Economic Growth and Economic Development

A country's economic health can usually be measured by looking at that country's

economic growth and development. This lesson defines and explains economic growth
and economic development, including the role of U.S. foreign aid.

Economic Growth
A country's general economic health can be measured by looking at that country's
economic growth and development. Let's take a separate look at what indicators
comprise economic growth versus economic development.
Let's first examine economic growth. A country's economic growth is usually indicated
by an increase in that country's gross domestic product, or GDP. Generally speaking,
gross domestic product is an economic model that reflects the value of a country's
output. In other words, a country's GDP is the total monetary value of the goods and
services produced by that country over a specific period of time.

Economic Development
Now let's take a look at economic development. A country's economic development is
usually indicated by an increase in citizens' quality of life. 'Quality of life' is often
measured using the Human Development Index, which is an economic model that
considers intrinsic personal factors not considered in economic growth, such as literacy
rates, life expectancy and poverty rates.
While economic growth often leads to economic development, it's important to note
that a country's GDP doesn't include intrinsic development factors, such as leisure time,
environmental quality or freedom from oppression. Using the Human Development
Index, factors like literacy rates and life expectancy generally imply a higher per capita
income and therefore indicate economic development.

economic development of India

The economic development of India was dominated by socialist-influenced

policies, state-owned sectors, and red tape & extensive regulations, collectively
known as "License Raj". It led the country and its economy isolated from the
world economy. However the scenario started changing from the mid-1980s,
when India began opening up its market slowly through economic liberalization.
The policy played a huge impact on the economic development of India. The
Indian economic development got a boost through its economic reform in 1991
and again through its renewal in the 2000s. Since then, the face of economic
development of India has changed completely.
The economic reform of 1991 played a pivotal role in the economic development
of India. Reaping its benefit, the growth of the country reached around 7.5% in
the late 2000s. It is also expected to double the average income within a decade.
According to the analysts, if India can push more fundamental market reforms, it
will be able to sustain the rate and can even achieve the government's target of
10% by 2011.

India's Economic Development: Role of States

India is world's 12th largest economy and also the 4th largest in terms of
purchasing power parity adjusted exchange rates (PPP). It is the 128th largest in
the world on per capita basis and 118th by PPP. However, states have a major
role to play in the economic development of India. There are few states which
have higher annualized 1999-2008 growth rates comparing to others. The growth
rates for the states like Gujarat (8.8%), Haryana (8.7%) and Delhi (7.4%) are
considerably higher than other states like Bihar (5.1%), Uttar Pradesh (4.4%) and
Madhya Pradesh (3.5%).

Economic Development the Decisive Factors

The economic development of India largely depends upon a few factors, which
prove to be decisive. According to the World Bank, for a better economic
development, India needs to give due priorities in various issues like
infrastructure, public sector reform, agricultural and rural development, reforms
in lagging states, removal of labor regulations and HIV/AIDS.

Agriculture
Agriculture, along with other allied sectors like fishing, forestry, and logging play
a major role in the economic development in India. In 2005, these sectors
accounted for almost 18.6% of the GDP. India holds the second position
worldwide in terms of farm output. It also generated works for 60% of the total
workforce. Though, currently seeing a steady decline of its share in the GDP, it is
still the largest economic sector of the country.
In India, a steady growth has been observed in the yields per unit area of all the
crops since 1950. And the reason behind this is the fact that, special emphasis
was given on agriculture in the five-year plans. In 1965, the country saw green
revolution. Improvements came in the various areas like irrigation, technology,
provision of agricultural credit, application of modern agricultural practices and
subsidies.

India has done considerably well in agriculture and allied sectors. The country is
the worlds largest producer of tea, coconut, cashew nuts, black pepper,
turmeric, ginger and milk. India also has the largest cattle population in the
world. It is worlds second largest producer of sugar, rice, wheat and inland fish.
It is in the third position in the list of tobacco producers in the world. India also
produces 10% of the overall fruit production in the world, holding the first
position in banana and sapota production.

Industrial Output
India occupies 14th position in the world in industrial output. The manufacturing
sector along with gas, electricity, quarrying and mining account for 27.5% of the
countrys GDP. It also employs 17% of total workers. The economic reforms of
1991 brought a number of foreign companies to the Indian market. As a result, it
saw the privatization of several pubic sector industries. Expansion in the
production of FMCG (Fast-moving Consumer Goods) started taking place. Indian
companies started facing foreign competitions, including the cheap Chinese
imports. However, they managed to handle it by cutting down costs, refurbishing
management, banking on technology and low labor costs and concentrating on
new products designing.

Services
In services output, India occupies 15th spot in the world. Around 23% of the total
workforce in India works in service industry. This is also the sector which provides
quick growth with a growth rate of 7.5% during 1991-2000 from 4.5% in 1951-80.
With a substantial growth in IT sector, a number of foreign consumers showing
interests in Indias service exports as India has got low cost, educated, highly
skilled workers in abundance. Besides this, ITES-BPO sector has also become a
big source of employment for a number of youths.

Banking and Finance

Since liberalization, India has seen substantial banking reforms. On one
hand, one could see the mergers of banks, competitiveness and
reducing government interference, on the other hand one can also
see the presence of several private and foreign players in the
banking and insurance sectors. Currently the banking sector in India
has got maturity in terms of supply, reach-even and product range.
The Indian banks are also said to have clean, transparent and strong
balance sheets comparing to their Asian counterparts.

Comparison chart
Economic Development
Economic development implies changes in
income, savings and investment along with
Implications progressive changes in socio-economic
structure of country (institutional and
technological changes).
Development relates to growth of human
capital indexes, a decrease in inequality
Factors figures, and structural changes that improve
the general population's quality of life.

Economic Growth
Economic growth refers to an
increase in the real output of goods
and services in the country.

Growth relates to a gradual increase

in one of the components of Gross
Domestic Product: consumption,
government spending, investment, net
exports.

Qualitative.HDI (Human Development

Quantitative. Increases in real GDP.
Index), gender- related index (GDI), Human
Measurement
poverty index (HPI), infant mortality,
literacy rate etc.
Effect

Brings qualitative and quantitative changes

in the economy

Economic development is more relevant to

measure progress and quality of life in
Relevance developing nations.

Scope

Concerned with structural changes in the

economy

Brings quantitative changes in the

economy
Economic growth is a more relevant
metric for progress in developed
countries. But it's widely used in all
countries because growth is a
necessary condition for development.
Growth is concerned with increase in
the economy's output

Difference between Economic

Growth and Development
Economic growth measures an increase in Real GDP. (real Output). GDP is a
measure of the national income / national output and national expenditure.
It basically measures the total volume of goods and services produced in an
economy.

Economic Development

Development looks at a wider range of statistics than just GDP per capita.
Development is concerned with how people are actually affected. It looks at
their actual living standards
Measures of economic Development will look at:

Real income per head GDP per capita

Levels of literacy and education standards
Levels of health care e.g. number of doctors per 1000 population
Quality and availability of housing
Levels of environmental standards

Factors affecting Economics growth in developing

countries

Levels of infrastructure e.g. transport and communication

Levels of corruption
Educational standards and labour productivity
Labour mobility
Flow of foreign aid and investment
Level of savings and investment

Economic Growth without Development

It is possible to have economic growth without development. i.e. an increase
in GDP, but most people dont see any actual improvements in living
standards.

1.

2.
3.

4.

5.

6.

Economic growth may only benefit a small % of the population. For

example, if a country produces more oil, it will see an increase in GDP.
However, it is possible, that this oil is only owned by one firm, and therefore,
the average worker doesnt really benefit.
Corruption. A country may see higher GDP, but the benefits of growth
may be siphoned into the bank accounts of politicians
Environmental problems. Producing toxic chemicals will lead to an
increase in real GDP. However, without proper regulation it can also lead to
environmental and health problems. This is an example of where growth
leads to a decline in living standards for many.
Congestion. Economic growth can cause an increase in congestion.
This means people will spend longer in traffic jams. GDP may increase but
they have lower living standards because they spend more time in traffic
jams.
Production not consumed. If a state owned industry increases output,
this is reflected in an increase in GDP. However, if the output is not used by
anyone then it causes no actual increase in living standards.
Military Spending. A country may increase GDP through spending
more on military goods. However, if this is at the expense of health care and
education it can lead to lower living standards.

National Income is the money value of all final goods and services
produced in an economy during a financial year. At the level of
an economy, value of fined goods and services is equal to the
total income of all factors of production viz labour, capital, land
and entrepreneurship.
This total income is equal to total expenditure on goods and services.
Therefore, in an economy,

There are different measures of national income like Gross National

Product (GNP), Net National Product (NNP), Gross Domestic Product
(GDP), Net Domestic Product (NDP), etc.
These are often used interchangeably though conceptually there is
some difference among them. Difference between GNP and NNP arises
because of depreciation (consumption of fixed capital).

Reasons for Growing

Importance of National
Income
The growing importance of national income studies in recent years
is due to the following reasons:
National Income is generally believed to be the most important single
index of the overall economic situation of a country and as such
commands a great deal of public interest. An individual as well as the
government, have to maintain the accounts of their incomes and
expenditures in one form or another. They must have a clear idea as to
the sources of income and the heads of expenditure.
Accounts maintained by private individuals are called Private
Accounting, whereas the account of the entire economy is called Social

Accounting. In order to have an accurate idea of the economic progress

in different sectors and sub-sectors of an economy it is but essential to
maintain social or national accounts. It is the foremost duty of a welfare
government to know the changes in national income and per capita real
income in order to have a proper assessment of the economic progress
in the economy.
Since the publication of Keynes General Theory of Employment,
Interest and Money in 1936, there has been a change over from microanalysis to macro-economy considerations like the aggregate national
income, national consumption, national saving and investment. There is
a shift from the constituent parts of an economy to the economy as a
whole.
The development of modern macro-economic analysis has assumed
great importance after the publication of Keynes General Theory.
Before its publication, the study of national income remained confined to
a few academic scholars. The study of national income is basic to study
of Keynesian theory of employments as the total performance of an
economy is judged by an increase in income and employment.
The preparation of social accounts is by no means as easy task, as
there is good deal of dependence on statistical data. Such bodies of
data, treating different aspects of the nations economic activity are the
national income and product accounts, the input output table, the flow of
funds statements, the balance of payments and the national balance
sheets.

1. Economic policy:
National income figures are an important tool of macro-economic
analysis and policy, national income estimates are the most
comprehensive measures of aggregate economic activity in an
economy. It is through such estimates that we know the aggregate yield
of the economy and lay down future economic policy for development.

2. Economys structure:
National income statistics enable us to have a correct idea about the
structure of the economy. It enables us to know the relative importance
of the various sectors of the economy and their contribution towards
national income. From these studies we learn how income is produced
and how it is distributed, how much is spent, solved or taxed.

3. Economic planning:
National income statistics are the most important tools for long-term and
short- term economic planning. A country cannot possibly frame a plan
without having a prior knowledge of the trends in national income. The
Planning Commission in India also kept in view the national income.
The national income estimate before formulating the five year plans.

4. Inflationary and deflationary gaps:

National income and national product figures enable us to have an idea
of the inflationary and deflationary gaps. For accurate and timely antiinflationary and deflationary policies, we need regular estimates of
national income.

5. National expenditure:

National income studies show as to how national expenditure is

dividend between consumption expenditure and investment
expenditure. It enables us to provide for reasonable depreciation to
maintain the capital stock of a community. Too liberal allowance of
depreciation may prove harmful as it may unnecessarily lead to a
reduction in consumption.

6. Distribution of grants-in aid:

National income estimates help a fair distribution of grants-in-aid by the
federal governments to the state governments and other constituent
units.

7. Standard of living:
National income studies help us to compare the standards of living of
people in different countries and of people living in the same country at
different times.

8. International sphere:
National Income studies are important even in the international sphere
as these estimates not only help us to fix the burden of international
payments equitably among different nations but also they enable us to
determine the subscriptions of different countries to international
organizations like U.N.O., I.M.F., I.B.R.D., etc.

9. Budgetary policies:
Modern governments try to prepare their budgets within the framework
of national income data and try to formulate anti- cyclical policies
according to the facts revealed by the nation income estimates. Even

the taxation and borrowing policies are so framed as to avoid

fluctuations in national income.

10. Public sector:

National income figures enable us to know the relative roles of public
and private sectors in the economy. If most of the activities are
performed by the state, we can easily conclude that public sector is
playing a dominant role.

11. Defence and development:

National income estimates help us to divide the national product
between defense and development purposes. From such figures, we
can easily know how much can be spread for war by the civilian
population.

Today, national income statistics are collected by all the countries of the world for a number of
years. Raising national income is the important goal of all economic activity. Economic welfare of
a country depends upon what goods and services are available for the consumption of its
individuals. The changes in national income statistics show how the economy is developing and
enables the government to lay down the appropriate economic policy necessary under the
circumstances. With the help of national income statistics it is possible to chart cyclical
movements, find out the inflationary gap, measure economic growth and development, and
evaluate the countrys material standard of living in comparison with other countries. The
following are the main uses of national income.
1. Since income is a flow of wealth changes in the national income give some indication
of economic welfare.

2. National income is used to compare standards of living in different countries.

3. National income figures are used to measure the rate of growth of a country.

4. The national income accounts make it possible for an analysis of the behaviour of the
different sectors of the economy.

5. Inflationary and deflationary pressures can be estimated with the help of national
income statistics.

6 National income statistics can be used to forecast the level of business activity at later
date, and to find out trends in other annual data.

7. The national income figures are useful in providing a correct sense of proportion about
the structure of the economy.

8. In war time, the study of components of national income is of great importance

because they show the maximum possible production possibilities of the country.

9. National income statistics can be used to determine how an international financial

burden should be an apportioned between different countries. The quantum of national
income measures the ability of a country to pay contributions for international purposes,
just as the income of a person measures his ability to pay for the upkeep of his country.

10. Above all the national income statistics are used for planned economic development
of a country. In the absence of such data, planning will not be possible.

Methods of measuring national income:-

1. income method:In this method, we measure national income on the basis of factor incomes of people,
business organization and the government of the country. The factor incomes mean
rent, wage, interest and profit. These are the payments made to or received by land,
labor, capital and organization respectively and is used in the country in a year.
Moreover, we add net factor incomes earned from abroad. There are people selfemployed too. Their income is in mixed form. Thats; why, it is added separately. Profit,
interest and rent earned by government in a year is added as property and
entrepreneurial income of government. The savings of non-departmental organizations
too is added separately as factor income. The sum of factor incomes in the country gives

NDP at FC. To NDP at FC we add net factor income from abroad and we get NNP at FC or
NI as following.
2. expenditure method
in this method, national income is calculated summing up the expenditures of
household sector, business sector, government sector and foreign trade sector. The
expenditures of these sectors are called consumption expenditure, investment
expenditure, government expenditure and net export. However, the expenditure may
be on goods produced in previous years. Thats why; we adjust it subtracting opening
inventory and adding closing inventory. If we sum op the expenditures we obtain GDP at
MP .then from GDP at MP we subtract depreciation and net indirect tax as following to
get NI
Consumption expenditure of household sector
Government expenditure on final goods
Investment expenditure ( private +public)
Foreign trade sector (export-import)
Change in inventory (closing-opening)
Gross domestic product at market price
Less: depreciation
Net factor income from abroad
Less: net indirect tax
National income
3. Product method:
In this method, we measure NI on the basis of monetary values of final products or
value added in each stage of production and distribution. The economy (country) is
divided into 3 different sectors namely: primary, secondary, tertiary.
Primary: agriculture, forestry, livestock rearing etc.
secondary: health, sanitation, transportation, education etc
tertiary: tourism, sports, music etc.
Types of method
A. final product method
In this method, NI is measured on the basis of monetary values of final product.
Firstly, we find monetary values of final product of primary, secondary and tertiary
sectors. Sum of the final products gives GDP at MP. To GDP at MP we add net factor
income from abroad and from it we subtract depreciation and net indirect tax to find NI.

Final product of primary sector

Final product of secondary sector
Final product of tertiary sector
GDP at MP
Depreciation
Net indirect tax
Net factor income from abroad
NI
B. value added method:
In this method, NI is measured adding the values added in each stage of production and
distribution. Firstly we add values added in primary, secondary and tertiary sectors. Sum
gives GDP at FC. From that we subtract depreciation and to it we add net factor income
from abroad to find NI.
Value added in primary sector
Value added in secondary sector
Value added in primary sector
GDP at FC
Depreciation
Net factor income from abroad
NI

Thus, these are the methods of measuring national income

There are many non monetary income and output in developing countries like owner
occupied house, self consumed agriculture products etc. due to non monetary nature
they arent included in national income
2. Problems of double counting
Only final goods and services should be included in national income. But it is arduous to
distinguish between final goods and intermediate goods. Intermediate goods also can
be used for final consumption. There are possibilities of double counting
3. Underground economy

Under ground economy consists of illegal transactions like drugs, gambling, smuggling
etc. they are not included in national income thus income become less than actual
amount
4. Petty production
There are large numbers of petty producers and it is difficult to include their production
in national income because they dont maintain any account.
5. Public services
Public services like general administration, police, and army services are difficult to
evaluate and they become hard to include in national income accounting
6. Illiteracy and ignorance
If majority of people are illiterate and ignorant, they cant keep the records of
production activities accurately. Hence, it is difficult to get correct information.
7. Capital gains or losses
When price of any assets alters then owner can make gains or losses. Such gains or
losses are not included in national income.
8. Wages and salaries paid in kind
Payments made in kind maynt be included in national income. But facilities given in
kind are calculates as supplements of wages and salaries on the income side
9. Conceptual problem
The major obstacles is whether to include the income generated within country or even
generated abroad in national income and which method should be used in measuring
national income
10. Transfer payments
Individual get pension, unemployment, allowance, windfall gains, subsidies on many
measures , but they create difficulty in the measurement of national income.

difficulties in calculation of national

income?
The measurement of national income is beset with difficulties. In under
developed countries these difficulties are more prominent. The
difficulties in calculation of national income can be discussed as
follows:
Conceptual difficulties: there has been a difference of opinion
regarding the term nation in the concept of national income. It has to
define exactly, whether it is geographical entity of the country or the
nationals including those residing abroad. Since national income
constitutes a quantitative measure of economics activity rather than
verbal description. Since everything has to be equated to the money

value, services produced in economy for love of humanity, affection

and philosophy could not be taken into consideration in calculating
national income.
Overlapping of occupations: in backward economies there is an
overlapping of occupation in rural sector which makes it difficult to
know the income by origin. A worker in a peak season works in a farm,
drives a country cart in off season. Takes up unskilled work, etc.
similarly, the village money lender combines his profession with the
cultivating of his farm.
Difficulty in value estimation: in backward areas, the
cultivators, artisans and cottage industry workers do not have a fair
idea of the expenses of their occupation. Hence the net value of their
products cannot be estimated precisely.
Non- monetized sector: barter dealing and non-monetized sector
creates the problem of inputting the value of their produce and
services and by guess work and approximation.
Incomplete government records: due to ignorance and illiteracy
in backward areas, the data may not be available and if available, may
be unreliable. Also, the figures furnished by government officials may
not be from reliable sources and data is not current.
Problems in agricultural sector: in agricultural activities there is
a good deal of guess work in data relating to cropwise production and
in figures relating to animals and forest products.
Problems in industrial sector: data relating to output, cost, etc.
are available only in big units. The small units do not maintain these
figures correctly. The village money lenders and indigenous bankers
maintain absolute secret of their and they do not furnish correct
information.
Non-applicability of a uniform formula: in a big country where
wide disparities and regional differences, a uniform formula cannot be
applied. The data of one region cannot be applied to another region
with minor modification. Every region would be a separate entity
requiring specialized approach suited only to that region.
Double-counting: the error of double-counting is another obstacle
to be avoided in the calculation of national income.
Inefficient data collection: the machinery for collecting
statistical data may not be efficient. The investigators, preparation of
adhoc figures, making sample surveys, etc.

uses of national income statistics?

National income figures help governments in planning, policy making,
preparation of budgets and forecasting the level of economic activity.
Formulation of economic policies: national income statistics are
valuable instruments of economic analysis and a guide to economic
policies to be pursued. It is more useful in context of planning and
formulation of realistic plans.
Studying economic structure: it gives an idea of the structure of
the economy. It helps to make inter- sectoral comparisons and to study
the rate of growth of the economy. The growth of national income is an
index of the growth of the productive capacity of an economy.
Inter- sectoral comparisons: it helps to study inter-sectoral
growth. Such comparisons are useful. Share of various sectors can be
studied to find out structural defects and weaknesses of the economy.
Indicator of economic welfare: it enables us to study per capita
income or per capita consumption which are general indicators of
economic growth. But it is not helpful in revealing distribution of
income in the society.
Making international comparisons: national income estimates
enables us to make international comparisons and standard of living of
people.
Contribution to international institutions: it shows the capacity
of a country to bear some common burden of international institutions
like the U.N.O.

Trends in National Income Growth in India since 1951

1950 to mid-1970s: Income poverty reduction shows no discernible trend. In 1951, 47% of
India's rural population was below the poverty line. The proportion went up to 64% in 1954-55; it
came down to 45% in 1960-61 but in 1977-78, it went up again to 51%.

Mid-1970s to 1990: Income poverty declined significantly between the mid-1970s and the end
of the 1980s. The decline was more pronounced between 1977-78 and 1986-87, with rural
income poverty declining from 51% to 39%. It went down further to 34% by 1989-90. Urban
income poverty went down from 41% in 1977-78 to 34% in 1986-87, and further to 33% in 198990.

After 1991: This post-economic reform period evidenced both setbacks and progress. Rural

income poverty increased from 34% in 1989-90 to 43% in 1992 and then fell to 37% in 1993-94.
Urban income poverty went up from 33.4% in 1989-90 to 33.7% in 1992 and declined to 32% in
1993-94 Also, NSS data for 1994-95 to 1998 show little or no poverty reduction, so that the
evidence till 1999-2000 was that poverty, particularly rural poverty, had increased post-reform.
However, the official estimate of poverty for 1999-2000 was 26.1%, a dramatic decline that led to
much debate and analysis. This was because for this year the NSS had adopted a new survey
methodology that led to both higher estimated mean consumption and also an estimated
distribution that was more equal than in past NSS surveys. The latest NSS survey for 2004-05 is
fully comparable to the surveys before 1999-2000 and shows poverty at 28.3% in rural areas,
25.7% in urban areas and 27.5% for the country as a whole, using Uniform Recall Period
Consumption. The corresponding figures using the Mixed Recall Period Consumption method
was 21.8%, 21.7% and 21.8% respectively. Thus, poverty has declined after 1998, although it is
still being debated whether there was any significant poverty reduction between 1989-90 and
1999-00. The latest NSS survey was so designed as to also give estimates roughly, but not fully,
comparable to the 1999-2000 survey. These suggest that most of the decline in rural poverty over
the period during 1993-94 to 2004-05 actually occurred after 1999-2000.

Role of agriculture in Indian economy

Agriculture is the main sector of Indian economy which is amply powered by the
following points:1. Share in National Income: The contribution from agriculture has been
continuously falling from 55.1% in 1950-51 to 37.6% in 1981-82 & further
to 18.5% in 2006-07. But agriculture still continues to be the main sector
because it provides livelihood to a majority of the people.
2. Largest Employment Providing Sector: in 1951, 69.5% of the working
population was engaged in agriculture. This percentage fell to 66.9% in
1991 & to 56.7% in 2001. However, with rapid increase in population the
absolute number of people engaged in agriculture has become
exceedingly large.
3. Provision of Food Surplus to the Expanding Population: Because of
the heavy pressure of population in labor-surplus economies like India &
its rapid increase the demand for food increases at a fast rate. Therefore,

unless agriculture is able to continuously increase its surplus of foodgrains, a crisis is likely to emerge. Experts foresee that by the end of 11 th
five year plan (i.e., 2011-2012), the demand for food-grains is expected to
increase to 280.6 million tons. Meeting this demand would require 2%
growth per annum. The challenge facing the country is clear as during the
last 10 years the food-grains have been growing at a meager 0.48%.
4. Contribution to Capital formation: There is a general agreement on the
importance of Capital Formation in economic development. Unless the
rate of Capital Formation increases to a sufficient high degree, economic
development cannot be achieved. Agriculture can play a big role in
pushing the Capital Formation in India. Rural sector can transfer labor &
capital to the industrial sector which can be effectively used to increase
the productivity in the latter.
5. Providing Raw Material to industries: Agriculture provides raw materials
to various industries of national importance. Sugar industry, Jute industry,
Cotton textile industry, Vanaspati industry are examples of some such
industries which depend on agriculture for their development.
6. Market for Industrial Products: Since more than two-thirds of the
population of India lives in rural areas, increased rural purchasing power is
a valuable stimulus to industrial development.
7. Importance in International Trade: Agriculture constitutes about 75% of
the total exports of the country. Such is the importance of agriculture as far
as earnings of foreign exchange are concerned.

Industrialization in India from

the late 1800s to 1947

Introduction

In 1750, India produced nearly 25 % of the world's manufacturing

output and was only outdone by China, which constituted 32.8 %. By 1880
however, India only took up 2.8 % of world exports (1), and after its
independence from British colonization in 1947, it was one of the most
poverty-stricken regions in the world. India's economic deterioration is
particularly ironic, considering the industrial boom that Britain experienced
during the same era (2). Nevertheless, from 1750 to 1947 India experienced
modernization of its economy in various areas including agriculture, factory
production, finance, and even film production. Though India did lose its edge in
the textile trade and did in fact experience de-industrialization (3), its thriving
"Bollywood" cinema market and automobile production in Hindustan are some
notable examples of economic modernization.

Industrialization
Industrialisation is the process of manufacturing consumer goods and capital goods and of
building infrastructure in order to provide goods and services to both individuals and businesses.
As such Industrialisation plays a major role in the economic development of underdeveloped
countries like India with vast manpower and varied resources.

phases of Industrialization
The process of industrialization, though complex, can be divided into three
distinct phases.
The first phases consists in a division of labor. Doing so allows not only for the
production of a diverse array of products but also for the development of
specialization within the working population. The operational level of this phase
remains rather small.
The second phase of industrialization, however, allows the process to increase
in scale. During the second phase, workers who have developed specializations
during the course of the first phase are gathered into a collective setting:
factories. The presence of factories in the industrial process certainly increases
the efficiency with which workers finish their products. In addition, factories
allow for much greater productivity. This phase marks the beginnings of large
scale - and even national - labor and industrial systems.

The third phase of industrialization capitalizes on the results of the first two.
Where the second phase introduces the increased efficiency and productivity of
the factory environment, the third phase introduces machinery into the mix.
This further increases productivity and efficiency, and the design of machinery
also contributes to the importance of specialization in industry. The presence of
machines also marks the culmination of large scale industry.

Need for Industrialisation in India

Industrialization plays a significant role in the process of economic development. The
examples of developed countries indicate that there is a direct relationship between high
level of income and industrial development.
The less developed countries are generally primary producers and import industrial output.
With industrialization of their own economy they need not import industrial product from
outside and this helps in reducing the trade gap.
Industrialization also helps in satisfying a variety of demands of the consumer's. With
modernization of the economy the demand for industrial product has increased considerably.
Industrialization brings a change in the socio-cultural environment of the economy. It makes
people dynamic, hard-working, mobile, skillful, efficient, and punctual. It brings a change in
the way-of life of the people and makes people more commercial. It also provides security to
the economy by making it self-dependent.
Thus industrialization in a nutshell acts as a catalyst in the smooth process of economic
development.

ROLE OF INDUSTRIALISATION IN INDIA

1. Raising Income: The first important role is that industrial development provide a secure basis
for a rapid growth of income. The empirical evidence suggests a close correspondence between
the high level of income and industrial development. In the industrially developed countries, for
example, the GNP per capita income is very high at around $ 28,000. Whereas for the industrially
backward countries it is very low at around $ 400 only.
2. Changing the Structure of the Economy: In order to develop the economy underdeveloped
countries need structural change through industrialization. History shows that in the process of
becoming developed economy the share of the industrial sector should rise and that of the
agricultural sector decline. This is only possible through deliberate industrialization. As a result,
the benefits of industrialization will trickle down to the other sectors of the economy in the form of

the development of agricultural and service sectors leading to the rise in employment, output and
income.
3. Meeting High-Income Demands: Beyond certain limits, the demands of the people are
usually for industrial products alone. After having met the needs of food, income of the people are
spent mostly on manufactured goods. This means the income-elasticity of demand for the
manufactured goods is high and that of agricultural products is low. To meet these demands and
increase the economys output underdeveloped countries need industrialization.
4. Overcoming Deterioration in the Terms of Trade: Underdeveloped countries like India need
industrialization to free themselves from the adverse effects of fluctuations in the prices of primary
products and deterioration in their terms of trade. Such countries mainly export primary products
and import manufactured goods. The prices of primary products have been falling or are stable
whereas the prices of manufactured products have been rising. This led to deterioration in the
terms of trade of the LDCs. For economic development such countries must shake off their
dependence on primary products. They should adopt import substituting and export oriented
industrialization.
5. Absorbing Surplus Labour (Employment Generation): Underdeveloped countries
like India are characterized by surplus labour and rapidly growing population. To absorb all the
surplus labour it is essential to industrialise the country rapidly. It is the establishment of
industries alone that can generate employment opportunities on an accelerated rate.
6. Bringing Technological Progress: Research and Development is associated with the
process of industrialization. The development of industries producing capital goods i.e.,
machines, equipment etc., enables a country to produce a variety of goods in large quantities and
at low costs, make for technological progress and change in the outlook of the people. This
results in bringing about an industrial civilization or environment for rapid progress which is
necessary for any healthy economy.
7. Strengthening the Economy: Industrialisation of the country can provide the necessary
elements for strengthening the economy. In this regard the following points may be noted.
(a) Industrialisation makes possible the production of goods like railways, dams, etc. which
cannot be imported. These economic infrastructures are essential for the future growth of the
economy.
(b) It is through the establishment of industries that one can impart elasticity to the system and
overcome the historically given position of a primary producing country. Thus, with
industrialization we can change the comparative advantage of the country to suit its resources
and potentialities of manpower.
(c) Through industrialization the requirements for the development of agriculture can be met. For
example, improved farm-implements, chemical fertilizers, storage and transport facilities, etc.,
appropriate to our own conditions can be adequately provided only by our own industries.

(d) The industrial development imparts to an economy dynamic element in the form of rapid
growth and a diversified economic structure which make it a progressive economy.
(e) Providing for Security: Industrialisation is needed to provide for the countrys security. This
consideration becomes all the more critical when some international crisis develops. In such
situation, dependence of foreign sources for defence materials is a risky affair. It is only through
industrial development in a big way that the national objective of self-reliance in defence materials
can be achieved.

Latest Trends Of Industrialization In India

India has seen a rapid rise in industrialisation in the past few decades, due its
expansion in markets such as pharmaceuticals, bio-engineering, nuclear
technology, informatics and technology-oriented higher education. These latest
trends have made India more globally-minded as their desire to trade with the
world increases.
It is said that India has deliberately targeted markets they know they can make
instant in-roads into. Industries such as pharmaceuticals and bioengineering have been seen as ideal in increasing the national incomeusing the
country's new-found expertise. Also, India now exports a whole variety of
products and knowledge, including petroleum products, textile goods, jewellery,
software, engineering goods, chemicals, and leather merchandise.
There are a lot of comparisons drawn between India's industrialisationmodel and
that of China. Both countries have realised the importance of theexport
market and how to capitalise on their huge workforces - allowing them to become
leading powers in the global market on several fronts. Western countries look
favourably to countries such as India and China due to their low production
costs in comparison to European and US prices; again a favourable characteristic
allowing the countries to build their economies.
The industrialisation of India looks set to continue for some time and the result
could well be that India becomes a major player in many global markets in the
future.

Impacts of Industrialization in India

India is a predominantly agricultural country. The well-being of Indian economy is directly
connected with the welfare of her masses dwelling in the rural areas. With the scientific and
industrial development, we had to adopt a vigorous industrial policy. The introduction of
heavy industries have both positive and negative impact on Indian society and economy.
Government launched massive economic reforms: Our Government introduced
New Economic Policy in 1991. The vigorous economic Plans enshrined the industrial
schemes and projects.

Positive Impact of Industrialization

Low cost of production: The introduction of industries have led to the decrease in the
cost of production of many essential items. The decrease in cost is the result of economy of
Large scale production. It allows to save time and labour. Industrial goods have become
more affordable for common people.
Self-sufficient: Before independence, we used to spend hundreds of millions of rupees
over import of cloth only, as we had no heavy industries in the real sense of the term. With
the advancement of textile industry in our country, we are able to manufacture clothes at a
much lower cost. In this way, we made ourselves self-sufficient in providing our basic needs.
Employment: Large industries need thousands of skilled and semi-skilled workers. It
provides massive employment opportunity for a large chunk of people.
Improved Agriculture: In the modern age efficient agricultural system is that, which is
done with the help of machine and mechanical devices. For this purpose, we have to adopt
the latest Industrial system.
Defense and security: But we must keep pace with the march of time. We have to
defend our country against foreign aggression. We must manufacture latest weapons, for it is
most unwise to depend upon foreign aid for defense of ones country.

Negative Impact of Industrialization

Mechanized, heavy and large-scale industries have negative impact which adversely affects
the environment, society and economy of this country.
Decline of cottage industry: Throughout, India has been proud of her rural cottage
industries. The silk produced by the village-weavers had been a source of attraction all over
the world. With the advent of heavy mechanical industries began the chapter of the decline
of our village cottage industries.
Mass migration from rural areas: Another attack is that with the creation of heavy
mechanized industries in the urban areas, the rural population would start mass-migration
into town and cities, thereby making the unemployment problem more acute and complex.

Depletion of natural resources: Due to industrialization, there is constant depletion

of natural resources. Many industries are powered by thermal power plants that consumes
coal. Since, large industries are spread over many acres of land, agricultural lands and
forests are often cleared to make available the required land.
Pollution: Large industries emits many harmful gases into the environment. The
introduction of harmful chemicals into air leads to air-pollution. The noises that it produces
leads to noise-pollution.
Increase of war-like situation: Out of the degenerating effects of heavy industries is
born contention. In developed nations, most of these Heavy industries are engaged in the
production of war materials. With a lot of war weapons in hands, there has been an increase
in war-like situation among countries.

Problems of Industrialization
in India
(i) Gap between Targets and Achievement:
The review of targets and achievements of every plan shows that there
is a great difference in both. The rate of growth is very slow than the
fixed targets. For instance, Fifth Plan achieved 5.5 per cent growth rate
against its target of 7.9 per cent. Similar trend was found in the Sixth
Plan.
It attained 5.9 per cent growth rate while it fixed 7 per cent. In particular,
industrial sector failed to absorb a higher proportion of labour force. In
the following Plans also, there is a gap between targets and its
achievements. Therefore, gap between targets and achievements is a
matter of deep concern for all of us.
(ii) Under Utilization of Capacity:

A large number of industries suffer from under-utilization of capacity.

According to an estimate, it varies between 50 to 60 per cent.
(iii) Industrial Sickness:
The incidence of sickness in large and medium scale industries has
increased manifold in recent years. It not only aggravates the problem
of unemployment but also creates adverse climate for industrial
investment.
(iv) Elite Oriented Consumption Pattern:
Another unfavorable aspect that the production of industrial goods only
caters to the needs of rich consumers while the requirements of
common masses have been marginally expanded.
(v) Growth of Big Houses:
In spite of various policy measures adopted by the government (MRTP
Act and licensing policy), the share of big houses in the total assets of
the private corporate sector has increased. This resulted in the
concentration of economic powers in few hands.
(vi) Increase in Regional Imbalances:
Perhaps, the most serious weakness is that industrial development has
remained concentrated in a few advanced states of Maharashtra,
Gujarat, West Bengal and Tamil Nadu. These states accounted for a
very large proportion of about 80 per cent of the industrial activities of
the country. Other states get only a small share (Bihar, Orissa and
Madhya Pradesh).
(vii) Non-Proper Employment Planning:

Another constraint has been noticed in the industrialization of the

country as it lacks a proper employment planning. It favoured capitalintensive techniques while the need of the hour is to adopt labourintensive techniques in the country.
(vii) Poor Productivity Performance:
The productivity performance in the industrial sector has been poor and
dismal. According to the study made by the Dr. Hallis Chenery who
observed covering 40 countries, that India is at the bottom in terms of
increasing capital output ratio in manufacturing sector.

Advantages of industrialization

Industrialization in economic condition marked by an increase in the

importance of industry to an economy. During the process of
industrialization per capita income increases and productivity levels
increase
The advantages of industrialization are as follows:
1. employment opportunity
2. affordable price
3. development of skills
4. utilization of resources

5. earning of foreign currency

1. employment opportunity :- Industries have provided employment to
people. As we know an industry requires skilled, semi skilled and
unskilled manpower. so people having different abilities are employed
In the context of our country Nepal industrialization has been of great
importance in reducing unemployment. According to the data it is found
that even now 48% of total population of Nepal are unemployed. So an
industry can be of great help in reducing unemployment.
2. affordable price :- An industry produces goods in large quantities so
the production cost is reduced and the price becomes affordable like for
example a computer is a demand of people it is imported from other
countries the costing is definitely very high but if the same computer is
started to be produced in own country the price will be reduced and it
will be affordable to everybody.

3. development of skills:- An industry develops skills and ability in an

individual, so we can say industry is a factor which is responsible to built
up a countrys manpower. It makes a person specialize in a particular
field. For example a person is employed in a noodle factory he/she can
learn the skills to manufacture noodles and he/she can start own noodle
business. so an industry is of great importance in developing individual
skills
4. utilization of resources: Industry utilizes the resources present in
country, and produce finished products which are of affordable and best
quality. For example there is sufficient sugar cane present in the Terai
side of Nepal so it can be used to produce sugar in the sugar industry.
5. earning foreign currency :- If the goods are produced in bulk
quantities then the goods can even be used for export purpose which

will help in earning foreign currency. Our country Nepal is specialized in

production of carpets and pashmina shawls so it exports the products in
order to earn high foreign currency.

PUBLIC SECTOR IN INDIA

Meaning of Public Sector

Public Sector organisations are owned and controlled by the government (or local
government). They aim to provide public services, often free at the point of delivery eg the
NHS. There are particular goods, called merit goods and public goods which cause problems
for the private sector, and so they are often better provided by the public sector.
At the time of independence, India was backward and underdeveloped basically an agrarian
economy with weak industrial base, high rate of unemployment, low level of savings and
investment and near absence of infrastructural facilities. Indian economy needed a big push. This
push could not come from the private sector because of the lack of funds and their inability to
take risk with large long-gestation investments. As such, government intervention through public
sector was necessary for self-reliant economic growth, to diversify the economy and to overcome
economic and social backwardness.

OBJECTIVES: The public sector aims at achieving the following objectives:

i.
ii.

To promote rapid economic development through creation and expansion of infrastructure

To generate financial resources for development

iii.
iv.
v.
vi.
vii.

To promote redistribution of income and wealth

To create employment opportunities
To promote balanced regional growth
To encourage the development of small-scale and ancillary industries, and
To promote exports on the one side and import substitution, on the other.

Characteristics of Public Sector

1. State Ownership:
The enterprise ownership has to be vested with the State. It could be in the nature of Central,
State or local government ownership or any instrumentality of the state too can have the
ownership of public enterprise.
2. State Control:
Public Enterprise is controlled by the Government both in its management and functioning.
The Government has the direct responsibility to manage the affairs of the enterprise through
various devices and exercises control over it by means of a number of agencies and
techniques.
3. Public Accountability:
Public Enterprises owe accountability to people as they are funded through public money.
This accountability is realised through legislature and its committees, ministers, audit
institutions and other specialised agencies.
4. Autonomy:
Public Enterprises function with utmost autonomy under given situations. They are free from
day to day interference in their affairs and management.
5. Coverage:
The public enterprise traverses all areas and activities. There is hardly any field of activity,
which is not covered by the operations of public enterprises.

Role of Public Sector:

The public sector has been playing a vital role in the economic development of the country.
Public sector is considered a powerful engine of economic development and an important
instrument of self-reliance. The main contributions of public enterprises to the country's economy
may be described as follows:
1. Filling the Gaps in Capital Goods: At the time of independence, there existed serious gaps in
the industrial structure of the country, particularly in the fields of heavy industries such as steel,
heavy machine tools, exploration and refining of oil, heavy Electrical and equipment, chemicals
and fertilizers, defense equipment, etc. Public sector has helped to fill up these gaps. The basic
infrastructure required for rapid industrialisation has been built up, through the production of
strategic capital goods. In this way the public sector has considerably widened the industrial base
of the country.
2. Employment: Public sector has created millions of jobs to tackle the unemployment problem
in the country. Public sector accounts for about two-thirds of the total employment in the
organised industrial sector in India. By taking over many sick units, the public sector has
protected the employment of millions. Public sector has also contributed a lot towards the
improvement of working and living conditions of workers by serving as a model employer.
3. Balanced Regional Development: Public sector undertakings have located their plants in
backward and untrodden parts of the county. These areas lacked basic industrial and civic
facilities like electricity, water supply, township and manpower. Public enterprises have developed
these facilities thereby bringing about complete transformation in the socio-economic life of the
people in these regions. Steel plants of Bhilai, Rourkela and Durgapur; fertilizer factory at Sindri,
are few examples of the development of backward regions by the public sector.
4. Contribution to Public Exchequer: Apart from generation of internal resources and payment
of dividend, public enterprises have been making substantial contribution to the Government
exchequer through payment of corporate taxes, excise duty, custom duty etc. In this way they
help in mobilizing funds for financing the needs for the planned development of the country. In
recent years, the total contribution from the public enterprises has increased considerably,
between the periods 2002-03 to 2004-05 the contribution increased by Rs 81,438 crores on the
average.
5. Export Promotion and Foreign Exchange Earnings: Some public enterprises have done
much to promote Indias export. The State Trading Corporation (STC), the Minerals and Metals
Trading Corporation (MMTC), Hindustan Steel Ltd., the Bharat Electronics Ltd., the Hindustan
Machine Tools, etc., have done very well in export promotion. The foreign exchange earnings of
the public sector enterprises have been rising from Rs 35 crores in 1965-66 to Rs 42,264 crores
in 2004-05.
6. Import Substitution: Some public sector enterprises were started specifically to produce
goods which were formerly imported and thus to save foreign exchange. The Hindustan
Antibiotics Ltd., the Indian Drugs and Pharmaceuticals Ltd. (IDPL), the Oil and Natural Gas

Commission (ONGC), the Indian Oil Corporation Ltd., the Bharat Electronics Ltd., etc., have
saved foreign exchange by way of import substitution.
7. Research and Development: As most of the public enterprises are engaged in high
technology and heavy industries, they have undertaken research and development programmes
in a big way. Public sector has laid strong and wide base for self-reliance in the field of technical
know-how, maintenance and repair of sophisticated industrial plants, machinery and equipment in
the country. Through the development of technological skill, public enterprises have reduced
dependence on foreign knowhow. With the help of the technological capability, public sector
undertakings have successfully competed in the international market.
In addition to the above, the public sector has played an important role in the achievement of
constitutional goals like reducing concentration of economic power in private hands, increasing
public control over the national economy, creating a socialistic pattern of society, etc. With all its
linkages the public sector has made solid contributions to national self-reliance.

Limitations: of public sector

Despite their impressive role, Public enterprises in India suffer from several problems and
shortcomings. Some of these are described below:
1. Poor Project Planning: Investment decisions in many public enterprises are not based upon
proper evaluation of demand and supply, cost benefit analysis and technical feasibility. Lack of a
precise criterion and flaws in planning have caused undue delays and inflated costs in the
commissioning of projects. Many projects in the public sector have not been finished according to
the time schedule.
2. Over-capitalization: Due to inefficient financial planning, lack of effective financial control and
easy availability of money from the government, several public enterprises suffer from overcapitalization The Administrative Reforms Commission found that Hindustan Aeronautics, Heavy
Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd were over-capitalized. Such
over-capitalization resulted in high capital-output ratio and wastage of scare capital resources.
3. Excessive Overheads: Public enterprises incur heavy expenditure on social overheads like
townships, schools, hospitals, etc. In many cases such establishment expenditure amounted to
10 percent of the total project cost. Recurring expenditure is required for the maintenance of such
overhead and welfare facilities. Hindustan Steel alone incurred an outlay of Rs. 78.2 crore on
townships. Such amenities may be desirable but the expenditure on them should not be
unreasonably high.
4. Overstaffing: Manpower planning is not effective due to which several public enterprises like

Bhilai Steel have excess manpower. Recruitment is not based on sound labour projections. On
the other hand, posts of Chief Executives remain unfilled for years despite the availability of
required personnel.
5. Under-utilisation of Capacity: One serious problem of the public sector has been low
utilisation of installed capacity. In the absence of definite targets of production, effective
production planning and control and proper assessment of future needs many undertakings have
failed to make full use of their fixed assets. There is considerable idle capacity. In some cases
productivity is low on account of poor materials management or ineffective inventory control.
6. Lack of a Proper Price Policy: There is no clear-cut price policy for public enterprises and the
Government has not laid down guidelines for the rate of return to be earned by different
undertakings. Public enterprises are expected to achieve various socio-economic objectives and
in the absence of a clear directive, pricing decisions are not always based on rational analysis. In
addition to dogmatic price policy, there is lack of cost-consciousness, quality consciousness, and
effective control on waste and efficiency.
7. Inefficient Management : The management of public enterprises in our country leaves much
to be desired. Managerial efficiency and effectiveness have been low due to inept management,
uninspiring leadership, too much centralisation, frequent transfers and lack of personal stake.
Civil servants who are deputed to manage the enterprises often lack proper training and use
bureaucratic practices. Political interference in day-to-day affairs, rigid bureaucratic control and
ineffective delegation of authority hamper initiative, flexibility and quick decisions. Motivations and
morale of both executives and workers are low due to the lack of appropriate incentives.

Causes for the expansion of public enterprise

At the time of independence, India was backward and underdeveloped basically an agrarian
economy with weak industrial base, high rate of unemployment, low level of savings and
investment and near absence of infrastructural facilities. Indian economy needed a big push. This
push could not come from the private sector because of the lack of funds and their inability to
take risk with large long-gestation investments. As such, government intervention through public
sector was necessary for self-reliant economic growth, to diversify the economy and to overcome
economic and social backwardness.
Let us discuss the rationale or causes for the expansion of public sector enterprises in India.
1. Rate of Economic Development and Public Enterprises: The justification for public
enterprises in India was based on the fact that the targeted rate of economic growth planned by
the government was much higher than could be achieved by the private sector alone. In other
words, the public sector was essential to realize the target of high growth rate deliberately fixed
by the government.

2. Pattern of Resource Allocation and Public Enterprises: Another reason for the expansion
of the public sector lies in the pattern of resources allocation decided upon under the plans. In the
Second Plan the emphasis was shifted to industries and mining, mainly basic capital goods
industries to be developed under the aegis of the public sector. Thus more resources for
industrialization were funneled through the public sector.
3. Removal of Regional Disparities through Public Enterprises: Another important reason for
the expansion of the public sector was the need for balanced development in different parts of the
country and to see that there were no serious regional disparities. Public enterprises were set up
in those regions which were underdeveloped and where local resources were not adequate.
Good examples are the setting up of the three steel plants of Bhillai, Rourkela and Durgapur and
the Neyveli Project in Madras which were meant to help industrialise the regions surrounding the
projects.
4. Sources of Funds for Economic Development: Initially, state was an important source of
funds for development. The surplus of government enterprises could be re-invested in the same
industries or used for the establishment and expansion of other industries. Profits of public sector
industries can be directly used for capital formation which is necessary for the rapid development
of the country.
5. Socialistic Pattern of Society: The socialistic pattern of society envisaged in the Constitution
calls for expansion of public sector. For one thing, production will have to be centrally planned as
regards the type of goods to be produced, the volume of output and the timing of their production.
Besides, one of the objectives of the directive principles of the Indian Constitution is to bring
about reduction of the inequalities of income and wealth and to establish an egalitarian society.
The Five Year Plans have taken this up as a major objective of planning. The public enterprises
were used as major instruments for the reduction of inequalities of income and to bring about a
more equitable distribution of income in several ways.
6. Limitations and Abuses of the Private Sector: The behavior and attitude of the private
sector itself was an important factor responsible for the expansion of the public sector in the
country. In many cases the private sector could not take initiatives because of the lack of funds
and their inability to take risk with large long-gestation investments. In a number of cases, the
government was forced to take over a private sector industry or industrial units either in the
interest of workers or to prevent excessive exploitation of consumers. Very often the private
sector did not function as it should and did not carry out its social responsibilities. Accordingly, the
government was forced to take over or nationalize the private sector units.
To sum up, the expansion of the public sector was aimed at the fulfillment of our national goals,
viz., the removal of poverty, the attainment of self-reliance, reduction in inequalities of income,
expansion of employment opportunities, removal of regional imbalances, acceleration of the pace
of agricultural and industrial development, to reduce concentration of ownership and prevent
growth of monopolistic tendencies by acting as effective countervailing power to the private
sector, to make the country self-reliant in modern technology and create professional,

technological and managerial cadres so as to ultimately rid the country from dependence on
foreign aid.

Private Sector
introduction
The private sector is the part of a country's economic system that is
run by individuals and companies, rather than the government. Most
private sector organizations are run with the intention of making
profit.
The segment of the economy under control of the government is
known as the public sector. Charities and non-profit organizations are
sometimes considered to make up a third segment, known as the
volunteer sector. However, such organizations are more commonly
considered part of the private sector.
The private sector is larger in free enterprise economies, such as the
United States, in which the government imposes relatively few
restrictions on businesses. In countries with more government control,
such as China, the public sector makes up the larger part of the
economy.

The term 'private sector' refers to the segment of the economy that is not directly
controlled or operated by government-run agencies and organizations, which make up
the public sector. Other terms that are used to refer to the private sector include the
'citizen sector' or the 'free market.' The private sector is made up of companies that
operate to make a profit. (A third segment of the economy, made up of charities and
nonprofit organizations, is known as the voluntary sector.)
In very basic terms, the private sector includes anything that is not part of the public
sector. Where the public sector provides services for everyone, the private sector
provides goods and services generally only for the people who pay for them. For
example, people who purchase an item in a store, subscribe to a magazine, or lease a
car are the only ones eligible to receive those specific goods and services.

characteristics of private sector

These undertakings are owned, controlled and financed by private businessmen. There is no
government participation in them. The main motive of private sector undertakings is to earn
profits. Their main characteristics are as under:
(a) Private Ownership and Control:
A private sector undertaking is fully owned and controlled by the private entrepreneurs. It
may be owned by one individual or by a group of individuals jointly. When owned by one
person, it is called Sole Proprietorship. A group of persons may jointly own the firm in the
form of joint Hindu family business, partnership, Joint Stock Company or cooperative
society.
(b) Profit Motive:
The main objective of private sector undertakings is earning profits. Profits provide the
reward for the risk assumed and the required return on capital.
(c) No State Participation:
There is no participation by the Central or State Governments in the ownership and control
of a private sector undertaking.
(d) Private Finance:
The capital of a private sector undertaking is arranged by its owners. The sole trader
contributes the capital of a sole proprietorship. In case of partnership, capital is invested by
the partners. A joint stock company raises capital by the issue of shares and debentures. A
private sector undertaking can also raise loans to meet its long-term and short-term needs
for funds.
(e) Independent Management:
A private sector undertaking is managed by its owners. In case of sole proprietorship and
partnership, the owners directly manage the firm. The management of a joint stock company
lies in the hands of directors who are the elected representatives of the shareholders.
Key Private Investment Sector in India:

Healthcare: The health care sector of India has opened new investment opportunities for
non-resident Indians (NRIs) and person of Indian origin (PIO) to invest in India because
of the rise in disposable income, penetration of health insurance and unhealthy lifestyle of
present generation.
Food Processing: India is emerging as sourcing hub of processed food because of huge
agriculture sector, abundant livestock, and cost competitiveness. The food services sector
in India is expected to register a growth of 50 per cent in investments in 2012 to about
US$ 750 million, as food suppliers and retail companies plan to scale up business and
stay competitive by tapping the large potential of the domestic market.
Real Estate: Returns from the investments in real estate sector of India have
consistently performed well and have even outperformed other sectors. The sector is
offering huge investment opportunities to NRIs and PIOs because of the friendly policies
of the Government of India. People residing outside India holding Indian passports as well
as PIO are allowed to invest in residential and commercial properties in India, according
to the Reserve Bank of India.
Pharmaceutical: Pharmaceutical sector of India is gaining its position as a global leader.
The pharma market in India is expected to touch US$ 74 billion in sales by 2020 from the
current US$ 11 billion; according to a PricewaterhouseCoopers (PwC) report. Growth will
be driven by the fastest growing molecules in the diabetes, skincare and eye care
segment, as per a report by research firm, Credit Suisse. So, it is one of the most
importantinvestment sectors in India.
Power: India has been one of the top performing clean energy economies in the 21st
century, registering the fifth highest five-year rate of investment growth and eighth
highest in installed renewable energy capacity. The sector is opening up new
opportunities for NRIs/PIOs.
The importance of private sector in Indian economy can be viewed from the
tremendous growth of Indian IT & ITeS industry including both BPOs and Indian software
companies, private banks and financial service companies.

Private Sector of Indian Economy

The private sector of Indian economy is the past few years have delineated
significant development in terms of investment and in terms of its share in the
gross domestic product. The key areas in private sector of Indian economy that

have surpassed the public sector are transport, financial services etc.
Indian government has considered plans to take concrete steps to bring affect
poverty alleviation through the creation of more job opportunities in the private
sector of Indian economy, increase in the number of financial institutions in the
private sector, to provide loans for purchase of houses, equipments, education,
and for infrastructural development also. The private sector of Indian economy is
recently showing its inclination to serve the society through women
empowerment programs, aiding the people affected by natural calamities,
extending help to the street children and so on. The government of India is being
assisted by a number of agencies to identify the areas that are blocking the entry
of the private sector of Indian economy in the arena of infrastructural
development, like regulatory policies, legal procedures etc.
The most interesting fact about the private sector of India economy is that
though the overall pace of its development is comparatively slower than the
public sector, still the investment of private sector in the recent past, i.e. in the
first quarter of 1990 registered approximately 56 % which rose to nearly 71 % in
the next quarter, accounting for an increase of 15 %. Certain steps taken by the
Indian government are acting as the stepping stone of the private sector
continued journey to success, include industrial delicensing, devaluation that was
implemented previously.
The private sector of Indian economy is also adversely affected by the huge
number of permits and enormous time required for the processing of documents
to initiate a firm, however the central government has decided to abolish MRTP
Act and incorporate a Competition Commission of India to bring the public sector
and the private sector at the same platform.
The participation of the private sector of Indian economy is desired by the
government of India for infrastructural development including specific sectors
like power, development of highways and so on. As the contribution of public
sector in these sectors have been arrested due to the shift of the attention of the
Indian government to issues like population increase, industrial growth.

The main reasons behind the low contribution of the private sector in
infrastructural development activities are that:
The small and medium scale companies in the private sector of Indian
economy suffer from lack of finances to welcome the idea of extending their
business to other states or diversify their product range.

The private sector of Indian economy also suffer from the absence of
appropriate regulatory structure, to guide the private sector and this speaks for
its unorganized framework.

The unorganized framework of the private sector is interrupting the proper

management of this sector resulting in the slowdown of its development.

Joint Sector
The joint sector is an extension of the concept of mixed economy. The Industrial Policy
Resolution 1956, sowed the seeds of the joint sector by advocating Government participation in
the equity capital of private sector enterprises to promote socially determined pattern of
industrial growth.

Joint sector industries are owned jointly by the government and private individuals who
have contributed to the capital, but the day-to-day management is in private hands.

Joint sector consists of business undertakings wherein the ownership, control and
management are shared jointly by the Government, the private entrepreneurs and the public
at large.
According to the guidelines laid down by the Government of India, the share capital of a joint
sector undertaking (without foreign participation) is to be divided as follows: government 26
per cent, private businessmen 25 per cent and the public 49 per cent.
No single individual or organisation can hold more than 25 per cent of the paid-up capital of
a joint sector enterprise without the permission of the Central Government.
In case of foreign participation, the respective shares will be: Government 25 per cent, Indian
entrepreneur 20 per cent, foreign investor 20 per cent and the investing public 35 per cent.
Maruti Udyog, Cochin Refineries and Gujarat State Fertilizers are examples of joint sector
undertakings in our country.
The main characteristics of joint sector enterprises are as follows:
1. Mixed Ownership:
The government, private entrepreneurs and the investing public jointly own a joint sector
enterprise.
2. Combined Management:

The management and control of a joint sector enterprise lies with the nominees or
representatives of the Government, private businessmen and the public.
3. Share Capital:
The shares of the Government, private businessmen and the public in the capital are 26 per
cent, 25 per cent and 49 per cent, respectively. The aim is to pool the financial resources and
technical know-how of the State and the private individuals.

PPPs broadly refer to long term, contractual

partnerships between the public and private sector
agencies, specially targeted towards financing,
designing,
implementing,
and
operating
infrastructure facilities and services that were
traditionally provided by the Government and/or its
agencies. These collaborative ventures are built
around the expertise and capacity of the project
partners and are based on a contractual agreement,
which ensures appropriate and mutually agreed
allocation of resources, risks, and returns. This
approach of developing and operating public utilities
and infrastructure by the private sector under terms
and conditions agreeable to both the government
and the private sector is called PPP.

What's PPP
Public Private Partnership (PPP) is a contract between a public sector institution/municipality
and a private party, in which the private party assumes substantial financial, technical and
operational risk in the design, financing, building and operation of a project.
Traditionally, private sector participation has been limited to separate planning, design or
construction contracts on a fee for service basis based on the public agencys specifications.

Expanding the private sector role allows the public agencies to tap private sector technical,
management and financial resources in new ways to achieve certain public agency objectives
such as greater cost and schedule certainty, supplementing in-house staff, innovative
technology applications, specialized expertise or access to private capital. The private partner
can expand its business opportunities in return for assuming the new or expanded
responsibilities and risks.
PPPs provide benefits by allocating the responsibilities to the party either public or private
that is best positioned to control the activity that will produce the desired result. With PPPs,
this is accomplished by specifying the roles, risks and rewards contractually, so as to provide
incentives for maximum performance and the flexibility necessary to achieve the desired
results
What is not a PPP ?

The way a PPP is defined in the regulations makes it clear that:

A PPP is not a simple outsourcing of functions where substantial financial, technical

and operational risk is retained by the institution

A PPP is not a donation by a private party for a public good

A PPP is not the 'commercialisation' of a public function by the creation of a stateowned enterprise

A PPP does not constitute borrowing by the state.

PPP Models in Practice

There are range of PPP models that allocate a responsibilities and risks between the public and
private partners in different ways. Depending on the nature of the project, the contractual
structure/agreements used for new projects would include inter-alia: (as per Infrastructure
Policy 07)

Build-and-Transfer (BT): a contractual arrangement whereby the concessionaire

undertakes the financing and construction of a given infrastructure or development

facility and after its completion turns it over to the Government Agency or Local
Government unit concerned, which shall pay the proponent on an agreed Schedule its
total investments expended on the project, plus a reasonable rate of return thereon.
This arrangement may be employed in the construction of any infrastructure or
development project, including critical facilities which, for security or strategic reasons,
must be operated directly by the Government.

Build-Lease-and-Transfer (BLT): a contractual arrangement whereby a

concessionaire is authorized to finance and construct an infrastructure or development

facility and upon its completion turns it over to the government agency or local
government unit concerned on a lease arrangement for fixed period after which
ownership of the facility is automatically transferred to the government agency or local
government unit concerned.

Build Operate and Transfer (BOT): a contractual arrangement whereby the

concessionaire undertakes the construction, including financing, of a given

infrastructure facility, and the operation and maintenance thereof. The concessionaire
operates the facility over a fixed term during which it is allowed to charge facility users
appropriate tolls, fees, rentals, and charges not exceeding these proposed in its bid or
as negotiated and incorporated in the contract to enable the concessionaire to recover
its investment, and operating and maintenance expenses in the project. The
concessionaire transfers the facility to the Government Agency or Local Government
unit concerned at the end of the fixed term.

Build-Own-Operate-and-Transfer (BOOT): a project based on the granting of a

concession by a Principal (the Union or Government or a local authority) to the

concessionaire, who is responsible for the construction, financing, operation and
maintenance of a facility over the period of the concession before finally transferring
the facility, at no cost to the Principal, a fully operational facility. During the concession
period the promoter owns and operates the facility and collects revenue in order to
repay the financing and investment costs, maintain and operate the facility and make
a margin of profit.

Build-Own-and-Operate (BOO): a contractual arrangement whereby a concessionaire

is authorized to finance, construct, own operate and maintain an infrastructure or

development facility from which the proponent is allowed to recover its total
investment , operating and maintenance costs plus a reasonable return thereon by
collecting tolls, fees, rentals or other charges from facility users.

Build-Operate-Share-Transfer (BOST): a contractual arrangement whereby a

concessionaire is authorized to finance, construct, operate and maintain, share a part

of the revenue and transfer the infrastructure facility at the end of the period. The
proponent is allowed to recover its total investment, operating and maintenance costs

plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from
facility users.

Build-Own-Operate-Share-Transfer (BOOST): a contractual arrangement whereby a

concessionaire is authorized to finance, construct, own operate and maintain, share a

part of the revenue and transfer the infrastructure facility at the end of the period. The
proponent is allowed to recover its total investment, operating and maintenance costs
plus a reasonable return thereon by collecting tolls, fees, rentals or other charges from
facility users.

Public Private Partnership has played a vital role in India's Economic

Growth
Introduction
After India gained independence from British rule, it sought to establish itself as a leader in
world politics and economics. Considered as the third largest economy in Asia, India is
moving towards this goal with renewed force.
While the negative impact of recession has dented most world economies at some point or
another, nations such as India seek to utilize their resources and demographic dividend for a
brighter future.
Public-private partnerships (PPPs) have played a vital role in spurring economic growth in
India. Regardless of which political party has been at the helm, public-private partnerships
have had a high success rate in India. New technologies and software have been the result
of collaborations between the corporate world and the public sector.
Viewpoint
PPPs in India have ensures the speedy and cost effective of key projects in sectors such as
power, technology and infrastructure. This has great value for taxpayers who are benefiting
from the impact of such ventures.
Public-private partnerships in India have integrated public infrastructure with the superior
financing and maintenance provided by private enterprises. The synergistic collaborations
between the public sector and private firms and companies have led to the generation of
resources and knowledge transfer.
PPPs have overcome the capacity constraints of the economy by generating huge
productivity through optimal utilization of labour and capital resources.

 Joint ventures and partnerships between the leading companies and the government have
been very successful in generating jobs as well as growth in key economic sectors.
The public sector has regulated the projects to ensure accountability and delivery of quality
products and services.
Innovation and excellence characterize the public-private partnerships that have emerged
across the years in India. These PPPs are ensuring the effective utilization of state assets in
a manner that is productive as well as profitable.
Infrastructure created using these partnerships is of a superior quality. This has led to the
development of many good airports and buildings across India. India needs more basic
infrastructure and PPPs are the best way to accomplish this.
PPPs also help the public sector to develop a more commercial approach. This is essential
as most parties in India are very oriented towards social welfare and they often do not
consider factors such as profit. Any partnership is only successful if it is able to meet the
needs of the masses and also generate a profit.
PPPs have also ensured that the Indian public gets value for its money. India is a nation
that has to meet the challenges of generating enough resources to meet the needs of the
people.
India has one of the fastest growing populations in the world. Using the finances of the
private firms to complete the PPP ventures has led to conservation of national and
governmental resources.
Conclusion
Public-private partnerships offer great value for money. They also meet high standards of
excellence. PPPs have contributed towards the growth and development of the Indian
economy in multiple ways.
Combining the professionalism of the corporate sector with the welfare objectives of the
state has resulted in projects such as the Mumbai airport which are known for their world
class facilities and advanced amenities.

1.

The Ministry of Micro, Small and Medium Enterprises , a branch of

the Government of India, is the apex body for the formulation and administration of rules,
regulations and laws relating to micro, small and medium enterprises in India. The current
Minister of Micro, Small and Medium Enterprises is Kalraj Mishra since 26 May 2014.

Micro, Small and Medium Enterprises

1.

The MSMED Act, 2006 defines the Micro, Small and Medium
Enterprises based (i) on the investment in plant and machinery for those
engaged in manufacturing or production, processing or preservation of goods
and (ii) on the investment in equipment for enterprises engaged in providing or
rendering of Services.

definition of MSME
The Government of India has enacted the Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is
as under:

Enterprises engaged in the manufacture or production, processing or

preservation of goods as specified below:

1.

A micro enterprise is an enterprise where investment in plant and machinery does

not exceed Rs. 25 lakh;

2.

A small enterprise is an enterprise where the investment in plant and machinery

is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and

3.

A medium enterprise is an enterprise where the investment in plant and machinery

is more than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding
land and building and the items specified by the Ministry of Small Scale Industries vide its
notification No.S.O.1722(E) dated October 5, 2006

Enterprises engaged in providing or rendering of services and whose

investment in equipment (original cost excluding land and building and furniture, fittings
and other items not directly related to the service rendered or as may be notified under
the MSMED Act, 2006 are specified below.

1.

A micro enterprise is an enterprise where the investment in equipment does not

exceed Rs. 10 lakh;

2. A small enterprise is an enterprise where the investment in equipment is more than

Rs.10 lakh but does not exceed Rs. 2 crore; and
3. A medium enterprise is an enterprise where the investment in equipment is more
than Rs. 2 crore but does not exceed Rs. 5 crore.

In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED)
Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes:
(a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production of
goods pertaining to any industry specified in the first schedule to the industries (Development and
regulation) Act, 1951) or employing plant and machinery in the process of value addition to the
final product having a distinct name or character or use. The Manufacturing Enterprise
aredefined in terms of investment in Plant & Machinery.
(b) Service Enterprises: The enterprises engaged in providing or rendering of services and
are defined in terms of investment in equipment

The Micro, Small and Medium Enterprises (MSME) sector has acquired a prominent place in the growth of the
Indian economy. The role of Micro, Small and Medium Enterprises (MSME) in the economic and social
development of the country is well established. Lending to the MSME sector has acquired significance with the
enactment of Micro, Small and Medium Enterprises Development Act in the year 2006 [MSMED Act, 2006] by the
Government of India to have a focused and balanced growth of Micro, Small and Medium Enterprises.
MSME Sector's Contribution to Indian Economy
45% of industrial production
35% share in exports
More than 8000 products
One of the major growth driver of Indian Economy
Model of Socio economic policies of the Govt of India
Develops appropriate indigenous technology
Second largest sector after agriculture

More than 26 million units

Provides employment to over 59 million
Importance of SMEs:
Contribution to employment, growth and wealth distribution
Provide economies with greater flexibility. Low fixed cost
Competitiveness in market place
Seed bed for entrepreneurial ability and innovation
Balanced Regional development
Lending under priority sector under the MSMED Act, 2006 is classified as:
Micro and Small Enterprises engaged in the manufacture or production, processing or preservation of
goods
Micro and Small Enterprises engaged in providing or rendering of services
All advances granted to units in the Khadi and Village Industries Sector (KVI), irrespective of their size of
operations, location and amount of original investment in plant and machinery
Under Indirect Finance:
Advances to persons involved in assisting the decentralized sector in the supply of inputs and marketing of outputs
of artisans, village and cottage industries
Advances to cooperatives of producers in the decentralized sector viz., artisans, village and cottage industries
Loans granted by banks to NBFCs for on-lending to Small and Micro Enterprises (manufacturing as well as
service)

MEANING OF
MULTINATIONAL
COMPANIES
Multinational companies are those companies whose management, ownership and control
are spread in more than one country. It does business in two or more countries. It is a large
industrial organization. They are established in one country as parent country and in other
countries as subsidiaries or as host countries. They produce and distribute goods and
services in all these countries where they operate. The main aim of these companies is to
operate business in most of the part of the world. Popular multinational companies of the
world are IBM Company (USA), Sony Company. Wai wai, nestle company, coca cola company.

Characteristics of mnc
1.

2.

3.

4.

5.
6.

Productive organization: this organization produces various types of goods and

services. It is supplies in many countries. It uses its own technology, patent right for
manufacturing goods.
World wide: multinational companies operate in whole world. It extends its
business world wide. It establishes many branches in various companies. They
extend their business in more than one country.
Ownership and control: ownership of company remains on both parent and
host country. Parent company control, manage and help in the operation of all host
countries. They have control in capital, high technology, and trade mark.
Transfer of technology: these multinational companies are establishes with hug
capital and advanced technology. It also transfers the technology in the host
countries that can be used for production.
Marketing superiority: it is large organization which has international name
and fame. It has good network world wide for distribution of goods.
High efficiency: these organizations operate their business with efficiency. They
use advanced technology. They also involve keenly in research works. They used
many trained person that helps in the production of quality goods.

Merits of
multinational
companies
1.

2.

3.

4.

5.

6.

7.

Quality: it provides and produces quality goods. It produces goods which can
satisfy the international customers too. It has huge investment and consists of
trained and qualified personnel and specialists. It uses advanced technology to
produce quality goods.
Mass production: it produces huge number of quality goods to satisfy the
customers from all around the world. It must supply the goods constantly
worldwide. Advanced technologies are used for mass production.
Low cost of production: the cost of production is also low. It produces goods in
huge quantity which increases the rate of return and decreases in the cost of
production. Low cost of production is the major benefit for multinational companies
Employment: it provides employment opportunities to large number of people
from all around the world. Most of the host countries can help to solve the
unemployment problems. It helps to maintain the living standard of people. It helps
in consumer satisfaction too.
Increase in government revenue: multinational companies produce and sell
the goods in large number of quantities. It earns abnormal profit. Government from
both parent and host countries can collect custom duty, income tax, sales tax etc. In
that way, government can earn more revenue.
Increase in export: it produces commodities in international standard. They
are not produced to meet the needs of local people only. Host countries have the
benefit of exporting the goods in other many countries of the world where the
company has been or not established. It helps largely in the export business
Industrialization: multinational companies help in industrialization. It brings
more capital in the business and help to establish industries. It also uses advance
technologies to establish industries. It helps in establishment of industries in host
country too.

Defect of
multinational
countries:
1.

2.

3.

4.

5.

Outflow of foreign exchange: It uses local capital for their industrial

development. They earn industrial development. They earn huge amount of
dividend too. The foreign currencies from host countries also go out in the form of
royalty and technical fees.
Negative effect on local industries: Multinational companies have huge
market in national as well as international market. This has negatively effected on
local industries. They have increased competition on local industries and are slowly
replaced by multinational companies.
Economic exploitation: The main aim of multinational companies is to earn
maximum profit. They use unused natural resources and labor,. They produce
goods and services at lower cost but the market price is very high. They earn
maximum profit by unfair exploitation of host country
Exploitation of consumers: Multinational companies produce goods and
services at lower costs by using cheap local resources and labor in the host country.
Due to the high cost of royalties of these commodities they charge higher price to
the local consumers. As a result, local consumers are exploited.
Inequality of employment: There is distinction on employee between parent
and host country. They provide minimum employment to local people. They provide
minimum wages to the local people. They use advanced technology for the
production of goods so that only highly skilled manpower which may not be
available in the host countries are employed. They appoint low level employee from
host countries and give low salary and high level employees from their own country
and give high salary. This creates inequality in employment

World Trade
Organization (WTO)
And Its Role in
Globalization: An
Analysis
The impact of the information technology has been to highlight
a fourth element in the process of globalization and make it
typical of globalization in our times. This is financial capital
invested in the capital market of emerging countries. It is true
that in the earlier period of gradual globalization, finances were
even invested but this was in the form of foreign direct
investment in factories and enterprises in different countries.
The integrated capital market is a unique feature of the 20th
century and our current times. A corollary of the process of
globalization and the impact of technology has been the
impact of advances in communication especially through
satellite broadcasts as well as other means of communications
like fax, telephones and the internet. This freedom of
communication has also led to a pressure especially on those
governments which try to operate a controlled regime. The
collapse of the Soviet Union from 1990 onwards and the
conversion of many of the erstwhile communist countries to
market dynamics can also be, among other things, traced to

the era of information technology where policing the borders

became more difficult in view of the reach of technology.

This, in turn, led to a greater pressure on the global trade front

resulting finally in the end of the Uruguay round leading to the
setting up of the WTO in 1995. One major impact of the WTO
has been that the trade barriers must be brought down.
Government of India is also now part of this general trend.
After the permit license raj for nearly forty years, from 1991
due to factors beyond contract, the Government of India
adopted policies which are more market friendly. We are still
progressing perhaps in a gradual way with two steps forward
and one step backward. But the fact remains that in certain
infrastructure areas like telecommunications, changes have
come to stay.
The World Trade Organization (WTO) is among the most
powerful and one of the most secretive international bodies on
earth. It is rapidly assuming the role of global government, as
134 nation-states, including the U.S., have ceded to its vast
authority and powers. The WTO represents the rules-based
regime of the policy of economic globalization. The central
operating principal of the WTO is that commercial interests
should supersede all others. Any obstacles in the path of
operations and expansion of global business enterprise must
be subordinated. In practice these obstacles are usually
policies or democratic processes that act on behalf of working
people, labor rights, environmental protection, human rights,

consumer rights, social justice, local culture, and national

sovereignty.
The International Forum on Globalization (IFG) focused its
efforts throughout most of 1999 on the WTO and its relation to
the larger issue of economic globalization. In Seattle, World
Trade Organization (WTO) talks collapsed from internal
irreconcilable divisions and the weight of protests directed at
labor, human rights, the environment and secrecy. While
grievances coalesce into new coalitions, an extensive structure
of roots underlying these branches was unearthed: the
perverse incentives favoring transnational corporations and
vast inequality in the prices of goods traded. Creating a system
that promotes healthy economic development will require
creating new rules, new institutions and funds.
The WTO, globalization, and a new world order
IMF-instituted structural adjustment programs (SAPs) were
designed to boost export crops to ensure repayment of debts.
But belt-tightening stipulations cut nation-state spending on
housing, education, health and public transport the sectors
that buttress domestic economies. Dismantling state
infrastructures has harmed many nations and has widened
income gaps. The discrepancy between the state of the
economy and the condition of populations has become
increasingly evident. By the early 1990s it became apparent
even to prominent World Bank economists that SAPS were
pulling the rug out from under national infrastructures,
preventing poverty alleviation and competition, and
encouraging corruption. Meanwhile, floating exchange rates
facilitated an explosion in currency trading (yen vs. dollars,
etc.) from $18 billion daily in 1972 to over $1.5 trillion daily in
the 1990. The rapid movement of what might be called

specudollars helped set the stage for the 1996/97 collapse of

Asian currencies. A new architecture for global governance
could have three elements:
[1] Rules: New rules are needed to constrain capital flows to
prevent the volatile, destabilizing, speculative movement of
capital and to direct funds towards healthy development.
Unplayable debts must be forgiven. The forgiving of debt would
be a compensation for past inequities of terms of trade and
extraction of wealth.
[2] Institutions: The World Bank (WB) is a bank, not a
development agency. One possible candidate for
administrating global governance is the Global Environmental
Facility (GEF) a union of the UN Development Program, the
UN Environmental Program and the WB. GEF gives grants.
Recently it has increased Non-Governmental Organization
(NGO) participation, albeit inadequate; and its funding is
grossly insufficient.
[3] Incentives and Funds: Perverse subsidies those
encouraging the extraction, mining, refining and combustion of
coal and oil must be eliminated. Subsidies and tax
incentives must be switched to stimulate producers and
consumers of clean energy and energy-efficient technologies.
New enterprises for fuel cells, solar, etc., can generate jobs
and trade a win-win for the economy and the environment.
International agreements such as the Kyoto Climate and
Biodiversity Conventions are hampered by the absence of
financial resources. Universal acceptance of the 1987 Montreal
Protocol to phase out stratospheric ozone depleting chemicals
was achieved when funds were allocated to transfer
technology to poor nations. For wealthy and poor nations,
funds can help jump-start clean, infant industries. Funds are
also needed to support what the private sector will not, such as
watershed protection.

Compensation will be needed for nations sharing their genetic

resources for medicines and crops. And (credit Harvard
economist Jeffrey Sachs), funds are needed to develop
vaccines and drugs for diseases like HIV/AIDS and malaria, for
which there is no current lucrative market in the most afflicted
nations. And funds are needed for reparations for climate and
extreme weather-driven devastation in nations such as
Honduras, Venezuela and Mozambique. Developed nations
have also begun to experience more severe and unpredictable
weather patterns. Hurricane Floyd in North Carolina,
September 1999, afforded an abrupt and devastating end to an
extended summer drought. Prolonged droughts are also
afflicting parts of Europe, while growing temperature contrasts
between cold poles and warm tropics generate windstorms, like
the twin winds that raced across the Atlantic over Christmas
1999, destroying Frances forests. Extreme weather events are
having long-lasting ecological and economic impacts on a
growing cohort of nations, affecting infrastructure, trade, travel
and tourism.
WTOs limited mission
The WTO replaced the better known GATT (General
Agreements on Tariffs and Trade) which was itself a far cry from
the originally planned International Trade Organization (ITO).
The ITO was to be created after the second World War as the
third pillar of the Breton Woods system and was meant to take
an integrated approach to many trade related matters:
securing full employment, reducing tariffs which stand in the
way of economic growth, protecting workers rights, preventing
undue domination and manipulation by big companies
(competition policy), assisting weaker economies in gaining
access to capital and technology, and managing commodity
trade. The WTO was established with a far more limited

mission:
[1] Enforcing the trade contracts negotiated in the Uruguay
Round (1986-1994) among the member countries (132 by end
September 1997).
[2] Continuing negotiations on trade and investment rules
and liberalization of trade in agricultural and manufactured
goods, the services sector (e.g. consultancies, tourism) and
investment.

WTOs role in globalization and marginalization

At the Singapore Ministerial conference many euphoric
statements were made about the achievements of
globalization and the WTOs contribution to this process.
Globalization is not only the result of technical innovations,
capital concentration, the geographic spread of production
processes and other company strategies to improve profitmaking worldwide 24 hours a day. Political decisions by
governments to remove institutional barriers to international
tradeand capital flows and to provide incentives for companies
have also supported the globalization process: at national level
through unilateral liberalization and structural adjustment for
export-led growth, and through labor and social policy reform;
at regional and multilateral levels, through agreements on
trade and investment liberalization.
The WTO is the most important regulator of trade at
international level and also sets the terms within which
regional agreements can be signed. In this way, globalization is
managed at world level from a trade perspective.
The WTO contributes to unequal competition

The WTO and the Uruguay Round agreements contribute to

unequal competition because:
1. Developed countries give less market access to products
from developing countries (average 4.3%) than those from
among themselves (average 3.8%), and tend to impose high
tariffs on those products most valuable to least developed
countries (clothing, leather, fish, agriculture).
2. The phasing out of quantitative restrictions for textiles and
clothing exports to the North is very slow and may make it
difficult for small and poor producers to compete.
3. The agricultural agreement has led to competition between
(indirectly) subsidized farm products of the North and
unsubsidized agricultural products in developing countries.
4. Safeguard and anti-dumping rules still have loopholes and
are more frequently being used to stop competition from laborintensive products.
5. The enforcement of intellectual property rights (TRIPs) is
likely to make necessary technology and essential goods (e.g.
medicines, seeds) too expensive while not being able to stop
bio-piracy by foreign companies.