hile some of the highest rated soaps on private channels charged half that price# DD did not have a marketing team% )hich could market the advertisements slots as a package# Private channels like VEE and Star had their o)n marketing teams )hich provided the advertisers )ith a package of advertisement slots on their programs# But DD had Fo different producers )ith FG different half-hour programs slots for four hours of prime time each )eek# Each producer sold commercial time separately% to the advertisers# But advertisers preferred package deals% )hich% )ould give them airtime across the programs for a )hole )eek# Bre#t/in( fres/ -ife into DD 2fter SS $ill )as sacked in AKKI% 'a4eeva 'atna Shah )as appointed as ne) "E6 of Prasar Bharti# Shah began overhauling the programs of the t)o DD channels and )eeding out corruption in the net)ork# 7e stopped commissioning programs on DDA and DDB# 7e decided to auction programming hours to the private players )ho produced the programs for DD and market them# Shah also announced the setting up of a board comprising eminent film-makers% actors% poets% )riters and people from different )alk of life# &his board )as to be entrusted the task of revamping DD# In BLLL% the government appointed a committed headed by Shunu Sen ;"E6% Muadra 2dvisory% a strategic marketing "onsultancy<% (' (arayana +urthy ;"E6% Infosys< and 1iran 1arnik to )ork out a program for reviving DD# &he committee considered three options# 0 Privati/ing of DD% continuing to run it as a Public Service #Broadcaster

;PSB<% and running DD on both PSB and commercially viable lines# 6f the three options% the committee recommended the third option# &he committee felt that there )as no need to privati/e DD% but recommended drastic steps for reviving it# Some of the important steps suggested by the committee )ere 0 Do)nsi/ing BF N of DD.s BALLL strong staff $etting into ne) media Setting up its o)n marketing department Developing a sharper programming focus#

6ne of the recommendations )as to improve the :uality of broadcast# DD sought the help of BB" to digiti/e its channels# +odi Entertainment (et)ork began distributing the five DD channels via satellite# DD )ent in for a revenue sharing deal )ith BE8 for sho)ing movies% arid auctioned the H0AL pm slot on DD +etro to the 7F"! - (ine net)orks# In addition to 's# A#BA bn that DD got from this deal% the move helped DD to penetrate urban homes as )ell as " 3 S homes to some e,tent# DD also entered into an agreement )ith Direct to 7ome platforms like Echostar and 2stra to distribute DD - 9orld in HK countries# DD employed 2ccenture to advise it on ho) to go about revamping its financial% management and administrative systems# &he (ational Institute of Design )as employed to redesign the logo# In BLLL% DD announced that it )ould start its o)n people meter pro4ect through a separate corporate entity in partnership )ith a fe) private channels and some advertisers# DD felt that its programs )ere not getting enough vie)ership ratings because the vie)er samples used by the t)o firms doing the ratings -I+'B - 2" (ielsen and 6'$ +2'$

)ere largely from " 3 S homes# &heir ratings did not accurately reflect the vie)ing habits of the Indian populace# 2ccording to most% these steps )ere bound to have a positive effect on revenue# 7o)ever% for real gro)th DD had to be freed from political interference#

TABLE I &DD CHANNELS & A SNAPSHOT DD A Primary channel )ith national% regional% basis +etro urban local and educational programs on a time sharing DDB entertainment channel targeted at

vie)ers% particularly the young vie)ers#

Programs relayed by the terrestrial transmitters DDE to DD AC in EH cities &en separate regional language channels 0 +alayalam% 1annada% DD AE to DD AH &amil% +arathi% 6riya% Bengali% &elugu% and $u4arati% 1ashmiri

2ssamese (et)orking of the regional services of the four 7indi speaking states 0 8P% Bihar% +P and 7imachal Pradesh Pun4abi 'egional Service International channels Sports channel BE hours ne)s channel

DDAI DD India ;DD 9orld< DD Sports DD (e)s

TABLE & II : CABLE TV 7RO6TH IN URBAN INDIA OE2' AKKB AKKC AKKE AKKF AKKG BLLL BLLA (8+BE' 6F 768SE76!DS 9I&7 "2B!E &5 ;I( +I!!I6(< A#BL C#CL AA#IL AF#LL AI#LL BB#LL CL#LL

TABLE III& FALL IN REVENUES OF DD YEAR AKKF-KG A3KG-KH AKKH-KI AKKI-KK AKKK-LL BLLL-LA ;Estimate< TABLE& IV COMPARISON OF THE NE6S CHANNELS STAR NE6S "hannel encrypted >EE NE6S "hannel not DD NE6S "hannel not encrypted "an be freely aired "ontent caters to the mass market 7indi predominant language REVENUE ;RS" BN"< E#CL F#HB E#KL C#KK G#AL G#FL 7RO6TH OVER PREVIOUS UYEAR ;=< I#AL CC#BL - AE#CL - AI#FL FB#IL G#LL

encrypted Decoders are re:uired "an be freely aired "ontent caters to the premium segment English predominant language "ontent caters to the mass market 7indi predominant language

6nly premium brand.s 2ll brands accepted# (o ads# 6nly social ad taken# 5ery selective regarding ads (ot selective regarding ads# messages )ere broadcast

REVIE6 ?UESTIONS & A# B# C# Discuss the features of modern business 9hat is business environment T business environment T 9rite a short note on 0 a< political environment cultural environment c< economic environment environment E# F# G# H# I# 9hy should the environment be scannedT 9hat purposes )ould it serveT E,plain in detail @he features and elements of economic environment# 9hat is an economic systemT Discuss various economic systems )ith their merits and limitations# 9hat are the features of mi,ed economic system T E,plain in detail the )orking of mi,e-A economy in India# 9hat type of distortions could take place in planning in a mi,ed economic systemT b< social and d< religious 9hat are the constituents of

K# AL#

2nalyse the strengths and )eaknesses of capitalism and socialism# Distinguish bet)een +ar,ism and communism# &race their evolution#

C/#.ter 1 II
Political economy- $overnment and business - Public control of business - %rends and structure of Indian economy - Socio - economic problems of India Po-iti$#- e$onom% @7overnment #n+ usiness

&he :uestion of government interference in economic activities has been debated for a very long time by the economists# 9hile the early economists considered economics as a handmaid of politics% the modem vie) is that politics is the handmaid of economics# 9ith the gro)ing importance of the role of government in economic )elfare% the modem economists firmly believe that the sphere of government in economic development has no boundary# 7o)ever% there is no unanimity among the economists about the e,tent and mode of state intervention in the economic sphere# 7ence% )e can identify the follo)ing political ideologies regarding the government intervention in an economy# i# &he earliest opinion )as that the government has nothing to do in an economy as the society )ill regulate itself# &his opinion also stated that the government )ill )ither a)ay over a period of time# &hese ideologists are called 2(2'"7IS&S# ii# 6pposing the anarchists? vie) is the "6++8(IS&S? vie)# 2ccording to them% the individuals cannot do anything on their o)n and there is a need for government to supervise and regulate individuals# &he state )ill o)n everything and it is the fundamental duty of the government to organi/e and direct all

economic activities# 7ence% government becomes the custodian of the society and it has a very )ide role to perform# In bet)een the above t)o vie)s% there are t)o more vie)s about the e,tent of government intervention in an economy# 9hile one vie) highlights the individuals% the other lays emphasis on the need for the government# 2ccording to the individualists vie)% the government a necessary evil# Even 2dam Smith advocated very limited functions for the State and to him the government should confine to the maintenance of la) and order# &his vie) )as holding good in the case of 9estern countries )hile in most of the under developed countries the economists themselves argued for larger intervention of the state# Individualism )as found to be e,ploitative and against the )elfare of the society# 7ence% another ideology that emerged )as "6!!E"&I5IS+# 2ccording to collectivism% interest of the society is more important than the individuals# &hey considered that state has a very useful and desirable role to play in an economy# So they assigned unlimited po)ers on the State and argued that the state intervention is necessary to promote social )elfare# &he State should therefore% play a very vital role in economic development# &hese t)o limits about the role of government are often referred to as "2PI&2!IS+ and S6"I2!IS+# &he modern vie) is that state must play a significant role in an economy that all the essential services should be State o)ned and controlled# 2ccording to the modern vie) the role of government includes maintenance of la) and order% achieving e:uality and social 4ustice% protecting the )eak from the economically strong% fighting against poverty% etc# &he areas of government intervention in modern state may be broadly discussed under the follo)ing heads 0 !" PROTECTIVE FUNCTIONS &

By performing these functions% the modem government creates the necessary atmosphere for performing productive activities# Protection from e,ternal attacks and maintenance of internal peace are necessary so that economic activities )ill be performed to ma,imi/e the )elfare of the society# Some people argue that this function of the government is unproductive% but )ithout this function% no economy can ensure performance of productive activities# '" ADMINISTRATIVE FUNCTIONS

$overnment activities include a host of administrative )orks# 2ll these )orks are performed through various departments and so the government maintains a large number of officials and agencies )ho implement the government policies# 9orks of routine nature are performed by these officials and the efficiency in the administration is a must for rapid economic gro)th# *" PROVISION OF SOCIAL SECURITY

&his is a ma4or function of the modern government as it is concerned )ith the improvement in public )elfare# +aintenance of public health% provision of unemployment insurance% free medical and educational facilities% granting old-age pensions% provision of decent housing facilities% maintenance of public perks% libraries% museums% etc#% have become part of the government functions# &hough these functions are not in any )ay productive% yet they are necessary to encourage and promote productive activities# 4" ECONOMIC FUNCTIONS

6ne of the basic economic functions of the modern government is to ensure optimal utili/ation of the available resources# &his involves both

identification and proper use of the resources# Especially these days every country needs to put the available resources to the best use so that the society gets the ma,imum benefits# Further if the resources utili/ation is left in the hands of the private enterprise% they )ill under utili/e the resources as they have only profit ma,imi/ation as their ob4ective# &here are also possibilities of the emergence of monopolist tendencies% concentration of )ealth in the hands of a fe)% etc# hence% every modern state should interfere in resources utili/ation# 2nother important function of the government is to maintain economic stability# &his means protecting the economy from the influence of business cycles# In the process of gro)th% boom and depression are inevitable# But they must be under check% as other)ise% there )ill be uncertainty affecting the business prosperity and through that industrial development# 7ence% the modern governments control and regulate the )orking of the economic forces so as to achieve economic gro)th )ith stability# 2nother very important economic function of the government is price control and rationing# &his measure aims at preventing escalation in prices of essential commodities and controls the price of other commodities# By resorting to retail and )holesale price maintenance policies% the government can strive to bring do)n the price level# &his calls for buffer stock operations as )ell as efficient demand and supply management of commodities )hich the country is badly in need of# &his is achieved by introducing rationing of essential commodities through )ell designed public distribution mechanism# 2ll these mean% enormous efforts are re:uired on the part of the government apart from the )illing cooperation from the traders and businessmen# In practice it is found that price control and rationing are very difficult to be implemented during inflationary period due to the e,ploitative and monopolistic attitude of the businessmen and traders#

Oet another area )here government intervention is needed is the removal of ine:uality in a country# &his ine:uality arises because of the mal-distribution of the economic )ealth and prosperity# &hough national income increases% the rich becomes richer and the poor the poorer# &his tendency should be changed through legal and political steps# For this purpose government in several countries have enacted legislations and announced concessions in favour of poor people# Implementation of these legislations and concessions involve a lot of difficulties and they have to be periodically revised# &he ob4ect of the government in this connection must be to prevent concentration of economic po)er and )ealth in the hands of a fe)# 2nother important economic function of the modem government is to achieve economic gro)th# For this purpose the government has to plan for economic development and in this task the government part from deciding the targets% planning process% resources identification and allocation% etc#% It should also arrange for financing the plans# It should be noted that planning has become important in both developed countries as )ell as under developed countries# In the developed countries planning is used to achieve stability in development% )hile in under developed and developing countries it is used for accelerating economic development# &he government intervention in an economy is a must for the follo)ing reasons0 A# In developing economies the vicious circle of poverty impedes the economy from developing faster# &his vicious circle can be broken only )ith the government intervention# In the absence of it% any amount of planning )ill fail to bring about the necessary impetus to gro)th in such economies#

B#

In the process of economic development% instability should be avoided at any cost# Even in developed countries% such instabilities are avoided )ith government intervention# In developing countries% therefore% the government should plan for proper allocation and utili/ation of resources as )ell as economic stability# 2llo)ing the market forces to operate has certainly some advantages# But in under developed countries market forces do not operate smoothly because of e,ternal rigidities and structure bottle-necks# &o overcome these forces pinning do)n economic development% government intervention is needed#

C#

&he basic re:uirement for rapid economic development is the economic and social infrastructure# &he investment re:uirement for the provision of such infrastructural facilities runs to crores of rupees# &his can be provided only the government and not the private sector# Further such investments are not income or profit yielding and so private enterprises may not come forth to undertake such investments# So government has a concrete role to play in inventing on such social and economic infrastructures#

E#

Investment

in

social

overheads

is

undertaken

by

the

government by mobili/ing financial resources from various sources# &hese sources of government include ta,ation% public borro)ing and deficit financing and these sources cannot be resorted to by the private enterprises# It is also )ell kno)n that private enterprises lack comprehensive approach to economic development# F# $overnment intervention is indispensable in under developed economies because in such economies% there are several

obstacles to economic development )hich can be overcome only by the government# 2s +ir and Bald)in observed every under developed economy needs to a critical minimum of and government intervention reduce indivisibilities

discontinuities in the economy% to overcome diseconomies of scale and offset certain other forces that arise to depress development% once development begins# Pu -i$ $ontro- of usiness

In a mi,ed economic set up like India% the government retains control over strategic and key industries and operations# &his is done through the creation of public sector units# &he role of public sector units is e,plained belo)# Dis$uss t/e ro-e of Pu -i$ Se$tor in In+i# Since AKEI% the public sector in India has been playing a significant role in every sphere along )ith the private sector# &hese t)o sectors have been functioning as complementary to each other% though the government policies have been usually more favourable to public sector than to the private sector# Inspite of this% the private sector has also emerged victorious in several fields and since the announcement of !iberali/ation polices in AKKA% )e can reasonably e,pect the private sector to reach its potential and the public sector )ould also strive its best to )ithstand #he domestic and international competition# 7ence% the future offers e,cellent scope for both the sectors% but it is clear that only the most efficient sector can survive% so ho) the private and public sectors are going to react to this challenge )ill be kno)n in due course# 7o)ever% let us no) discuss the role of public and private sector in India in detail#

!"

Ro-e of .u -i$ se$tor&

First of all it is necessary to understand that the public sector includes the autonomous corporations% the departmental enterprises o)ned and controlled by both the State and "entral $overnments# &he role of public sector )ould be discussed )ith reference to various indicators like employment% investment% output% national income contribution% savings% coital formation% capital stock% etc# #A Pu -i$ se$tor #n+ em.-o%ment (ener#tion&

6ne of the important contributions of public sector to the Indian economy is that it has generated huge employment opportunities and this has reduced the problem of unemployment to a large e,tent# &he employment opportunities in public sector includes government administration% defence% health% education% research and development% enterprise o)ned by "entral and State governments# It offered employment for ALH lakhs of people in AKHA )hich slo)ly increased to AFE#I lakhs in AKIA and it has touched AKL lakhs in +arch% AKKA# &his constituted nearly HAN of the total employment generated in the economy% in AKKA# 2s regards the sector-)ise employment opportunities created by the public sector% in AKIK public sector accounted for EH%IN of the total employment generated by it through employment in government administration% community% social and personal services% follo)ed closely by transport% storage and communications )ith AG#AN and manufacturing AL#AN 7ence% it is clear that )ith the gro)th of public sector% the country is benefited )ith more and more employment opportunities# A Pu -i$ se$tor #n+ in$ome of t/e .u -i$ se$tor&

&he share of public sector income in the net domestic product has been increasing consistently from H#FN in AKFL-FA to about BFN in AKIH-II# In a matter of about CF years the public sector contribution to net domestic product has risen appreciably and constitutes one fourth of the total net domestic product &his is mainly because of the rapid e,pansion of the public sector since AKFA# &his BFN of contribution in net domestic product is certainly better than K#GN of contribution by the public administration# 7o)ever% the private sector income constituted HF#AN of the total net domestic product# It should be noted that the public sector units are run on service motive and very little commercial motive# $A Pu -i$ se$tor #n+ s#vin( #n+ $#.it#- form#tion &

&his is yet another crucial yardstick to evaluate the contribution of public sector# &he percentage share of public sector in total domestic savings increased from A#H to B#C of $ross national product at market prices# But in absolute terms it increased from 's# AGK crores in I Plan period to 's# HIAF crores in 5II Plan# 9hen )e consider the percentage share in total sayings% the contribution of public sector has actually gone do)n from AH in I Plan period to AA in the 5II Plan# 7o)ever% the contribution of public sector in capital formation @gross domestic) is really commendable# It increased from a modest figure of C#FN of $ross national product at market prices in I Plan period to AL#HN in 5II Plan# 2s a result the ratio of percentage contribution by public sector and private sector in total domestic capital formation changed from CC 0 GH in the I Plan to EH 0 FC in the 5II Plan# From this it is clear that the contribution by the private sector during the same period has declined from GHN to FCN +A Pu -i$ se$tor #n+ $#.it#- sto$,&

"apital stock refers to the total stock of plant and machinery% e:uipment and tools and other capital goods available at a point of time for further production# Based on the data available up to AKHK-IL% it )as found that the percentage share of public sector in total capital stock bet)een AKGL-GA and AKHK-IL increased from BG to CH )hile that of private sector declined from HE to GC during the same period# In absolute terms% the capital stock increased from 's# AG%CHH crores in AKGL-GA to 's# GI%EHI crores in AKHK-IL in public sector @i#e#% an increase by over 's# FB%LLL crores) but in the private sector the increase )as from 's# EG%FIC crores to 's# A%AG%LIK# crores @i#e#% an increase by over 's# GF%LLL crores)# &he increase is less pronounced in public sector because of the follo)ing reasons0 A# Public sector investments are mostly in economic infrastructure )hich does not contribute any output# B# Public sector is mostly concerned )ith high capital intensity pro4ects like rail)ays% iron and steel% po)er% irrigation% etc# C# &he gestation period of public sector pro4ects are very long# E# &he capacity utili/ation is very much less in public sector units# F# +ost of the pro4ects of public sector are having higher capitaloutput ratio# eA Pu -i$ se$tor #n+ infr#stru$ture&

&he economic development of a country depends on the development and maintenance of infrastructural facilities# &he essential re:uirement is provided by public sector# &he industriali/ation is accelerated only through infrastructural development# Investment in po)er% roads% bridges% irrigation% etc#% is non-income yielding% long gestation period oriented% and heavy investment pro4ects# 7ence these are not

attractive for private sector# But )ithout them the country cannot develop faster# &herefore it is apt to state that the public sector units are responsible for the creation of infrastructures )hich constitute the backbone of economic development and industriali/ation# fA Pu -i$ se$tor #n+ in+ustri##se&

&here is no denying the fact that public sector has provided a strong base for our industriali/ation# 6ur industrial policy has clearly assigned a significant role for public sector% till the end of the third five year planP industriali/ation )as taking place at a slo)er pace because only the important public sector units )ere established till then# Since the private sector could not really rise up to meet the task% since the I5 Plan the establishment of public sector units started on a brisk rate and the industriali/ation has been accelerated to a commendable level# Further private sector )ith its commercial ob4ectives could not undertake several of the pro4ects and investment re:uirement of these pro4ects )as also beyond the potential of the private sector# 7ence% if at all India today is having a strong industrial baseP it is mainly due to the contribution of the public sector# (A Pu -i$ se$tor #n+ e0.ort .romotion&

Public sector has responded )ell to the needs of the nation by taking up the task of e,porting our products and finding market for them in other countries# In this respect the contribution of State &rading "orporation% +inerals and +etal &rading "orporation% 7industan Steel !imited% 7industan +achine &ools% etc#% are )orth noting# Infact% these units are primarily responsible for e,ploiting the captive market for our goods abroad# &he foreign e,change earnings of the public sector has gone up from a modest figure of 's# CF crores in AKGF-GG to 's# AHL

crores in AKGK-HL% to 's# F%ICA crores in AKIE-IF and then to 's# K%AKI crores in AKKA-KB# &he increase has been more than CLL times comparing AKGF-GG figures )ith that of AKKA-KB# &hough there may be criticisms about the performance of the public sector units% yet there can be no dispute about the e,port achievements of public sector units )ithin a period of BF years# /A Pu -i$ se$tor #n+ s#vin( of forei(n e0$/#n(e t/rou(/ im.ort su stitution& India.s balance of payments has been a cause for )orry since Independence% the main reason being increasing imports# &his trend had to be reversed and the government rightly selected public sector to establish units to produce domestically the goods imported so as to conserve the foreign e,change and also utili/e more the domestic resources# 8nits like 7industan 2ntibiotics !imited and Indian Drugs and Pharmaceutical !imited% have together effectively checked the inroads attempted by the multinational corporations in the field of drugs and pharmaceutical# Similarly Indian 6il "orporation !imited and 6il and (atural $as "ommission have succeeded in bringing do)n our dependence on other countries for crude to some e,tent# &hey are very active in identifying oil deposits and natural gas# &heir efforts are supplemented by research and development to invent methods of using the natural gas and reduce the imports of crude# In this respect the public sector )orks to)ards achieving self sufficiency# 9ith concerted efforts it should be possible for India to achieve selfsufficiency in the near future# 7o)ever% the poor performance of the public sector is causing concern% as unless steps are taken to improve their performance% the achievement of self-sufficiency. may be delayed#

iA

Pu -i$ se$tor #n+ (ener#tion of intern#- resour$es &

2 close scrutiny of the public sector performance )ill certainly make one to note the contribution to)ards internal resources made by the public sector# For e,ample% the internal resources generated by the public sector during 5 Five year plan )as 's# C%ECK crores% during 5I Five year plan 's# AA%HBA crores and during the period AKIF-IG to AKIK-KL% the generation )as 's# CH%GHI crores# In AKKL-KA and AKKAKB also the public sector undertakings together generated 's# BE%CHG crores# &his indicates that the public sector units have turned the corner and )ith the measures taken up already to spruce up their )orking )e should be able to reali/e still greater generation of internal resources# 3A Pu -i$ se$tor #n+ $ontri ution to e0$/eBuer&

Public sector contribution to the "entral E,che:uer is% in terms of dividend% corporate ta,% e,cise duty% customs and other forms# &hese contributions add to the mobili/ation of resources for our planned development# It is interesting to note that the contributions totaled 's# BH%FHL crores in the 5I Plan period% 's# HL%IKC crores during the 5II Plan and 's# AK%FBL crores in AKKL-KA and 's# BL%CGG crores in AKKAKB# It may be noticed that the annual contributions during the 5II Plan period is nearly HFN of the contributions during 5I Plan# 2mong the different forms in )hich these contributions are made% E,cise duty and "ustoms alone constituted more than IBN of the total in the 5I Plan period% )hile this )as HGN during the 5II Plan# Subse:uently% in AKKLKA these t)o accounted for IBN of the total contributions and in AKKAKB it )as almost ICN indicating that public sector units do make a valuable contribution to the E,che:uer# Since the performance of the public sector is poor% their contribution in terms of dividend is very

insignificant and this has to be changed at the earliest so as to make them contribute si/ably even in this form# ,A Pu -i$ se$tor #n+ (ro2t/ of #n$i--#r% units&

Public sector also makes a valuable contribution by helping the gro)th of ancillary units and small scale units# &he Bureau of Public Enterprises have undertaken the study to find out the public sector units )hich could transfer their production and other facilities to small scale sector# 8nder this scheme about AILL units )ere set up till AKIG# &he public sector also enters into regular contracts for purchasing the entire production or FLN of the production of small scale and ancillary units# Such purchases from ancillary units amounted to 's# EFA crores in AKIF-IG# IA Pu -i$ se$tor #n+ +eve-o.ment of st#tes #n+ re(ions& 6ne of the ob4ectives in establishing public sector units is to facilitate the states and the back)ard region to develop faster# In this connection% public sector has certainly creditable performance# Public sector contributes to the State government.s resources in terms of sales ta, and other state level ta,es# Public sector investments are directed to)ards the pro4ects in the back)ard regions and industrially poor districts# In this )ay the public sector )orks in its o)n )ay to eliminate the industrial imbalance in states and districts# So far )e have e,plained in detail the contributions made by the public sector to)ards Indian economic development# It is often said% that even )hen their performance is poor% the public sector contributions have been so much% and by improving their performance% )e should be #$,2#r+

able to make them contribute their full potential to achieve a higher rate of economic development# It is satisfactory to note that efforts in this direction to improve the public sector performance have been initiated and by the turn of the century public sector )ill emerge as the main contributor to our economic development# TRENDS AND STRUCTURE OF INDIAN ECONOMY Fe#tures of In+i# #s #n un+er +eve-o.e+ $ountr% &o classify a country as developed or under developed% one should study the features of an under developed country# &here are several indicators of under development# !et us discuss each one of them )ith reference to India to ultimately ans)er the :uestion )hether India is a developed or under developed country# !" E0isten$e of -o2 .er $#.it# in$ome&

It is customary to compare the per capita income of a country )ith other countries to determine )hether the country in :uestion could be categori/ed as under developed or developed# &he IBID is also adopting this method and it has classified the countries as i# lo) income countries% ii# +iddle income countries and iii# high income countries# 2ccording to the 9orld Development 'eport% AKKC% the annual per capita income of these three types of countries is estimated as under0 !o) income countries +iddle income countries 7igh income countries S CFL S BEIL S BALFL

It is clear from the above figure that any country )ith 4ust A#FN of the percapita of the high income countries can be categori/ed as lo)

income country and as under developed country# In these under developed countries% the per capita income is very lo) because i# net national income is very lo) or ii# Population is very high or iii# the national income is very lo) and the population is very high# &hough this used to be the basis for categori/ing the countries% Jrecently the I+F has measured the value of each country.s national income in terms of the purchasing po)er of its o)n currency at home% instead of the currency.s value on international e,changes# Follo)ing this India.s per capita income in AKKA )as assessed as S AAFL as against S CCL calculated follo)ing the old basis# 7ence% on the basis of the ne) methodology India can no longer be considered as an under developed economy# '" E0isten$e of ver% /e#v% .o.u-#tion&

&he si/e of population is one more inde, of development status# It is found that a country )ith lo) population is developed and that )ith a small si/e of population is under developed# It should be noted that in the case of former the annual gro)th rate of population is very lo)% compared to the gro)th rate in the later# 2ccording to the 9orld Development 'evie)% AKKC% the annual gro)th rate of population in the lo) income countries )as B#L bet)een AKIL and AKKA )hile in middle income countries it )as A#I and in the high income countries the rate )as L#G during the same period# 7ence% it is clear that )ith a higher rate of gro)th% the lo) income countries )ill e,perience population e,plosion over a period of time# &his population e,plosion )ill have serious impact on the economy and impede every effort to achieve higher rate of development# For e,ample% the population e,plosion )ill result in increased poverty% high rate of unemployment% scarcity for essential goods% etc#

*"

Pre+omin#n$e of #(ri$u-tur#- se$tor:

&his is another important characteristic of the under developed economy# In such economies% the percentage of population depending upon agriculture for livelihood )ill easily be HLN# &he contribution of agricultural sector to national income )ill be high and it is estimated to be over CFN# &he nature of e,ports )ill be mainly primary goods like agricultural ra) materials# In the case of India nearly HLN of the population depends on agriculture sector @both directly and indirectly) )hereas in a developed country this used to be only about BLN &he contribution by agricultural sector to national income )ill be around E to FN in developed countries and the composition of e,ports )ill be mostly manufactured goods and high-tech products# It may also be noted that in under developed economies% the productivity in agriculture )ill be abysmally lo) due to the use of out-dated technology% conventional method of cultivation% poor :uality seeds and fertili/ers% illiteracy of farmers% very high rural indebtedness% etc# &he result is agricultural production )ill be lo) and so the contribution to national income )ill also be lo)# 2dded to this% the sector depends on the success of monsoon and failure of monsoon directly affects the economic gro)th and development# 4" In E0isten$e of -#r(e s$#-e unem.-o%ment& under developed country there e,ists very large scale

unemployment due to various factors# Further the unemployment )ill continue to increase over a period of time# &he unemployment is due to factors like% huge population% lo) level of economic activity% poor technology% lack of investment% large illiteracy% etc# Even those )ho are employed may not add anything significant to production# &hat is there )ill be disguised unemployment too# &he problem is )orsened by the

e,istence of under employment% )hich means the available labour po)er is not fully utili/ed# &he overall effect of all these is that the labour productivity )ill be very poor# &he efforts to improve the productivity may rot succeed due to resistance by labour unions and organi/ations# &he economy )ill remain under developed so long as the unemployment remains high# 5. E0isten$e of 2i+es.re#+ .overt%&

Poverty e,ists in every country# But the difference is that in developed countries% poverty e,ists only in certain pockets% )hile in under developed countries% poverty is )idespread - almost C E of the country lives belo) the poverty line# In under developed countries% the preponderance of agricultural sector% large scale unemployment% income disparities% high illiteracy% etc#% account for )idespread poverty# 2dded to these% the lack of investment opportunities% lo) productivity% primitive technology% etc#% also result in poverty as any amount of production )ill not generate income# &he )age level is so lo) that the people have very lo) saving# 2ny amount of efforts to alleviate poverty does not bear fruit due to maladministration% corruption% etc# C" Primitive .ro+u$tion $on+ition&

&he e,cessive population pressure leads to heavy demand for land# &he available land is not put to productive use# &here is very high capital deficiency% one because of lo) saving and second the conspicuous consumption is very high# In other )ords% the little saving is used in unproductive )ays# 9ith poor capital formation% the government )ould invest heavily in capital intensive pro4ects as )ell as )elfare pro4ects# &he return is very poor and prolonged# &he technology is so back)ard and primitive that the input output ratio is

very high# &he obsolete technology also results in poor return and lo) productivity# 2nother ma4or )eakness is that there is lack of entrepreneurial ability# 7ence% investment opportunities are not easily identified and risky ventures are never undertaken# &he si/e of market is small% the market information is absent% market intelligence is very poor% the administrative ability is at lo)est level and there is lack of investment opportunities# 2ll these culminate in poor utili/ation of the available entrepreneurial ability and talent D" Forei(n tr#+e $om.osition&

&he composition of foreign trade in under developed country is very much influenced by its historical relations )ith other countries# +ost of the under developed countries )ere colonies in the recent past and naturally their foreign trade composition clearly reflects this# &hey e,port unfinished% agricultural ra) materials and import heavy capital goods# 6bviously% their terms of trade )ill be unfavorable# Further there e,ists heavy geographic concentration in their trade# 2ny failure of agricultural sector )orsens the foreign trade position# 9ith heavy reliance on the imported machineries% these countries lack latest production technology# &he poor balance of trade and balance of payments deficits force them to borro) heavily from the developed countries and international financial institutions# &hey are caught up in the debt trap and outgo of interest on international debt is so heavy that the county )ill struggle to maintain the e,change rate# &he increases reliance on other countries for manufactured goods )ill sub4ect the countries to economic and political sub4ugation of the e,porting countries# E" E0isten$e of 2i+e +is.#rit% in in$ome #n+ .oor st#n+#r+ of -ivin(&

&hese countries are also noted for very high income disparities because of concentration of productive factors in the urban areas% very lo) mobility of labour from rural to urban% lo) rate of employment in the rural areas in relation to urban areas% high )age rate in the urban and poor )age rate in the rural areas% etc# &he income disparity is further )idened by deteriorating terms of trade bet)een agricultural and industrial sectors# 2s a conse:uence% the standard of living )ill be very poor in the rural areas than in the urban areas# Even in urban centers% there )ill be gro)th of urban slums# 2s already pointed out in these countries the population depending on agriculture is very high and so the employment opportunities as )ell as income generation is very lo) compared to that in the industrial sector# 2s in the initial stage of development the industrial gro)th )ill be confined to urban centers% the standard of living )ill be on the )hole very poor# F" E0isten$e of +u#-isti$ e$onom%&

Dualism refers to the e,istence of a developed sector side by side )ith an under developed or undeveloped sector# 9e )ill come across the co-e,istence of sophistication and primitive characteristics in every )alk of life# For e,ample% in the urban areas% one )ill find the use of modem technology in the production field as )ell as households% )hile in the rural areas% the age old% anti:uated techni:ues )ill be used in the production as )ell as in households# &his dualism retards economic gro)th# &hat is% the subsistence sector in the rural areas )ill pull do)n )hatever little economic progress is achieved )ith the developed and modem sector# Further in the urban areas% one can come across the e,istence of dualism% in every activity# For instance there )ill be modern% technologically sophisticated industries e,isting side by side )ith industries )ith labour intensive and poor technology# &here )ill be

high )age e,ecutives e,isting )ith poorly paid slum d)ellers# Firms )ith international collaboration producing ultra modem products )ill be found along )ith the domestic firms using inferior technology# In the rural areas also the dualism can be found# 9e can find the coe,istence of farms )ith vast e,pansive areas using modern production technology along )ith small farms )here such technologies can never even be dreamt of# &he bigger farms )ill be using trained and skilled laborers )hereas the small farms )ill mostly be depending on the family labour and untrained% semi-skilled labour# 9hile the capital investment by the big farms )ill be several times higher than those of the small farms% the rural indebtedness )ill be found more )ith the small farms than the large farms# &he marketing strength% holding po)er% storage facilities% processing facilities% bargaining po)er% etc#% )ill all be very much different bet)een large farms and small farms# From the above e,planation% it could be understood that every effort to develop the economy should be designed so as to make it applicable to both the modern sector as )ell as the undeveloped one# 7ence% the overall gro)th )ill be more determined by the contributions of the undeveloped sector# !G" E0isten$e of 2e#, #n+ ineffi$ient #+ministr#tion&

8nder developed countries al)ays evince this feature# &he political and social factors influence to a large e,tent the efficiency of administration# In these countries% the administrative system is noted for lethargy% red tapism% bureaucratic interference% delay in decision making% partiality% political influence in decision making process% bending the la)s for favourable people% etc# &he result of this is inefficiency# 2n efficient employee never gets his due as the rules and regulations do not permit this# &he accountability at the higher levels is very much less# &he responsiveness of the administration in a critical

situation is more rules ridden or ritualistic rather than realistic# &here is lack of managerial and administrative talents in these countries# &he lack of kno) ho)% the resistance to change% lack of motivation% etc#% are responsible for this administrative inefficiency# SOCIO ECONOMIC PROBLEMS OF INDIA !" Dis$uss t/e fe#tures of In+i#n Po.u-#tion &he Demographic features of India can be discussed in terms of the follo)ing ideas0 i# ii# iii# iv# v# vi# vii# &rend in population $ro)th rate of population !ife e,pectancy Infant mortality rate Density of population 2ge and se, composition 'ural-urban distribution and viii# !iteracy and levels of development# !et us no) discuss each one of these features in detail# i" Tren+ in .o.u-#tion&

2s the country )ith second largest population #in the )orld% India has been handicapped )ith very large population found in a small area# It is said that India has AGN of the total land area of the )orld# &his situation has been remaining for decades as sho)n by the &able A belo)# It could be seen from the table belo) that till about AKCA% the si/e of population )as not increasing at an alarming rate# Specifically bet)een AKAA and AKBA% the population si/e almost-remained stagnant# &here )as a slight increase in the si/e bet)een AKBA and AKCA# &he decade AKCA to AKBA probably )as the only period )hen

Indian population almost remained the same# &his probably )as due to the epidemics% )ars% etc#% )hich took a heavy toll during the decade# 2fter AKEA )e find a consistent increase in our population cruising ail concern# +ore specifically the increase in population )as by 0 about E crores bet)een .EA anc# .FA% AA crores bet)een .GA and .HA% about AF crores bet)een .HA and .IA and about AG crores bet)een .IA and .KA# 7ence% after the decade AKBA-AKCA% )e find the increase in population remained almost the same during the decade .HA -.IA and .IA-.Kl# In the past nine decades% i#e#% since AKLA the addition to our population has been by about GL crores# But )ith the slo)ing do)n of the population gro)th since AKIA% )e may e,pect the population to gro) at a slo)er rate in the corning decade# TABLE ! & SI>E OF POPULATION Hin $roresA

YEAR AKLA AKAA AKBA AKCA AKEA AKFA AKGA AKHA AKIA AKKA

POPULATION BC#I BF#B BF#A BH#K CA#K CG#A EC#K FE#I GI#C IE#G

In AKKC% India?s population )as estimated to be II#F crores#

ii"

7ro2t/ r#te of .o.u-#tion&

&he gro)th rate in population is measured as the difference bet)een the "rude birth rate and "rude death rate# 6f course% the migration and population should also be taken into account# But in Indian e,perience% the migration as a percentage of the total population is very insignificant# 7ence% ignoring migration% )e should lake the difference bet)een the crude birth rate and crude death rate as the normal gro)th rate in our population# &he &able B belo) gives the normal gro)th rate in our population# TABLE & ' NORMAL 7RO6TH RATE OF INDIAN POPULATION

PERIOD AKLA-AKAA AKAA-AKBA AKBA-AKCA AKCA-AKEA ALEA-AKFA AKFA-AKGA AKGA-AKHA AKHA-AKIA AKIA-AKKA

CRUDE

CRUDE

NORMAL 7RO6TH RATE G#GL L#FL AL#AL AE#LL AB#FL AI#KL BB#BL BB#BL BA#AL

BIRTH RATE DEATH RATE EK#BL EB#GL EI#AL EI#GL EG#EL CG#CL EF#BL CA#BL CK#KL BH#EL EA#HL BB#IL EA#BL AK#LL CH#BL AF#LL CF#BL AA#EL

From the &able0B above% it could be observed that the normal gro)th rate of population )as very lo) from AKLA to AKBA mainly because both the crude birth rate arid crude death rate )ere high# But ever since AKBA% there has been :uite notable decline in crude death rate but not such a pronounced decline in birth rate# 2s a result the0 normal gro)th rate of population has remained high and Infact has been increasing# 6ne sign of consolation is that during AKIA-AKKA% the crude birth rate has declined by B#LL points and the normal gro)th rate has

also declined by about A#LL point# &his trend% if continued% by the turn of this century India may have lesser addition to population )hich is a good sign# It is estimated that our birth rate )ould fall do)n to BH#F during AKKA-AKKG and the death rate )ould go do)n to K#E during the same period thereby the normal gro)th rate )ould be AI#A for this period# Based on this the pro4ection for the period AKKG-BLLL% birth rate )ill be BE#K% death rate )ill be I#E and the normal gro)th rate )ill be AG#F# iii" Life e0.e$t#n$%&

!ife e,pectancy is usually used as a measure of gauging the health condition of population of a country# 2 country )ith a high death rate and )ith death occurring at early age% the life e,pectancy )ill be lo) and a country )ith a lo) death rate and )ith death occurring at an advanced age% the life e,pectancy )ill be high# 7ence% a high life e,pectancy is a yardstick for health condition of the population of a country# In Indian case% there has been a significant fall in death rate since AKFA and so our life e,pectancy )hich )as 4ust BC years during AKLA-AKAA increased to EG#E years during AKGA-HA and further to FI#B years during AKKA# 7o)ever% this is very much lo) compared to some of the countries like Sri !anka and &hailand% another interesting feature is that in India the average life e,pectancy is more for female population than for the males# &he reason for this could be that the number of male deaths at early stage is more than that of the females# &he increase in life e,pectancy is certainly R )elcome sign% but iP carries )ith it some social problems like% the increase in number of 4oint families% multi-generation families% unemployment due to e,tension of service for those )ho retire lead to unemployment for youngsters% increase in dependents per family% etc# iv" Inf#nt mort#-it% r#te&

&his refers to the number of child death% from birth before reaching the first birth day# &his is measured as number of children that die before completing first year after birth per ALLL children born# &he infant mortality rate )as very high in India during the early part of this century and it )as BLE# But thanks to the development in science and concerted efforts taken by the government% the mortality rate has come do)n to about IL per ALLL in the KL.s# 7o)ever% there is a variation bet)een urban and rural areas# 2s on date the mortality rate is about FL per ALLL in urban areas and IG per ALLL in rural areas# It is also found that there is variation among the states in mortality rate# 2s for e,ample% in 1erala it is only AH per ALLL )hile it #is ABB in 6rissa# "omparing other countries% the mortality rate is very high in India# For e,ample% in Srilanka it is only CB% in Philippines it is EK and in &hailand it is EE# 9ith improvement in science and e,tension of medical facilities to rural areas% the infant mortality rate is coming do)n rapidly in India% but there is much to achieve in this direction# v" Densit% of .o.u-#tion&

&his measure helps to determine the e,tent of burden on land area in a country# It is measured as the ratio of number of persons per s:uare kilometer of land area# India.s density is one of the highest among the countries in the )orld )ith BGH# &his is very high compared to countries like "anada# &hough density is high% Dapan has a very high per capita income of S BFECL# It is )ell established that there is no relationship bet)een density of population and the economic development# "ountries like "anada )ith very lo) density of B#F persons s:# km# has very high per capita income of S BLEHL and as already indicated Dapan )ith very high density has also a very high per capita income# 2mong the Indian states also )e come across )ide

variation in density as for e,ample the 8nion &erritory of Delhi has GCAK as density against 2runachal Pradesh )ith 4ust AL persons s:#km# It is said that countries )hich are industrially advanced )ill have higher density and )herever the climatic conditions% rainfall% etc#% are good the density )ill automatically be high#

vi"

A(e #n+ se0 $om.osition &

&his information helps to determine and ans)er certain :uestions relating to employment% dependents% birth rate% etc# 2ge composition in India is such that @he young persons @L - EL years of age) constitute more than GFN of our total population# 7ence% even if the birth rate declines% yet the addition to our population because of the predominance of younger aged persons )ill be more for some more years to come# &he immediate implication of this feature is that the dependency ratio )ill be very high# 6n an average it )orks out to be FLN# But )hen the birth rate declines% this )ould also decline and the proportion of )orking population )ould go up leading to increase in claimants for employment# 2s regards se, composition% in India it has come do)n over the decades from KGB females per ALLL males in AKLA to KCL CLLL in AKHA and then to KBK ALLL by the turn of this century# It is found that this se, ratio is one of the lo)est among the countries in the )orld# &he reasons for this lo)est se, ratio is the deliberate termination of pregnancy of female child% legislation on abortion% increasing infanticides of female children% lesser care for female children resulting in their early death% etc# But )ith the spread of literacy% improvement

in medical facilities% change in social attitude% etc#% the se, ratio is likely to increase# Even no) in some of the states like 1erala% and &amilnadu the se, ratio is high# vii" Rur#-1ur #n +istri ution&

&his is yet another feature of population )hich clearly indicates the e,tent of change in the concentration of population in rural and urban areas# In the past% the rural concentration )as very high and slo)ly this is changing that the urban concentration is increasing# 9hile this is a good sign of development% yet increasing urbani/ation has led to several social problems like urban poverty% increasing number of urban slums% congestion% lack of social amenities% artificial demand for important facilities like transport% health% education% entertainment% etc# &he proportion of population in urban areas has consistently increased from AE#AN in AKEA to about BGN AKKA# It is likely to touch CBN by BLLL# &he rural-urban distribution is not even among the states# 9hile in advanced states% the urban concentration is high% in less developed states the rural concentration is still continuing to be high# viii" Liter#$% -eve-& !iteracy level refers to the number of people in the population )ho can read% )rite and understand arithmetic# &he literacy rate determines the economic development# 2ny country )ith lo) literacy rate is bound to be less developed than countries )ith high level of literacy# In India the literacy level )as very poor before independence and since then )ith all the positive steps taken the literacy rate has gone up# &his could be understood )hen )e compare the literacy rate of males and females in AKFA and AKKA# In AKFA the literacy rate of males )as BFN and that of

females )as 4ust IN and in AKKA% the literacy rate of males increased to FB#GN and that of females CB#CIN# &he substantial increase in literacy level is due to schemes like compulsory free education for children upto AE years of age% noon meal scheme% increasing opportunities for educated in employment% especially among )omen% increasing self-employment opportunities for )omen% etc# It is also to be noted that the literacy level is high in both males and females in urban areas than in rural areas# &his is obvious because in the urban centers the facilities are more than in die rural areas# It is also a good signal that over the period the gap bet)een literacy rate in males and females is narro)ing do)n# In AKKA the female literate formed about GA#FGN of male literate as against 4ust CCN in AKFA# 2s in the case of other features discussed so far% literacy rate is not uniform in all the states# Economically developed states report a higher percentage of literacy among males and females than the less developed states# 9ith the increase in allocation of fund for education )ith a thrust to primary education% establishment of more and more correspondence course institutes% formal arid non-formal education spread% etc#% the literacy level is bound to pick up still before BLLL 2#D# N#ture of .o.u-#tion .ro -em in In+i# #n+ t/e effe$ts of .o.u-#tion (ro2t/ on In+i#n e$onomi$ +eve-o.ment &he population problem in India is a basic problem faced by the economy# &he population e,plosion is due to various factors# 9e )ill discuss these causes for population e,plosion first and then understand ho) this affects our economic development#

C#uses& It is convenient for us to classify the causes for population e,plosion by identifying the causes for high birth rate and the causes for declining death rate# !" C#uses for /i(/ irt/ r#te&

It has been already discussed that birth rate in India has not sho)n any significant decline over the decades# &his slo) fall in birth rate is one reason )hy the country has population e,plosion# &he follo)ing are the reasons for high birth rate in India 0 iA C-im#ti$ f#$tors&

8nlike the other countries% India has a climatic condition )hich affects the maturity age of girls# 2n Indian girl matures at an early age of AC years )hich means the reproductive span or the child bearing span is very high# In 9estern countries the climate is cool that the maturity age is not so lo)# 6bviously the reproductive span is much shorter# iiA a) So$i#- institutions& +arriage is a social compulsion in India# &hat is% once a girl

matures% the social opinion is that she should get married at the earliest after maturity# &he age of maturity being AC years% the number of )omen in the reproductive age group is very large# &his means females in the age group of AF to EK years can bear child# 6nce the marriage takes place at the age of AC% every )oman can bear child% at least theoretically for CL to CE years# &his age group constitutes EHN of the total female population in India# It is also found that the

percentage of )omen in this reproductive age group is very high i#e#% IA#EEN in AKIA# 7o)ever% this proportion is slo)ly falling over the period# 6ne more reason for high population is the practice of child marriage# &hough this practice incoming do)n% yet the average age of marriage among females )as belo) AK years even by AKIH-II# b) &he prevalence of D6I(& F2+I!O SOS&E+ is another reason for

high population gro)th in the country# &he main belief in a 4oint family system is that the married couple should have babies# People )ho do not have babies are looked do)n and there is a social stigma attached in such cases# Further there is a specific preference for male babies# So until a couple gets a male baby they tend to encourage child bearing# &his preference for male baby is due to various reasons like old age security% labour value of male child% la)s of inheritance% social customs like death rituals% getting do)ry% etc# 7o)ever% )ith the spread of education and increased employment of )omen in various occupations in the society% the tendency is to have lesser and lesser babies and the specific preference for male babies is also on the decline# &he Doint family system is slo)ly disintegrating and giving place to independent small family due to increasing cost of living% preference for remaining independent% increasing employment after retirement% encouraging use of contraceptives replacing the conventional techni:ues of birth control% etc# iiiA E$onomi$ f#$tors&

&he most important factor under this category is poverty# &he poor people prefer to have a large number of children Inspite of poverty due to the follo)ing reasons0

@i)

9hether the family si/e is small or big% poverty is all pervasive% hence% an average family prefers to have more children than a fe)#

@ii)

"hildren are treated as an asset in poor families as more children can help the family in )ork% even at very young age% thereby raising the income earning capacity of the family#

@iii) 2s the condition in the poor families is very poor% the infant mortality rate is very high# &o neutrali/e this every family prefers to# have more children as this @iv) 9ould be in a )ay an insurance against high infant mortality rate# @v) 2 large number of children in a family can look after the aged better )ith large earnings and so the preference for more children% @vi) &he failure of family planning programme to convince the poor people% as the consider the number of children as the best )ay to get more income through odd 4obs# @vii) Indirect government support and subsidies for poor families like ration :uantity based on the si/e of family% etc @viii) Possibility of getting pecuniary benefits on occasions like election% philanthropic functions% free distribution of basic necessaries% etc#% from the political parties is yet another reason for a big family si/e# 6n die )hole the economic factors indicate that Inspite of being poor% there are several reasons for maintaining a large family si/e than small ones# !et us no) discuss the impact of population e,plosion on economic development of India#

A#

&he si/e of population has a direct impact on the si/e of national income of a country# In Indian e,perience% the net national product at factor cost )ent up by BAFN bet)een AKGA and AKKA but since the population increased at a rate of KBN during the same period% the percapita income increased only by FIN during the period# 2s the population increases% the increase in national income% even if it is substantial% )ill be spread over a larger number of persons thereby the percapita income is lo)# 9ith lo)er percapita income all the other dependent variables of income% vi/#% saving% consumption% investment% etc#% )ill also be lo)er#

B#

&he most important effect of population gro)th is on the food supply# In the - past% +althus has e,plained this in terms of his geometrical ratio and arithmetical ratio# 7e pointed out that the population increases at a slo) arithmetical ratio# "onse:uently over a period of time the rate of gro)th of population )ill e,ceed that of food production# &his leads to food problem# In the case of India% Inspite of a spectacular achievement on the food front% the scarcity for food continues as e,plained belo)# &he net availability of food grains bet)een AKFG and AKKB increased by AELN but the population during the same period recorded an increase of AAIN and so the percapita availability of food grains increased only by ALN # 9ith ever increasing population% there is a need for the government to maintain the public distribution system )ith all its malpractices at a phenomenal cost to the e,che:uer#

C#

2nother vital aspect of impact of population on economic development is that )ith rising population% the percentage of dependents also increases apart from the increase in non-

)orking population deteriorated bet)een AKGA and AKIA# In AKGA the number of unproductive consumers )as BFG million but it increased to EGE million by AKIA% )hich in percentage terms is FHN and GBN respectively# &he unproductive consumers are those )ho do not contribute anything to national income# 7ence% )ith every addition to population the absolute number of unproductive consumers increases )ho make no contribution to national income% but claim a substantial share of national income# 2s a result the economy is impoverished# It should also be noted that )ith ELN of our population in the age group of L to AE years of age and GN belonging to aged group of above GL years of age% there is increase in dependency )ith every addition to population# &his is clearly a drain of savings of every household and the society is denied of precious savings and the capital formation# E# 2 very significant effect of population gro)th is on employment# It is very simple idea to understand# 9ith increase in population there is si/eable addition to the labour force% but )hen the employment generated is less than the addition to the labour force% the result is unemployment and underemployment# For instance during the 5I plan period the number of unemployed )as BL#H million accounting for H#HEN of the labour force% )hile by AKKL this has increased to nearly BC million# Inspite of eight five year plans and generation of employment% it is proved that the number of employment generated is clearly less than the addition made to the population# &his means that a valuable resource is unutili/ed or under utili/ed# &his is a national )aste# If )e consider among the unemployment% the educated unemployed% then the gravity of the situation )ill be easily understood#

F#

&he increase in population makes a heavy demand on the community facilities like education% health% housing% etc# In the case of education% in India primary education is made free of cost and the e,penditure incurred by the government on this account alone is 's# B%BEG crores# Since the number of children in the age group of G to AE years is about AFG million and e,penditure at the rate of 's# AEE per year per child )ill mean a heavy drain on the financial resources# In the case of medical facilities the number of people depending on public hospitals and other medical facilities is increasing day after day causing a heavy drain on resources for the government# 2part from the availability of education and medical facilities being threatened by the gro)ing population% the :uality of service rendered is also found to be very poor# &he rising population has made housing a ma4or problem# &he result is up coming of slums in every part of the country# !eading a life of ab4ect poverty% the poor people neither have access to education% medical or housing facilities# 2dded to these is the e,penditure of the government on populist )elfare schemes like noon meal scheme% free books and note books% free chappals% etc# 2ll these political compulsions have denied the economy the crucial financial resources for developmental purposes#

G#

'apid population gro)th affects capital formation in a country# 9ith rising population% it is already pointed out that the national income is shared by a larger number of people and so the per capita income is lo)# "onse:uently% the saving potential of the people is also lo)# In order to achieve rapid economic gro)th% there is# a need to at least maintain the gro)th in national income# But India )ith B#BN gro)th rate @annual) of population%

national income must rise at the same rate so that the per capita income remains the same# For this purpose capital investment should take place at least in the order of about ABN )hereas in India the capital investment gro)th is poor because of poor saving#-Even though it is said that our annual saving rate is about BCN% ma4ority of saving is used for unproductive purposes like marriage% on 4e)els% etc# 7ence% the capital formation is very poor and the population gro)th eats a)ay )hatever increase in national income is possible# H# Population gro)th has impact on environment# &his )as e,plained by 2nne Ehrlich in terms of a formula I [ P2&% )here I refers to environmental impact% P stands for population% 2 refers to per capita consumption and & refers to environmentally harmful technology that supplies 2# &he three factors P2& have multiplicative relationship and so their combined effect is very serious# Further )ith every significant addition to population% there is misuse of resources like )ater% electricity% land% etc# &he result of this misuse is that a huge :uantity of )aste is generated increasing# I# Population% then people )ill start cutting trees to get the cheapest fuel available# Slo)ly this leads to denudation of forests leading to ecological imbalance affecting the environment# Substitutes used also affect the environmental purity as in the case of atomic po)er or plastics% etc# in different forms )hich directly affect the environment# For e,ample% the demand for fuel )ill go up )ith

K#

Population e,plosion carries )ith it severe social problems# 9hen the population increases% )e )ill find migration of )orkers from% rural to urban centers seeking employment )hich directly means additional pressure on the urban facilities# 2part from mushrooming of urban slums% several problems like communal riots% thefts and other such anti-social activities are committed# &he crime rate goes up disturbing the peace and mental strain% causes a change in attitude and social values get eroded# People become more and more self-centered and such an environment is not good for shaping the future generation#

AL#

&here is a direct impact on :uality of population due to population e,plosion# By :uality of population )e mean the )ork potential% mental make up% )ork culture% etc# 9ith ever increasing population% every individual family is unable to maintain the standard of living and this affects the health and mental conditions of people# 2utomatically these )ould affect the productivity of )orkers# &he )ork force is so )eak physically and mentally# 9ith pressure of family% the )orkmen demand for more )ages and salaries# &hey try to earn ma,imum by carrying out inferior :uality )ork or )orking in more places )ith lesser efficiency# &he )ork culture is tampered that every person )ants to minimi/e )ork and ma,imi/e leisure# &he effect of all these is the productivity is very lo) and the country loses#

AA#

In an agricultural oriented country like India% the increasing population e,erts a heavy pressure on limited land resources# 9ith millions depending on agricultural sector% the pressure )ould be more and this leads to sub-division and fragmentation of land holdings making them unfit for adopting modem methods of cultivation# &his affects the productivity of land#

&hough this is neutrali/ed through scientific methods like using high yielding variety of seeds% application of fertili/ers and pesticides% multiple cropping% etc# 2ll these depend on availability of )ater# 9ith environmental degradation% the monsoon fails and the increasing demand for drinking )ater% etc#% )ill result in scarcity of )ater for multiple cropping0 Further more fre:uent use of the same land even )ith application of fertili/ers% )ould result only in the operation of la) of diminishing returns# &herefore% )ithout controlling population gro)th it is not possible for any country to achieve rapid economic gro)th% and maintain it if achieved# For this a suitable population policy is very much needed# Po.u-#tion .o-i$% of (overnment sin$e in+e.en+en$e During the first five year plans% the government )as not sufficiently concentrating on a sound population policy# It )as merely allotting funds through every five year plan for family planning# From a modest sum of 's# GF lakhs during the I Plan% the amount increased to 's# F crores in II Plan% 's# BF crores in III Plan% 's# BHH crores in the I5 Plan# 9ith such a serious problem on hand vi/#% control of population% the amount allocated till the I5 Plan )as sufficient enough to sustain the family planning programs but not for e,tending it to the rural areas in a big )ay# During the 5 Plan the allocation touched 's# ELK crores )hich )as increased to 's# A%EEI crores in the 5I Plan% hence% only 5 Plan on)ards% )as there any concrete attempt to control the population# &ill the I5 Plan the government )as focusing on the follo)ing lines of action to control population0 A# Spreading kno)ledge of family planning techni:ue# B# Supply of contraceptives to all in the rural and urban areas#

C# Financial incentives for people )ho undergo family planning operations# E# "onducting a large number of camps for sterili/ation operation for both males and females# 2fter the lifting of emergency the government seriously considered the follo)ing for controlling population0 @ii) @iii) @iv) @v) raising the minimum marriageable age of males and females through legislative provisions raising the level of education among the females raising the monetary compensation for sterili/ation operation especially in the rural areas making sterili/ation operation compulsory for couples )ith t)o children etc# But such coercive tactics failed to yield the fruit% as in most of the cases% the officials )ere more concerned about the target fi,ed for them than the public sentiments and reaction# &he 5I Plan fi,ed the target for net reproduction late as one to be achieved by AKKG against the present level of A#GH# &he target for sterili/ation operation% I8D insert ion and "" usage% could not be reached due to the follo)ing reasons0 absence of infrastructural facilities% political compulsions% cultural values% religious sentiments% high infant mortality rate% etc# During the 5II Plan certain basic understandings about our population as given belo) made the government to approach the problem from a different angle#

@i)

It )as understood that the ma4ority of Indian population is living belo) the poverty line and it is this group )hich has a very high birth rate#

@ii)

In a democratic set up it is necessary to set the minimum age for marriage and also the prescription of sterili/ation operation through legislation#

@iii) &o increase the acceptance of sterili/ation operation% the infant mortality rate should be brought do)n# @iv) 8sing other incentive like priority in housing% increase in salary% preference in employment% adult ration for child% etc#% as follo)ed by "hina% )hich could successfully bring do)n its birth rate significantly in a decade# T/e VU F-#n #$$or+in(-% fi0e+ t/e fo--o2in( t#r(ets & @"urrent level given in brackets) i# ii# iii# iv# Population gro)th rate A#BN @B#LCN) "rude birth rateBA ALLL @CL#G ALLL) "rude death rate K ALLL @AL#C ALLL) Infant mortality rate GL ALLL @KA ALLL)

9ith these targets% the Plan formulated the Family planning and maternity and child health strategies# &hrough this the Plan also aimed at reducing the maternal mortality rate# #&he family planning programs )ere re-oriented to make them family )elfare programs% thereby giving emphasis on every aspect of the family than on. the birth rate and reproduction rate# 7o)ever% mere )as a heed for orientation of everybody concerned in order to achieve that target set# &he government on its part made a hefty contribution through plan allocations# Po.u-#tion .o-i$% in t/e VU P-#n &

9ith the findings of the "ensus conducted in AKKA% the government has decided lo formulate an 2ction plan on follo)ing lines 0 i# &o e,tend the family )elfare services to more areas and improving the :uality of service# ii# &o give more autonomy for States to manage these programs so as to avoid the target focused action# iii# &o introduce innovative programs for achieving higher level of family )elfare especially among the urban slums# iv# &o identify the districts )ith birth rate above CK ALLL and develop special programs for these districts# v# &o invite and appreciate the involvement of voluntary and nongovernmental agencies to these programs# vi# 'elating the grants to the village panchayats and the State government for rural development )ith the achievement in bringing do)n the birth rate# vii# viii# i,# &o encourage small family concept# &o dispel the son-preference attitude# Devising schemes for post-retirement period so as to

discourage unnecessary issue of children# ,# &o improve the political )ill in implementing all these programs#

9ith these policy options% one may e,pect that during the 5III Plan% the rate of gro)th of population )ould slo) do)n so as to bring do)n the net reproduction rate to A as targeted already# B#-#n$e of .#%ments .osition sin$e !FF! #n+ $riti$#-

ev#-u#tion of t/e Ne2 e0.ort1im.ort .o-i$% !FF' 1 !FFD" &he balance of payments position% )hich had reached a point of near collapse in Dune% AKKA% slo)ly stabili/ed during the course of AKKA-KB# 2lthough ne) policies to deal )ith the situation )ere :uickly formulated by the ne) government and implemented )ithin a fe) months the e,ternal payments situation took time to stabili/e primarily because it had been allo)ed% to deteriorate to a state of near bankruptcy in Dune AKKA# Foreign currency reserves had declined to S A#A# billion despite heavy borro)ing from the I+F in AKKL-KA and a substantial part of this )as held in illi:uid deposits )hich could not have been easily mobili/ed if needed# International confidence had all but collapsed% commercial borro)ings had dried up-and even letters of credit opened by Indian banks )ere being generally re4ected unless accompanied by confirmation by foreign banks# &he strategy for the management of the balance of payments outlined in the Budget for AKKA-KB )hich )as presented in Duly% AKKA relied upon a combination of macro economic stabili/ation and structural reforms industrial and trade policy# It )as recogni/ed that in the medium term% the solution to the balance of payments problem )ould have to come from a much stronger e,port performance% but in the shorter run the strategy had to be underpinned by mobili/ation of e,ternal financing from the multilateral agencies and from bilateral donors# 'estoration of access to imports through liberali/ation had to depend initially upon additional financing since the e,port efforts

)ould take time to sho) results# Since access to e,ternal commercial borro)ing )as constrained the only other sources of funds )ere the bilateral and multilateral agencies# 5isible support from the multilateral agencies )as important for restoring international confidence# 2ccordingly% the government negotiated a standby arrangement )ith the I+F in 6ctober% AKKA for S B#C billion over a BL-month period% a Structural 2d4ustment !oan )ith the IB'D of S FLL million and a 7ydrocarbon Sector !oan )ith the 2DB for S BFL million# Parallel )ith the effort to dra) on multilateral sources% the government also launched the India Development Bonds aimed at mobili/ing ('I sources of funds# 9ith the assurance of e,ternal support through these efforts% there )as a gradual stabili/ation of the balance of payments position in the course of AKKA-KB# Foreign e,change reserves )ere restored to more normal levels increasing from S A#A billion in Dune% AKKA to S F#G billion at the end of +arch% AKKB% &he entire amount of dra)ls from the I+F in AKKA-KB )ith the accretion from India Development Bonds together amounted to an inflo) of S B#IH billion# &his )as less than the increase in reserves of S E#FA billion from Dune AKKA to end +arch% AKKB# In effect% the e,ceptional financing mobili/ed in AKKA-KB )as used primarily to build up reserves# Import restrictions )ere gradually lifted in the course of AKKA-KB as the balance of payments stabili/ed# By the end of AKKA-KB the ne) !iberali/ed E,change 'ate +anagement System introduced in the Budget for AKKB-KC eliminated import licensing in most capital goods% ra) materials% intermediates and components and introduced a dual e,change rate system )ith one rate effectively floated in the market# &he Budget for AKKB-KC also reduced the customs duties in line )ith

declared $overnment policy in order to make the Indian economy more competitive and gradually e,posing Indian industry to e,ternal competitive pressure# &he trade and e,change rate policy regime for AKKB-KC )as therefore characteri/ed by ma4or progress in eliminating unnecessary administrative and discretionary controls over foreign trade )hich )ere contributing to making our economy uncompetitive#

&he year AKKB-KC sa) a revival of imports to more normal levels# &he total value of imports in 8S S in the period 2pril-December AKKB increased by AG#FN over the level in the corresponding period of AKKAKB# &he increase appears large only in comparison )ith a highly depressed level prevailing in AKKA-KB# In fact the level of imports in AKKB-KC as a )hole is e,pected to be around S BF billion )hich is some)hat lo)er than the level in AKKL-KA# E,ports in AKKB-KC performed far better than in AKKA-KB# &otal e,port gro)th in the period 2pril-December )as C#EN in dollar terms compared )ith an observed decline of A#FN in AKKA-KB% &he performance of total e,ports is depressed by the decline of more than GLN in e,ports to 'ussia and other States of the former Soviet 8nion in AKKB-KC# &he gro)th of e,ports to the general currency area in the period 2pril-December )as AA#EN# &he average gro)th rate in 2prilDecember% AKKB has been adversely affected by a decline in e,ports of IB#FNU in December% reflecting the disturbed conditions prevailing in that month% figures for Danuary are also likely to be depressed by the riots 8S S AK billion# But it is hoped that the e,port performance in subse:uent months )ill return to the high gro)th rates of AF - AG per cent observed during September-(ovember#

&he current account deficit in AKKB-KC is e,pected to be around S H billion% reflecting the revival of imports to more normal levels# &his deficit is being financed through a combination of traditional financing sources and e,ceptional financing# 7o)ever% there are important uncertainties in the balance of

payments# &he full impact of the disturbances in December% AKKB and Danuary% AKKC on e,ports and-imports is difficult to assess at this stage# "learly% the receipts on account of tourism )ould be less than anticipated# &he inflo) of ('I deposits has in any case been small this year# &he inflo) of e,ternal assistance is also sub4ect to some uncertainties conse:uent upon constraints that affect the rate of utili/ation# 2 step up in commercial borro)ings )as% in any case% not envisaged# Finally% there is the uncertainty arising lags# Interest rates from leads and and% e,change rate e,pectations do affect the

timing of receipt of e,port proceeds and payment of import costs# 7o)ever% )hile these uncertainties 4ustify a measure of caution in assessing prospects% the balance of payments in AKKA-KB has performed more or less as e,pected# Ne2 e0.ort1im.ort .o-i$% !FF' 1!FFD & 6n +arch CA% AKKB% the $overnment announced a ne) e,port-import policy for the period AKKB-AKKH# &his policy has the follo)ing ob4ectives0 A# &o institute the re:uired frame)ork for globali/ation of the India.s foreign trade# B# &o improve the e,port capabilities of our industry% the policy aims at promoting the productivity% moderni/ation and competitiveness#

C# &o facilitate improvement of image of our products in foreign markets% the policy encourages the attainment of high :uality in the e,port products# E# By allo)ing liberal access to ra) materials% intermediates% components% consumable and capital goods etc#% in the international market% the policy )ants to achieve higher e,ports# F# &he policy provides for deregulation to achieve self-reliance so that the domestic producers can improve their efficiency and become competitive internationally# G# &he policy also lays emphasis on research and development as )ell as technological advancements so that the domestic producers )ill benefit from globali/ation# H# 2 significant ob4ect is to simplify the procedure for e,ports and imports# Subse:uently% the government announced further modification to the above policy by 2pril A% AKKC# &he important features of this modified policy are0 @i) &he duty-free e,port benefit given to the E,port oriented units and the units in E,port Processing Vones is e,tended to units engaged in agriculture and allied activities provided they e,port FLN of their total production# @ii) &he government removed AEE items from the negative list of e,ports leaving only prohibited items% items re:uiring license and canali/ed items# @iii) 2s a step to tap the potential agents of farm sector% professionals% hotels% travel and diagnostic

centers% the government e,tended the E,port promotion capital goods scheme to them# @iv) For more than BBLL items% standard input-output norms are fi,ed to enable the issue of license under the duty e,emption scheme# @v) &he criterion for recogni/ing e,port houses is no) based on the foreign e,change earning to F6B values of physical e,ports# @vi) @vii) &he procedure relating to e,port and import has been further simplified# "ompensation )ould be given for unutili/ed import licenses for duty free license scheme and e,am scrip holders# &hese provisions in the latest e,port-import policy )ould certainly enable India to improve her e,ports and bring do)n imports# &his has been e,perienced during the first half of AKKE itself# Stru$tur#$om.osition of n#tion#in$ome in In+i#" T/e

-imit#tions of N#tion#- in$ome estim#tion in In+i#" 2ccording to the First report of the (ational Income "ommittee% J(ational income estimate measures the volume of commodities and services turned out during a given period% counted )ithout duplication#J &his means the total volume of goods and services produced in a year in a country is valued in monetary terms to obtain the (ational income of the country concerned# 'egarding the measurement of (ational income% it could be done in three different )ays depending upon the interpretation of concept of national income# If (ational income is considered as a flo) of goods

and services% then the method used is called Product method# If (ational income is treated as a flo) of income then the relevant method of measuring it is called Income method# 2lternatively% if (ational income is treated as a flo) of e,penditure% the method used is called the E,penditure method# 2part from these traditional methods of measuring (ational income% one more method is evolved and it is called the 5alue added method# !et us no) look into the contents of each of these methods# i) Product method0 In this method% the value of goods and services produced in an economy during a year is found at the market prices% to obtain the gross national product at market prices# By subtracting indirect ta,es and adding subsidies% )e obtain the $ross national Product at factor cost# By deducting from $ross national product the depreciation% )e obtain the (et national product# ii) Income method0 9hen )e aggregate the income received by various factor services% like rent% )ages salaries% interest and profit )e obtain the (ational income at a factor cost# By deducting depreciation from this )e obtain the (et (ational income at factor cost# iii) E,penditure method0 By classifying e,penditure as

consumption e,penditure and investment e,penditure% and then adding them )ill get is the (ational income# &his could be calculated at market prices or at factor cost as in the other methods# iv) 5alue added method 0 #In all the above methods% there is a possibility of double counting and to avoid this the best

method is to sum up only the value added to the product or services at every stage# In that manner only the net accretion in value of a product or service )ill be taken into account to arrive at the final value of all goods and services produced in a year# &his method is by far considered as the best though it bristles )ith certain problems and-difficulties# In India )e adopt a combination of the product method and income method for measuring (ational income# Tren+ in N#tion#- in$ome sin$e !F5! & &he gro)th of (ational income in India since AKFA can be understood from the &able given belo)# RATE OF 7RO6TH OF NATIONAL PRODUCT1IN INDIA HFi(ures in .er$ent#(eA

PLAN FI'F& SE"6(D &7I'D F68'&7 FIF&7 SI*&7 SE5E(&7 EI$7&7

ACTUAL C#G E#L B#E C#C F#L F#E F#H ---

TAR7ET B#A E#F F#G F#H E#E F#B F#L F#G

2nalysis of the (ational income in India has yielded the follo)ing trends 0

A#

&here has not been a consistent increase in our (ational income as revealed by the gro)th figure given in the table above# 6ur real national income )as going up at an annual average rate of &!'# )hile the population )as also increasing at an average annual rate of B#ACN "onse:uently the per capita income increased at an annual rate of only A#IN

B#

It could be observed that the rate of gro)th declined over the decades# 9hile it )as around C#IN during FL.s% it came do)n to C#FN during GL.s and then further to C#AN during HL.s# IKIL.s )itnessed a reversal of the trend by recording FN per annum# But again in the first three years of KL.s the rate came do)n to C#FN % 2 similar movement )as also observed in the per capital income#

C#

"hanges and fluctuations in the gro)th rate of (ational income )as very nigh bet)een years# &he main reason for this is that )e continue to depend on uncertain monsoon to succeed every year# 2 successful monso4Cfi boosts up the rate of gro)th )hile an adverse monsoon brings do)n the rate# In Indian e,perience% the failure of monsoon is a regular feature and so the gro)th rate in (ational income has been declining over the decades#

E#

2s years rolled% it )as observed that the fluctuations in gro)th of national income also )idened# For instance during the first decade the fluctuation )as bet)een - A#HBFH and \ I#AFGI )hile it )idened in the second decade lying bet)een - E#HFGF and \ K#BLHA# Fortunately there )as negative gro)th rate in the eighties and the fluctuations )ere ranging bet)een \ B#B to \ AA#B but early nineties repeat the earlier performance )ith

the gro)th rate varying bet)een \ A#F and \ F#I# &he fluctuations )idening over the decades clearly indicate that our planned efforts are not really bearing fruits and that )e still depend on uncertain monsoon# F# 2n interesting observation is that this overall fluctuations over the period is :uite consistent )ith the fluctuations recorded by the primary% secondary and tertiary sectors# In other )ords% these basic sectors )ere not free from fluctuations and in a )ay the fluctuations in them cause the over all fluctuations# 2mong the sectors% the primary sector understandably recorded )ide fluctuations follo)ed by the secondary and then the tertiary sectors# &his observation is more confirmed )hen )e study the sectoral contribution# G# "omposition of (et Domestic Product @(DP)0 &he contribution by different sectors to the (DP )ill vary from country to country and even for a country from time to time depending upon the stage of economic development# It is usual that in the initial stage of development the contribution by primary sector )ill be very much higher than in the other sectors and over a period this )ould change# In Indian case also this has become true# For e,ample in the table given belo) theP contribution of the three sectors under)ent a change over a period of four decades# It )ould be clear from the table belo) that the contribution by the tertiary sector is on the increase over the period follo)ed by the secondary sector and then the primary sector# &his is because the rate of gro)th of the tertiary and secondary sectors has been more than double that of the primary sector# &he secondary sector )hich

accounted for a higher gro)th rate till the end of the II Plan started receding and the tertiary sector has retained the lead in gro)th rate# !" COMPOSITION OF NET DOMESTIC PRODUCT HIn .er$ent#(eA SECTOR P'I+2'O SE"6(D2'O &E'&I2'O !F5'15* to !F5515C FG#LG AF#GC BI#CA !FE51EC to !FEF1 FG CE#FI BG#FH CI#KF !FF!1F' BH#LL BK#LL EA#CL

B#

9hen )e study the compound gro)th rate of commodity and

non-commodity sectors% )e find that the rate of gro)th is higher in the case of latter# &his tendency is )elcome because the primary and secondary sectors can only generate limited employment opportunities )hile the service sector or the tertiary sector or the non-commodity sector has greater potential in respect of employment# 9ith economic development% the share of transport% communication% energy% banking and insurance to the national product )ould automatically increase as is e,perienced in India# C# &he study of per capita distribution of $DP in agricultural and

non-agricultural sectors indicates that over four decades the per capita distribution is more in the case of non-agricultural sector than the agricultural sector# &he reasons for this are that0 a) the gro)th rate is high in the non-agricultural sector than in the agricultural sector and b) as the population increases% there is no significant shift taking place from the agricultural to non-agricultural sector#

&his is clear from the table given belo)0

PER CAPITA DISTRIBUTION OF 7DP HAmount in Rs"A

SECTOR 2$'I"8!&8'2! (6(-2$'I"8!&8'2! E#

!F5G1 !FCG1C! 5! IGL#IC KFG#AH

!FDG1

!FEG1 !FFG1F! AAEC FAIK

D! E! KFF#GL KEL#EI

AIIG#FB BFHC#CB CCLB#GK CFLG#EH

Share of the rural and urban sector to (DP is also used to

understand the composition of (DP# In Indian case% the contribution by the urban sector to (DP is very much higher than that of the rural sector# Similarly the per capita income in the rural and urban sectors in terms of ratio sho)s that the per capita income )as high in the urban sector and lo) in rural sector# &he ratio increased from A0 BLI in AKFA to A 0 BEA in AKHL-HA# But subse:uently it declined because )ith the increase in population% the si/e of urban population increased and that of rural population declined# 7ence% in AKIL-IA the ratio )as A 0 BCB and A 0 BEG in AKIK-KL# F# &he analysis of the share of organi/ed and unorgani/ed sectors

in the (DP in terms of the factor income revealed that the share of factor income in the organi/ed sector increased consistently over the last three decades% but that of the unorgani/ed sector remained dormant even in AKKL# &his is because the si/e of unorgani/ed sector

consisting of agricultural sector% corporate sector and service sector# &he share of factor income in the organi/ed and unorgani/ed sector is given in the table belo)# SHARE OF OR7ANI>ED AND UNOR7ANI>ED SECTORS IN NDP HIn .er$ent#(eA SECTOR 8(-6'$2(IVED 6'$2(IVED G# !FCG1C! !FDG1D! !FDF1EG !FEF1FG HE#EL BF#GL HB#BI BH#IB GE#IA CF#AF GC#CF CG#GF

&o study the share of public and private sectors in-the $DP let us look into the table belo)0

SECTORS P8B!I" P'I52&E

!FCG1C! AL#FG CK#CE

!FDG1D! AE#EK IF#FA

!FEG1E* AK#IL IL#BL

!FFG1F! BG#EL HC#GL

&he table above clearly indicates that the share of private sector in $DP remains high and constitutes nearly HFN of $DP even in AKKL-KA# But the share of private sector has declined from about KLN to about HEN bet)een AKGL-GA and AKKL-KA# 6n the other hand% )ith the emphasis on public sector% its share in $DP has sho)n a consistent increase in the past three decades and it is constituting more than BFN by AKKL-KA# &he reason for the lo) share of public sector in $DP is mainly because that it started developing late% and that the agricultural sector is mostly in private sector" Based on the above indicators )e may come to a conclusion that over the past four decades% the secondary and tertiary sectors have emerged as important sectors )ith the tertiary sector occupying the top position# &he urban sector is continuing to hold a more important

place than the rural sector# &he unorgani/ed sector still remains in the predominant position and the public sector is yet to make a significant leap in contribution to $DP# Limit#tion of n#tion#- in$ome estim#tion in In+i# & &he conceptual confusions associated )ith national income estimation have not been cleared satisfactorily and so the estimation process is sub4ected to various interpretations# 2part from these the follo)ing limitations are also found in the estimation0 A# &he e,istence of non-moneti/ed sector and the output flo)ing from it has remained outside the computation of national income# In Indian case% in the agricultural sector the barter system still continues that a si/eable :uantity of produce does not enter into the market system at all# For e,ample% the )ages paid in kind itself is substantial :uantity and it is not included in the valuation process# B# !ack of data relating to the income of small producers and household enterprises is yet another serious limitation# +ost of the households engage in alternative occupation and the income earned through that is never accounted for# For e,ample% the services of cook% household preparations of edible items% etc#% are valuable but the income earned through such occupations is never kno)n% similarly in the rural areas% the small producers never maintain details of income% e,penditure and other data relating to their production# It is reasonable to e,pect that the income generated through these sources is substantial and )hen it is not included in national income the estimate of national income is very much less#

C#

Difficulty in differentiating @he economic functions performed is yet another limitation in# the estimation of national income# For e,ample% an agricultural peasant during the season may )ork in his o)n field% and also in the farm yard of the neighbour% during the off-season he may )ork at a match factory% or 4ust rear cattle of others% etc# &hen ho) to classify his incomeT &he usual practice is to classify the income earned under industry origin# but )ith a si/eable section of the people depending on agricultural sector )here the occupation is seasonal% it is very difficult to estimate the income earned from various occupations#

E#

E,istence of black money and unaccounted money is another ma4or hurdle in the estimation of national income# 6f course this problem is e,perienced by every country# In India the (ational Institute of Public Finance and Policy h0ts estimated in AKIC-IE% the si/e of beck money to be around AI to BAN of the total income# 9ith every possible increase in this category of income over the period% the estimation of national income is bound to be very much less#

F#

&he compilation of data for national income estimation is taking place in a very loose manner# 8sually the data at the village level are compiled by the village head man )ho may not collect these data in the scientific )ay in )hich it should be collected# 6bviously the aggregation of these data )ill involve lot of inaccuracies# Further there is more than one official agency supplying the data )hich rarely tally# 2nother bad practice is to round off the data in an unscientific manner# estimation# 2ll these have serious implications on the data base for national income

6n the )hole% the national income estimation is sub4ected to the above limitations# Efforts are being taken at every stage to improve the estimation process% computeri/ation of data% has been started only recently and )ith tins a reasonable 4 level of accuracy in the data can be e,pected# Further centers like "enter for +onitoring the Indian Economy have been established and their )ork is integrated# 9ith these% national income estimation should become satisfactory in future# PROBLEM OF POVERTY !" #n+ ev#-u#te t/e v#rious .overt% er#+i$#tion .ro(r#mme" 2bsolute poverty is a state in )hich a person lacks resources even to meet or his family.s biological needs%-lives in a condition of isolation )ith a high degree of insecurity# &his condition is likely to be hereditary# Further the person may neither be educated nor have anyone to care for him and may live in poor or inade:uate housing and )ork in inhuman conditions# Basically such persons may not be able to meet the fundamental costs of living# 'elative poverty is a state in )hich the position of a person or a family can be f e,pressed in relation to others in the society% especially in terms of the living and f )orking conditions# &his clearly picturises the ine:ualities in the society# &he poverty of a person or a family is al)ays e,plained and understood )ith reference to the average level of the society# &hose people )ho are found to live )ith lo) income% less Distin$tion et2een # so-ute #n+ re-#tive .overt%" Povert% -ine in In+i#n $onte0t" T/e $#uses for .overt% in In+i#

remunerative employment% poor living conditions% etc compared to the average determined for the society are said to be living under poverty# In Indian conte,t% )e e,amine absolute poverty to understand the e,tent of poverty and also the causes as )ell as the eradication programs undertaken by the f government# In order to estimate the poverty and the number of poor people in the country% the concept of poverty line. is used# In defining the poverty line usually three important factors are considered vi/#% i) minimum nutritional level for subsistence% ii) cost of this minimum diet and iii) per capita consumption e,penditure# #9hile using these factors% care is taken )hile making inter-year comparison of poverty by using appropriate deflators to neutrali/e the effect of inflation# +ost of the studies on poverty have used the data supplied by the (ational Sample Survey# But all these studies have been able to make only a rough measure of Indian poverty# 7ence% for our purpose )e )ill consider the measure adopted by the Planning commission# &he Planning commission has used the nutritional re:uirement as the basis for computing the poverty line# 2ccording to the "ommission% there is a need to define poverty line for rural areas and urban areas separately# 2ccordingly% interms of calorie re:uirement per person per day% the "ommission fi,ed BELL calories for rural areas and BALL calories for urban areas# In terms of monetary unit% it )orks out to be 's# AL%IKL for rural areas and 's# AB%FHL for urban areas @at AKKA-KB prices)# 6n this basis the Economic survey AKKB-KC estimated the percentage population belo) the poverty line as sho)n in the table belo) 0

AREA '8'2! 8'B2( 2!! I(DI2

!FED1EE CC#EL BL#AL BK#KL

!FEF1FG BI#BL AK#CL BF#IL

&he estimate of poverty given in the above table by the Planning "ommission is contradicted by various studies undertaken by research scholars# For e,ample% )hile the Planning "ommission estimated about BBN points fall in poverty bet)een AKHB-HC and AKIH-II% Prof# +inhas and others have pointed out that the decline during the above period )as only by ABN points# 2nother aspect of the poverty estimate is that there is a significant regional difference as )ell as inter-state difference# For e,ample% in AKII% the percentage population living belo) the poverty line in different regions is as given belo)0

RE7ION S68&7 E2S& "E(&'2! 9ES& (6'&7

!FDG GA#L GA#I EG#K EG#A AB#G

!FE* EG#B FH#C EL#B CI#B K#I

!FEE EC#B FA#C CH#B CE#K I#C

Based on the above tables% it could be understood that Jthe poverty has declined over a period and significantly during the IL.s# &his is attributed to the follo)ing reasons 0 i# ii# &he $(P increased by FDN during the IL.s compared to about C#FN increase till the HL?s# &he poverty eradication programs undertaken by the government has started yielding the fruits#

iii#

&he increasing urbani/ation has resulted in the increase in income% especially the urban migrants remit si/eable amount of money to their relatives in the rural areas resulting in improved standard of living in rural areas#

iv# v#

&he spread of education and impact of education together have contributed to the reduction of poverty# &he development of non-farm activities in the rural areas has also helped to improve the status of the rural poor#

C#uses of .overt% A# &he ever increasing population0 &his is one of the basic reasons for poverty% especially the rural poverty# It is )ell kno)n that the annual addition to population )as more than the rate of economic gro)th# &he :uality of our population% especially the productivity and health condition% is so poor that population gro)th merely adds only the si/e of claimant to the available resources )ithout making any significant contribution to the output# B# &he large scale unemployment is the ne,t factor )hich is both a cause for poverty as )ell as the effect of poverty# It is a cause in the sense that )hen millions of people remain )ithout employment% their contribution to output is nil but they claim a share in the output# 9hen the claimants to the limited output is high% then the per capita availability -is so lo) )hich causes poverty# 8nemployment is the result of poverty in the sense that )hen the poor people% mostly unskilled% )ant employment% they do not get employment Even if they manage to get the employment is purely seasonal and temporary#

C#

2nother important reason is the under utili/ation of the available resources# Inspite of technological advancement% scientific improvements% etc#% the utili/ationis very much far from satisfactory# 2s a result the total output is less )hereas the claimant is more )hich causes poverty#

E#

&he gro)th strategy adopted by the country through Five year plans has not yielded the desired or the targeted results# +ost of the schemes of poverty

F#

Eradication has touched only a small segment of the population# &he agricultural sector is still remaining in the same position that it is unable to contribute significantly through increased production and productivity to our national income#

G#

&he e,istence of ine:ualities in income is yet another reason for poverty# &he ine:ualities are mainly due to the concentration of )ealth and property in the hands of a fe)# 2s a result the percapita income is very lo) resulting in poverty#

H#

Ecological degradation and deforestation are also causing poverty# &he urban poor reed forest based resources mainly )ood for fuel purposes# &his they obtain by indulging in indiscriminate felling of trees and denudation of forests# &his directly affects the earning scope for the rural poor% as they depend mostly on the forest resources and agricultural lands for their livelihood# 9ith the fast denudation of forests% the rural poor become poorer#

I#

&he distribution of resources in the country is not even and this is evident from the ine:ualities e,isting among the states# For e,ample% even in the KL.s 6rissa remains a back)ard state )hile +aharashtra is in the forefront like Pun4ab% 7aryana% 8ttar Pradesh% etc# &his is one of the reasons for the prevalence of poverty in certain states#

Me#sures to #--evi#te .overt% A# &he first step to)ards eradication of poverty is to achieve fast economic gro)th# It is reali/ed that poverty in India is more due to institutional factors and so there is a need to attack directly poverty through programs aimed at particular group of people# &hat is )hy programs like Integrated 'ural Development Programme% Da)aharlal 'o4gar Oo4ana% etc have been introduced# B# &he large scale producers have to be oriented to)ards v elfare of the community and the small scale industries should be +oro employment generating and help in the removal of unemployment% especial in the rural areas# C# 2t the national level% the country should improve the rate of surplus generation by increasing resources mobili/ation# But this )ill be difficult )hen the propensity to save and invest is very lo) among people and the ta, rates are very stiff# &his could be achieved by achieving better utili/ation of resources% using better techni:ues% improving the technology% etc# 2ll these )ill help to generate the income in the economy and the percapita income )ill also go up# E# 9ith the application of improved technology% use of high yielding variety #seeds% fertili/ers and insecticides% it should be possible

to increase the production and productivity in the agricultural sector )hich directly )ill increase the income of the farmers# &his in turn means higher per capita income for the rural folks thereby reducing poverty in the rural areas# F# It is )ell kno)n that nearly HLN% of Indian population is depending on agricultural sector and the agricultural sector is completely depending on monsoon% +onsoon is most uncertain that the famous saying is WIndian agricultural is gamble )ith monsoon#X &here is a need to improve the irrigation facility #and relieve the dependence on monsoon so that the agriculturists )ill have good production and achieve a higher level of productivity )ith )hich they can be relieved from poverty# G# Several other measures like a forestation% massive rural

employment generation% improving soil conservation% adopting latest technology in production process% improving the allied occupation to provide alternative employment opportunities for the farmers during the off-season% etc#% can certainly bring do)n the level of rural poverty# H# 2s recommended by the 9orld Bank% the rural employment schemes should be more oriented to)ards )omen as it is found that in nearly CFN of the rural family )omen?s? share in the family income is :uite significant# Special schemes could be devised to improve the employment opportunities for )omen so as to supplement the income of the family )ith )omen?s? earnings# I# &he rural credit system needs revie)% especially after nearly BF years after nationali/ation of banks# &he banks should be

involved more in the rural schemes and ne) employment oriented schemes have to be identified and liberal financial assistance should be provided for such schemes so as to help remove poverty in the rural areas# K# Efforts should be made to discourage conspicuous consumption among the people and encourage them to make productive investment# &his% calls for a change in life style of the people and their consumption behaviour# &hough it )ould fake a long time to achieve this% yet steps should be initiated at the earliest in this direction# AL# Encouraging co-operative efforts in various fields% improving and spreading educational opportunities% creating the a)areness among the people that the poverty is only a stage and it could be overcome )ith consistent efforts% devising ne) schemes targeting specific group and its peculiarities% rigorous implementation of land reform policies% etc are all other measures )hich )ould bring do)n poverty in India# 2ll the schemes )ere in operation for :uite some time and an evaluation of these schemes has brought out certain deficiencies of them# Efforts have to be taken up to overcome these deficiencies so that these schemes )ould help to eradicate poverty in India# @i) @ii) &he first deficiency is that these schemes are )eakly integrated )ith other plans for area development# &he community assets created through various schemes has not been employment generating in nature#

@iii)

&he )elt to do farmers and people in the rural areas are found to be the beneficiaries of the schemes aimed at eradicating poverty#

@iv)

&he delay in the implementation of the schemes and the allotment as )ell as release of funds for these schemes is robbing the e,pected benefits of these schemes#

@v)

Politicians interfere in the process of identification of the beneficiaries that the fruits of these schemes do not reach the targeted group of people#

@vi)

Failure to provide ade:uate training to the persons0 in-charge of implementing various schemes is also another reason for the schemes not being effective#

@vii)

Poor flo) of communication and details about the various schemes to the rural folks is one more reason for the deficiency of these schemes# &here is a need to strengthen the publicity for these schemes so that the needy )ill be benefited#

2s has been already stated% the government has introduced various schemes aimed at eradicating poverty% especially in the rural areas% but the above mentioned deficiencies should be vie)ed seriously so that the efforts to eradicate poverty )ill start bearing fruits# Pro -em of unem.-o%ment in In+i# 8nemployment is of different types# Every type of unemployment is found in India# Before )e analyse the nature of unemployment% )e should understand the types of unemployment A# Structural unemployment0 &his is a type of unemployment caused .mainly by the change in the development strategy adopted by an economy# For e,ample% suppose a country basically agricultural in nature% plans to adopt industriali/ation as

a strategy# &his )ill result in displacement of labour in agriculture and not all of them can be accommodated in the industries# &his type of unemployment caused is called Structural unemployment# B# "yclical unemployment0 Every economy goes through the ups and do)ns in the process of development# &his type of economic fluctuations is studied through the behaviour of business cycles# 7ence% during the period of inflation% the unemployment )ill be less and during the period of depression unemployment )ill be more# Such type of unemployment is caused mainly because of the deficiency of effective demand# 1eynes has discussed this type of unemployment in his theory# Such unemployment is caused due to the economic fluctuations and every country )ill e,perience this type of unemployment# C# Frictional unemployment0 &his is another type of unemployment )hich is caused by shift in the productive effort# For e,ample% during )ar time% )orkers are absorbed in )ar-time industries# 6nce the )ar is over% these )orkers are rendered unemployed as the )ar-time industries and production do not continue# Such an unemployment is called factional unemployment# 2n economy )hich is fle,ible can :uickly solve this type of unemployment# E# Seasonal unemployment0 &his type of unemployment is very closely linked )ith the seasonality in production in any sector# For e,ample% in the agricultural sector% during the harvest season% there is heavy demand for labour# 2ll unemployed laborers )ill get )ork# But once the harvest season is over% these laborers remain unemployed#

F#

8nder-employment or disguised unemployment0 &his is the type of unemployment )hich is never practically seen% but only e,perienced# Suppose a 4ob )hich can be performed by 4ust AL )orker% has in reality has BL )orkers% then the e,cess AL )orkers )ho are not actually re:uired are said lo be under employed or disguised unemployed# In other )ords% the surplus labour do not make any addition to the output# &echnically% their marginal product is /ero# Such a situation is called )ider-employment or disguised unemployment# In India this is the type of unemployment )hich is found in large scale in agricultural sector and public sector# 2lternatively% )hen a Post-graduate :ualified person is employed as a peon% then he is said to be under employed as his true potential is not really put into use#

G#

Educated unemployment0 &his type of unemployment is found among the educated persons# &hough there are different levels of education% at any level% if a :ualified person is unemployed% then he adds to the number of educated unemployment#

H#

'ural and urban unemployment0 Depending upon )here there is unemployment% )e may classify unemployment as rural an#A urban unemployment#

TREND IN EMPLOYMENT IN INDIA 9hen )e analyse the gro)th rate of employment by se, and residence )e observe the follo)ing trend0 A# &he employment on the )hole has been gro)ing at the rate of B#BA per annum during the AF year period @AKHB-HC to AKIH-II)#

B#

&he rate of gro)th in urban employment )as found to be more than that of the rural employment% the respective rate being E per cent and A#HF per cent# 2s a result% the share of employment in the total employment had gone from AGN to BBN during the AF year period studied#

C#

It is of interest to note mat unemployment among male and female increased more or less at the same rate and their share in total employment also remained the same over the AF year period#

E# F#

7o)ever% the rate of gro)th of employment had been declining )hen )e divide the AF years into three F year period# 2s regards the gro)th rate of employment in organi/ed and unorgani/ed sectors% it )as found that in both the rate of employment )as on the decline% though the rate of employment in the unorgani/ed sector )as greater than that of the organi/ed sector during the AF years studied#

G#

2mong the sub-sectors in the organi/ed sector% the rate of employment )as more in public sector than in private sector# 9hile in public sector the rate of employment )as gro)ing at the rate of CN per annum the employment in private sector increased at a lo)er rate of L#FN per annum#

H#

&he study of gro)th rate of employment in ma4or sectors of our economy indicated that in terms of gro)th rate of employment the sectors could be listed in the follo)ing order0 "onstruction% Electricity% gas and )ater supply# +ining% &ransport% storage and "ommunication% +anufacturing% Services and 2griculture#

NATURE OF UNEMPLOYMENT IN INDIA Even before )e discuss the e,tent of unemployment in India% it should be noticed no accurate estimate of the problem is available# &his is mainly because of various types of unemployment and lack of data base on unemployment even agencies like Directorate $eneral of Employment and &raining or "ensus or (ational Sample Survey or the Employment e,changes can give accurate information on unemployment# 7o)ever% the available estimates could be used to understand the magnitude of this problem# !ooking into the Plan documents one can get the information about the backlog of unemployment at the beginning of each Plan# &his is given in the &able belo)# BACILO7 OF UNEMPLOYMENT DURIN7 FIVE YEAR PLANS

PLANS Back log - at the start of the Plan 2ddition to the labour

I C#C K#L

II F#C AA#I

III H#C AH#L BE#A AE#F K#G

AnnK#G AE#L BC#G AA#L AB#G

VI AA#C CB#A EC#E CF#G H#I

VII H#I CG#C EE#A EL#E C#H

force during the Plan &otal @A\B) AB#C AH#A 2dditional employment H#L AL#L generated Back log - at the end of the Plan F#C H#A

From the &able it could be seen% that the unemployment at the end of every Plan has gone up to the 2nnual Plans and after that the Backlog had come do)n during the 5I and 5II Plans% &his implies that efforts

taken to generate employment have yielded the desired though the entire backlog could not be erased completely#

result%

It may be noticed that this reduction in backlog need not be taken as an indicator of the problem being solved# It is necessary to study the unemployment se,-)ise% and residence status-)ise to understand the problem in right perspective# &his are being studied belo)# &he analysis of unemployment rates se,-)ise and residence status)ise indicated that0 @i) &he current daily status unemployment rates )as found to decline both in urban and rural areas for both males and females @ii) 2 current )eekly status unemployment rate )as found to increase for males )hereas among the urban females this rate )as almost constant )hile in the case of rural females it )as found decline# @iii) &he usual status of unemployment )as found increasing among males and females in both the rural and urban areas# CAUSES FOR UNEMPLOYMENT &he problem of unemployment in India is caused by various causes# !et us no) discuss the main causes for this problem0 A# &he first cause for unemployment is the steady increase in population# &he rate of population gro)th is around B#BN per annum )hile the rate of employment gro)th is hardly matching

)ith it# 7ence% the unemployment situation )orsens )ith every addition to population# B# &he rate of labour absorption in the organi/ed sector in India is very limited as most of the segments in this sector are already full )ith labour force# 7ence% the best )ay to absorb the surplus labour is by e,panding the small scale units )hich are highly labour intensive# C# &he lo) productivity in agricultural sector is another reason for unemployment# 9ith a large scale under-employment and disguised unemployment in the rural sector% there is limited addition to the output# 2s a result ma4ority of the rural folks remain unemployed and they cannot also be absorbed by the industrial or other sectors as they do not have training# E# &he indiscriminate increases in the number of graduates coming out of the universities and the lack of link bet)een the curriculum and the actual re:uirement by the industries are the ne,t set of reasons for large scale unemployment among the educated persons# F# &he mushrooming of technical institutions throughout the country is yet another reason for the unemployment among the technicians# G# &he large scale failure and sickness among the small scale units in the country is another reason for unemployment# H# &he failure of several schemes for generating employment is itself a reason for the e,istence of large unemployment#

I#

&he lack of co-ordination among various agencies engaged in generating prevailing# employment also results in unemployment

K#

&he delay in identifying the potential sectors for generating employment has resulted in the building tip of huge backlog of unemployment#

AL#

&he lack of training facilities and the lacunae bet)een the training institutions and employing agencies is another reason for unemployment among the trained persons#

AA#

&he inherent resistance to mobility among the laborers itself is a reason for unemployment For e,ampleP laborers do not prefer to go to places )here 4obs are available even if it amounts to remaining unemployment other)ise#

So-utions to so-ve t/e .ro -em of unem.-o%ment& &he unemployment problem needs solution at different levels# &he solution for this problem at the urban level is different from those at the rural level# 7ence% steps are to be taken at both the levels to bring this problem under control# 9e discuss belo) the solutions for this problem under urban level and rural level separately# Su((estions for so-vin( ur #n unem.-o%ment&

A#

&he foremost step is to make education relevant to the society# Instead of continuing )ith the purely academic orientation% efforts should be made to spread vocational education#

B#

Industries )ith lo) capital intensity should be started in large scale so that they can generate more employment# &hough the small scale units have come into e,istence in large scale% yet the failure rate among them is very high# Steps should be taken to minimi/e this sickness among small scale units so that they can generate employment in large scale and help to solve this decades old problem#

C#

&he import of technology should be discouraged and the domestic technology should be updated so that it can generate more employment#

E#

Industrial

units

)ith

short

gestation

period

should

be

encouraged in large scale# F# Decentrali/ation of units and incentives for location outside the urban limits to industries% )ould help to relieve the urban unemployment to a large e,tent# G# Financial assistance to self-employed persons should be made more liberal that such types of employment )ill help to minimi/e the intensity of the unemployment problem# H# "onsidering the potential of the service sector% organi/ed and co-coordinated efforts are re:uired to encourage establishment of units in the service sector )hich can take the load to a large e,tent#

I#

Productivity in industrial sector should be improved that more opportunities arc automatically created#

So-utions for rur#- unem.-o%ment in$-u+es t/e fo--o2in( .oints & A# B# Establishment of small scale units to utili/e the locally available resources is one important step# Providing training facilities for the rural folks in various areas )ill help them to improve their skills so that they can get employment in various sectors# C# E# F# G# E,tension of rural oriented 4obs )ill also help to solve the problem# !arge irrigation schemes )ith e,cellent capacity to generate large scale employment should be started "ommunity development pro4ects should be initiated )ith guidance to effectively tap the rural man po)er# Several agricultural oriented small units like dairy farm% poultry farm% beekeeping% etc#% should be set up in large scale so as to provide off-season employment and also supplement agricultural income# H# Spreading vocational education among the rural folks )ill also help them to improve their skills )ith )hich they can get employment# I# K# !iberal financial assistance% managerial and technical guidance )ill go a long )ay to minimi/e rural unemployment# Effectively schemes to funds )ill% help monitoring in the rural employment prevent malpractice and )rong diversion of reali/ing the ob4ectives of these rural

employment schemes arid pro4ects#

AL# Establishing links )ith the urban market to ensure ready market for the products from the rural areas )ill help to ease the unemployment among the self-employed rural folks% T/e .ro -em of rur#- unem.-o%ment Me#sures to so-ve t/is .ro -em &he agricultural sector offers livelihood for millions of people in India# 6ne segment of these dependents is the agricultural laborers# &here is no parallel to the sufferings of these agricultural laborers# &his is a uni:ue group of laborers )ith certain peculiar characteristics# Infact it is because of these peculiarities of agricultural laborers that they remain al)ays in ob4ect poverty# 6ne of the peculiarities is that these agricultural laborers remain unorgani/ed# 8nlike the laborers in industrial sector% the agricultural laborers have no opportunity to come together# &hey remain independent that once a laborer gets the )ork on a day he does not bother about others# 9hen he remains unemployed no other laborer takes any interest or sho)s any concern# Being illiterate these laborers have not understood the importance of collective bargaining# 2nother peculiarity of the agricultural laborers is that they mostly remain unskilled# &his is because of their nature of occupation% )hich is seasonal and mostly temporary# Further there is no specific )ork that any laborer concentrates and every laborer is prepared to do any type of )ork connected )ith cultivation# 7ence% no speciali/ation or skill is ac:uired by them# &he e,tent of illiteracy among them also stands in their )ay of improving their skill through training#

&he agricultural laborers are highly migratory in nature unlike the industrial )orkers )ho are more stable in their 4obs# &his is a peculiarity that could be found only )ith agricultural laborers# &he nature of their occupation is such% that these agricultural laborers get temporary 4ob )herever they go# Being unskilled they go in search of 4ob and accept any offered to them# Further% unlike the industrial )orkers )ho do more speciali/ed and specific )ork% the agricultural laborers have several% odd 4obs that they need not stick on to a particular 4ob or employer for ever# It is because of this migratory nature of their )ork% that they are unable to command any remunerative re)ard for their )ork and get organi/ed# 2 very important peculiarity of the agricultural laborers is that their employers in most of the circumstances also are poor and so they do not offer remunerative )ages# Further the employer and his family members also involve themselves in every )ork along )ith the hired )orkers# &his results in very close contact bet)een the agricultural laborers and their employers# &ill very recently% there is no codified rule or regulation for protecting the interest of the agricultural laborers# In the case of industrial )orkers% several legislation are enacted at various points of time to protect their interest# In the absence of such )ell defined rules and regulations% agricultural laborers are sub4ected to various types of e,ploitations and they are denied of their dues# Further these )orkers have no appellate authorities to appeal and get their grievances redressed# +ostly% the disputes relating to agricultural laborers are settled at the village level )here the money po)er is found to be final# In other )ords% the rich farmers and landlords al)ays decide cases against the interest of the )orkers and the latter also do not react to such one-sided 4udgments% lest they should remain unemployed for ever#

9ith all the above peculiarities e,plained it is not a surprise that the agricultural laborers lead a #life of misery# &his is clearer )hen )e study their economic condition# @i) +a4ority of the agricultural laborers do not o)n any land# Even those o)ning land% the average si/e of landholding is 4ust A#CC acre# @ii) &he employment that the laborers get is temporary and purely seasonal# It is )ell kno)n that on an average an agricultural )orker gets employment only for about E months per year and this too not at one stretch# 6bviously% the laborers borro) heavily and remain in debts forever# @iii) 9ith no fi,ed hours of )ork and regular )ages% these laborers lead a life of penury and they are never able to balance their income and e,penditure# It is estimated that more than FBN of the agricultural )orkers are in debts )hich range bet)een 's# BEE in 9est Bengal and 's# AILI in 'a4asthan# Inspite of the minimum )ages legislation% the )ages of the laborers remain abysmally lo) as in most of the places the legislation has no relevance# Further% the agricultural )ages do not go up on par )ith the industrial )ages due to the absence of collective bargaining% e,ploitation by landlords% illiteracy of laborer% etc# @iv) 2 very significant feature of the agricultural laborers is that most of them come under >bonded laborers#? &his means% )hen a laborer is unable lo meet his family e,penditure )ith his meager income% he borro)s from the money lenders or landlords at very high rate of interest# &he repayment does

not arise )ith his income level# 7ence% the entire family is indebted to the money lender or the landlord% )ho uses these laborers through generation for cultivation and other purposes# &his if% ho) the agricultural laborers families become bonded laborers# @v) 9ith very poor economic back ground% the agricultural laborers lead a life of misery# (aturally% their productivity is very lo)# &his affects not only their ability to command better )ages% but also the country )ith lesser productivity in the sector# So far )e have discussed the peculiarities and the economic conditions of agricultural laborers# 9hat are the reasons for thisT &he causesP for the poor position of the agricultural )orkers are as follo)s0 A# &he e,cessive gro)th of population is the basic reason for this condition of agricultural laborers# 9ith si/eable addition every year% the dependence on agricultural sector increases )hich in turn increases the unemployment# 2s a result the laborers arc prepared to )ork even for very lo) )ages# &he employment that they get is not permanent and purely seasonal# &hey migrate from place to place in search of good employment but not permanent employment# 9ith large scale unemployment% they lead a poor life and they have very little strength to be productive# 2nother outcome of this dependence on land is indebtedness# B# It is )ell kno)n that the agricultural laborers are paid poor )ages and the )ages are paid even today in kind# &his affects the purchasing po)er or the capacity of the )orkers#

Immediately after the harvest% )hen the laborers are paid their )ages in terms of the crop% these laborers try to dispose of this in the market% or the village shops and they reali/e lesser money value much less than )hat they )ould get if they are paid in cash# 7ence even if the agricultural laborers get their )agesJ% their purchasing po)er is relatively lo)# C# &he tenure of employment is highly uncertain in the case of agricultural )orkers# In the absence of any rule or regulation the employment of laborers is sub4ected only to the personal likes and dislikes of the employer# &hey are e,ploited to the ma,imum e,tent by the land lords# &here is no bargaining po)er in the absence of any organi/ation to protect their interest# &his in turn has encouraged bonded laborer system# &he laborerT 2l)ays live in poverty and in the absence of alternative occupation )ork under suppressing conditions# &his affects their productivity as )ell as initiative to get organi/ed# &hey remain unskilled being satisfied )ith )hat they get# E# 6ne more important reason for the pathetic condition of the agricultural laborers is that they do not get any protection from the government also# 9hatever legislation are there% they all only help the po)erful landlords )ho are able to circumvent the legislation finding loopholes# Further% State is a silent spectator to the e,ploitations of the laborers% as )ithout the aggrieved protesting% there is no scope for the government to intervene# &he poor laborers also do not have any other alternative source of income# 2nother problem is even if the government is able to relieve the bonded laborers from their bondageP the e,penditure on their rehabilitation is very huge that States hesitate to accept this burden# 6nce the laborers

are free to )ork% they do not get 4ob as they mostly are unskilled# &here is also no scope for accommodating% them in any other productive sector as they do not possess any other skill# 2ssuming that the government is able to allot them land so that they can cultivate it and survive% these laborers do not have the )here)ithal to use the land and survive# In several cases% these laborers )ho are given land% are found to pledge the land )ith the money lenders and once again remain agricultural laborers# 7ence% )hen )e consider the above e,planation% )e find that the agricultural laborers have no scope for leading a normal life# 7o)ever% )e may suggest the follo)ing ideas )ith )hich their problems may be solved at least to some e,tent# &he (ational "ommission on 'ural !abour has also made certain recommendations to improve the position of these laborers# !et us no) discuss these in detail# A# 6n its part the government has passed the +inimum 9ages 2ct to ensure that the agricultural laborers are not e,ploited# 9hile the 2ct has provisions to pay minimum )ages% it has no teeth# In other )ords% though the 2ct has been passed% it remains ineffective% in the sense that the government is not able to enforce this 2ct# &he main reason for this is that agricultural laborers are highly unorgani/ed unlike the industrial )orkers# In the absence of unions% the provisions of this 2ct are not effectively implemented# Further the laborers are in debts and in certain cases these debts have been incurred in the past by their forefathers# &hey do not come for)ard to rise against their employers for fear of losing their occupation# 7ence% mere passing of +inimum 9ages 2ct )ould not help the )orkers%

unless the government follo)s it up )ith measures for effective implementation# B# In order to protect the interests of agricultural )orkers% the government has launched several special programs like Small Farmers Development 2gency% and +arginal Farmers and 2gricultural !aborers Development 2gency# &hese are specific programs to protect a particular group of laborers falling in small farmers% marginal farmers and agricultural laborers category# &hese programs are implemented to start )ith in certain areas so that slo)ly they could be e,tended to other areas# In the past the government launched community development programs to protect the )eaker sections in the agricultural sector# 9ith such programs% the benefits maR flo) to the target group% but there is a need to e,tend these programs to others in other areas and also to come up )ith corrective steps )herever these programs do not reach the targeted group# C# 2nother important step taken to mitigate the condition of the agricultural )orkers is land reclamation and settlement# &he government as )ell as service organi/ations are engaged in the process of reclaiming lands from the big farmers #and rich land lords# &hese land are pooled and then= redistributed among the agricultural- )orkers and landless peasants# Bhoodan movement )as started by 5inoba Bhave mainly to encourage philanthropic land lords to donate voluntarily lands )hich )ere redistributed among the landless peasants and )orkers# &hese efforts met )ith very little success and the lands mobili/ed in this )ay either )ere found to be not fit for cultivation or in litigation# Further there )ere several problems in the redistribution process# For instance% proving die identity and domiciles bf

agricultural laborers )ere main problems# In several cases after the lands )ere redistributed% the laborers either retained the lands uncultivated for )ant of funds for cultivation or pledged them for raising funds for running their families# 7ence% there is an urgent need to attend to this problem of reclamation and resettlement and eliminate all the obstacles and hurdles in the process# E# Several ne) rural employment programs have been launched by the government-at different points of time# "ertainly these programs have helped to bring do)n the problem of unemployment in the rural areas and divert the surplus manpo)er in the agricultural field to the of her closely related occupations# &hese programs range from laying of roads to minor irrigation% canal construction% soil conservation% social forestry% etc# 2s lakhs of people are involved in these programs% to some e,tent there is scope for using the idle manpo)er in the rural areas# 7o)ever% these schemes themselves cannot eradicate poverty or unemployment in the run areas# 2part from the shortage of funds for implementing such schemes the government has to monitor several such schemes at the same time )hich adds to the administrative burden of the government# Possibility of making the local rural agencies responsible for the administration and operation of these schemes )ould help to make the benefits flo)ing from such schemes to reach the targeted group# F# 2 very significant improvement in this connection is the passing of &he Bonded !abour System @2bolition) 2ct% AKHG# &his 2ct has completely liberated all the bonded laborers at one stroke# But the effectiveness of this 2ct is still in doubt% because laborers

themselves have preferred to stay )ith the landlords or their employers for fear of losing their livelihood and the difficulty for the government to find them alternative employment# 7ence% Inspite of this 2ct% the bonded labour system is still found in several parts of the country# &he government should no) seriously think of implementing this legislation and simultaneously create agencies )hich )ill arrange for the rehabilitation of the released bonded laborers# &he contribution of the voluntary organi/ations can also be invited as government alone cannot attend to this task# 2s a step to)ards rehabilitation these agencies can train the displaced bonded laborers in simple )orks like printing press% book binding% stitching% carpentry% etc#% so that the released laborers can start )ith a ne) occupation instead of once again coming into the fold of agricultural occupations# G# 2nother positive step in this direction has been the "entral government coming out )ith the insurance scheme for ails-the agricultural laborers# &he premium of 's# AL per year is paid by the government and the insurance cover is for 's# ALLL# Every head of a family is insured% and this is a small beginning# &his scheme should be slo)ly e,tended so that the family of agricultural laborers )ill have some tort of protection after the death of bread )inner# H# 9ith the establishment of the (ational Back)ard "lasses Finance and Development "orporation recently% the government has sho)n its determination to attend to the problems of the poor and do)ntrodden agricultural laborers# &his "orporation )ill help to generate self-employment. opportunities% provide

concession in finance and assist to improve the technical skill of laborers belonging to Back)ard "lass# I# 2 ma4or development in alleviating the problems of agricultural laborers is the setting up of the (ational "ommission on 'ural !abour by the government% )hich submitted its report in Duly% AKKA# &he "ommission has gone into the depth of the conditions of the small fanners% marginal farmers and the agricultural laborers and made a number of #recommendations# Basically the "ommission felt that the level of living of the agricultural laborers should be improved and they should be involved in the development process# In this connection the follo)ing are the recommendations the "ommission0 @i) @ii) @iii) Free and compulsory education for all children in the rural areas upto the age of AE# Prohibition of child labour in every form in any industry# &o provide collateral - free loans to )omen% a separate (ational "redit Fund has to be set up from )hich loans could be given to )omen# @iv) @v) Fi,ation of minimum )ages as 's# BL per day )ith a provision to change it by linking the )ages )ith "onsumer Price Inde,# Provision of liberali/ed credit to laborers through co-operative banks# &hese suggestions are being e,amined by the State governments and the "entral government and )hen they are accepted% then )e may e,pect the condition of the agricultural laborers to improve# THE INFLATIONARY TREND IN INDIA AND THE STEPS TAIEN BY THE 7OVERNMENT OF INDIA TO CONTROL INFLATION IN INDIA" made by

Immediately

after

independence%

the

inflationary

pressure

)as

controlled by the government by taking the follo)ing measures0 A# &he government imposed ne) ta,es and increased the rate of old ta,es to absorb the surplus purchasing po)er in the hands of the people# B# C# E# F# &he government also simultaneously reduced the money supply# &he public e,penditure )as also reduced to some e,tent# &he government announcement of increase in bank rate from C to CA B per cent in (ovember% AKFA had a good impact# $overnment also simultaneously took several steps to increase the volume of production# In spite of these efforts during the period five year plans the inflationary pressure continued# During the I Plan period in spite of the increase in agricultural and industrial output% the inflation set in mainly because of the failure of monsoon in AKFF and a heavy dose of deficit finance to the tune of 's# EBL crores# In the II Plan% the increases in prices of ail commodities continued to be e,perienced# &here )as very limited success on the control inflation# 7o)ever% the government could resort to a lo)er level of deficit finance to the tune of 's# KEI crores against a target of 's# ABLL crores# &he III Plan )itnessed further spiraling up of prices# During this plan several factors contributed to)ards the inflationary pressure# Specifically the "hinese aggression% increased money supply% increase in government e,penditure and acute shortage of foreign e,change fuelled the inflation# &he actual deficit finance )as 's# AACC crores much above the provision of 's# FFL crores# &he reliance on deficit financing continued during the annual plans the government resorted to nearly 's# GIB crores of deficit financing# &he I5 Plan period )itnessed some efforts on the part of the government to bring

do)n the inflationary pressure# For instance% the government decided to finance its public e,penditure through non-inflationary means as far as possible% the bank rate )as raised from G to HN &he cash reserve ratio )as 4acked up from C to FN# &he minimum rate of interest to be charged by the commercial banks on their loans and advances )as fi,ed at ALN But all these steps failed to bring the desired result as the government resorted to a huge dose of deficit financing to the tune of 's# BAFL crores against the original target of 's# IFL crores# During the 5 Plan period there )as no let up on the price front# &he inflation rate )as so alarming that the government had to introduce several measures# &hrough several ordinances% the government fro/e all profits and )ages at current levels and through the third ordinance% the compulsory deposit scheme introduced# for the income ta, payers )as So prices slo)ly started declining# By +arch% AKHG the

price level in India rose by AA N &o control this high rate of inflation% the government resorted to supply management policies# It curbed further increase in money supply and the effort )as to increase the supply of )age goods# But the policies failed because the government gave a greater emphasis on controlling credit rather than controlling money supply# During the 5I Plan the deficit finance )as to the tune of 's# FLLL crores and so the inflationary pressure continued to build up# the government came up )ith its anti-inflationary policy by laying emphasis on0 increasing the production% better capacity utili/ation% imports of essential commodities in short supply% regulated e,ports of those needed domestically% curbing the activities of hoarders and black marketers% constant monitoring of the prices of essential good and making permanent the "ompulsory Deposit scheme and enhancing the rate of this deposit# &he 'BI increased the Bank rate from K to ALN and it also increased the "'' to HN from GN and the Statutory li:uidity ratio from CEN to CFN It raised the minimum margin for the food credit to ALN inspite of all these tasks the inflationary pressure not

only continued but became more aggravated# During the 5II Plan period also the government continued )ith most of the above mentioned measures )ith greater seriousness# But even at the end of the 5II Plan period the inflation rate )as hovering above ALN )hich taken is really high# It is to be noted that there is nothing )rong )ith the measures taken up by the government of India to curb inflation in India# &he main problem is the implementation of these measures# In practice there is no co-operation from the public and other financial institutions especially in the unorgani/ed sector# 2s a result all the efforts of the 'BI are nullified# !arge scales smuggling% hoarding% black marketing% etc continue to take place in the economy )ithout any check# Further large scales ta, evasion and e,istence of black money and the )orking of the parallel economy% etc#% have also posed serious challenges to the effective implementation of the policies of the government# 6n its part the government is unable to brig do)n the si/e of deficit finance due to its commitment to the )elfare activities# 7ence% the time has come to take a drastic decision in the interest of economic stability to put an end to all the evils nd evil practices in the economy# THE PRICE MOVEMENTS IN INDIA SINCE INDEPENDENCE AND CAUSES FOR RISE IN PRICE IN INDIA Price movements in a country can be analy/ed only )hen the )holesale price inde, is available# In India% though this )holesale price inde, )as computed after independence% yet the price :uotations )ere not complete as they did not include all the commodities# Further the government had been changing the base year fre:uently )ith an an,iety to prevent people from really comparing the purchasing po)er over a period of time# 7ence% in India the base year originally )as

AKFL-FA% )hich )as changed to AKGL-GA and then to AKHL-HA and finally to AKIL-IA# 6f course% no) the )holesale price inde, is more comprehensive as it includes almost all the commodities traded# 9e )ill discuss the price movements in four phases0 phase I 0 AKFA to AKHA% Phase II 0 AKHAAKIL% Phase III 0 AKIA-AKKL Phase I5 0 lKKL?s# P/#se I H!F5!1!FD!A &

In this phase% roughly )e study price movements through the first three five year plans and the annual plans# During the I Plan% the price movements )ere very much less and the )holesale price inde, )as KK @base year AKFB-FC [ ALL)# 2s regards the food articles% the price inde, )as hovering around KL )hich indicated a very comfortable position during this Plan# But encouraged by this trend% the government undertook various ne) pro4ects by resorting to deficit financing# &he result of this )as that during the II Plan the price level )ent up by BL per cent# &he price position )orsened during the III Plan as this )as the time )hen there )as "hinese aggression and Pakistan invasion# 2s a conse:uence the defence budget )ent up leading to soaring up of prices# For instance% bet)een AKGA and AKGG% the prices of foodstuffs )ent up by EL per cent% the price of cereals )as up by EF per cent and in the case of pulses it )ent up by HL per cent# &here )as inflationary spiral# Fortunately in AKGH-GI% )ith the sudden spurt in food production @$reen 'evolution)% the price level came do)n and in AKGI-GK% there )as a marginal fall in prices by one percent# P/#se II H!FD!1!FEGA & &his is a very crucial period as far as Indian price situation is concerned# It )as during this period that India )itnessed a very steep

rise in price level# &hough the rate of increase in price level )as very much less @around F to H per cent) in the first three years of the III Plan% it soared up by AK points in the fourth year and by EH points by the last year &he reasons for this )ere0 heavy influ, of refugees from Bangladesh and the e,penses incurred on them% the failure of the kharif crop in AKHB-HC% the failure of the take over of the )holesale trade in )heat and the rise in crude oil price# For the first time in India% the )holesale price inde, touched a peak of CCA in September% #AKHE# &he government initiated a number of measures like compulsory deposit scheme% nabbing of black marketers% smugglers and hoarders invoking the provisions of the +aintenance of Internal Security 2ct @+IS2)% etc#% )hich together resulted in the declineJ in the price level# &he )holesale price inde, stood at CLK by +arch% AKHF and then further dropped to BIC by +arch% AKHG# &hough immediately after the pronouncement of-emergency the price level declined% it once again started increasing at the September% AKHE level by +arch% AKHH# 2fter the emergency period% the Danata government came to po)er and follo)ing various policies it succeeded in arresting the price rise# It could maintain the price at AIF points applying the demand - supply management% higher buffer stock% high foreign e,change reserve% increased food production as )ell as industrial production# But the inflationary budget of AKHK% contributed to the reversal of trend in price that by Danuary AKIL% the )holesale price inde, stood at BCE# P/#se III H!FEG1!FFGA In Danuary% AKIL% the "ongress @I) government came back to po)er and it kept controlling inflation as the prime ob4ective# &he government tried to achieve this through demand and supply management# 2ll the anti-inflationary policies )ere brought in to contain inflation# &he temporary price stability found by the end of HL.s did not continue as

the inflationary spiral resulted in the alround increase in prices# &he )hole sale price inde, increased from BAI in AKHK-IL to CCI by AKIEIF# &he demand side ad4ustments announced by the government included altering the cash reserve ratio of commercial banks% ceiling on lending by commercial banks% ban on recruitment by government% reduction in the money supply% etc# 6n the demand side% the government attempted to increase the supply of goods and services using short term and long term measures# 9ith all these measures the annual increase in price )as around H to I per cent# 7o)ever during the later part of IL.s% the situation did not continue to be the same# &he )holesale price inde, )hich came do)n to ABF by AKIF-IG started increasing and by AKIK-KL it )as around AGG# &he annual rate of inflation )hich )as 4ust E#H per cent by AKIF-IG% shot up to I#A per cent by AKIK-KL# &he main reasons for this )as the serious shortfall in the production of essential agricultural goods like edible oils% cotton% pulses% etc# $overnment resorted to tightening of selective credit control policies% and also used the supply management side by side# Specifically% it used the buffer stock built up over the previous years effectively and even imported edible oils% introduced employment schemes% relief programs% etc# P/#se IV H.o"st1!FFGA & &his phase )as marked by hefty increase in price right from AKKL# Several reasons could be attributed to this vi/#0 high administered prices% gulf-surcharge on petroleum products% high dose of deficit financing% high indirect ta,es% etc# &he combined effect of all these )as that the )holesale price inde, stood at AIL by AKKL-KA and increased to BBK by AKKB-KC# &he annual rate of inflation% ho)ever% came do)n from AB#A per cent in AKKL-KA to AC#G per cent in AKKA-KB and then to

K#K in AKKB-KC# 7aving e,perienced a decline in price rise% the government announced reduction of e,cise duties% customs duties% etc#% in AKKC-KE budget to achieve a further fall in price by AKKC-KE# DEMAND1PULL FACTORS THAT CAUSED INFLATION IN INDIA" &he demand-pull factors )hich caused inflation in India are 0 Demandpull factors0 &he demand-pull factors are responsible for increase in price% because% )hen the demand for goods and services increase at a higher rate than the rate at )hich the supply of these goods and services increase% there )ill be shortage )hich results in price rise# 8nder demand-pull factors )e may mention the follo)ing factors to be very important0 #A He#v% (overnment e0.en+iture &

&he administrative e,penditure of the "entral and State governments increase from a mere 's# HEL crores in AKFL-FA to nearly 's# B lakhs by AKKA-KB# 2dded to this )as the increase inP government investment on several )elfare schemes and programs from 's# ALLL crores in AKFL to 's# FLLLL crores by AKKL# 2part from the plan e,penditure% the non-plan e,penditure of the government increased at a greater speed# 9ith higher government e,penditure% more money entered into circulation of the economy )hich fuelled inflation# A Defi$it fin#n$in(&

Deficit financing-is one basic reason for the drag in our development and the inflation prevailing in the economy# &he 4ustification that in the initial stage of development every country is bound to have deficit financing is no longer reasonable in Indian case% as the time has come that our Five year plans should lead us to generate more resources

from other sources instead of depending too much on deficit financing# &he amount of deficit financing has increased from 's# CCL crores during the I Five year plan to a huge amount of 's# BL%LLL crores during the 5III plan# &his implies that our planners have started using deficit financing as the main source of funds for meeting our plan e,penditure# It should be noticed% that over the five year plan period since I plan there has been an increasing reliance on deficit financing that the peak is found during the 5II Plan# 9ith consistent efforts% the planners are hoping to bring do)n this :uantum of deficit financing to around 's# BL%LLL crores during the 5III Plan# 9hether this is going to be achieved or not can be found out only in future# $A E0isten$e of -#$, mone% &

6ne of the reasons for the e,istence of too much money supply in the economy is the circulation of black money in -the economy in very large :uantity# &here is no reliable estimate of the e,tent of black money in circulation in India# 2ccording to one estimate the :uantum is about the same si/e as that of the legal tender money# &he large scale ta, evasion% ta, avoidance% black marketing% hoarding% corruption% buying and selling of real estate in the urban centers% etc#% are the reasons for the e,istence of black money# 9hile the source of this type of money cannot be easily found out% it is very difficult to bring to book those )ho are indulging in such illegal activity# 9ith uncontrollable volume of black money in circulation% the price level continues to rise% and any measure to control the price )ill not be effective# So inflation )ill continue to remain in the economy# +A Po.u-#tion e0.-osion &

Ever since independence the gro)th of population has eaten a)ay all the fruits of development# 9ith the annual rate of population increase hovering above B per cent% the scarcity for foodstuffs and essential commodities )ill persist# 2s a result the prices continue to spiral up inspite of efforts to check the price level# Basically the si/e of population )ill )ork on @he demand forces and so the available :uantity of output is proved to be inade:uate al)ays# 2s a result the prices continue to soar#

THE COST1PUSH FACTORS CAUSED INFLATION IN INDIA" &here are factors )hich act on the cost of production# &hese factors push the cost up)ards and once the cost of production is high% the producers and manufacturers have to raise the price to recover the cost of production# 2s a result the price level )ill go up# &here are several reasons for the operation of the cost-push factors# &hey are0 #" Err#ti$ f-u$tu#tions in t/e su..-% of (oo+s

In Indian situation% as agriculture is a gamble )ith the monsoon% die food production depends on the successful monsoon# E,cept a fe) years% there had been failure of monsoon# &he shortage in agricultural output affects the supply of not only the food grains but also the ra) materials to agro-based industries# 2dded to this are the po)er shortage% fuel shortage% labour problems% strikes and lockouts% transport bottlenecks% etc#% &he end result is that both the agriculturists and the industrialists e,perience rise in cost of production# &hey recover this by fi,ing a higher price for the finished product &he position is )orsened by the operations of the black marketers% smugglers% hoarderers% middlemen and others#

"

Im.osition of /e#v% t#0es

&a,ation in India is itself a reason for the inflationary situation# &here has been all-round heavy ta,ation on individuals% corporate bodies as )ell as commodities# 9ith higher ta,es% the cost of production only increases leading to rise in price# 9henever a fresh ta, is imposed% the manufacturers simply pass this on to the consumers by raising the price more than the amount of ta,# 2dded to this is the heavy allocation of funds by the government to public sector )hich added a precious little to the coffers of the government# "onsidering the investment in the public sector units% the return from them is meager that even the available funds are fritter a)ay that the government simply imposes ne) levies to augment funds# &his in turn affects the cost and the price# $" A+ministere+ .ri$es

In a socialist economy like ours% the market forces are intervened by the government in terms of administered price policy# 2s per this policy the government stipulates the minimum price for most of the essential commodities and ra) materials# For e,ample the rail)ays have been revising their freight rate and passenger fare that the cost of transportation is going up adding significantly to the cost of production and in turn the price level# In the case of steel% cement% coal% etc#% the government fi,es a higher price )hich inflates the cost of production in almost every sector indirectly contributing to the inflationary spiral# +" Risin( oi- .ri$e

&he heavy import bill on petroleum crude itself makes a significant addition to our price level# &he international price has been going up and to meet the import commitment% the government raises the internal price of petrol% diesel and petroleum products# 6ne argument given for the stiff rise in the price of these products is that it )ould discourage the consumption of these products# But the increasing sale of t)o )heelers% three )heelers% cars% trucks and !orries prove that there has infact been an increasing demand for oil# Further the ma4or consumer of oil is government# 2s a result the overall rise in price cannot be controlled )ith any measure# 2ny change in international oil price immediately affects the domestic price of oil# For instance in AKIL alone% the oil price )ent up by ACL per cent in the international market follo)ed suit by the domestic price# &he gulf surcharge )hich )as imposed also caused the rise in price of petroleum products# 6n the )hole the fuel price adds fuel to fire# METHODS OF CONTROLLIN7 INFLATION Inflation has to be controlled% other)ise the e,tent of damage done to the economy )ill be something substantial and the economy )ould take a long time to recover from the effects of inflation# In this direction of control of inflation% the follo)ing are the theoretical measures available# &hese measures could be classified into three groups vi/#% A# +onetary measures% B# Fiscal measures and C# 6ther measures# I" MONETARY MEASURES &

+onetary measures are steps taken by the "entral bank of a country as the head of the monetary system# &hese measures are usually refereed to as the% :uantitative credit controls and :ualitative credit

controls# &he former include bank rate% open market operations and the variable reserve ratio# &he% latter include margin re:uirements% moral suasion% direct action% control through directives% "onsumer credit regulation or rationing% publicity% etc# #A ?u#ntit#tive $re+it $ontro-s 0 Bank rate is the first% measure to curb credit creation activity of the commercial banks% as during inflationary period the volume of money supply has to be reduced# Bank rate is the rate at )hich the central bank of a country re-discounts the bills already discounted by the commercial banks# 9hen the central bank )ants to control credit creation by commercial banks% it )ould simply increase the bank rate# "orrespondingly the commercial banks )ould increase the discount rate )hich acts as a disincentive for the businessmen and others to approach the commercial banks for discounting their bills# 7o)ever% the success of this policy depends on the cooperation of the commercial banks# 6pen market operations are another :uantitative credit control measure# In this% the central bank )ould buy or sell securities in the open market )hich are sold or purchased by the commercial banks for cash# During inflationary situation% the central bank )ould sell securitiesP in the open market% and )hen the commercial banks purchase them% for cash then capacity of the commercial banks to create credit )ill be very much restricted 9ith less credit created% the money supply in the economy )ill come do)n bringing do)n the pressure of inflation# &he third0 policy is variable cash reserve ration# 2s per statute% every commercial bank should maintain a certain percentage of its total deposits in terms of cash reserve )ith the central bank# &he percentage of reserve to be maintained% called as cash reserve ratio% is determined by the central bank# By increasing the cash reserve re:uirement% the

central bank can reduce the cash available )ith the commercial hanks thereby controlling their capacity to create credit# A ?u#-it#tive $re+it $ontro-s 0 Mualitative credit-controls aim at channelising the available funds in the most productive uses or applications# In terms of various measures the central bank can govern the credit policies of the commercial banks# &he first of these control measures is the margin re:uirements# 2ccording to this policy% the central bank specifies the amount of margin that each commercial bank should maintain )hile lending on securities to the common public# By increasing the margin re:uirements% the central bank can discourage borro)ings on certain securities# If the central bank )ants to help the priority sector it can accordingly instruct the commercial banks to maintain a lo)er margin on securities offered for borro)ing for priority purposes# +oral suasion refers to the persuasive techni:ue adopted by the central bank )ith P the commercial banks in making the later understand the need to pursue a particular type of credit control policy# &hough the central bank is empo)ered )ith statutory po)ers to regulate the commercial banks% yet the central bank believes persuasive policies rather than using its statutory authority# "entral bank can also issue directives to the commercial banks outlining the details of the ob4ectives of the various credit control policies% the need to follo) them% the e,pected result of them% etc# &his )ill help the commercial banks to understand and co-operate )ith the central bank in times of financial crisis# "entral bank also regulates the flo) of credit to)ards consumer re:uirements# &his called as regulation of consumer credit &he central bank can even specify the types of consumer credit )hich could be encouraged and those that could be discouraged# 6n receipt of directions from

the central bank% the commercial bank act accordingly% either by liberali/ing consumer credit or restricting consumer credit# Direct action may also be taken by the central bank to control the commercial banks# &his can range bet)een issuing )arning to cancellation of license# But in practice central bank never resorts to this measure as all the commercial banks invariably follo) the policies of the central bank#

'"

FISCAL MEASURES

By fiscal measures )e refer to the steps taken by the head of the fiscal system vi/#% the government# &he fiscal measures include # a) government e,penditure b) ta,ation c) public borro)ing and d) debt management #A e) 6ver valuation of currency#

7overnment e0.en+iture 0 &his is also kno)n as public

e,penditure# It is )ell kno)n that in a socialist country like India% the government undertakes several activities ranging from defence to )elfare activities# 2ll these mean that government pumps in a lot of money into the economy )hich ultimately adds to the money supply and fuel inflation# During the period of inflation% the money supply is high% the purchasing po)er of the people is also high and so the private consumption and investment e,penditures )ill be of the high order# If the government also continues to invest heavily then the inflationary spiral )ill be )orsening# &o avoid this the government should slo)ly reduce its e,penditure during inflation so that at least to that e,tent% the money supply in the economy )ill be reduced# But in practice such a policy is not at all possible as )ith ever rising prices% the poor and do)ntrodden needs protection from the inflation and this )ill be lost if the government reduces its e,penditure# 7o)ever% this is

considered as one of the measures to control inflation by combining it )ith the other measures# A T#0#tion& &a,ation is a )ell conceived measure against

inflation# 8nder this the government )ill be able to achieve t)o purposes at the same time# Firstly% it )ill be able to augment the revenue of the government and secondly it )ill be able to curb un)anted consumption e,penditure of the people by bringing do)n their purchasing po)er and disposable income# During inflation the government should increase the ta,es so that it can achieve both the purposes mentioned above# Further the government can also design its ta, policy in such a )ay that the la, burden is more on the rich and less on the poor# &his is achieved by imposing heavy direct ta,es )hich )ill directly affect the rich people# By imposing moderate indirect ta,es% the government )ill be able to collect more from those )ho spend more# &he rich as )ell as poor )ill be contributing to)ards the e,che:uer# 7o)ever% it is often said that imposition of indirect ta,es )ill only add to the increase in prices% especially )hen the producers shift the burden of ta, to the consumers# But the ob4ect of indirect ta,es is to curb the consumption of un)anted commodities# 7ence% )ith the direct and indirect a,es% the government should be in a position to redistribute the income in the economy )hich is a must during inflationary period# $A Pu -i$ of orro2in( 0 Public borro)ing or public debt is one more controlling inflation# 2ccording to this policy% the

method

government aims at siphoning-off the e,cess purchasing po)er in the economy by encouraging people to lead to the government# &his can be done either making lending voluntary or compulsory# 8nder the voluntary lending% the government educates the people of the need to lend to the government especially during the inflationary period#

7o)ever% sometimes compulsory lending is to be resorted to because% the people may not respond to the calls of the government# "ompulsory lending can be i different forms# But it is often said that such compulsory lending )ill affect only the salaried class and not the rich people# In that case% the salaried class is )orst affected during inflation and making them to surrender )hatever little surplus that they have )ith them amounts to double ta,ing them# Further compulsory saving or lending may also encourage people to find )ays of evading Such policies# In general% economists have favored only the voluntary saving or lending by the public# d) De t m#n#(ement & Debt management refers to the )ay in

)hich the % government deals )ith the retirement or repayment of the public debt# &his has to be done in such a )ay that brings do)n the money supply in the economy# So )hen there is inflation% the government should retire or refund the debt to the commercial banks by encashing the securities only out of the budget surplus# &his )ill help to curb the commercial banks. ability to create credit# But a ma4or problem )ith this policy is that during inflation budgetary surplus is not so easily created# 2lternatively% the central bank can retire the debt by sales of bank ineligible bonds to non-bank investors like insurance companies% savings bank individuals% etc# &his )ill take a)ay the spend-able money from the public thereby reducing the inflationary pressure# But even this method can fail as the non-bank investors can al)ays refuse to e,change the spend-able money for these bonds# eA Overv#-u#tion of $urren$% & &his is another method used to

control inflationary pressure in an economy# 2ccording to this method% the value of the currency is revised up)ards so that e,ports )ill be costlier and imports cheaper# &his )ill help in increasing the stock of domestically produced gods and encourage more imports# &his )ill

mean the availability of goods int he country )ill increase ;hereby the price level of them )ill have to come do)n# But this measure has to be cautiously adopted as it carries )ith it seeds of deflation# *" OTHER MEASURES &

2part from the measures discussed above% the government can also implement the follo)ing policies 0 a) In$re#se out.ut & &his policy may appear to be very easy one

but in practice this involves several difficulties# &o make the producers increase their output% they should be assured of their profit as other)ise they )ill not be inclined to increase the output# Further the increase in output can be brought about by fuller utili/ation of the e,isting resources% prevention and settlement of industrial disputes% updating the technology% lending liberally to e,pansion and ne) establishment purposes of the industry% maintaining industrial peace by activating all the machineries of settlement of industrial disputes% etc# +ere increase in output )ill not bring do)n the inflation% it has to be follo)ed by increased availability of products for the consumers# &his calls for curbing and punishing black marketing% hoarding and smuggling activities so that the benefits of increased production )ill be en4oyed by the economy# b) 6#(e .o-i$% & &his is another important control measure# &his

is often misunderstood as )age free/e policy# &his means that the government should not stand in the )age increase sanctioned to the employees if their productivity is very high# encourage the employees reduce their e,penditure# to &he government can make voluntary contributions and

Simultaneously% through other measures%

the government should bring do)n the cost of living so that the

laborers )ill not demand higher )ages# 9age policy cannot be effective unless it is coupled )ith several other policies# c) Pri$e $ontro-s #n+ r#tionin(& &his is one of the most popular 8nder this

policies applied in every country )hile they face inflation#

measure% the government should prevent escalation in prices of essential commodities and control the price of other commodities# By resorting to retail and )holesale price maintenance policies the government can strive to bring do)n the price level# &his calls for buffer stock operations as )ell as efficient demand and supply management of commodities )hich the country is badly in need of# &his is achieved by introducing rationing of essential commodities through )ell designed public distribution mechanism# 2ll this mean% enormous efforts are re:uired on the part of the government apart from the )illing co-operation from the traders and businessmen# In practice it is found that price control and rationing are very difficult to be implemented during inflationary period due to the e,ploitative and monopolistic attitude of the businessmen and traders# 7o)ever% )ith stringent penal measures the government can make this policy effective in controlling inflation in a country#

Revie2 Buestions A# B# C# E# F# G# H# I# K# 2ssess the need for government intervention in an economy# Discuss the role of public sector in India "omment )hether India is an under developed country Discuss the features of Indian population E,amine the nature of population problem in India and the effects of population gro)th on Indian economic development 6utline the population policy of the government since independence 2nalyse the Balance of payments position since AKKA and critically evaluate the (e) e,port-import policy AKKB-AKKH# Discuss the structural composition of national income in India# E,plain the limitations of (ational income estimation in India# Distinguish bet)een absolute and relative poverty# Discuss the concept of Poverty line in Indian conte,t# 9hat are the causes for poverty in India and evaluate the various poverty eradication programme# AL# AA# AB# AC# 2nalyse Problem of unemployment in India# Discuss the problem of rural unemployment and the measures to solve this problem# E,amine the inflationary trend in India and discuss the steps taken by the government to control inflation in India# Discuss the causes for inflation in India and suggest measures to arrest inflation#

CHAPTER III
$overnment controls and regulations - (egulating economic and industrial activities- Industrial Licensing policyontrol of monopolies apital issues control - $overnment control over FDI and collaboration - Distribution and price control - )e* E+I, policy - Foreign e-change flo* regulation -%echnology transfer 7OVERNMENT CONTROLS AND RE7ULATIONS Since independence% $overnment of India introduced a number of controls and regulations so as to lead the country on the path of progress# 6riginally these controls and regulations )ere considered to be a part of development strategy# But subse:uently% they emerged as the need of the society# 9hile the AKEI Industrial policy resolution did not lay much emphasis on the controls and regulations% in AKFA the government brought in the Industrial ;Development and 'egulations< 2ct# &his 2ct made licensing a part of industrial development# &he ob4ectives of licensing )ere stated as0 Facilitate desired pattern of industrial development Provide for development of back)ard regions &o encourage broad based o)nership of industries &o prevent concentration of po)er in the hands of a fe) &o offer protective environment for the small scale &o regulate inflo) of foreign capital and technology &o provide for the use of appropriate technology &o eliminate industrial pollution &o encourage more of e,ports and adopt import measures substitution industries

 9ith

&o ensure conservation of foreign e,change resources and to ensure proper allocation of the e,change resources &o achieve high gro)th in employment opportunities the above ob4ectives% the government passed the 2ct#

"onse:uent to this 2ct% the follo)ing categories of industries )ere re:uired to obtain license0 (e) undertaking +anufacture of ne) article E,pansion of e,isting capacity substantially "ontinuation of certain category of business in certain "hanging the location of the industry areas

&his licensing policy continued for a long time till AKKA Industrial policy adopted the policy of liberali/ation# &he licensing policy has resulted in a number of malpractices among the large industrial houses# &his )as brought to light by the Dutt "ommittee report in AKGH &he revelations of the Dutt committee led to the enactment of +onopolies and 'estrictive &rade Practices 2ct in AKHL# In AKKA% the government changed the contents of the !icensing policy and the important provisions are spelt out hereunder# &he Dutt committee identified BL larger industrial houses% FC large industrial# houses and GL large independent concerns through its study# Some of the important findings of the "ommittee are given belo)0 A# a< HC large houses accounted for FG N of the total proposed investment on machinery by the entire private corporate sector

b<

GLN of the value of import of capital goods by the entire

private corporate sector )as accounted for by these HC large industrial houses c< BL larger industrial houses accounted for EA N in the total proposed investment on machinery and for EL N in the total approved import of capital goods# B# &he percentage of unimplemented issued licenses )as the highest for the large independent companies and other foreign companies# &he largest number of unimplemented licenses )as for the house of Birlas ;AGI< follo)ed by &atas ;EAD# &he Birlas )ere also leading on charges of preemption# C# &he private sector )as allo)ed to participate in areas reserved e,clusively for the public sector% E# &he four industrially advanced states namely +aharashtra% 9est Bengal% $u4arat and &amilandu )ere able to ac:uire GB N of the DLtal licenses issued# &his )as against the spirit of balanced regional development# F# &here )as no indication as to )hich industries could be treated as specifically reserved for the small and medium sector# G# Foreign collaboration )as allo)ed even in non-essential

consumer goods# &he "ommittee observed that0 Was a matter of fact% by permitting foreign collaborations sometimes in multiple numbers% and thus permitting capacities to be created% an inevitable demand for import of various components and ra) materials for feeding plants is set up# &his% combined )ith the allocation of other scarce materials% helps to satisfy the demand

of the higher income groups% but it is not necessarily a contribution to economic gro)th nor is it the best )ay of utili/ing the scarce foreign e,change resources of the country# H# Financial institutions sho)ed a distinct preference to the large industrial houses over the public sector# 2ll these )ould help to 4udge that industrial licensing system failed to achieve the ob4ectives of planned economic development as )ell as of preventing concentration of economic po)er# &he Dutt committee made the follo)ing recommendations &o set up a core sector consisting of industries of basic% critical and strategic importance to the economy &o adopt the concept of >Doint Sector? or undertakings )here both the public and private sectors acted as partners in a pro4ect# &he Doint Sector could have collaborations )ith foreign concerns as )ell as )ith the private sector in India &o change the basis of financial assistance by nationali/ed banks and public sector financial institutions i#e#% a)ay from the large industrial houses &he government to have the right to convert its loans and debentures into e:uity &he middle sector to be kept open for ne) entrepreneurs

INDUSTRIAL LICENSIN7 POLICY &o achieve the ob4ectives of the strategy of the industrial sector in the KL?s a number of changes in the system of industrial approvals have been brought about# &he domestic producers )ill be able to )ithstand

the competition in the country as )ell as abroad only through procedural reforms# 7ence% the role of government )ill be changed from that of e,ercising control to one of providing help and guidance# "hanges in the policy to)ards public sector in the last fe) years have clearly indicated that private sector enterprises )ill be allo)ed to compete in many areas hitherto earmarked for public sector# "onse:uently% the ne) policy has completely reclassified the Indian industries as belo)0 a) Eight industries have been completely reserved for the public sector# &hey are0 i# 2rms and ammunition and allied items of defence e:uipment% defence aircraft and )arships% ii# atomic energy% iii# coal and lignite% iv# mineral oils% v# mining of iron ore% manganese ore% chrome ore% gypsum% sulphur% gold and diamond% vi# mining of copper% lead% /inc% tin% molybdenum and )olfram% vii# mineral specified in Schedule to the 2tomic Energy 6rder% AKFC and viii# rail)ay transport b) Eighteen industries have been listed as industries )hich re:uire compulsory licensing# 7o)ever% this provision )ould not apply in respect of the small scale units taking up the manufacture of any of the items reserved for e,clusive manufacturing in small scale sector# "ompulsory licensing )ould be re:uired in the follo)ing industries0 i# coal and lignite% ii# petroleum other than crude and its distillation products% iii# distillation and bre)ing of alcoholic drinks% iv# sugar% v# animal fats and oils% vi#% cigars and cigarettes of tobacco and manufactured tobacco substitutes% vii# asbestos and asbestos based products% viii# ply)ood% decorative veneers and other )ood based products such as particle board%

medium density fibre board% block board% i,# ra)J hides and skins% leather% chamois leather and patent leather% ,# tanned or dressed fur skins% ,i# motor cars% ,ii# paper and ne)sprint e,cept bagasse based units% ,iii# electronic aerospace and defence e:uipment of all types% ,iv# industrial e,plosives% ,v# ha/ardous chemicals% ,vi# drugs and pharmaceutical ,vii# entertainment electronics and ,viii# )hite goods like domestic refrigerators# 2s regards the provisions of the industrial licensing policy% i) Industrial licensing has been completely abolished for all pro4ects e,cept for the industries classified above% i#e#% the area reserved for public sector %and the list of AI industries and the areas reserved for small scale industries )ill continue# ii) Public sector )ill continue to maintain monopoly in industries coming under the areas of security and strategic considerations# iii) In pro4ects )here imported capital goods are re:uired% automatic clearance )ill be given provided the foreign e,change availability is ensured through foreign e:uity# 6r alternatively if the value of imported goods does AALA e,ceed BFN of the total value of plant and e:uipment sub4ect to the ceiling of 's# B crores% automatic clearance )ill be given# 7o)ever% this )ould come into effect only from 2pril% AKKB in vie) of the current balance of payments position# In all the other cases% the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development )ill be re:uired#

iv)

E,cept the list of industries re:uiring compulsory licensing% the other industries )ill not re:uire any approval from the "entral government for their location in ares other than cities of more than one million population# In cities )ith more than one million population% non-polluting industries like electronics% computer soft)are and printing )ill be permitted outside BF kms# of the periphery# If such cities re:uire industrial re-generation policies )ill be made more fle,ible# 7o)ever% the e,isting /oning and land use regulation and environmental legislation )ill continue to regulate industrial locations# 2ll efforts )ill be made through incentives and other methods like infrastructural development% to disperse the industry to rural and back)ard areas#

v)

(e) Broad banding facility )ill be provided to the e,isting units so as to enable them to produce any article )ithout additional investment# &he e,emption from licensing )ill be applicable to all substantial e,pansion of e,isting units#

vi)

&he mandatory convertibility clause )ill no longer be applicable for term loans from the financial institutions for ne) pro4ects#

vii)

2 very significant step is to abolish all the e,isting registration schemes#

viii)

In case of substantial e,pansions and ne) pro4ects% it is enough if the entrepreneurs file the information memorandum#

i,)

&he

list

of

industries

re:uiring

compulsory of

licensing

and

industries

for

automatic

approval

foreign

technology

agreements )ill be notified in the Indian &rade "lassification @7armoni/ed system)#

2s a result of the )ide changes in the !icensing policy% the government also brought about changes in the +'&P 2ct# &he follo)ing is the summary of the changes effected in that 2ct# MRTP ACT 2 ma4or deviant of the ne) policy is in respect of the +'&P 2ct# &he ne) policy aim at removing the unnecessary bureaucratic controls and allo) the industries to breathe in an atmosphere of freedom# &he efforts of the government in the past intervening in the investment decisions of the +'&P companiesP have been proved to be counterproductive# 7ence% the ne)ly empo)ered +'&P "ommission )ill en:uire into complaints received from individual consumers or classes of consumers# &he follo)ing is the essence of the provisions in the ne) policy regarding +'&P 2ct# i# &he limits of assets in respect of the +'&P companies and dominant undertakings have been removed and suitable amendment in the +'&P 2ct )ill be made in due course# ii# &he need to obtain the prior approval of the central

government for establishing ne) units% e,pansion of e,isting units% merger% amalgamation and take over as )ell as appointment of Directors have all been removed# iii# &he +'&P 2ct )ill be used only for controlling and regulating monopolistic% restrictive and unfair tarde practices# 2s a follo)up the +'&P "ommission )ill be authori/ed to in:uire suo moto or complaints lodged by individual consumers or classes

of consumers regarding monopolistic% restrictive and unfair trade practices# iv# 2ll the necessary amendments )ill be made in the +'&P 2ct to give more punitive and compensatory po)ers to the +'&P "ommission# Contro- of $#.it#- issues Since independence% capital issues in India have gone through different types of control mechanism# Initially control of Stock e,changes )as contemplated and accordingly Securities "ontracts ;'egulation< 2ct )as passed in AKFG# It aimed at centrali/ation of control% regulation of the stock e,changes and the transactions entered therein% the avoidance of illegitimate and manipulative speculation and the protection of genuine investors% &he 2ct applied to all transactions )hether for)ard or ready and it prohibited or regulated factors% )hich facilitated speculation in stock e,changes# But the 2ct could not abolish for)ard trading )hich ultimately caused erratic behaviour of the Stock e,change# &he government basically depended on t)o institutions to control the capital market vi/#% the "ontroller of "apital Issues ;""I< and the Directorate of Stock E,changes# ""I gave consent to the issue of non-government companies consisting of e:uity and preference shares% partly and fully convertible debentures% bonus shares and right shares# It also gave consent to the issue of bonds of public sector undertakings# But on the recommendations of the (arasimham committee% the government abolished the office of ""I and freed the primary capitol market from the government regulations# T/e re$ommen+#tions of N#r#sim/#m Committee J II on fin#n$i#- se$tor reforms

&he main recommendations of the (arasimham committee are0 A# B# C# E# F# Phased reduction of Statutory !i:uidity 'atio to BF N over a period of five years Progressive reduction in "ash 'eserve 'atio Phasing out of directed credit programs and redefinition of the priority sector# Deregulation of interest rates so as to reflect emerging market conditions Stipulation of minimum capital ade:uacy ratio of EN to risk )eighted assets by +arch AKKC% IN by +arch AKKG and IN by those banks having international operations by +arch% AKKE# G# 2doption of uniform accounting practices in regard to income recognition% asset classification and provisioning against bad and doubtful debts# H# I# K# Imparting transparency to bank balance sheets and making full disclosures Setting up of special tribunals to speed up the process of recovery of loans Setting up of 2sset 'econstruction Fund to lake over from banks a portion of their bad and doubtful advances at a discount AL# 'estructuring of the Banking system so as to have three or four large banks )hich could become international in character% I to AL national banks and local banks confined to specific regions and rural banks including ''Bs confining to rural areas# AA# Setting up one or more rural banking subsidiaries by public sector banks AB# Permitting ''Bs to engage in all types of Banking business AC# 2bolition of branch licensing

AE# !iberalising the policy )ith regard to allo)ing foreign banks to open offices in India AF# 'ationalisation of foreign operations of Indian banks AG# $iving freedom to individual banks to recruit officers AH# Inspection by supervisory authorities based essentially on the internal audit and inspection reports AI# Ending duality of control over Banking system by Banking division and 'BI AK# 2 separate authority for supervision of banks and financial institutions )hich )ould be a semi-autonomous body under 'BI BL# 2 revised procedure for selection of "hief E,ecutives and Directors on Boards of Public Sector banks BA# Segregation of direct lending functions of IDBI to a separate institution BB# 6btaining resources from the market on competitive terms by DFIS BC# Speedy liberali/ation of capital market by removing restrictions on premia dispensing )ith prior government approval etc# BE# Supervision enactment of of merchant separate banks% legislation mutual funds% leasing companies% etc#% by separate agency to be set up by 'BI and providing appropriate frame)ork for mutual funds and laying do)n prudential norms for such institutions# 2fter the abolition of ""I% the government set up the Securities and E,change Board of India ;SEBI< in AKII )hich became a statutory body since AKKB# SEBI has the follo)ing ob4ectives0 'egulating the business in stock markets and other securities market 'egistering and regulating the )orking of the stock brokers% sub-brokers% share transfer agents% bankers to an issue%

trustees of trust deeds% registrars to an issue% merchant bankers% bankers to an issue% trustees of trust deeds% registrars to an issue% merchant bankers% under)riters% portfolio managers and other intermediaries associated )ith the securities market 'egistering and regulating the )orking of collective investment schemes including mutual funds Promoting and regulating the self regulatory organi/ations Prohibiting fraudulent and unfair trade practices relating to securities market Promoting investors education and training of intermediaries of Securities market Prohibiting inside trading in Securities 'egulating substantial ac:uisition of shares and take over of companies Performing such functions and e,ercising such po)ers under the provisions of "apital Issues ;"ontrol< 2ct% AKEH% and Securities "ontract ;'egulation< 2ct% AKFG% as may be delegated to it by the "entral government Since its inception% SEBI has achieved the follo)ing0 guidelines to suing companies% regulation of portfolio management services% regulation of mutual funds% action for delays in transfers and refunds% action for delays in transfers and refunds% issue of guidelines to protect investors% ensuring proper functioning of the Stock e,changes% regulation of foreign institutional investors and periodical revie) of the )orking of the capital market# FOREI7N CAPITAL AND THE POLICY OF 7OVERNMENT

RE7ARDIN7 THE USE OF FOREI7N CAPITAL

Foreign capital or investment has become significant part of sources of funding for various pro4ects in every country# &his source of funding has received the attention of both the government as )ell as the corporate sector that there has been increasing reliance on this source for planning and e,ecution of pro4ects by the government as )ell as the corporate sector# Foreign capital can come into a country in different forms# !et us first understand these forms of foreign capital before discussing the need for foreign capital# Forms of forei(n $#.it#-& @a) Direct entrepreneurial investment0 In this form of foreign capital% the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries# For instance an 2merican business group may invest in a ne) pro4ect in India directly and start its o)n affiliate or branch or even a subsidiary# Sometimes% the investors abroad may participate in the stocks or share capital of Indian companies# 9henever the Indian companies go for public issue of shares or debentures% the foreign investors may respond by participating in such public issue# &his is also called foreign capital# In the past e,ternal business group used to invest in ne) companies and that form of foreign capital and used to flo) much% is but no)-a-days more participation in the e:uity or debenture of companies by foreign investors non-resident Indians becoming predominant# @b) Foreign collaboration0 Foreign collaboration is another form of foreign capital# 8nder this a domestic company may 4oin )ith

the foreign company% mostly the reputed one in the industry% and start )ith the 4oint operation in India# 8sually this type of effort is undertaken to get the state of the artA or the latest technology available abroad in the Indian companies# Foreign collaboration may be only for technology or for funding or both# 2ccordingly )e may have technical collaboration% financial collaboration or mi,ed collaboration# &he collaboration may be bet)een private parties or companies in the t)o countries% or the foreign company )ith Indian $overnment or bet)een the foreign government and the Indian government# @c) Inter-government loans0 &his type of foreign capital refers to the loans granted by the government of one country to that of the other for a specific purpose or for general economic reconstruction# For e,ample under the +arshall plan% 8S2 gave loans to various European governments to help them in the reconstruction of their )ar-shattered economies# &he developed countries also grant loans and grants to the under developed countries to help them in economic development programme# @d) !oans from international institutions0 &his source of foreign capital has emerged as a very important source in the recent years# +ost of the developing countries get si/eable :uantum of funds from this source# International institutions like International +onetary Fund @I+F)% International Bank for 'econstruction and Development @IB'D)% 2sian Development Bank% 2id India "onsortium% and others have all become very important providers of funds for developing countries# &he role of I+F and IB'D in tiding over the balance of payment difficulties and e,ecution of po)er and irrigation pro4ects%

cannot be e,aggerated# &he 2sian Development% Bank has also been a ma4or provider of funds for development in Indian case# @e) E,ternal commercial borro)ing0 2nother source of foreign capital is the borro)ing in the capital market of other countries# &his can be done either directly or indirectly by the government# In both )ays% the inter-government understanding and political relationship apart from the domestic investment climate are all important# Such capital is normally used for international trade purposes and specifically for e,port credits# 2gencies like 8S E*I+ bank% Dapanese E*I+ bank% E"$" of 81% etc#% are all playing vital role in this segment of foreign capital# Nee+ for forei(n $#.it#-& (o country can be self-sufficient today# Even developed countries have to depend on the developing countries for certain purposes and also for marketing their products# Further the specialisation in finance has become )orld )ide% that every investor )ants to ma,imise return on his investments and minimi/e the risk# &his is applicable both to government investment as )ell as corporate and private investments# &hese are days of multi-national corporations and giants that closed economic system can no longer be realistic# In this situation% flo) of capital from one country to another in different forms takes place for several reasons# From the vie) point of a country% there is a need to e,ecute their plans for economic development# Specifically in Indian case% the need for foreign capital cannot be e,aggerated# &his could be e,plained in terms of the points given belo)0

@a)

&he availability of funds for e,ecution of plans and achieve rapid economic development determine the ob4ective of such plans# Domestic availability of funds% especially in the developing countries is becoming difficult )ith the government in these countries undertaking increasing responsibility for the )elfare activities# 7ence% these countries have to tap the source lying outside to get the funds re:uired for their development purposes# In this respect the foreign capital should be attracted at any cost and in any form#

@b)

Domestic investors and managers of funds available% may not have the re:uired e,pertise or entrepreneurship in identifying the right and profitable avenues for investment# &his may be due to lack of e,perience or inability to identify opportunities# 9hen foreign capital is allo)ed to flo)% the benefits of the e,perience of the foreign technicians% finance specialists% production specialists% marketing )i/ards% etc#% are made available to the domestic ventures# &his )ill improve the efficiency of the domestic pro4ects )hich is directly benefitting the country# 6n this count foreign capital should be )elcomed#

@c)

6ne of the basic re:uirements for achieving rapid economic development is mobilising savings# Savings depend upon income and income depends on the level of economic activity# 7ence% any attempt to increase savings should start )ith attempts for increasing income )hich necessitates increasing investment If the domestic rate of savings and the purpose for )hich savings is used is unproductive% then efforts should be made to obtain the necessary investment from abroad# &his )ould accelerate economic development leading to income generation and increased savings# 7ence% in the process of

economic development foreign capital becomes an essential ingredient# @d) Foreign capital is necessary for one more reason# In every developing country% the economic development re:uires investment in certain pro4ects relating to infrastructural

development% basic industries% etc#% )hich are long gestation pro4ects% lo) income yielding% but accelerating economic development# (o private investment or corporate investment in these pro4ects )ill come about in the early stage of development either because the investors have no inclination or because the capital market in such a situation is not developed# But the government has to initiate development activities% for )hich foreign capital becomes essential# 6nce the >economic engine? is activated% in due course% the economic development )ill start taking place# 8ntil then foreign capital is needed# @e) Foreign capital can be in different forms as has been already e,plained# "ountries like India having high rate of savings% but lo) investment in productive pro4ects% )ith large human force but )ith less employment opportunities% have to seek technical kno)-ho) and technology available abroad# &hese can be slightly modified to suit the domestic conditions so that the production can take place in large scale% cost can be minimi/ed and employment opportunities can be generated in large scale# Further there are areas like atomic energy% automobile industry% management% marketing and others )here )e do not have the best of e,perts or e,pertise# &he best available talent or technology available abroad can be imported so that )e can improve our strength in these areas and become a force to

reckon )ith# &his )ill also help us to achieve higher level of economic development# @f) 6ne of the methods of achieving higher levels of development is through mutual co-operation )ith other countries through bilateral or multi-lateral agreements )hich provide e,cellent scope for transfer of technology% etc#% bet)een countries# Political )isdom )arrants use of such agreements for mutual benefits )hich leads to flo) of foreign capital from one country to another# Pro -ems of forei(n $#.it#-& So far )e have discussed the need for and role of foreign capital in Indian economic development# !et us no) study the problems that are associated )ith the foreign capital# A# &he foreign investors are choosy in e,tending their funds to pro4ects floated in our country# It is found that foreign capital flo)s easily to)ards the private sector pro4ects but )ith a lot of hesitation to the pro4ects of public sector# 9hile there is 4ustification for hesitant flo) to)ards public sector% our government has been giving pride of place only to pubic sector in achieving rapid economic development 7ence% it is clear that there is no lack of investment opportunities% but there is difference in ideology# &herefore% flo) of foreign capital is not uniform to all sectors# &his trend has to be observed so that corrective measures can be taken to attract more foreign capital to public sector pro4ects#

B#

2nother serious problem of foreign capital is the domestic technology is simply duplicated due to over indulgence and dependence on e,ternal assistance# &here are several areas )here India has achieved e,cellence as in electronics industry% but there are collaborations )ith foreign products in this field# Such duplication is in no )ay beneficial to the country# &his has to be corrected#

C#

6ne more e,perience is that under the prete,t cf transferring technology% technology foreign in countries 2part simply from Dump their obsolete India# importing inappropriate

technology% there are also situations )hen the technology not re:uired is imported# Further% there are tie-up agreements )ith such imported technology )hich are unfavourable to India# But such agreements have been approved much against the interest of our domestic manufacturers and technologists# E# 6ften me complaint about foreign capital is the restrictive conditions imposed by the e,porting country# It may be relate to spares or technicians or repatriation of profits% etc# 2n increasing number of such agreements )ould only be against our o)n interest F# 7eavy remittance of profits% dividends% etc#% is yet another problem under foreign capital# In Indian e,perience% there )ere cases )hen the inflo) of foreign capital )as less than the remittance of profits% the classic e,amples being ESS6 and "2!&E*% the t)o oil companies of 8S origin# Such remittances cause severe strain on our already strained balance of payments and foreign e,change reserve position# Even if the agreement provides for such remittances% the country cannot afford to lose

the hard earned foreign e,change resources under this type of remittances# G# 6ne more conse:uence of foreign capital is that it causes serious balance of payments problem# 9hen foreign capital in different forms is permitted% )ith the preference of the foreign investors% the private sector is able to attract more than the public sector# 2s a result the private sector indulges in importing heavily their re:uirements )hich results in heavy outflo) of earned e,change reserves on the one hand and leads to balance of payments deficits on the other# Even if the government has to ultimately approve of such imports% yet the private sector is able to appease the officials through liaison officers and get the necessary approvals# H# 6ne of the essential conditions laid by the government )hile approving the foreign collaboration is that in due course there should be Indianisation of personnel# &his policy is easily defeated in practice# In the past under the provisions of Foreign E,change 'egulations 2ct% every foreign multinational company is made to dilute their o)nership to HEN and in case of branches of foreign companies their total holding should not e,ceed ELN# It is found that these foreign companies have very high profitability% as in the case of "olgate Palmolive )ith IKN of profit rate% are able to very easily raise capital from the Indian capital market# &heir shares are being :uoted at very high rate that they raise the necessary funds easily# &he shareholders of these companies indirectly support the company through political lobbying# &he Indianisation of personnel is easily bypassed as these companies retain the po)ers to appoint their o)n "hairmen and +anaging Directors# 6bviously even )ith a

holding of only BGN of the shares% these foreign companies have control over the companies easily by-passing the policy# 9henever the multinationals become Indian companies they stand to gain# So long they remain multinationals they are sub4ected to heavy ta,es# But once our Indianisation of Personnel policy is invoked% these multinationals become Indian companies and pay less ta,# 7ence% our policy is in no )ay affecting the foreign companies% in tact% the policy is turning out to be unfavourable to India itself 7overnment .o-i$%& Since independence% the government has been declaring its policy to)ards foreign capital of different types# &he policy declared in 2pril% AKEK has remained the main frame)ork for the subse:uent policies# &he salient features of the AKEK policy are0 @i) @ii) @iii) @iv) @v) Foreign capital )ill have the same treatment as given to domestic capital# &he investors )ill be allo)ed to remit the profits earned# &he o)nership and control of the foreign companies should in due course be in the hands of Indians# In case of take over of the undertaking% a fair and e:uitable compensation )ould be paid# In case a foreign company )ants to have control for some time% the government may e,amine this in each individual case before giving permission# &his policy in nut shell means that there )ill be no discrimination against the foreign companies or their investments in India# &his remained as the basic frame)ork of foreign policy all through# 9ith this policy% the government pursued its foreign policy making minor changes at times# Broadly )e may refer to three phases through )hich

our foreign policy relating to foreign capital and investments evolved# In the first phase )hich lasted from AKFA to AKGF% the government )as liberal in its attitude to)ards foreign capital# &his included concessions and incentives to foreign capital )hich helped us to achieve industrial development# &he second phase )hich started from AKGF% is a period in )hich the government )as very strict and imposed several restrictions and regulations# 6nce again in Phase III% starting from AKKA% a liberal policy is introduced# &he salient features of the latest policy to)ards foreign capital @AKKi) is given belo)0 Forei(n investments& Foreign investments carry )ith it the benefit of technology transfer% marketing e,pertise% modern managerial techni:ues and ne) possibilities for promotion of e,ports# 2s this re:uirement is felt in this )orld of industrial change and cooperation% the (e) Industrial Policy @(IP) has clearly contained the follo)ing provisions relating to foreign investments0 A# In high priority industries approval )ill be given for direct foreign investment upto FAN foreign e:uity and all the bottlenecks in this process )ill be removed# "learance in such cases )ill be given if the foreign e:uity covers the foreign e,change re:uirements for imported capital goods# &he necessary amendments to the FE'2 )ill be made# B# &he general policies governing the domestic units in regard to import of components% ra) materials and intermediate goods and payment of kno)ho) fees and royalties )ill also be applicable to the high priority industries in )hich foreign investment is limited to FAN 7o)ever% the payment of royalty

)ill be routed through the 'BI to enable it to monitor the outflo) of foreign e,change on payments are balanced by e,port earnings over period of time# C# 2ll the other foreign investments not included in the category A stated above )ill re:uire prior clearance# E# &rading companies primarily e,port oriented )ill also be permitted under the foreign e:uity proposals as indicated in A above# 7o)ever% the provisions of his e,port-import policy applicable to the domestic units )ill also be applicable to such trading companies# F# &o encourage substantial inflo) of foreign investment% a Special Empo)ered Board )ould be constituted# &his Board )ould negotiate )ith the large international firms and approve direct foreign investment in select areas# &his is e,pected to fetch foreign technology and open the industries in India to )ider )orld market# Such investments )ill be sub4ected to favourable treatment based on the merits irrespective of the rules% regulations and procedures in practice# 2s regards foreign technology agreement% a )elcome change in the outlook of the government is the realisation that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedures and policies# &he interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industriali/ation# 2s a result of this liberali/ation% automatic approval for technology agreements related to high priority industries )ill be made )ith respect to certain specific parameters# 6ther industries )hich can enter into such agreements

)ithout incurring the e,penditure of foreign e,change )ill also be e,tended liberal treatment# &he industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises# In due course this measure is e,pected to pave the )ay for e,change of superior technology from India )ith other countries# 9ith the overall liberali/ation% the competition )ill be high and it is e,pected that industries )ill invest much more in research and development activities# 1eeping in vie) all these e,pectations% the government has announced the follo)ing changes in regulation governing foreign technology agreement0 A# (o prior permission is needed for hiring foreign technicians% foreign testing of indigenously developed technologies# Such activities involving payments )ill be governed by the guideline of the 'BI and such payments can be made through blanket permits# B# 2utomatic permission )ill be given for foreign technology agreements% relating to the high priority industries# &he royalty payments through such agreements )ill be sub4ected to certain provisions# 8pto the payment of 's# A crore royalty )ill be at the rate of FN for domestic sales and IN for foreign sales or e,ports# 7o)ever% the total royalty payment should not e,ceed IN of the sales over a AL year period from the date of agreement or H year period from the date of commencement of production# C# In case of industries not covered in the high priority list automatic permission )ill be given for technology agreement provided it does not entail any foreign e,change payment commitment#

E#

In all the other cases% the general procedures in practice )ill be adhered to and such industries )ill re:uire specific approval#

Forei(n #ssist#n$e #n+ In+i#n five %e#r .-#ns& In the &able given belo) )e find that the e,ternal assistance is playing a vital role in the financing of our five year plans# 'ight from the I Five Oear Plan% )e find that in absolute terms the inflo) of foreign assistance is very much on the increase# 9hile it )as a modest figure of 's# AKL crores in the I Plan% it )as 's# AF%ACK crores by 5II Plan and during the 5III Plan it rose to nearly 's# BI%HLL crores# 7ence% it is clear that the e,ternal assistance or foreign capital has become a ma4or component of financing of Indian five year plans# In terms of percentage% the e,ternal assistance )ent up from a mere K#G in the I Plan to BI#B in the III Plan% CF#K during the 2nnual plans# From the I5 Plan on)ards% the percentage of e,ternal assistance declined from AC to I#BN during the 5III Plan% but this decline should not be misunderstood as declining importance of e,ternal assistance in the financing of our five year plans# &he table given belo) )ill clarify this aspect FOREI7N ASSISTANCE AND INDIAN FIVE YEAR PLANS PLAN FI'S& SE"6(D &7I'D F68'&7 FIF&7 SI*&7 SE5E(&7 EI$7&7 POLICY ON FDI AMOUNT HRs"$roresA AKL A%LKL B%CKL B%LKL F%ICL AL%KCL AF%ACK BI%HLL Per$ent#(e AL BE BI AC AF AA I#E I#B

&he government policies on Foreign Direct Investment ;FDI< have been changing since AKKA - KB# 2nalysis of these policies )ould help to place in proper perspective the prospects and problems of FDI# &his )as also taken into consideration )hile suggesting methods of improving the inflo)s of FDI# 2s apart of the structural ad4ustment policies introduced in the Indian economy by $overnment of India since Duly AKKA% policies relating to foreign financial participation in Indian companies and those relating to foreign technology agreements have also undergone a radical charge# Briefly stated% three tiers for approving proposals for foreign direct investment in this country )ere introduced0 @A) the 'eserve Bank.s automatic approval systemP @B) Secretariat for Industrial 2pprovals for considering proposals )ithin the general policy frame)ork but outside the po)ers delegated to 'eserve BankP and @C) Foreign# Investment Promotion Board% specially created to invite% negotiate and facilitate substantial investment by international companies that )ould provide access to high technology and )orld markets# &he foreign investment policy )as further liberali/ed during the period under revie)# Fully o)ned foreign enterprises )ill hence forth be allo)ed to set up giant po)er pro4ects )ithout the re:uirement to balance dividend payments )ith e,port earnings# &he general permission granted by the 'eserve Bank under the provision of#0 the Foreign E,change 'egulation 2ct% AKHC has brought the FE'2 companies @i#e# those having more than ELN foreign e:uity) on par )ith the Indian companies and thus provides a level playing field to all# &he e,isting FE'2 companies have also been e,tended the facility of FAN e:uity# 2lso% the use of foreign brand names and trademarks on goods for sale )ithin the country has been permitted#

Significant amendments to the FE'2 for rela,ing several of its restrictive provision have been contemplated# &he follo)ing measures )ere introduced in the recent period to further liberalise the foreign investment policy0 @A) E,cept for BB industries in the consumer goods sector% the earlier stipulation that dividend remittances of companies receiving approval under the foreign e:uity up to FAN scheme% must be balanced by e,port earnings over a period of H years% )as scrapped in respect of all foreign direct investment @by non -('Is) in Dune AKKB# &he measure )as e,tended to investment by ('Is 6verseas "orporate Bodies @6"Bs) in September AKKB# @B) For the purpose of investment in oil refineries and development of discovered oil fields% foreign private e:uity participation to the e,tent of BG per cent is considered as sufficient# For making investment in Indian companies% ('Is 6"Bs have been granted automatic approval by the 'BI to invest% )ith full repatriation benefits% up to ALLN in the issue of capital or convertible debentures of a private public limited company engaged in or proposing to engage in high priority industries% sub4ect to certain conditions# &he e,isting scheme of ALLN ('I investment in cent per cent e,port oriented units and also for the revival of sick units )ill continue cent per cent ('I participation in po)er generation has also been permitted# In the conte,t of such revisions% the earlier HEN scheme has been discontinued#

&he $overnment has set up a Bureau% officially kno)n as the Interface for ('I Scientists and &echnocrats @I('IS&)% that )ill bring ('I scientists and technocrats in contact )ith Indian industries )hich )ould benefit from the e,pertise of ('Is# &he Department of Industrial Development has set up an Winvestment promotion and pro4ect monitoring cellX popularly kno)n as facilitation ceil% to provide pre and post investment services for different industrial approvals and respond to :ueries relating to various ministeries departments# 'BI has granted general permission to foreign citi/ens of Indian origin% )hether resident in India or not% to ac:uire stipulations# $eneral permission has been granted to (on-resident Indian citi/ens and foreigns citi/en of Indian origin to let out their residential properties ac:uired for their bonafide residential purpose but )hich on account of their residence abroad% are not re:uired for their immediate residential purpose# &he rental income or proceeds of any such income shall both be repatriable outside India at any time in future and such funds should be credited to the o)ner?s 6rdinary (on 'esident 'upee account maintained )ith an authori/ed bank in India# In order to simplify and remove regulations )hich hinder free flo) of foreign capitaU in to India as also investment by Indian companies in 4oint venture overseas% restriction imposed on FE'2 companies @i#e# companies incorporated in India in )hich the non-resident interest is more than ELN) under sec BG @H)% BI% BK% and CA of F'E2% AKHC have all been removed as outlined belo)% there by placing them on par )ith hold and transfer by scale or inheritance% residential properties situated in India sub4ect to certain

other Indian companies in regard to their operations in India# FE'2 companies are no) permitted# a# b# c# d# e# &o borro) money or accept deposits from persons resident in India# &o accept appointment as agent or technical or management advisers in India% of any person or company# &o allo) their trademarks to be used by any person or company# &o carry on in India any activity of trading% commercial% or industrial nature e,cept agricultural and plantation activity# &o ac:uire any undertaking in India carrying on any trade% commerce or industry or purchase the shares of any such company% and f# &o ac:uire% hold% transfer or dispose of by sale% mortgage% lease% gift% settlement or other)ise any improvable property in India# Person of Indian nationality or origin and others @returning home after a minimum stay of immediate preceding G months abroad) have been granted general permission to bring into India as part of their baggage% gold% in any form% up to FLLLgms% provided duty is paid at the rate of 'sBBL per ALL gms# @earlier 's% EFL - per AL gms ) in any convertible foreign currency @I)#

2s part of the continuing efforts to provide an investment friendly environment in India for foreign investors% the follo)ing policy initiative )ere undertaken during the year AKKB-KC# @I) &o keep pace )ith the ever e,panding global technological revolution in the field of computers% an Electronic 7ard)are &echnology Park @E7&P) scheme )as set up allo)ing for ALLN e:uity participation% duty free import of capital goods and a ta, holiday i#e# e,emption from corporate income ta, for block of F years commencing from the date of the starting of commercial production# @II) In the ne) (ational mineral policy% the ceiling on foreign #e:uity participation in Indian companies engaged in mining activities )as hiked to FLN# In the area of non-captive mines% e:uity participation of over FLN by foreign partners could be considered on a case by case basis# @III) 2uthori/ed dealers )ere delegated po)ers to allo) remittance of dividend @including interim dividend) on e:uity preference shares to non-resident shareholders of all Indian companies% as also those in )hich investments have been made by ('Is 6"Bs under the ELN scheme or any other scheme )ith repatriation benefits# @I5) ('Is )ere allo)ed to invest up to ALLN on non-repatriation basis% in any partnership private 'BI# proprietorship concern or in public limited companies @e,pect in agricultural 6"Bs are not permitted to invest-In

plantation activities) )ithout seeking prior approvals of other 7o)ever% proprietorship partnership concerns @B)#

In keeping )ith the ob4ective of attracting funds from the ('Is in the form of deposit and foreign investment several steps )ere taken during the year AKKC -KE% such inflo)s% even )hile adhering to considerations of cost effectiveness and dampening of volatility# +a4or policy initiatives undertaken during the year )ere as follo)s0@I) Deposits 8nder Foreign "urrency (on 'esident 2ccount @F("'2)

scheme proved to be volatile during the payments crisis% of AKKL-KB# &hey )ere also relatively costly given the spread above international interest in the prescription of interest rates for these deposits as also the cost implicit in the provision of e,change guarantee for such deposits# In this regard% the Bank.s 2nnual 'eport for AKKB-KC had observed0 Jattempts have been made in the recent period to restructure the e,isting F"('2 scheme and to put in place ne) schemes )hich @a) reduce the reliance on the F"('2 scheme% @b) make e,change risk cover a commercial proposition% and @c) reduce volatile components of deposits under the e,isting F"('2 scheme#X In pursuance of this ob4ective deposits of four different maturities i#e# WG months and above but less than one yearJ% one year and above but less than t)o yearsX t)o years and above but less than three years%X and three years onlyJ )ere completely )ithdra)n effective from +ay AF%AKKC% 6ct# AB%PKKC% Feb AF% AKKE and 2ugust AF% AKKE respectively# Furthermore% interest rates prescribed on F"('2 of various maturities )ere fine-tuned from time to time to secure alignment )ith movements in international interest rates# Interest rates on (on 'esident @E,ternal) 'upee 2ccounts @(' @E) ') deposits )ere also revised do)n)ards effective 6ct AI%AKKE )hile the interest rate on savings deposits )as brought do)n from FN to E#FN those on term deposits are not allo)ed to e,ceed IN#

@II)

In consonance )ith the move to)ard full convertibility in the

current account% the interest accruing on deposits under (on 'esident @(on - 'epatriable) 'upee Deposits @(' @(') 'D) )as rendered eligible for repatriation effective from 6ct A% AKKE# &he principal amount under the scheme )ill continue to be non-repatriable @III) &he Foreign "urrency 6rdinary (on-repatriable @F"6() scheme%

introduced in Dune DKKA% under )hich the principal as )ell as interest earned )ere not repatriable% )as suspended )ith effect from 2ugust BL% AKKE# Interest accruing on the e,isting F"6(-scheme from the :uarter beginning 6ct A% AKKE )as ho)ever made eligible for repatriation# +a4or policy changes )ere% effected )ith a vie) to ensuring that investment flo)s )ere channelled in a manner consistent )ith overall +acro-economic re:uirements# &he follo)ing policy guidelines )ere dra)n out in this regard0 @I5) 9ith a considerable improvement in the e,ternal payments

position and the level of reserves% it )as considered necessary to follo) a restrictive policy to)ards Foreign "urrency "onvertible Bonds @F""Bs) as they constitute a part of the country.s e,ternal debt till their conversion in to e:uity# 2s per the fresh guidelines of the government @issued on +ay AA# AKKE ) for Euro issues% companies )ere allo)ed to issue F""BS only on merits as a part of the e,ternal debt restructuring programme )hich )as intended to lengthen maturity and soften terms# @5) 8nder the automatic approval scheme for foreign investments%

ne) guidelines )ere issued for determining issue price of preferential shares issued AL foreign investors to increase their stakes up to FAN in

the business of any Indian company engaged in the high priority industries sho)n in the 2nne,-Ill to the statement on industrial policy of Duly BE% AKKA# "onse:uent upon the abolition of the office of the "ontroller of "apital Issues @""I) and subse:uent guidelines issued by the Securities and E,change Board of India @SEBI) on Dune AA and AH%AKKB% e,isting companies )ishing to raise foreign e:uity )ere to make the issue at a price decided by the shareholders in a special resolution# In certain proposal received from the e,isting companies for enhancement of foreign e:uity% ho)ever% the companies )ere found to be issuing foreign e:uities at a large discount to the market price% @set out in the last year.s 'eport)# &his mismatch in the price of shares for investment and disinvestment could cause distortion in the inflo)s and outflo)s of foreign e,change under the head of foreign investment# 9ith the ob4ective of preventing a fe) shareholders from getting substantial and undue enrichment and unearned gains% to ensure higher foreign e:uity flo)s% and to make both investment and disinvestments market-related% It )as decided )ith effect from 2ugust E% AKKE that preferential allotment of shares by companies must be at market related price applicable to all foreign investment proposals )hether approved by the 'BI or by the SI2 follo)ing% guidelines0 &he issue price of shares under preferential allotment @other than allotment on rights basis)% )ould have to be at the market value of the shares determined on the basis of their average price during the immediate preceding si, months at the main listing center calculated on the monthly average of the high and lo) rates :uoted for the shares at such centres# In the absence of a market price% ho)ever% @as in the FIPB sub4ect to the

case of 8nlisted companies% !isted companies% )here shares are not regularly traded% etc) the 'BI )ould be guided by the net asset value and earnings per share# @5) Indian companies engaged in or proposing to engage in housing

and real estate development% i#e# @A) development of serviced plots and construction of built-up residential premises% @B) real estate covering construction of residential and commercial premises including business centers and offices% @C) development of to)nships% @E) city and region level urban infrastructure facilities including roads and bridges% @F) manufacturing of building materials and @G) financing of housing development )ere allo)ed to issue shares convertible debentures to ('Is up to ALLN of the ne) issue on repatriation basis# 'epatriation of original investment in such cases )ould be permitted by the 'BI only after a lock in period of three years from the date of issues of shares debentures# &he above facilities )hich )ere not available to 6"Bs% have no) been e,tended to them on the same terms and conditions as applicable to ('Is 5II) ('Is 6"Bs )ere so far permitted to invest in schemes of financial

domestic +utual Funds floated by public sector banks incentives to ('Is

institutions on non-repatriation basis# 9ith a vie) to providing further 6"Bs to invest in domestic +utual Funds% they )ere permitted to invest on repatriation basis also# 2s a ne) policy measure% such investments )ere also permitted to be made through secondary market# @5III) 8nder the 6ct AKKC guidelines for issue of bonds by Public Sector 8ndertaking @PS8s)# $overnment have allo)ed PS8s to issue bonds

under its public issues to ('Is

6"Bs through prospectus by private 6"B

placement )ith the facility of repatriation of both principal and interest on the bonds# (o limit% ho)ever has been specified for ('I investments in such bonds# @I*) ('Is companies% estate% etc# Besides the various investment facilities e,tended to ('Is 6"Bs )ere permitted concern% funds to shares% make by 6"Bs in

on repatriation basis and under various non repatriable schemes% the investment of public partnership proprietorship Indian (either debentures Indian sector nor the

mutual the

floated

banks financial Institutions% deposits )ith Indian companies% real investment deposit amount income interest thereon% )as eligible for repatriation# Further% the investment deposits held in India by Indian nationals )ho have become non-residents investment on account of their going abroad on employment immigration% as )ell as income interest earned on such deposits )as not allo)ed earlier to be repatriated abroad# deposits are% ho)ever% no) &he income interest on such investment years% as indicated belo)0 @I) Income accruing during AKKE-KF and thereafter to the e,tent of 8S SiLLL per annum is remittable )ith immediate effect @b) income earned over and above 8S SALLL in a year )ould be allo)ed to be remitted as follo)s0@A) 6ne third of the annual income earned during the financial year AKKE-KF% @B) &)o third of the annual income earned during AKKF-KG and @C) the entire amount earned during AKKG-KH and on)ards 'emittance of such income% 7o)ever )ould be allo)ed only after the payments of ta, as per the provision of the Income &a, 2ct @C)#

permitted to be repatriated in a phased manner over a period of three

9ith a vie) to opening more areas for investment by ('Is

6"Bs 'BI

has decided to allo) them to invest% on a repatriation basis% in all activities e,cept agriculture and plantation activities% sub4ect to certain conditions during AKKE -KF# 2ccordingly% e,isting or ne) Indian companies purchase @both leasing% private trading activities) and public limited companies) @e,cept e:uity engaged proposing to engage in any activity including financial% hire other are services allo)ed to etc# issue agricultural plantation

shares convertible debenture.s on repatriation basis to ('Is 6"Bs provided the aggregate allocation of shares convertible debentures :ualifying for repatriation benefits to such non-residing investors does not e,ceed BEN of the ne) issue# Earlier ('Is and 6"Bs )ere permitted to invest on a repatriations basis in ne) issues of shares convertible debentures made by companies engaged in industrial or manufacturing activities and also in certain other sectors such as hotels% hospitals% shipping development of computer soft)are and oil e,ploration# It has also been decided to permit authori/ed dealers to grant loans to ('Is holding Indian passports for ac:uisition of a house conditions# @II) 2s a process of further liberali/ation % general permission has fiats for residential purpose against security of immovable property proposed to be ac:uired by them sub4ect to certain

been granted to ('Is 6"Bs to purchase the shares on repatriation basis of Public Sector Enterprise @PSES) dis-invested by "entral $overnment sub4ect to the condition that @a) the holding of share by a ('I or by an 6"B% at any-time% does not e,ceed one percent of the paid-up capital of the PSE concerned% @b) the purchase consideration bid money is received by )ay of remittance from abroad through normal banking channels#

@III) free

('Is resident in (epal )ill be permitted hence forth to make foreign e,change through proper banking channels# Such

investment in India provided the funds for the purpose are remitted in investments )ill either be on repatriation or on non-repatriation basis depending on the terms and conditions applicable under the e,isting schemes under ('I investment# @I5) In the conte,t of on going economic liberali/ation% the policy and

procedures governing approvals under the schemes for ALLN E,port 6riented 8nits @E68S) and E,port processing Vones @EPVs) )ere further revised# 2ll proposals conforming to the parameters presented vide press note (o AC @AKKA) series dated 6ct K%AKKA% Department of Industrial Development% +inistry of Industry% shall receive automatic approval )ithin t)o )eeks from Secretariat of Industrial 2pprovals @SI2)% +inistry of Industry @Department of Industrial Development) in the case of ALLN E68s and from the Developments "ommissioners @D"s) concerned for units to be set up in EPVs# 2ll other proposals )hich do not conform to the parameters for automatic approvals% shall be considered by the Board of 2pprovals @B62) and disposed )ithin EF days from SI2 @5) 8nder the (ational &elecom Policy% AKKE )hich enunciates the

guidelines for the entry of private sector into Basic &elecom Services% 4oint venture bet)een an Indian and a foreign company is allo)ed sub4ect to a ma,imum of EKN e:uity participation from the latter# @5I) It has been decided that foreign investment up to FAN and

foreign technology agreements in the cast of bulk drugs% their intermediates and formulations thereof @e,cept those produced by the

use of recombinant D(2 technology) )ill be granted automatic approval sub4ect to the parameter of 'BI# Since the second half of AKKC-KE% the Indian economy has e,perienced surges in capital flo)s )hich took the forms of foreign investment flo)s both direct and portfolio% and inflo)s into various deposit schemes for non-resident Indians# 9ith current account deficits remaining modest during AKKC-KE and AKKE-KF% the policy response to the capital flo)s )as accommodative and this enabled on unprecedented build up of international reserves# 9ith the conse:uent attenuation of monetary targets threatening the ob4ective of inflation control% the policy stance s)itched to one of thro)ing sand in the )heels in the second half of AKKE-KF# 5arious measures put in place )ere progressively tightened during the first half of AKKF-KG in support of the conduct of monetary policy# 9ith the )idening of the current account deficit and the onset of volatility in the foreign e,change markets in the second half of AKKF-KG% the restrictive stance of policy )as eased and a number of measures )ere taken to rela, controls and allo) for a larger inflo) of foreign capital# 2s in the past% these measures )ere related to foreign investment flo)s and deposits by ('Is and the policy ob4ective of attracting capital flo)s has been carried for)ard during the first half of AKKG-KH# Policy changes in AKKG - KH )ere0 8nder the 2utomatic route% the

ceiling for lump sum payments of technical kno)-ho) fee )as% increased from 's# I crorc to 8S S B million% effective (ov F%AKKG# 9ith a vie) to liberali/ing the e,isting facility for investments by ('Is in India% it )as decided to allo) investments by ('Is to establish schools and colleges in India sub4ect to certain regulations# 9ith a vie) to e,panding the coverage of investment proposals considered under the 2utomatic 2pproval 'oute effective Dan AH%AKKH% the $overnment

announced the inclusion in 2nne,ure III of the statement of Industrial Policy AKKA @i) C categories of industries items relating to mining activities for foreign e:uity up to FLN @II) AC additional categories of industries items for foreign e:uity up to FAN and @III) K categories of industries items for foreign e:uity up to HEN Foreign Direct Investment )as allo)ed into si,teen non-banking financial services @merchant banking% under)riting% services% portfolio financial management services% investments advisory

consultancy% stock broking% asset management%

venture capital%

custodial services% factoring% credit refinance% credit rating% leasing and finance% housing finance% fore, holding and credit card services) during the year AKKH KI% through the Foreign Investment Promotion Board @FIPB) sub4ect to guidelines relating to minimum capitali/ation norms% schedule of capitali/ation and domestic e:uity participation# In a ma4or drive to simplify procedures for foreign direct investment under WautomaticX route% the 'eserve Bank dispensed )ith the need for its prior approval for such proposals# In order to simplify procedures further in respect to foreign direct investment cases already approved by the $overnment of India @SI2 FIPB)% the 'eserve Bank dispensed )ith re:uirement for its Win-principleX permission before receiving overseas investment or for issuing shares to foreign investors# issued by SI2 FIPB could issue shares Indian companies satisfying the conditions stipulated in the letter of approvals securities to foreign investors and file one copy of the application together )ith re:uired documents )ith the concerned 'egional office of 'eserve Bank )ithin CL days from the date of issue of shares# E,panding the scope of Wautomatic routeX for foreign direct investments% the government of India approved AC additional categories of industries items under services sector for foreign e:uity participation up to FAN of the e:uity% three items relating to mining activity up to FLN foreign e:uity participation

and nine categories of industries activities up to HEN foreign e:uity participation# 2s a part of liberali/ation process% 'eserve Bank of India decided to permit foreign banks operating in India to remit their profits surplus to their head offices )ithout the approvals of the 'eserve Bank# &he permission is sub4ect to the banks complying )ith the provisions of Banking 'egulation act% AKEK# Financial turmoil in the )orld economy% imposition of economic sanctions and sluggishness in domestic activity had some bearings on foreign investment during the year# &he 8nion Budget% AKKK-BLLL announced the establishment of Foreign Investment Implementation 2uthority ;FII2< in order to rationali/e and simplify approval and implementation procedures of foreignA investment proposals# 9ith a vie) to further facilitating inflo)s of foreign direct investment% e,pansion of automatic list of approvals and a more dynamic role for Foreign Investment Promotion Board )ere also announced# Foreign investment recovered during AKKK - BLLL reflecting the stability of the domestic currency% broad-based industrial revival% easing of economic sanctions and return of orderliness in the financial markets coupled )ith strong stock market performance# 2 number of policy initiatives )ere taken during the year to further facilitate inflo)s of foreign investment# In 2ugust AKKK% a Foreign Investment% Implementation 2uthority @FII2) )as established for speedy conversion of approvals to actual flo)s# &he Insurance 'egulatory and Development 2ct @I'D2) )as passed in December AKKK permitting foreign e:uity participation in domestic private insurance companies up to BGN of the paid-up capital# +oreover% investments in

all sectors% e,cept for small negative list% )ere placed% in February BLLL% under automatic route for direct investments# Indian companies vZere allo)ed% sub4ect to specified norms% to raise funds for investments through issue of 2D's $D's )ithout prior government approval and up to FLN of these proceeds )ere allo)ed for ac:uisition of companies in overseas markets# Indian companies could ac:uire companies engaged in information technology and entertainment soft)are% pharmaceuticals and bio - technology in the overseas market through stock - s)ap options up to S ALL m on automatic basis or ten times the e,port earnings during the preceding financial year as reflected in the audited balance sheet% )hichever is lo)er# FDI is seen as a means to supplement domestic investment for achieving a higher level of economic gro)th and development# FDI benefits domestic industry as )ell as the Indian% consumers by providing opportunities for technological up-gradation% access to global managerial skills and practices% optimal utili/ation of human and natural resources% making Indian industry internationally competitive% opening up e,port markets% providing back)ard and for)ard linkages and access to international :uality goods and services# &o)ards this end% the FDI policy has been constantly revie)ed% and necessary steps have been taken to make India a most favourable destination for FDI# &he ma4or initiative taken to attract FDI during BLLL -BLLA 3 BLLA BLLB are as follo)s0 In pursuance of $overnment.s commitment to further facilitate Indian industry to engage unhindered in various activities% $overnment has permitted% e,cept for a small negative list% access to the automatic route for FDI% )hereby% foreign investors only need to inform the 'eserve Bank of India )ithin CL days of

bringing in their investment% and again )ithin CL days of issuing any shares# (on-Banking Financial "ompanies @(BF"s) may hold foreign e:uity up to ALLN if these are holding companies# Foreign investors can set up ALCN operating subsidiaries @)ithout any restriction on number of subsidiaries) )ithout the condition to disinvest a minimum of BFN of its e:uity to Indian entities% sub4ect to brining in 8S SFL m out of )hich 8S S H#F m to be brought upfront and the balance in BE months# Doint venture operating (BF"s that have HFN or less than HFN foreign investment )ill also be allo)ed to set up subsidiaries for undertaking other (on Banking Financial "ompany activities% sub4ect to the subsidiaries also complying )ith the applicable minimum capital inflo)# FDI up to EKN from all sources is permitted in the private banking sector on the automatic route sub4ect to conformity )ith 'BI guidelines# In the process of liberali/ation of FDI policy% the follo)ing policy changes have been made0 @i) @ii) @iii) @iv) ALLN FDI permitted for B% to B e-commerce "ondition of dividend removed forth)ith 'emoval of cap on foreign investment in the Po)er Sector ALLN FDI permitted in oil-refining# balancing on BB consumer items

2utomatic 'oute is available to proposals in the Information and &echnology Sector% even )hen the applicant company has a previous 4oint venture or technology transfer - agreement in the same field# 2utomatic 'oute of FDI up to ALLN is allo)ed in all manufacturing activities in Special Economic Vones @SEVs)% e,cept for the follo)ing activities0 @i) @ii) @iii) @iv) @v) 2rms and ammunition% e,plosives and allied items of defence e:uipment% defence aircraft and )arshipsP 2tomic substancesP (arcotics and Psychotropic substances and ha/ardous chemicalsP Distillation and bre)ing of alcoholic drinksP "igarettes cigars and manufactured tobacco substitutes#

FDI up to ALLN is allo)ed )ith some conditions for the follo)ing activities in &elecom Sector0 @i) @ii) @iii) @iv) ISPs not providing gate)ays @both for satellite 3 submarine cables)P Infrastructure Providers providing dark fiber @IP "ategory I)P Electronic +ailP 5oice +ail#

FDI up to HEN is permitted for the follo)ing telecom services sub4ect to licensing and security re:uirements @proposals )ith beyond EKN shall re:uire prior $overnment approval)0 @i) internet services providers )ith gate)aysP @ii) 'adio PagingP and @iii) End-to-end band)idth#

Payment of royalty up to BN on e,ports and AN on domestic sales is allo)ed under automatic route on use of trademarks and brand name of the foreign collaborator )ithout technology transfer# Payment of royalty up to IN on e,ports and FN on domestic sales by )holly o)ned subsidiaries to offshore parent companies is allo)ed under the automatic route )ithout any restriction on the duration of royalty payments# 6ffshore 5enture "apital Funds "ompanies are allo)ed to

invest in domestic venture capital undertakings as )ell as other companies through automatic route% sub4ect only to SEBI regulations and sector specific caps on FDI# FDI up to BGN is eligible under 2utomatic 'oute in the Insurance sector% as prescribed in the Insurance 2ct% AKKK% sub4ect to their obtaining licence from Insurance 'egulatory 3 Development 2uthority# FDI up to ALLN is permitted in airports% )ith FDI above HEN re:uiring prior approval of the $overnment# FDI up to ALLN is permitted )ith prior approval of the $overnment in courier services sub4ect to e,isting la)s and e,clusion of activities relating to distribution of letters# FDI up to ALLN is permitted )ith prior approval of the $overnment% for development of integrated to)nship% including housing% commercial premises% hotels% resorts% city and regional level urban infrastructure facilities such as roads and bridges% mass rapid transit systems% and manufacture of building material in all metros% including associated commercial development of real

estate# Development of land and providing allied infrastructure )ill form an integral part of to)nship.s development#

FDI up to ALLN is permitted on the automatic route in hotel and tourism sector and for +ass 'apid &ransit Systems in all metropolitan cities% including associated commercial development of real estate# FDI up to ALLN in drugs and Pharmaceuticals @e,cluding those% )hich attract compulsory licensing or produced by recombinant D(2 technology and specific cell tissue targeted formulations) placed on the automatic route# &he defence industry sector is opened up to ALL per cent for Indian private sector participation )ith FDI permitted up to BG per cent% both sub4ect to licensing# International Financial Institutions like 2sian Development Bank% International Financial "orporation% "ommon)ealth Development "orporation% $erman Investment and Development "ompany @DE$) etc#% are allo)ed to invest in domestic companies through the automatic route% sub4ect to Securities and E,change Board of India 'eserve Bank of India $uidelines and sector specific caps on FDI @AL)#

FDI .o-i$ies for t/e %e#r !FFE 1!FFF Financial turmoil in the )orld economy% imposition of economic sanctions and sluggishness in domestic activity had some bearings on foreign investment during the year# &he 8nion Budget% AKKK - BLLL announced the establishment of Foreign Investment Implementation 2uthority ;FII2< in order to rationali/e and simplify approval and

implementation procedures of foreign investment proposals# 9ith a vie) to further facilitating inflo)s of foreign direct investment% e,pansion of automatic list of approvals and a more dynamic role for Foreign Investment Promotion Board )ere also announced# FD- .o-i$ies for t/e %e#r !FFF 1 'GGG Foreign investment recovered during AKKK - BLLL reflecting the stability of the domestic currency% broad-based industrial revival% easing of economic sanctions and return of orderliness in the financial markets coupled )ith strong stock market performance# 2 number of policy initiatives )ere taken during the year to further facilitate inflo)s of foreign investment# In 2ugust AKKK% a Foreign Investment Implementation 2uthority @FII2) )as established for speedy conversion of approvals to actual flo)s# &he Insurance 'egulatory and Development 2ct @I'D2) )as passed in December AKKK permitting foreign e:uity participation in domestic private insurance companies up to BGN of the paid up capital# +oreover% investments in all sectors% e,cept for a small negative list% )ere placed% in February BLLL% under automatic route for direct investments# Indian companies )ere allo)ed% sub4ect to specified norms% to raise funds for investments through issue of 2D's $D's )ithout prior government approval and up to FLN of these proceeds )ere allo)ed for ac:uisition of companies in overseas markets# Indian companies could ac:uire companies engaged in information technology and entertainment soft)are% pharmaceuticals and bio-technology in the overseas market through stock - s)ap options up to S ALL m on automatic basis or ten times the e,port earnings during the preceding financial year as reflected in the audited% balance sheet% )hichever is lo)er# FDI Po-i$ies For T/e Ye#r 'GGG 1 'GG!

FDI is seen as a means to supplement domestic investment for achieving a higher level of economic gro)th and development FDI benefits domestic industry as )ell as the Indian consumers by providing opportunities for technological up-gradation% access to global managerial skills and practices% optimal utili/ation of human and natural resources% making Indian industry internationally competitive% opening up e,port markets% providing back)ard and for)ard linkages and access to international :uality goods and services# &o)ards this end% the FDI policy has been constantly revie)ed% and necessary steps have been taken to make India a most favourable destination for FDI# &he ma4or initiative taken to attract FDI during BLLL -BLLA 3 BLLA BLLB are as follo)s0 In pursuance of $overnment.s commitment to further facilitate Indian industry to engage unhindered in various activities% $overnment has permitted% e,cept for a small negative list% access to the automatic route for FDI% )hereby% foreign investors only need to inform the 'eserve Bank of India )ithin CL days of bringing in their investment% and again )ithin CL days of issuing any shares# (on-Banking Financial "ompanies @(BF"s) may hold foreign e:uity up u ALLN if these are holding companies# Foreign investors can set up ALLN operating subsidiaries @)ithout any restriction on number of subsidiaries) )ithout the condition to disinvest a minimum of BFN of its e:uity to Indian entities% sub4ect to bringing in 8S SFL m out of )hich 8S S H#F m to be brought upfront and the balance in BE months# Doint venture operating (BF"s that have HFN or less than HFN foreign

investment )ill also be allo)ed to set up subsidiaries for undertaking other (on Banking Financial0 "ompany activities% sub4ect to the subsidiaries also complying )ith the C% applicable minimum capital inflo)# FDI up to EKN from all sources is permitted in the private banking sector on the automatic route sub4ect to conformity )ith 'BI guidelines# In the process of liberali/ation of FDI policy% the follo)ing policy changes have% been made0 @v) @vi) @vii) ALLN FDI permitted for B to B e-commerce "ondition of dividend balancing on BB consumer items

removed forth)ith 'emoval of cap on foreign investment in the Po)er Sector @viii) ALLN FD permitted in oil-refining# 2utomatic 'oute is available to proposals in the Information and &echnology Sector% even )hen the applicant company has a previous 4oint venture or technology transfer agreement in the same field# 2utomatic 'oute of FDI up to ALLN is allo)ed in all manufacturing activities in Special Economic Vones @SEVs)% e,cept for the follo)ing activities0 @vi) 2rms and ammunition% e,plosives and allied items of defence e:uipment% defence aircraft and )arshipsP @vii) 2tomic substancesP mi @viii) (arcotics chemicalsP @i,) @,) Distillation and bre)ing of alcoholic drinksP "igarettes cigars and manufactured tobacco substitutes# and Psychotropic substances and ha/ardous

 @v)

FDI up to ALLN is allo)ed )ith some conditions for the follo)ing activities in &elecom Sector0 ISPs not providing gate)ays @both for satellite3 submarine cables)P Infrastructure Providers providing dark fiber @IP "ategory I)P 5oice +ail#

@vi) @i,)

@vii) Electronic +ailP

FDI up to HEN is permitted for the follo)ing telecom services sub4ect to licensing and security re:uirements @proposals )ith beyond EKN shall re:uire prior $overnment approval)0 @i) internet services providers )ith gate)aysP @ii) 'adio PagingP and @iii) End-to-end band)idth# Payment of royalty up to BN on e,ports and AN on domestic sales is allo)ed under automatic route on use of trademarks and brand name of the foreign collaborator )ithout technology transfer# Payment of royalty up to IN on e,ports and FN on domestic sales by )holly o)ned subsidiaries lo offshore parent companies is allo)ed under the automatic route )ithout any restriction on the duration of royalty payments# 6ffshore 5enture "apital Funds "ompanies are allo)ed to

invest in domestic venture capital undertakings as )ell as other companies through automatic route% sub4ect only to SEBI regulations and sector specific caps on FDI# FDI up to BGN is eligible under 2utomatic 'oute in the Insurance sector% as prescribed% in the Insurance 2ct% AKKK% sub4ect to their

obtaining licence from Insurance 'egulatory 3 Development 2uthority# FDI up to ALLN is permitted in airports% )ith FDI above HEN re:uiring prior approval of the $overnment# FDI up to ALLN is permitted )ith prior approval of the $overnment in courier services sub4ect to e,isting -la)s and e,clusion of activities relating to distribution of letters% FDI up to ALLN is permitted )ith prior approval of the $overnment% for development of integrated to)nship% including housing% commercial premises% hotels% resorts% city and regional level urban infrastructure facilities such as roads and bridges% mass rapid transit systems% and manufacture of building material in all metres% including associated commercial development of real estate# Development of land and providing allied infrastructure )ill form an integral part of to)nship.s development# FDI up to ALLN is permitted on the automatic route in hotel and tourism sector and for +ass 'apid &ransit Systems in all metropolitan cities% including associated commercial development of real estate# FDI up to ALLN in drugs and Pharmaceuticals @e,cluding those% )hich attract compulsory licensing or produced by recombinant D(2 technology and specific cell tissue targeted formulations) placed on the automatic route# &he defence industry sector is opened up to ALL per cent for Indian private sector participation )ith FDI permitted up to BG per cent% both sub4ect to licensing#

International Financial Institutions like 2sian Development Bank% International Financial "orporation% "ommon)ealth Development "orporation% $erman Investment and Development "ompany @DE$) etc#% are allo)ed to invest in I domestic companies through the automatic route% sub4ect to Securities and E,change Board of India 'eserve Bank of India $uidelines and sector specified caps on FDI#

In+ustri#- .o-i$% reso-utions of !F4E8!F5C #n+ !FEG" Industrial policy comprises of the procedures% principles% rules% policies and regulations )hich together govern the industrial sector to guide the industrial development or the country in conformity )ith the ob4ectives of five year plans and the needs of the economy# 2s the economy develops% the government has to closely study the process of economic development and make necessary changes and modifications in the policies so as to make the policies relevant for the situation or the environment prevailing in the country at different points of time# 2 Sometimes the changes in policies are so drastic that a ne) approach at the industrial development or the development of any other sector is arrived at# 9hen these changes are announced the reactions from the sector concerned are studied closely by the government and necessary amendments are made to the policies already announced# In Indian scene% the situation prevailed immediately after independence )as completely different from )hat is being )itnessed today# 7ence% if )e study the industrial policies announced in the later EL.s and early and middle >FL?s )e )ould get a background )ith )hich )e )ill be able to understand and appreciate the changes that have been announced in AKKA# &his )ould also help us to understand the 4ustifications for the drastic changes announced

at periodical intervals# 7ence% )e )ould discuss no) in brief% the features of AKEI% AKFG and AKIL Industrial Policy 'esolutions# INDUSTRIAL POLICY !F4E Immediately after independence% the government had to give a guideline for the industries in India and so it announced its policies for industries# &he political freedom attained in AKEH% posed a challenge to the government% to devise its o)n policies# 9ith the production at lo) levels% population increasing% partition impacts% rising price level% industries to be developed to accelerate economic development% etc#% the AKEI Industrial policy resolution )as announced# &hrough that the government clearly accepted its responsibility of ensuring planned development of industries of various types# &he AKEI policy laid the foundation for a ne) e,perience as )ould be clear from the follo)ing features of the policy# &he industries )ere classified into the follo)ing four categories0 A# &he strategic industries to be completely o)ned by the government included manufacture of arms and ammunition% production and control of atomic energy% o)nership and management of rail)ay transport% etc# (o private sector participation or e,istence )ill be permitted in this category of industries# B# &he second group included the basic and key industries# Private sector e,istence in this group )ould be tolerated for a period of AL years after )hich their performance )ould be evaluated# (e) units in this category. )ill be established only by the government and the e,isting ones )ould be taken over by the government if their performance is found to be

not satisfactory after the revie)# &he industries included in this category include0 aircraft manufacture% coal% iron and steel% ship building% radio sets and mineral oils% etc# C# In this category government included the basic industries like salt% automobiles% heavy fertil/sers% tractors% prime movers% electrical heavy nonengineering% chemicals% machinery% machine tools%

electro-chemical

industries%

ferrous metals% rubber manufacture% po)er and industrial alcohol% cotton and )oollen te,tiles% cement% sugar% paper and ne)sprint% air and sea transport% minerals and industries relating to defence# Private sector )ill be given complete freedom to enter into this category% but the government can intervene and regulate any of them% if found necessary# E# 2ll the other industries formed the fourth category# +ainly left for private sector% the government pointed out that progressively it may participate but not eliminate the private sector# Both individual as )ell as co-operative undertakings )ill be permitted in this sphere# &his policy also gave importance to small scale industries and suggested that both the central and state governments should 4oin together in solving the problems faced by the small scale industries# 2s these industries )ould offer good scope for absorbing the displaced labourers% and agricultural )orkers and )ee also ideal for co-operative type of organisation% the government felt that they must be developed# 2s regards the foreign capital% the government clearly pointed out that there is need for free flo) of capital as )ell as technology# 2t the same time the government )ill be also made said that it the should Indian regulateP and no discrimination bet)een foreign

undertakings )ith regard to the applications of the provisions of the policy resolutions# Profits and repatriation of capital )ould be permitted sub4ect to the provisions of the -foreign e,change control# Further if any undertaking is nationalised% then fair and e:uitable compensation )ould be paid#

Ev#-u#tion& &he main aspect of this policy is that it laid the foundation for the introduction of +I*ED E"6(6+O in India# 8nder this the government )ill encourage coe,istence of both private and public sector units in industries according to the provisions of the policy# &his paved the )ay-for the participation of government and the corporate sector in the industrial building process of the country# &his also facilitated a direct comparison bet)een the performance of both the sectors% in terms of various indicators# Being the first policy resolution the government had made a good beginning# But this policy )as criticised for being classificatory# It gave an impression that the private sector% even in spite of possessing the potential )as not allo)ed to play its due role in the industrial development# Secondly% there )as a threat of nationalisation% specifically% in the case of industries under the second category# &hirdly% the government intervention )as present even in the case of third category of industries# 7ence% on the )hole% being the first policy% the government could not make the policy more imaginative% e,cept% of course% introducing the principle of mi,ed economy# INDUSTRIAL POLICY !F5C

2 ne) policy )as necessitated after AKFA% because% India adopted a socialistic pattern of society% the "onstitution guaranteed Fundamental 'ights and Directive Principles of State policy and the First five year plan )as completed by AKFG# 2fter revie)ing the developments and achievements% the government came out )ith the Industrial Policy 'esolution of AKFG# For all the later policies% this became the basis and until AKIL% the provisions of this policy remained more or less in force# &he follo)ing are the important features of this Policy0 &he industries )ere classified into three categories# &his )as indicated in terms of Schedule 2% Schedule B and Schedule " industries# &he Schedule 2 industries are completely slate o)ned and the state is responsible for the development and gro)th of them# &he Schedule B included industries )hich )ere under the control of government% especially ne) units# &he private sector is also permitted to enter into this category% but it )ill be given only a supplementary role# &he Schedule " industries included all the remaining industries% the future of )hich )ould be completely in the hands of private sector# 6f course% government regulation in general )ould be formulated and made applicable to them as any other industries# &he first classification @Schedule 2) included AH industries% the Schedule B included AB industries and Schedule " included all the rest# &he government clearly indicated that the above classification is not very rigid% and private participation and presence even in the first category in the nature of allied units% user of by-products% etc#% )ould

be permitted% similarly the government may enters the Schedule " industries if the planning and development )arrants it# &he private sector is e,pected to )ork in close unison )ith the state# &he government assured fair and free treatment to private sector units and non-discriminatory treatment )as also promised# &he government continued to encourage the gro)th and development of small scale and village industries by e,tending subsidies% ta, concessions% protection from large and medium industries% and assisting them in modernisation to improve their competitive strength# &he 'esolution also aimed at reducing the regional disparities in the gro)th and development of industry so as to achieve balanced industrial development throughout the country# &he 'esolution also highlighted the need to protect and improve the conditions of industrial )orkers in the country# +ainly several machineries for settling industrial disputes )ere thought of# &he government continued )ith its policy regarding foreign capital )ithout much change# Ev#-u#tion0 &his resolution assigned a ma4or role to the public sector# It created a condition in )hich the public sector units could be established and developed )ell# &his )as fell necessary to achieve the desired rate &he government and pattern of development of industries in India#

made it clear that it had no intention to )ipe out the private sector% instead it )anted the private sector to emerge as the supplementary sector for the public sector and 4oin the latter to achieve rapid industrial and economic development# 2fter the resolution came into force% over a period it )as found that the private sector developed faster by taking advantage of loopholes and e,ceptions in the 'esolution# &here )ere cases )here licenses )ere issued to private 7ence% sector )hile public sector should have been given the license#

it )as found that this 'esolution in fact% led to the rapid gro)th of private sector# INDUSTRIAL POLICY OF !FEG 2s already pointed out the Industrial policy of AKFG formed the basis of this policy in AKIL# &his ne) policy had the follo)ing ob4ectives0 @i) @ii) @iii) @iv) @v) @vi) @vii) to achieve the optimum utilisation of the installed edacity to achieve ma,imum production and through that achieve higher productivity and employment generation to rectify the regional imbalance by focusing on the back)ard areas giving priority treatment for agro-based industries to promote inter-sectoral relationship to encourage the gro)th of e,port oriented substitution industries to speed up the gro)th of small scale units% etc# and import

9ith these ob4ectives in vie)% the ne) policy laid do)n the follo)ing provisions0 A# 2fter revie)ing the performance of the public sector units the government has decided to introduce measures for improving the efficiency of these units so as to make them contribute more to)ards the economy# B# In order to promote economic federalism% the

policy provided

for integration of industrial development in the

private sector# &he government also decided to eliminate the artificial division bet)een small and large scale industrial units# In each district a fe) nucleus plants )ill be set up )hich )ould

generate opportunities for a number of small% cottage and ancillary units# &his )ould ultimately create the scope for faster industrial development in the industrially back)ard districts#

C# a# b# c#

&o provide the scope for more and more small and cottage industries% the government redefined these units as belo)0 the limit of investment for tiny units )as to be raised from 's# A lakh to 's#B lakhs the limit of investment for small scale units )as to be raised from 's# AL lakhs to 's# BL lakhs and increase the limit of investment for ancillaries from 's# AF lakhs to 's# BF lakhs#

E#

to promote industrial gro)th in rural areas and also to improve the employment opportunities there and raise their percapita income% the policy provided for promoting industries in the rural areas# &his )as also e,pected to maintain the ecological balance in the country# $reater attention )ould be given to the gro)th of handlooms% handicrafts and khadi and other village industries#

F#

2nother important provision )as that the government decided to regularise the unauthori/ed e,cess capacity )ith the industrial units% especially the FE'2 3 +'&P units by allo)ing them automatic e,pansion by BFN of the e,isting licensed capacity on a selective basis#

G#

&o prevent spread of industrial sickness% the government indicated that very stringent steps )ould be taken against those units )hich are deliberately mismanaged and indulging in financial improprieties# 2s regards the e,isting sick units% arrangements )ould be e,plored to revive them or to encourage their mergers )ith healthy units by introducing suitable ta, concessions to encourage such actions# 9hen other methods of

revival of sick units are not found feasible% then the management of such sick units )ould be taken over# EVALUATION &his policy has several lapses# Its claim to eliminate the division bet)een small scale and large scale units is something contradicting the basis of such divisions# &here )as a need to treat the small scale )ith liberal treatment so that in a labour intensive economy% these units can create employment opportunities# &here is nothing )rong )ith such specific preferential treatment of small scale units# But this policy aimed at removing such differences# Secondly% this policy created a precedence by regularising the unauthori/ed e,cess capacity created by large units% instead of taking action against such erring big units# 9hile the big units )elcomed this move of the government% yet this has resulted in the e,pectation that the government )ould continue to have such liberal treatment in future also# &his indirectly has also affected the gro)th prospects of ne) industries and the e,isting medium and small scale units# &hough the government 4ustified its move by stating that such a move )ould facilitate fuller utilisation and higher output% yet the conse:uence of such a move )as not thought about# 7o)ever% it may be pointed out that the seeds of liberali/ation )ere so)n through this policy and the government.s intention to select capital intensive path of development# T/e fe#tures of !FF! In+ustri#- .o-i$% &he government announced its ne) Industrial policy in Duly AKKA# &he ne) policy has outlined several changes )hich have together opened a ne) era to the gro)th and development of industrial sector in India% &he conventional regulations and restrictions have been replaced )ith

liberali/ation and reliefs# "onse:uent to the announcement of the ne) policy% there has been all round 4ubilation in the industrial sector# &he follo)ing are the salient features of the ne) industrial policy# Even by AKIF-IG% the government realised the need to encourage the industrial sector to stand on its o)n legs and to)ards achieving this a number of policies and procedural changes have been announced# &his )as e,pected to increase productivity% reduce costs and improve the :uality )ith )hich the domestic industries are e,pected to face competition )ith strength# &here )as an honest attempt to release the public sector from a number of constraints and it )as given a large measure of autonomy# &echnological and managerial moderni/ation programs )ere taking place in large scale# 2ll these measures together contributed to the achievement of an impressive annual gro)th rate of I#FN policy during )ill the 5II Five to year a plan# 7aving policy understood to the effectiveness of all the policy changes in the past% the ne) industrial continue pursue sound encourage entrepreneurs% develop the indigenous technology through intensive research and development activities% dismantle the regulatory system% improve the capital market% etc# Small scale sector )ould get a special attention and the government promised to come out )ith a ne) policy to)ards the small scale industries# Foreign technology and investment )ould be )elcomed to improve the domestic production base and increase the e,ports# &he +'&P 2ct )ould be suitably modified to encourage competition# Public sector )ill be made to run on commercial lines and play a vital role in economic development# &he essence of this ne) policy )ill be discussed under the follo)ing heads0 A# Industrial licensing% B# Foreign investment% C# Foreign technology agreement% E# Public sector% F# +'&P 2ct and G# Small scale and tiny sector policy#

INDUSTRIAL LICENSIN7 POLICY &o achieve the ob4ectives of the strategy of the industrial sector in the KL.s a number of changes in the system of industrial approvals have been brought about# &he domestic producers )ill be able to )ithstand the competition in the country as )ell as abroad only through procedural reforms# 7ence% the role of government )ill be changed from that of e,ercising control to one of providing help and guidance# "hanges in the policy to)ards public sector in the last fe) years have clearly indicated that private sector enterprises )ill be allo)ed to compete in many areas hitherto earmarked for public sector# "onse:uently% the ne) policy has completely reclassified the Indian industries as belo)0 a) Eight industries have been completely reserved for the public 2rms and ammunition and allied items of defence

sector# &hey are0 i#

e:uipment% defence aircraft and )arships% ii# atomic energy% iii# coal and lignite% iv# mineral oilsP v# mining of iron ore% manganese ore% chrome ore% gypsum% sulphur% gold and diamond% vi# mining of copper% lead% /inc% tm% molybdenum and )olfram% vii# mineral specified in Schedule to the 2tomic Energy 6rder% AKFC and viii# rail)ay transport# b) Eighteen industries have been listed as industries )hich re:uire

compulsory licensing# 7o)ever% this provision )ould not apply in respect of the small scale units taking up the manufacture of any of the items reserved for e,clusive manufacturing in small scale sector# "ompulsory licensing )ould be re:uired in the follo)ing industriesP i# coal and lignite% ii# petroleum other than crude and its distillation

products% iii# distillation and bre)ing of alcoholic drinks% iv# sugar% v# animal fats and oils% vi#% cigars and cigarettes of tobacco and

manufactured tobacco substitutes% vii# 2sbestos and asbestos based products% viii# ply)ood% decorative veneers and other )ood based products such as particle board% medium density fiber board% block board% i,# ra) hides and skins% leather% chamois leather and patent leather% ,# tanned or dressed fur skins% ,i# motor cars% ,ii# paper and ne)sprint e,cept bagasse based units% ,iii# electronic aerospace and defence e:uipment of all types% ,iv# industrial e,plosives% ,v# ha/ardous refrigerators# 2s regards the provisions of the industrial licensing policy% @i) Industrial licensing has been completely abolished for all pro4ects e,cept for the industries classified above% i#e#% the area reserved for public sector and the list of AI industries and the areas reserved for small scale industries )ill continue# @ii) Public sector )ill continue to maintain monopoly in industries coming under the areas of security and strategic considerations# @iii) In pro4ects )here imported capital goods are re:uired% automatic clearance )ill be given provided the foreign e,change availability is ensured through foreign e:uity# 6r alternatively if the value of imported% goods does not e,ceed BFN of the total value of plant and e:uipment sub4ect to the ceiling of 's# B crores% automatic clearance )ill be given# 7o)ever% this )ould come into effect only from 2pril% AKKB in vie) of the current balance of payments position# In all the other cases% the prior approval and clearance from the chemicals% ,vi# and drags ,viii# and )hite pharmaceutical goods like ,vii# entertainment electronics domestic

Secretariat of Industrial approvals in the Department of Industrial development )ill be re:uired# @iv) E,cept the list of industries re:uiring compulsory licensing% the other industries )ill not re:uire any approval from the "entral government for their location in ares other than cities of more than one million population# In cities )ith more than one million population% non-polluting industries like electronics% computer soft)are and printing )ill be permitted outside BF kms# of the periphery# If such cities re:uire industrial re-generation policies )ill be made more fle,ible# 7o)ever% the e,isting /oning and land use regulation and environmental legislation )ill continue to regulate industrial locations# 2ll efforts )ill be made through incentives and other methods like infrastructural development% to disperse the industry to rural and back)ard areas# @v) (e) Broad-banding facility )ill be provided to the e,isting units so as to enable them to produce any article )ithout additional investment# &he e,emption from licensing )ill be applicable to all substantial e,pansion of e,isting units# @vi) &he mandatory convertibility clause )ill no longer be applicable for term loans from the financial institutions for ne) pro4ects% @vii) 2 very significant step is to abolish all the e,isting registration schemes#

@viii)

In case of substantial e,pansions and ne) pro4ects% it is enough if the entrepreneurs file the information memorandum#

@i,)

&he list of industries re:uiring compulsory licensing and industries for automatic approval of foreign technology agreements )ill be notified in the Indian &rade "lassification @7armoni/ed system)%

FOREI7N INVESTMENT Foreign investment carries )ith it the benefits of technology transfer% marketing e,pertise% modem managerial techni:ues and ne) possibilities for promotion of e,ports# 2s this re:uirement is felt in this )orld of industrial change and cooperation% the ne) policy has clearly contained the follo)ing provisions related to foreign investment0 @i) In high priority industries approval )ill be given for direct foreign investment upto FAN foreign e:uity and all the bottlenecks in this process )ill be removed- "learance in such cases )ill be given if the foreign e:uity covers the foreign e,change re:uirements for imported capital goods# &he necessary amendments )ill be made in the FE'2# @ii) &he general policies governing the domestic units in regard to import of components% ra) materials and intermediate good and payment of kno)-ho) fees and royalties )ill also be applicable to the high priority industries in )hich foreign investment is limited to FAN 7o)ever% the payment of royalty )ill be routed through the 'BI to enable it to monitor the outflo) of foreign e,change on account of dividend payment also to ensure that such payments are balanced by e,port earnings over a period of time#

@iii)

2ll the other foreign investments not included in the "ategory I slated above )ill re:uire prior clearance#

@iv)

&rading companies primarily e,port oriented )ill also be permitted under the foreign e:uity proposals as indicated in @i) above# 7o)ever% the provisions of the E,port-Import policy applicable to the domestic units )ill also be applicable to such trading companies#

@v)

&o encourage substantial inflo) #of foreign investment% a Special empo)ered board )ould be constituted# &his Board )ould negotiate )ith the large international firms and approve direct foreign investment in select areas# &his is e,pected to fetch foreign technology and open the industries in India to )ider )orld market# Such investments )ill be sub4ected to favourable treatment based on the merits irrespective of the rules% regulations and procedures in practice#

FOREI7N TECHNOLO7Y A7REEMENT 2 )elcome change in the outlook of the government as evidenced by the ne) policy is the reali/ation that the sophisticated technology% from abroad can be brought in only through liberal and less restrictive procedure and policies# &he interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industriali/ation# 2s a result of this liberali/ation% automatic approval for technology agreements related to high priority industries )ill be made )ith respect to certain specific parameter# 6ther industries )hich can enter into such agreements

)ithout incurring the e,penditure of foreign e,change )ill also be e,tended liberal treatment# &he industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises# In due course this measure is e,pected to pave the )ay for e,change of superior technology from India )ith other countries# 9ith the overall liberali/ation% the competition )ill be high and it is e,pected that industries )ill invest much more in research and development activities# 1eeping in vie) all these e,pectations% the government has announced the follo)ing changes in regulations governing foreign technology agreement0 @i) (o prior permission is needed for hiring foreign technicians% foreign testing of indigenously developed technologies# Such activities involving payments )ill be governed by the guidelines of the 'BI and such payments can be made through the blanket permits# @ii) 2utomatic permission )ill be given for foreign technology agreements relating to the high priority industries# &he royalty payments through such agreements )ill be sub4ected to certain provision# 8pto the payment of 's#A crore% royally )ill be ] FN for domestic sales and IN for foreign sales or e,ports# 7o)ever% the total royalty payment should not e,ceed IN of sales over a AL year period from the date of agreement or H year period from the dale of commencement of production# @iii) In the case of industries not covered in the high priority list automatic permission )ill be given for technology agreement

provided it does riot entail any foreign e,change payment commitment# @iv) In all the other cases% the general procedures in practice )ill be adhered to and such industries )ill re:uire approval# PUBLIC SECTOR &he public sector )as given the predominance in the industrial development over the last four decades and the amount of investment made in this sector% though 4ustified from the point of vie) of socialistic democracy% it has been struggling )ith so many problems like poor productivity% e,cess staffing% lack of continuous technological upgradation% inade:uate attention to research and development% etc# &he rate of return on investment in public sector has been so lo) that it has prevented the automatic gro)th of these assets to the government# &he main reason for this poor performance of the public sector has been the taking over of the sick units from the private sector and the number of units )hich are in the consumer goods and service sector# 7ence% in the ne) policy the government has rightly given the emphasis to the development of public sector in the field of essential infrastructure goods and services% technology development and building of manufacturing capabilities% manufacture of products such as defence e:uipment# &he public sector )ill also enter the other areas not strengthened if they generate good profits and the management )ill be granted more autonomy through a system of memorandum of understanding# Private sector )ill be invited to induce competition in these areas# In selected industries in public sector% the government )ould disinvest a part of the e:uity share holding to provide market discipline to the performance of the public sector#

Based on these vie)s the ne) policy has the follo)ing provisions regarding the public sector0 @i) 2 revie) of the public sector portfolio investment )ill be made to give the emphasis on the role of public sector in the strategies% high tech and infrastructure# Public sector units )ill be allo)ed entry into areas not strictly reserved for it# @ii) &he Board for Industrial and Financial 'econstruction )ill be approached to help the sick units to rehabilitate them# &o protect the interest of )orkers )ho are likely to be affected due to rehabilitation of public sector sick units% a social security system is proposed to be devised# @iii) 2 significant policy aimed at raising the resources and encouraging public participation in the gro)th of public sector units is that the government )ill offer a part of its share holding in the public sector to the mutual funds financial institutions% generaU public and )orkers# @iv) In the direction of strengthening the management of public sector units the Board of public sector management )ill be made more professional and given more po)ers# Further to make the management of such units more autonomous and accountable a system of memorandum of understanding )ill be adopted# 2part from improving the e,pertise of the government in implementing the +68% the government also )ould place in the Parliament the +68 to facilitate detailed discussion#

MRTP ACT 2 ma4or deviant of the ne) policy is in respect of the +'&P 2ct# &he ne) policy aims at removing the unnecessary bureaucratic controls and allo) the industries to breathe in an atmosphere of freedom# &he efforts of the government in the past intervening in the investment decisions of the +'&P companies have been proved to be counterproductive# 7ence% the ne)ly empo)ered +'&P "ommission )ill en:uire into complaints received from individual consumers or classes of consumers# &he follo)ing is the essence of the provisions in the ne) policy regarding +'&P 2ct0 @i) &he limits of assets in respect of the +'&P companies and dominant undertakings have been removed and suitable amendment in the +'&P 2ct )ill be made in due course# @ii) &he need to obtain the prior approval of the central government for establishing ne) units% e,pansion of e,isting units% merger% amalgamation and take over as )ell as appointment of Directors have all been removed# @iii) &he +'&P 2ct )ill be used only for controlling and regulating monopolistic% restrictive and unfair trade practices# 2s a follo)-up the +'&P "ommission )ill be authori/ed to in:uire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic% restrictive and unfair trade practices# @iv) 2ll the necessary amendments )ill be made in the +'&P 2ct to give more punitive and compensatory po)ers of the +'&P "ommission#

In+ustri#- .#ttern in In+i# on t/e eve of .-#nnin( #n+ (ro2t/ sin$e t/e I Five Ye#r P-#n By AKFL% the industrial pattern in India )as completely under the shackles of the British policy# &ill independence% India )as used as a market for the finished goods of Briton and so nothing spectacular could be e,plained about the industrial pattern in India at that time# &he main features of the industrial pattern on the eve of planning @AKFL) )ere0 A# &here )as a conspicuous lop-sided pattern of industry found by AKFL# 6n the one side large industries o)ned by British businessmen )as e,isting and the other e,treme the indigenous industries of small si/e but in large numbers )as found# &here )as no medium scale industries at all# 6bviously the employment pattern )as concentrated in these t)o e,treme types of industries# B# &he capital intensity in Indian industries )as very lo) compared to several other 9estern countries# &his )as because of lo) )age level and very small market si/e for the products# So there )as no scope for large scale production# C# &he composition of industrial output )as such that the ratio bet)een consumer goods and capital goods )as GB0 CI# &his amply e,plains the under developed nature of the capital goods sector# 6n the eve of the I Plan the government studied the prevailing situation and then decided to launch the process of industriali/ation in India in order to achieve a higher rate of gro)th# For this purpose steps

)ere taken to design the industrial development to accelerate gro)th# &he plan-)ise steps for achieving a higher rate of industrial development is given belo)0 I Plan0 During this Plan the emphasis )as more on the development of agricultural sector than the industrial sector# 7o)ever% the effort )as to improve the po)er and irrigation facilities so as to facilitate rapid industriali/ation# &he target for the gro)th )as to achieve HN But in reality this called for huge investment )hich did not come forth# 6ut of the total investment planned for the industrial sector @'s# HKH crores)% 's# KE crores )as the outlay fi,ed for the public sector# &he Plan also aimed at fuller utili/ation of the e,isting capacity# 7o)ever several important industries like Sindiri Fertili/er factory% "hittaran4an !ocomotive factory% Indian &elephone industries% etc )ere set up during this Plan# II Plan0 &he seeds of industriali/ation )ere so)n during this Plan# During this Plan period several important changes took place and the most notable one being the government declared its Industrial policy resolution AKFG# 7eavy industries and large scale industries )ere to be set up# &he total investment by the private and public sector )as 's# AFHF crores# @i) @ii) @iii) @v) @vi) &he follo)ing priorities )ere set up to achieve a desirable pattern of industrial development during this Plan# &o give top priority to heavy engineering and machine building industries# E,panding the capacity of some of the industries producing aluminium% cement% chemical pulp% fertili/ers% etc# &o undertake moderni/ation and re-e:uipment of the ma4or national industries like cotton te,tile and 4ute# &o achieve fuller utili/ation of available capacity and &o e,pand the capacity of the consumer goods industries#

9ith these priorities% ma4or iron and steel plans )ere set up in public sector in collaboration )ith other countries# 2part from these the industrial development also included the development of several other medium scale and small scale units in large scale# &he combined effect of all these industrial development )as during this Plan period the inde, of industrial production shot up to AKE in AKGL-GA from a mere ACK in AKFF-FG# III Plan0 &his Plan provided for a big leap in industrial development by raising the rate of investment to a ne) peak to strengthen the industry% po)er and transport and also to achieve a rapid rate of industrial progress# 9ith this vie)% the total investment ear-marked for industrial development )as 's# CLLL crores in )hich public sector contribution alone amounted to 's# AHLL crores# In fact in this Plan the public sector )as given predominant role# 2part from this the village and small scale industries received a great impetus in the form of 's# EBF crores of investment by private and public sector# 2dded to this )as to set up CLL ne) industrial estates throughout the country# &he target for industrial development )asJ fi,ed at AEN% though the actual achievement )as only H#GN per annum# &here )as overall industrial development and it )as thought that the country could receive the stage of self-reliance# I5 Plan0 9ith a good agricultural output on the eve of this Plan @)hich coincided )ith the start of $reen revolution)% the industrial development started picking up# &his Plan had specific ob4ectives for industrial development as indicated belo)0 A# B# &o fulfill the commitments made for investments &o e,pand the production capacity as re:uired by the future

C# E#

&o bring do)n the level of dependence on import for supplies &o e,ploit the e,isting internal development to lay the base for ne) industries#

9ith a total investment of 's# FCLL crores by the private and public sectors% the Plan provided for the development of large% medium and small scale and village industries# But during this Plan the achievement )as )ell belo) the target due to several factors# Specifically% operational problems in some of the basic industries% lack of integrated planning% deficiency in design% loss of man-days due to strikes and lock-outs% decline in demand for industrial machinery% inade:uacy of investment% stagnation in the production of commercial crops% etc# 5 Plan0 &his Plan started )ith the emphasis on the follo)ing )ith the ob4ective of achieving self-reliance and gro)th )ith social 4ustice0 i# 'apid gro)th of the core sector% ii# Encourage development of industries )hich accelerate rapid diversification and gro)th of e,ports% iii# Increasing the production of industries )hich supply for mass consumption% iv# &o curtail the production of non-essential commodities e,cept for e,port purposes# 9ith this emphasis the total investment by the public private sectors )orked out to 's# ALACF crores# &he 5illage and small scale industries received tremendous encouragement during this Plan and the government reserved production of ABE items for small scale industries# Inspite of all these% the actual achievement of industrial development )as 4ust F#CN per annum against a target of S#AN &his )as mainly because of the capacity constraints in industries like cement% paper and fertili/er% lack of transport facilities% shortage of fuel% electricity% lo) administered price% strained industrial relations% inefficient management% etc#

5I Plan0

&his Plan started )ith a strategy to achieve structural

diversification% moderni/ation and self-reliance# &o)ards this% the Plan formulated policies on the follo)ing lines0 i# Enhancing the manufacturing capacity in a substantial )ay

covering a )ide range of industries% ii# $iving special attention to the capital goods industry and electronics industry in particular% iii# In order to meet the foreign e,change re:uirements% the e,ports of the engineering goods and industrial products )ould be stepped up% iv# Providing for a combination of the import of contemporary technology and also development of indigenous technology through intensive research and development and v# Developing a strategy for back)ard regions# &he Plan provided for an overall of investment of 's# BBAIH crores% though the actual e,penditure )as of the order of 's# CLLLL crores# 7o)ever% the industrial gro)th did not e,ceed the target determined due to various reasons% the important of )hich are0 Po)er shortage% poor industrial relations and continued labour unrest% poor demand conditions% lack of concern for improvement of efficiency failure to give greater emphasis on the technology up-gradation% etc# 5II Plan0 &his Plan provided for a total investment of 's# AKHLI crores by the Public sector and 's# BHFB crores for the development of the village and small scale industries# 6ver and above this the private sector investment of a very huge si/e )as also forthcoming# &he Plan developed an industrial strategy )ith the follo)ing elements0 @i) to completely remove the infrastructural deficiencies like po)er shortage% by providing for more efficient use of the e,isting capacity and also establishing ne) po)er plants#

@ii) @iii) @iv)

to encourage moderni/ation of industries especially

sugar

and te,tile industries through up-gradation of technology# to determine specific targets for productivity for ma4or industries like steel fertili/er% paper% cement etc# to identify the industries )hich possess competitive advantage and then encourage them more to improve their e,port by making the e,port production an integral part of the domestic production# @v) @vi) to encourage the >sunrise? industries )hich carry enormous potential for improving productivity and :uality to reduce regional disparities in industrial development and also ensure dispersal of industries by locating ne) industries in industrially back)ard states and districts% @vii) to e,tend the coverage of pollution control system in more industries# 2n encouraging note during this Plan )as that the actual achievement of gro)th )as very much better than )hat it )as in other plans% against a target of I#FN &his better gro)th rate )as achieved mainly because of i# better performance of infrastructural sector% changes in the area of licensing% higher import of capital goods% higher utili/ation of the e,isting capacity% e,tending of broadbanding policy to more industries% etc# &he overall outlay during this Plan )as 's# BBAEI crores# 5III Plan0 2t the start of this plan% the government had taken a crucial decision to change its fiscal% monetary% trade% industrial and foreign investment policies# In one )ord% the liberali/ation policy )as announced# &he continued emphasis on public sector )as dropped as it had provided the necessary momentum for gro)th and so the private sector initiatives have to be encouraged# &he overall efficiency of the

private sector proved that it has come off age and play a greater role in the economic development# &he competitive advantage of Indian industries should be made full use of and so the private sector is vested )ith the responsibility for improving the efficiency and productivity# 2n open door policy is adopted to facilitate the gro)th of private sector and also to integrate the domestic production )ith the rest of the )orld# E,ternal collaboration% 4oint ventures% etc )ill all be vie)ed )ith a main focus on the flo) of benefits# &he overall outlay in this Plan )as set at 's# ELGHC crores# &he Plan has fi,ed I#KN as the annual average gro)th rate and )ith the prevailing conditions% this target appears to be reasonable and achievable# EKIM B#n, #n+ t/e fun$tions of EKIM B#n, T/e s$/emes of fin#n$in( of t/e B#n, &he E,port-Import Bank of India @E*I+ Bank) established on Ast Danuary% AKIB is a )holly o)ned financial institution of the government# It )as established% by an 2ct of Parliament% for the purpose of financing% facilitating% promoting foreign trade of India# It is a principal financial institution for co-ordinating the )orking of institutions engaged in financing e,ports and imports# "hapter I5 of the E*I+ Bank 2ct provides0 W&he E*I+ Bank may grant% in or outside India% loans and advances% by itself or in participation )ith any bank of financial institution )hether in or outside India% for the purpose of e,port or import and shall also function as the principal institution for co-ordinating the )orking of institutions engaged in financing of the e,port in such manner as it may deem appropriate#J &he "hapter provides further0 J&he E*I+ Bank may also carry on and transact all or any of the follo)ing kinds of the follo)ing business% namely0

@a)

granting loans and advances to a scheduled bank or any other bank or financial institution notified in# the 6fficial $a/ette by the "entral $overnment in this behalf by )ay of refinance of loans and advances granted by it for purpose of e,port or import#

@b)

under)riting

the

issue

of

stocks%

shares%

bonds

or

debentures of any company engaged in e,port or import% the E,port-Import Bank of India 2ct% AKIA# @c) issuing bid bonds or guarantees in or outside India by itself or in participation )ith any government bank or financial institution in or outside India# @d) accepting% collecting% discounting% re-discounting purchasing% selling or negotiating in or outside India bills of e,change or promissory notes arising out of transactions relating to e,port or import and granting of loans and advances in or outside India against such bills or promissory notes# @e) granting% opening% issuing% confirming or endorsing letters of credit and negotiating or collecting bills and other document dra)n there under# @f) undertaking any transaction involving a combination of government to government and commercial credit for purpose of e,port or import# @g) granting loans and advances outside India for any Indian 4oint venture#

@h)

granting lines of credit to the government of any foreign state or any financial institution or person outside India for purpose of e,port and import#

@i)

granting loans and advances to any person in India in connection )ith his e:uity contribution in any 4oint venture in any country outside India#

@4)

financing e,port or import of machinery and e:uipment on lease basis#

@k)

subscribing to or entering into such other dealings in foreign e,change% as may be necessary for the discharge of its functions#

@l)

subscribing to% or investing in% or purchasing of% stock% shares% bonds% or debentures of any country outside India#

@m)

opening of any account in any bank in or outside India or the making of any agency arrangement )ith% or acting as agent or correspondent of% any bank or other institution in or outside India#

@n)

transferring for consideration% any instrument relating to loans and advances granted by it#

@o)

issuing participating certificate#

@p)

subscribing to% or investing in% or purchasing of stock% shares% bonds% or debentures to the e,tent necessary for the enforcement of a line% pledge or other contractual right

@:)

undertaking and financing of research% surveys% technoeconomic or any other study in connection )ith the promoting and development of international trade#

@r)

providing technical% administrative and financial assistance of any kind for e,port or import#

@s)

planning%

promoting%

developing

and financing

e,port-

oriented concerns# @t) forming or conducting subsidiaries for carrying out its functions# @u) acting as agent of the "entral $overnment% any State $overnment% the 'BI% the Development bank or any other person as the "entral $overnment may authori/e# @v) collecting% compiling and disseminating market and credit information in respect of international trade% @)) @,) @y) doing any other kind of business )hich the "entral government may authori/e# generally doing such other acts and things as may be incidental to or conse:uential upon% the e,ercise of its po)ers or to discharge of its duties under this 2ct or any

other la) of the time being in force% including sale or transfer of any of its assets# Fin#n$in( s$/emes of t/e EKIM B#n,& &he present focus of the Bank is on medium term and long term credits# 9henever a buyer of goods or services e,ported from India is allo)ed to defer payment% an e,port credit% arises# Deferred e,port credit is available for the sale of machinery% manufactured goods and related services# Such credit may be in the form of WSupplier.s creditX or WBuyer?s creditX - Supplier.s credit arises )hen an Indian e,porter e,tends credit to the overseas buyer and finances himself through the E*I+ Bank# Deferred e,port credit takes the form of Buyer.s credit )hen the E*I+ Bank e,tends credit directly to the buyer# &he E*I+ Bank operates three broad programs of financing vi/# !oans% 'ediscounting and $uarantees# 2t present the Bank operates nine lending schemes )hich are briefly described belo) !" Lo#ns to In+i#n $om.#nies&

Direct financial assistance to e,port0 Funds are provided% on deferred payment terms% to Indian e,porters of plant% e:uipments and related services% )hich enable the e,porter to e,tend deferred credit to the overseas buyer# &his programme covers pro4ect e,ports% )hich could be turn-key pro4ects construction pro4ects# Such pro4ect e,ports arise )hen an Indian company contracts either to set up on a turnkey basis any te,tile mill% sugar plant or contracts a construction pro4ect overseas# Financing e,port of eligible goods is covered under this programme#

"onsultancy and technology services0 Indian companies can borro) funds from E*I+ Bank and provide deferred credit overseas buyers of Indian consultancy of technology services# 6verseas investment financing0 &he bank provides financing% )here an Indian company establishes a 4oint venture overseas% and re:uires funds to)ards e:uity participation# Pre-shipment credit0 &his programme is available for companies% that have )on an e,port contract for the eligible goods and are seeking finance to produce the goods )hich entails a production period e,ceeding si, months# Lo#ns to forei(n (overnment $om.#nies #n+ fin#n$e

institutions& &his is offered directly to foreign importers for the import of eligible Indian goods and related services )ith repayment terms spread over a period of years# !ines of credit to foreign governments0 Besides Foreign $overnment% such lines of credit are available to foreign financial institution# Such lines provide long term finance for import of Indian capital goods related services# 'elending facility to banks overseas0 'elending facility to banks overseas is made available to enable them finance to importers% for import of Indian capital goods# Banks overseas )ould intermediate bet)een foreign buyer and E*I+ Bank% and the latter )ould intermediate )ith the supplier#

'ediscounting facility0 8nder this type of assistance% specific mention may be made about the follo)ing schemes0 E,port Bills 'ediscounting0 &his lending programme is available to commercial banks% in India% )ho are authori/ed to deal in foreign e,change# Such banks can re-discount their short term usance e,port bills portfolio )ith E*I+ Bank# E*I+ Bank provides funds% under this programme% for a period of KL days against e,port bills that have e:ual period to run% before reali/ation# 'efinance of e,port credit0 8nder this programme% commercial banks% in India% )ho are authori/ed to deal in foreign e,change% can obtain from E*I+ Bank ALLN refinance of term loans e,tended for e,port of eligible Indian goods# Such credit enables Indian E,porters to offer credit terms to foreign Importers# For an e,port contract upto 's# AL million% commercial banks can obtain financing participation under E*I+ Bank.s other programme% including syndication facility# $uaranteeing of obligation0 &he $uarantee programme is available in the case of construction and turnkey contracts# "onstruction contracts involve erection% civil )orks and commissioning# In such contracts% an Indian e,porter usually re:uires bid bond% advance payment guarantee% performance guarantee% guarantee for retention money and guarantee for borro)ings abroad# E*I+ Bank participates )ith "ommercial banks in India in the issue of guarantee# V#rious f#$i-ities offere+ +ifferent $#te(ories % t/e EKIM B#n, to t/e e0.orters of

iA

F#$i-it% to e0.orters of en(ineerin( (oo+s #n+ turn,e% .ro3e$t e0.orters&

Deferred payment e,ports arise )hen the e,port proceeds are to be received beyond si, months from the date of shipment @in case of e,ports to 2fghanistan and Pakistan beyond three months)# &urnkey pro4ects arc those )hich involve rendering of services like design% civil construction% erection and commissioning of plant along )ith supply of e:uipment# &ypical of pro4ects include for supply% erection and and commissioning e:uipment generation% transmission

distribution of po)er and plants for manufacture of cement% sugar% te,tiles% chemicals% etc# 9hen an Indian. e,porter e,tends deferred credit directly to the overseas buyer% the e,port contract falls under the category of WSupplier?s "redit#X 6n the other hand% if a foreign buyer is offered credit by a financial institution or a consortium of financial institutions in India and the Indian e,porter is paid the e,port value by the institution@s) concerned% the relative e,port contract falls under the category of WBuyer.s credit#X Supplier.s credit0 "redit is provided by the E*I+ Bank on deferred payment basis% in participation )ith commercial banks% to Indian e,porters% of engineering goods and turnkey pro4ects to enable them to e,tend credit to importers overseas# 9here individual contract value is not more than 's# A crore banks may provide the credit and avail ALL per cent refinance from the E*I+ Bank#

6verseas buyer.s credit0 2s an alternative to Supplier.s credit availed by the e,porters% credit e,tended by the E*I+ bank to buyers abroad )ith a vie) to enable the latter to import engineering goods and pro4ects from India% on deferred credit terms# "redit to overseas buyers is also available from the E*I+ Bank in the form of !ines of "redit to overseas financial institutions% foreign governments and agencies% and relending facility to overseas banks# Pre-shipment credit0 "redit is available to eligible e,porters to buy ra) materials and inputs re:uired to produce capital e:uipment that has to be e,ported# E*I+ bank participates in the credit if the re:uirement is for a period of more than AIL days# Foreign currency loans0 Foreign currency loans can be availed of from the E*I+ Bank at market rates to cover purchase procurement of machinery from third countries# &echnology and consultancy services finance0 "redit is also available to eligible Indian e,porters of technology and consultancy services to enable them to e,tend term credit to importers overseas# (on-funded facilities0 E,porters of engineering goods and turnkey pro4ects abroad arc also provided the follo)ing facilities0 i) issue of Bid Bonds ii) issue of advance payment guarantees% iii) issue of performance guarantees% iv) issue of guarantees for release of 'etention +oney.s and v) issue of guarantees for raising Borro)ing overseas# iiA F#$i-it% to overse#s $onstru$tion .ro3e$t e0.orters&

"onstruction pro4ects involve civil )ork% Steel structural )orks% as )ell as design% e:uipment supply% erection and commissioning# &ypical pro4ects include electrification and utility% po)er transmission% pipelines% )ater resource management systems% airports% roads% bridges% hotels% housing and erection of industrial plants# &he E*I+ Bank offers funded% non-funded and advisory services to Indian construction pro4ect e,porters# Pre-shipment credit0 &he Bank finances the e,ports from India and the preliminary e,penses in rupees relating to the e,ecution of the pro4ect# "ommercial banks also e,tend this facility for definite periods at confessional rates of interest# Post-shipment rupee credit0 &he E*I+ Bank enables financing of e,ports until progress payments are received commercial banks e,tend this facility at confessional rates of interest# Foreign currency loan0 &he Foreign currency loan can be availed of from the E*I+ Bank% at market rates% to cover purchase procurement of machinery from third countries# Deferred credit0 &he E*I+ Bank provides deferred credit facilities against security for a portion of the contract covering e,port of selected items and technical services from India#

(on-funded facilities0 E,porters of construction pro4ects overseas are also provided several facilities as e,plained already# iiiA Consu-t#n$% #n+ te$/no-o(% servi$e fin#n$e& Indian companies e,ecuting overseas contracts% involving consultancy and technology services% can avail of E*I+ Bank.s financing programme )ith a vie) to offer deferred payment terms of their clients# &his enlarges the market for e,port of Indian consultancy services# &he consultancy and technology servi$es for this purpose include0 a) providing personnel including skilled and unskilled )orkmen are persons for rendering technical or other servicesP b) &ransfer of technology% kno) ho) e,pertise or other skillsP c) furnishing any information% blue prints% plans or adviceP and d) any other activity considered acceptable by the E*I+ Bank# Indian consultants% having corporate status or other)ise )ho-have secured a contract for e,port of services )herein deferred payment term need to be offered to the client% can utili/e the facility# ivA Lines of $re+it& E*I+ Bank e,tends lines of credit to overseas $overnment of 2gencies nominated by them to enable buyers in those countries to import capital engineering goods from India on deferred payment terms# &his facilities enables Indian e,porters to offer deferred credit terms to customers in those countries as per terms and conditions already negotiated bet)een the E*I+ Bank and the overseas governments# &he e,porters can obtain payment from the E*I+ bank against negotiation of shipping documents% )ithout recourse to the e,porters#

vA F#$i-it% for s%n+i$#tion of E0.ort $re+it ris,s& "ommercial banks% in participation )ith E*I+ Bank provide long term credit% at competitive rate of interest% to Indian e,porter of capital goods% turnkey pro4ects and consultancy services% thereby enabling Indian e,porters to compete effectively in the international markets# &he facility for syndication of term e,port risks lends fle,ibility to# the e,port credit mechanism by allo)ing banks to assume risks% )ithout blocking their funds -for long terms% at fi,ed interest rates% commercial banks can no) support e,port proposals )ithout impairing their li:uidity# "ommercial banks seeking enhancement in their e,port portfolio can avail of this facility end participate in the syndication arrangement# viA F#$i-ities for +eeme+ e0.orts& "

JDeemed e,portX occur in case of specified transaction )ithin India )hich result in foreign e,change earnings or foreign e,change savings# Deemed e,ports involving supply of capital goods and other eligible goods have access to the E*I+ bank.s deferred credit facility #at internationally competitive interest rates# E*I+ bank e,tends credit through the supplier or directly to the buyer# Intermediating banks institutions can also avail of refinance facility from the E*I+ bank covering the full value #of the term credit# E*I+ bank may% in addition% provide pre-shipment @)orking capital) facility% normally for large transactions involving long manufacturing cycle time#

6ther facilities available from the E*I+ bank relating to .deemed e,ports. include issue of guarantees and bridge financing in foreign currency# &hese facilities are normally availed by pro4ect e,porters# viiA A+visor% servi$es& &hrough its International +erchant Banking division% the E*I+ Bank offers the follo)ing advisory services0 @a) )ork closely )ith Indian companies in designing financing packages for 4oint ventures in third countriesP @b) advise Indian companies e,ecuting contracts abroad% on sources of favourable financing overseasP @c) providing access to Euro-financing sources and global credit sources to Indian companies engaged in e,portsP @d) advise on e,change control practices globally and @e) advise and design financial packages for e,port oriented industries in India &hese services are being added to in order that tailor-made financing packages for high value e,port contracts are available# +inistry of "ommerce% $overnment of India% determines the eligibility of transactions )hich are to be treated as .deemed e,ports# &hese are published% from time to time% in the Imports and E,port Policy Book# Ne2 e0.ort1im.ort .o-i$% !FF' 1 !FFD" &he balance of payments position% )hich had reached a point of near collapse in Dune% AKKA% slo)ly stabili/ed during the course of AKKA-KB# 2lthough ne) policies to deal )ith the situation )ere :uickly formulated by the ne) government and implemented )ithin a fe) months the e,ternal payments situation took time to stabili/e primarily because it had been allo)ed to deteriorate to a state o near bankruptcy in Dune AKKA# Foreign currency reserves had declined to S

I#I# billion despite heavy borro)ing from the I+F in AKKL-KA and a substantial part of this )as held in illi:uid deposits )hich could not have been easily mobili/ed if needed# International confidence had all but collapsed% commercial borro)ings had dried up and even letters of credit opened by Indian banks )ere being generally re4ected unless accompanied by confirmation by foreign banks# &he strategy for the management of the balance of payments outlined in the Budget for AKKA-KB )hich )as presented in Duly% AKKA relied upon a combination of macro economic stabili/ation and structural reforms i industrial and trade policy# It )as recogni/ed that in the medium term% the solution to the balance of payments problem )ould have to come from a much stronger e,port performance% but in the shorter run the strategy had to be underpinned by mobili/ation of e,ternal financing from the multilateral agencies and from bilateral donors# 'estoration of access to imports through liberali/ation had to depend initially upon additional financing since the e,port efforts )ould take time to sho) results# Since access to e,ternal commercial borro)ing )as constrained the only other sources of funds )ere the bilateral and multilateral agencies# 5isible support from the multilateral agencies )as important for restoring international confidence# 2ccordingly% the government negotiated a standby arrangement )ith the I+F in 6ctober% AKKA for F B#C billion over a BL-month period% a Structural 2d4ustment !oan )ith the IB'D of S FLL million and a 7ydrocarbon Sector !oan )ith the 2DB for S BFL million# Parallel )ith the effort to dra) on multilateral sources% the government also launched the India Development Bonds aimed at mobili/ing ('I sources of funds#

9ith the assurance of e,ternal support through these efforts% there )as a gradual stabili/ation of the balance of payments position in the course of AKKA-KB# Foreign e,change reserves )ere restored to more normal levels increasing from S A#A billion in Dune% AKKA to S F#G billion at the end of +arch% AKKB# &he entire amount of dra)ls from the I+F in AKKA-KB )ith the accretion from India Development Bonds together amounted to an inflo) of S B#IH billion# &his )as less than the increase in reserves of S E#FA billion from Dune AKKA to end +arch% AKKB# In effect% the e,ceptional financing mobili/ed in AKKA-KB )as used primarily to build up reserves# Import restrictions )ere gradually lifted in the course of AKKA-KB as the balance of payments stabili/ed# By the end of AKKA-KB the ne) !iberali/ed E,change 'ate +anagement System introduced in the Budget for AKKB-KC eliminated import licensing in most capital goods% ra) materials% intermediates and components and introduced a dual e,change rate system )ith one rate effectively floated in the market# &he Budget for AKKB-KC also reduced the customs duties in line )ith declared $overnment policy in order to make the Indian economy more competitive and gradually e,posing Indian industry to e,ternal competitive pressure# &he trade and e,change rate policy

regime for AKKB-KC )as therefore characteri/ed by ma4or progress in eliminating unnecessary administrative and discretionary controls over foreign trade )hich )ere contributing to making our economy uncompetitive# &he year AKKB-KC sa) a revival of imports to more normal levels# &he total value of imports in 8S S in the period 2pril-December AKKB increased by AG#FN over the level in the corresponding period of AKKAKB# &he increase appears large only in comparison )ith a highly

depressed level prevailing in AKKA-KB# In fact the level of imports in AKKB-KC as a )hole is e,pected to be around S BF billion )hich is some)hat lo)er than the level in AKKL-KA# E,ports in AKKB-KC performed far better than in AKKA-KB# &otal e,port gro)th in the period 2pril-December )as C#EN in dollar terms compared )ith an observed decline of A#FN in AKKA-KB# &he performance of total e,ports is depressed by the decline of more than GLN in e,ports to 'ussia and other States of the former Soviet 8nion in AKKB-KC# &he gro)th of e,ports to the general currency area in the period 2pril-December )as AA#EN# &he average gro)th rate in 2prilDecember% AKKB has been adversely affected by a decline in e,ports of AB#FN in December% reflecting the disturbed conditions prevailing in that month% figures for Danuary are also likely to be depressed by the riots 8S S AK billion# But it is hoped that the e,port performance in subse:uent months )ill return to the high gro)th rates of AF - AG per cent observed during September-(ovember# &he current account deficit in AKKB-KC is e,pected to be around S H billion% reflecting the revival of imports to more normal levels# &his deficit is being financed through a combination of traditional financing sources and e,ceptional financing# 7o)ever% there are important uncertainties in the balance of

payments# &he full impact of the disturbances in December% AKKB and Danuary% AKKC on e,ports and imports is difficult to assess at this stage# "learly% the receipts on account of tourism )ould be less than anticipated# &he inflo) of ('I deposits has in any case been small this year# &he inflo) of e,ternal assistance is also sub4ect to some uncertainties conse:uent upon constraints that affect the rate of utili/ation# 2 step-up in commercial borro)ings )as% in any case% not

envisaged# Finally% there is the uncertainty arising from leads and lags# Interest rates and e,change rate e,pectations do affect the timing of receipt of e,port proceeds and payment of import costs# 7o)ever% )hile these uncertainties 4ustify a measure of caution in assessing prospects% the balance of payments in AKKA-KB has performed more or less as e,pected% Ne2 e0.ort1im.ort .o-i$% !FF' 1 !FFD 6n +arch CA% AKKB% the $overnment announced a ne) e,port-import policy for the period D KKB-AKKH% &his policy has the follo)ing ob4ectives0 A# B# &o institute the re:uired frame)ork for globali/ation of the India.s foreign trade# &o improve the e,port capabilities of our industry% the policy aims at promoting the productivity% moderni/ation and competitiveness# C# &o facilitate improvement of image of our products in foreign markets% the policy encourages the attainment of high :uality in the e,port products% E# By allo)ing liberal access to ra). materials% intermediates% components% consumable and capital goods etc#% in the international market% the policy )ants to achieve higher e,ports# F# &he policy provides for deregulation to achieve self-reliance so Jthat @he domestic producers can improve then- efficiency and become competitive internationally# G# &he policy also lays emphasis on research and development as )ell as technological advancements so that the domestic producers )ill benefit from globali/ation# H# 2 significant ob4ect is to simplify the procedure for e,ports and imports#

Subse:uently% the government announced further modification to the above policy by 2pril A% AKKC# &he important features% of this modified policy are0 @a) &he duty-free e,port benefit given to the E,port oriented units and the units in E,port Processing Vones is e,tended to units engaged in agriculture and allied activities provided they e,port FLN of their total production# @b) &he government removed AEE items from the negative fist of e,ports leaving only prohibited items% items re:uiring license and canali/ed items# @c) 2s a step to the tap the potential of farm the sector% E,port professionals% hotels% travel agents and diagnostic centers% @d) government e,tended promotion capital goods scheme to them# For more than BBLL items% standard input-output norms is fi,ed to enable the issue of license under the duty e,emption scheme# @e) &he criterion for recogni/ing e,port houses is no) based on the foreign e,change earning to F6B values of physical e,ports# @f) @g) &he procedure relating to e,port and import has been further simplified# "ompensation )ould be given for unutili/ed import licenses for duty free license scheme and E*I+ scrip holders# &hese provisions in the latest e,port-import policy )ould certainly enable India to improve her e,ports and bring do)n imports#J &his has been e,perienced during the first half of AKKE itself#

Pu -i$ Distri ution !" Me#nin( #n+ o 3e$tives of Pu -i$ Distri ution S%stem ;PDSL &he countries like India )ith more population commensurate )ith production of minimum needs especially food grains% are necessarily in a position to have a streamlined system of distributing the essential commodities to the population living )ith lesser purchasing capacity to fulfill the ob4ectives of democratic government# 2s a fundamental "onstitutional right% in India the producers and traders of food grain have the right to do business freely and can earn profit as much as possible# &hey )ere given every right to influence the market by means of pricing% supply% distribution% etc# 2t the same time the consumers are also given rights to protect themselves from greedy traders% )ho are indulged in malpractices in trade# It becomes the duty of the government to protect the rights of both producers% traders and consumers# In our country the government is liable @o protect consumers and that too consumers )ho are living belo) the poverty level# "onsumers )ho are living belo) the poverty line are to be provided their minimum needs# JPoverty is concerned )ith the relationship bet)een the minimum needs of people and their ability to satisfy their needs# J+inimum needsJ and the amount of money re:uired to satisfy their needsJ - first its minimum food budget# ;Economic and Social Issues - !eft)ich 3 Sharp< $radually out government took steps to safeguard the interest of the population )ho are under poverty line and also to improve the gro)th rate of productivity in agriculture and industry and trade# &hese steps led to the dual price mechanism in market% legislation in pricing and marketing and introduction of PDS#

PDS is at present functioning for the cause of middle income and poor income group )ith consumer orientation# "onsumerism has been e,plained as follo)s0 J+easures are intended to protect consumers from unscrupulous .sellers )ho presumably charge more for goods and services# &hen they are )orth to buyers# &he priceR controls on various items fall into this category# &hese consumers )ho can get as much at the controlled price as they )ould purchase at an uncontrolled price clearly gains# &he market mechanism may be able to bring about an Je:uilibriumJ bet)een demand and supply# Even in this sphere% but it )ill not be able to bring about a balance bet)een need and supply# Planning is necessary to take care of the poor and do)n trodden )ho are for the most part% outside the market system and have little asset endo)ment to benefit from the natural gro)th of economic activity# J&he market alone cannot ensure employment and a living )age to all our rural poorJ ;Prime +inister.s statement on Ith Plan< &2B!E0 A#A (et availability of foodgrains in India Oear AKFG AKGA AKHB AKHK AKIE AKII AKIK AKKL AKKA Population in +n# CKH EEB FGB GFK HCI HKK IAG ICC IEK (et availability of foodgrain in m#t# GC HG KG AAE ABI ACB AEH AEE AFI Per capita availability in gms ECA EGK EGH EHE EHI EEI EKE EHE FAL

;Source0 $ovt# of India% Economic Survey% :uoted by 'uddar Dutt 3 1P+ Sundaram in Indian Economy% AKKC)

&he net availability of food production has increased from GC m to AFI m bet)een AKFG and AKKA% )hereas the population has increased from CKH m to IEK m during the same period# &o be more specific the greater gro)th of population )as in the rural areas# It also signified that the share of family consumption in total food production )ill increase and much less )ill be left over as marketable surplus# &his type of deviation% indicated the government to enter into e:uitable distribution system of food supply# &2B!E0 A#B &he gro)th of population and gro)th of food supply Oear AKHK-IL AKIC-IE AKIH-II AKKL-KA AKKA-KB Population in #m# GFK HCI HKK ICC IEK Food Production in m#t# AAL AFB AEL AHH AHF

@Source0 Indian Economy% 'uddar Dutt 3 1P+ Sundaram) During the past planning years our country has faced heavy inflationary pressure# &he vulnerable section of the community )as very much affected by the heavy raise in prices# During unproductive seasons the daily bread )inners in urban areas and the rural agricultural landless laborers are the ones very much affected by the steep rise in prices of essential commodities# 7ence it is the duty of our government to protect the vulnerable class from this crisis# &hus the government entered into this PDS# &he crop yield in India is very lo) )hen compared to other countries# &he crop yield in India is :uite disproportionate to the abnormal gro)th rate of population needs% Even after $reen revolution% )hich took up

the food production spectacularly% the international% comparison brings a lo) position of India# 7ence it is the sole responsibility of our government to streamline the food supply to protect the )eaker sections of the society# &2B!E0 A#C 2verage yield per hectare ;in Mtls#< "ommodity 'ice "ountry AKFA-FG India I "hina AH Dapan BG 9heat India H "hina K France BA $ermany BI Source0 Economic Survey AKKL% P ^## &he seasonal fluctuations create AKGA-GG AL AI CC I K BK CC AKIH-II AH CF EL BL CL CL GI

disparity

in

the

:uantum

of

production# &he gro)ing regional disparity in food production creates an artificial food scarcity# &he amount of food supply and other demand are taken into consideration by the "entral government to fi, up the prices# So it becomes important to distribute the food grains on the basis of population% supply and demand# 7ence it is inevitable on the part of the government to bring a streamlined system in food production% management for e:ual distribution# Food problem and its management become comple, and multifarious due to black marketing and hoarding# &hese practices create artificial demand for food supply and reflects as the high prices% the )orst sufferers )ould be the poorer and middle class people# &his paved the )ay for PDS# Famine )ere fre:uent in the past but rare in the present# Bihar ;AKGFGG<% +aharashtra ;AKHB-HC<% 9est Bengal ;AKHE-HF<% etc#% &hrough PDS

government shall augment food supply to tackle the food crisis# &here are certain other factors )hich affect the free open market system such as social and political revolutions# So the government is liable to lay its hand and supply food grains and other essentials at the cost of affected people# Fluctuations in prices of food grains affect producers and consumers as )ell# &he negative effect of price rise )ill be more severely felt by the )eaker sections of the society# &he distribution system should aim at e:ual and fair distribution of commodities to the general public# Muality food is the other criteria taken into consideration by the government# +ore than HFN of the Indians cannot afford to pay for :uality diet )hich results in malnutrition# 2dulteration is one of the reasons for poor :uality of food grains# +ass and mushroom gro)th of slums in Indian cities and their belt areas also necessitated the PDS# 7ence PDS is becoming an essential system in urban areas# 6ver cro)ding and the conse:uent pressure of population on land hence led to subdivision and fragmentation on land% decline in per capita area% disguised unemployment and thus marginal productivity of labour is /ero or negative# &he unemployed or under employed gets only seasonal employment only# &hey are not getting any personal income# &his needs effective PDS# '" Evo-ution of PDS in In+i# Before II 9orld 9ar the deficiency in food production )as met out by importing food grains from Burma% Dapan and other countries# During this time the import of food grain )as highly affected# In AKEA the

"entral government fi,ed the statutory )heat price and in AKEB statutory price )as fi,ed for rice also# &he administration of controls )as vested initially in the state government# &he Crd Price control conference in AKEA led to the interference of the central government &he conference held in AKEB recommended an 2ll India Plan for distribution of )heat and rice# For further streamlining% a Food grain Policy committee )as appointed in Duly AKEC under the "hairmanship of &( $regory ;Food Policy and Economic Development in India% Dospeh% S#"#% +adras AKGA< &he recommendations of the "ommittee to bring all ma4or food grains under statutory price control% calling for "entral supervision to supply of food grains to deficit areas% introducing rationing system in the larger cities )ith over one lakh population initially and e,tendable to other gradually% to all food grains and all sections of society# Based on the scheme% the distribution of rice )as introduced first in +adras in rationing and then in Bombay# In AKFL government of India appointed a committee to revie) the situation kno)n as Food grains procurement committee# &he follo)ing )ere recommended by that "ommittee0 Effective co-ordination and fo_d production% distribution system of essential commodities and a good control over the distribution of the same# In AKFL due to bad crop and steep rise in food grain prices% due to 1orean )ar% India had to face a slump period# &his )as overcome by getting a loan of B m t of )heat from 8S2# During the First five year plan the government of India had the ob4ective of reducing the dependence on foreign food and food and )as to attain self sufficiency in domestic production# &he series of good harvests in the country and the conse:uent decline in food grain prices

during I Plan period made the government to rela, the control and later remove it altogether# Food prices during this period )ere reduced by BCN

In AKFF% the problem of food shortage and rise in prices again emerged# But soon it )as rapid# In AKFG the government of India entered into an agreement )ith 8S2 under P!EIL# 8S2 agreed to supply C#A m t of )heat and L#AK m t of rice for the ne,t three years# &his gave the opportunity for the government of India to stabili/e the price structure# In AKFI-FK% the crisis )as acute# &here )as severe food crisis in Bihar% Bombay% 'a4asthan% &amilnadu% 6rissa% etc# In AKFK% food grains prices rose to EAN in the first three years of II Plan# In AKFH% the government of India appointed a "ommittee to revie) the food problem called as JFood grains En:uiry committeeJ &he recommendations )ere as follo)s0 A# compulsory countries till procurement of food grains from foreign

a successful policy is framed by the central

government of India# B# it recommended for an organi/ed PDS through a net)ork of fair price shops and also to maintain buffer stock# ;Dandekar committee report< - about the fair price shop during AKGA -GE the prices of domestic grains in general continued to rule considerably above the price at )hich the imported grains )ere being issued through the fair price shops# So the government has set up in AKGE-GF F"I to build up buffer stock of F m t every year# But it has failed due to t)o consecutive drought years#

During AKGH-GI% the name of the Fair Price Shop Scheme )as corrected into PDS )ithout arty change in the system of organi/ation# 7o)ever the PDS came in full s)ing during E th and Fth Plan# &his Plan has recommended the follo)ing0 A# It is needed on a regular basis B# &o have an ade:uate buffer stock system# +oreover the re:uirements of the PDS should be met mostly through internal procurement# Due to shortage of stock in AKHC-HE% the government had to import food grains and there )as a high rise in price due to this the PDS could not fulfill its ob4ectives# In AKHF the government of India appointed the (ational commission on 2griculture# &he recommendations )ere0 A# 2lU to)ns and cities )ith a population of over one lakh should have a full fledged system of PDS# B# 2ll chronically drought prone areas should be covered under PDS# C# 2ll industrial to)n )orkers covered under all India "onsumer Price Inde, numbers should have PDS# E# 2reas affected by flood% are to be covered under PDS# 2ll these recommendations )ere at a later stage fully implemented and e,ecuted by the government of India# Fifth five year plan )as )ith the aim of removing poverty and gro)th of social 4ustice and e:uality and also attainment of self-sufficiency. in all areas# Since AKHE% the PDS has handled efficiently the distribution of food grains )ith F"I# In AKHE the government created a full fledged system of civil supplies and co-operation to ensure orderly production and distribution of commodities# &he "entral government has developed support organi/ation such as (ational 2gricultural "o-operative +arketing Federation ;(2FED< and (ational "onsumers "o-operative Federation ;(""F< to undertake

)holesale trading# Si,th and Seventh Plan took steps to minimi/e the problems of the society to get basic amenities like education% health care% sanitation% and safe drinking )ater food grains# &he Seventh plan pays special attention in increasing the production of food grains% edible oils% sugar% te,tile and other items of mass consumption# &he Eighth plan aims at the gro)th of diversification of agriculture to achieve self- sufficiency in food production and to generate surplus for e,ports# &he estimated agricultural production during the Eighth Plan is given belo)# &2B!E0 A#E ES&I+2&ED 2$'I"8!&8'2! P'6D8"&I6( D8'I($ Ith P!2( 'ice 9heat "ourse cereal Pulses 2ll food grains Sugar cane KA-KB m t HB#F FG CL AE AHB#C BCF KG-KH II GG CK AH BAL BHF 2nnual gro)th output C#KF C#CE F#E C#KG E#LA C#AK

Ith Plan proposed to raise the production of rice% pulses% oilseeds# It 2imed at self sufficiency and to prevent e,ports of food grain# &he main ob4ective of this Plan )-`s the e,tension of PDS to in accessible rural% tribal areas% etc# Ev#-u#tion of $onsumer $o1o." F#ir .ri$e s/o.s Before AKAB% co-ops# 9as started in India as 2gricultural co-ops# During the I 9orld 9ar period% a number of consumer stores came up in fe) important cities and to)ns# primary stores in India# In AKBI-BK there )ere in a) CBC Before 7 9orld 9ar period there )ere CKG

stores )ith ECLLL members# During II 9orld )ar the dimension of @he ob4ectives of these stores changed# &he acute shortage of food supply

during and after the II 9orld 9ar forced the government to intervene into the functions of consumer co-ops# agencies for the to government prevent black in commodities &hen the co-op stores acted as the distribution to of controlled e:uitable &he ensure

marketing

distribution# In the first five year plan the importance of consumer societies )as emphasi/ed but it )as not properly implemented# Second five year plan reiterated the scope of the development of a net)ork of the co-op societies in urban areas also# 2 committee )as appointed by the $overnment to revie) the functions of these societies# &hey have recommended a good organi/ational set up anJ effective structural pattern of consumer co-ops% their si/e% viability and )hole sale stores promoters% etc# &he "ommittee differentiated the primary% )holesale and district )holesale societies and norms specified is given belo)# @"o-op sector in India - Sami 8ddin% +afa/ur 'ahman%############## Primary Share "apital co-op# FLLL FLLLL ALLLLL &urnover A lakh B lakh CLL lakh +embers BFL ALL Primary stores

Stores 9holesale stores 9holesale stores

are members BLL Primary members

In the Crd five year plan it )as observed that .conditions for the development of consumer co-ops are generally favourable and if the special efforts are made rapid progress can be achieved# &his )ill be of greatest help not only on in the stabili/ation of retail prices but also in preventing the evils of adulteration in food stuffs#. 2fter "hinese aggression the government of India felt the need of co-op# "onsumer societies to ensure the supply of food grains at controlled rate to the

home needs# 7ence the government provided financial and also establishment assistance to all co-op consumer stores# Share "apital "ontribution +anagement e,penses $odo)n contribution 'ent subsidy Primary Stores 's# BFLL 's# AILL 2pe, )holesale stores 's# FLLLL 's# GLLL 's# ABFLLL 's# KLLL @+a,imum)

@'ef0 S# P# Dain President Indian "hamber of "ommerce and Industry% 7industan &imes% (ov# AKGB% P G) During III Plan period the number of stores promoted )ere as follo)s0 +ore than A lakh populated city In to)ns )ith more than FLLLL population District primary stores AAC ACH ELLL

During Eth F year plan it )as e,tended to urban areas )ith population of A lakh and more and stores opened to cover population of over BLN of urban and to capture at least BLN of retail trade# "o-op fair price shops in rural areas )ere also promoted during F th and Gth plan periods# B#AB lakh villages )ith AFLLL societies undertook supply of daily essential goods of life# It rose up to ILLLL during AKGE-GF# During AKHC-HE Indian economy has )itnessed an unprecedented inflation of essential goods# In AKHF the emergency )as declared in India and the then Prime +inister announced the BL point programme# 2s per this programme the government envisaged to provide economic and social 4ustice to common man# Drastic financial and fiscal measures )ere taken up against smugglers% hoarders% black marketers% etc#% by the government#

In order to manage that situation% the government of India set up t)o ne) departments of "ivil supplies and co-operative section is to coordinate and harmoni/e the activities at various levels of the state government and ministry of the central government for an effective PDS# &hese ne) departments have evolved a broad strategy for an effective PDS# &he strategy evolved )ith multi dimensional approach% and the vital points are identification of essential goods for different areas% effective monitoring of function and of retail prices of consumer goods and essential goods selection of vulnerable areas for introducing the scheme of public distribution% ear marking of manufactured goods in the organi/ed sector for distribution through cooperatives% closer links bet)een co-op# +arketing and forging public distribution%

induction of representatives of consumers% including house)ives in keeping a )atch on the PDS% making administrative arrangements to ensure smooth functioning of the system and a more effective enforcement of various legislative measures designed to protect the interest of the consumers# &hus co-ops have been given an important place in the PDS# Further essential items )ere being supplied to students hostels% universities and colleges on preferential terms# 2ccordingly% it has become the policy of the state government to the possible e,tent% ne) fair price shops should be allotted to the co-ops# 2nd the co-op# Fair price shops# In due course% the central government advised the state governments that @hey should not deal directly )ith the manufactured essential commodities and should use the consumer co-ops as an agency to distribute the commodities#

&he Gth and .th five year plans of government of India had follo)ed an integrated approach and paid attention not only to production and procurement but also to storage and transportation of selected commodities# Further the plan insisted to e,pand PDS :uickly to cover all areas of the country% particularly back)ard% remote and inaccessible areas# 7ence the government of India instructed all state governments to e,tend PD points inmost difficult inaccessible areas# &he government of &amilnadu took steps to open additional fir price shops in the said areas and also took steps to develop the infrastructure needed to open fair price shops in those areas# From AKKB% an additional :uantity of ICL t of rice per month )ere issued in these areas under special subsidy scheme# $overnment of India reduced the issue price by 's# FL per :uintal to these areas# $overnment India also bears 's# BF# per :uintal as incidental cost for effective distribution to tribal areas# &he price per :uintal charged by &amilnadu "ivil Supplies "orporation ltd#% after ad4usting central contribution is given belo)0 'ice "ommon Fine Super fine "entral pool price @per :uintal in 's#) CCH GAH GEI &amilnadu PDS price FAB FKB GBC

&he price in PDS is comparatively lo)er than the price under central pool# Four-P 1gs# E,tra :uantity of rice )ere given to card holders in tribal area in addition to general :uota prescribed in other areas# 2ccording 'ice "ommon to integrated &ribal development# Programme% the issue Before A#B#KE 2fter A#B#AKKE @per kg#) @per kg#) B#BF C#BF price of rice is as follo)s in &ribal areas in &amilnadu

Fine and Superfine 9heat

C#FL C#LF

E#HF C#IL

In order to protect the )eaker sections of the society the government has further reduced the issue price of food grains by 's# FL per :uintal by Duly AKKE# &he government of &amilnadu conse:uently ensures minimum availability of BL kg# Per person per month and per family in those areas% )hich are predominantly tribal and remote# 2ccording to the report of the +inistry of "ivil supplies% the government of India bet)een 2pril% AKKC% to +arch AKKE over ELLL tonnes )ere lifted by states in the revamped PDS# 9ith an off take of IFN 2fter AKKF 2pril% the position improved to ALLN State governments are advised to integrate the schemes such as Da)ahar 'o/gar Oo4ana employment assurance scheme% )age employment programme% etc#% along )ith issues under PDS# &his indicates that the PDS has given very little to the poor# .&he responsibility of the revamping system )ill be% if there is true targetting# &argetting in terms of keeping high income group a)ay from PDS#J &he poorer class should be taken care of by the PDS fully# ;'am+anohar 'eddy.s article in &he 7indu% AB#H#AKE< Further "hief +inister of &amil (adu said JIt is not enough to associate )omen in the vigilance panels alone% the shops should be made to be entirely manned by )omen#J ;&he 7indu dt# AB#H#AKKE< She appealed to )omen to adopt the PDS as a people.s movement since it )as an essential movement# &he structure of 6rgani/ation0 It has the follo)ing components0 "entral government% F"I% State government and &amil (adu "ivil supplies corporation ltd#% "o-operative societies% !ink co-operative societies% Fair price shops% 5illage primary co-operative societies#

2fter the famine in AKGB the "entral government took pains to tackle the problem of food supply# &hus according to the F year plan% the government had proposed to streamline the ration supply of essential commodities# 6ne of the main ob4ective of the central government )as to maintain a sufficient amount of buffer stock# 9ith this vie) the government of India promoted a separate company kno)n as food corporation# F"I is procuring food grains during heavy harvest seasons and supplies to all over the country# !ater during shortage of food supply civil supplies )as &he food supply )as fairly maintained by the F"I though PDS# F"I is maintaining their o)n purchase points% hulling and processing points% etc#% all over the country# &he government of India has appointed a "ommission for the analysis of 2gricultural Prices# &his commission fi,es the price considering the cost of production% cost of fertili/er% labour cost% cost of seeds% cost of scientific implements% transportation cost% etc# T/e ro-e of Civi- su..-ies #n+ $onsumer .rote$tion &he government of &amil (adu has a separate department and a ministry of "ivil supplies# If is under the control of a minister of food and civil supplies# &he policies and other ob4ectives are effectively implemented through the ministry# Policy and aim of "ivil supplies department0 &o ensure that food articles and essential commodities .are supplied in ade:uate :uantity0 &o ensure that essential commodities are available at fair price# &o supply ade:uate :uantity of essential goods at an affordable price to all lo) and middle income group people m the country and to protect them from black marketers% hoarders% etc#

M#in fun$tion of $ivi- su..-ies +e.#rtment& "onsumer education is the main aim of the $overnment of India# By publishing pamphlets% dialogue and visual media through &5% movies ne) papers% government bulletinsP etc#% "ivil supplies department coordinate the activities of officials so that the essential Jcommodities )ill be available at fair price# It has taken steps to maintain uniformity in the price allover the state% e:uitable distribution of commodities# Procurement and distribution of commodities are entirely at their disposal# "ivil supplies department is empo)ered to issue licenses to traders% )ho are dealing in commodities0 &hey regulate their market dealings and has the right to take steps against the black marketers% hoarders% etc#% thus maintaining a strong and good PDS# In &( there is a "ommissioner for "ivil supplies controlling al districts# Belo) the rank of "ommissioner there is one Doint commissioner# 2 district is divided into several /ones% )hich are under the control of Deputy "ommissioners# &here are 2ssist "ommissioners% in the rank of Deputy collectors# &hese officials are controlling the issue Bnd use of family cards and supply of essential commodities through family cards# &hey play the role of inspecting authorities in the free flo) of public distribution# "ommissioners of civil supplies in &amil (adu is ape, enforcing authority of government policies and la)s in the state regarding food supply# 6ut of the total AAFL shops% CAI are managed and o)ned by &(S" ltd#% and ICB run by co-ops# In +adras

4"

Pro -ems of PDS reported by the

Problems e,perienced under PDS in "hennai city

sample respondents are classified source-)ise and presented belo)#

Pro -ems #t t/e PDS s/o. -evei A# &he allotment order for issue of commodities from the godo)n is issued regularly in the case of &("S" ltd#% )hile it is delayed in the case of "o-operatives because the &("S" ltd#% the allotment is directly made by the Food "orporation of India )hile for the "o-operatives it is done through the "ivil Supplies department# 2llotment to "o-operatives is made only )hen the payment is made before the. liftment of commodities# In the absence of regular allotment and supply of essential commodities% consumers suffer and they have to make several trips to the respective0 shops0 to dra) their re:uirement# B# In the absence of si/able :uantity of commodities are lost

through pilferage% damage by )hite ants% rats% rodents% etc 9hile &("S" ltd#% shops e,perienced this problem to a limited e,tent% the shops in the co-operative segment reported this as a serious# problem# Poor storage facilities affect the :uality of commodities% )hich drives the public from the PDS shops# 2s a result the ob4ective of the PDS is defeated# C# 6ne of the important problems stated at the shop level )as the non-issue of the essential commodities# But the surveys revealed that HB per cent of the non-issue )as due to the failure of the card holders to dra) their re:uirement# E# 8nder )eighment is one of the standing complaints against the PDS shops# But most of these complaints are not properly registered in the complaint book# &his is because the consumers are illiterate and not a)are of the e,istence of such complaint book# &his is because the consumers are illiterate

and not a)are of the e,istence of such complaint book# 2nother reason for not registering the complaint is the consumers do not )ant to incur the displeasure of the shop employees and face conse:uences of complaining# F# &hough the rules governing the administrating of the PDS shops provided for punishment of erring staff and actions against any malpractice% in more than IL per cent of the cases no punishment )as added# &his is because of the &rade union interference% political pressure% inconvenience )hich )ill be caused to the customer due to the closure of shops% corruptive practices etc# &he e,amination of the reasons for the prevalence of such malpractice among the staff in PDS shops revealed that the salary for the staff is very lo) and the several of them are not regulari/ed in their services# G# 2n important problem at the shop level is the security risk faced by the shops located in slum areas and other violence prone areas# &hey are under% constant threat from anti-social elements# Pro -ems of $onsumers A# 2s no credit facility is e,tend by PDS% poor people% )ho are the target segment never get the benefits of PDS# Illiteracy coupled )ith poverty make them pledge their ration cards )ith the pa)n brokers or other shop keepers% )ho in turn dra) essential commodities from PDS shops using these ration cards% and sell the essential commodities at open market prices# B# 2 serious problem reported by the consumers is the

under)ieghment# (early EL per cent of the consumers of &("S"

ltd#% shops and KL per cent of the consumers of shops in "ooperative segment reported this problem# &his brings to light the poor performance pf the PDS shops% )hich has a great impact on the overall performance of the PDS# C# Indirectly% the consumers of the PDS shops are themselves responsible for the ills of the PDS# &he failure of these consumers to dra) their allotted :uota of essential commodities facilitate all malpractices# &he consumers cite poor :uality of commodities% under)eighment% inconvenient location of shops% absence of credit facility and non-availability of commodities in times of need as the reasons# But this leads to several other problems like% deterioration of :uality of commodities% forced diversion of commodities to unauthori/ed persons through duplicate cards or cards on )hich only sugar and kerosene alone are bought# E# &o control the malpractices at the shop level% government has provided for a complaint register in each PDS shop# But the study% revealed that more than EL per cent of the consumers are not a)are of the e,istence of complaint register )ith the PDS shops# Even though the other consumers are a)are of this facility% only four per cent of the complaints are registered# &he reasons stated for this are0 fear of conse:uences like protracted disputes )ith the staff concerned at the PDS shops% need #to establish the basis of complaint% time taken for en:uiry% etc# Pro -ems of Offi$i#-s of PDS A# Issuing of cards is reported as a very difficult )ork as it involves a multistage receipt operation involving issue of application% of application% verification through en:uiry and spot

inspection% preparation of cards and issue of cards#

Deliberate

concealment of vital information like income details% si/e of family% correct address% etc# pose severe hurdles in the issue of cards# 2dded to these% the upcoming of ne) residential colonies and slum area pose a challenge to the officials in the verification of genuineness of the applicants# B# Delay in the allotment to co-operative shops cause a serious of other problems# Delay in allotment% and liftment add% to the )oes of the officials of PDS# &his results% in delay in distribution infuriating the consumers of these shops# C# +alpractices at the-shop level is another serious problem reported# In the absence of registered complaints no concrete and corrective actions could be taken# 9henever such actions are initiated% the political intervention and union threats make% them inactive# 4. Funds management is another problem of the officials of PDS# &he source of income for these shops is the commission earned on :uantity sold# 9ith this the salary payable to staff% improvement of facilities at the shops like storage% issue counters% security for goods% etc#% have to be managed# &he necessity to make advance remittance to lift the controlled commodities from the godo)ns add to the financial difficulties# F# !abour problems of different types at the PDS shops are e,perienced# For instance% aggressive unions stand in the )ay of any disciplinary action against erring staffP adoption of pressure tactics to get the regulari/ation of service of laborers% demand for higher pay and allo)ances% etc#

Po-i$% o.tions &he evaluation of PDS )ith reference to the ob4ectives set for the study revealed the need for formulating policies on various aspects# &hese are suggested hereunder# Su((estions for s/o. -eve- .ro -ems& regular intervals by an e,ternal body# the problems are identified% they could be proportions# M Such an evaluation eliminated at the

A# 6ne of the primary need of PDS is the ob4ective evaluation at )ould bring to light the problems crippling the PDS% and once root itself% instead of allo)ing them to assume unmanageable &his evaluation process could be handled by a "ommittee consisting of representatives of all interests - card holders% shop officials% policy makers% academicians% finance professionals and la)yers0 &he membership .in the "ommittee should be strictly based on the credentials and e,posure in such tasks# &he "ommittee shall be constituted fresh once in t)o years% to avoid any scope for influence or interference# &he policies formulated by the "ommittee shall be publici/ed and public are implemented% the follo) up action shall be called for a monthly basis# B# 6ne of the basic problems of the shops in the "o-operative segment is the delay in the allotment# Efforts should be taken to study the system of allotment and eliminate unnecessary bureaucratic delays# &he Food "orporationP of India @F"I< could be made% to supply directly to all shops thereby avoiding the delay# &he allotment to shops for a month may continue to be on the basis of closing stock of the previous month% but the closing statements from each shop should be collected )ithin

first t)o days of a month and consolidated area-)ise# &his )ould facilitate pooled shifting of commodities from the F"I godo)ns thereby economi/ing on transportation and avoiding delay# 2s regards the verification of closing stock% staff could be deputed from shops in another area to avoid any manipulations# C# 2 ma4or hurdle in# the successful functioning of "o-operative shops is the availability% of funds# &his could be solved by implementing the follo)ing suggestions0 a) Shops in an area could be grouped and the shop in-charge of each shop could be made to undergo a training in funds management# &his training could be on a regular basis involving Finance professionals# b) State government may consider granting financial

assistance for the shops in the "o-operative segment on concessional terms through the 'egional office of these "o-operative shops# 2 proposal for development plans shop-)ise may be obtained and evaluated by the 'egional office# &hen the re:uired funds may be obtained and allotted to each shop# 2s regards the repayment the shops could be allo)ed to sell controlled items to generate revenue# Priority in this regard% should be given for improvement ofP storage facilities at the shop level# c) &he advance remittance to be made for allotment of commodities by F"I could be determined in advance on the basis of three monthly average allotment% instead of )aiting for the closing stock statement each month# 2ny e,cess% advance remitted may be ad4usted against the subse:uent remittance and any deficit may% also be

collected once the amount of% deficit is intimated# &his )ould help to avoid delay in allotment and liftment of commodities# "onse:uentlyP the diversion of commodities to generate re:uired funds% could be reduce to large e,tent# Further the :uality of facilities could be improved# E# 9ide publicity should be given among the public% especially among people d)elling in slum areas to make them conscious of their right to complaint against any malpractice at theP PDS% shops achieved by printing in% bold letters% the information on the availability of complaint book in all the PDS shops# &his could very easily be achieved by printing in bold letters% the information on the availability of complaint book in all the PDS shops% on the e ration card itself# F# 2 fre:uently reported problem at the shop level is the labour% problem# &his needs an integrated effort to solve# 2part from involving the 3 staff union in labour related matters% the reasons for the problems should be studied seriously# &his may even be entrusted to the "ommittee constituted for evaluation of PDS shops# 2s the main reason for labour problem is related to service conditions and the salary structure and other allo)ances% the government must recommend the salary structure making it fle,ible to provide for modifications as and )hen the need arises# 2t the 'egional level% establishment of a separate cell to address the labour problems )ould go a long )ay to improve the )orking relationship# Su((estions for $#r+ /o-+er re-#te+ .ro -ems& commodities% )ould also be maintained as )ith government funding the storage

A#

2s regards the problem of under )eighment% a multi-level approach is necessary to solve this# 2 flying s:uad )ith necessary po)ers and authority may be constituted )hich )ould check the )eighment at the shops periodically and submit a report to the authority concerned# 2ny punitive action taken on erring staff should be% strictly in accordance )ith the procedure laid do)n by the government# In the case of complaints from card holders% their identity should be kept confidential# &his )ould encourage% the card holders to come )ithout any apprehension% )henever any manipulative practices are noticed#

B#

2ny unauthori/ed issue of controlled commodities should be vie)ed very seriously# &he shop level )orkers should be made familiar )ith the series of actions that )ould be initiated in the event of such unauthori/ed issues# Preferably an undertaking from the shop level staff could be obtained at the 3 time of recruitment itself% e,plicitly empo)ering the organi/ation to prosecute them for any such violation of rules and regulations# Publici/ing the manipulative actions resorted to by shops )ould also serve as a deterrent -apart from educating the customers#

Su((estion for .ro -ems of Offi$i#-s of PDS A# &he effectiveness of the PDS depends on the fool proof system of issue of cards# In this regard% the e,isting system of verification and cross checking are found to be operating )ell and these could be revie)ed from time to rime# It )ould also be better to get an undertaking from the employers to the correctness of salary details in the application for cards rene)ed or ne) cards issued#

B# Issue of ne) cards or rene)als to applicants in ne) residential localities or slum areas should be strictly under the supervision of a field inspection team headed by a person at the 2ssistant "ommissioner level# C# 9ide publicity about the malpractices at the shop level should be given to educate the public and encourage them to register complaints# E# 'ecruitment of staff at every level should be structured and preferably handled by an independent government body to eliminate any favoritism in recruitment% Ot/er su((estions A# It )ould be a healthy practice to encourage independent study of functioning of PDS in different states so as to improve the e,isting system in any state# Interaction )ith the academic bodies on this )ould be much re)arding to strengthen the system# B# Publication of the functions and performance of PDS in the state )ould help to invite suggestions for improvement from the common public# C# 9hile the policies are formulated% involvement of all interests like card holders% shop level )orkers and officials should be called for# &his )ould help in drafting viable policies# E# Incentive schemes could be announced at /onal level for shops )hich function efficiently# &he criteria for determining the

performance could be generated by involving the people concerned# F# Similarly incentives and promotion could be announced for flying s:uads )hich are effective in detection and elimination of malpractices at the shop level# G# &here is an urgent need to constitute "ard holder.s council in each area )hich )ould help to resolve the disputes of various nature among the public and shops in that area Disputes beyond the po)ers of the "ard holders council could be referred to higher level authorities for disposal# H# Professionals from different fields may be invited to function as the 7onorary "onsultants to improve the efficient functioning of the PDS# I# "ard holder contact )eek could be organi/ed every :uarter to provide a forum for ventilating their grievances and making suggestions for improvement# &hese meetings should be held in the presence of Deputy "ommissioners and the suggestions given should be e,amined and implemented# Pri$e $ontro-s Price control refers to the policy of the government to monitor and regulate the price changes in an economy# &his is attempted by the government )ith the follo)ing ob4ectives0 A# &o ensure that there is social and distributive 4ustice# &he fruits of planning and development should reach all the people so that the benefits of development is e:ually distributed# 9hile the rich people in a community have the )here)ithal to protect

themselves under any eventuality% the poor and do)n trodden al)ays get e,posed# &o protect such people price control is essential# B# &o ensure that people get :uality goods at a reasonable price# &his is achieved by controlling the price as )ell as the :uality of the commodities produced# C# &o protect the community from the e,ploitative tendency of the monopolies )ho resort to restrictive trade practices# E# &o achieve supply control and management the government should control price# F# 2s the price of inputs )ould ultimately get reflected on the output% ;here is a need to control both the input price and output price# G# &o ensure that the available resources are properly allocated and directed and also to eliminate the misuse of resources% price control is necessary# H# 8nless there is price stability% the value of money is bound toP fluctuate )hich in turn% affect the e,change% rate# &his results serious balance of payments problems# I# &o insulate the economy from )ide fluctuations% inflation and deflation - price controls are necessary# A(ri$u-tur#- .ri$e .o-i$% of t/e (overnment&

&erms of trade refers to the relative changes in prices in t)o sectors% and the I corresponding effect of these on the respective sector# For e,ample% suppose the agricultural prices increase at a slo)er rate than the prices in the manufacturing sector and industrial sector# &hen the agriculturists have to pay a higher price for manufactured goods and sell their o)n goods at a lo)er price# &his is certainly unfavorable to the agriculturists# 6n the other hand suppose the agricultural prices increase at a higher rate than that of the industrial prices% then the situation is favourable to agriculturists# 8sually in developing countries the terms of trade is unfavorable to agriculturists and India is not an e,ception to this# &o change this trend% government has been announcing its agricultural price policy so as to ensure that the terms of trade does not deteriorate# &hanks to the steps taken by the government that today to some e,tent the terms of trade is better than )hat it )as in the past# &he logic behind the government trying to design a policy in favour of agricultural sector is that )hen the agricultural sector is benefited by the terms of trade% then the agriculturists get better prices and this makes their occupation profitable# &his )ould encourage them to demand% more of industrial goods# 2utomatically the industrial sector )ill be able to develop based on this ever increasing demand and market prospects It is al)ays said that demand is a more potential factor in accelerating gro)th of industrial sector than the supply# 7ence% the government is formulating the agricultural price policy to make me terms of trade better and favourable for agricultural sector# &he price policy for agricultural sector in India could be discussed in t)o distinct phases# 6ne before AKGF and the other after AKGF# Before AKGF% our agricultural price policy )as more consumer based# 2s the percapita income )as lo)% the government felt the prices of agricultural goods should be controlled and )hen they have to be

distributed through fair price shops% the consumer price )as very much less than the open market price# &his directly affected the interest of the agriculturists# 7ence% the government decided to set up in AKGF the "ommission on 2gricultural "osts and Prices @"2"P)# &his "2"P has the follo)ing ma4or functions to perform0

A# &o function as the advisory body to government in matterrelating to price policy for ma4or food crops and commercial crops to formulate a balanced and integrated price structure taking due care of the producer.s and consumer.s interest# B# &o revie) periodically the price policy already determining and then make necessary ad4ustments and revisions to make the price policy effective# C# &o e,amine the e,isting method= of determining cost of marketing and marketing margins for different crops in different regions% so as to make suggestions for reducing marketing costs and margins to ensure that theJ producers get a fair return on their investment# E# &o make regular revie) of the studies on agricultural prices and collect% information and data relating to agricultural prices and to suggest methods of improvement# F# &o study and advise the government on all matters relating to agricultural government# production and prices referred to it by the

9ith the setting up of the "2"P% India is able to follo) a consistent price policy% for agriculture# &his has helped to narro) the gap in agricultural prices prevailing in surplus and deficit states and stabili/e the price of food grains# &he "2"' follo)s a specific procedure before giving shape to the price policy for crops# First it collects the opinions and information from various State $overnments% the producers organi/ation% marketing organi/ation and other agro-based industries% consumer organi/ations% research institutions and others through a detailed% :uestionnaire# commodity# 6nce the reply is received from the State governments% the "2"P hold discussions )ith other agencies for each &hen it finalises its findings and recommendations and sends its report to the government# &his report% is circulated among the concerned ministries and departments as )ell as PlanningJ "ommission# 2fter getting the vie)s of these institutions and organi/ations% the final report is submitted to the Parliament for its approval and final decision# &he agricultural price policy has the follo)ing constituents0 !" Minimum su..ort .ri$e&

&his is the price announced by the government for various crops )ell in advance of the harvest# If the actual market price falls belo) this level% then the government has the commitment to buy the :uantity available for sale irrespective of the ruling price in the market# &his is basically to ensure that the fanners are not affected due to fall in price in the market# &he "2"P arrives at this minimum price for each crop after taking into account the cost of production% input prices% the prices for competing crops and the need to maintain the economic stability# 6nce the price is announced )ell before the harvest% the e,pectation is that the farmers are certain atleast to get the minimum assured by the government# But a ma4or problem in arriving at the price is that sufficient data are not available on a continuous basis# &o overcome

this the data relating to cost of production and input prices are being collected regularly by the research institutions throughout the country from )hom the "2"P is collecting the data# '" Pro$urement .ri$es& &hese are prices at )hich the government buys the agricultural produce from the farmers mainly for the purpose of public distribution# It is easy to understand that the procurement prices should be higher than the minimum support price% so that the government can encourage the fanners to sell the produce to the government# &he "2"P arrives at the procurement prices for all crops on the basis of input prices% price of related crops% inter-state disparities in prices of the produce% fair return to the farmers% etc# *" Pu -i$ +istri ution& &his is in fact the back bone of the pricing policy in that through this arrangement the government ensures availability of produce to the common man at a reasonable price# &hrough statutory rationing as )ell as the informal rationing the government achieves the ob4ect of stabili/ing the prices of agricultural commodities# 2t the same time the government also allo)s the open market in all these commodities so that any one )ho can afford to pay the open market price can buy these goods and those )ho cannot afford can get these from the ration shops or fair price shops# 4" Minimum uffer sto$,s&

&his is yet another important constituent of the price policy# &hrough this the government maintains sufficient stocks to prevent any violent price fluctuations in the market for agricultural produce# For e,ample% suppose the price in the open market soars up% then the government )ould release the produce from its stock and brings do)n the price

)hile )hen the price in the open market goes do)n% the government makes the purchase to add to its buffer stock% thereby prevents further fall in price# 2ll efforts to maintain the agricultural price have not been successful due to the follo)ing reasons0 @i) Procurement policy of the government has not been very successful and it is found that hardly AFN of the total food grain produced is covered by the procurement of the government# &his sho)s clearly the inade:uate% effectiveness of the procurement policy# @ii) &he prices fi,ed for the various crops do not have any link )ith the rising cost-of cultivation# 2s a result the farmers incur loss# &his they avoid or minimi/e either by curtailing the output or s)itching on to some other crop# @iii) &he public distribution is found to have several loop holes# 'ight from the stage of procurement% storage% till the stage of sale through fair price shops. several malpractices are noticed# &he result% the public distribution fails to bring the benefits e,pected of it# @iv) "onsumers often complain that the price they pay is much higher than the price paid to the farmers by the government# &his price differential is due to various ta,es and costs incurred apart from the margins claimed by theP intermediaries# 2s a result the government plans for price stabili/ation taking the price it pays to the fanners% )hile the actual price at )hich the consumers pay is much in variation# 7ence% the price policy ob4ective is not accomplished# @v) &he ob4ective of price policy is to obtain an integrated price by taking into account various components before arriving at the final price# But such an integration is not found in practice and more

fre:uently% the farmers use political pressure to get a higher price for the produce# formulated# In order to rectify the defects in the price policy% the follo)ing suggestions are made0 A# &he minimum support price fi,ed by the government should protect only the efficient producer and not 4ust every producer# B# &he price policy should only help the farmers to prevent the losses and not to make profits# C# &he minimum support price should be arrived at on the basis of the cost of cultivation of efficient farmers# E# &he support price announced by the government should enable the farmers to make necessary ad4ustments to minimi/e their loss# F# &he price fi,ed by the government should not be inflationary in nature# G# &he price policy should help to discourage and eliminate oligopolistic practices in the market# &he government on its part% having reali/ed the need to revise the basis of arriving at the cost of cultivation figures% set up a committee under the chairmanship of 7anumantha 'ao in AKKL to suggest an alternative methodology for computing the cost of cultivation# &his committee suggested the follo)ing revised methodology )hich )as accepted by the government0 &his defeats the principles on )hich the price policy is

I# &he )ages paid to the laborers included in the valuation of labour could be based on either the statutory minimum )ages or actual )ages )hichever is higher# II# +anagerial element is valued at the rate ALN of the total cost# III# &he procurement price and the minimum support price announced in advance could be ad4usted according to the actual in the market# 9ith all the above development% )e are slo)ly coming closer to the determination of a realistic price for agricultural produce# But a very recent development is no) posing a ne) challenge# &he Dunkel.s draft has suggested that the government should slo)ly )ithdre) all the subsidies e,tended to the agricultural sector that the farmers should be made to compete )ith each other and also the international farmers purely on the basis of the :uality of the produce# &he protection given to the agricultural sector should slo)ly be )ithdra)n that only the efficient farmersP can continue in the fold and that )ay the country )ould be benefited# &hough there is some truth in this argument% yet% in our country liberali/ation is catching up% in the industrial sector and the agricultural sector is not matured enough to react positively to liberali/ation policies and there is a school of thought that the acceptance of Dunkel.s draft may make the situation difficult for the Indian farmers% in spite of the government.s assertions to the contrary# Forei(n e0$/#n(e re(u-#tions Foreign e,change refers to the earnings and payments made by a country on its e,ports and imports of goods and services over a year# &he more the country earns% the better it is# &here are several sources through )hich the foreign e,change flo)s into a country# 2part from the e,ports of goods and services% there are remittances

made by the non - residents Indians living abroad% other countries making payments to their consulates and embassies% gifts and grants from other governments to Indian government% loans and advances received by Indian government% other adhoc receipts under various heads% etc# Similarly% the if outflo) of foreign e,change )ould include the corresponding payments made by any source in India to countries abroad# 6ver and above all these official sources of inflo)s and outflo)s% there are several other unofficial resources% of inflo)s and outflo)s# In fact% the government can control effectively the official sources but the unofficial sources remain outside the government control and so E-they cause havoc to the economy# &here is a need to control and regulate the foreign e,change resources% as other)ise% they might have a direct impact on the e,change rate and the balance of payments position% )hich% in turn )ould affect the internal price stability# 7ence after independence% the government passed a Foreign e,change regulation 2ct in AKEH )hich )as subse:uently modified in AKHC# &he follo)ing are the ob4ectives of regulating foreign e,change0 &o conserve the foreign e,change resources# &o account for all inflo)s and outflo)s of foreign e,change to eliminate any negative impact on balance of payments and e,change rate# &o monitor% control and channelising the utili/ation of foreign e,change resources and through that to accelerate the economic development 2s per the regulations% 'BI is the institution vested )ith all po)ers to deal )ith all aspects of foreign e,change# (ormally% the 'BI empo)ers travel agencies and the commercial banks to deal )ith foreign

e,change# &hey are re:uired to submit returns on a daily basis so that the e,tent of foreign e,change received and issued is closely monitored# &he AKKA Industrial policy resolutions had specific provisions relating to foreign e,change regulations# &hese are briefly summed up belo)# Forei(n investments& Foreign investments carry )ith it the benefit of technology transfer% marketing e,pertise% modern managerial techni:ues and ne) possibilities for promotion of e,ports# 2s this re:uirement is felt in this )orld of industrial change and cooperation% the (e) Industrial Policy @(IP) has clearly contained the follo)ing provisions relating to foreign investments0 A# In high priority industries approval )ill be given for direct foreign investment upto FAN foreign e:uity and all the bottlenecks in this process )ill be removed# given if the foreign re:uirements for imported "learance in such cases )ill be e,change necessary capital goods# &he e:uity covers the foreign

amendments to the FE'2 )ill be made# B# &he general policies governing the domestic units in regard to import of components% ra) materials and intermediate goods and payment of kno)-ho) fees and royalties )ill also be applicable to the high priority industries in )hich foreign investment is limited to FAN 7o)ever% the payment of royalty )ill be routed through the 'BI to enable it to monitor the outflo) of foreign e,change on payments are balanced by e,port earnings over period of time# C# 2ll the other foreign investments not included in the category A stated above )ill re:uire prior clearance#

E# &rading companies primarily e,port oriented )ill also be permitted under the foreign e:uity proposals as indicated in A above# 7o)ever% the provisions of he e,port-import policy applicable to the domestic units )ill also be applicable to such trading companies# F# &o encourage substantial inflo) of foreign investment% a Special Empo)ered Board )ould be constituted# &his Board )ould negotiate )ith the large international firms and approve direct foreign investment in select areas# &his is e,pected to fetch foreign technology and open the industries in India to )ider )orld market Such investments )ill be sub4ected to favourable treatment based on the merits irrespective of the rules% regulations and procedures in practice# 2s regards foreign technology agreement% a )elcome change in the outlook of the government is the reali/ation that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedures and policies# &he interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industriali/ation# 2s a result of this liberali/ation% automatic approval for technology agreements related to high priority industries )ill be made )ith respect to certain specific parameters# 6ther industries )hich can enter into such agreements )ithout incurring the e,penditure of foreign e,change )ill also be e,tended liberal treatment# &he industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises# In due course this measure is e,pected to pave the )ay for e,change of superior technology from India )ith other countries# 9ith the overall

liberali/ation% the competition )ill be high and it is e,pected that industries )ill invest much more in research and development activities# 1eeping in vie) all these e,pectations% the government has announced he follo)ing changes in regulation governing foreign technology agreement0 A# (o prior permission is needed for hiring foreign technicians% foreign testing of indigenously developed technologies# Such activities involving payments )ill be governed by the guidelines of the 'BI and such payments can be made through blanket permits# B# 2utomatic permission )ill be given for foreign technology agreements relating to the high priority industries# &he royalty payments through such agreements )ill be sub4ected to certain provisions# 8pto the payment of 's# A crore royalty )ill be at the rate of FN for domestic sales and IN for foreign sales or e,ports# 7o)ever% the total royalty payment should not e,ceed IN of the sales over a AL year period from the date of agreement or H year period from the date of commencement of production# C# In case of industries not covered in the high priority list automatic permission )ill be given for technology agreement provided it does not entail any foreign e,change payment commitment# E# In all the other cases% the general procedures in practice )ill be adhered to and such industries )ill re:uire specific approval#

In AKKK% some more modifications )ere brought in the Foreign E,change +anagement 2ct ;FE+2<# &hese modifications are to come into effect from +ay CA% BLLL and until then the Enforcement Directorate )as given time to probe and investigate all cases of FE'2 violations# &he basic difference bet)een FE'2 and FE+2 is stated by the 'BI as P the ob4ect of FE'2 )as to conserve foreign e,change resources% )hereas the ob4ect of FE+2 is to facilitate e,ternal trade and payments and to promote orderly maintenance of foreign e,change market in India# FE+2 has the follo)ing important features0 FE+2 substantially liberali/ed various provisions to make the e,ternal trade and payment very simple% )hich% specifically benefited #the residents traveling for business professional reasons# &he E,change Earners. Foreign "urrency account holders and the 'esidents. Foreign E,change account holders are no) permitted to freely use the funds held in both the categories of accounts for any permissible current account transactions# &he rules relating to foreign investment have been made more transparent# FE+2 provided for civil procedure in cases of violation and contained elaborate redressal machinery for total 4ustice and fairness to the aggrieved persons# &he FE+2 also prohibited seven categories of current account transactions in lotteries% banned maga/ines% football pools% narcotics% etc% Te$/no-o(% Tr#nsfer Da)aharlal (ehru )as responsible for the improvement of Science and &echnology in India# 8nder his leadership several research institutions

like

&he

"ouncil

of

Scientific

and

Industrial

'esearch

;"SI'<%

Department of 2tomic Energy% &he Indian "ouncil of 2gricultural 'esearch )ere all established# &hese )ere follo)ed by Department of Electronics% Department of Space &echnology% the Indian Space 'esearch organi/ation% etc# In AKFI the Science Policy 'esolution )as passed )ith the ob4ectives to0 Foster% promote the sustain by appropriate means the cultivation in science and scientific research in all its aspects - pure% applied and educational# Ensure an ade:uate supply )ithin the country of research scientists of higher :uality and recogni/e their )ork as an important component of the strength of the nation# Encourage and initiate )ith all possible speed programs for the training of scientific and technical personnel on a scale ade:uate to fulfill the country.s needs in regard to science and% education% agriculture% industry and defense# Ensure for the people of the country all the benefits that can accrue from the ac:uisition and application of scientific kno)ledge Follo)ing this policy% on the agricultural front% the country )itnessed $reen 'evolution% )hich made the entire )orld turn to India for its e,perience and e,periments in agriculture# &he success achieved )as phenomenal that production and productivity increased manifold# But correspondingly the irrigation and other infrastructure facilities like storage facility% transport% communication% etc#% developed slo)ly# For a long time% there )as absence of effective linkage bet)een the scientific laboratories and the fanners# But this )as overcome by early AKHL.s and since then Indian agriculture has been on the for)ard march#

6n the industry front% though there )as )ide talk about self-reliance% yet in reality and the industries spent precious little on Science technology# +oderni/ation )as given lo) priority# 'esearch and

development activity and investment )as found only in a very fe) industrial units# 2nother aspect )as the improvement in Science and &echnology never crossed the urban frontiers# &hough India ranked second in the )orld in terms of technical manpo)er% this )as never utili/ed to our advantage# serious considerations to 6nly government organi/ation gave some research and development activities#

Further the attempt )as to develop and apply technology to meet the re:uirements of the rich community in India# 9hatever technology that )as imported never suited our domestic re:uirements and attempts to adopt them for Indian environment did not succeed# 2fter the declaration of !iberali/ation in AKKA% the government has given very serious consideration to &echnology and development# summary of the &echnology policy of AKKA is given belo)# 2 )elcome change in the outlook of the government as evidenced by the ne) policy is the reali/ation that the sophisticated technology from abroad can be brought in only through liberal and less restrictive procedure and policies# &he interference of the government in this regards to be reduced so as to enable the domestic industries in achieving a high rate of industriali/ation# 2s a result of this liberali/ation% automatic approval for technology agreements related to high priority industries )ill be made )ith respect to certain specific parameter# 6ther industries )hich can enter into such agreements )ithout incurring the e,penditure of foreign e,change )ill also be e,tended liberal treatment# &he industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises# In due course this &he

measure is e,pected to pave the )ay for e,change of superior technology from India= )ith other countries# 9ith the overall liberali/ation% the competition )ill be high and it is e,pected that industries )ill invest much more in research and development activities# 1eeping in vie) all these e,pectations% the government has announced the follo)ing changes in regulations governing foreign technology agreement0 @i) (o prior permission is needed for hiring foreign technicians% foreign testing of indigenously developed technologies# Such activities involving payments )ill be governed by the guidelines of the 'BI and such payments can be made through the blanket permits# @ii) 2utomatic permission )ill be given for foreign technology agreements relating to the high priority industries# &he royalty payments through such agreements )ill be sub4ected to certain provision# 8pto the payment of 's# I crore% royalty )ill be ] FN for domestic sales and IN for foreign sales or e,ports# 7o)ever% the total royalty payment should not e,ceed IN of sales over a AL year period from the date of agreement or H year period from the date of commencement of production# @iii) In the case of industries not covered in the high priority list automatic permission )ill be given for technology agreement provided it does not entail any foreign e,change payment commitment# @iv) In all the other cases% the general procedures in practice )ill be adhered to and such industries )ill re:uire approval# REVIE6 ?UESTIONS A# Discuss the ob4ectives of licensing policy in India#

B# !ist the findings and recommendations of Dutt committee report# C# Discuss the features of Indian licensing policy# 7o) far current policy is a deviation from the old ones T E# E,plain F# 9hat the do T circumstances you under by )hich +'&P of 2ct )as brought# 9hy )as it given up on the eve of !iberali/ationT understand !ist control capital issues the recommendations of (arasimham the

committee II in this conte,t# G# Discuss the forms of foreign capital# H# 9hy is foreign capital re:uiredT I# Discuss the role of foreign capital in economic development# K# 2naly/e the problems of foreign capital# Discuss in this conte,t the policy of the government to)ards foreign capital since independence# AL# AA# AB# AC# AE# AF# AG# E,plain the government policy on Foreign Direct Investment# AKEI% AKKA "ritically evaluate the Industrial policy resolutions of E,plain briefly the provisions of the Industrial policy 9hat is an E*I+ bank T 9hat are its functionsT 9hat is meant by public distribution systemT Discuss the

AKFG and AKIL# )hich laid the foundation for liberali/ation#

4ustifications for it continuance# "omment on the )orking of public distribution system in India# "ritically e,amine the functioning of public distribution system from the vie) point of institutions% people and government# Suggest suitable remedies# AH# 6utline the contours of agricultural price policy in India#

AI#

9hat is meant by foreign e,changeT 9hat are the 4ustifications for regulating itT "omment on the policy of the

government in relation to foreign e,change# Discuss the need for technology transfer# 2nalyse the policy of the government in this regard#

CHAPTER IV ,onetary and fiscal system - Ban/ing and credit structure in India Financial institution - Fiscal system - theory and practice INDIAN FINANCIAL SYSTEM AND COMMERCIAL BANIIN7 &he shape and status of an economy to a large e,tent depend on the development it had achieved% )hich in turn depends on the strength of financial sector# 2 country )ith a strong financial sector is bound to progress faster and steadier than any other country # Financial sector refers to all the categories of financial institutions )hich provide as a conduit bet)een those )ho are in need of funds and those )ho are supplying funds# Such institutions are usually referred to as financial intermediaries# 9hile these intermediaries do function at a profit% not all of them are profit centered# In other )ords% the financial intermediaries can be broadly classified as organi/ed sector institutions and unorgani/ed sector institutions# &hose in the former category function in the interest of the society and so not very much profit centered# &he )ay in )hich all these institutions are integrated is understood through a study of financial system# &he structural positioning of these intermediaries determine the flo) of funds in an economy# &hat is% ho) these institutions mobili/e funds and ho) they distribute or channelise the funds mobili/ed depend on ho) they are organi/ed# For instance% in the olden days% only money lenders provided the needed funds either from their o)n savings or that of their close relatives# 6bviously they confined their operations only to a limited locality and purposes# Depending upon the borro)er and the security offered% they charged varying rate of interest and there )as absolutely no regulation of their business practices# But once public institutions like commercial banks came into the scene% there )as a need to organi/e their operations strictly in relation to the national priorities# &hus came the institutions in the organi/ed sector% )hich are

governed by a set of rules and regulations# 7ence% if in a country the si/e of operation of the institutions in the organi/ed sector is large% then the flo) of funds from the savers to investors )ill be smooth and )ould contribute to)ards the economic development# Even the mere presence of unorgani/ed sector institutions )ill countervail the contributions of the organi/ed sector institutions# In the Indian conte,t% the financial system includes a number of institutions in the organi/ed sector and unorgani/ed sector## 8nder the organi/ed sector )e could include0 the State bank of India and its associates% all the nationali/ed commercial banks% the 'egional 'ural banks% private sector Indian and foreign banks% non-scheduled hanks% all the levels of co-operative banks% $overnment institutions like (ational Savings "orporation% Post office savings banks% Provident fund% all the corporations created by legislature like !I"% 8&I% etc# In the unorgani/ed sector% the institutions are of several types ranging bet)een money lenders% chit funds% nidhis% finance companies% etc# &he constituents of Indian Financial system changed over a period of time% as the nature of demand for funds changed and so institutions had to come up to meet the specific needs of a demand segment# For instance% )hile the rationali/ed commercial banks and co-operative banks are focussed more to)ards the priority sector and rural segment% the chit funds and nidhis came into the scene to cater to the needs of businessmen and small firms# Finance companies entered the scene mainly to meet the funds re:uirements of hire purchase and leasing firms# 9hile specialised institutions add to the maturity of the financial system% the difficulty in regulating them e,poses the gullible small savers and investors to a great risk# &he regular failure of finance companies% nidhis% etc#% have rudely -shaken the confidence of the common public and discouraged them from investing activities#

7ro2t/ of NBFCs& (on banking financial companies have emerged as a single most important constituent of our Financial system# &hese institutions have originally started functioning as hire purchase agencies% but introduced in due course a host of innovative services% that their number has s)elled to nearly FLLLL by AKKI# &hey have been very popular in the Indian scene mainly because they could mobili/e huge funds by offering attractive high rate of interest% adopting a simple procedure for processing and lending% improving customer relations and introducing ne) customer oriented funding schemes# &o understand their e,tent of coverage% there are hire purchase finance companies% housing finance companies% investment companies% mutual benefit financial companies% etc# &hough their gro)th )as actually adding to the financial products in the market% the operation of a number of them raised :uestions about their stability# and genuineness of intentions# 9hen a number of such (BF"s failed% in responseP public outcry% regulatory guidelines )ere brought by the 'BI# 2 number% of committees )ere set up to e,amine the Particularly% the nature and content of the regulatory mechanism# committee of AKKG assume significance# included0 2bolition of category)ise classification of finance companies# 2pplication of uniform regulation for all finance companies# Focussing regulatory attention on large si/e companies# "ompulsory registration of all deposit accepting companies# Determining capital ade:uacy standards and prudential norms#

recommendations of the Shah committee of AKKB and 1hanna &heir recommendations

 Prescription of provision for bad and doubtful debts# "ompulsory annual credit rating# Follo)ing this% a number of provisions in the 'egulations 2ct )ere amended and the 'BI ;2mendment< 2ct AKKH has brought forth the follo)ing regulations0 (BF"s are more clearly defined and their minimum net o)ned funds )as% fi,ed at 's# BF lakhs# 'egistration )ith 'BI at the time of entry is made compulsory# E,isting units )ere given time of three years to reach the minimum level of)% net o)ned funds# (BF"s should transfer not less than BLN of their profits to the reserve fund every year# In case of any violation of any of the regulations by the (BF"s% the 'BI )ill prevent them from accepting deposits and also sell% transfer% etc# their properties# Several other regulatory measures )ere announced in Danuary% AKKI )hich include0 (BF"s )ith credit rating belo) .2. are not allo)ed to accept deposits# For any violation of norms% the repayment of deposits )ill be ordered by 'BI# Interest rate and brokerage fi,ed# 'egular ta, returns should be filed# (o lending is permitted against the o)n security# But the (BF"s appealed to the 'BI to rela, the provisions% as other)ise their business )ould be at stake# 2ccordingly 'BI some of the

regulations% providing for the gro)th of these (BF"s at the am protecting the interest of investing public# Housin( S$/emes 7ousing emerged as one of the important priority sector lending schemes# &his so because of both increase in the demand for houses in both the urban and rural areas# 9ith considerable number of people settling do)n in urban slums% housing problem has assumed a tremendous proportion# 2s a se:uel to this% the government has established (ational 7ousing Bank in AKII )ith a number of programmes to address the housing needs of various sections of the population# Specifically a 7ome !oan 2ccount is devised to promote the savings habit among the public for ac:uiring houses# 9ith a minimum periodicity of F years% any one can open a 7ome loan account )ith any scheduled bank# &he amount deposited into the account is also e,empted from income a,# &he balance in the account earns interest at ALN# 6nce the specified period of deposit is over% the account holder is eligible for housing loan# &he loan amount is determined as a multiple of accumulated savings in 7ousing !oan 2ccount# !oans granted under this category )ill be refinanced by the (ational 7ousing Bank# &he "ommercial banks are advised to provide A#FN of their incremental deposit over the previous year for direct or indirect loans or investments# Schemes funded by 78D"6% like (ehru 'o4gar Oo4ani have gone a large e,tent in easing the housing problems of the rural masses# 2part from this under Priority Sector allocations the follo)ing housing loans are provided 0

2< Direct advance 0

!oans upto 's# F lakh are granted for construction

of houses and upto 's# FL%LLL to)ards repairs of houses for all categories of borro)ers# B< Indirect advance 0 8nder refinancing scheme% non governmental agencies are also eligible )hen they lend for house construction# 2dvances are also given for the clearance of the slum and rehabilitation of the slum d)ellers# Subscribing to the bonds issued by the (ational 7ousing Bi#nk and 78D"Miis also e,tended# 2s regards the margin on loans% the percentage of margin is determined based on the loan amount# the property and 2s a security% mortgage of +a,imum $overnment guarantee are acceptable#

repayment period is-fi,ed at AF years% and the repayment holiday is also granted to the borro)er# &he eligibility condition for getting loan is fi,ed in relation to the income of the borro)er# Interest rate on loan is again linked to the amount borro)ed# &hrough Indira 2yas Oo4ana scheme free d)elling units are given to the persons living belo) poverty line in the rural areas% belonging to S" and S& community and bonded labourers# &he scheme is% also e,tended to families of servicemen of the armed forces and paramilitary forces killed in action irrespective of their income &his scheme is implemented through the District Development 2gency# limit#'ural

Beneficiaries are identified through $ram

Panchayat or Block Development 6fficer# &he beneficiary has to under take the construction of the house and the money is released in stages#

THE FUNCTIONS OF COMMERCIAL BANIS &he functions performed by the commercial banks may be listed B#F follo)s 0 A) 2ccepting deposits% C) In vestment of funds% F) 2gency functions% B) !ending loans and advances% E) Promote the use of che:ues% G) Purchase and sale of

foreign

e,change% .0 Financing of internal and international trade% I) "reation of credit% K) 6ther functions and AL) Fulfillment of socio-economic ob4ectives# !" A$$e.tin( +e.osits& &his is one of the primary functions of commercial banks# &he commercial banks accept different types of deposits% the deposits may be broadly classified as a) demand deposits and b) time deposits# &he former refer to the deposits )hich are repayable by the banks on demand by the depositors% )hile the time deposits are accepted by the banks for a fi,ed period of time before the e,piry of )hich they don.t return the deposit# &he demand deposits include the current account deposits and savings bank account deposits# &hese t)o types of deposits earn very lo) rate of interest as they can be )ithdra)n any time# In the case of savings deposit% the depositor is not allo)ed to )ithdra) more than a fi,ed number of times or amount over a period of time# &he time or term deposits include the fi,ed deposit and In the former a sum is deposited for a fi,ed period recurring deposits#

of time determined at the time of deposit and is never allo)ed to be )ithdra)n before the e,piry of period of deposit# 2ny such foreclosures )ill invite penalty apart from forfeiting the interest# 'ecurring deposits are the type of deposits in )hich a depositor agrees to deposit a fi,ed sum of amount every month for a number of months as determined in advance% and at the end of )hich the depositor )ill be repaid his deposit amount along )ith interest# Every bank )ill be interested in mobilising as much deposit as possible as it )ould

improve its li:uidity )ith )hich the bank can meet is liabilities and e,pand its business#

'" A+v#n$in( of -o#ns & "ommercial banks accept deposits and use them for e,pansion of their business# &he banks never keep the deposits mobili/ed idle# 2fter keeping some cash reserve% they invest the funds and earn# &hey also lend loans and advances to the common men after satisfying themselves about the credit )orthiness of the borro)ers# &hey grant different types of loans like ordinary loans in )hich the banks lend money against collateral security# "ash credit is another type of loan in )hich the entire amount sanctioned is credited into the borro)er.s account and he is permitted to )ithdra) only a specified sum at a time# 6verdraft is yet another facility under )hich the customer is allo)ed to )ithdra) an amount sub4ect to the ceiling fi,ed% from his account and he pays interest on the amount of overdra)n# Discounting bills of e,change is another type of advance granted by the commercial banks in )hich a genuine trade bill is discounted by the banks and the holder of the bill is given the amount and the banks arrange to collect the due from die dra)er of the bill on the date of maturity# *" Investment of fun+s & 6ne of the main functions of the commercial banks is to invest their funds so as learn interest and returns apart from utili/ing their funds in a productive manner# India as per the statutes% they must invest a part of their total investments government securities and other approved securities so as to impart li:uidity# Banks apart from enabling them to earn out of their investment Banks no)# days have set up mutual funds through )hich they mobili/e funds from the people invest them in very

attractive pro4ects )hich is a help rendered to the investors )ho other)ise )ill not have the benefit of participating in the pro4ect# Banks administer these mutual funds through specialists and e,perts )hose services are not available to the common men# 4" Promote use of $/eBues& By the spread of banking habit% banks have achieved a remarkable successi-pil promoting and encouraging the use of che:ues by people in the settlement of their-claims# "he:ues are not only safe but are die cheapest medium of e,change in me place of cash% apart from being fully negotiable instrument 5. A(en$% fun$tions of $ommer$i##n,s &

"ommercial banks function as he agent of their customers and help them several )ays# For these agency services% the banks charge a nominal amount &he agency services include% transfer of customer.s funds% collection of funds on behalf of the customers% transactions in the shares and securities for their customers% collection of dividends on shares and interest on debentures for their customers% payments of subscriptions% dues% bills% premia on behalf of the customers% acting as the &rustees and E,ecutor of the customers% offering financial and other consultancy services% acting as correspondents of the customers% etc# C" Pur$/#se #n+ s#-e of forei(n e0$/#n(e & &he banks also undertake to help their customers in dealing or transacting in foreign e,change# &hough only banks )ith license to deal in foreign e,change along can act on behalf of their customers% yet in India several commercial banks by virtue of their relationship help the customers in this connection#

D" Fin#n$in( intern#- #n+ intern#tion#- tr#+e & &his is a ma4or function of the commercial banks# &he international trade depends to a large e,tent on the financial and other support given by the banks# 2part from encouraging bills transactions% the banks also issue letter of credit facilitating the importers to conduct their trade smoothly# &he banks also process all the documents through consultancy services and reduce the botheration of the traders# &hey also lend on the basis of commercial bills )arehouse receipts% etc#% )hich help the traders to e,pand their business# E" Cre#tion of $re+it& It is )orth noting the credit created by the commercial banks# In the process of their lending operations they create credit &he process involves the follo)ing mechanism0 )henever the banks lend loans% they do not pay cash to the be &o)ersP instead they credit the accounts of the borro)ers and allo) them to )ithdra) from their accounts# &his means every loan given )ill create a deposit for the banks# Since every deposit is e:ual to money% banks are said to be creating money in the form of credit 2s a result the volume of funds re:uired by the trade% government and the country is met by the banks )ithout any necessity to use actual cash# F" Ot/er fun$tions& 6ther functions of the commercial banks include providing safety vault facility for the customers% issuing traveller.s che:ues acting as referees of their customers in times of need% compiling statistics and other valuable information% under)riting the issue of shares and debentures% honouring the bills dra)n on them by their customers% providing consultancy services on financial and investment matters to customers% etc#

!G" Fu-fi--ment of so$io1e$onomi$ o 3e$tives & In the process of performing all the afore-mentioned services% the banks do play key role in the economic development and nation building# &hey help the countryR in achieving its socio-economic ob4ectives# 9ith the nationali/ation of banks% the priority sector and the needy people are provided )ith sufficient funds )hich helm them in establishing themselves# In this )ay the commercial banks provide a firm and durable foundation for the economic development of every country# CREDIT CREATION BY BANIS "ommercial banks accept deposits and lend loans and advances# In this process= they create t)o types of deposits% namely primary deposits and derivative or deposits# &he form refers to the cash deposited by a customer in a bank or deposit a che:ue )ith the bank for collection# deposit# &he banker merely accepts cash am converts it into a 7ence% this is merely a passive role performed by the banks#

&hese primary deposits do not add to the money stock in the economy From their e,perience and observation the banks kno) that not all the customs )ill )ithdra) their deposits on any single day# 7ence% after providing for some reserve to meet the cash re:uirement of the depositors% the banks lend the balance to the borro)# &he amount of reserve to be maintained by the banks is "ash 'eserve 'atio )hich is determined by the central bank# &he derivative or active deposits refer to the deposits )hich are created out of the #- loans and advances granted by the banks# Suppose an individual is sanctioned loan of 's# ALLLL by a bank 2# &he bank does not give him cash )hile sanctioning the loan# Instead the bank merely opens an account in the name of individual and credits his account )ith 's# ALLLL# 7e is then allo)ed to )ithdra) this amount

)henever he )ants# 9hen the bank credits his account )ith 's# ALLLL% it is treated as a ne) deposit received by the bank# 7ence% the bank derives this ne) deposit from the loan given and the bank has actively created this ne) deposit# &his is the reason )hy it is al)ays said that loans create deposit.# &he ne) deposit created in this manner )ill add to the money stock of the economy# 9henever the loan is returned by the borro)er to the bank% then there is no further possibility of creating ne) deposit# &his results in net decrease in money stock# &herefore creation of credit or granting of loan adds to money supply to in the economy and the return of loan results in reduction in money supply# It should also be noted that the banks create active deposits )hile they purchase assets or securities from others or discounting the bills of e,change or any other negotiable instruments# But the ma4ority of credit is created only out of the loans given# &he multiple credit creation process can be e,plained )ith a single bank or more than one bank# &he former is called single bank credit creation and the latter multiple bank credit creation model# &o e,plain both these models% let us assume i) there are three banks 2% B% and " ii) the cash reserve ratio is ALN and iii) an initial deposit @primary deposit) of 's# ALLLL is made into bank 2# 9hen bank 2 receives the ne) deposit its balance sheet )ill appear as belo) 0

BALANCE SHEET OF BANI A LIABILITIES 's# (e) deposit ALLLL ALLLL (e) "ash ASSETS 's# ALLLL ALLLL

6ut of this ne) deposit of 's# ALLLL the bank has to maintain a reserve of ALN )hich )orks out to 's# ALLL# &he balance of 's# KLLL% can be lent by the banker# Suppose Bank 2 lends 's# KLLL to P% a borro)er% )ho uses this fund to pay off his creditors# 6n giving the loan to P% the balance sheet of Bank a )ill be 0 BALANCE SHEET OF BANI A LIABILITIES 's# Deposit ALLLL ALLLL "ash @'eserve) !oan to +r# P ASSETS 's# ALLL KLLL ALLLL

&he creditors of P may have an account )ith bank BJ and so they may deposit 's# KLLL received from P in bank B# &his is the primary deposit of fresh deposit bank B# 6f this the bank )ill maintain a reserve of 's# KLL and it may give a loan% of 's# IALL to M# &hen the balance sheet of bank B )ill appear thus 0 BALANCE SHEET OF BANI B LIABILITIES 's# (e) deposit KLLL KLLL "ash @'eserve) !oan to +r# M ASSETS 's# KLL IALL KLLL

Suppose M uses this loan of 's# IALL to pay off his creditor )ho has an account )ith Bank "# Bank " )ill% then% get a fresh deposit of 's# IALL

and it )ould lendR 's# HBKL after keeping a cash reserve of 's# IAL &he balance sheet of bank appear as belo) 0 BALANCE SHEET OF BANI C LIABILITIES 's# (e) deposit IALL IALL "ash @reserve) !oan to +r# ' ASSETS 's# IAL HBKL IALL

' may use this loan to repay his creditor )ho may have an account )ith Bank D and it )ould create loan out of the ne) deposit received# 7ence% in the above e,ample% a fresh deposit of 's# ALLLL in Bank 2 has resulted in the creation of loans to the tune of 's# BECKL @KLLL \ IALL \ HBKL)# If this process continues more amount of credit )ill be created# In the above e,ample% )e have assumed that each borro)er has enabled fresh deposits in different banks# Suppose the amount lent by Bank 2 is retained by it @because the creditors of P deposit the money in bank 2 itself)# 7ence% the e,ample given above e,plain the multibank credit creation model and if it is altered sightly% assume the e,istence of bank 2 alone% then it becomes an e,ample for single bank credit creation model# It is of interest to kno) the total amount of credit created by the commercial banks in the above e,ample# &his could be found out that die follo)ing formula 1 [ A r# In the formula 1 is the deposit multiplier and r is the cash reserve ratio# In the above e,ample r [ ALN% ie#% A L#AL )hich is e:ual to AL# &his means that original deposit )ill multiply by AL times if the cash reserve ratio is ALN Suppose )e increase the cash reserve ratio to BLN then the multiplier )ill be F and the cash reserve ratio is FN% the multiplier )ill be BL# 7ence a rise in

cash reserve ratio )ill reduce the volume of credit created and a fall in cash reserve ratio )ill increase the volume of credit created# 9e find the total amount of credit created )e can use the deposit multiplier calculated above multiply it )ith the initial deposit In other)ords% 2ddition aggregate deposits - Fresh deposit , 1 In the above e,ample% fresh deposit is 's# ALLLL and the multiplier is AL# 7ence the total credit created is ALLLL , AL [ ALLLLL# So far )e have e,plained the credit creation process by the commercial banks# 9e can also e,plain the credit contraction process )hich means% that )henever the depositors )ithdra) their deposits then the banks )ill be left )ith lesser cash to create only lesser credit# Both the credit creation and contraction are sub4ected to the follo)ing limitations0 A# &he volume of cash in circulation determines the e,tent of credit created# 9ith larger volume of cash% the primary deposits )ill be more thereby the credit created )ill also be more# 2ny reduction in the volume of cash )ill reduce primary deposits and so the credit created# B# "ash reserve ratio% in fact% is a primary determinant of credit created# It has been already sho)n that higher the cash reserve ratio lesser )ill be credit created and lo)er the ratio greater )ill be the credit created# C# &he e,ternal drain or the e,tent of )ithdra)al of cash by the depositors also determine the volume of credit created# there is heavy )ithdra)al of cash by depositors 9hen there )ill be

reduction in credit crated and lesser )ithdra)al )ill encourage a larger volume of credit created# E# Banking habit of the people is one of the factors influencing the credit createdP If people conduct most of their businesses using che:ues rather than cash% then the banks )ill have more cash @primary deposits) to create more credit )hen people use more of cash rather than che:ues% bills% etc# F# &he central bank is the leader of the monetary system and its decision to follo) a liberal credit policy )ill encourage more of credit creation and a stringent credit policy )ill bring do)n the credit created# G# &he availability of a large volume of collateral securities )ill facilitate larger volume of credit creation and )ith lesser volume of collateral securities only% lesser credit )ill be created# H# &he business condition prevailing in the country )ill be one more factorP determining the e,tent of credit creation activity# 9ith prosperity and boom conditions prevailing there is greater opportunity for additional investment and. 0 so the credit creation )ill take place in large scale# During the period of depression and# adversity% as the investment opportunities are very limited% there is no scope for credit creation# PERFORMANCE THEIR FUNCTIONIN7 OF THE AND COMMERCIAL SOLUTIONS BANIS IN INDIA8 THEIR

PROBLEMS

TO

IMPROVE

&he trends in performance of commercial banks in India can be e,plained in terms of various indicators given belo)# I# Deposit mobili/ation 0 2 phenomenal success in deposit mobili/ation is achieved by the commercial banks since nationali/ation# In AKFL-FA the total deposit )ith the commercial banks )as 's# IIL#G crores )hich rose 's# ALBABH crores in AKIG-IH# &his )as mainly due to raid branch e,pansion after nationali/ation% the increase in money supply in the economy% the improved banking habits among the public% etc% ho)ever% the rate of increase in deposit has not been commensurate )ith the rapid rate of increase in branch e,pansion# &his is easily understood from the lo) per capital deposit of 's# HBC# further even in AKIG the total deposit )ith the commercial banks amounted to only CEN of the national income# 7o)ever% encouraging signs and indicators are being observed )hich may herald a si/eable increase in deposit mobili/ation in the years to come# &he main indicators are the increasing fi,ed deposit and declining current deposits# 9ith better interest on deposits% the banks should be able to improve their deposit mobili/ation# B# &his ob4ective has been certainly achieved as is clearly indicated by the follo)ing facts# From a mere 's# FEG#KC crores in AKFL-FB the total advances by the commercial banks stood at 's# FHFAI crores in AKIG-IH# &his is more than ALLN increase in advances compared to AKFL-FA# In AKFL-FA% the banks )ere lending only GB#AN of their total deposit in the form of advances )hich has increased to GF#HN in AKIG-IH# Since the nationali/ation% the advance to priority sector by the commercial banks has infact enabled this sector to gro) )ithout any financial constraint# In AKIG-IH% the advances to the priority sector out of the total bank

credit rose to EC#GN achieving a significant ob4ective of nationali/ation in providing the scarce resources to the priority purposes# 2n important feature of this si/eable advances is that the share of the public sector banks is the ma,imum and the commercial banks have also started concentrating on the priority sector# C# Substantial increase in investments 0 6ne of the important reasons for maintaining0 the profitability in the commercial banks is their pattern of investments# &he investments by thebanks )ent up from about 's# CGL crores in %AKFF-FG to more than 's# CIFGC crores in AKIG-IH# 6f this about CH#IN of the investments are in government securities# E# Branch e,pansion 0 6ne of the significant achievements of the government is the rapid branch e,pansion achieved over these CG years# From a fe) thousand branches in ALFL-FA% the number of branches stood at ICBA in AKGK )hich increased to FCFGH branches by Dune% AKIH# &his )as also due to the merger of smaller banks into bigger banks# &he voluminous banking operationsR in the country today is mainly due to the fact that almost every third village has a branch Gf a bank# &hough initially such a branch e,pansion activity led to competition among them% yet over a period )ith the measures taken by the banks% the competition among the banks have come do)n# F# Si/eable increase in the advance to)ards the priority sector 0

Banks have played a commendable role in the provision of advance to the priority section 2part from the :uantum of assistance% the coverage of banks in terms of assistance to various segments also increased# By December% AKHK the priority

sector advances constituted CE#EN of the total bank credit as against BF#IN un Dune AKHH# &he government fi,ed a target of ELN )hich )as achieved by the banks as already indicated under the advances given by the banks# &he banksPJ have been strictly instructed that they should e,tend GLN of the deposit mobili/ed in the rural and semi-urban areas to the priority segments in those areas# By Dune AKIH% the commercial banks. advance )as EC#GN of their total deposits )hich )as e,tended to the priority sector# G# Declining profitability of banks 0 2 very serious matter of

concern about the operation of the commercial banks in India is that their profitability is fast. declining# &here are several reasons for this# Firstly% the banks have to mobili/eP their deposits among the increasing competition among themselves and also% among the various schemes of savings announced by the government# 2s a result the banks have to bear a higher cost of deposit mobili/ation )hich directly% affect their profitability# Secondly% the interest paid on the reserves maintained by the commercial banks )ith the central bank is very lo) and this considerably reduces their profitability# &hirdly% )ith the e,pansion of branches throughout the country% the operational cost of the banks have gone-8p% thereby bringing do)n their profitability# Fourthly% the outgo in terms of staff salary and other allo)ances also take a)ay a si/eable amount of income from the banks bringing do)n their profitability# Fifthly% the priority sector lending by the banks at concessional rates is yet another reason for poor profitability# Si,thly% the banks have been lending large amounts to the sick units due to the compulsion from the government# "onse:uently their profit is affected#

Pro -ems of t/e $ommer$i#-

#n,s &

A# "ommercial banks% though very large in number have not effectively mobili/ed the deposits in the country# &his is very clear from the fact that a large number of non-banking financial institutions mobili/e considerable deposits from the public# B# &he banking habits among the public is not yet at an encouraging level# Especially in the rural areas people prefer to keep their money at home at great risk man depositing )ith the banks# C# $overnment is also responsible to some e,tent for the slo) development of banks in India# &here is no compulsion from any government institution that the funds available )ith the government agencies should be kept as deposits )ith commercial banks only# E# "ompetition from foreign banks% non-banking financial

intermediaries% a score of government aided institutions have also made the business of the banks difficult# F# 2 si/eable amount of funds of the commercial banks are locked )ith the sick units# &he investments in these units are made#only on the government insistence# G# &he fre:uent loan melas organi/ed and disbursal of

unproductive loans have also created a big problem to the banks# Further the cancellation of loans from banks% )aiver of these loans for specified period% etc#% also add to the problems of banks#

&o overcome the above problems in an effective manner the follo)ing suggestions can be considered0 A# &he competition bet)een the commercial banks and the other non-scheduled banks as )ell as foreign banks should be eliminated# &his is being done by various provisions relating to opening of a ne) branch% )orking hours% investment of funds% allotment of area for each bank% etc# But in terms of )orking it is better that the competitive spirit is maintained so that the banks )ill be constrained to maintain and improve their efficiency# B# &he e,isting banking structure should be modified to match the re:uirements and changes# For instance% instead of allo)ing the e,istence of a number of small banks% attempts should be made to amalgamate the small and inefficient ones )ith the big and efficient ones# Especially in the case of branch e,pansion a more critical study is called for so that establishment of uneconomic and< unviable branches can be avoided# &he areas really in need of banking facilities should be carefully identified )ith long term perspective and then the branchesU should be opened# 2 close monitoring of the )orking performance of each< such ne) branch should be made so as to determine the 4ustification allo)ing their e,istence# C# &he banking functions should be thoroughly overhauled so as to introduceP modern methods of functioning# For instance% the ageold method of maintaining a large number of ledgers should be done a)ay )ith andP computers should be used in large )ay# 2part from this% possibility% of e,tending banking services throughout the day @BE I ours banking) should beP thought of#

Some of the branches of foreign banks have started offering this A facility and Indian counterparts can also think of such methods# E# Streamlining the banking procedure is a long felt need in India# Surprisingly% even among the nationali/ed banks there is no uniform procedure for several functions# 8niformity )ill not only help the people to understandP the procedure but also the banks to economic their operations% for instance% if there is a uniform account opening for prescribed for all the banks% then possibly large scale printing of this form )ill bring do)n the cost of printing# !ike thisP uniformity in every procedure )herever possible should be identified and-implemented# &his )ill be identified an effort to economi/e the use of resources# F# Periodical and stringent revie) of the competency and efficiency of the staff is. also a must By devising a healthy procedure for staff evaluation% every bank can attempt to ma,imi/e the output and minimi/e the strain# +ere-strengthening of the staff )ithout arrangement for improving the staff performance through rigorous training% updating of kno)ledge% evaluation% etc#% . )ill only )eaken the functioning efficiency of the bank# G# Innovative methods of deposit mobili/ation should be thought of% apart from the conventional methods# &he banks could call for opinion from the public regarding the methods of deposit mobili/ation and may even consider giving re)ards and pri/es for the best suggestions# H# E,tending the area of operation of the banks should take up ne) areas like leasing% hire purchase% etc#% to mop up the additional deposits and also to e,tend the banking coverage#

I# Investment of funds should be very carefully planned and every attempt should be made to ma,imi/e the return on various types of investments# 2s far as possible the loan recovery should be ma,imi/ed# 2ny attempt to )aive the loans or cancel the loans )ill only encourage defaulters# K# $overnment should also be sympathetic to)ards these banks by allo)ing their funds to flo) to)ards the banking sector# &he surplus funds available )ith the government could be placed at the disposal of the banks )hich )ill strengthen their operation and in fact the economy )ould be benefited more in terms of ne) loans and advances# AL# Efforts should also be made to solve the customer problems by involving them in the decision making process# &he service charges imposed on various services should be rationali/ed and restructured and as far as possible the uniformity in this regard must be achieved# It is often seen that the private sector banks give concessions or even )aive the service charges to some of the ma4or customers% )hile the nationali/ed banks have no such provision# 2s a result% private sector banks are able to attract a si/eable volume of funds through deposits# AA# Educating the common public about the manipulative activities of the non-balance financial institutions like chit funds% nidhis% mutual funds% etc#% so as to make them understand that the same type of services can be availed of from the banking system but )ith lesser risks# &he regulation in this regard should be made more rigid so as to discourage any >blade companies? from resorting to any shady dealing and manipulative activities#

AB# "onsidering the pivotal position occupied by the banking sector in the country% it is high time that politicians are prevented from pressuri/ing the banking sector to yield to their unhealthy practices )ith ulterior motives# 2 country )here banking sector is completely free from political interference alone reaps the e,pected benefits from that sector and encourage health banking practices# LEAD BANI SCHEME 2 milestone in the history of banking in India is the nationali/ation of the AE ma4or commercial banks in AKGK# &his process )as undertaken )ith the main ob4ective of involving the banking sector in a big )ay in the nation building and economic development# &o help to achieve this commendable ob4ective% t)o committees )ere set up vi/#% (ational "redit "ouncil Study $roup )ith D#'# $adgil as the "hairman and the "ommittee of Bankers under the chairmanship of (ariman# &hese committees independently )ent into their terms of reference banks in and recommended an .area approach. for involving the

economic development# &his paved the )ay for giving a concrete shape to the% lead bank of scheme.# 2s nationali/ation of banks took place to e,tend and e,pand the banking services to all the un-banked areas especially the rural areas% the 'BI decided to implement its !ead Bank scheme through the nationali/ed banks# But this did not discourage the private sector banks from playing their role in economic development# Infact the !ead bank scheme involved all the nationali/ed banks% State bank of India and its associates and three private sector banks# 7ence% the era of bank-propelled economic development started#

T/e Le#+ A#

#n, s$/eme /#s t/e fo--o2in( fe#tures &

2ll the districts in the country e,cept the +etropolitan area )ere allotted among the banks selected for this purpose#

B#

Each bank )as e,pected to take all the initiative to develop the district allotted to it# &he initiative includes conducting a detailed survey to identify the resources and the potential of the district concerned and then to devise suitable schemes for utili/ing these resources#

C#

&he identification of unbanked centers is also included in this regard and such centers )ill be e,amined thoroughly to determine )hether bank should be established in such places or not#

E#

&he districts )ere allotted to the different banks depending upon the si/e of the bank% the resources )ith )hich they operated% the ability to handle additional volume of )ork% regional orientation of the bank concerned% etc#

F#

&he district allotted to a bank should not be considered as the area )herein only the bank concerned alone should initiate or carry out the developmental )orks# In other)ords% the lead bank should not become a monopoly in the district allotted% but it should also invite participation from other agencies in the district# In that manner the lead bank )ill function as a leader of a consortium#

G#

&o co-ordinate all the development activities taking place in the allotted district and other potential pro4ects for the district% the lead bank is e,pected to set up a district level consultative

committee of banks and other financial institutions# &his committee )as vested )ith the po)ers to revie) the performance in various schemes periodically# 6or,in( of t/e Le#+ #n, s$/eme

&o start )ith the BF banks selected a% lead banks have completed the survey of the district allotted% to each of them# &he district consultative committee in each district has also been formed# &he lead bank scheme also designed and monitored the branch e,pansion activities in all the unbanked areas and )ith nationali/ation in AKGK% the branch e,pansion took place simultaneously in about CCG district of the country# &he lead banks also started co-ordinating the activities of various agencies in the rural areas like co-operative banks% commercial banks% other financial agencies and other development agencies# &he lead banks also started identifying the potential of each district and studied critically the e,isting line of business and other activities# It also could identify the credit gap in each district# "redit gap refers to the difference bet)een the credit needs of the rural areas and the credit supplied by all the agencies% to bridge this credit gap the lead bank took several steps# Firstly% it decided to improve the deposit mobili/ation in the area concerned# Secondly% the :uantum of funds re:uired for the development activities in the district )as estimated# &hirdly% the various agencies in the district )ere% approached to participate in the scheme# Fourthly% )ith the district consultative committee the performance of each scheme )ould be revie)ed periodically and corrective steps if any re:uired% )ould be taken up# I this manner the lead bank scheme aimed at removing the credit gap in each district# &he lead bank scheme )as e,pected to generate the follo)ing benefits0

A# &he entire country )ould inherit a sound banking system# B# there )ill be perfect and effective supervision and e,pansion of the credit facilities# C# &he various agencies connected )ith the developmental activities in each district )ould be able to achieve a high degree of co-ordination and operation# E# &he available scarce resources in each district )ould be mobili/ed concerned# F# &he banks )ill start playing a significant role in the economic rebuildingU and development# G# 2 systematic attempt )ill be made to identify the credit gaps in each district. and appropriate action )ill be taken to fill up these gaps# H# &here is absolutely no scope for achieving development in ontdistrict at tile.s cost of other district# In other)ords% the lead bank scheme )ould also#J contribute in its o)n )ay to)ards the balanced regional development# But the lead bank scheme failed in certain respects encouraging the critics of this scheme to argue against this scheme on the follo)ing grounds0 A# 9hile it is true that lead bank )ould take up the role of initiatingthe development in the district allotted% but it cannot assume the role of the Planning commission# B# 2 lot of confusion prevailed among the lead banks regarding their e,act function and ob4ectives# 7o)ever this confusion )as removed later on )hen the lead banks started sharing their survey findings )ith other interested agencies in the district and and used for the development of the district

also started opening branches themselves in the areas identified by them# C# "ritics also pointed out that a financial and commercial institution like bank cannot be best suited to analyse and solve the task of techno-economic )ork#
r

Further the banks can be

taken as professional institutions in the field of finance and not in the area of development# It )as pointed out that banking function is completely different from the development function# In the absence of trained and skilled staff the lead banks could not accomplish the ob4ectives for )hich they )ere created# E# &here )ere several other practical difficulties in e,ecuting this scheme# For instance% the allotment of districts to the banks )as not done strictly% on the basis of regional orientation of the banks# 2s a result the banks could not effectively attend to the initial spade )ork in the district allotted to them# 6perational difficulties like language barrier% difficulty in controlling the )ork from long distance% difficulty in finding staff for the ne)ly opened rural branches% reluctance of the staff to move to rural areas% absence of trained and skilled people% etc#% together raised serious doubts about the success of this Scheme# F# 2 ma4or criticism of the scheme )as that the authors of this scheme thought that once the banks are established in the rural or unbanked areas% the other problems in those areas )ould automatically be solved# Development of any region or area depends on the availability of infrastructural facilities% in that area# 7ence% )ithout the other facilities basically re:uired for developmental efforts% banks alone cannot transform the area or region#

"onsidering these problems of the lead bank schemes% steps have been taken to improve the scheme# For instance% the Banking commission itself has recommended the regrouping of the banking system so as to makeP the allocation of districts more meaningful and purposeful# 2 detailed training programme )as charted to be implemented by every bank among the e,isting and the ne)ly recruited staff# &he detailed re:uirement of each region including finance% )as assessed so as to make the appropriate agencies to come up )ith necessary assistance to the bank to implement the scheme# 2nother effort taken up )as-to arrange for multi-level discussion among the participating banks the scheme so as to share the available information and other details of the scheme to find out solutions for various problems# 2 close co-ordination and cordial relationship )as maintained )ith the state government concerned to strengthen the scheme# FUNCTIONS OF CENTRAL BANI 2ccording to De 1ock% modem central bank performs si, important primary functions# &hey are0 A# "entral bank has the monopoly of note-issue# B# "entral bank acts as-the banker% agent and adviser to the government# C# "entral bank acts as bankers. bank# E# "entral bank acts as the custodian of the nation.s gold and foreign e,change reserve# F# &he "entral bank collects and publishes economic statements and other useful information# G# &he "entral bank acts as the controller of credit#

2part from the above functions% "entral bank also performs the follo)ing t)o functions0 a) it is the custodian of the cash reserves of commercial banks and b) it acts as the bank of central clearance% settlement and transfer# !et us no) discuss each one of these eights functions in detail# Centr##n, /#s t/e mono.o-% of note issue &

In olden days )hen the paper currency )as introduced% each king issued his o)n currency or in each province a paper currency )as used# 9hen commercial banks )ere established% each one issued its o)n currency# 8nder both these situations% N there )as lack of uniformity in the notes issued# &here )as also lack of recognition of the notes issued% further there )as a ma,imum limit up to )hich the commercial bank could issue notes as they had been maintaining limited cash reserve and sometimes commercial banks failed to convert their notes into other forms of assets )hich shook the confidence of the common public# &herefore% the government itself undertook the issue of currency in its o)n hand# Even this )as not satisfactory as it lacked elasticity and fle,ibility% hence% finally central bank )as made in charge of issue of currency# &his centrali/ed system of note issue has the follo)ing advantages A# It facilitated uniformity and absolute control over the monetary system# B# It built up public confidence on banks# C# It offered complete fle,ibility to the monetary system# E# It enabled perfect control over the credit created by the commercial banks# F# It also helped to maintain the internal and e,ternal value of money#

7ence% in these days every country has vested the "entral bank )ith the responsibility of issuing currency and it started )ith Bank of England in AIIE# In India the 'eserve Bank of India is issuing currencies# Every currency issued is backed up by suitable asset of value% like foreign currencies% government securities% other securities and other metallic reserves# 2s a result of this back up% the public confidence on the banks and the currency issued has gone up#

ii# Centr#-

#n, #$ts #s t/e

#n,er8 #(ent #n+ #+viser to t/e

(overnment& 2s the banker of the central government% the central bank performs several functions# Some of the important functions are0 A# It keeps the account of the government and so accepts receipts to the government and payments by the government# B# It acts as the collecting banker of the che:ues% drafts% etc#% payable to the government# C# It also transfers funds from one place to another on behalf of the central government# E# It also provides short term loans to the government to tide over the temporary crisis# F# It also conducts all the international financial transactions on behalf of the government# 2ny payment for imports or receipts from e,ports are all accepted by it on behalf of the government# G# It manages the public debt on behalf of the government% spent from receiving ta, payments from the common public# By virtue of the information that it possesses% the central bank functions as the adviser of the government It helps the government to

monitor the economy# It formulates the monetary policy and helps in the implementation of the policy# It suggests to the government the type of foreign policy% ta, policy% commercial policy% e,change rate policy% etc#% depending on the economic conditions prevailing in the country# It also maintains the foreign e,change reserves of the government# iii" Centr##n, #$ts #s t/e #n,ersM #n,&

&his function of the central bank can be classified into t)o subfunctions# &hey are0

A# It is the custodian of the cash reserve of the commercial banks and B# It is the lender of the last resort# !et us discuss each one these sub-functions# 2s regards the first sub-function% it is mandatory in the case of commercial banks in every country to keep a part of their total liabilities in the form of cash reserves# &he :uantum of cash reserves )hich the banks have to maintain depends on the policy of the central bank# 8sually the commercial banks maintain t)o types of cash reserve# 6ne type of reserve is maintained )ith the central bank and the other is maintained by the commercial banks )ith themselves# &his type of centrali/ation of reserve of commercial banks confer the follo)ing advantages 0 A# It improves the public confidence# B# It facilitates effective and fuller utili/ation of cash reserve of the country# C# It enables the central bank to go to the rescue of the commercial bank )hich is in need of funds# E# 6n the basis of the serve% the commercial banks are able to create credit# F# It also conducts all the international financial transactions on behalf of the government 2ny payment for imports or receipts from e,ports are all accepted by it on behalf of the government# G# It manages the public debt on behalf of the government% apart from receiving ta, payments from the common public# H# &he central bank is able to e,ercise absolute control over the activities of the commercial banks#

9e have already stated that the central bank acts as the lender of the last resort# &his means )henever the commercial banks% in times of need% are not able to get financial accommodation from any other source% they can get it from the central bank# &his is done in several )ays# 6ne popular )ay is that the commercial banks sell their securities and rediscount valid trade bills )ith the central bank and in turn get financial resources# &he financial support by the central bank enables the commercial banks to improve their li:uidity apart from carrying on their functions )ith limited funds# 9hile this strengthens the public confidence% this also empo)ers the central bank to impose and e,ercise absolute control over the commercial banks# 2 significant merits of this function is that it has enabled the central banks over the globe to direct and regulate the flo) of credit# &hey could ensure the availability of ade:uate funds for the priority sectors# iv" T/e Centr##n, is t/e $usto+i#n of t/e n#tionMs (o-+ #n+

forei(n e0$/#n(e reserves& "entral bank performs this very important function to protect the country from the conse:uences of foreign% trade# It issues the e,port and import permits to the traders and others# &hrough this% it ensures that all the international transactions are performed only through the central bank and the payments and receipts are routed through it# &his prevents misuse and speculation in foreign e,change# 9ith the centrali/ed system% the central bank is able to maintain the e,change rate and resort to selling or buying of foreign currencies to minimi/e the fluctuations in the e,change rate# It is also able to encourage all the productive e,port oriented activities and discourage the unnecessary and )asteful import activities# It also formulates and e,ecutes e,change regulation policies% punishing and penali/ing the erring individuals and institutions# It strengthens the county.s trade relations )ith other countries#

v" T/e Centr#-

#n, $o--e$ts #n+ .u -is/es e$onomi$ st#tisti$s

#n+ ot/er usefu- inform#tion& In every country% it is the central bank )hich is given the po)ers to collect all the economic data related to the country and publish them as authoritative information# &his helps the government to understand the actual economic condition prevailing in the country and take suitable policies# For instance% through the collection and analysis of price data the government is able to understand and formulate the necessary price policies to maintain internal price stability# Similarly% credit policy% agricultural policy% industrial policy and other policies are all formulated on the basis of the economic data and useful information provided by the central bank# vi" Centr##n, #$ts as the #n, of $entr#- $-e#r#n$e8

sett-ement #n+ tr#nsfer& 9ith the e,pansion of branch of banks and increasing use of banking services% the transmission of funds from one place to another place has become essential# &he volume of funds transmission has gone up by several times these days that any delay is causing irreparable damage to the economy# &he transfer of funds takes place efficiently and Every bank having an account )ith central Further the credit base in :uickly only )ith the help of central bank# "entral bank is the centre of clearing house operations# bank is able to easily settle its payments receipts )ithout any need to go through cumbersome cash movement# an economy can e,pand only )hen the negotiable instruments can be freely transferred and honored )ith minimum delay possible# In this respect the clearing house operation of the centralR. bank in every country assumes special importance# &he value of this service of

thereof central bank can be understood only )hen this service is affected in times of banker strikes# paraly/ing the economy# vii" Centr##n, #$ts #s t/e $ontro--er of $re+it& 6f all the functions of the central bank% this function of the central bank is very important# Indiscriminate and uncontrollable creation of credit )ill result in serious implications# 7ence% the central bank performs this function# It helps in first limiting the :uantum of credit created through its :uantitative credit control policies and second it also ensures that the available funds are channeli/ed properly P so that the funds )ill be used productively# &he central bank achieves this through its :ualitative credit control policies or selective credit control policies# &hrough the credit control policies% the central bank strives to maintain domestic price stability% e,change rate stability% high level of employment% etc# "entral bank has several )eapons to discharge this function )hich are interlinked and help to achieve the ob4ectives of credit control policies# OBLECTIVES OF CREDIT CONTROL POLICY OF THE CENTRAL BANI VARIOUS INSTRUMENTS OF ?UANTITATIVE CREDIT CONTROL ALON7 6ITH THE LIMITATIONS OF EACH ONE OF THE INSTRUMENTS" &he follo)ing are the ob4ectives of the credit control policy of the central bank 0 A# +aintaining the internal price stability# B# "ontrolling the economic fluctuations% i#e#% business cycle# C# 2chieving the stability in e,change rate# E# +aintaining the stability in the money market# 7uge amounts of cash transactions remain immobile causing immense of difficulties and

F# Promotion of economic gro)th through )ell planned and coordinated efforts and G# Preparing the country to meet any eventuality like )ars# Broadly% the various methods of credit control can be classified i) Muantitative credit control and ii) Mualitative credit control# &he former aims at controlling the volume of credit and money supply in the economy% )hile the latter aims at channelising the available credit in the desired direction# &he :uantitative credit control policy makes use of three important methods of controlling the volume of credit and money supply in a country# &he three methods are0 A# Bank rate or discount rate policy# B# 6pen market operations and C# 5ariable cash reserve ratio# !" B#n, r#te or +is$ount r#te .o-i$% & It is one of the earliest methods of general credit control developed by the Bank of England and it )as considered an effective method till the outbreak of I 9orld )ar# 2fter the )ar% Bank of England developed other methods as it found the bank rate policy to be not so effective# &he essence of this policy that commercial banks approach the central bank )henever they are in need of financial accommodation# &hey get the necessary assistance by re-discounting the eligible bills and other securities# &he "entral bank )ould re-discount these instruments at a rate )hich directly determines the volume of funds )hich the commercial banks can get through this method of financial accommodation# 2 revision of this re-discounting rate by the central bank )ill necessitate the commercial banks to change their rate of discounting of eligible bills and securities#

2s a result the businessmen )ill be encouraged or discouraged in approaching the commercial banks to get financial accommodation# 7ence% it could be understood that the re-discounting rate is very much linked )ith all the other market rates andP discounting rate# In order to understand the process let us take an e,ample# Suppose a commercial bank has a discounted trade bill )orth 's# B lakhs at AFN and given holder of he bill 's# A#HL lakhs# Suppose the commercial bank is in need of funds it can approach the "entral bank and get the same bill re-discounted# Suppose the re-discounting rate ALN% then the commercial bank )ill get after re-discounting the bill 's# A#I lakhs# (o) it should be noted that the rate at )hich the "entral bank discounts the eligible bills already discounted by the commercial banks is called re-discount rate or bank rate# &he discount rate refers to the rate at )hich the commercial bank discounts the bills of the businessmen# &he bank rate or the re-discount rate and the discount rate are very closely related# Suppose thereJ is inflationary situation prevailing in the economy and the "entral bank )ants toa reduce the purchasing po)er# It )ill then raise the bank rate# Suppose the bank rate is raised from ALN to AFN correspondingly the commercial banks )ill also raise their discounting rate from AFN to say BBN 2s a result the commercial bank )ill get only 's# A#H lakhs after re-discounting the bill and the businessman )ill get only 's# A#FG lakhs after discounting the bill# Since the rate of discount is very high or the cost &his )ill lead of borro)ing in the market becomes high% the business men )ill start borro)ing less and so volume of credit )ill come do)n# to decline in economic activity and the price level )ill fall do)n# Similarly during deflationary situation% the do)n)ard revision of bank rate )ill bring do)n the discount rate and encourage more borro)ing and e,pand the economic activity and allo) the price level to go up helping the economy to recover# 2t a lo)er bank rate and discount

rate the bank credit is made cheaper and borro)ing is attractive-&here are t)o interpretations available in e,plaining the process of the bank rate policy# 6ne )as developed by 7a)trey and the other by D#+# 1emes# 2ccording to 7a)trey% the interest changes constitute ma4or part of the cost of holding and that businessmen are very much sensitive to changes in interest rate# 7e e,plained that any change in bank rate )ill bring about corresponding changes in short term interest rates# Suppose the bank rate is raised% the short term rate of interest )ill go up making the bank credit costly and discouraging the business men from borro)ing and investing# &his )ill lead to shrinking of business activity affecting employment and income# 9hen the employment goes do)n% the income goes do)n% bringing do)n the purchasing po)er% thereby the demand for goods )ill fall causing price to fall# Similarly a rise in bank rate )ill have opposite effect# 1eynes% on the other hand% )as of the opinion that any change i bank rate )ill affect the short term interest rates and bring do)n the capital value of old long term securities as the ne) short term securities carry higher return# So there )ill be diversion of investment from long period to short period securities# &o avoid this diversion% the long term rates should be revised up)ards )hich )ill make borro)ing costly# 2s there )ill be no corresponding up)ard revision in the marginal efficiency of capital of long term investment the businessmen )ill be forced to reduce their investment )hich )ill mean fall in output% employment and income# 2s a result the aggregate demand )ill fall do)n and the inflationary tendency )ill be arrested# Both these interpretations are correct as one approaches the problem of inflation through short period securities and the other through long term securities#

&he effectiveness of the bank rate policy in controlling the credit depends on the follo)ing conditions0 A# &he bank rate and the other interest rates should be very closely interconnected% as other)ise the desired effect through manipulation of bank rate cannot be achieved# B# &he economic structure of the country should be elastic# &his means that )ages% costs and. prices should be fle,ible so that they cart change depending upon the changes in bank rate# C# &he e,istence of )ell developed and )ell 6rgani/ed short term funds market is the ne,t re:uirement# Limit#tions of t/e the follo)ing reasons0 A# B# &he conditions for the success of the bank rate policy are rarely met in practice% making it ineffective# Businessmen and industrialists are found to be less sensitive to changes in interest rate as they change their policies depending upon the business prospects and adversities# C# Bank rate has been found to be non-effective in controlling deflation% as mere reduction in bank rate and through that making credit cheaper does not enthuse the investors to increase their investment# E# &here e,ists conflict bet)een the internal and e,ternal effects of the bank r policy# For becomes F# instance% )hen domestic borro)ing costly% international borro)ing may become cheaper #n, r#te .o-i$%&

&he bank rate policy in practice has not been very effective because of

defeating the purpose changing the bank rate# "ommercial banks are found to be increasingly less dependent on the central bank and so any change in bank rate fails to bring the necessary effect#

G# H# I#

'ank rate policy affects both the productive as )ell as unproductive activities in the same )ayP so it is not advisable# &he increasing importance given to the fiscal policy% especially after 1eynes has made the bank rate less useful# &he changing pattern of business finance )ith over emphasis on ploughing back of profits% building up reserve funds% etc have made investors relying less on commercial bank credit and as a result bank rate policy has become ineffective#

K# AL#

&he formulation of other methods of credit control has also led to the decline in importance of bank rate policy# Financing through discounting of bills or other negotiable instruments has become outdated as there are other modern methods of financing and so bankP rate policy is less effective#

2s far as India is concerned the bank rate policy has not been very effective because0 @i) the e,istence of organi/ed banking sector and the unorgani/ed indigenous banking sector# 2ny change in bank rate )ill affect only the former and not the latter# @ii) @iii) there is no co-ordination bet)een the organi/ed and unorgani/ed sectors# the Indian commercial banks al)ays keep e,tra cash reserve to tide over their financial crisis )ithout relying on the central bank and @iv) the bill market and the non-availability of eligible bills have made the bank rate policy ineffective# '" O.en m#r,et o.er#tions & &he open market operations as a method of :uantitative credit control are interpreted in t)o )ays# In a broad sense% it refers to the buying and selling of government securities as )ell as other eligible papers

like bills and securities of private concerns by the central bank# In a narro) sense it means the buying and selling of only government securities by the central bank in the money market# &he process of open market operations affects the volume of credit% the level of business activity and the internal price level# &he process is e,plained belo)#

Suppose in an economy there is inflationary tendency and the e,pansion of credit is very high% and die central bank )ants to control this# &hen the central bank )ill start selling securities in the open market to both the banks as )ell as the private individuals# 9hen these securities are bought% payment is made in terms of cash# &his )ill bring do)n the cash reserve of the commercial bank )ith )hich they can only crease lesser credit 2s a result the e,pansion of credit )ill be reduced# Similarly% suppose the central bank )ants to e,pand credit in order to revive an economy in deflationary situation# &hen it )ill start buying securities in the open market from the commercial banks and others# &his means% the central bank )ill pay them cash adding to their cash reserve# &his )ill enable commercial banks to create more credit# 2part from e,panding or contracting credit creation% open market operation can also influence the interest rate# For instance% )hen the central bank buys securities giving cash% the interest rate )ill fall do)n and )hen the securities are sold% the interest rate )ill go up# &he open market operations became very popular since the A 9orld )ar# 9ith the increased availability of government and other securities% it has become more useful# 2s the bank rate )as proved to be ineffective% there )as need to make increasing use of open market operations# Further it has helped to remove the shortage of money in

the money market apart from helping to make the bank rate policy successful# 2 ma4or contribution of the open market policy is that it is very helpful in checking the .run on banking#. 7o)ever% the success of the open market operation depends on the follo)ing conditions0 A# E,istence of a )ell developed securities market is a must for making the policy effective# &he non-fulfillment of this condition has made this policy less effective in under developed countries# B# &he maintenance of e,cess cash reserve by the commercial banks defeats the ob4ect of this policy easily# C# &he operations of e,traneous factors like leakage of cash or in4ection cash into the country may affect the effectiveness of this policy# Suppose )hen the central bank buys securities% the in4ection of additional cash be used to set right the balance of payment deficit or people may P holding more cash or the velocity of money may decline# ineffective# E# &he attitude of the borro)ers may stand in the )ay of this policy succeeding% suppose the central bank )ants to e,pand credit and so buys securities# &he availability of credit need not induce the investors to borro) more from commercial banks# &hat is if the investor.s attitude is not in consonance )ith the policy of the central bank% the open market operationR )ill fail# F# &he central bank should have ade:uate stock of securities to effectively% participate in the open market operations# G# &he commercial banks should not have any other )ay of getting financial accommodation from the central bank as other)ise die open market operations )ill be less effective# H# It has been found in practice that this policy is more effective in controllingR credit creation or e,pansion rather than in 2s a result policy becomes

stimulating credit e,pansion as the borro)ers are influenced by other factors apart from the cheapness of credit# *" V#ri# -e $#s/ reserve r#tio & "onsidering the limitations of the bank rate policy and the open market operations% the need to develop a very effective method% of credit control )as felt# Especially% the need )as to directly control the po)er of the commercial banks to create credit 5ariable cash reserve ratio )as suggested as one more method of :uantitative credit control by 1eynes# Further this method is considered necessary for promoting the overall li:uidity and solvency of the banking system% apart from improving the public confidence on the banking system# &he process of )orking of this method of credit control can be easily understood )ith an e,ample# Suppose in an economy there is over e,pansion of credit )hich is possible )ith e,cessive cash reserves )ith the commercial banks# &o check this% the central bank may raise the cash reserve ratio say from BLN to BFN &hen this )ill bring do)n the availability of cash reserve )ith the commercial banks# 9ith lesser cash reserve they can only create lesser credit# Similarly% suppose the central bank )ants to e,pand the credit creation by the commercial banks# &hen it )ill bring do)n the cash reserve ratio say from BFN to BLN &his )ill enable the "ommercial banks to have more cash reserve )ith )hich they can create more credit# It should be noticed that the cash reserve ratio determines the credit multiplier in an economy# 2n increase in former )ill contract credit through multiplier effect and reduction in the former )ill e,pand credit through multiplier# In India the variable cash reserve ratio is slightly altered and it is called Statutory !i:uidity 'atio @S!')# S!' means that every commercial bank should maintain a certain amount of li:uidity to meet its liabilities# &his

S!' includes% the cash reserve )ith the 'BI% cash-)ith other banks-and investment in government securities% any increase in S!' )ill reduce the lendable funds )ith commercial banks and decrease in S!' )ill increase the lendable funds )ith them# S!' helps in not only credit control but it also helps in assisting the government.s borro)ing programs# &his method is also called as the method of secondary reserves re:uirements# &hough the variable cash reserve ratio is considered superior to other methods of :uantitative credit control% it has the follo)ing limitations0 A# "ommercial banks )ith e,cess reserve are least affected by the method# B# "ommercial banks )ith a very strong source of foreign funds can by-pass this policy# C# &he central bank.s policy of liberali/ing or contracting the credit may not be commensurate )ith the investor.s attitude# E# &his policy also affects all commercial banks uniformly i#e#% banks )ith large cash reserve as )ell as small reserve# 2s a result the policy may harm some banks in the process protecting the economy# F# &he commercial banks )ill lose their freedom because of the policy% hence% they )ill al)ays be cautious in maintaining additional reserve# G# 2s the cash reserves maintained by the commercial bank do not fetch any interest% in a )ay% this policy brings do)n the earnings of commercial-banks# H# 2s this method is very effective% it has to be very carefully applied by the central bank as other)ise it has to undo itself all that it has attempted to maintain economic stability# I# &his policy directly affects the securities market as increase in cash reserve re:uired by the central bank )ill force the

commercial banks to dispose of securities they have% causing depression in prices of securities resulting in heavy financial loss# In spite of all these limitations% the variable cash reserve ratio is by and large effective method of controlling the :uantum of credit in an economy this policy has to be carefully adopted as other)ise% it may result in severally% un)anted conse:uences on the economy#

?UALITATIVE

CREDIT

CONTROL

OR

SELECTIVE

CREDIT

CONTROLN POLICY AND THEIR LIMITATIONS" Mualitative or selective credit control policy refers to the set of

policies implemented by the central bank in order to channeli/e the available credit in-the desired direction# For e,ample% suppose in India the agricultural and small scale industry sectors are to be encouraged% then the 'BI may direct the commercial banks to be more liberal in lending to these sectors and be strict )hile lending to other sectors# &his )ill help the economy to provide ample opportunities for the priority sectors to gro)# In other )ords% in every country the government determines in advance the priorities and to ensure that the banks conform to the priorities in their lending policies% the selective credit control policies are implemented# 7ence% )hile the :uantitative credit control policies aim at controlling the volume of credit created% and the money supply in the economy% the :ualitative credit control policies help in using the available funds only for the important purposes and discourage unnecessary lending by commercial banks# &he ob4ectives of the selective credit control policies are 0

A# to divert available funds only to the urgent and desirable purposes% B# to control and regulate a particular sector an economy )ithout affecting the entire economy as a )hole C# to discourage )asteful and uneconomical consumer e,penditure on non-essential items# E# to correct the unfavorable balance of payments of a country and F# to control and regulate even the non-banking financial houses or intermediaries# &he important methods of selective credit control policies are 0 A# +argin re:uirements B# 'egulation of consumer credit C# "ontrol through directives E# 'ationing of credit F# +oral suasion G# Direct action and H# Publicity# !" M#r(in reBuirements & It is )ell kno)n that commercial banks lend against valuables and securities# &hese securities are the collateral for the amount lent# 9hile accepting the securities for the loan the banks first asses the market value of the securities and then considering the amount of loan re:uired the bank )ould re:uire the margin to be paid by the borro)er )hich on most occasions is the difference bet)een the market value of the securities and the amount of loan re:uired# 7o)ever% the central bank has the right to determine the margin amount payable by the borro)ers# &his margin amount is stipulated in terms of percentage of the value of the securities offered or the amount of loan re:uired# &he central bank can vary this percentage of margin re:uirement from time

to time to regulate the flo) of credit on certain securities# In other )ords% central bank can also fi, different percentages of margin re:uirements on different types of securities against )hich the loan is given% this method is effectively used to counter inflationary a deflationary conditions in an economy# &he ma4or advantages of this method are0 A# B# C# it ensures use of available funds only for productive and useful purposes% it discourages speculative activities% it helps to control inflation by diverting the funds available to produce only goods )hich )ill help to bring do)n the price level and E# it encourages sound investment pro4ects#

7o)ever% this method has serious limitations as e,plained belo) 0 A# fi,ation of very high percentage of margin may drive the borro)ers to black0 money market and B# it may encourage collusion and corruption among the bank officials to sho) undue favors to certain borro)ers# E,ample 0 Suppose a person * approaches a commercial bank 2 for a loan of 's# BLLLL to buy a motor cycle# &he banker then )ould ask borro)er to remit% say BLN of the value of the motor cycle as margin money# +r# * )ould remit 's# ELLL and then the banker )ould give him a loan of 's# BLL# Suppose the central bank )ants to discourage such lendings# It may increase the margin re:uirement from BLN to ELN &hen +r# * should remit 's# ILLL to the banker to get a loan of 's# BLLLL# &his may discourage * from approaching the baker for the loanR% Suppose +r# O )ants a loan of 's# FLLLL to start a small scale business unit# &he-banker then may ask him to remit 's# FLLL @4ust

ALN of the amount of loan) as margin money# Suppose the central bank )ant to encourage such lendings it may% fi, 4ust FN as the margin re:uirement for such loans and then +r# O )ould have to# pay only 's# BFLLL as margin money# '" Re(u-#tion of Consumer $re+it& 2ccording to this method of selective credit control the commercial banks are instructed to encourage borro)ing for certain purposes and discourage certain% other types of borro)ing# 8sually consumers approach the commercial banks for loans to buy durable consumer good like &#5#% refrigerators% )ashing machines% etc# &he banks )ould direct the consumers to pay a part of the price of the item to be purchased and the% remaining amount is given as credit# &he central bank may regulate the consumer credit in different )ays# +ost popular methods are 0 @i) "entral bank may e,tent or curtail the consumer loans to buy certain items during a particular time# For e,ample% during inflationary period% the central bank may curtail the commercial banks from lending to enable consumers to buy &#5# fridge% etc# &hen the demand for these lu,ury items )ill come do)n bringing do)n their price and indirectly helping to control general price level# @ii) &he central bank may alter the initial money to be deposited by the borro)er and through that encourage or discourage borro)ing# For e,ample% during inflationary situation% the central bank may instruct the commercial banks toJ get ELN of the value of the item to be purchased as the initial deposit payable by the consumer# &hen this )ould discourage the consumer from borro)ing# During the normal period this initial deposit re:uirement may be reduced to 4ust ALN# @iii) "hanging the maturity period of the loan is one more method of consumer credit regulation#% Suppose the central bank )ants to

encourage the consumer credit% then it may# allo) ma,imum repayment period say GL month.s# 6n the otherZhand% if it )ants to discourage the consumer credit% it may fi, the ma,imum repayment period as only CL months# 2ccordingly the lending operations )ill increase or decrease# @iv) "hanging the rate of interest on consumer credit is one more usual method to regulate# Increase in rate of interest )ill discourage borro)ing )hile reducing the interest )ill encourage borro)ing# *" Contro- t/rou(/ +ire$tives & &his method means the periodical directions% instructions% information% guidelines and )arning issued by the central bank to the commercial banks to make the latter follo) the credit policies of the former# &he main ob4ectives of this method are 0 @i) @ii) to control the lending policies of the commercial banks# to channeli/e the available credit to more productive and urgent uses from less urgent and less productive purposes# @iii) @iv) to completely prohibit lending to)ards a particular purpose and to determine the ma,imum amount that could be lent for certain purposes# Every central bank is empo)ered to issue such directive by virtue of the statutory po)ers conferred on it and usually the central bank implement this policy by offering incentives like liberal refinancing facility to banks )hich follo) the directives and restraining the erring banks by arranging for scrutiny of their lending pattern or imposing penalties for violation# In practice the commercial banks usually follo) the guidelines and directives of the central bank and conflict on the ground seldom arises#

4" R#tionin( of $re+it& It is necessary for every commercial bank to approach the central bank to improve its li:uidity in times of need# "entral bank can effectively use this .dependence of commercial banks to control the credit creation or make them )ork according to the need taf the time# 'ationing of credit can be interpreted in t)o )ays0 @i) the central bank may fi, the ma,imum amount of financial accommodation to an commercial bank on the basis of rediscounting facilities# @ii) the central bank may fi, the :uota for every commercial bank for financial accommodation# &he central bank may use the policy in any one of the t)o )ays or both the )ays% For instance% it may feel that a particular bank is creating e,cessive credit# &o control this central bank may fi, the ma,imum amount of financial accommodation that the particular commercial bank can get from central bank through re-discounting of eligible bills )ith central bank# &his )ill certainly make the commercial bank to control its credit creation# But this method of credit control has certain limitations# Firstly% the central bank is suppose to be the lender of last resort for the commercial banks# But )hen it rations the credit to the commercial banks% it appears to be contradicting its role as a lender of the last resort# Secondly% the method is not so effective in a situation )here the commercial banks have built up sufficient reserve so that they need not approach the central bank in times of need# In that case% rationing of credit has no purpose to serve# &hirdly% this method can be effective only )hen there is e,cess demand for credit over the supply of credit 7o)ever% the central bank uses this policy along )ith the other policies in order to improve the over all effectiveness of the selective credit control policies#

5" Mor#- su#sion& +oral suasion refers to the persuasive approach of the central bank to)ards the commercial banks in making the latter follo) and implements the policies of the former# &hough the central bank is empo)ered to take direct action on the erring or violating commercial banks% yet it e,ercises that option only rarely# In its place% the central bank takes efforts to e,plain to the commercial banks the need for follo)ing certain policies# &his is done either through periodical conference )ith commercial banks% or by appealing to the sentiments of the commercial banks# In effect this method aims at bringing to commercial banks into line through use of moral force instead of resorting to the legal po)ers# It should be noted that this method has no legal back up or support# It is merely applied using the conventional relationship bet)een the commercial banks and the central bank# It has been :uite successful in countries like 81% France% 7olland and others# But it has not been very effective in 8S2 under the unit banking system# In India% the 'BI has found this to be very effective as there e,ists a very cordial relationship bet)een the central bank and commercial banks# 6f course% the success of this policy depends on the prestige% influence and leadership of the central bank Further since it has no legal back up in times of credit e,pansion it is not effective# C" Dire$t #$tion& Direction action is one more method of selective credit control in )hich the central bank uses coercive measures against the erring commercial banks or banks violating the central bank ruling# It may vary from general instructions to the banks to special directives to the erring banks# &hough this method has the legal sanction% central banks around the globe rarely apply this method# 2s a matter of direction action% central banks are vested )ith vast po)ers ranging from

refusing credit and re-discounting facilities or imposing penal rate of interest on banks )hich have sought financial accommodation from central bank beyond the prescribed limit# In several countries% the central bank is empo)ered to formulate general credit policy or prescribe die rates of interest on different types of loans and advances or to divert the available bank credit to a particular industry etc# &hough this method is very effective it is very rarely applied in isolation# It is normally combined )ith other methods# method has certain limitation like0 A# Direct action on commercial banks may make them )ork against the central bank at least psychologically# B# &he commercial banks are at a loss sometimes to follo) the policy of central bank regarding productive and unproductive lending% essential and non-essential borro)ing% etc#% in the absence of clear cut definition# C# &he central bank through this method is able to regulate the functioning of commercial banks only# It cannot control directly any misuse of credit by any borro)er# E# &his role of central bank contradicts its traditional function as the last resort# D" Pu -i$it% & 8se of publicity as a method of selective credit control is a debatable :uestion# In advanced countries this is used as an effective method of credit control )hile developing countries it is yet to be recogni/ed as a measure# 7o)ever the central bank can public its vie)s% opinions% policies% guidelines% directions% observations% etc#% periodically about the economic situation prevailing in the country of economic -variable.s behaviour% money market% public finance% trade% industry% agriculture% etc# Such publications help to understand the changing situations and But this

the needs of a country# &he commercial banks are able to formulate their policies )ith the back ground information published% by the central bank% this method is very )idely used in most of the advanced countries and in India the 'BI publishes various statements% returns% etc#% helping the country to follo) the changing#P economic situations and through that guiding the commercial banks# But the effectiveness of this method of credit control is debatable and it is usually applied along )ith the other methods control along )ith the other methods of credit control# 6n the )hole all the methods discussed above are not free from limitations )hich are e,plained hereunder0 A# &he selective credit control policies are applicable to commercial banksP institutions in the unorgani/ed sector and the non-banking financial intermediaries are left out of the coverage# 2s a result these policies may land commercial banks in a disadvantageous position# B# In the absence of clear cut definition of productive and unproductive lendings% commercial banks cannot be effectively controlled through these policies# C# &hese policies are ineffective as the commercial banks are unable to ensure the use of funds for the purpose for )hich they are given# E# "ommercial banks are encouraged to resort to manipulations and unhealthy practices to remain outside the effect of these policies# F# G# In practice% these policies )ere not found to be effective in unit banking system# &hese policies have no relevance if the businessmen% investors and other resort to different methods of raising funds than approaching the commercial banks#

H#

It has to be noted that credit is one of the factors affecting the price of goods and services but control of credit-alone cannot bring about the desired changes in price level# In this respect% the selective credit control policies can be treated only as the alternative available and not the only method of achieving economic stability#

FINANCIAL INSTITUTIONS In+ustri#- Fin#n$e Cor.or#tion of In+i# HI1OCIA #n+ ev#-u#te its 2or,in( &he IF"I )as set up by the $overnment of India in Duly% AKEI under a special 2ct )ith an authori/ed capital of 's# AL crores% @increased to 's# BL crores later) )ith a vie) to achieve speedier industrial e,pansion of the country# Pre-independent India could not advance industrially% since the British rulers at that time had no interest in the gro)th of industries in India% Indian industries needed institutional finance support to e,pand and moderni/e and this need )as met by the establishment of IF"I# &he shareholders of IF"I consist of IDBI% scheduled banks% insurance companies% investment trusts and cooperative banks# &he repayment of capital and a minimum annual dividend are guaranteed by the $overnment of A India# &he "orporation is authori/ed to issue bonds and debentures in the open% market% to borro) foreign currency from the 9orld Bank and other organi/ations% accept deposits from the public end borro) from 'BI# &he important functions of the "orporation are0 @i) @ii) &o grant loans and advances to industrial concerns and to subscribe to the debentures floated by them# &o guarantee loans raised by the industrial concerns in the capital market#

@iii) @iv)

&o under)rite the issue of stocks% shares% bonds and debentures of industrial concerns# &o directly subscribe to the shares of any concern#

&he "orporation gives long and medium term finance only to companies engaged in manufacturing% mining% shipping and generation and distribution of electricityP )ith a ceiling of 's# A crore to any single loan# &he period of the loan shall not e,ceed BF years# &he "orporation charges lo)er rates of interest in case of pro4ects in notified back)ard areas# &he follo)ing aspects are e,amined by the "orporation before a loan is granted0 @i) @ii) @iii) @iv) @v) @vi) @vii) the importance of the industry to die national economy the feasibility of the scheme% the cost of the scheme% managerial competence% nature of security offered% ade:uacy of the supply of inputs like ra) materials% availability of technical personnel etc# the :uality of the product% @viii) end use of the product# &he "orporation accepts only fi,ed assets of the borro)ing company as security and does not normally accept floating assets like ra) materials and finished products as security# Personal guarantee of the Directors is also insisted upon# &he "orporation e,ercises supervision and control over the borro)er-company by appointing directors to the Board of +anagement and as a last resort could take over the management in case of persistent and )illful default# Periodical reports

from the borro)ers and inspections by the-"orporation help the "orporation to )atch the activities of the borro)er# &he "orporation has rendered considerable service to our industries# 2mong the many industries )hich have received assistance from the "orporation% mention may be made of fertili/ers% cement% po)er generation% paper% industrial machinery% etc# In +arch% AKHF% the "orporation sponsored the 'isk "apital Foundation @'"F) to provide assistance to ne) entrepreneurs including technologists and professionals for promoting industrial pro4ects to provide loans free of interest or at nominal rate of interest# &he Foundation )as later @AKII) converted into 'isk "apital and &echnology "orporation !td# @'"&")# In addition to providing risk capital% the ne) "orporation provides technology finance by0 @i) providing substantial innovative technologies products% processes% market services% technological up-gradation% energy conservation% etc# @ii) @iii) meeting the e,penditure of national and international consultants% financing sponsored commercial ' 3 D programs#

In the area of priority sector% the IF"I has started ne) promotional schemes such as Interest Subsidy Scheme for 9omen Entrepreneurs% "onsultancy Fee Subsidy Scheme for providing marketing assistance to small scale units% encouraging the moderni/ation of tiny and small scale and ancillary unit and control of pollution in the small and

medium scale units# !ately% the IF"I has evinced great interest in the development of back)ard districts# "onsidering the financial facility available to the large and medium scale industries% even after E decades of independence% the role played by IF"I is something commendable# 9hen the commercial banks have their o)n policy restrictions in lending for large and medium scale industries% the big units could not also raise funds easily through the capital market% general hesitation of the common% public @both domestic and foreign) to invest in such big units% IF"I is the only institution )hich has come for)ard to fund the large and medium scale industries# Since its formation in AKEI% till +arch% AKKB IF"I has e,tended financial assistance to the tune of 's# AE%CLL crores to the industries of )hich nearly 's# K%GGL crores have been disbursed# &hough the IF"I has been critici/ed for charging high rate of interest% delay in sanctioning of loans% insisting on personal guarantees of the Directors% etc#% the "orporation has been rendering e,tremely credit )orthy service in the industrial development of the country# It has entered into the field of funding through under)riting debentures and shares guaranteeing of deferred payments in respect of imports from% abroad by industrial units% directly participating in the public issue of shares and debentures by the industrial concerns% etc# 7ence% this institution% has certainly served the purpose for )hich it has been formed# Industrial Development Bank of India @IDBI) &he IDBI )as established under the Industrial Development Bank of India 2ct% AKGE as a )holly o)ned subsidiary of the 'BI# It started

functioning on Duly A% AKGE# &he main ob4ective in establishing this Bank )as to provide long term finance to industries# From February% AKHG the o)nership of IDBI )as transferred to the $overnment of India% 9ith the de-linking from 'BI% the IDBI became the ape, body for all industrial financing institutions in the country# &he Bank plays a special role in0 @i) @ii) planning% promoting and developing industries to fill the gaps in then industrial structure in the countryP co-ordinating the )orking of institutions engaged in financing% promoting or developing industries and assisting in the development of such institutions% @iii) providing technical and administrative assistance for promotion% management or e,pansion of industry and @iv) undertaking market and investment research and surveys as also techno-economic studies in connection )ith development of industry# IDBI en4oys considerable operational fle,ibility# &he Bank can finance all types of industries irrespective of the form or si/e of an organi/ation# Its activities are not crippled by restrictions on the nature and type of security )hich it should accept# &he Bank is empo)ered to finance all types of industrial undertakings engaged in manufacturing% mining% processing% shipping and other transport industries and hotel industry# &he assistance rendered by the Bank can be grouped under three categories vi/#% i# direct assistance% ii# indirect assistance and iii% special assistance# A# Direct assistance0 &his category consists of pro4ect finance% under)riting of and direct subscription to industrial securities%

moderni/ation assistance scheme for all industries% soft loans% technical refund loans and e:uipment finance loans# &he Bank has the option to convert its loans into e:uity# It can guarantee loans raised by industrial concerns in the0 open market from .notified? financial institutions# It can also accept% discount or rediscount bonafide commercial bills or promissory notes of industrial concerns# B# Indirect assistance0 &his category is in the form of assistance through other institutions# It can refinance term loans given by other financial institutions like% IF"I% SF"s% etc#% repayable )ithin C to BF years# It can refinance term loans repayable bet)een C and AL years given by scheduled banks State# C# "o-operative banks# &he Bank can subscribe to stocks% shares% bonds or debentures of IF"I% the SF"s or any other .notified. financial institutions# E# Special assistance0 &he Bank has a special fund kno)n as the Development 2ssistance Fund to be used for assisting those industrial concerns )hich are not able to secure funds in the normal course because of lo) rate of return# F# &he Bank also renders assistance to Back)ard areas by giving loans on softer terms% such as concessional rate of interest% longer grace and repayment periods# &he Bank e,tends assistance to small scale industries and small road transport operators indirectly through the State level institutions and commercial banks by )ay of refinance# &he Bank has launched a Fund called national E:uity Fund Scheme in AKII for providing support% in the nature of e:uity to tiny and SSI units and has set up all 5oluntary E,ecutive "orps "ell to utili/e the services

of e,perienced professionals for counseling SSI units tiny and cottage units and for providing consultancy support in specific areas# &he principal sources of funds for the Bank are its o)n share capital and reserves% borro)ing from $overnment of India and 'BI% market borro)ing by )ay of * bonds% etc# &he authori/ed capital of the Bank is 's# A%LLL crores )hich can be raised further upto 's# B%LLL crores# &he IDBI @as )ell as other term lending institutions) have introduced a t)o-tier interest rate structure for loans for industrial pro4ects in the large% medium and small scale sector )ith effect from 2ugust% AKKL# &he first tier relates to the initial t)o years or the construction period of industrial pro4ects @)hichever is shorter) and the second tier applies to the period thereafter )hen industrial pro4ects are e,pected to commence production# For the first tier% the normal interest rate )ould remain unchanged at AEN per annum% )hereas for the second tier% the normal interest rate )ould be AFN per annum# &o impart greater fle,ibility from Duly% AKKA% the Bank has the freedom to charge interest rate above the floor rate of AFN# 2ccording to the provisional figures available during the year AKKL-KA% the Bank sanctioned financial assistance to the tune of 's# F%GLE#G crores and disbursed 's# C%FAA#F crores# Similarly% in AKKB-KC alone% the Bank had sanctioned 's# K%EFK#E crores of financial assistance of )hich it disbursed 's# G%GGK crores# Since its inception in Duly AKGE% till the end of +arch% AKKB IDBI had sanctioned financial assistance of nearly 's# GE%GKG crores and disbursed nearly 's# EH%LII crores# In+ustri#- Cre+it #n+ Investment Cor.or#tion of In+i# HICICIA I"I"I )as set up in AKFF under the Indian "ompanies 2ct# &his )as sponsored by a mission from the 9orld bank as a result of international

co-operative effort to encourage private investment in India# It started )ith an authori/ed capital of 's# GL crores and a subscribed capital of 's# BB crores# &he authori/ed and subscribed capitals have since been increased to 's# ALL crores and 's# EK#F crores respectively# &he aim of I"I"I is to stimulate the promotion of ne) industries to assist the e,pansion and moderni/ation of e,isting industries and to furnish technical and managerial aid so as to increase production and thus create employment opportunities# 9ith this aim in vie) the "orporation provides financial assistance to enterprises as detailed belo)0 under)riting of direct subscription to shares% bonds% and debentures% loans in rupees and foreign currencies guaranteeing payments for credits given by Indian and foreign sources# credit facilities to indigenous manufacturers )ho sell industrial e:uipment on deferred payment basis# e:uipment leasing facility merchant banking services pro4ect counseling for non-resident Indians

'egarding sources of funds for its activities% the "apital of the "orporation is supplemented by borro)ing from $overnment of India% the 9orld Bank% IDBI% other foreign governments agencies% and issue of bonds debentures in India and foreign commercial markets# &he I"I"I has promoted sponsored the follo)ing institutions0

@a) 7ousing Development "orporation of India @7DF") to provide long term finance to middle and lo)er income group of individuals% co-operatives% etc @b) "redit 'ating Information Services of India !imited @"'ISI!) to provide credit rating services to the corporate sectorP @c) &echnology Development and Information company of India limited @&DI"I) to finance the transfer and up-gradation of technology and provide . technology information# &he provisional figures available for AKKL-KA put the "orporation.s assistance at 's# C%IFH#F crores as sanctioned and 's# A%KCG#F crores as disbursed# A+#m Smit/Ms $#nons of t#0#tion soun+ t#0 s%stem ' A+#m smit/Ms C#nons of t#0#tion & " 2dam Smith laid do)n four canons of ta,ation# &hey are0 i) canon of ability% ii) canon of certainty% iii) canon of convenience and iv) canon of economy# @i) "anon of ability 0 2ccording to this principle of ta,ation% the people in a country should contribute to)ards the government e,penditure# &heir#0=b contribution should be according to the ability to pay of each individual# 2 rich man should contribute more and the poor either should contribute less 3 or can be e,empted# &his principle of ta,ation )ill ensure that the cost of public e,penditure is shared by the people in accordance )ith their individual ability# @ii) "anon of certainty 0 2dam Smith insisted that the#n+ t/e .rin$i.-es of #

government should kno) in advance the amount of revenue

that it could raise and the time )hen it could mobili/e the revenue# 6n the part of individual ta, payers% they must kno) clearly the amount of ta, that they have to payP the time )hen they should pay and the method of paying the ta,# 2dam smith felt that it is necessary that the people should be certain about their ta, commitment% so that there cannot be any e,ploitation of the ta, payers either by the government or by the ta, collectors# &his implies% once the people are clear about the amount of la,% they )ill plan their e,penditure accordingly so that ta, payment )ill not be felt a penalty# @iii) "anon of convenience 0 2ccording to this canon% the ta, should be such that it is levied at the time )hen it is convenient for the people to pay# Similarly the manner in )hich the ta, has to be paid should also be convenient for the ta, payers# For e,ample% the sales ta, paid on any commodity is included in the price and the consumer does not feel )hen he pays the ta,# 2t the same time% the government is able to collect the ta, effectively )ithout any possibility of evasion or avoidance# @iv) "anon of economy 0 &his is a very important principle stating that the cost of collection of ta, should be less than the ta, revenue# In other )ords% the purpose of imposing ta, )ill be defeated if the government has to spend
f

more money to

collect less ta, revenue# 6nly )hen there is economy in ta, collection% that the ta, revenue reali/ed can be spent usefully# For e,ample% in the case of direct ta, like income ta,% the government may organi/e ta, raids on people )ho evade ta,# If the cost of these raids is greater than the amount of ta,

recoverable% then it is not )ise# 6n this ground% indirect ta, like sales ta, is more economical than income ta,# Several other canons of ta,ation have been introduced by the modem economists# Some of these canons are 0 canon of simplicity% according to )hich the ta, structure should be easily understandable to the common men so that payment of ta,es )ill not be difficult# 2nother canon is canon of productivity )hich implies that the ta,es should fetch ade:uate revenue to the government to meet the public e,penditure# 6ther canons like canon of elasticity% canon of fle,ibility% canon of diversity and canon of neutrality have also been introduced# 2ccording to +rs# 7icks% a sound ta, system should have the follo)ing characteristics0 a# b# c# It should facilitate financing of public services# &a,% should be levied according to the ability of the people% the inde, of ability being income and family circumstances and similarly placed persons should pay similar ta,es to avoid any discrimination# From the discussion above% )e may lay do)n the follo)ing four broad characteristics as the principles of a sound ta, system# !" EBu#-it% in t#0 ur+ens &

&his principle suggests that )hen the ta,es are levied they ensure e:uality in ta, burdens# In other )ords% through ta,es the government can ensure that the ta, burden is spread in such a )ay that persons )ho are placed in similar positions are made to bear the same burden of ta,es# &his implies that people )ho are better-off should bear more ta, burden than those )ho are )orse-off# &hough this principle is universal% yet in the implementation of this principle problem like indicators of e:uality% effectiveness in practice% the method of achieving this e:uality% etc#% )ill all be faced#

'" Pro+u$tivit%& 9ith the ever increasing responsibility of modern )elfare state% the need for financial resources is al)ays felt# 2s the modern governments spend huge amounts of money on public pro4ects to maintain high level of public )elfare% they have to raise enormous funds through ta,ation# 8nless ta,es are productive% the governments )ill find it difficult to implement public pro4ects# Especially in a developing country% ta,es are to be highly productive so that country can achieve gro)th )ith stability# 2part from being productive% ta,es should also be fle,ible and ensure regular inflo) of funds for the government# &his implies that ta,es#% should not only fetch regular flo) of revenue% but this flo) should increase on decrease depending upon the circumstances# 6f course% the productivity of ta,es is a relative term and it depends on several factors such as ta, base% rate of ta,% the e,emptions and concessions granted% the efficiency of collection% the ta, payers psychology% etc# 7ence% the fiscal authorities should design the ta, system in such a )ay at each ta, levied is productive and fle,ible# *" Re$o(nition of t/e ri(/ts #n+ .ro -ems of t/e t#0 .#%ers& $overnment should not be aiming merely at high revenue through ta,es# 9hile designing the ta, system% it should take into account the various problems and difficulties of the common public so that the ta,es imposed )ill be successfully implemented# &he government should also recogni/e die rights of the ta, paying public# &he ta, system should be such that the public are able to easily pay the ta, )ith minimum inconvenience and their complaints and grievances are sympathetically heard and redressed# (o ta, system can bring the e,pected revenue unless the ta, paying public understands the purpose of the ta, and cooperate )ith the ta, administrators# 7ence%

the government should make the ta, la)s simple and comprehensible and the collection procedure simple# &a, payment should be a pleasure and must not irritate the public# &he ta, administrators should be tactful% courteous% remain impartial and be alert all the time to avoid any evasion and avoidance# 2 system to en:uire into the grievance of the ta, paying public should also be formulated so that the public )ill have a )ay of settling their problems and difficulties in paying ta,es# 6nly )hen the administrators are understanding and sympathetic% the morale of the ta, payers )ill be high and die ta, system )ill function smoothly# 4" A+#.t# i-it% of t/e t#0 stru$ture& &he ta, system evolved should be such that it matches )ell )ith the prevailing situation% hi a developing country% the burden of ta, should not be very heavy as this )ill directly affect the morale of the ta, payers# 2t the same time the government should also raise ade:uate revenue to meet its mounting public )elfare e,penditure# &he best ta, structure is one )hich can be modified suitably )ith changes in economy# Distin$tion et2een +ire$t t#0 #n+ in+ire$t t#0

Dire$t #n+ in+ire$t t#0& &a,es are classified as direct ta, and indirect ta,# But the meaning of

these t)o types of ta,es is not clear# For a long time economists interpreted these t)o types in different )ays# For instance% one group of economists considered ta,es on production as direct ta,es and those on consumption as indirect ta,es# &a,es imposed on income are treated as direct ta,es and those on e,penditure treated as indirect ta,es# D#S# +ill distinguished these t)o types of ta,es in terms of the ability to shift the ta,# 2ny person on )hom the ta, is imposed% if he

himself pays the ta,% it is called direct ta, and if he is able to shift the ta, Do somebody )ho ultimately pays it then it is called indirect ta,# For e,ample% income ta, is paid by a person as it is levied on the income earned by him% so it is a direct ta,# 6n the other hand the sales ta, imposed on the seller is shifted to the buyer# (o)-a-days the distinction bet)een direct and indirect ta,es is e,plained )ith reference to the basis of assessments and not on the point of assessment# 7ence% ta,es assessed on the basis of income are called direct ta,es and those assessed on the basis of e,penditure are called indirect ta,es# 7o)ever% even this classification is not free from difficulties# For instance% )hen one man.s income is treated as another man.s e,penditure% ta, on one man.s income may become the ta, on another man.s e,penditure# 7ence% till date there has been no satisfactory distinction bet)een direct and indirect ta,es# 7o)ever% in practice this distinction is retained more for the purpose of grouping the different ta,es# Merits #n+ +emerits of +ire$t t#0& Merits0 A# Direct ta,es are based on the principle of ability to pay and so they help to distribute ta, burden e:ually# B# 2s the ta, is imposed on each individual% for e,ample% based on his income% he is certain about the amount of ta, payable by him# 7ence% the direct ta, satisfies the canon of certainty# C# Direct ta,es are also highly fle,ible# &he revenue from them can be increased or decreased depending upon the need of the government# For e,ample% the government can simply raise the rate of ta, to get more revenue and bring do)n the ta, rate to reduce the revenue#

E# &he ta, paying people are more interested in the )ays in )hich the ta, revenue is spent by the government# &hey feel proud of participating in the public pro4ects by paying ta,# Demerits& A# Direct ta,es like income ta,% are considered as ta, on honesty of the people# &hose people )ho can evade or avoid it are rarely prosecuted# 7ence% there is no incentive to pay the ta,# B# &here is no logical basis for levying or determining the ta,# 2s a result political considerations over)eigh the economic and other considerations# For e,ample% a communist government may impose very stiff ta, rate )hile a socialist government may not do so# 7ence% there is ample scope for arbitrariness in the imposition of ta,# C# From the vie) point of ta, collection% the cost of collection of direct ta,es is very high compared to that of indirect ta,es% For e,ample% income ta, has to be collected from every person )ho should pay ta,# 7ence% a very elaborate arrangement is re:uired in the form of administrative machinery )hich simply increases the cost of ta, collection# E# 6ne more difficulty is not all the ta, paying individuals are a)are of the provisions of income ta,# &he provisions are so complicated that unless an individual is clear about them he )ill be paying more ta,# In the case of corporate ta,% every effort is made to minimi/e the ta, burden by taking advantage of the loopholes in the ta, la)s# F# 2nother demerit of the direct ta,es is that in case of any dispute% it takes a long time for the common public to secure 4ustice and still more time to get back the e,cess ta, paid#

&he evaluation of the merits and demerits of direct ta,es indicates the problems e,perienced are more related to administrative aspect and not the economic aspect# Efforts have been taken in India to simplify the assessment% e,emptions% procedures and refund of direct ta,es# &his has helped to increase ta, revenue from direct ta,es# &he ta, administrators in India adopt persuasive techni:ues instead of coercive methods to obtain as much ta, revenue as possible and minimi/e ta, evasion and avoidance# Fre:uently amnesty schemes are announced to provide opportunities to the public to turn honest Merits of In+ire$t t#0& A# Indirect ta,es are imposed at the point of consumption and so it is very easy to collect them# B# &he cost of collection of indirect ta,es is almost nil as every person )ill pay the ta, as he buys the commodity on )hich the ta, is imposed# C# It is very simple and easily understandable as only a fi,ed percentage of the sale price is collected as ta,# E# 2 significant merit of indirect ta,es is that it cannot be evaded or avoided as the only alternative to not paying the ta,es is not to consume# F# !ike direct ta,es% indirect ta,es are also highly fle,ible# &hey can be altered to suit the re:uirement of government.s need for funds# G# 2nother important merit is that even the poorest in a country )ill contribute to)ards the cost of public service# H# Indirect ta, is the ideal )ay to discourage consumption of lu,urious and un)anted goods# Demerits&

A# &he fundamental defect of this type of ta, is that it does not conform to the principle of ability to pay as it affects every individual hi the same )ay irrespective of his economic position# B# &he revenue from indirect ta,es cannot be certain# &his is because a ta, imposed on a commodity )ith highly elastic demand )ill bring do)n the demand for the commodity and along )ith that the ta,es# 6n the other hand a ta, on a good )ith inelastic demand can fetch the desired revenue# 2 main difficulty is that the elasticity of good is influenced by several factors and so the ta, revenue may be uncertain# C# 2s the indirect ta,es are usually a fraction of the price paid% the ta, payers never feel the payment of ta,es# 7ence% they evince little interest to kno) ho) the amount of ta, revenue is spent# E# Oet another problem of indirect ta,es is that very stiff rates encourage black marketing% smuggling and other illegal trading practices# F# Sometimes% the indirect ta, levied on a commodity )ill vary from state to state causing lot of hardship for the ta, administrators and encouraging the people to buy the goods in the state )here the ta, is less and sell the goods% in the state )here the ta, is high# &his might affect the businessmen in the latter state# G# &hough the cost of collection of indirect ta,es is less% yet% the records to be maintained and inspected are voluminous involving enormous time and energy of the la, administrators# &his gives )ide scope for corruption and malpractice among the officials# Com.#rison of +ire$t #n+ in+ire$t t#0es& 7aving discussed the merits and demerits of both the direct and indirect ta,es% it could be understood that indirect ta,es are superior to direct ta,es in several respects# For e,ample% indirect ta,es can be selectively imposed on goods of harmful nature to discourage the

consumption of such goods# &his selectivity is not possible under direct ta,# Bet)een the t)o types of ta,es% direct ta,es directly affect the incentive to )ork and save severely# But indirect ta,es have no such direct impact# In a developing country% to reduce income ine:uality increased dose of indirect ta,es is better# &hough this may mean ta,ing the poor also% yet in modern times% )ith overall improvement in standard of living% slo)ly poor people should also be sub4ect to the ta, net# +oreover% in a country )here there is large scale ta, evasion% ta, avoidance% black marketing% smuggling% etc#% indirect ta,es are the best instruments to put do)n such evil practices# 2ll these superiority of indirect ta,es over the direct ta,es need not mean that direct ta,es should be abolished# 2 balance should be maintained bet)een these t)o types of ta,es so as. to discourage and avoid any attempt to evade or avoid ta,# &he various problems associated )ith each one of these t)o types of ta,es should be seriously studied to overcome them# Especially the administrative problems can be overcome only by e,posing the officials to the modem techni:ues of ta, collection% giving them attractive incentives and re)ards for honest )ork% encouraging them to suggest modification to improve the effectiveness of the ta,es% etc#

DEFICIT FINANCIN7 Its .ur.ose8 effe$ts #n+ -imits of +efi$it fin#n$in( Deficit financing is understood in different )ays in different countries# It is understood as the e,cess of current e,penditure over current revenue )hich is financed either through public borro)ing or the creation of ne) money by the government# So the deficit budget is

also called deficit financing in 8S2# But in India deficit financing is understood in a different )ay from deficit budget# 9hile the former refers to a situation )here the current e,penditure e,ceeds current revenue of the government% the latter is taken to mean the e,cess of aggregate e,penditure @both on current and capitaU accounts) over aggregate revenue# &he former is called deficit budgeting and the latter deficit financing in India# Deficit financing in Indian conte,t refers to the meeting of budgetary deficit through the creation of ne) money adding to the e,isting money supply in the economy# Deficit financing includes any or all of the follo)ing in India0 i) the government )ithdra)ing its cash balance )ith the "entral bank% ii) the government borro)ing funds from the "entral bank% and iii) the governmentP resorting to printing of ne) currency notes )ith a vie) to cover the budget deficit Pur.ose of +efi$it fin#n$in(& follo)ing are theP purposes0 A# 9ar finance0 2 country in )ar e,periences severe shortage of financial% resources% especially the cost of modem )arfare is so prohibitive that the country resorts to deficit financing# During this period the country cannot resort to ta,ation or public borro)ing because of the situation in the economy# But it should be noted that such a method of financing the )ar e,penditure% is very dangerous% as during the )ar period apart from the destruction of% the e,isting assets% there is no possibility of increasing the production# Further all the productive activities )ill be to meet )ar re:uirements# 7ence% )ith the addition to money supply% there is no corresponding

&

&here are several purposes for resorting to deficit financing# &he

increase in the production# 2s a result% deficit financing during the )ar time should be highly inflationary in nature# B# Economic depression0 During the period of depression the purchasing no) of the people is very lo) and the private investment )ill not be possible because of the gloomy picture all round# &herefore economists like 1eynes suggested that public investment should be increased in large scale# &he funds for such a dose of public investment can come from either ta,ation or public debt or deficit financing# If ta,ation is resorted to for raising funds for public investment% as it means only a transfer of purchasing po)er from the people to the government% )hile during depression )hat is re:uired is ne) additional% public e,penditure# Public borro)ing or public debt as a source of public e,penditure is also having its o)n limitations# For e,ample% public borro)ing only means addition to the financial burden of the government and the pubic in terms of debt servicing or payment of interest on public debt# &herefore as a third alternative deficit financing is considered# &hough there are ob4ections to this alternative stating that it is basically inflationary% 1eynesian supporters argue the other )ay# During depression the economy is in a pit and all the resources are remaining unutili/ed or under utili/ed# In such a situation% if the government resorts to deficit financing it )ill only help to increase employment% output and investment# So there cannot be any inflation until the economy reaches-the lull employment level% no more deficit financing should be allo)ed as it then becomes highly inflationary# C# Economic developmentP 2lter the II 9orld )ar% several

countries around the )orld became independent# In their effort

to build up the nation% these countries )ere in need of heavy dose of funds# &his is all the more felt because some of these countries selected planning as a strategy of economic development# &hey had only three alternatives to raise funds for their development efforts# &hey are ta,ation% public borro)ing and deficit financing# &a,ation as a source of raising funds )as ruled out because of the nature of )ar shattered economy% lo) purchasing po)er of the people and also the political reasons prevented this alternative as most of the countries turned to be democratic one# Public borro)ing also could not be resorted to as people )ere already impoverished and there )as no )ay of inducing them to lend more# Further the debt servicing )as e,pected to over-)eigh the government.s financial burden# &hen every country preferred to use= deficit financing as a method of financing their economic planning and economic development# Even India relied on deficit financing right from the I Five year plan# 6f late deficit financing has become a permanent source of funding of Plan re:uirements# IA Effe$t of +efi$it fin#n$in( on .ri$e -eve-& &here are t)o opinions regarding the effect of deficit financing on the price level especially in a developing country# 2ccording to one vie)% deficit financing need not be inflationary in character especially if it is used during the peace time# &he advocates of this vie) argued that0 @a) In a developing economy the e,istence of non-moneti/ed sector )ill absorb the issue of ne) currency and shrink in its si/e over a period of time# &herefore the additional money pumped into the economy )ill not go to affect the price level#

@b)

6ver a period of time the demand for money for transactions and li:uidity purpose )ill increase# &herefore the additional money in4ected )ill not be spent but )ill only be kept by the people# &herefore% deficit financing need not be inflationary#

@c)

2 developing economy )ill have a large amount of unutili/ed resources and during peace time )hen the government resorts to deficit financing the additional money )ill be used only for resource utili/ation and so it need not be inflationary in nature#

7o)ever% the follo)ing arguments are leveled to claim that deficit financing is essentially inflationary in character0 @i) &here )ill be a lag in the e,pansion of output and the in4ection of additional money in the economy% such that the output )ill increase at a lesser rate than the money supply# "onse:uently% there )ill be inflation in the economy# &his is because of certain rigidities in the effort to increase the output# &herefore% the actual output )ill fail short of the potential output# @ii) Developing economies follo) unbalanced gro)th strategy and so they invest heavily on capital intensive pro4ects )hich have a long gestation period# 2s a result the return on investment in terms of higher output )ill take a longer time and mean)hile increased use of deficit financing )ill only affect the price level causing inflation# @iii) In a developing economy ma4ority of the people are poor and so their marginal propensity to consume is very high# 7ence% )hen their income increases due to deficit financing%

the demand for goods )ill outstrip the supply causing the prices to go up# @iv) $overnments also resort to deficit financing for unproductive purposes% )hich )ill only fuel the inflationary pressure# @v) &he developing countries have neither the necessary

e,pertise nor the efficient administrative set up to keep the inflationary pressure caused by deficit financing under check# 2s a result deficit financing should lead to inflation# "onsidering the above arguments and also the practical e,perience% it is found that deficit financing is inflationary in character# IIA Effe$t of +efi$it fin#n$in( on in$ome +istri ution & Deficit financing is inflationary in character and as a result it affects a section of the society favorably and the other section unfavorably# 'ich people become richer and the poor turns out to be poorer because of deficit financing especially during the )ar period# &he businessmen% traders% speculators% industrialists and other benefit by deficit financing through inflationary pressure )hile the )orkers% salaried income group% and others are affected badly# 7ence% the e,isting ine:uality in a developing country )ill be )idened more by deficit financing thereby defeating the ultimate purpose of socialism in bringing about e:uality# &herefore deficit financing is un4ust and it not only )orsens the income ine:ualities% it also prevents the attempt to improve the standard of living# IIIA Effe$t of +efi$it fin#n$in( on unem.-o%ment& 'egarding the effect of deficit financing on unemployment% )e have to classify the economies as developed and developing economies# &his is

because the 1eynesian prescription of deficit financing helps the developed countries to overcome the unemployment but it has not helped the developing countries in this respect# &his is because in developed countries% )hen the economy faces depression% to revive the economy the government should undertake a large scale public investment# Funds for this purpose cannot be raised through ta,ation or public borro)ing and so only deficit financing is the ideal method# Defied financing has helped the developed countries to overcome unemployment% because during depression the government increases the public investment )hich )ill increase the effective demand and thereby constitute the ground for increasing the private investment# 9ith the operation of multiplier then the output% employment and effective demand continue to increase pulling the economy out of the pit# But such a result in a developing economy is not possible% because% @i) @ii) the nature of unemployment is not cyclical but chronic and caused because of deficiency of capital there e,ists a large scale voluntary unemployment and disguised unemployment in the developing countries# &hose )ho are coming under the second category do not kno) that they are unemployed# @iii) in developing economics the multiplier process ta/es place regularly and smoothly and so unemployment is very much reduced# #But the conditions for the successful operation of multiplier are not found in developing countries and so the unemployment persists# @iv) further in developing economies because of rigidities% large scale investment in capital intensive industries% high marginal propensity to consume and high marginal propensity to import affect the possible increase in investment and employment opportunities# 9ith every increase in money supply% only the price level goes up and not the output and

employment# 7ence% the use of deficit financing in developing countries to solve the unemployment problem calls for a lot of precautions and careful administration as other)ise it )ould create several other complications# IVA Defi$it fin#n$in( #n+ e$onomi$ (ro2t/& It has been clearly proved that deficit financing m developing countries )ill accelerate economic gro)th% provided certain precautions are taken# &he positive% role played by deficit financing in developing countries is because of the follo)ing reasons0 Firstly% in developing economies% the physical and human resources are under utili/ed and so the created money. )ill facilitate% fuller utili/ation of these resources# Secondly% in developing countries% because of economic planning the national income )ill be increasing and along )ith that the money supply should also increase# &his should happen% as other)ise% the prices may fall and discourage any productive investment )hich should be disadvantageous for the economy# &hirdly% the developing countries are characteri/ed by the e,istence of non-moneti/ed sector# 9hen the economy gro)s% the si/e of this sector )ill shrink% )hich in fact means% that the additional money supply is being absorbed by this sector and so there is very little scope for inflationary pressure in the economy due to deficit financing#

Fourthly% )ith economic gro)th the standard of living of the people also goes up# &hen they )ould re:uire more money to meet their

increased demand or other)ise% their li:uidity preference )ill go up# &his can be met only )ith increased money supply# In spite of all the above arguments in favour of deficit financing% care should be taken to take notice of certain points# Firstly% in developing countries the e,istence of idle-human po)er is due to the limited gro)th of complementary capita resources# &herefore% the country concerned should aim at developing more labour intensive industries# Secondly% in developing countries deficit financing may be inflationary affecting the balance of payments position distorting the pattern of investment# &he diversion of resources to the production and consumption of nonessential resources cannot be ruled out# &his in turn )ill aggravate inflation# &herefore% the countries concerned should take the follo)ing steps to avoid facing the above conse:uences# Firstly% the country should resort to a moderate dose of deficit financing due to the poor absorption capacity of the country# Secondly% the authorities concerned should effectively check the rising prices of essential commodities% may be by follo)ing strict rationing and public distribution policies# &hirdly% a )ell planned ta,ation policy )ill also help to contain the inflationary pressure# Fourthly% the financial resources mobili/ed through deficit financing should be used for investment in short period high yielding productive pro4ects# &hat is care should be taken to identify industries )ith short gestation period so that )ith the increase in money supply there can be corresponding increase in production# Inspite of all these efforts% the country may e,perience inflation# But such inflation need not be taken as a serious problem% and in one )ay it is also re:uired to keep the initiative of the private sector investment# In other )ords% it )ill only help in achieving a higher economic gro)th# 7ence% deficit financing does promote economic

gro)th% provided the inflationary pressure is held under complete control# VA Vie2s on -imits of +efi$it fin#n$in(0 Economists have favored deficit financing for several reasons# &o them a country needs enormous resources to achieve a higher rate of gro)th# Especially a developing country )ill re:uire huge resources for public e,penditure pro4ects# 2 country like India )edded to public )elfare% really re:uires a huge :uantum of funds# &his can be arranged for in different )ays# 6ne )ay is ta,ation% the second# is public borro)ing and the third is deficit% financing# 9hile ta,ation in a developing country )ould bring do)n the effective demand% the public borro)ing may add to the financial burden of the people as the cost of debt servicing and management of public debt is so prohibitive that this cannot be an ideal source of funding economic recovery# 7ence% only deficit financing is left )ith as an alternative# If it is administered )ith proper care and diligence% it should in fact be gro)th stimulating rather than inflationary# &herefore% resorting to deficit financing need not be considered as a )rong step# It is often said that if the% government can keep the inflationary rise in price belo) a certain level% say CN then deficit financing is the ideal method of financing economic gro)th# 7o)ever% several precautionary steps are to be taken to ensure that deficit-financing is 4ustified and plays the role e,pected of it# &he follo)ing are some of the suggestive measures0 Firstly% the government should note the rate of gro)th of real income# If the real income gro) at a faster rate than the rate of money supply% then there )ill be very limited increase in price# 6n the other hand if the gro)th of real income is less than the rate of money supply% then

the economy )ill e,perience inflation# 7ence% the government should carefully monitor the gro)th rate of real income# Secondly% the government should% as far as possible use the funds obtained through deficit financing in promoting short period income generating pro4ects )hich are productive in nature# &his )ill facilitate absorption of increased purchasing po)er by the increase in output# &hirdly% a developing economy )ith the e,istence of a large amount of unutili/ed physical and human resources may reali/e that deficit financing is helpful in higher utili/ation of these resources# In that case the inflationary pressure should be very much under control# Fourthly% though deficit financing is the easiest )ay of raising resources for the government% the government should use this source 4udiciously# &his means it should be conscious of @lie efficiency of its administrative machinery and capacity#

Specially% a hard )orking% devoted and uncorrupted set up is re:uired if the inflationary effect of deficit financing is to be avoided# Fifthly% the government should not use the funds raised through deficit financing in funding long period gestation pro4ects even if they are highly productive# &he investment in such pro4ects )ill yield the return only over a period of time and by that time the inflationary pressure might set in the economy# Si,thly% the impact of deficit financing on balance of payments situation of a country should be studied closely so as to avoid any inflationary pressure affecting the economy# 8sually the favourable

balance of payments is inflationary in character and so the government must resist the temptation of adopting deficit financing )hile there is balance of payments surplus# &he e,tent of deficit financing in India is given in the &able belo)# From the table% )e can understand that the deficit financing is one basic reason for the drag in our development and the inflation prevailing in the economy# &he 4ustification that in the initial stage of development every country is bound to have deficit financing is no longer reasonable in Indian case% as the time has come that our Five year plans should lead us to generate more resources from other sources instead of depending too much on deficit financing# &he amount of deficit financing has increased from 's# CCL crores during the I Five year plan to a huge amount of 's# BL%LLL crores during the 5III plan# &his implies that our planners have started using deficit financing as the main source of funds for meeting our plan e,penditure# It should be noticed% that over the five year plan period since I plan there has been an increasing reliance on deficit financing that the peak is found during the 5II Plan 9ith consistent efforts% the% planners are hoping to bring do)n this :uantum of deficit financing to around 's# BL%LLL crores during the 5III Plan# 9hether this is going to be achieved or not can be found out only in future# DEFICIT FINANCIN7 DURIN7 FIVE YEAR PLANS @2mount in 's# "rores)

P!2( I II III I5

2+68(& 6F DEFI"I& FI(2("I($ CCL GFL A%AFL B%LGL

5 5I 5II 5III

F%ICL F%LLL BI%EFH BL%LLL

O 3e$tives of fis$#- .o-i$% #n+ t/e ro-e .-#%e+ # +eve-o.in( $ountr% &he follo)ing are the ob4ectives of fiscal policy0

% fis$#- .o-i$% in

A# +a,imi/ation of the aggregate saving is the first ob4ective# &ins are achieved by encouraging people to reduce the current and future consumption# Specifically. the attempt is to bring do)n and control the conspicuous consumption of the rich people# B# +a,imi/ation of capital formation is the second ob4ective# &hrough this ob4ective the country can try to achieve an accelerated economic gro)th# &his )ill help the country to overcome the stagnation and achieve a higher rate of economic gro)th# C# &he third ob4ective is to divert the available resources from the less productive to most productive purposes# &hrough this it is hoped that the resources )ill be applied more for socially useful pro4ects# In a country like India% )here centrali/ed planning is follo)ed% the plan determines the priorities of the country and the fiscal policy ensures the accomplishment of these priorities through redistribution of productive resources# E# Fiscal policy also helps in protecting the economy from inflation# Inflation in an under developed country is very dangerous% if it is not controlled in the initial stage itself# &hough inflation cannot

be avoided in the gro)th process% yet it has to be under full control as other)ise the benefits of gro)th )ill be eaten a)ay by inflation# F# Fiscal policy also helps in removing the sectoral imbalance in the economy in the process of gro)th# 8sually in a developing economy% the price level may go up in certain sector in the gro)th process affecting that sector badly# Fiscal policy through appropriate tools can al)ays prevent this sectoral imbalance% and help to maintain overall price stability# G# Fiscal policy provides the necessary incentives for the industries )hich are capable of generating employment opportunities in large scale# For instance% the small scale industries are employment oriented and so fiscal policy can e,tend incentives to them# H# 2 very important ob4ective of fiscal policy is to bring do)n and eliminate ine:ualities in income and through that ensure e:uitable redistribution of income and )ealth in society# &his may be considered as the social ob4ective of fiscal policy# But this ob4ective is in contradiction )ith the gro)th% ob4ective# &hat is% to achieve rapid economic gro)th% the savings in the economy should increase to facilitate rapid gro)th of capital formation# For this purpose% the rich should save ma,imum# If the fiscal policy tries to eliminate income and )ealth ine:uality then the saving potential of the economy )ill come do)n and affect the gro)th prospects# 7ence% the fiscal policy should neither be too much gro)th conscious nor attach importance to social ob4ective# 2n ideal mi, of these t)o ob4ectives is the right fiscal policy#

Ro-e of fis$#- .o-i$% in # +eve-o.in( e$onom%& &he important role played by the fiscal policy in a developing economy can be e,plained through 0 i# fiscal policy during inflation% ii# fiscal policy during depression% iii# fiscal policy and unemployment% iv# fiscal policy and income ine:ualities and v# fiscal policy and economic gro)th# &o understand the role of fiscal policy in a developing economy% first )e should understand the four tools or instruments of fiscal policy! &hese tools are0 i# public e,penditure% ii# ta,ation% iii# public borro)ing and iv# public debt management# (o) let us understand ho) these tools have to be used to achieve the various ob4ectives of fiscal policy in a developing economy# i" Fis$#- .o-i$% +urin( inf-#tion& Inflation is a period in )hich the purchasing po)er )ith% the people in the economy is high# &he first step to curb inflation is to control the purchasing po)er )ith the people# &his can be done using all the tools of fiscal policy# For instance% during inflation% since the private e,penditure is high the government should bring do)n the public e,penditure so that% to that e,tent the income generation )ill be% controlled# 2lternatively% the government can increase the e,isting ta, rates or impose ne) ta,es# &his )ill have the effect of taking a)ay the purchasing po)er from the rich and )ell-to-do people thereby curbing the consumption e,penditure# &he ta, revenue )ill then be used for public e,penditure purposes )hich )ill also be lo) during inflation# 7ence% there )ill be effective control of money supply in the economy# 2nother )ay in )hich the fiscal authorities can function is o indulge in

public borro)ing# &he government may start borro)ing from the people in large scale so that the disposable income )ith the people )ill be reduced bringing do)n the demand and prices# If voluntary lending is not effective% then the government may resort to involuntary lending or compulsory saving by the people# &hrough its debt management policy also the fiscal authorities can control inflation# &he anti-inflation debt management re:uires the retirement or payment of bank-held securities or debts through budgetary surplus# But this is very difficult in practice as in a developing country the government cannot have budgetary surplus# ii" Fis$#- .o-i$% +urin( +e.ression & Depression is a period characteri/ed by lo) income% lo) employment and lo) consumption# Fiscal policy should change this situation# &he government must adopt deficit budget in order to increase the income stream in the economy through increased in4ection of fresh purchasing po)er into the economy# Secondly% the government must encourage consumption and investment and for this purpose the ta,ation should be brought do)n# !iberali/ed corporate ta, policy )ill also help to increase the corporate e,penditure giving the necessary thrust for the revival of economic activity# Public e,penditure during this period must be increased# &he government can achieve this either through pump priming or compensatory spending# Pump priming refers to the initiation of investment activity by the government through its e,penditure on public pro4ects )hich )ill be follo)ed up by the increased private investment# "ompensatory spending is resorted to )hen the private investment is not ade:uate enough# &hen the government also in4ects public investment through public pro4ects# Public debt policy can be suitably modified to fight against depression# &he government should borro) more from the rich people-and spend this amount in-large0 scale on public )orks% and social security

pro4ects# 2ll these steps )ill help to protect the economy and enable it to recover from depression# iii" Fis$#- .o-i$% #n+ unem.-o%ment& Fiscal policy plays a vital role in generating employment opportunities in the developing countries# In a developing economy% it should aim at solving the problem of both cyclical unemployment and disguised unemployment# 9hile the former is of temporary nature% the latter has the sno)-balling effect &he latter refers to a situation in )hich more than the re:uired number of people are employed in a 4ob# In other )ords% by reducing the e,cess of labour from that 4ob% the productivity or production )ill not be affected# 7ence% it has been found that fiscal policy alone cannot solve this problem of unemployment in a developing economy# It has to be coupled )ith monetary policy# For instance% during inflationary period% the government should adopt surplus budget% along )ith hard money policy% )hile during depression% deficit budget should be combined )ith cheap money policy# iv" Fis$#- .o-i$% #n+ in$ome ineBu#-ities& &he 'ole of fiscal policy removing income ine:ualities in a developing economy cannot be e,aggerated# 9ith public e,penditure and ta,ation% the government can very easily achieve income e:uality# &he government should devise its public e,penditure scheme by focusing on the poor and do)n-trodden people in the society# It may provide cheap food% cheap cloth% subsidi/ed housing% free medical aid% free education% etc#% to the poor people thereby raising their standard of living# For this purpose% the government should raise funds by imposing ta,es on the rich people so as to bring do)n their purchasing po)er# It may completely or partially relieve the poor people from the ta, net# &his has the effect of-taking a)ay as much as possible from the rich people and spending on poor people# It may also resort to

large dose of indirect ta,es so as to make the rich bear the burden as the poor )ill be paying such ta,es only if they spend on items on )hich the government has imposed heavy indirect ta,es# &herefore% ta,ation and public e,penditure are the t)o very useful instruments of fiscal policy )hich can bring about the income e:uality in a developing economy# v" Fis$#- .o-i$% #n+ e$onomi$ (ro2t/ & Economic gro)th calls for the application of all the tools of fiscal policy# In developing economy% there may be no shortage of real or physical resources% but there may be a severe shortage of financial resources )hich are re:uired to utili/e the physical resources# &he ob4ect of fiscal authorities should be to mobili/e much funds as possible so as to carry out large scale public pro4ects# 2 very effective method of mobili/ing financial resources is ta,ation# &he government can resort to both the direct as )ell as indirect ta,es so as to generate as much funds as possible from all those )ho have the ability to pay# the population# &here can be specific ta,es Different type of to curb certain direct ta,es and indirect ta,es may be levied to cover every section ofconsumption activities# 2nother instrument available is public debt# 2part from the voluntary lending schemes the government should also devise schemes to encourage compulsory savings# 'esources mobili/ed in this manner should be spent in such a )ay that the infrastructural facilities are strengthened first# &his should be follo)ed by the e,penditure on gro)th oriented industries and other related activities# "are should be taken to avoid creating or )idening sectoral imbalance so that the benefits of gro)th )ill be shared by all the sectors in the economy# $overnment must use its planning machinery to identify the right priorities so that the hard mobili/ed funds are utili/ed in the best )ay possible# In this process no)-a-days the governments also resort to deficit financing# It is considered as a

means of financing economic development# But too much reliance on deficit financing )ill also be dangerous# 7o)ever% fiscal policy can play a vital role in helping to achieve a rapid economic gro)th# Pu -i$ e0.en+iture ii In+i# #n+ t/e $#uses for t/e mountin( .u -i$ e0.en+iture in In+i# Public e,penditure refers to the e,penditure incurred by the government @both central and state) on various public pro4ects# In these days% the )elfare governments have to incur heavy e,penditure so as to provide the minimum basic re:uirements to the poor and needy# 2part from this% the government should also undertake various activities like defence% transport% communication% po)er generation and distribution% medical% educational% etc# 2ll these )ill involve investing huge funds% )hich no private individual or corporate body can afford to make# Further the public e,penditure is incurred mainly for the purpose of achieving economic gro)th and development and )ithout any anticipation of re)ard or return# 7ence% public e,penditure incurred in large doses sometimes on )rong priorities may prove to be )aste# In India the si/e of public e,penditure incurred by the government is so huge as is clear from the table belo)# E*PE(DI&8'E 6F &7E "E(&'2! $65E'(+E(& @in 's# crores) OE2' AKFL-FA AKHL-HA AKIL-IA AKKC-KE B8D$E& 'E5E(8E E*PE(DI&8'E CFL C%AIL AE%FEL A%LA%IEL "2PI&2! E*PE(DI&8'E AIL B%EKL K%GCL BK%IEL &6&2! E*PE(DI&8'E FCL F%FHL BE%AHL A%CA%CBL

In the table above )e have indicated only the central government e,penditure and if )e include the state government e,penditure% then the total e,penditure of the government stood at 's# CG%IFL crores in AKIL-IA and )ent up to 's# A%KI%AGM crores in AKKC-KE @budget)# From this it could be understood that the public e,penditure in India has been increasing year after year# Before )e analyse the factors responsible for this huge increase in public e,penditure% let us understand the components of public e,penditure# Public e,penditure has t)o ma4or components vi/# A# (onplan e,penditure and B# Plan e,penditure# Both these are once again classified as 'evenue e,penditure and "apital e,penditure# &he (onplan revenue e,penditure includes 0 interest payments% defence revenue e,penditure% ma4or subsidies% debt relief to farmers pensions% postal deficit% police% social services% economic services% grants to states and 8nion territories% grants to foreign governments% etc# &he (on-plan capital e,penditure includes0 loans to public enterprises% loans% to States and 8nion territories and loans to foreign governments% etc# &he Plan e,penditure is used to finance various "entral plans like agriculture% rural development% irrigation and flood control% energy% industry and minerals% transport% communication% science and technology% environment% social services% etc# &his also includes "entral assistance for Plans of the States and 8nion territories# In the table belo) )e have represented the &otal e,penditure of the government @both "entral and State)#

E*PE(DI&8'E 6F &7E $65E'(+E(& SE"&6' @"E(&'2! 2(D S&2&E) @I( 's# "rores) P2'&I"8!2'S DE5E!6P+E(& E*PE(DI&8'E (6(-DE5E!6P+E(& &6&2! E*PE(DI&8'E AKGL-GA A%HCL ICL B%FGL AKIL-IA BE%ECL AB%EBL CG%IFL AKKA-KB B8D$E& A%AG%HCL IA%ECL A%KI%AGL

Re#sons for t/e (ro2t/ in .u -i$ e0.en+iture in In+i# & Several reasons could be given for the ever increasing public e,penditure in India# &he important reasons are given belo)0 A# Increasing defence e,penditure is one of the main reasons for the increasing public e,penditure# 9ith perennial threat in borders% India cannot but spend heavily on defence so as to keep the force )ith latest e:uipments and implements# B# &he ne,t reason is the mounting e,penditure on social )elfare schemes like family planning% aids control% malaria eradication% etc%# Such schemes are very important from the national health point of vie)# Similarly the e,penditure on noon-meal scheme by &amilnadu and other schemes aimed at the poor and do)n trodden cannot be given up 4ust because the government e,penditure is on the rise# C# &he increasing e,penditure on ma4or irrigation pro4ects and po)er pro4ects is another reason for the gro)th in public e,penditure# E# 9ith the ob4ective of improving the literacy% the government is spending huge amount on education )hich is another reason for the rising public e,penditure# F# 5arious services like community development programs% police% general hospitals% public parks% roads% communication% etc#% also take a huge share in public e,penditure#

G# Ever

increasing

e,penditure

on

)ages

and

salaries

of

government employees is another basic reason for the increasing public e,penditure# H# &he increasing cost of administering and managing the public sector units and public utility concerns also account for a si/eable part of public e,penditure# I# &he ever gro)ing public debt servicing is yet another reason for the heavy public e,penditure in India 9hen )e study the above reasons for increasing public e,penditure in India% )e )ill be able to understand that every developing country is going through a similar e,perience# 2fter all this is inevitable in the process of gro)th# INDIAMS PUBLIC DEBT Before independence% Indian public debt )as basically productive in nature as-%it borro)ed mainly for the capital re:uirements of rail)ay construction% irrigationP )orks% etc# 2ccording to an estimate% by AKCK India.s public debt stood at 's# A%BLL crores% of )hich nearly 's# KBF crores )as productive type# Further the total public debt included about 's# HCL crores of internal debt and 's# EHL crores )as India.s obligations in 81# During the II 9orld )ar% India.s public debt shot up to 's# A%KEL crores mainly due to )ar e,penditure and other capital e,penditure# In the post-independence period% India.s public debt during the I Plan )as targeted for 's# FBL crores )hile in the II Plan it )as raised to 's# A%BLL crores# Subse:uently% the government fi,ed higher target for public debt and mainly this could be reali/ed through government borro)ing and small savings#

India.s public debt consists of both internal debt and e,ternal debt# 9hile the% former includes loans raised from open market% compensation bonds% pri/e bonds and AF year annuity certificates% apart from treasury bills issued to 'BI and other commercial banks% the latter mainly included borro)ing from international institutions like I+F% IB'D% 2DB% etc# &he public debt in India could be discussed under t)o sections vi/# i#) public #debt of central government and ii) public debt of state governments# iA Pu -i$ +e t of $entr#- (overnment& &he "entral government mainly borro)ed for development schemes% though in these days it has started borro)ing even to #meet its current e,penditure# &he central government has been increasingly relying on the e,ternal debt as is sho)n in the table belo)# &he percentage of e,ternal debt in the total debt increased from a mere A#F in AKFL-FA to nearly AI by the year AKKC-KE @budget)# 6f the total e,ternal debt% India borro)ed more than CLN from the 8S2 alone# It is also interesting to note that the debt servicing has been increasing every year )ith increase in debt and the interest payment of the "entral government alone is around 's# CI%LLL crores by AKKCKE# In the table belo) )e have represented the debt and other obligations of the central government#

P8B!I" DEB& 2(D 6&7E' !I2BI!I&IES 6F "E(&'2! $65E'(+E(& I&E+S Internal Debt E,ternal Debt &otal Public Debt AKFL-FA 2+68(& 's# AKKC-KE 2+68(& 's# crores N crores N B%LBL KI#F B%LE%GKL IB CL A#F EG%EFL AI B%LFL ALL#L B%FA%AEL ALL

Pu -i$ +e t of St#te (overnments& 2s regards the state governments% the public debt is incurred mainly to)ards= the )elfare schemes and other social pro4ects# &he constituents of public debt in the case of State governments are0 i#e# internal debt consisting of market loans% 9ays and means advances from the 'BI% and !oans from banks and other institutions ii# !oans and advances from the "entral government and iii# Provident funds% etc# In the case of India% the loans and advances from the "entral government alone constituted nearly GLN of the total debt till AKHA and by AKKC @budget) this component accounted for about HLN of the total debt# &his is sho)n in the table belo)# 2nother important aspect of state government public debt is that it )as only around 's# C%CLL crores by +arch% AKGA% )hile it increased to about 's# A%GI%HIL crores as per-the budget estimate of AKKC# It is said that the State governments are using the overdraft facility from the 'BI )ithout any control and this causes serious concern for the "entral government# But this is so because% the "entral government is able to raise loans easily from various sources and that too at a cheaper rate% but the State governments find it difficult to raise funds through public borro)ing# &hey depend mainly on small savings and provident funds schemes# &hough higher targets in small savings are achieved by the State governments% yet not every state is successful in this regard# &he debt position of the States is presented in the table belo)0

DEB& P6SI&I6( 6F &7E S&2&E $65E'(+E(&S @In 's# crores) @Figures as end of +arch) Items A# Internal Debt @a\b\c) a) +arket loans b) 9ays an means advance from the 'BI c) !oans from banks and other institutions B) !oans and advances from "entral $overnment C) Provident funds% etc#% E) &otal debt @A\B\C) 'E5IE9 M8ES&I6(S A# B# C# E# E,plain the place of commercial banks in the Indian Financial System Discuss the functions of commercial banks# 9hat is meant by credit creationT E,plain the process of credit creation )ith an e,ample# Discuss the performance of commercial banks in India# 9hat are the problems that they e,perience and suggest suitable measures to overcome them# F# E,plain the features of lead bank scheme# 9hat benefits are they e,pected to generate and to )hat e,tent their functioning ensures this T G# H# I# Discuss the functions of central bank# 9hat the reasons for having both :uantitative and :ualitative credit control policiesT Discuss the instruments of :uantitative credit controls along )ith their limitations# !FC! FKL FLL EL FL B%LBL ACL B%HEL !FD! A%IFL A%BCL CIL BEL G%CGL FEL I%HFL !FF* HBu+(etA BF%EGL BB%LGL CKL C%LAL KF%GCL BB%BCL A%EC%CBL

K#

E,plain the various :ualitative credit control instruments# &o )hat e,tent are they effectiveT

AL# "ritically e,plain the functions of Industrial Finance "orporation of India# AA# Discuss the functions of IDBI and comment on its performance# AB# E,plain the purposes for )hich I"I"I )as established# 7o) far these purposes have been achievedT AC# 9hat do you mean-by canons of ta,ationT Discuss 2dam Smith.s canons of ta,ation# AE# Distinguish bet)een direct and indirect ta, along )ith their merits and limitations# AF# 9ith an e,ample% e,plain the meaning of deficit financing# Discuss its purposes% effects and limits# AG# 9hat is the need for fiscal policyT 9hat are the ob4ectives that fiscal policy is e,pected to accomplishT AH# Briefly outline the e,tent of public e,penditure in India# 9hat are the causes for mounting public e,penditure in IndiaT AI# "omment on Indian public debt#

CHAPTER V Economic planning and development - $overnment and planning1 India2s eight 3ive year plan and structural reforms - Industrial policies and promotion schemes - $overnment policy and FCH- Interface bet*een $overnment and public sector ECONOMIC PLANNIN7 AND DEVELOPMENT O 3e$tives of In+i#n Five Ye#r P-#ns #n+ t/e #$/ievements +urin( t/e e#r-ier Five Ye#r P-#ns

2fter attaining independence% India decided to adopt democratic socialism as its philosophy to achieve rapid development and allo) the benefits of development to reach every section of the people# &he setting up of a democratic socialist country could be possible only if all the sectors in the economy could be developed simultaneously# For this purpose India selected economic planning as the instrument to achieve rapid economic gro)th and development# &he "entrali/ed planning mechanism )as adopted and since AKFA% the country has gone through seven five year plans and three annual plans and )e are in the course of the Eighth plan# &he five year plans in India have set several ob4ectives# But the emphasis on any ob4ective changed from time to time# 9hile the earlier plans emphasi/ed economic gro)th of late the emphasis is on moderni/ation# 7ence% the priority among the various ob4ectives of economic planning changed from time to time# 7o)ever% all the five year plans in India have the follo)ing ob4ectives as principal ob4ectives 0 A# Economic gro)th% B# Self-reliance% C# Full employment E# +oderni/ation and F# Social 4ustice )hich includes reduction in income ine:ualities and removal of poverty# Each one of these ob4ectives is discussed briefly hereunder# !" E$onomi$ (ro2t/ & Economic gro)th has been considered as one of the primary ob4ectives of economic planning as it is hoped and once a higher rate of economic gro)th is achieved all the other ob4ectives laid for the plan )ould be automatically achieved# But the e,perience in other countries has been that economic gro)th has benefited only the rich at the cost of poor# 7o)ever% India gave top priority to the achievement of economic gro)th because of a long period of stagnation under the British rule )hen India.s resources had been plundered and so it could not develop

fast# 7ence% India adopted achievement of higher rate of economic gro)th as one of the principal ob4ectives of planning# Economic gro)th is measured in terms of the rate of increase in national income over a period of time# During the I five year plan India set AAN of gro)th in national income as the target for the five years of I Plan# India could easily achieve this target and in fact the Jachievement )as AIN increase in national income# 7aving been inspired by this remarkable achievement% India set a target of BFN increase in national income over the five years of the II Plan# &he plan model suggested by Prof# P#"# +ahalanobis )as adopted and priority )as accorded to industrial development )ith emphasis on large scale industries# &his led to the emergence of public sector units and along )ith this developmental )orks on transport and po)er )ere also undertaken in a very large scale# But at the end of the II Plan% the achievement )as only EN increase in national income per year on an average# 7ence the target )as limited to 4# gro)th per year in the 8I Plan# But due to "hinese aggression and Pakistan invasion% only AA#BN gro)th in national income over the five-years could be achieved# Economists had a lot of hope on the outcome of this clan as they e,pected )ith the success achieved through this plan% the economy )ould enter the stage of self-sustaining gro)th# Further% rate of increase hi population )as almost e:ual to that of increase in national income and so no significant addition )as made to the per capita income# &his made the government to give up the long term planning approach and so three annual plans )ere gone through# 9ith so much e,perience in planning% the planners decided to set >gro)th )ith stability. as the ob4ective of the I5 Plan# &he economists )anted to overcome the influence of uncertainties on economic performance and so they laid emphasis on building up huge buffer stocks of food grains and reducing the dependence on foreign capital# During the I5 Plan the

achievement )as only C#EN gro)th in national income per year against a target of F#HN# &he 5 Plan initially laid emphasis on self-reliance and removal of poverty but subse:uently the final draft accorded top priority only to economic gro)th# 7ence% a gro)th rate of F#FN per annum )as determined as the target and the achievement )as really commendable )ith F#BN per annum# But this achievement has not been smooth but highly erratic# Further gro)th )as not self-sustaining# &he 5I Plan therefore set F#BN per annum as the target and )anted to achieve this target by improving the efficiency of capital stock utilisation raising the investment rate% changing the investment pattern to suit gro)th re:uirements and taking up all measureP to prevent emergence of foreign e,change crisis# 2t the end of the plan% the target )as almost achieved though this could not be vie)ed as a great achievement as the acceleration in gro)th during this period had occurred after a year of negative gro)th# &he 5II Plan has aimed for FN per annum of gro)th rate# &he target of gro)th rate )as e,pected to be achieved in this plan as the gro)th rate in ma4or sectors of the economy )as found to be around F#FN per annum# Encouraged by this achievement% the 5III Plan has set a target of F#FN per annum and it remains to be seen ho) this is going be achieved )ith all round difficulties% specifically that of balance of payments# '" Se-f re-i#n$e& During the I and II Plans self-reliance )as mentioned as one of the ob4ectives% though the ob4ective could not be clearly defined# In the 7I Plan also the same position continued# 6nly from the I5 Plan the

concept of self-reliance could be clearly defined and understood# &he I5 Plan clearly pointed out that the dependence on foreign countries for concessional import of food grains should be reduced so that )hatever )ay India could earn foreign e,change should% be sufficient to meet her re:uirements of e,change# But the failure on the agriculture front due to monsoon failure forced imports of a large :uantity of food grains and the rise in prices of several essential commodities% import of essential articles )orsened the balance of payments position# &herefore in the 5 Plan e,port promotion measures )ere given priority# Since AKHH-HI% India could successfully reduce the imports of food grains )ith increased buffer stock# Simultaneously the encouraging gro)th of domestic basic industries like iron and steel% machine tools% heavy engineering% etc#% made India to e,port these items and she could ac:uire e,pertise in sophisticated technology# But a very serious obstacle to the achievement of this ob4ective )as the sharp rise in petroleum products# 7ence% efforts are under)ay to develop alternative sources of energy as )ell as discover ne) petroleum deposits# *" Fu-- em.-o%ment& &his ob4ective has been included in the plan ob4ective right from the day the planning as a methodology of development )as adopted by India# But this ob4ective has not been achieved in any of our plans# It )as never accorded the priority that it richly deserves# 2s a result employment generation during the plans has not been significantP the main reason for this is that our planners have been linking employment )ith investment targets# &o them if the investment increases the employment should also be generated# &he ever gro)ing unemployment since the I Plan clearly proves that the increasing investment has not been generating employment# Further )ith ever increasing population% there is si/eable addition to the number of

people seeking employment or the labour force# (othing spectacular has been done through the plans to increase the employment opportunities along )ith the increase in labour force# 2ll the schemes relating to generation of rural employment% self-employment% etc#% have not in any )ay solved the problem of unemployment# Every year the backlog of unemployment is s)elling and unless something drastic is done the ob4ective of achieving full employment )ill only remain on paper# 4" Mo+erni)#tion& +oderni/ation has been specified as one of the plan ob4ectives only from the 5I Plan# It is taken to mean only upgradation of technology# &o make this ob4ective very clear the planners defined +oderni/ation as 0 J+oderni/ation connotes a variety of structural and institutional changes in the frame)ork of economic activity# 2 shift in the sectoral composition of production% diversification of activities as advancement of technology and institutional innovations has all been part of the drive to change a feudal and colonial economy into a modem and independent entity#J Inspite of this clear definition% in practice +oderni/ation is restricted only to technological advancement# In agricultural sector the technological advancement has not been very high though certain achievements like% increase in the area under high yielding varietiesR increase in consumption of chemical fertili/ers% increase in the area under irrigation% etc#% have been recorded# Several other areas like +oderni/ation of canal system% irrigation and )ater management% use of ne) sources of energy% etc#% are still to reach any commendable position# 2s regards the industrial sector% though% +oderni/ation has taken place to a large e,tent% yet the productivity remains at a lo) level# 9hile in other countries% a high degree of advancement in technology has been achievedP in India progress has

been slo) and tardy in this regard# &he 5II and 5III Plans have aimed at improving the situation by giving top priority to the development and use of modern techni:ues in the e,isting as )ell as ne) industrial units# 2 ma4or stumbling block in this task is the funds re:uired# 9hile import of foreign technology is resisted% development of domestic technology is taking place at a very slo) pace# It is hoped that the (e) Industrial Policy announced by the government in Duly% AKKA can create the necessary atmosphere for updating our technology# 5" So$i#- 3usti$e& &his ob4ective of Indian planning implies0 a) 'eduction in income ine:ualities and b) 'emoval of poverty# #A Re+u$tion in in$ome ineBu#-ities & In the initial stages of planning it )as e,pected that )ith economic gro)th% the fruits of gro)th )ill trickle do)n to the lo)er strata of the economy# But this did not happen# &herefore reducing ine:ualities in income has to be spelt out as an ob4ective planning from the I5 Plan on)ards# India is an e,ample of a comple, nature of income ine:ualities# In the rural areas the aftermath of feudal system has created a very )ide disparity in income and in the urban centres the rapid industriali/ation has brought about a very serious and )ide income disparity# &he root causes for income ine:ualities in India are capital gains receipts% entrepreneurial and speculative profits and astronomical salaries and per:uisites for the business e,ecutives# &he Planning "ommission itself has pointed out that such serious ine:ualities in income could be set right only through restrictive measures and fiscal efforts# But a very important set back is the lack of reliable data about the magnitude of income ine:ualities# In the absence of this% any measure to check this problem cannot be

effective# In the case of ta,ation% it is found to be regressive in nature% that only the middle income group is severely affected )hile the high and very high income groups continue to remain unaffected# 7ence% a fresh look into this problem is urgently re:uired that social 4ustice can be ensured# A Remov#- of .overt% & 'emoval of poverty as an ob4ective of planning )as introduced only from the 5I Plan# &ill the 5I Plan% the benefits of gro)th did not percolate to the poor and do)ntrodden# &herefore the 5I Plan determined to combat poverty# For this purpose the Planning "ommission decided to introduce specific programs aimed at the poor# &hese policy programs should aim at apart from influencing the content of food for mass% more regional and class distribution of output# &he 5I Plan defined poverty in terms of calorie intake and this has helped to measure the poverty in the 5II Plan# 2ccording to 5II Plan the poverty has come do)n from FLN to CH#EN during the first four years of the 5I Plan# &he Plan attributed this to the success of I'DP and ('EP programs# But these t)o programs have not been very successful as they are implemented )ith least efficiency# Economists like 'a4 1rishna% 1# Sundaram and &endulkar have pointed out that the achievements under these schemes are e,aggerated# 7o)ever% the 5II Plan e,pected to bring do)n the poverty from CHN to BGN by the end of the Plan# &he 5III Plan continues to lay emphasis on rural development schemes to solve the problems of employment% poverty and income ine:ualities# Based on the detailed discussion about the ob4ectives of economic planning in India% it can be understood that planning is a method of gro)th strategy# But in India planning failed in the initial stages mainly because of uncertainties but from the 9 Plan% planning efforts are more efficient% thanks to the application of latest techni:ues of

planning# &he emphasis in Indian planning has been on achieving a higher level of gro)th% though some deviations )ere made during the I5% 5% 5I and 5II Plans# But these deviations in effect only underline the need for accelerating economic gro)th# 7ence% achieving economic gro)th has been in the back ground of Indian plan ob4ective since AKFA# &his is also clear if )e look into the )ay the ob4ectives like poverty alleviation% e:uitable distribution of income and )ealth and employment generation are all given up )henever they are found toP be conflicting )ith the ob4ective of higher economic gro)th# But our e,perience over these four decades of planning has been that even a higher rate of economic gro)th cannot benefit the entire society% particularly the poor people# Fortunately the economic policies announced by the government in mid-KA have taken this fact into consideration that measures have been introduced to make our industries and producers face the international competition% to give a boost to our e,port% to reduce the e,tent of reliance on imports% to increase the productivity of labour% to moderni/e the industries% etc# &he effect of such liberali/ation on the economy has to be seen only in due course of time# Mi0e+ e$onom% Evo-ution of t/e $on$e.t of Mi0e+ e$onom%& &here )as no reference to the mi,ed economic system in Economic literature in the past# Economists )ere mainly familiar and advocated the !aisse/ faire or free enterprise system% as several countries could develop fastly follo)ing the free enterprise system% in )hich there )as no or little government intervention# &he entire economic system operated )ith the price mechanism at its center point# &he producers produced )hat the consumers )anted and this provided very little scope for the government to intervene in the system# &he "lassical

economists and their ardent supporters believed that the invisible hand )ill direct the economy and )ith private initiative and enterprise% every country should be able to record a faster gro)th as proved in the case of 81% 8S2% Europe% 2ustralia% and other countries# But over a period under the leadership of 1arl +ar,% a ne) economic system )as developed called socialism% in )hich there is no scope for any private enterprise as everything is o)ned and controlled by the government# &he government decided the type of developmental activities and the re:uirements of the society and used the available resources in the provision of these re:uirements# Several countries like 8SS'% "ommunist "hina% 5ietnam% "uba and others preferred this socialist system In )hich government is made the custodian of the society# &he main reason for the emergence of this ne) economic system )as the failure of capitalism during the AKBK depression to revive every economy from depression# 1eynes himself thought that capitalism )ithout some of its evils could certainly help economic governed recovery# economic 7ence% a time came cannot )hen )ork economists felt that per cent free enterprise or cent per cent government development satisfactorily# 2 compromise bet)een these e,tremes )as thought of as an ideal economic system# &he ne) system called >mi,ed economic system? contained the merits of both the capitalism and socialism and appeared to be full of promise# &his mi,ed economic system is adopted by India as indicated by the First Industrial Policy 'esolution AKEI#

C/#r#$teristi$s of mi0e+ e$onom%& i" Co1e0isten$e of .u -i$ #n+ .riv#te se$tors& In a mi,ed economy% one )ill find the e,istence of both the private and public sectors# In such a system% the government )ill undertake the responsibility to build and develop certain sectoral activities and leave the other activities for the private initiative# In India% the government announced the adoption of the mi,ed economy system through its AKEI Industrial Policy 'esolution# &he government clearly earmarked the industries to be completely under the state control% the industries )hich are to o)ned and controlled by the state as )ell as the private sector and industries )hich are completely left for the private sector# In this )ay the 'esolution provided for the simultaneous e,istence of both private and public sectors# ii" St#te .#rti$i.#tion in e$onomi$ +eve-o.ment& &his is the second feature of mi,ed economy% according to )hich the state reserves its right to design and decide the type of development to be achieved# In such a set up% die government strives to promote the )elfare of the country by ensuring social order% social 4ustice and establishing all the necessary institutions )hich are re:uired to achieve the desired pattern of gro)th and development# iii" Distri ution of o2ners/i. #n+ $ontro- of resour$es& &his is the ne,t feature of mi,ed economy# In this system% the government itself enters the field of production so that the available resources are fully utili/ed# &his )ill also help to avoid concentration of )ealth in the hands of a fe) and enable distribution of o)nership and control of productive activities# 2s a result there is no scope for e,ploitation of any group% say labour% by any other group# In this )ay

the )eaker section of the community is )ell protected and taken care of# 6nly the mi,ed economy )ill enable the government to attain the ob4ectives of the Directive Principles of the Indian "onstitution# iv" Dire$tin( t/e investment in so$i#--% +esir# -e .ro3e$ts #n+ $/#nne-s & +i,ed economy facilitates the flo) of investment into channels )hich confers the society )ith several benefits# For e,ample% the Indian government has invested huge amount in several pro4ects to develop the infrastructural facilities# &his forms the basis for the development of other sectors# &he investment in this infrastructural area )ill not come forth from the private sector as the return is nil# 7ence% the government in a mi,ed economic set up provides the thrust by developing the necessary background and strength )hich )ill In encourage the private sector to invest in profitable opportunities#

this )ay the government plays a key role in a mi,ed economic system# v" S$o.e for #$/ievin( #-#n$e+ e$onomi$ +eve-o.ment&

!eft to itself% the private sector )ould establish its enterprises only in urban or sub urban areas and that too in already )ell developed states# &his )ill mean other areas )ill have no scope for But in a mi,ed economy% the government )ill itself development#

undertake the initiative to set up industries in back)ard-areas and encourage the private initiative to set up industries in such areas by offering several concessions and e,emptions# In the absence of mi,ed economy% several states in India )ould have remained industrially back)ard# vi" U-tim#te $ontro- #n+ re(u-#tion in t/e /#n+s of (overnment&

&his feature of mi,ed economy clearly spells out that in every activity affecting the economy% the government )ill be the ultimate authority# &hough the private sector is assigned its role to perform% the government )ill still monitor and control the )ay in )hich the private initiative is performing its role# Infact% according to the AKEI Industrial Policy 'esolution% the government made it clear that the industries already established by the private sector belonging to that category in )hich ne) industries )ill be established by the government alone% the government )ould undertake the revie) of the )orking of these industries in private sector after a period of ten years and if found not satisfactory% they )ould be taken over by the government# &hough this )as critici/ed as a threat of nationali/ation% yet through such a provision the government underlines its authority# Similarly in the banking and insurance sectors% the government nationali/ed banks emphasi/ing its po)ers to control and regulate any sector# vii" Co1o.er#tion in t/e fie-+ of e$onomi$ +eve-o.ment& 2ccording to this feature of mi,ed economy% the government formulates the design for development and invites the private sector to participate in the development# It clearly spells out the guidelines )hich )ould govern such co-operative efforts and the limits of freedom granted to the private sector# In Indian case% the government prepares the plans for development and spells out the areas left for the private initiative and the areas that )ill be under state control# 7ence% there is scope for the development of private sector% though only according to the design developed by the government P-#nnin( .ro$ess un+er mi0e+ e$onom%& 2s has been already stated% in a mi,ed economy there is a need to achieve a compromise bet)een self-interest and social interest# &his is a very difficult task as the government has to carefully foresee the

type of development it )ants to achieve and closely monitor the activities of the private sector to ensure that the social interest is never at stake# 6bviously% planning is a very difficult e,ercise in a mi,ed% economy set up# &he success of planning )ill depend upon0 i) the e,tent to )hich the public sector is able to rise to achieve the social gains aimed for% ii) the success of the state in guiding and regulating the private sector activities to)ards social goals and iii) the e,tent to )hich the state is able to check the distortions taking place in investment by private sector affecting the interest of the public sector# 7ence in the planning process the state has taken up the follo)ing steps to ensure the accomplishment of the ob4ectives of the mi,ed economy# @a) By holding complete o)nership of defence and heavy industries% the% government has provided an industrial base )ith )hich the private sector is e,pected to plan its investment activities# @b) &he state also has made huge investments in economic infrastructures so as to help the e,tension of market for goods% raising the productivity in agriculturalP and industrial sectors% encouragement of further productive investment# @c) &he government has complete control of the financial institutions including banks so that it can ensure that the banks and other institutions play a key role in the development activities of the state# &he government could

also reali/e the e,pected gains by encouraging the priority activities in every sector# &he economic institutions are made to support the )eaker sections of the community# @d) &hrough po)erful legislations like +'&P 2ct% FE'2% etc#% the government% could ensure that there is no scope for e,ploitation of the common people byP the private enterprise#

Such a legal frame)ork lays do)n the rules of the% game and ensure fair play in a mi,ed economic set up# @e) 2s a method of protecting the )eaker and do)ntrodden. people% the government has policies like rationing% price controls% etc# Such regulations are built in the planning mechanism itself so that the private sector cannot e,ploit the community# @f) &o)ards the improvement of )elfare in the economy% the state has undertaken several specific programs aimed at specific target groups# For e,ample schemes aimed at the back)ard and schedule tribe providing them reservation in educational% employment and other opportunities% rural oriented schemesJ for the rural folks% health for all schemes% provision of free educational and medical facilities upto a certain level% etc# 2ll these schemes aim at improving the social )elfare# In all these activities the private sector is also )elcome to play its role# @g) &he government makes effective use of the tools of fiscal policy vi/# ta,ation and public e,penditure% so as to achieve the ob4ectives of economic planning# Distortions in t/e .-#nnin( .ro$ess& 9e have e,plained above that the fundamental ob4ective of the mi,ed economy is to subordinate the self-interest for the national-interest# 9hether this has been achieved in Indian situation is a moot :uestion# Inspite of various types of regulations and controls% the fruits of mi,ed economy have not appeared to have reached the common men# Even after four decades after the adoption of mi,ed economy principle% )e come across glaring distortions )hich go to prove that mi,ed economy in practice has not been very effective# &his is mainly because of the influence e,ercised by the private enterprise through political

influence%

corruptive

activities%

dishonest

bureaucrats%

po)erful

national and international lobbying% etc# &he e,tent of distortions could be understood if )e study the follo)ing points0 A# 6ne of the basic ob4ectives of Indian planning is to eradicate poverty% but five decades after the adoption of planning strategy% the proportion of population belo) the poverty line has not significantly changed# B# &he planning mechanism has failed to check the rise in price level# Inflation has come to stay in India )ith no policy being effective# 9hen double digit inflation is controlled and results in single digit inflation% the country boasts of having achieved something very great# C# &he emergence and e,istence of black money is yet another yardstick to prove the failure of the mi,ed economy# &he high level of ta,ation has only resulted in effective ta, evasion and ta, avoidance# 2s a result the distance bet)een the rich and the poor remains )ide# E# &ill date there has been no effective method to prevent the concentration economic po)er in the hands of a fe)# &he rich becomes richer and the poor% the poorer# F# Inspite of five decades of planning% unemployment is very much on the R increase and the backlog in every plan is assuming dangerous proportions# &his is mainly because of the failure to control the gro)th of population and the adoption of capital intensive production techni:ues# G# &he failure to achieve re-distribution of income is yet another glaring distortion# 27 the efforts to bridge the gap bet)een the )ages of rural and urban )orkers or increase the real )age of the )orking class has not succeeded#

9hen )e study the above points% it is clear% that mi,ed economy has not carried us in the desired direction# &his is mainly because of the inability of the government as it is fre:uently yielding lo the pressure e,erted by the vested interests# Even the recent liberali/ation measure could be vie)ed from this angle# But a country cannot remain independent of the international pressures% especially )hen India is depending upon the I+F and IB'D% all its internal policies are indirectly governed by these lending agencies# 9hether this is right or )rong is a :uestion that could be ans)ered only after )e evaluate the gains of liberali/ation policy# But on the )hole% the e,pected benefits of mi,ed economy have not been reali/ed as% is clearly proved by the distortions discussed above# Sour$es of fin#n$e for In+i#n Five Ye#r P-#ns Financial resources for the five year plans in India are mobili/ed from various sources# &hese sources could be broadly classified as i) internal sources and ii) e,ternal sources# &he government is mobili/ing funds through both these sources and over a period )e find that some of the sources have become permanent as in @he case of deficit financing# Before )e study the pattern of financing the Five year plans% let us understand the components of the sources of finance# It may be noted that sources of finance refer to only the sources of finance for public sector# Internal sources of finance include the follo)ing0 @a) @b) @c) surplus from current revenues% i#e#% e,cess of current revenues over current e,penditure% contribution of public enterprises% mobili/ation of internal private savings through market borro)ing% small savings% provident funds% etc#%

@d) @e)

additional resource mobili/ation in the form of additional ta,es and additional revenue from public enterprises# deficit financing

E,ternal sources of finance mainly includes 0 a) loans and grants from foreign countries% b) loans from international institutions like I+F% IB'D%ID2% etc#% P#ttern of fin#n$in( of Five %e#r .-#ns& In the table belo) )e have sho)n the various sources of finance for the Indian five year plans upto 5I Plan# It may be noted that the total amount available from the domestic source has gone up from 's# A%EEL crores in the A Plan to 's# IG%GAL crores in the 5I Plan# In percentage terms )e find that the domestic source of funding constituted nearly HC during the I Plan and )hich increased to HI by the 5I Plan# Similarly the e,ternal assistance )hich )as 's# AKL crores @ALN) in the I Plan% )ent up in absolute terms to 's# I%FCL crores% though in percentage term it has declined to IN of the total# It could also be noticed that the amount of deficit financing has consistently increased from 's# CCL crores during the I Plan to a )hopping 's# AF%GIL crores during the 5I Plan# &his could be used to understand the unhealthy practice )hich the government is follo)ing# It is )ell kno)n that such a huge amount of deficit financing )ould only be inflationary% if ;he production does not correspondingly increase# It may be observed that the inflationary rise in price in India is namely due to this huge si/e of deficit financing of Indian Five Oear Plans#

SOURCES OF PLAN FINANCE & I TO VI PLAN HAmount in Rs" CroresA PLAN I II III I5 5 5I DOMESTIC BUD7ETARY RESOURCES A%EEL B%FGL F%LKL AB%LAL CB%ABL IG%GAL EKTERNAL ASSISTANCE AKL A%LKL B%CKL B%LKL F%ICL I%FCL DEFICIT FINANCIN7 CCL KFL A%AFL B%LGL F%ICL AF%GIL TOTAL A%KGL E%GLL I%GCL AG%AGL EC%HIL A%AL%IBL

2s regards the 5II plan% the Domestic resources fetched 's# CF%KII crores% the "apital receipts @net) accounted for 's# A%LC%BCB crores% the e,ternal assistance )as to the tune 's# AF%ACK crores and deficit financing )as 's# BI%EFH crores# 2ll these sources of funds augmented totally 's# A%IB%IAG crores for the Plan# In the 5III Plan% it has been estimated that the Domestic resources )ould total to 's# B%IC%KAF crores% the (et capital inflo) from abroad )ould be 's# BI%HM6 crores% and the Deficit financing )ould be limited to 's# BL%LLL crores# &he total-finance resource for the 5III Plan is fi,ed at 's# C%CB%GAF crores# 2mong the domestic budgetary resources% the surplus from the current reserves has not been very significant as in almost all die plans )e had only deficit in this account# &he contribution from public enterprises )as :uite insignificant atleast up to the 5I Plan as the percentage of

contribution hardly e,ceeded ALN even during the 5II Plan the contribution on this account )as only about HN# 7aving reali/ed that the contribution from the public sector has not been commensurate )ith the investment made in this sector% several measures are taken during the 5III Plan that% it is estimated that the public sector contribution during this Plan )ould be not less than CEN# &he inflo) from domestic private savings and additional resource mobili/ation during the I to 5I Plans have been :uite significant# It is interesting to observe that domestic saving in India has been :uite consistently high around CLN during the I to 5I Plans# Subse:uently also this domestic saving has been high% but the conversion of savings into productive investment is not coming forth# 6nce that is achieved% the financial resource from this side )ill assume significant proportion# 6n the )hole )e find that the pattern of financial resources for the implementation of our Five year plans has remained almost the same% though-there is some change in the contribution from each source in absolute terms over the plan period# 7overnment #n+ .u -i$ se$tor Since AKEI% the public sector in India has been playing a significant role in every sphere along )ith the private sector# &hese t)o sectors have been functioning as complementary to each other% though the government policies have been usually more favourable to public sector than to the private sector# Inspite of this% the private sector has also emerged victorious in several fields and since the announcement of !iberali/ation polices in AKKA% )e can reasonably e,pect the private sector to reach its potential and the public sector )ould also strive its best to )ithstand the domestic and international competition# 7ence% the future offers e,cellent scope for both the sectors% but it is clear that only the most efficient sector can survive% so ho) the private and

public sectors are going to react to this challenge )ill be kno)n in due course# 7o)everP 4et us no) discuss the role of public and private sector in India in detail# !" Ro-e of .u -i$ se$tor: First of all it is necessary to understand that the public sector includes the autonomous corporations% the departmental enterprises o)ned and controlled by both the State and "entral $overnments# &he role of public sector )ould be discussed )ith reference to various indicators like employment% investment% output% national income contribution% savings% capital formation% capital stock% etc# #A Pu -i$ se$tor #n+ em.-o%ment (ener#tion& 6ne of the important contributions of public sector to the Indian economy is that it has generated huge employment opportunities and this has reduced the problem of unemployment to a large e,tent &he employment opportunities in public sector includes government administration% defence% health% education% research and development% enterprise o)ned by "entral and State governments# It offered employment for ALH lakhs of people in AKHA )hich slo)ly increased to AFE#I lakhs in AKIA and it has touched AKL lakhs in +arch% AKKA# &his constituted nearly HA N of the total employment generated in the economy% in AKKA# 2s regards the sector-)ise employment opportunities created by the public sector% in AKIK public sector accounted for EH#IN of the total employment generated by it through employment in government administration% community% social and personal services% follo)ed closely by transport% storage and communications )ith AG#AN and manufacturing AL#AN#

7ence% it is clear that )ith the gro)th of public sector% the country is benefited )ith more and more employment opportunities#

A Pu -i$ se$tor #n+ in$ome of t/e .u -i$ se$tor& &he share of public sector income in the net domestic product has been increasing consistently from H#FN in AKFL-FA to about BFN in AKIH-II# In a matter of about CF years the public sector contribution to net domestic product has risen appreciably and constitutes one fourth of the total net domestic product# &his is mainly because of the rapid e,pansion of the public sector since AKFA# &his BFN of contribution in net domestic product% is certainly better than K#GN %of contribution by the public administration# 7o)ever% the private sector income constituted HF#AN of the total net domestic product# little commercial motive# $A Pu -i$ se$tor #n+ s#vin( #n+ $#.it#- form#tion& &his is yet another crucial yardstick to evaluate the contribution of public sector# &he percentage share of public sector in total domestic savings increased from# A%H% to B#C of $ross national product at market prices# But in absolute terms it increased from 's# AGK crores in I Plan period to 's# HIAF crores in 5II Plan# 9hen )e consider the percentage share in total savings% the contribution of public sector has actually gone do)n from AH in I Plan period to AA in the 5II Plan# 7o)ever% the contribution of public sector in capital formation @gross domestic) is really commendable# It increased from a modest figure of C#FN of $ross national product at market prices in I Plan period to It should be noted that the public sector units are run on service motive and very

AL#HN in 5II Plan# 2s a result the ratio of percentage contribution by public sector and private sector in total domestic% capital formation changed from CC 0 GH in the I Plan to EH 0 FC in the 5II PlanP From this it is clear that the contribution by the private sector during the same period has declined from GHN to FCN +A Pu -i$ se$tor #n+ $#.it#- sto$, & "apital-stock refers to the total stock of plant and machinery% e:uipment and tools and other capital goods available at a point of time for further production# Based on the data available up to AKHK-IL% it )as found that the percentage share of public sector in total capital stock bet)een AKGL-GA and AKHK-IL increased from BG to CH )hile that of private sector declined from HE to GC during the same period# In absolute terms% the capital stock increased from 's# AG%CHH crores in AKGL-GA to 's# GI%EHI crores in AKHK-IL in public sector @i#e#% an increase by over 's# FBf666 crores) but in the private sector the increase )as from 's# EG%FIC crores to 's# A%AG%LIK crores @i#e#% an increase by over 's# GF%LLL crores)# &he increase is less% pronounced in public sector because of the follo)ing reasons0 A# B# C# E# F# Public sector investments are mostly in economic infrastructure )hich do not contribute any output# Public sector is mostly concerned )ith high capital intensity pro4ects like rail)ays% iron and steel% po)er% irrigation% etc# &he gestation period of public sector pro4ects are very long# &he-capacity utili/ation is very much less in public sector units# +ost of the pro4ects of public sector are having higher capitaloutput ratio# eA Pu -i$ se$tor #n+ infr#stru$ture&

&he economic development of a country depends on the development and maintenance of infrastructural facilities# &he essential re:uirement is provided by public sector# &he industriali/ation is accelerated only through infrastructural development# Investment in po)er% roads% bridges% irrigation% etc#% is non-income yielding% long gestation period oriented% and heavy investment pro4ects# 7ence these are not attractive for private sector# But )ithout them the country cannot develop faster# &herefore it is apt to state that the public sector units are responsible for the creation of infrastructures )hich constitute the backbone of economic development and industriali/ation# fA Pu -i$ se$tor #n+ in+ustri##se&

&here is no denying the fact that public sector has provided a strong base for our industriali/ation# 6ur industrial policy has clearly assigned a significant role for public sector% till the end of the third five year planP industriali/ation )as taking place at a slo)er pace because only the important public sector units )ere established till then# Since the private sector could not really rise up to meet the task% since the I5 Plan the establishment of public sector units started on a brisk rate and the industriali/ation has been accelerated to a commendable level# Further private sector )ith its commercial ob4ectives could not undertake several of the pro4ects and investment re:uirement of these pro4ects )as also beyond the potential of the private sector# 7ence% if at all India today is having a strong industrial base%J it is mainly due to the contribution of the public sector#

(A Pu -i$ se$tor #n+ e0.ort .romotion& Public sector has responded )ell to the needs of the nation by taking up the task of e,porting our products and finding market for them in other countries# In this respect the contribution of State &rading "orporation# +inerals and +etal &rading "orporation% 7industan Steel !imited% 7industan +achine &ools% etc#% are )orth noting# Infact% these units are primarily responsible for e,ploiting the captive market for our goods abroad# &he foreign e,change earnings of the public sector has gone K%AKI up from a modest figure of 's# CF crores in AKGF-GG to 's# AHL crores in AKGK-HL% to 's# F%ICA crores in AKIE-IF and then to 's# crores in AKKA-KB# &he increase has been more than CLL times comparing AKGF-GG figures )ith that of AKKA-KB# &hough there may be criticisms about the performance of the public sector units% yet there can be no dispute about the e,port achievements of public sector units )ithin a period of BF years# /A Pu -i$ se$tor #n+ s#vin( of forei(n e0$/#n(e t/rou(/ im.ort su stitution& India.s balance of payments has been a cause for )orry since Independence% the main reason being increasing imports# &his trend had to be reversed and the government rightly selected public sector to establish units to produce domestically the goods imported so as to conserve the foreign e,change and also utili/e more the-domestic resources# 8nits like 7industan 2ntibiotics !imited and Indian Drugs and Pharmaceutical !imited% have together effectively checked the inroads attempted by the multinational corporations in the field of drugs and pharmaceutical# Similarly Indian 6il "orporation !imited

and 6il and (atural $as "ommission have succeeded in bringing do)n our dependence on other countries for crude to some e,tent# &hey are very active in identifying oil deposits and natural gas# &heir efforts are supplemented by research and development to invent methods of using the natural gas and reduce the imports of crude# In this respect the public sector )orks to)ards achieving self sufficiency# 9ith concerted efforts it should be possible for India to achieve selfsufficiency in the near future# 7o)ever% the poor performance of the public sector is causing concern% as unless steps are taken to improve their performance% the achievement of self-sufficiency may be delayed# iA Pu -i$ se$tor #n+ (ener#tion& 2 close scrutiny of the public sector performance )ill certainly make one to note the contribution to)ards internal resources made by the public sector# For e,ample% the internal resources generated by the public sector during 5 Five year plan )as 's# C%ECK crores% during 5I Five year plan 's# AA%HBA crores and during the period AKIF-IG to AKIK-KL% the generation )as 's# CH%GHI crores# In AKKL-KA and AKKAKB also the public sector undertakings together generated 's# BE%CHG crores# &his indicates that the public sector units have turned the comer and )ith die measures taken up already to spruce up their )orking )e should be able to reali/e still greater generation of internal resources# 3A Pu -i$ se$tor #n+ $ontri ution to e0$/eBuer& Public sector contribution to the "entral E,che:uer is% in terms of dividend% corporate ta,% e,cise duty% customs and other forms# &hese contributions add to the mobili/ation of resources for our planned development# It is interesting to note that the contributions totaled 's#

BH%FHL crores in the 5I Plan period% 's% HL%IKC crores during the 5II Plan and 's# AK%FBL crores in AKKL-KA and 's# BL%CGG crores in AKKAKB# It may be noticed that the annual contributions during the 5III Plan period is nearly HFN of the contributions during 5I Plan# 2mong the different forms in )hich these contributions are made% E,cise duty and "ustoms alone constituted more than IBN of the total in the 5I Plan period% )hile this HGN during the 5II Plan# Subse:uently% in AKKL-KA these t)o accounted for IBN of the total contributions and in AKKA-KB it )as almost IAN indicating that public sector units do make a valuable contribution to the E,che:uer# Since the performance of the public sector is poor% their contribution in terms of dividend is very insignificant and this has "o be changed at the earliest so as to make them contribute si/ably even in this form# ,A Pu -i$ se$tor #n+ (ro2t/ of #n$i--#r% units & Public sector also makes a valuable contribution by helping the gro)th of ancillary units and small scale units# &he Bureau of Public Enterprises have undertaken the study to find out the public sector units )hich could transfer their production and other facilities to small scale sector# 8nder this scheme about AILL units )ere set up till AKIG# &he public sector also enters into regular contracts for purchasing the entire production or FLN of the production of small scale and ancillary units# Such purchases from ancillary units amounted to 's# EFA crores in AKIF-IG# IA Pu -i$ se$tor #n+ +eve-o.ment of st#tes #n+ re(ions & 6ne of the ob4ectives in establishing public sector units is to facilitate the states and the back)ard region to develop faster# In this #$,2#r+

connection% public sector has certainly creditable performance# Public sector contributes to the State government.s resources in terms of sales ta, and other state level ta,es# Public sector investments are directed to)ards the pro4ects in the back)ard regions and industrially poor districts# In this )ay the public sector )orks in its o)n )ay to eliminate the industrial imbalance in states and districts# So far )e have e,plained in detail the contributions made by the public sector to)ards Indian economic development# It is often said% that even )hen their performance is poor% the public sector contributions have been so much% and by improving their performance% )e should be able to make them contribute their full potential to achieve a higher rate of economic development# It is satisfactory to note that efforts in this direction to improve the public sector performance have been initiated and by the turn of the century public sector )ill emerge as the main contributor to our economic development# In+ustri#- .o-i$% reso-utions of !F4E8!F5C #n+ 1980 Industrial policy comprises of the procedures% principles% rules% policies and regulations )hich together govern the industrial sector to guide the industrial development or the country in conformity )ith the ob4ectives of five year plans and the needs of the economy# 2s the economy develops% the government has to closely study the process of economic development and make necessary changes and modifications in the policies so as to make the policies relevant for the situation or the environment prevailing in the country at different points of time# Sometimes the changes in policies are so drastic that a ne) approach at the industrial development or the development of any other sector is arrived at# 9hen these changes are announced the reactions from the sector concerned are studied closely by the
0

government and necessary amendments are made to the policies already announced# In Indian scene% the situation prevailed immediately after independence )as completely different from )hat is being )itnessed today# 7ence% if )e study the industrial policies announced in the later EL.s and early and middle .FL.s )e )ould get a background )ith )hich )e )ill be able to understand and appreciate the changes that have been announced in AKKA# &his )ould also help us to understand the 4ustifications for the drastic changes announced at periodical intervals# 7ence% )e )ould discuss
!69

in brief% the

features of AKEB% AKFG and AKFL Industrial Policy 'esolutions# INDUSTRIAL POLICY !F4E Immediately after independence% the government had to give a guideline for the industries in India and so it announced its policies for industries# &he political freedom attained in AKEH% posed a challenge to the government AL devise its o)n policies# 9ith the production at lo) levels% population increasing partition impacts% rising price level% industries to be developed to accelerant economic development% etc#% the AKEI Industrial policy resolution )as announced# &hrough that the government clearly- accepted its responsibility of ensuring planned development of industries of various types# &he AKEI policy laid the foundation for ane) e,perience as )ould be clear from the follo)ing features of the policy! &he industries )ere classified into the follo)ing four categories0 A# &he strategic industries to be completely o)ned by the government included manufacture of arms and ammunition% production and control of atomic energy% o)nership and management of rail)ay transport% etc# (o private sector

participation or e,istence )ill be permitted in Ibis category of industries# B# &he second group included the basic and key industries# Private sector e,istence in this group )ould be tolerated for a period of AL years after )hich their performance )ould be evaluated# (e) units in this category )ill be established only by the government and the e,isting ones )ould be taken over by the government if their performance is found in he no0 satisfactory after the revie)# &he industries include in this category include0 aircraft manufacture% coal% iron and steel% ship building radio and mineral oils% etc# C# In this category government like included the basic industries electrical salt% automobiles% tractors% prime movers%

engineering% heavy machinery% machine tools% heavy

chemicals% fertili/ers% electro-chemical industries% non-ferrous metals% rubber manufacture% po)er and industrial alcohol% cotton and )oolen te,tiles% cement% sugar% paper and ne)sprint% air and sea transport% minerals and industries relating to defence# Private sector )ill be given complete freedom to enter into this category% but the government can intervene and regulate any of them% if found necessary# E# 2ll the other industries formed the fourth category# +ainly left for private sector% the government pointed out that progressively it may participate but not eliminate the private sector# Both individual as )ell as co-operative undertakings )ill be permitted in this sphere# &his policy also gave importance to small scale industries and suggested that both the central and state governments should 4oin together in solving the problems freed by the small scale industries# 2s these industries )ould offer good scope for absorbing the displaced

laborers and agricultural )orkers and )ee also ideal for co-operative type of organi/ation% the government felt that they must be developed# 2s regards the foreign capital% the government clearly pointed out that there is need for free flo) of capital as )ell as technology# discrimination )ill be made bet)een the Indian and 2t the foreign same time the government also said that it should regulateP no undertakings )ith regard to the applications of the provisions of the policy resolutions# Profits and repatriation of capital )ould be permitted sub4ect to the provisions of the foreign e,change control# Further if any undertaking is nationali/ed% then air and e:uitable compensation )ould be paid# Ev#-u#tion& &he main aspect of this policy is that it laid the foundation for the introduction of +I*ED E"6(6+O in India# 8nder this the government )ill encourage coe,istence of both private and public sector units in industries according to the provisions of the policy# &his paved the )ay for the participation of government aid die corporate sector in the industrial building process of the country# &his also facilitated a direct comparison bet)een the performances% of both the sectors% in terms of various indicators# Being the first policy resolution the government had made a good beginning# But this policy )as critici/ed for being classificatory# It gave an impression that the private sector% even in spite of possessing the potential )as not allo)ed to play its due role in the industrial development# Secondly% there )as a threat of nationali/ation% specifically% in the case of industries under the second category# &hirdly% the government intervention )as present even in the case of third category of industries# 7ence% on the )hole% being the first policy% the government could not make the policy more imaginative% e,cept% of course% introducing the principle of mi,ed economy#

INDUSTRIAL POLICY !F5C 2 ne) policy )as necessitated after AKFA% because% India adopted a socialistic pattern of society% the "onstitution guaranteed Fundamental 'ights and Directive Principles of State policy and the First five year plan )as completed by AKFG# 2fter revie)ing the developments and achievements% the government came out )ith the Industrial Policy 'esolution of AKFG# For all the later policies% this became the basis and until AKIL% the provisions of this policy remained more or less in force# &he follo)ing are the important features of this Policy0 &he industries )ere classified into three categories# &his )as indicated in terms of Schedule 2% Schedule B and Schedule " industries# &he Schedule 2 industries are completely slate o)ned and the state is responsible for the development and gro)th of them# &he Schedule B included industries )hich )ere under the control of government% especially ne) units# &he private sector is also permitted to enter into this category% but it )ill be given only a supplementary role# &he Schedule " industries included all the remaining industries% the future of )hich )ould be completely in the hands of private sector# 6f course% government regulation in general )ould be formulated and made applicable to them as any other industries# &he first classification @Schedule 2) included AH industries% the Schedule B included AB industries and Schedule " included all the rest#

&he government clearly indicated that the above classification is not very rigid% and private participation and presence even in the first category in the nature of allied units% user of by-products% etc#% )ould be permitted% similarly the government may enter the Schedule " industries if the planning and development )arrants it# &he private sector is e,pected to )ork in close unison )ith the state# &he government assured fair and free treatment to private sector units and non-discriminatorc. treatment )as also promised# &he government continued to encourage the gro)th and development of small scale and village industries by e,tending subsidies% ta, concessions% protection from large and medium industries% and assisting them in +oderni/ation to improve their competitive strength# &he 'esolution also aimed at reducing the regional disparities in the gro)th and development of industry so as to achieve balanced industrial development throughout the country# &he 'esolution also highlighted the need to protect and improve the conditions of industrial )orkers in the country# +ainly several machineries for settling industrial disputes )ere thought of# &he government continued )ith its policy regarding foreign capital )ithout much change# Ev#-u#tion & &his resolution assigned a ma4or role to the public sector# It created a condition in )hich the public sector units could be established and developed )ell# &his )as felt necessary to achieve the desired rate &he government and pattern of development of industries in India#

made it clear that it had no intention to )ipe out the private sector% instead it )anted the private sector to emerge as the supplementary sector for the public sector and 4oin the latter to achieve rapid industrial and economic development# 2fter the resolution came into force% over a period it )as found that the private sector developed

faster by taking advantage of loopholes and e,ceptions in the 'esolution# &here )ere cases )here licenses )ere issued to private sector )hile public sector should have been given the license# private sector# INDUSTRIAL POLICY OF !FEG 2s already pointed out the Industrial policy of AKFG formed the basis of this policy in AKIL# &his ne) policy had the follo)ing ob4ectives0 @h) @i) @4) @k) @l) @m) @n) to achieve the optimum utili/ation of the installed capacity# to achieve ma,imum production and through that achieve higher productivity and employment generation# to rectify the regional imbalance by focusing on the back)ard areas# giving priority treatment for agro-based industries# to promote inter-sectoral relationship# to encourage the gro)th of e,port oriented and import substitute industries# to speed up the gro)th of small scale units% etc# 7ence% it )as found that this 'esolution in fact% led to the rapid gro)th of

9ith these ob4ectives in vie)% the ne) policy laid do)n the follo)ing provisions0 A# 2fter revie)ing the performance of the public sector units the government has decided to introduce measures# B# for improving the efficiency of these units so as#to make them contribute more to)ards the economy# C# In order to promote economic federalism% the policy

provided

for integration of industrial development in the

private sector# &he government also decided to eliminate the

artificial division bet)een small and large scale industrial units# In each district a fe) nucleus plants )ill be set up )hich )ould generate opportunities for a number of small% cottage and ancillary units# &his )ould ultimately create the scope for faster industrial development in the industrially back)ard districts# E# &o provide the scope for more and more small and cottage industries% the government redefined these units as belo)0 a# b# c# the limit of investment for tiny units )as to be raised from 's# A lakh to 's# B lakhs the limit of investment for small scale units )as to be raised from
'E#

AL lakhs to 's# BL lakhs and

increase the limit of investment for ancillaries from 's# AF lakhs to 's# BF lakhs#

F#

&o promote industrial gro)th in rural areas and also to improve the employment opportunities there and raise their percapita income% the policy provided for promoting industries in the rural areas# &his )as also e,pected to maintain the ecological balance in the country# $reater attention )ould be given to the gro)th of handlooms% handicrafts and khadi and other village industries#

G#

2nother important provision )as that the government decided to regulari/e the unauthori/ed e,cess capacity )ith the industrial units% especially the FE'2 3 +'&P units by allo)ing them automatic e,pansion by BFN of the e,isting licensed capacity on a selective basis#

H#

&o prevent spread of industrial sickness% the government indicated that very stringent steps )ould be taken against those units )hich are deliberately mismanaged and indulging

in financial improprieties# 2s regards the e,isting sick units% arrangements )ould be e,plored to revive them or to encourage their mergers )ith healthy units by introducing suitable ta, concessions to encourage such actions# 9hen other methods of revival of sick units are not found feasible% then the management of such sick units )ould be taken over#

EVALUATION &his policy has several lapses# Its claim to eliminate the division bet)een small scale and large scale units is something contradicting the basis of such divisions# &here )as a need to treat the small scale )ith liberal treatment so that in a labour intensive economy% these units can create employment opportunities# &here is nothing )rong )ith such specific preferential treatment of small scale units# But this policy aimed at removing such differences# Secondly% this policy created a precedence by regulari/ing the unauthori/ed e,cess capacity created by large units% instead of taking action against such erring big units# 9hile the big units )elcomed this move of the government% yet this has resulted in the e,pectation that the government )ould continue to have such liberal treatment in future also# &his indirectly has also affected the gro)th prospects of ne) industries and the e,isting medium and small scale units# &hough the government 4ustified its move by stating that such a move )ould facilitate fuller utili/ation and higher output% yet the conse:uence of such a move )as not thought about# 7o)ever% it may be pointed out that the seeds of liberali/ation )ere so)n through this policy and the government.s intention to select capital intensive path of development#

T/e fe#tures of !FF! In+ustri#- .o-i$% &he government announced its ne) Industrial policy in Duly AKKA# &he ne) policy has outlined several changes )hich have together opened a ne) era to the gro)th and development of industrial sector in India% &he conventional regulations and restrictions have been replaced )ith liberali/ation and relief# "onse:uent to the announcement of the ne) policy% there has been all round 4ubilation in the industrial sector# &he follo)ing are the salient features of the ne) industrial policy# Even by AKIF-IG% the government reali/ed the need to encourage the industrial sector to stand on its o)n legs and to)ards achieving this a number of policies and procedural changes have been announced# &his )as e,pected to increase productivity% reduce costs and improve the :uality )ith )hich the domestic industries are e,pected to face competition )ith strength# &here )as an honest attempt to release the public sector from a number of constraints and it )as given a large measure of autonomy# &echnological and managerial +oderni/ation programs )ere taking place in large scale# 2ll these measures together contributed to the achievement of an impressive annual gro)th rate of I#FN policy during )ill the 5II Five to year a plan# 7aving policy understood to the effectiveness of all the policy changes in the past% the ne) industrial continue pursue sound encourage entrepreneurs% develop the indigenous technology through intensive research and development activities% dismantle the regulatory system% improve the capital market% etc# Small scale sector )ould get a special attention and the government promised to come out )ith a ne) policy to)ards he small scale industries# Foreign technology and investment )ould be )elcomed to improve the domestic production base and increase the e,ports# &he +'&P 2ct )ould be suitably modified to encourage competition# Public sector )ill be made to run on commercial lines and play a vital role in economic development#

&he essence of this ne) policy )ill be discussed under the follo)ing heads0 A# Industrial licensing% B# Foreign investment% C# Foreign technology agreement% E# Public sector% F# +'&P 2ct and G# Small scale and tiny sector policy#

INDUSTRIAL LICENSIN7 POLICY &o achieve the ob4ectives of the strategy of the industrial sector in the KL.s a number of changes in the system of industrial approvals have been brought about# &he domestic producers )ill be able to )ithstand the competition in he country as )ell as abroad only through procedural reforms# 7ence% the role of government )ill be changed from that of e,ercising control to one of providing help and guidance# "hanges in the policy to)ards public sector in the last fe) years have clearly indicated that private sector enterprises )ill be allo)ed to compete in many areas hitherto earmarked for public sector# "onse:uently% the ne) policy has completely reclassified the Indian industries as belo)0 Eight industries have been completely reserved for the public sector# &hey are0 @a) 2rms and ammunition and allied items of defence e:uipment% defence aircraft and )arships% ii# atomic energy% iii# coal and lignite% iv# mineral oilsP v# mining of iron ore% manganese ore% chrome ore% gypsum% sulphur% gold and diamond% vi# mining of copper% lead% /inc% tm% molybdenum and )olfram% vii# mineral

specified in Schedule to the 2tomic Energy 6rder% AKFC and viii# rail)ay transport# @b) Eighteen industries have been listed as industries )hich re:uire compulsory licensing# 7o)ever% this provision )ould not apply in respect of the small scale units taking up the manufacture of any of the items reserved for e,clusive manufacturing in small scale sector# "ompulsory licensing )ould be re:uired in the follo)ing industries0 i# coal and lignite% ii# petroleum other than crude and its distillation products% iii# distillation and bre)ing of alcoholic drinks% iv# sugar% v# animal fats and oils% vi#% cigars and cigarettes of tobacco and manufactured tobacco substitutes% vii# asbestos and asbestos based products% viii# ply)ood% decorative veneers and other )ood based products such as particle board% medium density fiber board% block board% i,# ra) hides and skins% leather% chamois leather and patent leather% ,# tanned or dressed fur skins% ,i# motor cars% ,ii# paper and ne)sprint e,cept bagasse based units% ,iii# electronic aerospace and defence e:uipment of all types% ,iv# industrial e,plosives% ,v# ha/ardous chemicals% ,vi# drags and pharmaceutical ,vii# entertainment electronics and ,viii# )hite goods like domestic refrigerators# 2s regards the provisions of the industrial licensing policy% @i) Industrial licensing has been completely abolished for all pro4ects e,cept for the industries classified above% i#e#% the area reserved for public sector and the list of AI industries and the areas reserved for small scale industries )ill continue# @ii) Public sector )ill continue to maintain monopoly in industries coming under the areas of security and strategic considerations#

@iii)

In pro4ects )here imported capital goods are re:uired% automatic clearance )ill be given provided the foreign e,change availability is ensured through foreign e:uity# 6r alternatively if the value of imported% goods does not e,ceed BFN of the total value of plant and e:uipment sub4ect to the ceiling of 's# B crores% automatic clearance )ill be given# 7o)ever% this )ould come into effect only from 2pril% AKKB in vie) of the current balance of payments position# In all the other cases% the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development )ill be re:uired#

@iv)

E,cept the list of industries re:uiring compulsory licensing% the other industries )ill not re:uire any approval from the "entral government for their location in areas other than cities of more than one million population# In cities )ith more than one million population% non-polluting industries like electronics% computer soft)are and printing )ill be permitted outside BF kms# of the periphery# If such cities re:uire industrial re-generation policies )ill be made more fle,ible# 7o)ever% the e,isting /oning and land use regulation and environmental legislation )ill continue to regulate industrial locations# 2ll efforts )ill be made through incentives and other methods like infrastructural development% to disperse the industry to rural and back)ard areas#

@v)

(e) Broadbanding facility )ill be provided to the e,isting units so as to enable them to produce any article )ithout additional investment# &he e,emption from licensing )ill be applicable to all substantial e,pansion of e,isting units#

@vi)

&he

mandatory

convertibility

clause

)ill

no

longer

be

applicable for term loans from the financial institutions for ne) pro4ects#

@vii)

2 very significant step is to abolish all the e,isting registration schemes#

@viii) In case of substantial e,pansions and ne) pro4ects% it is enough @i,) if the entrepreneurs file the information memorandum# &he list of industries re:uiring compulsory licensing and industries for automatic approval of foreign technology agreements )ill be notified in the Indian &rade "lassification @7armoni/ed system)%

FOREI7N INVESTMENT Foreign investment carries )ith it the benefits of technology transfer% marketing e,pertise% modem managerial techni:ues and ne) possibilities for promotion of e,ports# 2s this re:uirement is felt in this )orld of industrial change and cooperation% the ne) policy has clearly contained the follo)ing provisions related to foreign investment0 @i) In high priority industries approval )ill be given for direct foreign investment upto FAN foreign e:uity and all the bottlenecks in this process )ill be removed- "learance in such cases )ill be given if the foreign e:uity covers the foreign e,change re:uirements for imported capital goods# &he necessary amendments )ill be made in the FE'2# @ii) &he general policies governing @he domestic units in regard to import of components% ra) materials and in intermediate good and payment of kno)-ho) fees and royalties )ill also be applicable to the high priority industries in )hich foreign investment is limited to FAN 7o)ever% the payment of royalty )ill be routed through the 'BI to enable it to monitor the

outflo) of foreign e,change on account of dividend payment also to ensure that such payments are balanced by e,port earnings over a period of time# @iii) @iv) 2ll the other foreign investments not included in the "ategory I slated above )ill re:uire prior clearance# &rading companies primarily e,port oriented )ill also be permitted under the foreign e:uity proposals as indicated in @i) above# 7o)ever% the provisions of the E,port-Import policy applicable to the domestic units )ill also be applicable to such trading companies# @v) &o encourage substantial inflo) #of foreign investment% a Special empo)ered board )ould be constituted# &his Board )ould negotiate )ith the large international firms and approve direct foreign investment in select areas# &his is e,pected to fetch foreign technology and open the industries in India to )ider )orld market# Such investments )ill be sub4ected to favourable treatment based on the merits irrespective of the rules% regulations and procedures in practice# FOREI7N TECHNOLO7Y A7REEMENT 2 )elcome change in the outlook of the government as evidenced by the ne) policy is the reali/ation that the sophisticated technology% from abroad can be brought in only through liberal and less restrictive procedure and policies# &he interference of the government in this regard is to be reduced so as to enable the domestic industries in achieving a high rate of industriali/ation# 2s a result of this liberali/ation% automatic approval for technology agreements related to high priority industries )ill be made )ith respect to certain specific parameter# 6ther industries )hich can enter into such agreements )ithout incurring the e,penditure of foreign e,change )ill also be

e,tended liberal treatment# &he industrialists are left to themselves to decide and enter into foreign technology agreements depending upon the commercial viability of their enterprises# In due course this measure is e,pected to pave the )ay for e,change of superior technology from India )ith other countries# 9ith the overall liberali/ation% the competition )ill be high and it is e,pected that industries )ill invest much more in research and development activities# 1eeping in vie) all these e,pectations% the government has announced the follo)ing changes in regulations governing foreign technology agreement0 @i) (o prior permission is needed for hiring foreign technicians% foreign testing of indigenously developed technologies# Such activities involving payments )ill be governed by the guidelines of the 'BI and such payments can be made through the blanket permits# @ii) 2utomatic permission )ill be given for foreign technology agreements relating to the high priority industries# &he royalty payments through such agreements )ill be sub4ected to certain provision# 8pto the payment of 's# A crore% royally )ill be ] FN for domestic sales and IN for foreign sales or e,ports# 7o)ever% the total royalty payment should not e,ceed IN of sales over a AL year period from the date of agreement or H year period from the dale of commencement of production# @iii) In the case of industries not covered in the high priority list automatic permission )ill be given for technology agreement provided it does riot entail any foreign e,change payment commitment# @iv) In all the other cases% the general procedures in practice )ill be adhered to and such industries )ill re:uire approval#

PUBLIC SECTOR &he public sector )as given the predominance in the industrial development over the last four decades and the amount of investment made in this sector% though 4ustified from the point of vie) of socialistic democracy% it has been struggling )ith so many problems like poor productivity% e,cess staffing% lack of continuous technological upgradation% inade:uate attention to research and development% etc# &he rate of return on investment in public sector has been so lo) that it has prevented the automatic gro)th of these assets to the government# &he main reason for this poor performance of the public sector has been the taking over of the sick units from the private sector and the number of units )hich are in the consumer goods and service sector# 7ence% in the ne) policy the government has rightly given the emphasis to the development of public sector in the field of essential infrastructure goods and services% technology development and building of manufacturing capabilities% manufacture of products such as defence e:uipment# &he public sector )ill also enter the other areas not strengthened if they generate good profits and the management )ill be granted more autonomy through a system of memorandum of understanding# Private sector )ill be invited to induce competition in these areas# In selected industries in public sector% the government )ould disinvest a part of the e:uity share holding to provide market discipline to the performance of the public sector# Based on these vie)s the ne) policy has the follo)ing provisions regarding the public sector0 @i) 2 revie) of the public sector portfolio investment )ill be made to give the emphasis on the role of public sector in the strategies% high tech and infrastructure# Public sector units )ill be allo)ed entry into areas not strictly reserved for it#

@ii)

&he Board for Industrial and Financial 'econstruction )ill be approached to help the sick units to rehabilitate them# &o protect the interest of )orkers )ho are likely to be affected due to rehabilitation of public sector sick units% a social security system is proposed to be devised#

@iii)

2 significant policy aimed at raising the resources and encouraging public participation in the gro)th of public sector units is that the government )ill offer a part of its share holding in the public sector to the mutual funds financial institutions% general public and )orkers#

@iv)

In the direction of strengthening the management of public sector units the Board of public sector management )ill be made more professional and given more po)ers# Further to make @he management of such units more autonomous and accountable a system of memorandum of understanding )ill be adopted# 2part from improving the e,pertise of the government in implementing the +68% the government also )ould place in the Parliament the +68 to facilitate detailed discussion#

MRTP ACT 2 ma4or deviant of the ne) policy is in respect of the +'&P 2ct# &he ne) policy aims at removing the unnecessary bureaucratic controls and allo)s the industries to breathe in an atmosphere of freedom# &he efforts of the government in the past intervening in the investment decisions of the +'&P companies have been proved to be counterproductive# 7ence% the ne)ly empo)ered +'&P "ommission )ill en:uire into complaints received from individual consumers or classes of consumers# &he follo)ing is the essence of the provisions in the ne) policy regarding +'&P 2ct0

@i)

&he limits of assets in respect of the +'&P companies and dominant undertakings have been removed and suitable amendment in the +'&P 2ct )ill be made in due course#

@ii)

&he need to obtain the prior approval of the central government for establishing ne) units% e,pansion of e,isting units% merger% amalgamation and take over as )ell as appointment of Directors have all been removed#

@iii)

&he +'&P 2ct )ill be used only for controlling and regulating monopolistic% restrictive and unfair trade practices# 2s a follo)-up the +'&P "ommission )ill be authori/ed to in:uire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic% restrictive and unfair trade practices#

@iv)

2ll the necessary amendments )ill be made in the +'&P 2ct to give more punitive and compensatory po)ers0 the +'&P "ommission unemployment% small scale industries should be established and encouraged to gro) )ith government assistance in every )ay possible# Since then% the government has sho)n a priority for the development of small scale industries and this concern has yielded the fruits that today the small scale sector has emerged as an important segment of Indian industrial sector# &he investment of the small scale and ancillary industries has been raised periodically and as per the Industrial policy of AKKL% the investment limit for small scale industry is raised from 's# CF lakhs to 's# GL lakhs and units )hich e,port CLN of output by the third year% )ill have a higher investment limit of 's# HF lakhs# In the case of ancillary units the investment limit has been raised from 's# EF lakhs to 's# HF lakhs# Small scale units today include both the traditional and modern units# 9hile the former is basically labour intensive% capital light% using simple indigenous

technology% and the modern units are capital intensive using up-to-date technology# Ro-e of sm#-- s$#-e in+ustr% HSSIA A# SSI and production0 SSIs have significantly added to their level of total production% )hich simply means that they make a si/eable addition to national income# &he production level increased in value from 's# H%BLL crores in AKHC-HE to 's# A#HI%HLL crores in AKKA-KB% an increase by mere than BL times )ithin a span of t)o decades# B# SSI and employment0 6ne of the important reasons for establishing SSI is to generate employment opportunities% especially in the rural areas# &his ob4ective has been certainly achieved as could be seen from the figure% SSI provided employment for CK#H lakhs of people in AKHC-HE and in AKKA-KB this has touched ABI#I lakhs people% a three fold increase# &his implies that )ith more encouragement and solutions to the problems% SSIs can play a vital role in rural and urban employment generation# C# SSI and e,port earnings0 2 significant contribution of SSIs is in the field of e,ports# 6ver the period% our products have consistent demand in the )orld market% as it proved by the e,ports figures# From a modest earnings of 's# CKC crores in AKHC-HE this sector has earned 's# AB%FGI crores in AKKA-KB roughly CL times increase# &his constituted BI#HN of the total e,ports in AKKA-KB# 2 very important point to be observed is that our e,ports consists of mostly non-traditional items# E# SSIs and dispersal of industries 0 6ne best )ay of industriali/ing the rural areas is to establish SSI# &his )ould relieve the urban centers from the industrial congestions and other problems associated )ith it and help the rural areas to get industries# 9ith

SSI in the rural areas% the seasonal unemployment is eliminated% unskilled laborers are used% farmers are able to supplement their agricultural income% etc# 7o)ever% in India the regional dispersal of SSI is mostly concentrated in si, states0 +aharashtra% &amilnadu% 9est Bengal% 8#P#% the Pun4ab and $u4arat and these states alone account for FKN of the total SSIs in India# But this concentration )as mostly due to speciali/ation by particular districts# F# SSIs and industrial disputes 0 8nlike the large and medium industries% SSIs do not have serious industrial disputes and even if there are any% they do not affect all the units like the large and medium segments# Since in most units there is direct contact bet)een the proprietor and the )orkers% the possibility of disputes is very much minimi/ed# &he loss of man-days due to disputes is very high in medium and large scale industries than in SSIs# &his implies that thee industries ensure regularity in production% supply% etc# G# Inter-relationship bet)een SSIs and large scale and medium scale industries0 &his is very important aspect# SSIs today forms the backbone of the large and medium industries in that they supply the components% implements% etc#% re:uired by the large and medium scale industries and also function as the user of industrial )aste to produce by-products# &here are several products flo)ing from the large and medium scale industries )hich actually are the output from small scale units under subcontracting provisions# H# SSIs and utili/ation of resources0 SSIs in India also make a valuable contribution to the economy# Economic development can be accelerated and consolidated only )hen the available resources are fully utili/ed# In this respect% SSIs make use of physical% human and financial resources available in the rural

areas# In the absence of SSIs% vast physical and human resources )ill remain unutili/ed and to that e,tent the national income )ill be lo) and employment )ill be less# 2t the same time% the SSIs have also facilitated the gro)th of entrepreneurship in our country# Persons )ith re:uisite :ualities come for)ard to set up SSIs and once they succeed% slo)ly his encourages the others and in this manner the entrepreneurship skill develops and spreads# 7aving discussed the role of SSIs in Indian economic development% )e no) turn to understand their problems# It )as pointed out earlier that the SSIs are best suited for our country and they have contributed in so many )ays to the economy but the country is yet to reali/e the full potential of this sector# &his is because this sector is crippled by several problems# 2n understanding of these problems )ill help us to assess the policy prescriptions of the government and to suggest the necessary changes in them# A# Funds re:uirement 0 SSIs like any other industrial unit% re:uire &hough the fi,ed capital both fi,ed capital and )orking capital#

re:uirement of SSIs is lo)% yet the small entrepreneurs )ho come for)ard to start these units do not have sufficient fund of their o)n# &his being the situation% for their )orking capital% these SSIs need some source# 2s most of the SSIs are located in the rural areas they approach for funds )ith several agencies ranging bet)een the friends and relatives of entrepreneurs% money lenders% and other speciali/ed financial agencies# 2 ma4or obstacle in their )ay of getting funds is that being small their credit )orthiness is never accepted as satisfactory by the lenders# It is estimated that more than FLN of the Sols seek financial assistance of some sort or other# $overnment has established several institutional agencies to meet the re:uirements of @he SSIs# But these agencies have their o)n rules and regulations

insisting on securities% furnishing technical and other details at periodical intervals% pro4ect funding pattern% 4ustification for the pro4ect and the repayment0 capacity% marketing arrangements% other legal formalities to be fulfilled% etc# &he small entrepreneurs not being professional are unable to cope )ith these rigidities of these speciali/ed institutional agencies# &he application form for loans and the procedure for filling it and getting the loan are all lengthy% that the SSIs struggle for funds# B# Shortage of ra) materials0 &his is another basic problem of SSIs#

9hen these units are started% they estimate the availability of ra) materials and then make arrangement for purchasing them from the source# But there are several inputs like chemicals )hich are al)ays in perennial shortage# 2s a result these units have to compete )ith other medium and large scale units to get these ra) materials# Since these ra) materials are in scarcity% the demand being high% the cost of them is high# &he SSIs do not have any professional assistance )ho can liaise )ith the government or other agencies to get the ra) materials supply# &herefore% they are unable lo compete )ith the large and medium scale industries# &hough the government sho)s some priority in supply of these ra) 5 materials to the SSIs% the claimants are in large number and so the ra) materials are bought at high cost &he market variation in price is such that the medium anp5large units buy in bulk and maintain stock )hich the SSIs cannot afford to do as this )ould lock up their capital# 2s a result of these% the SSIs incur higher cost of production )hich eats a)ay a large part of their profits# C# Shortage of po)er 0 +ost of the modem SSIs depend on po)er for their )orking# 2s they are mostly located in semi-urban and rural areas% the supply of po)er is not regular# &his

directly affects their level of production# Even )hen po)er is available it is supplied only for restricted hours# 7ence% )hen these units are started% they assume the availability of regular po)er and estimate their production level# But in reality )hen they are unable to achieve that production level% they lose heavily# &hey cannot also afford to make alternative arrangements for po)er supply as is found )ith medium and large scale units )ith generators and other captive po)er plants# &his results in under utili/ation of capacity having impact on their profitability# E# Problem of marketing0 Oet another important problem for the small scale units is marketing their products# 9ith their rural bias in location% these units have to either sell in the rural areas or identify customers in the nearby to)ns or cities# (ever can they hope to market their products in distant places# 9ith local demand at a lo) level and the selling in distant places becoming difficult% they cannot avoid stockpiling )hich means they run short of )orking capital E,cept in the case of ancillary units )hich may have a permanent tie-up )ith large or medium units% the other SSIs al)ays have the problem in marketing their products# (either can they indulge in aggressive advertising or sales promotion nor can they adopt modern methods of selling# &hough some of the units are ALLN e,port oriented% yet not all of them can afford to approach assists the them distant markets# policies Even like if the government through Stores

purchase policy under )hich certain items re:uired by the government organi/ations are to be purchased only from the SSIs% yet selling through this channel means )aiting for a long time to get the bills cleared by the government# 7ence% these

SSIs neither can market their products efficiently themselves or through other agencies# 2s a result% most of the units indulge in reducing their production level% )hich affects their economies of scale# So in every )ay the marketing problems are e,perienced by the SSIs# F# Procedural )rangles )ith the government0 It is often said that the government offers several concessions% subsidies% priorities% etc#% to the SSIs# &rue% but )hat is offered by the government is very much less than )hat is needed by this sector# 2s a result several claimants for these limited assistance force it on the officials to determine certain norms for allocation or e,tension of these facilities# In other )ords% )hatever the government can offer is rationed among the SSIs# 2t this stage% the general concessions offered to the industrial sector make the situation )orse# &he SSIs have to compete )ith the other medium and large units to get their share# 2t this stage deliberate discrimination% official apathy% red tapism% corruption among officials% etc#% are all becoming rules rather than e,ceptions# Further the procedures involved in obtaining the government assistance are so cumbersome that the SSIs do not have the professional talent to complete them# G# Problems relating to e,ports0 Small scale units in India have made a significant deviation from the e,port of traditional items# &oday these units produce a number of products like &hese goods electronic components% spectacle names% leather goods% handlooms% chemicals% dyes% cosmetics% etc# have great demand in other countries# 6ur Indian products are comparable in :uality )ith the products from other

countries% but prices of our products are higher than those from other countries# &his is because of various reasons0 lack of kno)ledge about the market for different products% market information relating to consumer preference% selling terms% e,change procedures% rate regulations% packing and for)arding of bank 7ence remittance% facilities% absence

guarantees% payment of various duties% etc# In each one of these areas% the SSIs lack e,perience and guidance# inspite of producing good :uality products our units are unable to succeed in marketing them abroad# &he various agencies and boards established for this purpose are unable to really assist the SSIs# &here is complete lack of coordination among various agencies and producers# 2s result this sector% )hich can fetch considerable foreign e,change resources% is unable to realise it# H# !abour problems 0 SSIs are encouraged mainly because the are labour intensive# But over the years% these units have started losing considerable mandays due to labour problems# &here are several statutory regulations like Provident Fund contributions% Employee State Insurance% etc#% )hich the SSIs have to comply )ith# 9henever there is any violation% the labour problems erupt and affect the smooth functioning leading to accumulating loss# I# !ack of +oderni/ation0 SSIs by nature depend on indigenous technology# But )henever there is scope for improving the technology by importing if from abroad% the re:uirement of funds emerge s a hurdle# 7ence% )ith old technology production becomes costlier% and these units are unable to find market for their products and compete )ith other rivals#

K#

Difficulty in location of units 0 SSIs are encouraged to move to)ards the rural areas and back)ard regions# But the facilities in these places are very limited or under developed% that even though units are established in these locations% their operations are severely hampered by the limited availability of the facilities# 6f late there is ob4ection from the rural folks on the ground of environmental pollution# For instance% a tannery )ill not be allo)ed nearby the villages as it is feared that there )ill be )ater pollution# Similarly there is ob4ection to the location of chemical units% meat producing units% etc#% and this leads to competition for the place )here the facilities are available and )here there is not much of social resistance#

AL#

7igh rate of industrial sickness 0 &he industrial sickness is found afflicting this sector very much# 2mong the industries )hich are declared sick% ma,imum number of units is found only in the small scale sector# &he reasons for this are the problems so far e,plained# 9henever the SSIs fall sick% the effort to revive them is not at all on the lines found )ith the medium and large scale units# 2s a result the sickness is prevalent more among SSIs and the funds re:uired for reviving them rim to several crores# $overnment )ith its financial stringency cannot also come for)ard to bale out this sector from industrial sickness# By AKKA% B%BA%EHB small scale units )ere found to be sick resulting in the lock up of total bank credit to the tune of 's# B%HKB crores# 6f these units% B%LB%KKI units )ere declared non-viable units involving an outstanding baiik credit of 's# AKKH crores# &he magnitude of industrial sickness among SSIs has been a main concern of

the government in these days# Efforts taken to solve the occurrence of sickness among the SSIs are not found to be effective for one reason or the other# 7aving discussed the problems of the SSIs% let us no) study the measures re:uired and policies taken by the government to solve these problems# A# Institutional agencies0 &he government has taken a keen interest in the development of SSIs# 7aving identified the basic problems of this sector% the government has introduced an institutional structure to look after various aspects of this sector# &he Small Industries Development 6rgani/ation has been established by the "entral government mainly to co-ordinate% monitor and formulate policies for SSDs# It has Small Industries Service Institutes% branch institutes e,tension centers and regional testing centers and production and training centers# &he (ational Small Industries "orporation @(SI") has been established to provide themJ ra) materials and capital e:uipment and assist them in marketing of goods% etc# such corporations are also established at the state level# &o attend to the developmental 2part from these% several functions of the SSIs% the Small Industries "orporations have been set up at the slate level# speciali/ed Boards for each segment of the small scale sector have also been established like "oir Board% "entral Silk Board% "offee Board% etc# B# &echnical assistance0 6ne of the important areas )here the SSIs need assistance is in technical matters# 'ight from the stage of production do)n to packing and for)arding% they re:uire guidance# &hough initially they are started )ith the internal

technical e,pertise% over a period% they have to be guided properly for updating their technology so as to maintain their cost of production and profitability# &he installation and maintenance of machines and e:uipments% servicing them etc#% are also areas )here the SSIs need help# assistance% and such several others agencies like Small Institute% Small Scale Industries &o e,tend this Service "orporation Industries

Development

are established )hich take care of the &he various Boards set up for 2part from

technical assistance to SSIs#

different SSIs also e,tend their help in this regard#

guiding the SSIs% these institutionsR are also engaged in research and development and their research findings are also disseminated to benefit the SSIs# C# Industrial estates0 difficult to get a &hough SSIs can be easily formed% it is very location in these days )here all the For

infrastructural facilities are available at a reasonable price# estates#

this purpose the government has started establishing industrial Industrial estates are areas )here all the basic facilities etc#% are provided by the government# the industrial infrastructural roads% po)er% estates# allotted#

Facilities like )ater% )ork sheds% transport% communication% are made available in Individuals )ho )ant to locate their SSIs in such &hey )ill make the necessary payments to the

estates should apply to the government and get the )ork sheds governments in lump sum or installment as the case may be# &he government locates these industrial estates in back)ard regions and rural and semi-urban areas so that )hen SSIs are started% these regions slo)ly develop# &he government has also set up the SIDBI mainly to e,tend assistance for supporting the activities of the State governments% and their agencies in

connection )ith the development of SSIs# Special concessions are also granted to these agencies )hen they plan for locating the industrial estates in the rural areas# E# District Industries "entres @DI"s) 0 DI"s are institutional agencies )hich have links )ith the Development blocks on the one hand and the special agencies on the other# &hey provide guidance to entrepreneurs and SSI o)ners in almost every stage since the formation and also in pre-formation and post-formation% marketing% finance% credit guarantee% ra) materials% training% etc# &hey also guide the unemployed candidates )ith all the necessary details regarding the starting of SSIs# By +arch% AKKC% there )ere ECC DI"s covering ECA districts in India# F# Financial assistance0 6ne of the basic problems of the SSIs is the lack of funds# &o overcome this% several steps have been taken since AKGL# Briefly )e may refer to the follo)ing steps 0 @a) @b) 8nder the control of 'BI% the government introduced a "redit $uarantee Scheme for the supply of institutional credit to SSIs# IDBI is e,tending refinancing facilities and to the State finance $overnments corporations# @c) &he State governments provide seed capital and margin money to the entrepreneurs of SSIs to enable them to get assistance from the "ommercial Banks and State Finance "orporations# @d) Small industries development fund )as set up by the IDBI in +ay% AKKB mainly to increase the refinance facility to the banks and other institutional agencies to enable them to "ommercial banks% State

participate in a greater )ay in e,tending assistance to the SSIs# @e) 2 significant development )as the establishment of Small Industries Development Bank of India )ith the main purpose of functioning as the principal financing institution# It )ould concentrate on +oderni/ation and technological up-gradation% promotion of employment oriented industries% improving the marketing facilities% etc# @f) 2rrangement for die supply of ra) materials 0 'a) material shortage has been crippling the SSIs for a long time# &his problem is being solved by the government through the State Small Scale Industries "orporations# &hese corporations are made in charge of distributing the scarce ra) materials among the SSIs so that every unit )ill be able to get its :uota# $overnment is also e,ploring a scheme for maintaining a buffer stock of ra) materials% especially those )hich are in heavy demand% so that the SSIs )ill not have any difficulty in getting their supply from the authori/ed agencies# @g) +arketing assistance 0 In order to provide marketing assistance to the SSIs% the government has come out )ith several schemes like 0 @a) Stores purchase policy under )hich the government has earmarked items )hich should be purchased by the government organisations and departments only from SSIs# @b)Price preference to the products purchased from the SSIs by the public sector units# @c) &o improve the competitiveness of the SSI products% the government has provided :uality control and testing facilities at various places# @d)6rgani/ation of e,hibitions% sales emporia% etc#% at various places to enable the SSIs to market their products#

I#

Fiscal incentives0 &he government also has e,tended several fiscal concessions and incentives to SSIs to encourage them to gro)# &hese incentives include% ta, holidays for ne) units% investment allo)ance% e,emption from ta,ation% offering capital subsidies to units located in back)ard regions% e,emption from e,cise duty% etc#

2part from the above steps and measures taken% the government also allots huge amounts of money for establishing and developing SSIs# &he table belo) has the details regarding the total e,penditure incurred by the government plan )ise# It could be noted from the table that the e,penditure on SSIs has been increasing from the I Plan and by the 5III Plan it has gone up nearly ACL times#

7OVERNMENT EKPENDITURE ON SSIs" HAmount in Rs" $roresA PLAN I II III I5 5 5I 5II 5III TOTAL EKPENDITURE EI AIH BEI BEB FKB A%KEF C%BEK G%CCE

In the Industrial Policy AKKA the SSI sector has been given special emphasis# &he follo)ing are the important provisions0 @i) &o facilitate SSIs to have access to capital market% e:uity participation in them is allo)ed for other industrial undertakings not e,ceeding CEN of the total share holding% this is e,pected to provide funds for +oderni/ation% improving the technology% etc# @ii) &o liberali/e the flo) of funds through commercial banks by involving them in financing and also to e,tend the Single )indo) scheme as )ell as the E:uity Fund scheme# @iii) &o invoke the provisions of the Partnership 2ct to limit the liability of the ne) entrepreneurs in the event of failure of SSI# @iv) @v) @vi) &o improve the effectiveness of collection of dues% factoring services may be e,tended to SSIs# Involving the public sector units% co-operatives and of SSIs# @vii) 2llocating the ra) materials to the SSIs and tiny industries on priority basis# @viii) &o achieve co-ordination in the production programs of large% medium and small scale units# @i,) @,) &o establish and e,tend :uality control and testing facilities% &o encourage location of SSIs in the rural and back)ard regions# other professional agencies to improve the marketing of the products

@,i)

&o make the Small Industries Development 6rgani/ation as nodal agency for SSIs mainly in e,port promotion#

9ith @lie above steps already taken% the government has clearly sho)n its interest in the development of SSI sector# But a main problem is yet to be solved and that is the e,tent of industrial sickness in the small scale sector# &he number of units afflicted is on the increase year after year and unless some positive and preventive steps are immediately taken% the SSI sector )ill not be able to reach its potentials and make the invaluable contributions to the Indian economy# REVIE6 ?UESTIONS A# E,plain the ob4ectives of Indian five year plans and to )hat e,tent they have been accomplishedT B# &race the evolution of mi,ed economic principle in Indian economy# 9hat are the characteristics of mi,ed economyT C# E,plain the planning process under mi,ed economic set upT 9hat distortions that can take place in the course of such a planning processT E# "omment on the sources of finance for Indian five year plans# F# 7o) )ould you 4ustify the e,istence of public sector in India T 9hat role does public sector play in Indian economyT G# "ritically evaluate Industrial policy resolutions of AKEI% AKFG and AKILT H# Discuss in detail the Industrial policy of KKA )hich set the liberali/ation process onT I# E,plain the role of small scale industries in India# &o )hat e,tent the government policy has been supportive of the small scale industriesT

Discuss the problems of small scale industries and suggest suitable measures to overcome themT

CHAPTER VI (e) Economic Policy Environment in India Privatisation and issues !iberalisation and $lobalisation E,periences

Environmental assessment and evaluation# PRIVATISATION Since the time the government in several countries undertaken the economic development as the basic function% several developmental efforts have been made and a number of them failed to yield the e,pected results# &his is the e,perience of government both in developed countries as )ell as developing countries# 9hen such efforts of government failed% it is felt that such efforts could be left for private initiative# In this conte,t privatisation assumed very great importance# Privatisation in general means the reduction in the involvement of the State or public sector in economic activities of a country# &his may be in different forms as e,plained belo)# A# Denationalisation - those units )hich )ere nationalised in the past% to enable the government to have% management and control over them% are handed=over to @he private sector for continued operation#- For e,ample% suppose a commercial )as nationalised by taking it over from a private management% under privatisation% the government voluntarily reducer its hold in the bank by disposing of its o)nership e:uities to the private sector# B# 2nother form of privatisation is allo)ing the entry of private sector in the areas hitherto reserved or meant only for government or public sector# In other )ords% areas )hich are e,clusively for public sector are opened up inviting the private sector to enter# &he e,clusive state monopolies cease to be so

once the private sector is encouraged to enter# For e,ample% the electricity generation and distribution )as hitherto completely under the government% but this areas is being opened up for private sector# C# 6ne more )ay in )hich privatisation is made is by transferring the management and control of certain public sector undertakings or departmental type of organisation to the private sector# &his usually takes place in any one of the follo)ing )ays 0 a# Franchising - the government may provide the technical kno)-ho) and the name and brand name may be provided by the private sector# For e,ample% the millions of S&D IS&D telephone booths are o)ned by the private parties and the telephone link is provided to them by the government# In this case the private parties are franchistd to use the telecommunication links provided by the government# Before @his% the Postal and telegraph departments )ere completely providing this service# b# $overnment may contract out its service and make the service available to the common public through private bodies# For e,ample% rail)ays or air)ays may contract the catering service to an outside hostel or restaurant for a fi,ed period# c# !easing of facilities provided by the government is yet another form of privatisation# For e,ample% a shopping comple, built by the government may be leased out to private parties for a specified period against the% payment of lease rentals#

d# 2llo)ing the private sector to participate in the e:uity of government held company or public sector unit is one more form of privatisation# In this case the government )idely announces its intention of selling the e:uities of a public sector unit inviting the private sector to buy these % e:uities and become partner in the o)nership% management and control of the unit# E# By limiting the scope of public sector% the government may encourage private entry into a particular industry# &his% is another )ay in )hich privatising take place# &he best e,ample is the recent announcement by the government about the sale of !P$ by the private sector units apart from the e,isting public sector units# 7ence% privatisation may mean any of the above mentioned activities resulting in the entry of the private sector in the area completely reserved for the public sector# (o) let us go through the arguments )hich favoured privatisation in India# A# &he large number of public sector units e,isting in India% is accounting for a si/eable budgetary deficit year after year# &hat is these public sector units are run inspite of incurring loss% by meeting the funds re:uirement by them through deficit financing# &his has a direct impact on price level and inhibit the development of the economy# 7ence% privatisation is opted for# B# 9ith the mounting non-development and non-plan government e,penditure% the government faced )ith serious resource

constraint# &his further )idened by the dismal performance by the public sector# 7ence% privatisation is resorted to#

C#

&he poor performance of the heavily invested public sector accounts for increasing capital output ratio in the economy# &his can be checked only through privatisation#

E#

&here has been a very lo) rate return on investment in public sector units# 2gainst an investment of more than 's# A%LL%LLL crores% the return is a mere 's# B%HCL crores in AKKL-KA# &his clearly sho)s the )orst performance of the public sector# +ost of them are running on loss for year# &his is a serious drain of economic resources# &he alternative rectify the situation lies in privatisation#

F#

&he large scale loss of man days through strikes and lock outs in public sector units has already denied the economy )hat is due# "ontinued public sector e,istence )ill only )orsen the situation# 7ence% privatisation is a must#

G#

6ver staffing and lo) productivity are associated )ith public sector units leading to repeated loss# 6ne )ay of overcoming this is privatising the public sector#

H#

9ith the liberalisation policy announced% there is a need for every unit to gear up itself to face the e,ternP competition# &he umbrella protection is removed and the potential of each unit has to reach its peak to survive the competition in the field# Public sector units cannot )ithstand this e,ternal competition%

unless they are run on efficient lines# &he option therefore is to privatise#

&he arguments given above may not be taken as final to mean that privatisation is the panacea for all evils in the industrial sector of India or the ills of public sector# Even private sector is sub4ected to a number of criticisms# Before )e conclude )hether privatisation is a )iser move or not% let us consider the arguments against privatisation# A# In every developing economy% there e,ists a serious economic and social imbalance# &his is )idened by the private sector# &he basic ob4ective of the public sector is to ensure that the material progress in the society is shared by every sector of the society# 6nly for this purpose planning and the public sector are made indispensable# By privatising% the material progress )ill be reaped only by a minor segment of the society and the economic and social imbalance )ill only )iden# B# Privatisation does not ensure any rising level or income or standardisation# Especially )hen the need of the hour is to rise the standard of living% privatisation cannot help to achieve this by itself# Further privatisation cannot be the alternative in several areas of bad performance# Instead of resorting to this alternative% efforts could be made to identify the reasons for bad performance and rectify the situation# C# Being governed by profit ma,imisation ob4ective% the private sector al)ays attempts to minimise its costs in every )ay possible# Sometime this is achieved by using the obsolete

technology#

&his

means

that

the

private

sector

is

fully

responsible for under utilising the available resources# E# It could be easily understood that in India private sector is highly subsidised by the government# &he government invests heavily on infrastructural development like transport% electricity% )ater% etc#% and the private sector 4ust gets its share of the cake and en4oy the profit at the cost of the nation# Public sector also invests heavily on research and development #areas and the kno)-ho) developed is used by the private sector for its profit ma,imisation# F# &here are several areas in )hich the public sector is providing the market for the products from private sector# For e,ample% the number of sodium vapour bulbs% tube bulbs% etc#% re:uired by the government for various purpose is supplied only by the private sector# In this )ay the public sector is directly )orking for the profits of private sector# G# &he important reason for the slo) tardy economic gro)th of our country is the )eak public sector# Instead of strengthening the public sector units to accelerate economic gro)th% privatisation is not the right step# H# 6ne of the inevitable result of privatisation is the emergence of private monopolies and restrictive practices against the interest of the country# Dust because the public monopoly failed% private monopoly cannot be encouraged# Private monopolists do more damage than any good# ob4ected )ith all force# 7ence% privatisation should be

I# 2s regards the fuller utilisation of resources% a study on this in private sector and public sector )ill certainly reveal that the under utilisation is more in private sector than public sector# &his in turn mean deliberate under production and creation of artificial scarcity# 7ence% by privatisation )e )ill only encourage the tendency to under utilise )hereas the e,pectation is to achieve fuller utilisation# K# &he efficiency% being a relative term% has to be ob4ectively measured# &he rate of return on investment in public sector cannot be compared )ith that of private sector# &he private sector uses a different norms of estimating return on investment# Further mere financial performance cannot be taken as the basis for good overall performance# 7ence% one )ill be surprised to find that the public sector in several areas perform better than the private sector# AL# Private sector by nature is interested only in short term :uick profit yielding propositions and not on long gestation ones# 7ence% several basic and key industries cannot be and )ill not be started by private sector# But )ithout these industries the economy cannot move for)ard# 7ence% public sector units have to be continued# AA# Public sector units function under loss% mainly because they are made to )ork under various regulations and controls# &hese are not in any )ay deterring the private sector and so they have complete freedom to determine their policies# Suppose the public sector is also liberated from such oppressive controls and regulations% )e also find it functioning )ith profit and may even do better than the private sector# 7ence% privatisation is only an

attempt to allo) the public sector function freely# Such a policy could be only help to underline die superior performance of the public sector#

&he move to)ards privatisation in India has already started )ith the disinvestment of public sector undertaking# &o start )ith BLN of the interest in public sector undertaking is to be disinvested# &here has been a good response from the market for such a move# It is said that the resources mobilised through such disinvestment )ill be used for paying off the dues to employees opting for voluntary retirement% retrain the labourers and also for restructuring the unit# 9ith the disinvestment of BLN shares of public sector undertakings% their managerial comple,ion )ill undergo a change and they may become commercially successive# But as pointed out by the 'angara4an "ommittee in Dune% AKKC% such disinvestment )ill e,clude the strategically important areas like defence and atomic energy# &he privatising effort is being carried on )ith the hope that the public sector units )ill start operating on commercial lines and 4ustify their e,istence# 7-o #-is#tion &here has been a tremendous change in the global environment in the KL5 Several developments throughout the )orld have resulted in a ne) challenges forcing every country to gear up to face these challenges# &he important changes like unification of $ermany% resurgence of the Far East countries like Singapore% &ai)an% 1orea and 7ongkong% the fall of communist regime in Eastern Europe and the disintegration of 8SS'% as )ell "hina slo)ly becoming an open economy% etc#% have resulted in a ne) )ave of optimism and gro)ing

opportunities around the globe# Every country is trying to sei/e these opportunities by thro)ing open their economy and embarking on global marketing strategies to )in over the )orld# In other)ords% such an approach has made it clear that economic inter-dependence is on the increase and no country can remain a closed economy for ever# &he best e,ample is that of communist "hina% that )hen it has decided to open to receive the 9estern countries% especially in the trade sector% a sea change has taken place in "hina# &he 9estern countries are no) competing among themselves to invest heavily in "hina to reap the fruits of hitherto unaccessible market# $lobalisation in this environment is a policy involving the follo)ing aspects0 E,ports sector forms the nucleus of an economy as through this sector every country tries to ma,imise its e,ternal earnings# It is obvious that )hen e,port sector becomes a significant macro economic aggregate% the industrial sector completely depends on its for its o)n gro)th# 2utomatically the banking% insurance and other related sectors are also integrated )ell )ith the e,port sector# 2ll these mean% that the gro)th of and economy is ine,tricably linked up )ith the gro)th of its trading partners# 7ence% by opening up the market a country also enters into the markets of other countries and it becomes essential for the countries in the )orld% to change their production and marketing orientation to)ards global market# In other )ords% competing and succeeding in the international market becomes the ob4ective rather than confining to internal market# In this process of globalisation% the country concerned has to liberalise all its trade restrictions and barriers paving the )ay for the entry of international giants and thro)ing open challenges to the internal producing and e,porting sector# 7ence% globalisation in a )ay is the back door entry of F'EE &'2DE philosophy of the earlier days#

$lobalisation has been the result of various forces in the international markets such as0 @i) 6ver the period countries are found to have attained similarities in terms of the infrastructural facilities% channels of distribution and the marketing strategies# 7ence% such of those countries )ith these similarities find it beneficial to strengthen their trade ties# @ii) &here has been a huge flo) of funds from country to country )hich has resulted in the opening up of the domestic capital market# 2s a result several ma4or corporate giants raise funds through international capital market thereby facilitating flo) of huge funds from country to country in hitherto unkno)n volume# @iii) &echnology revolution has led to the emergence of cheap techni:ue of production and improved the :uality of the products )hich together remain a force to reckon )ith in the international market# @iv) 2s a conse:uence of all the above development% marketing strategies have become more complicated as in the global market consumers of various countries are to be satisfied# &he best )ay to )in over the consumers in the international scene i_ through best technology and :uality# 9ith the globalisation becoming a reality% producers in the )orld over have started adopting a strategy to ma,imise their gains# (o longer they have constraints in the form of geographical territories# &hey are able to produce at a cheaper cost of production by taking advantage of

cheap labour cost in developing countries% apart from entering into alliance )ith even their traditional rivals as has happened in the case of IB+ and +icrosoft or $eneral +otors and &oyota# 2ll these efforts help the producers to achieve ma,imum efficiency% )hich in turn inspires them to move for)ard to con:uer ne) peaks# 2s regards the developing countries% the globalisation policy is opening up a ne) unlimited opportunities for them to achieve a higher level of economic gro)th# 7itherto they )ere bound by protectionist rule% discriminatory policies% compulsory technology transfer% etc# 2ll these have denied the opportunities for them to enter the global market )hich )ould have sharpened their abilities and helped them to realise their potentials# &he practice used to be bilateral and multilateral agreements thereby satisfying the policy of mutual help and mutual gro)th# But )ith globalisation there is no such necessity as country )ith the right set of policies should be able to stand shoulder to shoulder )ith even developed countries on the strength of their technology and product :uality# In this connection the $eneral 2greement on &ariff and &rade @$2&&) has provided for the gro)th of multilateral trade based on negotiations at different points of time among the trading partners# In the latest negotiations at 8ruguay 'ound has touched upon certain ne) areas like trade in services and trade related aspects of investment and intellectual property rights# &his has created a ne) challenge for the developing countries# &he trend in globalisation has also led to the gro)th of trading blocks at the regional level like European Economic "ommunity% 2sia Pacific Economic cooperation% 8S2-"anada-+e,ico Free &rade 2greement% etc# 2t the same time there has been a big challenge for developing countries vi/# international debt# &o overcome this problem the developing countries should have some preferential treatment so that they )ould be able to increase their e,ports and tide over the

international debt problem# Interestingly% countries like South 1orea% Singapore% &ai)an and 7ong 1ong have improved their e,port performance and have been immensely benefitted through globalisation# 6ther countries like India have entered the race late and over a period they should also be successful# For this ne) challenge thro)n open% India has responded )ell and its policies indicate that India is slo)ly heading for)ard# &hanks to the AKKA policies announced by the government% that India no) has initiated reforms in the field of trade% industrial policy% fiscal policy% etc# &here has been greater reliance on foreign technology to improve the competitive efficiency of the Indian industries# &he days of industrial licenses and controls have gone and are replaced by an atmosphere of liberalisation# &his is done to integrate the Indian economy )ith the international market and global economy# 7o)ever% over these three years% India has not made any significant achievement like South 1orea or the other South East 2sian countries% inspite of having unlimited resources% broad based industrial infrastructure% trained manpo)er% abundant supply of cheap labour% etc# But certainly she is lacking in competitive efficiency )hich is very much re:uired for achieving success in the international scene# $lobalisation certainly offers India great opportunities )hich must be sei/ed# Especially on the follo)ing areas India has to seriously think and devise plans 0 @a) India best suited for large scale production at cheaper cost especially in agro-based industries# 9e have the necessary skill and trained manpo)er in this sector# 9hat is called for is the ability to enter into alliance )ith the partners overseas# &his should be follo)ed by a (ational policy for each sector# 6nce this is done% there is no reason )hy )e cannot also emerge as the South East 2sian countries#

@b) India should develop on its strength i#e#% areas )here it has the talent and potential like kno)ledge-led sectors% agricultural and fashion-led industrial products# 6nce )e identify this strength% our corporate sector engaged in these areas of production% should be encouraged to enter into global market to become Indian multinationals abroad )ith production facility in various part of the globe# @c) &here is a basic necessity for India to attract foreign investment in substantial :uantum# &his called for0 i) ii) to obtain the funds re:uired for large scale production and to create a)areness among the investors abroad about the investment opportunities in India and also to make our producers understand the reality that unless they improve they cannot )ithstand the global competition# 2s on date% India is unable to attract foreign investment because of the competition from "hina% Far East 2sian countries% !atin 2merican countries% etc#% India must come up )ith the necessary policies to outbeat these competition soon# Constr#ints & 9hile moving to)ards the global market% India has to be conscious of certain serious constraints and prepare herself to overcome them# Firstly% India should be a)are of the conse:uences of getting integrated )ith developing economies# &he interdependence is more unfavourable to the developing countries in the sense that )hen there

is economic fluctuations in the developed countries% that is bound to affect the developing countries# India should device methods to insulate itself from such e,ternal shocks and destabilisers#

Secondly% the e,port based economic reforms )ill certainly lead to inflo) of funds But )hat this results in% has to be carefully observed# 6nce the e,port earnings go up% the income increases and the tendency )ill be to import heavily )hich )ill rob the benefits realised# 7ence% efforts should be taken up no) itself to channelise the e,port earnings to)ards e,port boosting efforts and activities.% and discourage the tendency to import &hirdly% there is an increasing danger in the form of the emerging regional trade blocks# "ountries in different regions have completely removed the trade blocks among themselves% thereby they fight against any foreign invasion in the global market# Further such regional blocks have the tendency to create cartel like barriers in the market and ho) such a combined onslaught can be managed by India is another constraint for )hich an ans)er or a strategy should be found# Fourthly% historically free-trade has not benefitted every participant and so there is no guarantee that by globalisation policy India )ould be certainly reap the prospects of higher gro)th# 9ith the kno)ledge of these constraints% the globalisation policy should provide for achieving technological e,cellence in the manufacturing sector# &he competitiveness of the Indian industries must be improved through higher productivity and best :uality output# Efforts% should be made to enter into alliance )ith the partners abroad to get the best out of globalisation# &he Indian corporate sector should

learn to operate in an unregulated environment by strengthening themselves in every )ay possible# 7aving opened up% there is a compulsion that India has to prepare itself on the above lines if at all it should succeed in this globalisaticn efforts# ENVIRONMENT ASSESSMENT AND EVALUATION &he necessary inputs for assessing environment has been already dealt )ith# 9hile any one can compile information on environment% not every one can succeed linking this information and come out )ith meaningful understanding of inputs# &his being a specialist 4ob% different methods are follo)ed at different places for assessing the environment# Broadly these methods could be categori/ed under0 i# verbal and )ritten communication% ii# Searching and scanning iii# Spying and iv# Forecasting# Each method has its o)n merits and demerits# But all of them depend on the ability to cull out information# &he first method involves collection of oral and )ritten information from different sources# &he second one refers to the serious search for information at different places apart from using the internet )ebsites for scanning for information# Spying as a method involves% compiling information in a secret manner from competitors and others so as to suitably position an organi/ation# Forecasting is an e,Searching and scanning iii# Spying and iv# Forecasting# Each method has its o)n merits and demerits# But all of them depend on the ability to cull out information# &he first method involves collection of oral and )ritten information from different sources# &he second one refers to the serious search for information at different places apart from using the internet )ebsites for scanning for information# Spying as a method involves% compiling information in a secret manner from competitors and others so as to suitably position an organi/ation# Forecasting is an e,ercise in )hich based on the understanding of the past and present the future is predicted#

In all the methods determination of information re:uired is the first step# &his is follo)ed by identification of sources of the re:uired information# &hirdly% the collection of information follo)ed by processing of information# Fourthly% the processed data is sub4ected to analyses# &he results of the analysis are then interpreted )ith )hich the necessary action plan is devised# &o e,plain this process% let us consider the S96& 2nalysis# Each letter in the )ord .S96&. stands for0 S - Strength% 9 - 9eaknesses 6 - 6pportunities and & - &hreats# 2ll the information compiled is grouped under these four aspects and based on the outcome% a suitable strategy is developed# &his is e,plained )ith an e,ample about the !eather industry# Suppose )e confine to t)o segments in the leather industry% vi/#% foot)ear segment and leather segment# 7o) to assess their environment is e,plained belo)# S6OT #n#-%sis 1 E0#m.-e of Le#t/er 1 foot2e#r se(ment #n+ -e#t/er (oo+s se(ment &he S96& analysis is undertaken for these t)o segments vi/#% foot)ear segment and leather goods i3 S6OT #n#-%sis of foot2e#r se(ment& Stren(t/s& @a) Finished leather is AF per cent to BL per cent cheaper in India compared to other competitors in the )orld# @b) India has the largest cattle population in the )orld )hich ensures continuous availability of ra) material# @c) &he cost of labour is relatively cheap in this industry in India compared to other manufacturing countries# @d) &he cost of effluent treatment is considerably lesser in India#

@e) &here are specialised institutions like "!'I )hich facilitate access to inputs in manpo)er training% shoe design% :uality control% etc# @f) 6verall cost-competitiveness in India compared to European manufacturers is very high# &he cost difference )orks out to be BF per cent to FL per cent in different processes# 6e#,nesses & a< b) c) 9eight of carcass of Indian cattle is less and so only small hides are available for tanning# 2dvanced machineries re:uired by the industry are mostly imported# 8se of untrained manpo)er has a significant impact on :uality of the output apart from loss of production due to fre:uent labour strikes# d) e) f) g) 7uge losses are incurred due to )astage of hides and skins# Shoe components are largely imported by India# E,istence of poor infrastructure vi/# non availability of po)er% poor transport% etc# &he industry is dominated by the small scale units% )hich fre:uently become sick# &he reservation policy is responsible for this status#

O..ortunities & a< &he removal of import barriers in advanced country markets opened the markets in these countries# b) 6ver the period the flo) of output from the organised sector has been increasing#

c) "!'I has initiated action on a three level tannery modernisation programme )hich should improve the recovery of fallen hides% chrome recovery and effluent treatment% etc# d) &he 's# BBL m leather technology mode mission pro4ect launched by the "ouncil of Scientific and Industrial 'esearch to improve the tannery sector has opened opportunities# e) Muick response manufacturing techni:ues - )herein% instead of assembly line - enable )orkers to do a number of different operations% covering for each other as dictated by flo) of )ork gives higher throughput and :uality% fe)er re4ects# T/re#ts & a< Delivery delays cause loss of margins# b) &he lack of income ta, benefits and e,cise duty relief are the main barriers to the development of the organised sector# c) &here is a constant threat of regulations governing this industry being changed in the importing countries# ii< S6OT #n#-%sis for -e#t/er (oo+s

Stren(t/s & a) 2vailability of large-ra) material base# b) 2bundant availability of cheap labour# c) !ong tradition of processing leather and manufactured goods# d) Strong entrepreneurial culture# e) Significant presence in the global markets# f) E,istence of developed and supportive engineering and chemical industries# g) Improving infrastructural facilities in the form of transport% telecommunication# h) E,porter friendly policy frame)ork#

i) Institutions like "!'I% "!E% etc#% serve as the voice of the industry and also promote design and market development# 6e#,nesses & Inspite of the above strengths% India.s share in )orld leather trade is abysmally lo)# &he follo)ing are the reasons for this 0 a< (early IF per cent of the leather units in India are in the private sector% and are basically small si/ed and semi - mechanised production units# b) Poor :uality ra) material in the form of hides% skins and semi processed leather is a ma4or problem# c) !o) value additions and inefficiency in the industry# d) !ack of focus in marketing our leather products# e) 9eak fashion consciousness# f) E,cessive dependence on a fe) markets# g) Dearth of skilled and trained personnel# h) Slo) paced modernisation% upgradation due to insufficient resources# O..ortunities& a) +obility of manufacturing units to lo) cost countries like India% due to rising )age level in developed countries# b) E,istence of gro)ing middle class )hich provide large domestic market apart from reflecting international fashions )hich )ould ensure that the industry is in line )ith the latest global fashion trends# c) Increasing establishment of 4oint ventures in India by several global companies# d) 'eduction in import duty on chemicals% liberal import of machineries for processing leather

T/re#ts & a) 2 number of countries like "hina pose a threat to India.s advantage in terms of cheap labour# b) Supply of high :uality end-products and strong design infrastructure in spite of high )age levels% )ith competing countries like Italy# c) "hina is strengthened by the integration of 7ong 1ong )ith "hina# d) "hina.s membership in 2PE" implies that the 8S market )ill be much harder to tap# e) Eco - labelling is gaining global acceptance# E,porters )ill have to suitably adapt their product manufacturing processes immediately to even retain current market access# 7aving identified the S96& of both the segments% one should decide about the policies re:uired to e,ploit the opportunities% avoid the threats% build up the strengths and eliminate the )eaknesses# 9hen the assessment is made about the national market all the other relevant inputs like cultural preferences% religious beliefs% demographic aspects% etc#% should all be considered# But assessment of the international scenario is very complicated 4ob% as all information relating to the e,port markets should be available on a day to day basis# 7o)ever% these days% it is possible to get hourly information from every comer of the globe% thanks to the internet )ebsites# REVIE6 ?UESTIONS A# B# India# 9hat do you understand by privati/ation T 9hat are the different forms of itT Discuss the arguments for and against privati/ation in

C# E#

9ith an e,ample% discuss the meaning of globali/ation# 9hy globali/ation has become a reality T In the conte,t of globali/ation% )hat are the areas that India should focus and )hy T Discuss the constraints in this conte,t#

F#

6utline the need for environment assessment# 9hat are the different methodologies available for this purpose T $ive an e,ample for S96& analysis#