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Day 43

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FISCAL POLICY REVENUE


FISCAL POLICY
The government fiscal policy is used to stabilize the level of output and employment through changes in
its expenditure and taxes. The government attempts to increase output and income and seeks to stabilize
the ups and downs in the economy.
In the process, fiscal policy creates a surplus (when total receipts exceed expenditure) or a deficit budget
(when total expenditure exceeds receipts) rather than a balanced budget (when expenditure equals receipts).
Fiscal policy deals with the revenue and expenditure decisions of the government.

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As far as fiscal resources are concerned, taxes, user charges (power, water, transport charges etc); disinvestment
proceeds; borrowings from internal and external sources are the main channels.



Equity
Promotion of small scale industries
OR
Fiscal policy can achieve important public policy goals like growth
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Encouragement to agriculture
Location of industries in rural areas
Labour-intensive growth
Export promotion
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Development of sound social and physical infrastructure etc.


Instruments of Fiscal Policy
The two main instruments of fiscal policy are:
(a) Government Expenditure
(b) Government Revenues
REVENUE AND ITS CLASSIFICATION
They are divided into
TAX REVENUES
India has a well-developed tax structure with clearly demarcated authority between Central and State
Governments and local bodies.
Central Government levies taxes on
1. Income Tax (except tax on agricultural income, which the State Governments can levy) - Tax on income
of a person
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2. Customs Duties - Duties on import and export of goods


3. Central Excise - Taxes on Manufacturing of dutiable goods
4. Service Tax - Taxes on provision of services
5. Corporate tax: Taxes on firms and corporations
State Governments levies taxes on
1. Value Added Tax (VAT) - This is tax on sale of goods. While intra-state sale of goods are covered by
the VAT Law of that state, inter-state sale of goods is covered by the Central Sales Tax Act. Even the
revenue collected under Central Sales Tax Act is done so by the State Governments themselves and
actually the Central Government has no role to play so.
2. Stamp duty - Since land is a matter on which only State Governments can govern, thus the Stamp duties
on transfer of immovable properties are levied by State Governments
3. State excise - on Liquor and certain agricultural goods

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4. Land revenue
OR
5. Profession tax
Local bodies are empowered to levy tax on
1. Properties
2. Octroi and
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3. For utilities like water supply, drainage etc.


Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been
rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better
enforcement. The process of rationalization of tax administration is still ongoing in India.
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Tax revenues are further divided as:


A. DIRECT TAXES
In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.
Under the Income Tax Act, 1961 The Central Government levies direct taxes on the income of individuals
and business entities as well as Non business entities also.
The taxation level depends on the residential status of individuals.
The thumb rule of residential status is that an individual becomes resident in India if he has remained
in India for more than 182 days in a particular residential year.
If he becomes resident in India, then his global income i.e. income earned even outside India is taxable
in India.
Personal Income Tax
Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes
under Ministry of Finance in accordance with the provisions of theIncome Tax Act.
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Income Tax - Regressive, Proportional, or Progressive Taxation


Taxes can also be categorized as either regressive, proportional, or progressive, and the distinction has to do
with the behaviour of the tax as the taxable base (such as a households income or a business profit) changes.
Progressive taxa tax that takes a larger percentage of income from high-income groups than from low-
income groups.
Proportional taxa tax that takes the same percentage of income from all income groups.
Regressive taxa tax that takes a larger percentage of income from low-income groups than from high-
income groups.
Corporate taxes
The taxability of a companys income depends on its domicile. Indian companies are taxable in India on their
worldwide income. Foreign companies are taxable on income that arises out of their Indian operations, or, in
certain cases, income that is deemed to arise in India. Royalty, interest, gains from sale of capital assets located

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in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees
for technical services are all treated as income arising in India. Current rates of corporate tax.
Different kinds of taxes relating to a company
Minimum Alternate Tax (MAT)

OR
Normally, a company is liable to pay tax on the income computed in accordance with the provisions of
the income tax Act, but the profit and loss account of the company is prepared as per provisions of the
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Companies Act. There were large number of companies who had book profits as per their profit and loss
account but were not paying any tax because income computed as per provisions of the income tax act
was either nil or negative or insignificant.
In such case, although the companies were showing book profits and declaring dividends to the shareholders,
they were not paying any income tax. These companies are popularly known as Zero Tax companies. In
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order to bring such companies under the income tax act net, section 115JA was introduced in the year
1997-98.
Fringe Benefit Tax (FBT)
The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax (FBT) contained in Chapter
XIIH of the Income Tax Act, 1961.
Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of fringe benefits
provided or deemed to have been provided to the employees. The FBT is payable by an employer who
is a company; a firm; an association of persons excluding trusts/a body of individuals; a local authority;
a sole trader, or an artificial juridical person. This tax is payable even where employer does not otherwise
have taxable income. Fringe Benefits are defined as any privilege, service, facility or amenity directly or
indirectly provided by an employer to his employees (including former employees) by reason of their
employment and includes expenses or payments on certain specified heads.
Dividend Distribution Tax (DDT)
Under the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of
dividend shall be chargeable to dividend tax. Only a domestic company (not a foreign company) is liable
for the tax.
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Tax on distributed profit is in addition to income tax chargeable in respect of total income. It is applicable
whether the dividend is interim or otherwise. Also, it is applicable whether such dividend is paid out of
current profits or accumulated profits.
Wealth Tax
Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits derived
from property ownership. The tax is to be paid year after year on the same property on its market value,
whether or not such property yields any income.
Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following
persons: -
Individual
Hindu Undivided Family (HUF)
Company
B. INDIRECT TAXES

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In India, indirect taxes is a vast ocean as there are number of taxes to be paid on manufacture, import,
sale and even purchase in certain cases. Further the law is governed less by the Acts and more by day
OR
to day notifications, circulars and orders by the Governing bodies. So an explicit understanding is very
much essential.
Indirect taxes is based on the nature of Activity as follows:
Provision of services
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Manufacture of Excisable Goods


Import of Goods
Sale of Goods
Sales tax
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Central Sales Tax (CST)


Central Sales tax is generally payable on the sale of all goods by a dealer in the course of inter-state trade
or commerce or, outside a state or, in the course of import into or, export from India.
Value Added Tax (VAT)
VAT is a multi-stage tax on goods that is levied across various stages of production and supply with credit
given for tax paid at each stage of Value addition. Introduction of state level VAT is the most significant
tax reform measure at state level.
The state level VAT has replaced the existing State Sales Tax. The decision to implement State level VAT
was taken in the meeting of the Empowered Committee (EC) of State Finance Ministers held on June
18, 2004, where a broad consensus was arrived at to introduce VAT from April 1, 2005. Accordingly, all
states/UTs have implemented VAT.
Goods and Services Tax (GST)
GST is one indirect tax for the whole nation, which will make India one unified common market. The
GST intends to subsume most indirect taxes under a single taxation regime. GST is a single tax on the
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supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid
at each stage will be available in the subsequent stage of value addition, which makes GST essentially a
tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the
last dealer in the supply chain, with set-off benefits at all the previous stages. This is expected to help
broaden the tax base, increase tax compliance, and reduce economic distortions caused by inter-state
variations in taxes.
Why GST has been proposed?
Our Constitution empowers the Central Government to levy excise duty on manufacturing and service
tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added
tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect
taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the
Central Government, but collected and retained by the exporting States. Further, many States levy an
entry tax on the entry of goods in local areas.
This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure

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in the country that is ridden with hidden costs for the trade and industry.

OR
In order to simplify and rationalize indirect tax structures, Government of India attempted various tax
policy reforms at different points of time. A system of VAT on services at the central government level
was introduced in 2002. The states collect taxes through state sales tax VAT, introduced in 2005, levied
on intrastate trade and the CST on interstate trade. Despite all the various changes the overall taxation
system continues to be complex and has various exemptions.
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This led to the idea of One nation One Tax and introduction of GST in Indian financial system. This is
simply very similar to VAT which is at present applicable in most of the states and can be termed as
National level VAT on Goods and Services with only one difference that in this system not only goods
but also services are involved and the rate of tax on goods and services are generally the same.
Levy of GST
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The central government has the exclusive power to levy and collect GST in the course of interstate trade
or commerce, or imports. This will be known as IGST (Integrated GST).
A central law will prescribe the manner in which the IGST will be shared between the centre and states,
based on the recommendations of the GST Council.
Both, Parliament and state legislatures will have the power to make laws on the taxation of goods and
services. A law made by Parliament in relation to GST will not override a state law on GST.
Excise Duty
Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable goods have been
defined as those, which have been specified in the Central Excise Tariff Act as being subjected to the duty
of excise.
Customs Duty
Custom or import duties are levied by the Central Government of India on the goods imported into India. The
rate at which customs duty is leviable on the goods depends on the classification of the goods determined
under the Customs Tariff. The Customs Tariff is generally aligned with the Harmonised System of Nomenclature
(HSL).
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Service Tax
Service tax was introduced in India way back in 1994 and started with mere 3 basic services viz. general
insurance, stock broking and telephone. Today the counter services subject to tax have reached over 100. There
has been a steady increase in the rate of service tax. From a mere 5 per cent, service tax is now levied on
specified taxable services at the rate of 12 per cent of the gross value of taxable services. However, on account
of the imposition of education cess of 3 per cent, the effective rate of service tax is at 12.36 per cent.
NON TAX REVENUE
Non-tax revenue mainly consists of:
1. Interest receipts on account of loans by the central government
2. Dividends and profits on investments made by the government
3. Fees and other receipts for services rendered by the government
4. Cash grants-in-aid from foreign countries and international organizations.

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OR
SC
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Notes

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Economic Survey (2016-17)
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CLOTHES AND SHOES: CAN INDIA RECLAIM


7
LOW SKILL MANUFACTURING?

Context
Context: India on one hand celebrates it's favourable demographic dividend,
however it fails terribly short in providing good jobs to its labor force. Hence
taking cue from the success of China and other East Asian countries, who
significantly benefitted from high labor intensive and low skill manufacturing
sectors like Apparel and footwear, India must gear up with all policy measures

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such as subsidization, tax reform, labor law reform and favourable trade
agreement, to seize the narrow window of opportunity, especially when it's
south Asian competitors are battle ready to fill the vacancy created by China
OR
in recent times(owing to its increasing labor cost ).

Technical Terms
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A. Labour Intensity: Number of jobs created per unit investment (rs 1lak).Measured for different
sectors. e.g. Apparel sector generates 80 time more jobs than Auto sector for similar investment.
B. Female Labour Intensity: Number of female jobs created per unit capital investment(Rs. 1 lac).The
more female labor intensive a sector is, the more is its potential for social transformation through
women empowerment and financial inclusion.
C. Labour Force participation rate: The section of working population in the age group of 16-64 in
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the economy currently employed or seeking employment. People who are still undergoing studies,
housewives and persons above the age of 64 are not reckoned in the labour force.
D. Low wage Employees: Wage less than Rs20000/month.
E. Free Trade Agreement: Such agreements involve cooperation between at least two countries to
reduce trade barriers - import quotas and tariffs - and to increase trade of goods and services with
each other.
F. Least developed Countries (LDC): The Least Developed Countries (LDC) is a list of the countries
that, according to the United Nations, exhibit the lowest indicators of socio-economic development,
with the lowest Human Development Index ratings of all countries in the world. A country is
classified among the Least Developed Countries if it meets three criteria
Poverty - adjustable criterion based on GNI per capita averaged over three years. As of 2015 a
country must have GNI per capita less than US $1,035 to be included on the list, and over $1,242
to graduate from it.
Human Resource weakness based on indicators of nutrition, health, education and adult literacy and
Economic vulnerability: based on instability of agricultural production, instability of exports of
goods and services, economic importance of non-traditional activities, merchandise export
Notes

Economic Survey (2016-17) 47


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concentration, handicap of economic smallness, and the percentage of population displaced by


natural disasters.

Gist of Economic Survey Chapter


Introduction
Creating jobs is India's central challenge to achieve social transformation, which can be done by:
Generating rapid economic growth
Nurturing an enabling environment for investment is another; and
Targeted action yet another.
Related to the latter, India needs to generate jobs that are
Formal and productive,
Provide bang-for-buck in terms of jobs created relative to investment,

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Have the potential for broader social transformation, and
OR
Can generate exports and growth.
The apparel and leather and footwear sectors meet many or all of these criteria and hence are eminently
suitable candidates for targeting.
Why Clothes and Shoes?
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Apparel and footwear sector offer a lot of opportunities which other sector does not. These are:
a) Growth and exports
There is a linkage between GDP growth rates and export growth rates of these two sectors, as was seen
in East Asian countries.
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Take-off in economic growth in East Asia has been associated with rapid expansion in clothing and
footwear exports in the early stages.GDP growth rate of around 7-10% was associated with around
20% (in some cases 50%) for apparel and 25% for footwear growth in exports of these two sectors.
India has underperformed in these sectors, especially in leather sector during its take-off stage.
b) Jobs, especially for women
Apparels and Leather sectors offer tremendous opportunities for creation of jobs, especially for women.
Apparel sector is the most labor-intensive, followed by footwear.
Apparels are 80-fold more labor-intensive than autos and 240-fold more jobs than steel. The comparable
numbers for leather goods are 33 and 100, respectively.
With rapid exports growth about half a million additional direct jobs can be generated annually.
The opportunity created for women implies that these sectors could be vehicles for social
transformation. Women in Bangladesh, female education, total fertility rates, and women's labour
force participation moved positively due to the expansion of the apparel sector.
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c) A historic opportunity - China vacating space filled by others and not India!
India has an opportunity to promote apparel, leather and footwear sectors because of rising wage
levels in China.

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OR
SC
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India is well positioned to take advantage of China's deteriorating competitiveness because wage
costs in most Indian states are significantly lower than in China.
But the space vacated by China is fast being taken over by Bangladesh and Vietnam in case of apparels;
Vietnam and Indonesia in case of leather and footwear, even Indian companies are relocating to these
countries and Myanmar. India has to act fast if it does not want to lose in race.
Challenges
India still has potential comparative advantage in terms of cheaper and more abundant labour. But these
are nullified by other factors that render them less competitive than their peers in competitor countries.
The Apparel and Leather sectors face a set of common challenges, which are:
a) Logistics
The costs and time involved in getting goods from factory to destination are greater than those for
other countries
Further, few Very Large Capacity Containers (VLCC) come to Indian ports to take cargo so that
exports have to be trans shipped through Colombo which adds to travel costs and hence reduces the
flexibility for manufacturers.
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Economic Survey (2016-17) 49


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b) Labour regulations
Regulations on minimum overtime pay: There are strict regulations for overtime wage payment as
the Minimum Wages Act 1948 mandates payment of overtime wages at twice the rate of ordinary
rates of wages of the worker.
Lack of flexibility in part-time work and high minimum wages in some cases.
Onerous mandatory contributions that become de facto taxes for low-paid workers in small firms
that results in a 45 per cent lower disposable salary.
One symptom of labour market problems is that Indian apparel and leather firms are smaller compared
to China, Bangladesh and Vietnam, with 78% of firms employing less than 50 workers (same is just 15%
in China).
c) Tax & tariff policy
Globally demand is shifting towards man-made fibers, but Indian taxation (7.5% tax on cotton bases
products and 8.4% tax on man-made products) and tariff policy (10 percent tariff on man-made

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fibers v/s 6 percent on cotton fibers.) Discriminates against it and favors cotton based exports.
High tariffs on yarn and fiber increase the cost of production in clothing. Though duty drawback
OR
for tariffs on inputs is available, but that excludes purchase of domestically produced yarn and
domestic sale making and thus making such Indian products un-competitive.
A similar problem also afflicts footwear production with taxes of 20.5 per cent on leather and 27
per cent on non-leather footwear. There is a need for rationalization of these policies.
Globally demand in footwear industry is shifting from leather based to non-leather based, because of
SC

physical comfort, aesthetics and price affordability and various other factors. India has good share in
leather based exports and must shift to non-leather footwear if it wants to gain from China's slowdown
in exports, which occupies important place in this segment.
d) Disadvantages emanating from the international trading environment compared to competitor
countries.
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India's competitor exporting nations for apparels and leather and footwear enjoy better market
access by way of zero or at least lower tariffs in the two major importing markets, namely, the
United States of America (USA) and European Union (EU). Bangladesh and Ethiopia, both emerging
as major exporters and having significant share, have zero tariffs in case of apparel, whereas India
will face 9.1% tariff in EU and 11.4% in US. Same is the case with footwear sector.
An FTA with EU, UK can help India offset existing disadvantages in apparel sector and getting
relative advantages in footwear sector.
e) Sector specific challenge
Globally cattle bases leather products are preferred as compared to buffalo, goat or other animal
based. But in India despite availability of large cattle population very less cattle is available for
slaughter.
Responses needs
Several steps have been taken for textile and apparel sector:
Apparel exporters will be provided relief to offset the impact of state taxes embedded in exports,
which could be as high as about 5 per cent of exports.
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Textile and apparel firms will be provided a subsidy for increasing employment in the form of
government contributing the employers' 12 per cent contribution to the Employee Provident Fund
(EPF).
But all these need to be complemented by further actions:
FTAs with EU and UK must be negotiated after carefully weighing cost and benefits, with special
focus on apparel and footwear sector and jobs in this sector.
Introduction of GST will help in rationalization of taxes and removal of tax related disadvantage
against man-made fiber based apparel and non-leather footwear.
Third, a number of labor law reforms would overcome obstacles to employment creation in these
sectors. Statutory deductions like Employee Provident Fund Organization (EPFO), Employee Pension
Scheme (EPS), Employee State Insurance (ESI) etc. for low wage employees (salary less than Rs.
20,000/month) accounts to around 45%, which has been questioned on various accounts like:

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Low wage employees do not have a 45% saving rate, therefore would like to have money in
hand rather than statutorily deducted.

OR
EPFO and ESI have many accounts with unclaimed balances. EPFO fees are also very high.
All these create hindrances in path of formalization of jobs in the sector. Formal employment could
increase by offering employees three choices when they start employment:
Decide whether they want 12 per cent employee contribution to be deducted;
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Decide whether their 12 per cent employer contribution goes to EPFO or National Pension Scheme
(NPS);
Decide whether their health insurance premiums go to ESI or a private health insurance of the
employee's choice.
All these choices should be exercised on the part of employee, thus giving him greater choice.
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Conclusion
All industrial policy aimed at promoting a particular sector is not without risks. But the externality
generating attributes-employment, exports, social transformation - of the apparel and footwear sectors,
India's potential comparative advantage in it, and the narrow window of opportunity available, make the
risk worth taking. And, in any case, many of the proposed policy responses such as FTAs, tax rationalization,
and labour law reform could have wider, economy-wide benefits.

Supplementary Readings
Apparel and Footwear sector in emerging economy
In apparel and footwear, the differences between emerging and developed markets are significant. Developed
markets reported value and volume growth of 2 per cent, while emerging markets witnessed value growth
of 8 per cent and volume at 3 per cent in apparel and footwear during 2015. Consumers remain cautious
in developed markets as economic growth appears fragile, additionally, wider availability of trend-led
products at low prices and impressive growth in e-commerce continue to impact unit prices and value
growth. In contrast, emerging markets are benefiting from rising disposable incomes and aspirational
purchases.
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India is the second largest footwear producer in the world, with footwear production accounting for
approximately 9 per cent of the global annual production - 22 billion pairs as compared to China, which
produces over 60 per cent of the global production.
India annually produces 2.1 billion pairs of which 90 per cent are consumed internally while remaining
are exported primarily to European nations which include United Kingdom, Germany, USA, Italy and
France.
Footwear exports from India have grown at a CAGR of 20 per cent in Indian Rupee terms during the
last five year backed by growing demand from European nations and increasing focus of main importing
countries to shift sourcing from China to other low cost producing countries.
India is the third largest footwear consuming country in the world after China and USA, but with very
little separating the three, India is very soon expected to be the second largest consumer as well.
In absolute terms, footwear exports from India have risen from Rs. 71.5 billion in FY10 to Rs. 180.0
billion in FY15.
The growth in Indian fashion and lifestyle market has given an impetus to the footwear industry as well.

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From a basic need-based industry, it has become an evolving fashion and style category.
OR
The unorganised segment gains prominence in the Indian context due to its price-competitive products,
which are more suitable and attractive to the price conscious Indian consumer. But with increased
household income, shifting consumer behaviour from saving to spending, increasing brand consciousness
amongst Indian consumers, influx of large number of global brands and penetration in tier - II and III
cities by footwear companies, the organised retail in footwear market is rapidly evolving and expected to
grow at a higher rate in the future.
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The rural market of India is still largely untapped for footwear manufacturers. Companies are re-positioning
themselves and launching specific products and price ranges to expand their presence and increase their
consumer base in rural areas.

Related Questions
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1. Discuss the employment scenario in India .How can low skill manufacturing sector address the issue
of employment?
2. What are the challenges faced by Textile sector in general and apparel sector in particular. Enumerate
government initiatives to promote these sectors.
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NATIONAL CAPITAL GOODS POLICY


The National Manufacturing Policy envisaged manufacturing to contribute 25% to GDP and create 100 million
jobs. In contrast, till date, manufacturing activity contributes to 17% of India's GDP and only 4 million jobs
are estimated to have been created in the sector since 2010. The gap to stated aspiration is large.
The Capital Goods sector is a critical element to boost manufacturing activity by providing critical inputs, that
is, machinery and equipment.
Hence Government has come out with 1st ever policy for the country's capital goods sector. It envisages
carving out a roadmap to boost manufacturing in Capital Goods (CG) sector so that it becomes a part of
global value chains apart from mere supply chains.

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Vision: The National Capital Goods Policy is formulated with the vision to increase the share of capital 24

OR
goods contribution from present 12% to 20% of total manufacturing activity by 2025.
Objectives of the Policy:
The objectives of the National Capital Goods Policy are to:
Increase total production: To create an ecosystem for a globally competitive capital goods sector to
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achieve total production in excess of Rs. 750,000 Cr by 2025 from the current Rs. 230,000 Cr.
Increase employment: Raising direct and indirect employment from the current 8.4 million to Rs.30
million by 2025.
Increase domestic market share: To increase the share of domestic production in India's capital goods
demand from 60% to 80% by 2025 and in the process improve domestic capacity utilization to 80-90%.
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Increase exports: To increase exports to 40% of total production (from Rs 61,000 Cr to Rs 300,000 Cr)
by 2025 from current 27%, enabling India's share of global exports in capital goods to increase to 2.5%
and making India a net exporter of capital goods.
The policy also aims to facilitate improvement in technology depth across sub-sectors (increasing research
intensity in India from 0.9% to at least 2.8% of GDP), increase skill availability (training Rs.50 lakh
people by 2025), ensure mandatory standards and promote growth and capacity building of MSMEs
The objectives of the policy will be met by the Department of Heavy Industry in a time bound manner
through obtaining approval for schemes as per the roadmap of policy interventions.
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CONCEPT OF WILLFUL DEFAULTER


RBI has defined the 'willful default' to occur if the 'unit' has, inter-alia, defaulted in meeting its payment
obligations or not utilized the finance from the lender for the specific purposes for which finance was availed
or has siphoned off the funds.
Further, RBI has defined the term 'unit' to include individuals, juristic persons and all other forms of business
enterprises, whether incorporated or not. In case of business enterprises (other than companies), banks /
financial institutions may also report (in the Director column) the names of those persons who are in charge
and responsible for the management of the affairs of the business enterprise.
Hence willful defaulter is when there is:

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a) Default in repayment obligations by the unit to the lender even when it has the capacity to honour the
said obligations.
OR
b) Default in repayment obligations by the unit to the lender and has not utilized the finance from the lender
for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
c) Default in repayment obligations by the unit to the lender and has siphoned off the funds so that the
funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds
available with the unit in the form of other assets.
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d) Default in repayment obligations by the unit to the lender and has also disposed off or removed the
movable fixed assets or immovable property given by it for the purpose of securing a term loan without
the knowledge of the bank/lender.
How willful defaulters are affecting the economy?
The economy is facing the issue of Non-Performing Assets (NPAs) in Banking Sector especially in case of
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Public Sector Banks (PSBs). NPA is an asset, including a leased asset, becomes non-performing when it ceases
to generate income for the bank. In these NPAs there are two categories of defaulters:
a) Those who are unable to pay back due to economic slowdown both in domestic and global market and
other reasons outside their control.
b) Willful defaulters.
PSB's NPAs have touched a whopping Rs 3.69 lakh crore by 2015. Of this, willful defaulters owe public sector
banks Rs 64,335 crore, which constitutes about 21 per cent of total NPAs. If government is able to recover
the default amount by such willful defaulters or restrict them for future, it could easily finance government's
MNREGA and health expenditure and other social sectors out of that amount.
Government initiatives
The Government has taken various measures to deal with both these categories of defaulters.
In order to deal with default due to economic slowdown, the Government has taken various measures
to revive the stressed sectors which mainly include steel, textiles, power and roads among others.
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The Government has also done recapitalization of banks by providing Rs. 25,000 crore in the last year
Union Budget 2015-16 as well as in this year's budget 2016-17.
Transparency and professionalism has been brought in appointment process for top management positions
in the PSBs including Chairmen and Managing Directors.
The Government has taken various measures to make the management professional, has given full autonomy
to the banks in taking commercial decisions without any interference from the Government.
Bankruptcy Law has been cleared by the Parliament.
The SARFAESI Act and DRT Act have been amended to make the recovery process more efficient and
expedient. Wherever it was observed that number of cases in which action taken by the banks against
guarantors for recovery of defaulted loans is insufficient, the Government has advised the banks to take
action against guarantors in the event of default by borrowers under relevant Sections of SARFAESI Act,
Indian Contract Act and RDDB & FI Act.
A number of other steps have been taken by the Government and Reserve Bank of India. Government

E
has decided to establish six new Debt Recovery Tribunals (DRTs), to speed up the recovery of bad loans
of the banking sector. In addition, the Government has advised Public Sector Banks (PSBs) to constitute

OR
a Board level Committee for monitoring of recovery and to increase the pace of recovery and manage
NPAs.
SC
GS
Notes

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MARGINAL COST OF
FUNDS BASED LENDING RATE
Marginal Cost of Funds based Lending Rate (MCLR) will be the internal benchmark lending rates. Based
upon this MCLR, interest rate for different types of customers should be fixed in accordance with their
riskiness.
MCLR is calculated using different components such as:
a) Marginal cost of funds:
The marginal cost that is the novel element of the MCLR. The marginal cost of funds will comprise of
Marginal cost of borrowings and return on net-worth. According to the Reserve Bank of India, the Marginal
Cost should be charged on the basis of following factors:

E
Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit
OR
Borrowings - Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
Return on net-worth - in accordance with capital adequacy norms.
b) Negative carry on account of Cash Reserve Ratio (CRR):
It is the cost that the banks have to incur while keeping reserves with the RBI. The RBI is not giving an interest
SC

for CRR held by the banks. The cost of such funds kept idle can be charged from loans given to the people.
c) Operating Costs:
It is the operating expenses incurred by the banks.
d) Tenor Premium:
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It denotes that higher interest can be charged from long term loans.
The MCLR applicable from 1 April, 2016 have to be revised monthly by considering some new factors
including the Repo rate and other borrowing rates.
Notes