Download training course on economic reforms

TRAINING COURSE ON ECONOMIC REFORMS
COURSE GUIDE
SRI KRISHNA INSTITUTE OF PUBLIC ADMINISTRATION
RANCHI, JHARKHAND
INTRODUCTION
Like most other developing countries, India’s reforms were also
preceded by an economic crisis. In 1990-91, the gross fiscal deficit of the
central government reached 8.4 percent of GDP and annual rate of
inflation peaked at nearly 17 percent. During the 1980s, the growth rate
was accelerated by borrowing, but without any drastic restructuring of the
economy. This, in turn, aggravated the problem of external indebtedness.
The external debt rose from 12 percent of GDP in 1980-81 to 23 percent
of GDP in 1990-91. India borrowed heavily from abroad particularly in
the late 1980s. Much of the borrowing was from commercial banks and a
large part was in the form of Non-Resident Indian (NRI) deposits which
were short term capital inflows at high interest rates. Consequently the
debt service burden rose from 10 percent of current account receipts and
15 percent of export earnings in 1980-81 to 22 percent of current account
receipts and 30 percent of export earnings in 1990-91.
In 1990 and 1991, increased political risk, overly expansionary
macro economic policies, and a sharp decline in remittances from overseas
Indian workers in the wake of Gulf War led to outflows of short term
capital putting extreme pressure on India’s foreign exchange reserves. By
mid 1991, India’s foreign exchange reserves had declined to just two
weeks of import coverage. This was the cause that started India’s market
liberalization measures in 1991 led by then Finance Minister Manmohan
Singh.
The reforms in India followed a gradualist approach. Being crisis
introduced, the initial phase of reforms had to focus on macro-economic
stabilization. Simultaneously reforms of industrial policy, trade and
exchange rate policies and foreign investment policy were initiated along
with tax reforms, financial sector reforms and public sector reforms.
India’s reform strategy of stabilization cum structural adjustment
measures has produced some satisfactory results in the fields of inflation
control, industrial growth, foreign currency reserves, banking sector,
capital market, insurance market and so on.
AIMS
The aims of the course are:
1. To impart knowledge about economic reform in India
2. To manage the economic reforms in the states
D E S I G N E D FOR
1. Officers of Group A, B, C
FACILITATOR
Department of Personnel and Training
Government of India, New Delhi
STYLE OF THE COURSE
This is a short but comprehensive and intensive course with plenty
of activity for the participants. There will be emphasis on small
group of twenty trainees with a facilitator.
Plenty of reading material will be given to the participants to
streamline the entry behaviour of the trainees and to support their
course activities. Video Films are used to show the efficacy of the
economic reforms
The course basically follows a LECTURE/COACHING method
and it includes GROUP DISCUSSION, GUIDED READING
AND GUIDED EXERCISES. The lecture session contains
sufficient visual aids in the form of OHT / POWER POINT
presentations for transmission of facts and information to the
trainees.
In this Five Day Course, Two Reinforcement Quiz will be given to
the participants on second and fourth day in the afternoon session
so that their knowledge is further tested and enhanced.
On the Fifth Day, the participants will be divided into Groups of
Four and they will be given Topics related to “Economic Reforms”
for Group Presentation and Discussion. This session is intended to
stimulate interest and constructive thought in the participants. It
will also give an opportunity for reviewing the extent of transfer of
learning.
TRAINING MATERIALS
The course includes the following materials:
1. Trainer’s Process Sheet
2. Handout
3. Reinforcement Quiz
4. Overhead Transparencies (OHT)
5. Power Point Presentations
6. Video Films
OBJECTIVES
At the end of the course the trainees will be able to:
1. Distinguish Globalization, Liberalization and Economic
Reforms
2. Define various Economic Terms
3. Evaluate the Developments of Five Year Plans
4. Narrate the early initiative taken by Congress Government
5. Analyze Fiscal Imbalances
6. Describe Fiscal-Stabilization Measures
7. Classify the Inflation Control Measures
8. Narrate Balance of Payment & Foreign Exchange Management
9. Discuss Ending Control on Private Investment
10. Describe Opening of Economy for Trade
11. Discuss the End of Price Control Regime
12. Narrate Foreign Direct Investment, Disinvestments and
Infrastructure Development
13. List Insurance Reforms
14. Describe Capital Market Reforms
15. Explain Banking Reforms
16. Describe the impact on Economic Growth
17. Describe the Impact on Trade
18. Narrate the effects of Economic reforms on Agriculture
19. Describe the impact of Economic Reforms on Social Sector
20. List the Effects of Economic Reforms on Food Security
21. Identify the impact of Economic Reforms on Small Scale
Industry
22. Compare the Economic Reforms in India with other Countries
23. Outline the Economic Reforms in Different States
24. Define & Enumerate Second Generation Reforms
25. Write and present a paper on Economic Reforms
ASSESSMENT
Questionnaire will be given to the participants at the end of the
course to obtain their views about the achievement of objectives, content,
presentation, training methodology, time schedule, etc
SCHEDULE
DAY AND
TIME
MONDAY
9,00-18.00
TUESDAY
9.00-18.00
WEDNESDAY
9.00-18.00
THURSDAY
9.00-18.00
FRIDAY
9.00-17.00
CONTENTS
Introduction
Concept of Economic Reforms
Some Basic Economic Terms
International Experiences of Economic
Reforms
Five Year Plans
Early Initiative of Economic Reforms
Fiscal Stabilization
Inflation Control
Balance of Payment Management
Foreign Exchange management
Removing control on Private Investment
Opening of Economy for Trade
Reinforcement Quiz
Ending Price Control Regime
Foreign Direct Investment
PSU Reforms and Disinvestments
Infrastructure Development in Reforms
Insurance Sector reforms
Capital Market reforms
Banking Sector Reforms
Impact on Economic Growth
Impact on Trade
Impact on Agriculture
Impact on Small Scale Sector
Impact on Social Sectors
Impact on Food Security
Reinforcement Quiz
Second Generation Reforms
Initiative Taken in States
Group Presentation
Immediate Reaction Questionnaire
OBJECTIVES
1
2
22
3
4
5&6
7
8
8
9
10
11
12
12
12
13
14
15
16
17
18
21
19
20
24
23
25
CONCEPT OF ECONOMIC REFORMS
The recent waves of transition to democracy began in Southern
Europe in the mid 1970s, surged in Latin America in the mid 1980s, and
swept Eastern Europe, including the Soviet Union, in 1989-90. The
transitions often occurred when the respective economies faced serious
difficulties
or
even
profound
crises.
In several countries the collapse of authoritarian regimes was
accompanied by economic crisis, caused typically by the exhaustion of
state-led and inward-oriented strategies of development.
The state grew too much, regulated to excess, protected beyond
reason: In Latin America the state was onerous; in Eastern Europe,
overwhelming. Special interests of bureaucrats, managers of large firms,
and private businessmen replaced the public interest. Populist practices,
combined with inward-oriented developmentalist strategies, led to fiscal
indiscipline and public deficits. The consequence, besides the increasing
inefficiency of the entire economic system, was a fiscal crisis: In many
countries, the state became bankrupt. Hence, even though the regimes
were in various shades authoritarian, the state became economically
impotent.
Since economic crises often coincide with transitions to
democracy, many new democracies face a double challenge: how to
resume growth and at the same time consolidate the nascent political
institutions. Moreover, since the reforms necessary to restore the capacity
to grow inevitably engender a transitional deterioration in the material
conditions of many groups, the consolidation of democratic institutions
can easily be undermined under such conditions. The question thus arises
whether there is any reform strategy that will lead to resumed growth and
strengthen democracy.
The term ‘economic reforms’ has meant different things in
different countries in different situations. The reforms ultimately refer to
the behavioral pattern in a given economic system and not just to changes
in economic policies called as policy reforms (Agnihotri and
Ramachandran, 1996, p.24). It is the interaction between the policy
reforms and the changes in economic system that determines the success
or failure of the reform process. Kornai (Journal of Economic Literature,
vol.xxiv, pp.1687-1737) stated, “Reforms mean diminishing the role of
bureaucratic coordination and increasing the role of market”.
The term is also used to describe “significant changes in a
sizeable number of economic policies as part of a package of policy
changes” (Bates and Krueger, 1993, p.5). Thus the term refers not to
adhoc and piecemeal changes in policy but to fundamental changes with
respect to the extent of state intervention, greater reliance on market
forces, institutional and administrative changes, stabilization effort and
removal or relaxation of controls.
Democracies manage economic crises through stabilization
programs and structural reforms. Stabilization usually refers to the policies
initiated by the International Monetary Fund (IMF) and has been defined
as “the correction of imbalances which are held unsustainable”. The main
components of stabilization measures are exchange rate assessment, credit
ceilings, interest rate policy, reducing budget deficits as well as tax and
other measures to reduce public expenditure and raise revenue. These
measures were initially designed to address the problem of Balance of
Payment in developed countries.
The World Bank defined structural adjustment as reforms of
policies and institutions – macroeconomic (such as taxes), macro
economic (such as fiscal imbalances) and institutional (public sector
inefficiencies). Others define structural adjustment more narrowly to
denote policies aimed at improving an economy’s efficiency and long term
growth
Both the stabilization and structural adjustment are complimentary.
The World Bank’s emphasis on growth would yield results only when the
economy has attained measure of stability. Moreover some measures have
both stabilizing and structural effects. Moreover the policies of the World
Bank and the IMF are based on a common logic. As Bourguignon and
Morrison comment, “both treat the same illness, one by curative and the
other by preventive action. Both sets of policy view the policy as being
malevolent and as functioning in the interests of rent seeking groups in the
economy.
Since the state intervention in the economic sphere is believed to
be the root cause of all evils, the dominant theme of this paradigm is to
roll back the involvement of the state so as to let markets function freely.
An important characteristic of the economic reform package suggested by
the IMF and the World Bank is that a standard remedy is sought to be
administered in all the countries
But democracies are hampered by the vast expectations of
economic improvement they generate and by their vulnerability to popular
pressure and to interest group influence, while electoral cycles and
pluralist competition undermine their ability to plan for the long term
(Stallings and Kaufman 1989; Marer 1991). Yet new democracies appear
to have been no less able to impose economic discipline in hard times.
Comparative studies of economic reforms in the less developed countries
have shown no systematic differences among regimes in the choice of
economic reform strategies (Nelson 1990) and in economic performance
(Remmer 1986, 1990; Haggard, Kaufman, Shariff, and Webb 1990). And
even if it were true that authoritarian regimes are more capable of
imposing and persevering with economic reforms, we would not be
willing to treat democracy as an instrumental value to be judged by its
consequences for economic performance. The question often posed is not
how regimes affect the success of economic reforms but whether there are
ways to resume growth under democratic conditions.
MAIN CONTENTS OF ECONOMIC REFORMS
The ultimate economic criterion for evaluating the success of
reforms can only be whether a country resumed growth at stable and
moderate levels of inflation. Economic reforms comprise various mixes of
measures designed to stabilize the economy, steps taken to change its
structure, and, at times, sales of public assets. The central purpose of
stabilization is to slow down inflation and improve the financial position
of the state. The central goal of structural reforms is to increase the
efficiency of resource allocation. The aim of privatization is less clear,
since the ostensible reasons for the sale of public assets are not always the
true ones.(1) Yet even if all these measures are successful in their own
terms, their effect on growth is not immediately apparent. Stabilization
entails a reduction of demand, structural reforms engender closings of
inefficient firms, and privatization temporarily disorganizes the economy.
While particular reform programs differ in scope and pace, stabilization
and in particular structural reforms necessarily cause a temporary decline
in consumption. To be sustained, stabilization must entail a transitional
reduction of demand through a combination of reduced public spending,
increased taxation, and high interest rates. Trade liberalization,
antimonopoly measures, and reductions of subsidies to industries and for
prices inevitably cause temporary unemployment of capital and labor.
Privatization implies reorganization — again, a costly transition.
Moreover, market-oriented reforms are often undertaken when the effects
of the original shock are still present and while some important markets
are still missing. Finally, architects of reforms make mistakes, and
mistakes are costly. Hence, the effect of economic reforms on growth
must be negative in the short run. Indeed, for proponents of reforms,
unemployment and firm closing constitute evidence that reforms are
effective: If currently low unemployment failed to rise to between 8 and
10 percent in 1991, said the Czechoslovak economics minister, Vladimir
Dlouhy, "it would be a sign that the reforms were not working" (Financial
Times, 6 February 1991). Reform programs are thus caught between the
faith of those who foresee their ultimate effects and the skepticism of
those who experience only their immediate consequences.
The ‘economic reforms’ process advocated by
Brettonwoods institutions is characterized by 3-D: DEVALUATION,
DEREGULATION AND DEFLATION. Added to this are the policy
instruments of decentralization, privatization and globalization.
Evaluations of reform programs tend to be highly inconstant and
controversial. Given that market-oriented reforms inevitably entail a
transitional decline in consumption, it is not apparent how to judge their
success. There are three ways to think about success. The first, followed
by Nelson (1990) and most of her collaborators, is to define it merely in
terms of a continued implementation of reform measures, whatever they
may be; they gave up on using economic criteria to evaluate the success of
reforms and decided instead to explain "the degree to which policy
decisions were carried out rather than economic outcomes of the measures
taken." The second, implicit in most of the economics literature and in
Haggard and Kaufman (1991), is to conceptualize success in terms of
stabilization and liberalization. The third, to which we adhere, is to remain
skeptical until an economy exhibits growth under democratic conditions.
The first conception is untenable; since it is based on the
assumption that whatever measures have been introduced must be
appropriate. This conception admits no possibility of policy mistakes; and
— the point bears emphasis —such mistakes are frequent and perhaps
inevitable. The choice of the anchor (the nominal quantity on which the
stabilization program rests), the sequencing of deregulatory measures
(capital account versus trade first), the method and timing of devaluations,
and the distribution of cuts in public expenditures are not obvious. There
is no such thing as the sound economic blueprint, only alternative
hypotheses to be tested in practice and at a cost. Indeed, the sequencing of
reform strategies evokes sharp disagreements, and, as the Chilean debacle
of 1982 demonstrates, wrong decisions lead to costly mistakes.
The second conception is safer but still based on the
conjecture that stability and efficiency is sufficient to generate growth — a
conjecture we believe to be false. This posture assumes that partial steps
will eventually lead to growth and prosperity. Proponents of reforms argue
as if they had a Last Judgment archetype of the world: a general model of
economic dynamics that allows evaluation of the ultimate consequences of
all the partial steps. Yet this model is but a conjecture. Inflation may be
arrested by a sufficient dose of recession, but the evidence that successful
stabilization leads to restored growth is weak. Opening the economy and
increasing exports may result in improved creditworthiness of a country,
but the beneficiaries may be only the foreign creditors. The sale of public
firms may fill state coffers, but the revenues may be stolen or squandered.
Thus, the causal links between the particular reform measures and their
ultimate goal remain flimsy. As Remmer (1986) reported with regard to
the IMF standby programs, there is "only a moderate correlation between
the implementation of IMF prescriptions and the achievement of desired
economic
results."
If the ostensible purpose of market-oriented reforms is to
increase material welfare, then these reforms must be evaluated by their
success in generating economic growth. Anything short of this criterion is
just a restatement of the neo-liberal hypothesis, not its test. Given that the
reform process entails inter-temporal trade-offs, conjectures about distant
consequences cannot be avoided. Yet unless one insists on thinking in
terms of growth, one risks suffering through a long period of tension and
deprivation only to discover that the strategy that brought them about was
wrong. Having cited several instances in which stabilization policies
undermined
the
capacity
for
growth,
In all these examples, the supply has been reduced, thus creating
imbalances that, in time, have manifested themselves as excessive
demand. In these cases, demand-management policies alone would have
reduced the symptoms of these imbalances but would not have eliminated
the causes. Thus, stabilization programs might succeed stabilization
programs without bringing about a durable adjustment. The argument that
the worse, the better cannot be maintained indefinitely; at some time
things must get better. Resumed growth is the only reliable criterion of
economic success.
While economic reforms have been pursued by some authoritarian
regimes and by some well-established democracies, newly established
democratic regimes face simultaneously an urgent need to overcome an
economic crisis and to consolidate the nascent institutions. Hence, the
second criterion of successful reforms must be the consolidation of
democracy. And if reforms are to proceed under democratic conditions,
distributional conflicts must be institutionalized: All groups must channel
their demands through the democratic institutions and abjure other tactics.
Regardless of how pressing their needs may be, political forces must be
willing to subject their interests to the verdict of democratic institutions.
They must be willing to accept defeats and to wait, confident that these
institutions will continue to offer opportunities the next time around. They
must adopt the institutional calendar as the temporal horizon of their
actions, thinking in terms of forthcoming elections, contract negotiations,
or at least fiscal years. They must assume the stance put forth by John
McGurk, chairman of the British Labour Party, in 1919:
In the 1950s, the recognition of economic policy as a powerful tool
for promoting industrialization or for achieving full employment led to a
successful wave of state interventions in both the developed and
underdeveloped countries. In the latter group of countries, development
economics, based on the "big push" hypothesis, was the theoretical tool;
industrialization was the main objective; import substitution, the basic
strategy; the World Bank, the fundamental financial and advisory
institution at the international level. Since the 1970s, however, this picture
has changed radically. The Keynesian consensus collapsed in the
developed economies, and command economies of the Soviet type
stagnated. By the 1980s, the monetary policies of developed countries had
become stricter, the direction of net capital flows had been inverted, and
credits to debtor countries had been made conditional on accepting
stabilization and trade-liberalization programs. High foreign indebtedness,
usually related to ambitious import substitution and inward-oriented
industrial projects, brought many developing countries to fiscal crisis,
balance-of-payments crisis, economic stagnation, and high rates of
inflation. Concomitantly, neo-liberal thought conquered universities,
governments, and multilateral agencies in the First World. Development
economics lost ground, and market-oriented economic reforms became the
strategy offered by the First World to developing countries. While autarkic
industrialization was the blueprint for joining the developed world in the
past, economic liberalization is now the panacea offered to the less
developed countries, even though in the successful Far Eastern countries
and among the OECD countries state intervention, including a large dose
of protectionism, in fact continues to play a decisive role.
There is overwhelming evidence (Nelson 1990) that stabilization
efforts are normally undertaken as a result of a state’s fiscal crisis. By
"fiscal crisis" we mean not only that the public deficit is chronic or the
public debt excessive but that the state has lost the capacity to finance its
debt in non-inflationary terms. The erosion of public savings deprives the
state of the ability to pursue any kind of development policies. And when
the state hovers on the verge of bankruptcy and is unable to borrow, all
governments, regardless of their social base, the ideology they profess, or
the campaign promises they have made, end up undertaking the measures
that
are
necessary
to
restore
their
creditworthiness.
Yet if growth is to be resumed, the goal of reform measures must
be not only to reduce inflation and to increase competition but also to
restore the capacity of the state to mobilize savings and to pursue
development-oriented policies. State intervention in allocating resources
across sectors and activities, judicious and carefully targeted, is a
condition necessary to resume growth. (6) Having examined the
characteristics of financial markets in most developing countries, Blejer
and Cheasty (1989) concluded that they do not efficiently allocate
investments. (7) The state must acquire the capacity to mobilize savings.
According to Blejer and Cheasty (1989: 45-7), the government should aim
to set its total tax revenues and its total expenditures (both current and
capital) at levels that would yield an overall surplus, which could then be
made available, on a competitive and nonconcessionary basis, to the
private sector as well as to public enterprises. This would provide the
government with a powerful and flexible tool that would facilitate... the
efficient allocation of investment. [Moreover, they argue] the government
could increase domestic savings by undertaking actions, which increase
the perceived rate of return on private sector investments. One way of
doing this would be to invest directly in projects, which would result in
positive externalities to the private sector.
Economic reforms are inevitably a protracted process, and they
necessarily induce a temporary reduction of consumption for an important
part of the population. If such reforms are to proceed under democratic
conditions, they must enjoy continued political support through the
democratic process. The typical argument of economists — that the
economic blueprint is "sound" and only irresponsible "populists"
undermine it — is just bad economics. A sound economic strategy is a
strategy that addresses itself explicitly to the issue of whether reforms will
be supported as the costs set in. At the least, reforms must be credible
(Calvo 1989): It must be in the best interest of politicians to pursue the
measures they announce once they obtain support for these measures. But
the difficulty is more profound: how to persuade people to have
confidence in the reform process when this process temporarily induces
increased material deprivation.
Conclusion: The Five I's of Economic Reforms
The 1990s began with the widespread expectation that achieving
sound market-oriented, macroeconomic fundamentals was the ticket for
the prosperity that had long eluded poor countries. The decade is ending
with the more frustrating but also more realistic understanding that sound
macroeconomics is not a goal but just a precondition. It is also clearer now
that the recipe for prosperity has many ingredients, that their exact
quantities, mix, and the sequence in which they should be introduced are
not well known.
The search to find widely acceptable syntheses of the public
policies that should be used to move countries forward on the path toward
prosperity will of course continue. As these pages have demonstrated,
consensus on this subject is still elusive when the discussion moves from
general goals to the means to achieve them. However, this decade has left
a rich legacy in terms of the areas where action is needed and the search
for policy ideas that attract a significant level of consensus. They can be
grouped in five general categories. These five I's are: International
economic stability, investment, inequality, institutions, and ideology. No
matter what shape the future of economic reform takes, any new
consensus that may emerge will surely include these elements.
International Economic Stability: As long as the evolution of the
reforming economies is periodically derailed by powerful international
shocks, it will be difficult to cement whatever gains are produced by the
policies now in place. The solution is not to wait for a new "global
financial architecture" that would eliminate the effects of the international
economic cycle. Nor it is to impose a set of quasi-protectionist obstacles to
trade and investment flows that would isolate reforming economies from
external shocks. Rather, countries will have to develop a set of institutions
and policies that mitigate the impact of the shocks when they come, and
come they will. Examples of such measures are the commitment to strong
and well supervised banking systems, the establishment of a network of
contingent international lines of credit and other such arrangements that
would kick in automatically in case of a sudden eruption of international
credit crunches, the establishment of public budgeting processes and
institutions that counter the effects of external shocks instead of
amplifying them as has often been the case in recent years and, last but not
least, an exchange rate regime that diffuses the impact of external shocks.
Many countries have already began to move in this direction and some
have made significant progress in accepting that international financial
volatility is here to stay and thus they must prepare for it before the next
shock hits their shores. As discussed above however, there are profound
disagreements among economists about how to achieve these goals. The
development of ideas that reduce the area of disagreements is certainly a
priority.
Investment: Without investment there is no economic growth and without
it no economic policy is sustainable. Economic growth is not always
sufficient to alleviate poverty. Nonetheless, we know that without growth,
all other poverty alleviation efforts fall short.
From this perspective, both savings rates and foreign investment
become critical variables. Most recent research shows that higher savings
rates are better approached as an outcome resulting from the successful
implementation of a variety of other policies rather than as a target.
Even if, as the Asian crisis has shown, a high rate of savings does
not protect a country's economy from crashing, a higher savings rate is
needed to develop a stronger financial system that helps to buffer the
economy from external shocks. Mostly, however, higher domestic savings
and foreign capital are needed to cover the costs of the huge investments
that most reforming countries require to catch up with their high demand
for infrastructure and social services.
Therefore, given the magnitude of the demand for investment in
most countries, dependence on foreign capital will remain significant for
many years to come. Countries with the combination of conditions and
policies that are attractive to private investors in general (and foreign
investors in particular) are going to find that it is easier to fund their social
programs and build public support for the policies they are pursuing. The
capacity to attract and retain private investment will be a crucial defining
factor in the economic stability of a country and the sustainability of
policies that can, over time, improve the living conditions of the poor.
In this sense, it is also worth remembering that the many episodes
of massive capital flight tend to transform most domestic investors into
international investors. Therefore, the conditions needed to attract them
and motivate some degree of capital repatriation is not that different from
the set of incentives that all other foreign investors usually require to put
their money in a given country.
Inequality: Inequality is not a new phenomenon. In recent years,
however, globalization, democracy, and the information revolution have
brought it to the center of political debates. While poverty continues to be
a focus of political attention, nowadays it has to share the stage with
inequality. This is because worldwide inequality is increasing. But the
increased importance of inequality also results from heightened awareness
about it. As Rene de Chateaubriand had already noted in 1841, "The too
great disproportion of conditions and fortunes could be sustained as long
as it was hidden; but as soon as this disproportion has been generally
noticed, the death blow has been dealt. "
This means that in the years to come we will see renewed efforts to
fight inequality. In some countries these efforts will amount only to
populist rantings and the adoption of policies that sound good but that in
practice increase inequality and retard development. Examples of these are
the adoption of protectionist trade and investment policies, taxes that scare
investors away while not really distributing wealth, social protection
policies that cannot be funded without generating inflationary deficits,
labor laws that overly benefit those already employed while reducing
opportunities and income for unemployed workers that need it the most, or
the support for demands of public sector unions that in effect cripple the
capacity of the state to deliver social services. The central message is that
inequality will increasingly become a political lightning rod, pressuring
governments to take swift actions against it and show tangible results in
reducing income gaps. In some countries, this is likely to lead to the
adoption of policies that will delay growth, increase poverty, and retard
any significant progress towards a more just distribution of income. In
others, it may lead to a healthy focus on the urgent need to improve the
performance of public institutions, especially those in charge of providing
education and health to the poor.
Institutions: Public sector institutions are the black hole of economic
reforms. In most countries they absorb efforts and investment that yield
obscenely low returns to society, their personnel practices distort labor
markets, reduce countries' overall productivity, impair international
competitiveness, and are easy prey to vested interests that steer the
implementation of policies away from the general public good. Public
institutions are often at the center of the corruption that impairs and
discredits reform initiatives.
Malfunctioning institutions are not a new phenomenon and have
been, since time immemorial, at the core of most developing countries'
incapacity to achieve higher living standards.
The privatizations of the 1990s, the elimination of government
controls, and the deregulation of many sectors of economic activity
together with more prudent public spending, have done wonders to
alleviate some of the problems that plague these countries' institutional
landscape.
Yet, in most poor countries public sector institutions do not
function properly or simply don't work at all. Many, like schools,
hospitals, or police departments, are overwhelmed by a booming demand
for which they don't have, and have never had, the adequate personnel or
equipment to respond. Labor laws and various regulations that stifle any
attempts at efficiency paralyze others. And still others like customs, jails,
or agricultural subsidies' boards, are often corrupt to their core.
Revamping institutions obviously requires a long-term
commitment and the capacity to tackle difficult political and technical
challenges that have no preordained solutions. Moreover, institution
building is also very vulnerable to political discontinuities and economic
volatility. A change of minister or a sudden budget cut can do away with
years of efforts aimed at building competent teams or modernizing the
organizational culture of a public agency.
Sound macroeconomics and a competitive private sector are
necessary. But stability and market reforms are bound to be periodically
derailed without a strong and efficient public sector. Yet, the real
challenge ahead is to make sure that the urgency of the need to strengthen
institutions and therefore the political will to allocate massive resources to
these initiatives do not get too much ahead of the limited existing
knowledge about how to do this right.
Two Stages of Economic Reforms
Stage I
Stage II
Priorities
• Reduce inflation
• Restore growth
• Improve social conditions
• Increase international
competitiveness
• Maintain macroeconomic
stability
Reform Strategy
• Change macroeconomic rules
• Reduce size and scope of the
state
• Dismantle institutions of
protectionism and states
•
Create and rehabilitate institutions
• Boost competitiveness of the
private sector
• Reform production, financing,
and delivery of health care,
education, and other public
services
• Create "economic institutions of
capitalism"
• Build new "international
economic insertion"
Typical Instruments
•
Drastic budget cuts and tax reform
• Price liberalization
• Trade and foreign investment
liberalization
• Private sector deregulation
• Creation of social "emergency
funds" bypassing social ministries
• "Easier" privatizations
• Reform of labor legislation and
practices
• Civil service reform
• Restructuring of government,
especially social ministries
• Overhaul of administration of
justice
• Upgrade of regulatory
capacities
• Improvement of tax collection
capabilities
• Sect oral conversion and
restructuring
• "Complex" privatizations
• Building of export promotion
capacities
• Restructuring relations between
states and federal government
I. Principal Actors
• Presidency
• Economic cabinet
• Central Banks
• World Bank and IMF
• Private financial groups and
foreign portfolio investment
• Presidency and cabinet
• Congress
• Public bureaucracy
• Judiciary
• Unions
• Political parties
• Media
• State and local governments
• Private sector
Public Impact of Reforms
• Immediate
• High visibility
• Medium and long term
• Low public visibility
Administrative Complexity of
Reforms
• Moderate to low
• Very high
Nature of Political Costs
• "Temporary corrections"
widely distributed among
population
• Permanent elimination of
special advantages for specific
groups
Main Governmental Challenge
• Macroeconomic management by • Institutional development
insulated technocratic elites
highly dependent on midlevel
public sector management
Ideology: "In much of the world, the search [is] under way for an
alternative to what has come to be called neoliberalism, an alternative that
would make the market shift—the global turn to markets—more peoplefriendly than it has been so far. The neoliberal version of the market
economy may favor the interests of big international business.However the
neoliberal program suits almost no one else."
Debate about the right economic approach is far from over. In
some countries this debate may lead to experiments that diverge
drastically with some of the basic ideas of the 1990s that we now know are
necessary but not sufficient. These departures are likely to end in major
economic and political catastrophes and an eventual return to the basic
features of the approach now en vogue. In others, the debate may lead to
innovations and refinements that, while respecting the need for
macroeconomic balances and avoiding the over-reliance on the state may
in fact accelerate development.
As usual, the most important ingredient for the cure of a sick
country will be also the most elusive and random: the quality of its
leadership.
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SOME BASIC ECONOMICS TERMS
Ability-to-pay principle – The idea that taxes should be levied on a person according to how well
that person can shoulder the burden.
Absolute advantage – The comparison among producers of a good according to their productivity.
Administered Prices – Such prices are the outcome of the regulation and control of the
administrative machinery of the government. Normally fixation of the price is left to the interplay of
the forces of demand and supply in the market. When due to scarcities or the excessive demand,
the price that rules becomes high which the consumers find it hard to pay, the government steps in
as a special case to fix up the prices of certain essential or scarce products.
Advalorem Duty – Duty or tax imposed on the goods is broadly divided under two parts
(1)SPECIFIC :it depends on the physical attributes of the commodity ; ADVALOREM : it depends
on the value of the commodity e.g., when 5% advalorem duty is imposed on tea, a superior brand
of tea – like green lipton or red brook bond would pay higher duty as compared to the White Label
Tea. In contrast, specific duty would be per kg of tea leaves irrespective of its value.
Aggregate demand - Total value that the households, firms and Government are willing to pay for
the output of the economic during a given period .
Aggregate-demand curve – A curve that shows the quantity of goods and services that
households, firms, and the government want to buy at any price level.
Aggregate supply - total value of the output available household for purchase by the economic during a
given period.
Aggregate-supply curve – A curve that shows the quantity of goods and services that
firms choose to produce and sell at any level.
Appreciation – An increase in the value of a currency as measured by the amount of foreign
currency it can buy.
Asian Development Bank –The bank was set up in 1966 as per recommendation of United Nation
Commission for Asia and Pacific with a view to I) inculcate cooperation in the Asia and Pacific
region, ii) to accelerate the pace of economic development of the developing countries
Assets - Resources or things of value owned by an individual household or firm cash property title land
capital goods etc .
Automatic stabilizers – Changes in fiscal policy that stimulate aggregate demand when the
economy goes into a recession without policy makers having to take any deliberate action.
Average cost: -Average fixed cost is obtained by dividing total fixed cost by the quantity of output. It can
also be measured as the difference between the average to total cost and average variable cost
Average fixed cost- Fixed costs divided by the quantity of output.
Average Marginal Cost Relationship : When an average cost curve is falling the corresponding marginal
cost curve lies ; when the average cost curve is at its minimum the corresponding marginal cost curve is
equal to it and when the average cost curve is equal it and when the average cost curve is rising its
corresponding marginal cost curve lies above it.
Average Marginal Revenue relationship : When the average revenue curve is rising the
corresponding marginal revenue curve lies above it. When the average revenue curve is falling its
corresponding marginal curve lies it. And when the average revenue is at its maximum the
marginal revenue curve is equal to it.
Average revenue- Total revenue divided by the quantity sold.
Average tax rate – Total taxes paid divided by total income.
Average Total Cost:- average total cost is obtained by dividing total cost by the quantity of output.
Also average total cost is equal to the average fixed cost +average variable cost.
Average Variable Cost:- Average cost is obtained dividing the variable cost by the quantity of
output. Also average cost is equal to average total cost minus average fixed cost .
Balance of Payments - A statement of all transactions of a country with the rest of the world
during a given period transaction may be in trade imports and export of goods and services;
movement of short-time.
Balance of Trade -Part of the nation’s balance of payments concerning import and export A
favourable balance of trade means that exports exceed import in value an unfavourable balance of
trade means imports exceed exports in value.
Barter - Exchange of one good against another without the use of money
Bilateral monopoly - a market situation in which a monopolist seller.
Black Market:-Illegal market in which goods sell for more than legal ceilling price also market in
goods which is not openly recorded in account books to evade income tax.
Benefits principle – The idea that people should pay taxes based on the benefits they receive
from government services.
Bond- A certificate of indebtedness ; a legal agreement to pay a certain sum of money (called
principle ) at some future date and carrying a fixed rate of interest issued by corporations, centre
state and local government a means of financing long term investments.
Bond- This term is taken from the early English word band, which means a fastening. The work
bond implies that one is “bound” to repay an obligation.
Borrow – The word borrow derives from the Old English word borg, which means “pledge”.
Break-Even point - output at which average revenue equals average total cost In economics total
cost includes normal profits .The break even point as defined in economics therefore does not
imply zero profits .
Bretton Woods Institutions: Collective name for World Bank Group and the
International Monetary Fund (IMF), institutions established in 1944 at Bretton Woods,
New Hampshire, USA.
Broker – an intermediary between the buyer and a seller; in stock exchanges, brokers are well
known for their useful services and earn handsome commission as well
Budget Surplus - Budget in which total revenue exceeds total expenditure .
Bretton Woods – An international conference held in 1944 at Bretton Woods to discuss the
problem of making international payments. Discussions culminated in the formation of International
Monetary Fund in 1947 and the International Bank for Reconstruction and Development.
Budget- In the middle ages, French merchants carried their money in a bougette, or “little bag”.
The work borrows from the Latin work bulga, meaning “a leather bag”. Within the bag, one’s
monetary resources were kept.
Budget constraint – The limit on the consumption bundles that a consumer can afford.
Budget deficit – A shortfall of tax revenue from government spending.
Budget deficit- An excess of government spending over government receipts.
Budget surplus- An excess of tax revenue over government spending..
Business – Business originally applied to a person suspected of taking part in mischievous
activity. Eventually, it related to any type of activity, and later still to a type of vocation.
CASH RESERVE RATIO (CRR) : Banks are required to maintain a certain percentage of their time
and demand deposit as cash and this percentage is called CRR. The RBI pays a nominal interest
rate on the cash reserves maintained by the banks. Needless to say this rate is much less than the
market rate. Increased CRR levels result in an increased proportion of the banks’ resources lying
as idle cash.
Capital – The equipment and structures used to produce goods and services.
Capital- This word comes ultimately from the Latin word for “head”. The words capital
and cattle come from this same root. Cattle were and are a source of wealth, and are
typically measured in terms of how many “head of cattle”.; Physical capital is land and
the stock of products set aside to support future production and consumption. In the
national income and product accounts, private capital consists of business inventories,
producers' durable equipment, and residential and nonresidential structures. Financial
capital is funds raised by governments, individuals, or businesses by incurring liabilities
such as bonds, mortgages, or stock certificates. Human capital is the education, training,
work experience, and other attributes that enhance the ability of the labor force to produce
goods and services. Bank capital is the sum advanced and put at risk by the owners of a bank; it
represents the first "cushion" in the event of loss, thereby decreasing the willingness of the owners
to take risks in lending..
Capital input: A measure of the flow of services available for production from the stock of capital
goods. Growth in the capital input differs from growth in the capital stock because different types of
capital goods (such as equipment, structures, inventories, or land) contribute differently to
production.
Cash accounting: A system of accounting in which revenues are recorded when actually received
and outlays are recorded when payment is made..
Capitalism -Economic system featuring private property in means of production commodity
production and profit ad the guiding motivation force of production .
Capital Account –It includes those economic transactions that result in changes in foreign
financial assets and liabilities. Capital Transactions are classified into three main sectors viz.,
Private, Banking and Official
Capital Adequacy : Capital adequacy rules mean that a stockbroker has to have enough money
to conduct its business:
to support the risks of trading;
the possibility of reduced revenue from weak trading conditions;
the danger that book debts may not be fully realized.
Stringent rules governing capital adequacy for brokers have been laid down by the Securities &
Futures Association. Commercial banks also face a raft of capital adequacy rules established by
international regulators.
Capital Adequacy Norms :Capital Adequacy Norms expect scheduled commercial banks to make
large provisions amounting to over Rs.14,000 crores for bad and doubtful advances in their
portfolio. These were fixed at 8 percent by RBI in 1992.
Capital Market - places where long term to capital assets such as bonds debentures shares and
mortgages are bought and sold.
Capital flight- A large and sudden reduction in the demand for assets located in a country.
Cartel- A group of firms acting in unison; this word originates with the Latin word charta, which
means “paper” and led to the English word for chart. Initially, the word referred to a written
challenge to a fight. Later, it changed its meaning and referred to a libelous written statement. By
the 1600s, it became an agreement associated with prisoner of war exchanges. Eventually, the
word came to take on its current meaning, “an agreement in restrain of trade”.
CASH RESERVE RATIO (CRR) : Banks are required to maintain a certain percentage of their time
and demand deposit as cash and this percentage is called CRR. The RBI pays a nominal interest
rate on the cash reserves maintained by the banks. Needless to say this rate is much less than the
market rate. Increased CRR levels result in an increased proportion of the banks’ resources lying
as idle cash.
Catch-up effect- The property that countries that start off poor tend to grow more rapidly than
countries that start off rich.
Central bank- An institution designed to oversee the banking system and regulate the quantity of
money in the economy.
Ceteris paribus- A Latin phrase, translated as “other things being equal,” used as reminder that all
variables other than the ones being studied are assumed to be constant.
Circular-flow diagram – A visual model of the economy that shows how dollars flow through
markets among households and firms.
Classical dichotomy – The theoretical separation of nominal and real variables.
Closed economy- An economy that does not interact with other economies in the world.
Coase theorem- The proposition that if private parties can bargain without cost over the allocation
of resources, they can solve the problem of externalities on their own.
Changes in Consumption - Increase or decrease in consumption indicated by a shift of the
consumption function average propensity to consume curve to a new position.
Change in Demand - increase in demand brought about by changes in (1) buyers money in
comes (2) the prices of related goods (3) Buyers tastes and preferences (4)The number of buyers
in market and (5) buyers expectations regarding future prices and incomes indicated by a shift of
the demand curve to the new position.
Change in Quantity Demanded - Expansion or contraction of quantity demanded of a commodity
supplied in response to change in its price represented by a movement along the demand curve.
Change in Quantity Supplied - Expansion or contraction of quantity of a commodity supplied in
response to change in its price represented by a movement along the demand curve.
Change in supply - increase or decrease in supply brought about (1) change in technology;(2)
price of inputs (3) prices of other goods (4) number of sellers in the market (5) sellers expectations
regarding future prices and (6) goals of firms. Represented
by a shift of the supply curve to a new position.
Circular Flow of Economic Activity - A model which demonstrates the movement of goods and
resources and payments and expenditure among different sectors of the economy.
Collective bargaining – The process by which unions and firms agree on the terms of
employment.
Collusion- An agreement among firms in a market about quantities to produce or prices to charge.
Coin- The word coin comes originally from the Latin word cuneus, meaning “wedge”. The term
came to apply to wedge-shaped die that made these small pieces of money. Later, the word coin
was applied to the stamped image on the money, but eventually referred to the money itself.
Collective Agreement - A bargaining contract worked out between the Union and the
Management in which wages conditions of employment and similar matters are agreed upon
.
Collective Farms - A form of agricultural cooperatives in which the means of production are
commonly owned and after providing for depreciation and in vestment the output is divided
amongst the members according to the quality and quantity of work done by each member
collective farms exist in the soviet Union Bulgaria and some other socialist countries.
Commercial banks - Institutions that create credit financial institutions that accept deposit and
give loans and perform of the financial functions. They create credit by creating deposits on the
basis of their cash reserves Generally the total credit created is a multiple of the cash reserves
.The ratio of cash reserves to total deposits is prescribed by law
Commodity money- Money that takes the form of a commodity with intrinsic value.
Common resources- Goods that are rival but not excludable.
Commercial bank
Bank that offers a broad range of deposit accounts, including checking,
savings, and time deposits, and extends loans to individuals and
businesses. Commercial banks can be contrasted with investment
banking firms, such as brokerage firms, which generally are involved in
arranging for the sale of corporate or municipal securities.
Commodity prices
An index of commodities (such as oil and steel) traded in worldwide
markets.
Comparable worth – A doctrine according to which jobs deemed comparable should be paid the
same wage.
Comparative advantage- The comparison among producers of a good according to their
opportunity cost.
Compensating differential – A difference in wages that arises to offset the nonmonetary
characteristics of different jobs.
Competitive market – A market with many buyers and sellers trading identical products so that
each buyers an seller is a price taker.
Competitive market- A market in which there are many buyers and many sellers so that each has
a negligible impact on the market price.
Complements – Two goods for which an increase in the price of one good leads to a decrease in
the demand for the other good.
Company – The Latin words cum, “with”, and panis, “bread”, combine to form the source of the
word company. Initially, the word was relational, corresponding with the word companion.
Eventually, it came to exist within a business context as well.
Constant returns to scale – The property that long- run average total cost stays the same as the
quantity of output changes.
Consumer – The Latin term consumo means “eat up completely”, which understandably led to our
current use of the term consumer.
Consumer price index – A measure of the overall cost of the goods and services bought by a
typical consumer.
Consumer sovereignty -A concept in which the consumer in the market is said to be the king who
through his demand tastes and preferences decides what is to be produced and in what quantities.
Of course consumer sovereignty is limited by the existing distribution of income and influence on
demand exerted by sellers through advertisement and other measures of sales promotion.
Corporation: A form of business organization association of shareholders created under law and
recognized by it as artificial person. Its chief characteristics are limited liability of the shareholders
a permanent existence and ability to raise larger amount of capital resources through the sale of
shares and bonds .
Consumer surplus – A buyer’s willingness to pay minus the amount the buyer actually pays.
Consumption – Spending by households on goods and services, with the exception of purchases
of new housing.
Cost – The value of everything a seller must give up to produce a good.
Cost-benefit analysis – A study that compares the costs and benefits to society of providing a
public good
.
Cost: sacrifice -made to acquire something it may be in terms of money cost of bygone
alternatives.
Cost –Push inflation - A situation of general rise in prices in which costs( payment made to
factor owners) increase faster than productivity or efficiency. Familiar examples wage-push and
profit-push inflation
.
Credit - The promise to pay in the future in order to buy or borrow in the present. The right to defer
payment of debt.
Credit card - Any card, plate, or coupon book that may be used repeatedly to borrow money or
buy goods and services on credit.
Credit instrument - A written document serving as either a promise or order to transfer funds from
one person institution to another
Creeping inflation- slow and persistent rise in general level of prices over a long number of years
Currency - paper money excluding coins
Currency devaluation - A deliberate downward adjustment in the official exchange rate
established, or pegged, by a government against a specified standard, such as another currency or
gold.
Currency revaluation - A deliberate upward adjustment in the official exchange rate
established, or pegged, by a government against a specified standard, such as another
currency or gold.
Current Account – Term used in BOP means an account divided into ‘Merchandise’, Non
Monetary Gold Movement, and Invisibles.
Current-account balance: The net revenues that arise from a country's international sales and
purchases of goods and services plus net international transfers (public or private gifts or
donations) and net factor income (primarily capital income from foreign property owned by
residents of that country minus capital income from domestic property owned by nonresidents).
The current-account balance differs from net exports in that it includes international transfers and
net factor income. (BEA.
Current Assets - Cash and other assets that can be readily converted in to cash.
Current Liabilities- debts that fall during the year.
Cyclical unemployment - unemployment in industrial market economics resulting from down
showings of economic activity on account of deficient demand (insufficient to ensure Keynesian
full employment
Crowding-out effect – The offset in aggregate demand that results when expansionary fiscal
policy raises the interest rate and thereby reduces investment spending.
Currency – The paper bills and coins in the hands of the public.
Cyclical unemployment – The deviation of unemployment from its natural rate.
Deadweight loss – The reduction in total surplus that results from a tax.
Debt service: Payment of scheduled interest obligations on outstanding debt. ; debt service also
refers to a change in interest payments resulting from a change in estimates of the surplus or
deficit.
Deduction- A process in logical reasoning wherein from defined promises certain general
principles are deducted: opposite of induction.
Deficit: The amount by which the federal government's total outlays exceed its total revenues in a
given period, typically a fiscal year.
Deficit Budget – Budget can show three positions – SURPLUS, DEFICIT, BALANCED; when
expenditure of the government exceeds revenue, it is called deficit budget and it is made up by
raising loans –short or long term or internal or external.
Deposit- Deposit is created by putting together two Latin words ; de, a relatively common prefix
that means “away”; and positus, meaning “placed”.
Demand - The quantity demanded of a commodity that buyers would be willing to buy at different
alternative prices during a given period, all other factors influencing demand remaining unchanged.
Demand Curve- A curve tracing the relationship between quantity demanded of a commodity and
its prices during the given periods, all other determinants of demand remaining unchanged.
Demand deposits – Balances in bank accounts that depositors can access on demand by writing
a check.
Demand Price - Price which the buyer is willing to pay for a given quantity of a commodity.
Demand-Pull Inflation - A state of rising prices brought about by increase in aggregate demand in
the face of short supply.
Demand schedule – A table that shows the relationship between the price of a good and the
quantity demanded.
Depreciation – A decrease in the value of a currency as measured by the amount of foreign
currency it can buy.
Depression – A severe recession.
Derived demand - Demand for product or a factor of production which is derived from the
demand of some other product in the production of which it is a used . For example the demand
for bricks is derived from the demand for housing construction and the demand for steel is partly
derived from the demand for cars.
Devaluation-: official reduction in the foreign value of domestic currency. For example if the
official rate of exchanged between rupees and dollars is rupees 7=1$ and the government reduces
the value of rupee by making Rs. 10 =1$ this will be devaluation . It is done to encourage the
country’s export and discourage imports.
Diminishing marginal product – The property that the marginal product of an input declines as
the quantity of the input increases.
Diminishing returns – The property that the benefit from an extra unit of an input declines as the
quantity of the input increases.
Direct Tax - Tax that cannot be shifted; the burden of direct tax is borne by the person on whom it
is initially fixed. Example: personal income tax, social security tax paid by employees, death tax,
etc.
Discount Rate - Interest rate charged by the Central Bank on loans to member banks, also called
the bank rate; it is called a discount rate because the interest on the loan is discounted at the time
of the loan rather than collected at the time of repayment.
Discount rate – The interest rate on the loans that the Fed makes to banks
Discouraged workers – Individuals who would like to work but have given up looking for a job.
Discrimination – The offering of different opportunities to similar individuals who differ only by
race, ethnic group, sex, age, or other personal characteristics.
Diseconomies of scale – The property that long-run average total cost rises as the quantity of
output increases.
Disequillibrium - Lack of equilibrium. Example: the quantity supplied and quantity demanded of a
commodity at a given price are unequal so that there is a tendency for the market price and/or the
quantities supplied to change.
Disguised Unemployment - (under-employment): (1) A situation in less developed countries
where people are apparently employed but are actually unemployed or under-employed; for
example, in agriculture in India. (2) A situation in advanced countries in which the employed
resources are being employed in uses less efficient than normal; or example, a doctor may be
employed as a cab driver or as a compounder.
Disinvestment - Reduction in the total stock of capital goods on account of failure to provide for
depreciation.
Disposable Personal Income: income that remains after payment of personal tax.
Dissaving - consumption in excess of income. This may be financed by drawing down past
savings, by borrowing or by aid from others.
Dividend - Earnings on stocks paid to shareholders
.
Division of Labour - Specialization amongst workers, each worker doing a particular job; leading
to increased efficiently.
Draft - A bank order on a second party, directing payment to a third party.
Dumping - Sale of a commodity at different prices in different markers, lower prices being charged
in a market where demand is relatively elastic.
Duopoly - A market situation in oligopoly where there are only two sellers.
Dominant strategy – A strategy that is best for a player in a game regardless of the strategies
chosen by the other players.
Economics – The study of how society manages its scarce resources.
Economist – This important word is taken from the Greek work oikonomia, which means “house
management”. It originally applied to persons who were good administrators within a community,
business or home.
Economic Costs - Payments made to owners of factor-inputs for supply of their services to a
particular use.
Economic goods - Scarce goods which command a price; opposite of free goods.
Economic Growth - Rate of increase of an economy’s real income over a period expressed in
terms of GNP or NNP as total or per capita.
Economic (Pure) Profit - Net revenue; receipts of the firm in excess of economic costs including
normal profits.
Economies of scale – The property that long-run average total cost falls as the quantity of output
increases.
Efficiency – The property of a resource allocation of maximizing the total surplus received by all
members of society.
Efficiency – The property of society getting the most it can from its scarce resources.
Efficiency wages – Above-equilibrium wages paid by firms in order to increase worker
productivity.
Efficient scale – The quantity of output that minimizes average total cost.
Elasticity – A measure of the responsiveness of quantity demanded or quantity supplied to one of
its determinants.
Entrepreneurship (or Enterprise) - A factor of production, in modern economies, the organizer of
production, raising the capital required, organizing management of the business, making essential
business decisions; bearing risks and reaping the gains of success and loss of failure. Joseph
Schumpeter considers innovation as the essential function of an entrepreneur in the capitalist
system.
Equilibrium: A state of balance between opposing forces; a state of rest which once reached,
there is no tendency to change from it. Example: equilibrium exists when supply and demand for a
commodity are equal to each other at a certain price.
Equilibrium Conditions - Conditions in which equilibrium I an economic organism-a household, a
firm, or the entire economy-shall prevail.
Equilibrium Price - Price of a commodity in the market at which supply equals demand; the point
of intersection of supply and demand curve; price at which a firm’s profits are maximized (or losses
minimized if the firm has to produce at a loss).
Equilibrium Quantity - Quantity of a commodity at which demand equals supply; quantity of a
commodity at which a firm’s profits are maximized.
Equilibrium quantity – The quantity supplied and the quantity demanded when the price has
adjusted to balance supply and demand.
Equity – The fairness of the distribution of well-being among the various buyers and sellers.
Equity – The property of distributing economic prosperity fairly among the member of society.
Excess Reserves - Reserves in excess of the bank’s legal reserves; this determines bank’s
additional lending power.
Exchange rate: The number of units of a foreign currency that can be bought with one unit of the
domestic currency, or vice versa.
Excise tax: A tax levied on the purchase of a specific type of good or service ; Tax
imposed on the manufacture, sale or the consumption of various commodities such as taxes on
textiles cloth, liquor, tobacco and petrol, etc
Explicit Cost: Money expenditure recorded I the firm’s account book; contrasted with implicit cost.
External Economies (and Diseconomies) of Scale: Economies that are available to a firm on
account of concentration of industry at one place, economies of localization in the form of cheaper
transport, development of labour market, availability of cheap finances, etc. Diseconomies may
result form opposite tendencies raising the prices of inputs.
Externalities: External benefits for which no payment has to be made and which are external to a
household or a firm.
Excess demand – A situation in which quantity demanded is greater than quantity supplied.
Excess supply – A situation in which quantity supplied is greater than quantity demanded.
Excludability – The property of a good that a person can be prevented from using it.
Exports – Goods and services that are produced domestically and sold abroad..
Externality – The impact of one person’s actions on the well-being of a bystander.
Factors of production – The inputs used to produce goods and services.
Federal reserve (Fed) – The central bank of the United Stated
Fiat money – Money without intrinsic value that is used as money because of government decree.
Finance – Finance derives from the Latin and Old French word for fine, which originally meant
“end”. The French word for finance came to mean both “payment” and “ending”, but in the 18th
century the English adapted it to mean “the management of money”.
Financial intermediaries – Financial institutions through which savers can indirectly provide funds
to borrowers.
Financial markets – Financial institutions through which savers can directly provide funds to
borrowers.
Financial system – The group of institutions in the economy that help to match one person’s
saving with another person’s investment.
First Generation Reforms: Conditionalities applied through IMF programmes, which
focus on macroeconomic reforms to achieve macroeconomic stability, such as
liberalisation
of
the
exchange
and
interest
rates.
Fiscal Policy- Government’s expenditure and tax policy; an important means of moderating the
upswings and downswings of the business cycle.
The government's choice of tax and spending programs, which influences the amount and
maturity of government debt as well as the level, composition, and distribution of
national output and income. Many summary indicators of fiscal policy exist. Some, such
as the budget surplus or deficit, are narrowly budgetary. Others attempt to reflect aspects
of how fiscal policy affects the economy. For example, a decrease in the standardizedbudget surplus (or increase in the standardized-budget deficit) measures the short-term
stimulus of demand that results from higher spending or lower taxes. The fiscal gap
measures whether current fiscal policy implies a budget that is close enough to balance to
be sustainable over the long term. The fiscal gap represents the amount by which taxes
would have to be raised, or spending cut, to keep the ratio of debt to GDP from rising
forever. Other important measures of fiscal policy include the ratios of total taxes and
total spending to
Fixed Assets- Durable assets of a firm such as land, building, machinery, furniture and transport,
etc.
Fixed Costs- Costs that do not vary with the output; costs which r4main fixed even when output
changes. Example: interest on capital borrowed, property tax, rental payment, staff, etc.
Fisher effect – The one-for-one adjustment of the nominal interest rate to the inflation rate.
Fixed cost – Costs that do not vary with the quantity of output produced.
Foreign direct investment: Financial investment by which a person or an entity acquires a lasting
interest in, and a degree of influence over, the management of a business enterprise in a foreign
country. (BEA)
Foreign Exchange- Foreign currency and other papers used for making international payments.
Foreign Exchange Rate- Prices of the domestic currency in terms of foreign currencies.
Foreign Trade Multiplier - An import surplus or and export surplus has a multiplier effect on
changes in national income; magnified variations in national income as a result ooh changes in
exports or imports.
Free Goods - Goods with zero market price; opposite of economic goods.
Fractional-reserve banking – A banking system in which banks hold only a fraction of deposits as
reserves.
Free rider – A person who receives the benefit of a good but avoids paying for it.
Frictional Unemployment- Unemployment in the economic system due to frictions; laborers in the
process of changing one job for another; imperfect labour mobility due to lack of knowledge about
job opportunities and other factors which prevent people from finding suitable jobs smoothly.
Full Cost Price- Price at which all the firm’s costs of production are being met.
Full Employment- A situation in which the economy’s resources are being used fully; zero
deflationary unemployment, i.e. a situation in which all those who want to work at the current rate
of wages are, in fact, employed.
Functional Finance - The role of finances in a fiscal policy which aims at achieving full
employment with price stability and economic growth and not balanced budget policy as an end in
itself.
Functional Income Distribution - Payment made to the owners of factors of production in return
for the services of these factors; wages for labour, rent for land, interest on capital and profits for
entrepreneurship.
GATT: General Agreement on Tariffs and Trade. This was a dodgy international body set in 1947,
to probe into the ways and means of reducing tariffs on internationally traded goods and services.
Tariffs on primary products were drastically slashed in 1964. Member countries signed the Uraguay
Round Agreement in 1994 and became the World Trade Organisation.
Government Monopoly - Monopoly owned and operated by a central, or a state, or a local
government, Examples: postal services, irrigation and power systems, railways, etc.
Gross National Expenditure - Gross National Product from the income side; consists of national
income at factor cost – wages + rent + interest + profits + indirect taxes and capital consumption.
GDP deflator – A measure of the price level calculated as the ration of nominal GDP to
real GDP times 100.
Gilt Edged Market – the market in government securities or the securities guaranteed(as to both
principal and interest) by the government
Gross domestic income (GDI): The sum of all income earned in the domestic production of
goods and services. In theory, GDI should equal GDP, but measurement difficulties leave a
statistical discrepancy between the two. (BEA)
Gross Domestic Product (GDP) – The market value of all final goods and services produced
within a country in a given period of time.
Gross National Product (GNP) – The market value of all final goods and services produced by
permanent residents of a nation within a given period of time.
Horizontal equity – The idea that tax payers with similar abilities to pay taxes should pay the
same amount.
Human capital – The knowledge and skills that workers acquire through education, training, and
experience.
Human capital – The accumulation of investments in people, such as education and on-the-job
training.
Hyper Inflation - A situation in which general prices are rising sharply with no or little increases in
output, also called ‘runaway’ ‘or galloping inflation’.
Hypothesis - The term for expressing possible relationship between variables in the real world; a
working guess about the behaviour of things yonder certain conditions.
Import quota – A limit on the quantity of a good that can be produced abroad and sold
domestically.
Imports – Goods and services that are produced abroad and sold domestically.
Imports- Goods produced abroad and sold domestically.
In-kind transfers – Transfers to the poor given in the form of goods and services rather than cash.
Income - Earning by the use of all human or material resources; a flow in terms of money during a
given period.
Income Consumption Curve - In indifference curve analysis a line connecting the tangency points
of price lines and indifference curve upon changes of income, with no change in pieces; a line
which shows the amounts of two commodities that a consumer will combine when his income
changes while piece remains constant.
Income Effect - Change in the quantity of a commodity demanded when the real income of the
buyer changes as a result of the change in the price of the commodity alone (contrast with
substitution effect).
Income-Tax - A tax on the net income. Examples: personal income tax and corporation income
tax.
Income effect- The change in consumption that results when a price change moves the consumer
to a higher or lower indifference curve.
Income elasticity of demand – A measure of how much the quantity demanded of a good
responds to a change in consumers income, computed as the percentage change in quantity
demanded divided by the percentage change in income.
Indexation – The automatic correction of a dollar figure for the effects of inflation by lar or contract.
Indifference curves – Curves that show consumption bundles that give the consumer the same
level of satisfaction.
Indirect Tax - Tax which can be shifted to someone else other than the person on whom it is
initially imposed. Examples: excise duty, sales-tax, import duty.
Induction - Deriving through reasoning from facts or observations, general laws and principles; the
process of generalizing experience (opposite of deduction).
Industry - A group of firms producing similar or identical product.
Inferior good – A good for which an increase in income reduces the quantity demanded.
Inflation – An increase in the overall level of prices in the economy.
Inflation rate – The percentage change in the price index from the preceding period
.
Inflationary Gap -: Excess of aggregate demand from aggregate supply at full employment,
leading to inflation.
Infrastructure: Government-owned capital goods that provide services to the public,
usually with benefits to the community at large as well as to the direct user. Examples
include schools, roads, bridges, dams, harbors, and public buildings
Innovation - Introduction of new production, making; innovations increase revenues and/or reduce
cost. Innovation Theory put forward by Prof. Jeseph Schumpeter. According to this theory, human
progress is the result of a successive waves of innovations brought about by entrepreneurs; used
as explanation of how profits arise under competitive capitalism.
Investment: Physical investment is the current product set aside during a given period to be used for future
production--in other words, an addition to the stock of capital goods. As measured by the national income
and product accounts, private domestic investment consists of investment in residential and nonresidential
structures, producers' durable equipment, and the change in business inventories. Financial investment is
the purchase of a financial security, such as a stock, bond, or mortgage. Investment in human capital is
spending on education, training, health services, and other activities that increase the productivity of the
workforce. Investment in human capital is not treated as investment by the national income and product
accounts..
International Bank for Reconstruction and Development (World Bank): A bank established by
the UN in 1945 for reconstruction of economies in the post-wear period, and to promote
development of less developed countries. Loans are generally given for infrastructural
development. The bank fights shy of development in the public sector in profitable fields.
International Monetary Fund :Established in 1944 by the UN to ensure convertibility of the
currencies and multilateral trade; to eliminate short-run fluctuations in a nation’s economy due to
changes in trade of speculative movement of capital through exchange rate stabilization, and
ensuring that changes in the exchange rate of currency takes place with Fund’s approval.
Inventory: Stock of goods in the hands of a firm; includes raw materials and finished goods.
Investment: Expenditure on creation of new productive assets and inventories by households,
private business firms and government.; spending on capital equipment, inventories, and
structures, including household purchases of new housing.
Internalizing an externality – Altering incentives so that people take account of the external
effects of their actions.
Invisible – Invisibles are classified into services Comprising travel, transportation, insurance,
investment income, government not included elsewhere and miscellaneous) and transit payments.
Labor- This word comes from the Latin word laborare, which means “to be tried”. Beginning with
the Reformation, labour supposedly came to be regarded as a duty.
Labor force – The total number of workers, including both the employed and unemployed.
Labor-force participation rate – The percentage of the population that is in the labor force.
Law of demand – The claim that, other things being equal, the quantity demanded of a good falls
when the price of the good rises.
Law of supply – The claim that, others things being equal, the quantity supplied of a good rises
when the price of the good rises.
Law of supply and demand – The claim that the price of any good adjusts to bring the supply and
demand for that good into balance.
Less Developed ( Underdeveloped) Country: Countries with low productivity per person; hence,
low income per capita as compared to rich, developed countries. Other characteristics are: (1) Low
saving and investment; (2) High rate of population growth; (3) over-whelming dependence upon
agriculture and allied occupations for employment and income generations; (4) Low levels of
literacy; (5) Low nutritional standards and standards of health; (6) Extensive disguised
underemployment; and (7) Heavy reliance on few items for export.
Life cycle – The regular pattern of income variation over a person’s life.
Liquidity - The ease with which an asset can be converted into cash. Money is the most liquid
asset;the ease with which an asset can be converted into the economy’s medium of exchange.
Liquidity Preference, theory of Interest - Theory of interset of J.M.Keynes; demand for cash on
account of preference for liquidity on account of three motives: (1) the “transactions motive”; (2) the
“precuationary motive”; (3) the “speculative motive”.
Liquidity Trap - A condition in which an increase in money-supply will not lead to a reduction in
the rate of interest, for, the demand for money at this rate shall be infinite; the liquidity preference
curve at this rate shall be horizontal in shape.
Loanable Fund (Theory of Interest) - Theory according to which interest rate is determined by
the demand for, and supply of, loanable funds and not all money.
Lockout - Closing down of a factory by the employers to keep the workers out.
Lump-sum tax – A tax that is the same amount for every person.
Macroeconomics - Part of economic study which studies the economy as a whole, as
distinguished from the parts: aggregate demand, aggregate supply, saving and investment;
analyses the economic ‘forest’ as distinguished from the ‘trees’ that comprise the forest.
Marginal Cost - Change I total cost resulting from a unit change in output.
Marginal Cost Price - Price as determined by the point of equality of marginal cost and marginal
revenue.
Marginal Efficiency of Investment - Expected rate of return of the marginal unit of investment.
Marginal Product - Change in total product due to a unit change in the quantity of variable inputs.
Marginal Productivity Theory of Distribution - Theory or principle which states that a firm shall
employ a factor only up to the point where its MC = MRP.
Manager- The word manager comes from the Italian word maneggiare, “to train horses”, which
derives from their word mano, meaning “hand”
Market Economy - Economy system in which the central problem of an economy-what, how and
for whom-are decided by the operation of free market forces of supply and demand.
Market price - The price which prevails in the market at any particular time.
Market Rate of interest -Money rate of interest that prevails in the market at any particular time,
as distinct from real rate of interest.
Merger – The Roman word for “plunge” or “sink” is mergo.
Microeconomics - Part of economic theory which deals with the individual parts of the system
such as individual households, firms or industries; distinguished from macroeconomics; deals with
the “trees” in the economy which is the “forest’.
Mixed Economy - An economy in which both the state and the private sector co-exist; decisions
on what, how and for whom are made partially by the market and partially by the state or any other
public authority; many consider it essentially a transitory form.
Monetary Asset - Claim against a fixed amount of money, Examples: saving, deposits, promissory
notes, cash, bonus, accounts receivabl, etc Against each asset there is an equal amount of liability.
Monetary Liability - Promise to pay a claim in a fixed quantity of money; against each liability
there is a corresponding monetary asset.
Monetary Policy - Policy through which the monetary authority (such as the Reserve Bank of India
or the Federal Reserve System in USA) which expands or contracts the money supply, or makes
credit cheap or dear; used as contra-cyclical policy.; also,the strategy of influencing
movements of the money supply and interest rates to affect output and inflation. An
"easy" monetary policy suggests faster growth of the money supply and initially lower
short-term interest rates in an attempt to increase aggregate demand, but it may lead to a
higher rate of inflation. A "tight" monetary policy suggests slower growth of the money
supply and higher interest rates in the near term in an attempt to reduce inflationary
pressure by lowering aggregate demand.
Money - Anything which is acceptable in an economy as medium of exchange, measure of value,
a standard for deferred payments, and a store of value; different things used as money at different
times.
Money Income - Money received as remuneration for work Dona or services supplied; contrasted
with real income.
Money Wages - Wages received in cash; contrasted with real wages.
Money – One of the responsibilities of the Roman goddess Juno was to warn the Romans of
impending danger. In this capacity, she was called Juno Moneta, where the name Moneta derives
from a Latin word meaning “warn”. As a tribute to Juno, the Romans built a temple in the honor on
Capitoline Hill, which later became the place where coinage was kept. Becoming known also as
the guardian of finances, the name Moneta would evolve into our word money.
Monopolistic Competition - A market from with a large number or buyers and sellers of a
differentiated product; no carriers to entry of firms in the industry.In this market form. the demand
curve facing an individual seller in this market form is negatively sloped.
Monopoly – In Greek, the word monopolion means “the right to exclusive sale”.
National income: Total income earned by Indian. residents from all sources, including employee
compensation (wages, salaries, benefits, and employers' contributions to social insurance
programs), corporate profits, net interest, rental income, and proprietors' income.
National Income (at factor cost) - Total of all incomes earned to factors of production;
distinguished from personal income; used in economic literature to represent the outpur or income
of an economy in a simple fashion.
Oligopoly – A market structure in which only a few sellers offer similar or identical products.
Open economy – An economy that interacts freely with other economies around the world.
Open-market operations – The purchase and sale of United States government bonds by the
Fed.
Opportunity cost – Whatever must be given up to obtain some item.
Perfect complements – Two goods with right-angle indifference curves.
Perfect substitutes – Two goods with straight-line indifference curves.
Permanent income – A person’s normal income.
Personal Income - Total income received by individuals from all sources.
Personal Income Distribution - The way in which income is distributed between individuals,
groups and classes in an economy; often expressed as percentage of families falling within certain
income-ranges.
Planned Economy - Economic System in which basic decisions in an economy are made
according to a plan.
Philips curve – A curve that shows the short-run tradeoff between inflation and unemployment.
Physical capital – The stock of equipment and structures that are used to produce goods and
services.
Pigovian tax – A tax enacted to correct the effects of a negative externality.
Positive statements – Claims that attempt to describe the world as it is.
Poverty line – An absolute level of income set by the federal government for each family size
below which a family is deemed to be in poverty.
Poverty rate – The percentage of the population whose family income falls below an absolute level
called the poverty line.
Price ceiling – A legal maximum on the price at which a good can be sold.
Price discrimination – The business practice of selling the same good at different prices to
different customers.
Price elasticity of demand – A measure of how much the quantity demanded of a good responds
to a change in the price of that good, computed as a percentage change in quantity demanded
divided by the percentage change in price.
Price elasticity of supply – A measure of how much the quantity supplied of a good responds to a
change in the price of that good, computed as the percentage change in quantity supplied divided
by the percentage change in price.
Price floor – A legal minimum on the price at which a good can be sold.
Prisoner’s dilemma – A particular ‘game’ between two captured prisoners that illustrates why
cooperation is difficult to maintain even when it is mutually beneficial.
Private goods- Goods that are both excludable and rival.
Private saving – The income that households have left after paying for taxes and consumption.
Producer price index – A measure of the cost of a basket of goods and services bought by firms.
Producer surplus – The amount a seller is paid for a good minus the seller’s cost.
Production function – The relationship between quantity of inputs used to make a good and the
quantity of output of that good.
Production possibilities frontier – A graph that shows the various combinations of output that
the economy can possibly produce given the available factors of production and the available
production technology.
Productivity – The amount of goods and services produced from each hour of a worker’s time.
Profit – Total revenue minus total cost.
Progressive tax – A tax which high-income taxpayers pay a larger fraction of their income than do
low-income taxpayers.
Proportional tax – A tax for which high-income and low-income taxpayers pay the same fraction
of income.
Prudential Norms: Prudential norms and standards relating to capital adequacy, income
recognition, asset classification and provisioning have been upgraded. Indian banks are required to
achieve capital adequacy norms of 10% risk weighted assets by the year 2000. This is higher than
the 8% percent which is prescribed by the Basle Committee.
Public goods – Goods that are neither excludable nor rival.
Public saving – The tax revenue that the government has left after paying for its spending.
Rational expectations – The theory according to which people optimally use all the information
they have, including information about government policies, when forecasting the future.
Revenue – The word revenue was created by combining the Latin words re, which means “Back”,
and venio, which means “come”.
Real GDP – The production of goods and services valued at constant prices.
Real exchange rate – The rate at which a person can trade the goods and services of one country
for the goods and services of another.
Real interest rate – The interest rate corrected for the effects of inflation.
Real variables – Variables measured in physical units.
Recession – A period of declining real incomes and rising unemployment ;downswings
of business activity in a trade cycle, Income, prices, profits and employment are falling
during this phase of the trade cycle.
Regressive tax – A tax for which high-income taxpayers pay a smaller fraction of their income that
do low-income taxpayers.
Reserves – Deposits that banks have received but have not lent out.
Reserve ratio- The fraction of deposits that banks hold as reserves.
Reserve requirements – Regulations on the minimum amount of reserves that banks must hold
against deposits.
Salary – The Latin word salarium, meaning “salt allowance”, is the origin of the word salary. A
necessary part of one’s diet, Roman soldiers were supposedly given an allowance to buy salt as
part of their income. In time, this word applied more generally to one’s wages.
Sacrifice ration – The number of percentage points of annual output that is lost in the process of
reducing inflation by one percentage point.
Sales Tax: Percentage levy on retail price on goods.
Saving: Part of income not consumed.
Securities – The Latin words se and cura combine to form this word. Translated literally, these
words mean “without care”.
Socialism – This term originates with the Latin word socius, which had the basic meaning of
“sharing”, but was also used to refer to a comrade, a sharer or an ally.
Special drawing rights - SDR - A type of international money created by the International
Monetary Fund (IMF) and allocated to its member nations. SDRs are an international reserve
asset, although they are only accounting entries (not actual coin or paper, and not backed by
precious metal). Subject to certain conditions payments deficit of the IMF, a nation that has a
balance of can use SDRs to settle debts to another nation or to the IMF
Stagflation – A period of falling output and rising prices.
STATUTORY LIQUIDITY RATIO (SLR) : Banks are required to maintain a certain proportion of
their demand and time deposits in the form of gold or unencumbered approved securities. The RBI
is empowered to impose an SLR up to 40 percent. Under the directive of the finance ministry RBI
raised the SLR ratio to acquire funds to help the government to finance its consumption/nondevelopment expenditure.
Stock – A claim to partial ownership in a firm.
Stocks- Stocks originates from the Old English word stocc, a word for tree trunk. It implied that
something was solid, or even safe.
Store of value – An item that people can use to transfer purchasing power from the present to the
future.
Strike – The organized withdrawl of labor from a firm by a union.
Structural Adjustment – Refers to the action taken by the Govt. in response to external and
internal shocks so that on completion of structural adjustment programme, the economy would
regain the pre-shock growth path by removing imbalances, distortiers, and debtedness.
Surplus – The word comes from two related French words : sur, which means “over”; and plus,
which means “more”.
Substitutes- Two goods for which an increase in the price of one good leads to an increase in the
demand for other good.
Substitution effect – The change in consumption that results when a price change moves the
consumer along a given indifference curve to a point with a new marginal rate of substitutions.
Supply curve- A graph of the relationship between the price of a good and the quantity supplied.
Supply schedule- A table that shows the relationship between the price of a good and the quantity
supplied.
Tariff- This word comes from an ancient Arabic term, tarrif, which means “notification”; a tax on
goods produced abroad and sold domestically.
Tax incidence – The study of who bears the burden of taxation.
Technological knowledge – Society’s understanding of the best ways to produce goods and
services.
Theory of liquidity preference – Keyne’s theory that the interest rate adjusts to bring money
supply and money demand into balance.
Third World: This represents 145 developing countries of Asia, Africa and the Middle East. It is
characterised by low levels of living, low-income per capita, low education provisions, poverty and
starvation. This is real people, with real problems, who don't deserve to be wealth reserves for
cheap labour or economic experiments for rich countries!
Total cost- The amount a firm pays to buy the inputs into production.
Total revenue – The amount a firm receives for the sale of its output.
Total revenue – The amount paid by buyers and received by sellers of a good, computed as the
price of the good times the quantity sold.
Trade – When suppliers were less mobile, they walked between places where their goods were
sold. The Old English word for “tread” is trod, and the root of the word trade.
Trade balance – The value of a nation’s exports minus the value of its imports, also called net
exports.
Trade deficit – An excess of imports over exports.
Trade policy – A government policy that directly influences the quantity of goods and services that
a country imports or exports.
Trade surplus – An excess of exports over imports.
Tragedy of the Commons – A parable that illustrates why common resources get used more than
is desirable from the standpoint of society as a whole.
Transaction costs – The cost that parties incur in the process of agreeing and following through
on a bargain.
Underlying rate of inflation: The rate of inflation of a modified consumer price index for all urban
consumers that excludes from its market basket the components with the most volatile prices: food and
energy
Unemployment gap: The difference between the nonaccelerating inflation rate of unemployment (NAIRU)
and the unemployment rate..
Unemployment rate: The number of jobless people who are available for work and are actively
seeking jobs, expressed as a percentage of the labor force. (BLS)
Unemployment insurance – A government program that partially protects worker’s incomes when
they become unemployed.
Unemployment rate – The percentage of the labor force that is not employed.
Union – A worker association that bargains with employers over wages and working conditions.
Unit of account – The yardstick with which people post prices and record debts
.
Utilitarianism – The political philosophy according to which the government should choose
policies to maximize the total utility of everyone in society.
Utility – A measure of happiness or satisfaction.
Value of the marginal product – The marginal product of an input times the price of the output.
Variable costs- Cost that do vary with the quantity of output produced.
Velocity of money – The rate at which money changes hands.
Vertical equity – The idea that taxpayers with a greater ability to pay taxes should pay larger
amounts.
Welfare economics – The study of how the allocation of resources affects economic well-being.
Willingness to pay – The maximum amount that a buyer will pay for a good.
World Bank: The WB is an international financial institution, owned by 181 member countries and
based in Washington D.C. Voting power depends on financial contributions, proportional to
economic size of the country. So essentially, the G8: Japan, Italy, Germany, US, UK, France,
Canada, Russia countries hold over 50% of the power within the World Bank.
It's main objective is supposedly to provide development funds to the Third World nations in the
form of interest bearing loans and technical assistance. The World Bank has developed Structural
Adjustment programs such as that implemented in Argentina. Unlike the IMF, such programs
actually encourage an increase in Government spending and reforming institutional arrangements
to support the adjustment process. Otherwise, the program involves reducing tariffs, liberalising
trade and encouraging foreign investment
World price – The price of a good that prevails in the world market for that good.
World Trade Organisation (WTO): Geneva based watchdog and enforcer of the 1995 agreement
on free trade ( see also GATT )
INTERNATIONAL EXPERIENCES OF ECONOMIC REFORMS
Economic reform has become the order of the day. Only the speed and scope of
the free market reforms have varied greatly among transition econmies. Hungary and
China began liberalizing gradually in the 1960s and 1970s respectively. Vietnam
accelerated its liberalization in 1989 after partial reforms had failed to raise growth rates
or to stabilize the economy sufficiently. Poland liberalized with one “big band”, freeing
90 percent of process, eliminating most trade barriers, abolishing state trade monopolies
and making its currency convertible for current transaction all at once in 1990. Albania,
the Baltic countries, the former Czechoslovakia and the Kyrgya republic followed this
model of rapid and comprehensive liberalization. In Romania price reforms advanced
fitfully for three years after half of all prices were freed in 1990 but liberalization has
recently accelerated Russia substantially liberalized prices and imports in January 1992
but extensive export restrictions remained in place until 1995 . China has been the
world’s fastest growing economy since its free market reforms began in 1978. Vietnam
too has grown rapidly since abandoning pure central planning in 1986.
ARGENTINA
Privatisation of key companies was carried out in Argentina .
Selected micro-economic indicators taken for the period between 1982-92
show that the average growth in per capita of GDP as a percentage of
constant prices between 1982-86 was –0.9 but it improved to 7.6 in 1991
and 7.5 in 1992. In the area of inflation, the position was very bad in 198286 with its percentage rising to 316.5 but gradually the reforms came to
the rescue and brought it down to 24.9 percent.
BRAZIL
This Latin American country also encouraged large foreign
investment and large development projects. U.S.A., Europe and Japan
poured loans into Brazil (cheap imported oiled and easy foreign
capitals).Import substitution – industrialisation reigned supreme from
1950 to 1962 and 1968 to 1981.But frequent state intervention was alleged
as the cause of deterring investment and technology.
Strong state sector dominated but flawed, for indiscipline, due to
independent power of borrowings and rampant mismanagement. Country
suffered from high foreign debts and flight of capital. Its privatization
efforts are aimed at reducing “the public sector deficits”. So it reached in
1987 an agreement with creditor governments on rescheduling $ 4 billion
of debt without a parallel agreement with IMF.government allowed certain
industries to have free adjustment of price. Foreign debt servicing is the
main problem. It has relied on government to government transaction.
Privatisation was judicially inducted to improve efficiency of the public
sector.
INDONESIA
The country suffered from world recession and falling foreign
exchange revenues resulting in rescheduling of projects. Inefficient
monopoly, high transport and energy cost make industry non-competitive,
small size of market high labour cost, corruption, red tape and lack of
infrastructure repel investors. Infrastructure building is not open to the
private sector.
Indonesia has 215 state industries and now started privatization.
Foreigners equity can be up to 80 percent in export sector firms. It
deregulated protected sector, relaxed capacity ceiling which can be
succeeded by 30 percent without permission
NIGERIA
The oil revenue of Nigeria has been invested number of times in
public sector projects. The spending from high foreign exchange reserves
resulted in high rates of inflation. Expenditure on infrastructure went to
construction and services and neglected manufacturing. The result was
narrow urban based production structure. The 1980s oil glut and losses
were encountered with austerity measures. It failed to correct foreign
payment crisis. Consumer imports, prestigious and wasteful projects,
political patronage and personal enrichment were the causes of ill. The
government adopted measures of devaluation, package of fiscal measures
like abolition of import licences, price control and subsidies. The
restructuring of economy was attempted via (I ) diversification and
reduction of dependence on oil, (ii) fiscal balance, (iii) platform of
sustainable non-oil non-inflationary growth and (iv) reduced investment
on and improved efficiency of the public sector.
THAILAN D
Industry comprises 20 percent of Thai GDP and 7 percent
workforce (textile, sugar, cement, and petroleum). Favourable economic
factors were lower interest and electricity rates and lower domestic oil
prices. Constraints are slow project approval procedure, underdeveloped
transport, communication and ports
Its main priorities are small and rural engineering and agroindustries. But protectionism adopted against it by industrially advanced
countries impede growth of its export-oriented industries. The government
has tried to attract high tech as well as heavy industries. Following the
spate of privatization, a number of American subsidiaries have come.
KOREA
The Seoul government has made enormous progress in
restructuring Asia's third largest economy. He says the impact of
instituting reforms and maintaining a tight monetary policy has been most
noticeable in the substantial rise in South Korea's foreign reserves. They
rose from nearly $9-billion at the end of 1997 to $45-billion last month.
The country has also recorded a current account surplus of $31-billion for
the first time in nine months.
The country's short-term debt fell from 44% to 25% of total debt
over the last 10 months in 1997. He says while economic reform has been
painful for South Koreans, the recovery plan is on schedule and signals a
brighter future for business investment in South Korea.
Other factors in South Korea's economic recovery are a
stabilization in the country's currency -- the won -- and government efforts
to restructure the banking and corporate sectors. But he adds despite the
large-scale reforms, South Korea's economic recovery will take longer if a
turn around in the global economic environment does not occur in the next
year.
CHINA
China's transition from a planned economy to a market economy
began at the end of 1978. When China started the process, the government
did not have a well-designed blueprint. The approach to reform can be
characterized as piecemeal, partial, incremental, and often experimental.
Some economists regard this approach as self-defeating (Murphy,
Schleifer, and Vishny 1992). China's average annual rate of GDP growth
has been miraculous since the beginning of the transition (Lin et al. 1996)
and is the most successful of the transition economies. Nevertheless, the
Chinese economy has been troubled by an increasingly serious "boom and
bust" cycle (see Figure 1).
Changes in the macropolicy environment started in the commodity
price system. After the introduction of profit retention, the enterprises
were allowed to produce outside the mandatory plan. The enterprises first
used an informal barter system to obtain the outside-plan inputs and to sell
the outside-plan products at premium prices. In 1984, the government
introduced the dual-track price system, which allowed the state enterprises
to sell their output in excess of quotas at market prices and to plan their
output accordingly. The aim of the dual-track price system was to reduce
the marginal price distortion in the state enterprises' production decisions
while leaving the state a measure of control over material allocation. By
1988 only 30 percent of retail sales were made at plan prices, and the state
enterprises obtained 60 percent of their inputs and sold 60 percent of their
outputs at market prices (Zou 1992).
The second major change in the macro environment occurred in
the foreign exchange rate policy. In the years 1979-80, the official
exchange rate was roughly 1.5 yuan per U.S. dollar. The rate could not
cover the costs of exports, as the average cost of earning one U.S. dollar
was around 2.5 yuan. A dual rate system was adopted at the beginning of
1981. Commodity trade was settled at the internal rate of 2.8 yuan per
dollar; the official rate of 1.53 yuan per dollar continued to apply to noncommodity transactions. After 1985, the yuan was gradually devalued.
Moreover, the proportion of retained foreign exchange, which was
introduced in 1979, was gradually raised, and enterprises were allowed to
swap their foreign exchange entitlement with other enterprises through the
Bank of China at rates higher than the official exchange rate. Restrictions
on trading foreign exchanges were further relaxed with the establishment
of a "foreign exchange adjustment center" in Shenzhen in 1985, in which
enterprises could trade foreign exchanges at negotiated rates. By the late
1980s, such centers were established in most provinces in China and more
than 80 percent of the foreign exchange earnings was swapped in such
centers (Sung 1994). The climax of foreign exchange-rate policy reform
was the establishment of a managed floating system and unification of the
dual rate system on January 1, 1994.
Interest-rate policy is the least affected area of the traditional
macropolicy environment. Under the HIODS, the interest rate was kept
artificially low to facilitate the expansion of capital-intensive industries.
After the reforms began in 1979, the government was forced to raise both
the loan rates and the savings rates several times. However, the rates were
maintained at levels far below the market-clearing rates throughout the
reform process. In late 1993, the government announced a plan to
establish three development banks with the function of financing longterm projects, import/export, and agricultural infrastructure at subsidized
rates and to turn the existing banks into commercial banks. The three
development banks were established in 1994. The commercialization of
the existing banks is expected to take at least another three to five years.
Moreover, it is unclear whether after the reform the interest rate will be
regulated or will be determined by markets. The mentality of the HIODS
is deeply rooted in the mind of China's political leaders. To accelerate the
development of capital-intensive industry in a capital-scarce economy, a
distorted macropolicy environment--in the form of a low interest-rate
policy--is essential. It is likely that administrative interventions in the
financial market will linger for an extended period.
Because reforms in macro-policies, especially those regarding the
interest rate, lagged behind the reforms in the allocation system and micromanagement institutions, there were several economic consequences. The
first one was the recurrence of a growth cycle. Maintaining the interest
rate at an artificially low level gave enterprises an incentive to obtain more
credits than the supply permitted. Before the reforms, the excess demands
for credit were suppressed by restrictive central rationing. The delegation
of credit approval authority to local banks in the autumn of 1984 resulted
in a rapid expansion of credits and an investment thrust. As a result, the
money supply increased 49.7 percent in 1984 compared with its level in
1983. The inflation rate jumped from less than 3 percent in the previous
years to 8.8 percent in 1985 (see Figure 1). In 1988 the government's
attempt to liberalize price controls caused a high inflation expectation. The
interest rate for savings was not adjusted. Therefore, panic buying and a
mini-bank run occurred. Loans, however, were maintained at the
previously set level. As a consequence, the money supply increased by 47
percent in 1988. The inflation rate in 1988 reached 18 percent (see Figure
1). During the periods of high inflation, the economy overheated. A
bottleneck in transportation, energy, and the supply of construction
materials appeared. Because the government was reluctant to increase the
interest rate as a way of checking the investment thrust, it had to resort to
centralized rationing of credits and direct control of investment projects--a
return to the planned system. The rationing and controls gave the state
sectors a priority position. The pressure of inflation was reduced, but
slower growth followed.
As mentioned earlier, although the reforms in the micromanagement institution improved the productivity of the state sector,
deficits increased due to a faster increase of wages and welfare as a result
of the discretionary behavior of the managers and workers in the state
enterprises. Therefore, fiscal income increasingly depended on the nonstate sectors. During the period of tightening state control, the growth rates
of the non-state sectors declined because access to credits and raw
materials were restricted. Such a slowdown in the growth rate became
fiscally unbearable. Therefore, the state was forced to liberalize the
administrative controls to make room for the growth of the non-state
sectors. A period of faster growth followed. Nevertheless, conflicts arose
again between the distorted macro-policy environment and the liberalized
allocation mechanism and micro-management institution.
There has been much discussion as to why China's reforms have
been more successful than the reforms in Eastern Europe and the former
Soviet Union (Chen et al. 1992; Qian and Xu 1993; Harrold 1992;
McMillan and Naughton 1992; Gelb et al. 1993; McKinnon 1994). Except
for the desirability of gradualism, the studies emphasized China's initial
industrial structure (China has a large agricultural sector) or China's
decentralized regional economic structure. If China's success was mainly
the result of her unique initial conditions, then that success does not have
any implications for other economies, where the initial conditions may be
different. Nevertheless, the economic problems in pre-reform China-namely, the structural imbalance and the low incentives--are common to
all socialist economies because they all adopted a similar economic
development strategy and because they all have a similar macropolicy
environment, planned allocation mechanism, and puppet-like state
enterprises. Empirical evidence shows that, as in prereform China, Eastern
European and Soviet economies were all overindustrialized with oversized
state enterprises; their service sectors and light industries were
underdeveloped; and employees' incentives were low (Newbery 1993;
Brada and King 1991; Sachs and Woo 1993).
The "big bang" approach in Eastern Europe and the former Soviet
Union also attempts to replace an inefficient economic system with a more
efficient market system. The privately owned small firms emerged
immediately after the lifting of the ban on private enterprises. However,
the privatization of medium- and large-scale state enterprises was
prolonged and proceeded slowly (Murrel and Wang 1993, Wang 1992).
This resulting enterprise mix is in fact similar to what emerged in China.
However, China's approach did not disrupt production in the state sectors.
Therefore, China's gradual approach to reform achieved the same positive
effects of the "big bang" approach but avoided its costs. If transitional
costs and the path-dependence of institutional changes are taken into
account, China's gradual approach may be both theoretically and
empirically preferable to the "big bang" approach (Wei 1993).
The overall performance of China's gradual approach to transition
is remarkable, but China has paid a price. Because the reform of the
macro-policy environment, especially interest- rate policy, has lagged
behind reforms of the micro-management institution and resource
allocation mechanism, institutional arrangements in the economic system
have become internally inconsistent. As a result of the institutional
incompatibility, rent-seeking, investment rush, and inflation have become
internalized in the transition process. To mitigate those problems, the
government often resorts to traditional administrative measures that cause
the economy's dynamic growth to come to a halt and retard institutional
development.
From the preceding analysis we find that it is imperative for China
to complete the reform of the macro-policy environment so as to remove
the institutional incompatibility and ensure a sustained, smooth growth
path. Since the macro-policy environment is endogenous to the state's
development strategy, the government must give up the anti-comparative
advantage HIODS--or, in a modern version, the capital-intensive high-tech
industry-oriented development strategy--and shift to a strategy based on
China's comparative advantages. In addition, as the Chinese economy
becomes a more mature market economy and is more integrated with the
world economy, it is essential for the continuous growth of the Chinese
economy to establish a transparent legal system that protects property
rights so as to encourage innovations, technological progress, and
domestic as well as foreign investments in China.
Thus far, most elements in China's reforms were induced rather
than designed. However, the experience of China's transition may provide
a useful lesson for designing reform policies in other economies where the
heavy-industry-oriented strategy or other similar development strategies
have been adopted under capital-scarce conditions. Certainly, stages of
development, endowment structures, political systems, and cultural
heritage differ from one economy to another. To be effective, actual
reform measures should take the economy's initial conditions into
consideration and exploit all favorable internal and external factors.
Therefore, the specific design and sequence of reforms in an economy
should be "induced" rather than "imposed." However, in addition to the
general advice of maintaining economic and political stability and moving
the reforms in a path-dependent manner, the following lessons may be
useful for a government attempting reforms in an economic system similar
to that of pre-reform China:
UNITED KINGDOM
The U.K. set off the most aggressive and well known privatization
programme. The British Government initially realized regularly 7 billion
pound sterling from the sale of nationalize industries primarily by stock
floatation, the most notable example being the sale of British Telecom and
British Gas. The creation of a new regulatory authority for the
telecommunication industry (OPTEL) was the British Government
response to this challenge.
The privatization of state owned British Airways followed by the
privatization of BAA (British Airport Authority) is the most significant
event in the aviation history of United Kingdom. Already seven airports
involved- Heathrow, Gatwick, Stansted, Glasgow, Edinburg, Prestwick
and Aberden have been converted into companies and are operating in
their own right.
Among other public enterprises which the British Government has
privatized are the British Aerospace including defence equipment, British
Leyland, Cable Wireless, British Wireless, British Oil, the hotel chain of
British Railways, the Sea ports ran by Associated British parts, the
National Freight Company which ran a large road haulage business and
the Jaguar Car Company.
The United Kingdom (UK) has a free market economy and a
liberal financial services environment.
In May, 1997, the Labour Party won an overwhelming
Parliamentary majority, ending 17 years of Conservative government. The
new Prime Minister, Tony Blair, inherited a strong economy, with the
recovery from the 1990-92 recession in its fifth year. Gross Domestic
Product (GDP) expanded 2.3% in 1996 and at a 3.0 percent annual rate
during the first half of 1997. Most analysts expect growth to slow in the
second half of 1997 and in 1998 as tighter monetary and fiscal policy
combine with a stronger sterling to put a brake on the economy.
Underlying inflation averaged 3.0 percent in 1996, and is now slightly
above the 2.5% target range. Unemployment has fallen significantly,
reaching 7.1% in summer 1997, well below that of many continental
European nations.
FISCAL POLICY : The sharp recession of 1990-92 led to a record
budget deficit in 1993, encouraging the previous government to launch a
deficit reduction program in 1994. This and the economic recovery has
helped begin to unwind the deficit. The new government's determination
to live within spending limits set by the previous government, along with
the introduction of additional revenue measures in July 1997, has put the
UK on a clear course to achieve fiscal balance by the year 2000. The
General Government Financial Deficit was 4.0% of GDP in fiscal year
1996 (April 1996-March 1997) and is expected to fall to 1.5% in fiscal
year 1997 and 0.25% in fiscal year 1998.
TAX POLICY : The new government promised during the campaign
not to raise the personal income tax rate or broaden the Value Added Tax
(VAT). The bottom and top personal tax rates thus remain at 20 and 40%.
The government intends, however, to strengthen incentives for work and
savings, and will review the tax (and benefit) system to that end. This may
produce tax reform in the medium-term. The capital gains tax is being
reviewed; findings will be reported in March 1998. The main corporate tax
rate was reduced in July 1997 to 31% from 33%; the small companies' rate
was reduced to 21 from 23%. Labour also undertook a controversial
measure to tax the windfall gains of privatized utilities; this tax is expected
to yield 5.2 billion pounds sterling over three years, which will be used to
help finance the government's new Welfare-to-Work program. Other
domestic tax revenue sources include the VAT (currently 17.5%) and
excise taxes on alcohol, tobacco, retail motor fuels and North Sea oil
production.
MONETARY POLICY:
After the UK was effectively forced from the
Exchange Rate Mechanism (ERM) at the beginning of 1993, the Tory
government established an inflation target as the guiding objective for
monetary policy. The new Labour government has reiterated the
importance of a low inflation policy. It quickly granted the Bank of
England independence to set interest rates, with the aim of achieving an
inflation target of 2.5%. The UK manages monetary policy through open
market operations by buying and selling overnight funds and commercial
paper. There are no explicit reserve requirements in the banking system.
EXCHANGE RATE POLICY : Since the UK's withdrawal from the
ERM in January 1993, the pound sterling has floated freely. Sterling's
trade weighted exchange rate (1990=100) averaged 86.3 in 1996. In the
first nine months of 1997, it averaged 99.6. This appreciation reflects a
variety of factors, including higher interest rates in the UK than in
continental Europe and possibly concerns in the market about European
Economic and Monetary Union (EMU).
The new Labour government has indicated it views EMU
favorably, although it has also declared it "unlikely" that the UK will join
EMU when it is launched on January 1, 1999. Should the government
decide to pursue EMU membership, it has promised to seek approval from
Parliament and from the public (either through a referendum or general
election) before proceeding.
The UK economy is characterized by free
markets and open competition, and the government promotes these
policies within the EU and in international trade fora. The UK's low labor
costs and labor market flexibility are often credited as major factors
influencing the UK's success in attracting foreign investment.
STRUCTURAL POLICIES :
Prices for virtually all goods and services are established by market
forces. Prices are set by the government in those few sectors where the
government still provides services directly, such as urban transportation
fares, and government regulatory bodies monitor the prices charged by
telecommunications, electric, natural gas and water utilities. The UK's
participation in the EU Common Agricultural Policy significantly affects
the prices for raw and processed food items, but prices are not fixed for
any of these items.
Over the past 17 years, Conservative governments pursued growth
and increased economic efficiency through structural reform, principally
privatization and deregulation. The financial services and transportation
industries were deregulated. The government sold its interests in the
automotive, steel, coal mining, aircraft and air transportation sectors.
Electric power (except nuclear), rail transportation and water supply
utilities were also privatized. Local bus transportation is in the process of
privatization. Subsidies were cut substantially, and capital controls lifted.
Employment legislation significantly increased labor market flexibility,
democratized unions, and increased union accountability for the industrial
acts of their members. The Labour government in general is expected to
continue this approach, and has launched further reviews of the regulatory
systems governing utilities and transportation.
Although these structural policies have achieved substantial
economic results, some segments of the economy have still not adjusted.
Social welfare programs and the business community are still adjusting to
job losses and changes in the business climate resulting from deregulation
and privatization.
The UK has no meaningful external
public debt. London is one of the foremost international financial centers
of the world, and British financial institutions are major intermediaries of
credit flows to the developing countries. The British government is an
active participant in the Paris Club and other multilateral debt
negotiations.
DEBT MANAGEMENT POLICIES :
EXPORT SUBSIDIES POLICIES: The government opposes export
subsidies as a general principle, and UK trade-financing mechanisms do
not significantly distort trade. The Export Credits Guarantee Department
(ECGD), an institution similar to the Export-Import Bank of the United
States, was partially privatized in 1991.
Although much of ECGD's business is conducted at market rates
of interest, it does provide some concessional lending in cooperation with
the Department for International Development (DFID, akin to the U.S.
Agency for International Development) for projects in developing
countries. Occasionally the United States objects to financing offered for
specific projects.
The UK's development assistance program also has certain "tied
aid" characteristics. The UK adheres to the OECD "Arrangement on
Officially-Supported Export Credits" to minimize the distortive effects of
such programs.
WORKER RIGHTS:
Kingdom: a. The
The workers are enjoying the following rights in United
Right of Association: Unionization of the work force in
Britain is prohibited only in the armed forces, public sector security
services, and police force.
b. The Right to Organize and Bargain Collectively: Nearly 9
million workers, about a third of the work force, are organized. Employers
are not legally required to bargain with union representatives, but are
barred from discriminating based on union membership. Employers are
allowed to pay workers who don't join a union higher wages than union
members doing the same work. The 1993 Trade Union Reform and
Employment Rights Act limited that prohibition under certain special
circumstances in matters short of dismissal. The new Labor Government
has promised it will require union recognition where at least half the
workers belong to a trade union. A white paper outlining this proposal is
due early in 1998.
The 1990 Employment Act made unions responsible for members'
industrial actions, including unofficial strikes, unless union officials
repudiate the action in writing. Unofficial strikers can be legally
dismissed, and voluntary work stoppage is considered a breach of contract.
During the 1980s, Parliament eliminated immunity from prosecution in
secondary strikes and in actions with suspected political motivations.
Actions against subsidiaries of companies engaged in bargaining disputes
are banned if the subsidiary is not the employer of record. Unions
encouraging such actions are subject to fines and seizure of their assets.
Many unions claim that workers are not protected from employer
secondary action such as work transfers within the corporate structure.
c. Prohibition of Forced or Compulsory Labor: Forced or
compulsory labor is unknown in the UK.
d. Minimum Age for Employment of Children: Children under the
age of 16 may work in an industrial enterprise only as part of an
educational course. Local education authorities can limit employment of
children under 16 years old if working will interfere with a child's
education.
e. Acceptable Conditions of Work: The new government has
promised to establish a minimum wage, which was abolished by the Trade
Union Reform and Employment Rights Act of 1993. A Tri-partite
Commission is expected to make a specific recommendation in 1998
regarding the level. Daily and weekly working hours are not now limited
by law, although the EU directive outlawing mandatory work weeks
longer than 48 hours will be implemented soon.
Hazardous working conditions are banned by the Health and
Safety at Work Act of 1974. A health and safety commission submits
regulatory proposals, appoints investigatory committees, does research
and trains workers. The Health and Safety Executive (HSE) enforces
health and safety regulations and may initiate criminal proceedings. This
system is efficient and fully involves workers' representatives.
f. Rights in Sectors with U.S. Investment: U.S. firms in the UK are
obliged to obey legislation relating to worker rights.
U. S. A
In United States of America, public ownership plays a relatively
minor role in economic activity. Sale of assets is recent phenomenon. The
U.S.A. government sold roughly 7.8 billion dollars worth of public assets.
The growth of privatization has been predominantly in the era of
“contracting cut” of public services. Urban services such as waste
water/sewage treatment, solid waste disposal, fire protection, garbage
collection and public transportation have been contracted out by many
states and local governments. The latest trend in the United States is to
privatize more sensitive areas such as health and human services and
public safety. The contracting out of child welfare services through
competitive bidding has become increasingly popular.
A number of local governments are now contracting out the
management and operation of hospitals to commercial hospital chains. A
survey conducted showed that 47 percent of the cities and countries had
sub-contracted emergency medical service to private operators. There is a
speculation that the technology of limited access highway networks with
electronics road pricing system might offer scope for further privatization
in the transportation sector. Now experimental programmes in Minnesota
have been funded by the state for school districts to contract out to groups
of teachers the task of teaching non-core subjects such as art and sciences.
The following are the important features of privatization in USA :
1) The privatization in the USA has been dominated by the contracting out
the services at the state and local government levels
2) The reduction in the federal support to the state and local governments
and drying up of other sources of revenue were important factors for
privatization in the USA
3) Another important factor of fast privatization of the USA economy has
been the existence of a strong private sector and developed capital
markets. There are a number of firms and contractors interested in and
capable of taking over public assets and operating them.
GERMANY
The unification provided for quick political and monetary
integration of eastern Germany, freeing prices and cutting state subsidies
immediately after the treaty came into effect. From the beginning, East
Germany had the assurance of macroeconomic stability and credibility,
while liberalized prices led to instantaneous competition in goods and
factor markets. This overnight subjection of the GDR to global market
forces led to a grim adjustment shock. East Germany’s GDP dropped by
34.3 percent in 1991 alone, unemployment skyrocketed to an
uncompensated loss of 37 percent of all jobs by 19933 , and personnel
turnover in high political and management positions was high. Much of
the economic reasoning behind the transition was based in the assumption
of a J-curve behavior of output, whereby the initial adjustment shock
would be compensated in the long-run by an increase in growth. This
Schumpeterian process of "creative destruction" created severe social and
political strains on the East German Länder with pervasive discontent
("post-unification-dissatisfaction" as Wiesenthal calls it), youth violence
and low political affiliation.
The positive outlooks of a stable exchange currency with the
proven conservative monetary policy of the Bundesbank and the political
union distinguish the East German transition from other East European
transitions. West Germany had committed itself to financing the
unification project, spending about 4% of the GDP per year since 1991.
This annual sum, slightly smaller than the Marshall plan, went into the
reconstruction of the five eastern Länder, focusing on the reconstruction
and modernization of infrastructure and industry. Moreover, these transfer
payments were primarily debt financed, as opposed to being financed from
domestic savings, driving interest rates sharply up to obtain the necessary
capital inflows. As a result, on a macroeconomic level Germany shifted
from having large balance of trade and payments surpluses to being a net
capital importer. In turn, this increased interest rates in other countries that
needed to attract capital, slowing down their investment as well as that of
Germany’s4 . So while Germany’s neighbors benefited during the first
phase of unification from the added demand of the east, they were now
paying through higher interest rates and slower growth.
Thus the GDR transition cannot be viewed in isolation of the
international economy. Germany’s reluctance at the French demands of
commitment to a monetary union was swayed by the necessity to obtain a
permissive consensus to German unification. As Tsoukalis points out,
"what… tipped the balance was the perceived need to reaffirm the
country’s commitment to European integration in the wake of German
unification."5 Other international "exogenous" factors challenged the East
German transition. During the first few years, it had posted growth rates
higher than the west. However, with rising unemployment, the structural
economic challenges of the United States and East Asia and the slow
recovery of the Soviet economy (to which the East German economy had
been intricately linked), East Germany stopped outperforming the west in
1997. Initially, the western models of systems replication in East Germany
(promising a second "economic miracle") ignored such external
contingencies, expecting rapid economic recovery from the transitional
shock.
Two of the essential macroeconomic elements to a successful
transition had been bestowed upon East Germany by the process of
unification: a stable legal system and financial support from the west. The
neo-liberal J-curve argument depended fundamentally on privatization
policy as a way of recovering from the initial adjustment shock by
institutionalizing the profit motive and investment into the German
economy. In order to establish the concept of property rights it was
decided to restitute property to expropriated owners with the exception of
expropriations by the Russian military between 1945 to 1949, a condition
for USSR agreement to unification. Though it was hoped that this
principle of ‘restitution before compensation’ would encourage private
investment in the east it has come under significant criticism. Eberhard
Diepgen, the former governing mayor of Berlin, called it "the greatest
single mistake in the unification legislation"6 . It is specifically argued that
restitution hampered East German investment, because it did not
adequately create a functioning real estate market, an essential factor for
investment prospects. Compensation was the second option for cases when
pieces of land have been combined into inseparable units. The "Act
Regulating Open Property Issues Act Relating to Special Investments in
the German Democratic Republic" passed in September 1990, created a
long bottle-neck procedure towards obtaining the entitlement of property.
The main problems were that first, a competing claim on a piece of
property prevented investment by the current owner. Second, it was also
extremely difficult to distinguish between the ownership of a firm and the
ownership of land, which fell under different entitlement procedures.
Third the title records of firms had been ignored during the GDR regime
and last, many claimants went to court when the market value of a piece of
land and the compensation rate differed, making the process even more
drawn-out7 . The lengthy procedures significantly slowed investment in
East Germany until the Investment Priority Law of 1992 established a
more streamlined procedure. The investment priority mandated that even
with competing claims on a piece of land, the current holder can keep
investing until the decisions is made by the local administration. It is
argued that the restitution principle handed financial benefits to West
Germans who were able to invest in the east while East Germans were
threatened with the loss of their homes8 due to changes of entitlements.
The western approach towards the establishment of property rights hence
constituted a significant obstacle to eastern convergence.
Corporate governance in the financial and the non-financial sectors
was restructured as follows. First, the banking sector was reformed with
the Bundesbank taking control of East German banking system and the
Deutsche and Dresdner Banks taking over the branch networks of the
former GDR state bank. This allowed enterprise restructuring to occur
without the overhang of bad debt to indebted state enterprises9 . The
privatized banks could focus on modernizing the financial system. The
Treuhandanstalt (THA) was charged with holding of all assets of all
former state enterprises in their subsequent privatization. Its task consisted
of "organizing the organizational restructuring (corporatization) and
transformation of the state enterprises into market actors
(commercialization)."10 The mode of privatization was that of negotiated
contracts between potential buyers and the THA, though some auctions
occurred as well. The negotiations included commitments on employment
levels, volumes of investment, and obligations to secondary tasks such as
environmental reconstruction. The THA also engaged in pre-privatization,
i.e. in breaking down the large state firms (Kombinate). After 1992 the
focus on social and developmental effect was added to the THA criteria
for privatization. Prützel-Thomas states the THA faced an inherent
contradiction: "a market economy was to be created, basically through
state planning and interventionist measures, in a country with enormous
structural deficits, too few managers and entrepreneurs, and no
functioning organization of interests."11 The THA is the primary target of
eastern intellectuals who charged the FRG with ‘colonization’ motives.
This was due largely to the overwhelming representation by West German
bankers and financiers in the THA. The THA procedures were established,
benefited and carried through on western terms. Instances of fraud and
unaccountable contract negotiations, in combination with the lack of
knowledge of the industrial culture of state socialism and the lack of input
of GDR political elites led to widespread discontent with the THA. Within
four years, the THA privatized over 11,000 SOEs and after four years of
restructuring, it closed on December 31, 1994. Nevertheless, because
ownership was concentrated in the west, allegations on the THA’s policies
long-term negative implications on East German growth remain.
On the microeconomic level, East Germany’s privatization policy
had several advantages compared to those other east European economies.
First in management skills and adaptation to the Western economic model,
and second in accountability and understanding of accurate financial
information.12 The long entrepreneurial tradition in the east, with
industrialists in Dresden and Leipzig being among the strongest before
WWII, and the retention of managerial staff at companies led to the quick
adaptation to a western system of accountability. The THA
Eröffnungsbilanz (opening balance sheet) financial statements, required of
companies, served not only as the valuation of individual firms but of the
entire East German economy as well. Lastly, German federal laws
required detailed audit reports including the cost of environmental
cleanup, personnel reduction plans and the costs of restructuring, which
helped significantly in lowering the barriers to investment.
JAPAN
During 40 years of unprecedented and almost unrestrained
economic success, Japan caught up with and surpassed many of its
competitors to become the world's second largest national economy,
accounting for one seventh of world GDP.
During this period, Japan built up the largest pool of world
savings, amounting to 250% of its GDP, and accumulated the largest
foreign currency reserves of $220 billion.
Japan has also been at the forefront of a manufacturing revolution,
exporting techniques of modern production which have been adopted
world-wide.
Against this background it is sometimes difficult to understand the
abrupt change in fortune which has struck Japan in the 1990s. From being
“top dog” in the 1980’s, Japan approaches the new Millenium in an
uneasy, transitional condition, confronted with a series of seemingly
intractable problems of a severity sufficient to threaten even the economic
and social fabric of the country.
The causes of this collapse in confidence and the ensuing
economic recession have been thoroughly debated in Japan and indeed
throughout the world. It is not my intention to discuss them here today.
It is widely recognised that to regain self-sustaining medium to
long-term growth more than short-term stabilisation measures will be
required. Far-reaching economic and structural reforms will have to be
implemented. The more drastic the reforms, the quicker the recovery will
be.
The highly regulated model of economic development that brought
economic success to Japan before the ‘90s no longer fits into today’s
increasingly integrated and market-driven global economy. Widespread
state intervention, close and non-transparent links between the public and
private sectors and weak enforcement of competition rules all contributed
to Japan’s relative economic isolation. They ultimately produced a
misallocation of resources, reduced competitiveness, raised prices, limited
Japan’s openness to outsiders and constrained economic growth.
If Japan is to regain its place as an engine of the world economy,
structural reform is indispensable, as it was and still is in Europe. If
implemented vigorously, it will stimulate competition, increase
productivity, improve opportunities for domestic and foreign companies,
reduce prices, broaden choice and increase standards of living. Our own
experience with the 1992 Single Market programme bears this out.
For structural reform to work, deregulation is of paramount
importance. Government and business in Japan is aware of this. The Prime
Minister himself and MITI Minister Yosano are on record as strongly
favouring further ambitious regulatory reforms in Japan. But this political
commitment has to be translated into action covering not only strategic
reform but also balanced sectoral deregulation.
In this context, the Japanese Government has recently decided to
implement from January 2001 a restructuring of all the central government
ministries and agencies. This could mean that when the current Three Year
Deregulation Programme comes to an end there could be an entirely new
regulatory environment in Japan, underpinned by an effective Information
Disclosure Law and comprehensive public comment procedures.
There have, of course, already been advances. With regard to
administrative procedures, we particularly welcome plans to introduce
public comment procedures for new regulatory initiatives in Japan from
next April. There have also been positive developments towards
revamping regulatory structures in financial services. Furthermore, the
introduction of performance-based standards across the economy is a key
ingredient of reform and some sectors such as the construction industry
are moving in this direction. Having said this, a very great deal remains to
be done to make Japan an open, transparent and competitive economy.
NEW ZEALAND
Over the last 14 years, the New Zealand economy
has been through a very wide range of economic reforms. Within New
Zealand, there is still some debate about whether the reforms have
worked, but certainly the reforms have been very beneficial for New
Zealand,
To describe those reforms in detail, in many respects New
Zealand's reforms were very similar to those undertaken by other
developed countries over the same period, the extent of the reforms, and in
some cases the nature of the reforms, were internationally unique.
David Henderson, the British economist who spent most of the
eighties and early nineties as head of the Economics and Statistics
Department of the OECD in Paris, reviewed the New Zealand reforms in
1996 and commented that `the extent of liberalisation over the last 12
years places New Zealand in a class of its own within the OECD area'. He
went on to observe that `in no other OECD country has there been so
systematic an attempt at the same time to redefine and limit the role of
government, and to make public agencies and their operations more
effective, more transparent, and more accountable'.2
These reforms have taken New Zealand to fourth place in The
1998 Index of Economic Freedom, published by the Heritage Foundation
and the Wall Street Journal, ahead of all the countries of Europe and
North America. They also led to New Zealand's being ranked fifth in the
Global Competitiveness Index published by the World Economic Forum
in July/August 1997, behind only Singapore, Hong Kong, the United
States, and Canada.
Perhaps because of the extent to which the reforms have attracted
the attention of newspapers such as The Economist and the Financial
Times, there has been a steady procession of people - politicians,
bureaucrats, and journalists - from a wide range of countries, keen to know
what can be learnt from New Zealand's experience.
1. There has been enormous progress in dealing with previouslypersistent fiscal deficits, and are now one of the very few OECD
countries running a genuine fiscal surplus (that is, a surplus without
taking into account the proceeds of asset privatisation). Indeed, the
financial year ending at the end of this month marks the fifth
consecutive year of fiscal surplus (this one of nearly 3 per cent of
GDP) and, partly as a result, the ratio of net public sector debt to GDP
has fallen from over 50 per cent in 1992 to around 25 per cent
currently, one of the lowest such ratios in the developed world. The
latest estimate by the New Zealand Treasury is that this ratio will fall
to around 20 per cent within two years. This decline in public sector
debt will clearly help New Zealand to deal with the fiscal implications
of our gradually ageing population and in due course permit reductions
in the total tax burden, while on-going fiscal surpluses reduce the
competition for the available pool of savings, allowing interest rates to
be lower than would otherwise be the case.
2. New Zealand has made great progress in eliminating inflation, in part
at least because we have created an institutional structure which
insulates the day-to-day conduct of monetary policy from short-term
political pressures, while leaving the strategic decision about the
inflation rate clearly in the hands of the elected Government.3
Measured consistently with that of other countries, New Zealand's
3.
4.
5.
6.
consumer price inflation has been among the lowest in the world since
1991.
The country has made great progress in `getting the signals right' by
eliminating quantitative import restrictions completely, substantially
reducing tariffs, abolishing export subsidies, greatly improving the tax
system (by introducing a no-exceptions single-rate Value Added Tax,
abolishing wholesale sales taxes, reducing marginal income tax rates,
and reducing scope to avoid taxes), freeing up the financial system,
and reducing the distortions and inefficiencies caused by many
unnecessary rules and regulations.
New Zealand has greatly improved the efficiency of resource use in
the public sector, by corporatising and privatising many of the trading
activities and by insisting on much greater accountability in the core
public sector, partly through the simple expedient of introducing
proper accounting principles to the public sector. (In the case of the
Reserve Bank, operating costs are some 40 percent lower now than
they were at the beginning of this decade, even in nominal terms,
despite essentially unchanged outputs.)
There has been a considerable change in the relationship between
employers and employees, both by opening up the economy to greater
internal and external competition (which has made employers and
employees recognise the extent of their common interest) and by
changing the legislative framework within which industrial
negotiations take place.
A transformation has taken place in the views of most of those close to
the public policy formulation process, bureaucrat and politician alike.
For example, all six political parties elected to Parliament in 1996 now
support the importance of low inflation, and all but one party supports
the present institutional framework within which monetary policy is
conducted. All of the parties elected to Parliament except one supports
the New Zealand economy remaining open to the global economy meaning support for both a continued reduction in tariff protection and
continued openness to foreign investment. As an illustration of that,
motor vehicle tariffs, which stood at 55 per cent in 1981 and which
have been gradually reduced ever since, were removed completely in
last month's Budget with almost no political debate, despite the
resultant closure of the four remaining car assembly plants and some
component manufacturers.
R EFERENCES
1. G.S.Batra & R.C.Dangal (editors),”Globalisation and
Liberalisation”,Deep & Deep, New Delhi, 2000
2. Dutt & Nigam, “Yowards Commanding Heights”, Scope, New
Delhi, 1975
3. Foster, Christopher D., Privatisation, Public Ownership, and the
Regulation of Natural Monopoly, (Oxford: Blackwell, 1992) 458.
4. Privatization: The Lessons of Experience, Country Economics
Department, The World Bank.
5. David Parker, “Privatisation in the European Union, An
6.
7.
Overview”, Privatisation in the European Union, Theory and
Policy Perspectives, Edited By: David Parker, London, 1998.
Tony Prosser and Michael Moran, Privatization and Regulatory
Change in Europe, Edited By: Michael Moran and Tony Prosser,
Open University Press, Buckingham-Philadelphia, 1994.
Paul J.J. Welfens and Piotr Jasinski, "Privatisation and Foreign
Direct Investment in Transforming Economies", Dartmouth
Publishing Company, England & USA
FIVE-YEAR PLANS IN INDIA
First Plan 1951-56.
The first Plan with a total outlay of Rs. 2378 crores was a rather
haphazard venture, as the Planning Commission had no reliable
statistics to work upon. Besides, the plan had to be co-related to the
prevailing activities of various government departments. The result
was patchwork of isolated projects. All the same, the plan had a
national character and was based on a rational hypothesis. It laid
emphasis on agriculture, Irrigation, power and transport so as to
provide an infrastructure for rapid industrial expansion in future. The
plan turned out to be more than a success, mainly because it was
supported by two good harvests in the last two years.
Rs bn
Public outlay
19.6
Agriculture
2.9
Irrigation
3.1
Power
2.6
Village, small industries
0.4
Organized industries, mining
0.7
Transport & communications
5.2
Social services etc
Budgetary resources
4.6
14.4
Of which
Additional taxation
2.6
Internal private savings
6.9
External assistance
1.9
Deficit financing
3.3
Second Plan 1956-61
The Second Plan laid special stress on heavy industries. The
Industrial Policy Resolution was amended so as to shift the primary
responsibility for development on the Public Sector. Private Sector
was left to handle consumer industries. But the great quantity of
imports that the plan envisaged in both public and private sectors
practically denuded India’s accumulated sterling balances (as much as
Rs. 500 crores) in two years and compelled the country to seek
extensive foreign aid. Agriculture and small-scale industries remained
sluggish, without adding any momentum to development. The price
level under the Second Five Year Plan increased by 30%. Thus the
Balance of Payment and inflationary difficulties developed in the
Second Plan Period.
Rs bn
Overall outlay
77.7
Public outlay
46.7
Agriculture
5.5
Irrigation
4.3
Power
4.5
Village, small industries
1.9
Organized industries, mining
9.4
Transport & communications
12.6
Social services etc
Budgetary resources
8.6
25.6
Of which
Additional taxation
10.5
Internal private savings
14.1
External assistance
10.9
Deficit financing
9.5
Private investment
31.0
Third Plan 1961-66.
The Third Plan rode on a wave of high expectations following
overall growth of the Indian economy in the first two plan periods. The
Third Plan aimed at establishing a self-sustaining economy. Internal
resources having been strained to the utmost, the plan had to rely on
heavy foreign aid. Its aims were:
1. Secure an increase in National Income of over five percent per
annum and at the same ensure a pattern of investment, which
could sustain this rate of growth in subsequent plan periods.
2. Achieve self-sufficiency in food-grains and increase agricultural
production to meet the requirements of industry and exports
3. Expand basic industries like steel, chemicals, fuel and power
and to build machine-building capacity so that requirements of
further industrialization could be met within a period of about
10 years from country’s own resources.
4. Utilize fully the manpower resources of the country and ensure
substantial expansion in employment opportunities.
5. Establish progressively greater equality of opportunity and
bring down reduction in disparities of income and wealth and a
more even distribution of economic power.
During the Third Plan, national income (revised series) at 196061 prices rose by 20 per cent in the first four years but registered a
decline of 5.6 per cent in the last year. The growth rate in the third
plan was 2.3%, which was less than half of the target in the plan.
A growing trade deficit and mounting debt obligations led to
more and more borrowings from the International Monetary Fund. The
rupee was devalued in June 1966 to little purpose, as it soon turned
out. The Third Plan had become stuck.
Rs bn
Overall outlay
126.8
Public outlay
85.8
Agriculture
10.9
Irrigation
6.6
Power
Village, small industries
12.5
2.4
Organized industries, mining
17.3
Transport & communications
21.1
Social services etc
14.9
Budgetary resources
50.9
Of which
Additional taxation
28.9
Internal private savings
21.1
External assistance
23.9
Deficit financing
11.5
Private investment
41.0
Agriculture & allied
8.0
Industry & minerals
13.3
Power
Transport & communications
Others
0.5
2.5
16.8
Agriculture played an adverse role with production remaining
stagnant in the first three years and falling substantially in the last two
years mainly on account of drought. This led to large-scale imports of
food grains and other agricultural commodities, a greater dependence
on foreign aid and deficit financing.
On the Balance of Payment side, strains had begun to develop
at the very beginning of the Third Plan. In the face of rising imports of
food grains and other items and insufficient increase in exports the
situation got worsened and the country sought large foreign
assistance.
A growing trade deficit and mounting debt obligations led to
more borrowings from the International Monetary Fund (IMF). The
rupee was devalued in June 1966 for promoting export from India.
The Third Plan having gone awry, planning itself had become
discredited in the eyes of many and demands were made from
different quarters to declare a Plan holiday. But neither the
Government nor the Planning Commission admitted failure. They
refused to fall in with the demand for a Plan holiday and proceeded to
draw up the Fourth Plan as from 1966-67.
But the economy had so far degenerated that the Fourth Plan
could not be started in time, that the Fourth Plan could not be started
in time, which is to stay, in 1966. Instead, as a stopgap arrangement
planning was made annual. The Annual Plans continued from 1966 to
1969-1966-67, 1968-69.
Annual Plan 1966-69
The situation created by the Indo-Pakistan Conflict in 1965,
two successive years of severe drought, devaluation of the
currency, general rise in prices and erosion of resources
available for Plan purposes delayed the finalization of the Fourth Five
Year Plan. Between 1966 and 1969, three Annual Plans were
formulated within the framework of the draft outline of the Fourth
Plan.
Rs bn
Total outlay
66.3
Agriculture
9.7
Irrigation
Power
Village, small industries
4.7
12.1
1.3
Organized industries, mining
15.1
Transport & communications
12.2
Social services etc
11.2
Depressed farm output for two consecutive years (1965-66 and
1966-67), decline in the rate of growth of industrial production and
pressure on the line-eroded resources available for the annual plans.
Receipts from taxes were below the anticipated levels and non-plans
expenditure was very high.
The shortfall in the Annual Plan was made up by deficit
financing, which reached a level of Rs 676 crores during the period of
annual plans.
Fourth Plan 1969-74.
The Fourth Plan officially commenced on April 1, 1969 with the
publication of the draft plan. Growth with stability was the main
objective of the plan. Agriculture was expected to lead the growth with
a rate of 5 per cent per annum. Such a growth in agriculture would set
up a chain reaction in the economy. The target for the growth rate of
industry was set at about nine per cent per annum. Altogether the
national income was expected to increase at the rate of 5.5 per cent
per annum. Allowing for the increase of population at the rate of about
2.5 per cent, the per capita income was expected to increase at the
rate of 3 per cent per annum or about 16 per cent in the Fourth Plan
period.
Rs bn
Overall outlay
247.6
Public outlay
157.8
Agriculture
23.2
Irrigation
13.5
Power
29.3
Village, small industries
2.4
Organized industries, mining
28.6
Transport & communications
30.8
Social services etc
29.9
Budgetary resources
120.2
Of which
Additional taxation
42.8
Internal private savings
65.4
External assistance
20.9
Deficit financing
20.6
Private investment
89.8
Agriculture & allied
16.0
Industry & minerals
25.6
Power
Transport & communications
Others
0.8
9.2
38.3
At the time of formulating the fourth plan it was realized that
GDP growth and high rate of capital accumulation alone might not help
improve standard of living or help attain economic self-sufficiency.
Emphasis, therefore, shifted towards providing necessary consumption
benefits to the less privileged and weaker sections of the society
through employment and education. The plan also aimed at
accelerating the momentum of economic development and improving
stability of food grain production. Share of outlay to agricultural sector
was increased to 23.3% while that of industrial and transport and
communications sector was cut back. Family planning programme
received a big impetus and was allotted Rs2780m against Rs250m in
the
previous
plan.
The fourth plan aimed to increase the net domestic product (at 196869 factor cost) from Rs290.7bn in 1969-70 to Rs383.1bn in 1973-74,
reflecting a 5.7% CAGR. Foreign assistance was considerably reduced
in the fourth plan to 12.9% of total resources, from 28.2% in the
earlier plan period.
Achievements in the fourth plan were way below targets. The
last three years of the plan were quite disappointing; with problems
arising from influx of refugees from Bangladesh and Indo-Pak war in
1971. Agricultural growth was only 2.8% pa against the targeted 5%
pa coupled with successive failure of monsoons. The much-touted
green revolution seemed to be lacking the spread effect. Industrial
growth was only 3.9% against the targeted 8% pa.
Fifth Plan 1974-79.
The Fifth Plan draft as originally drawn up was part of a long
term Perspective Plan covering a period of 10 years from 1974-75 to
1985-86.The perspective plan attempted to co-ordinate various
sectors of the economy in terms of the new slogan Garibi Hatao
(Remove Poverty). The long-term rate of growth that the economy
was expected to achieve on a self-sustaining basis was put up at 6.2
per cent annum.
By the time the Fifth Plan was approved by the National
Development Council (Sept. 1976) its promises had become obsolete
and the total outlay had to be increased from Rs. 37,463 crores to
39,303 crores.
Rs bn
Overall outlay
664.7
Public outlay
394.3
Agriculture
48.7
Irrigation
38.8
Power
74.0
Village, small industries
5.9
Organized industries, mining
89.9
Transport & communications
68.7
Social services etc
68.3
Budgetary resources
321.2
Of which
Additional taxation
Internal private savings
External assistance
77.5
110.7
58.3
Deficit financing
13.5
Private investment
270.5
The plan targeted an annual growth rate of 5.5% pa in national
income. Foreign assistance was reduced further to 7.5% of total
resources, while reliance was placed on domestic capital and own
resources.
The fifth plan was terminated by the (new) Janata Government
in the fourth year on 31st March 1978. Only the targets relating to
food grains and cotton cloth were achieved in the fifth plan. The plan
was introduced at a time when inflation was very high. The cost
figures therefore had to be revised upwards and the targets had to be
scaled down.
Annual Plan (1978-79)
The main objectives of 1978-79 Annual Plan were: (a) the
removal of unemployment and substantial underemployment in
approximately 10 years, (b) provision of basic services (drinking
water, primary education, health) to 40 percent of the population in
the lowest income groups over the same period, (c) a significant
reduction in the present disparities of income and wealth.
The total outlay for the Annual Plan (including expenditure by
the center, states and union territories) for 1978-79 was placed at Rs
11,650 crores as against Rs 9,960 crores in 1977-78. This represented
an increase of 17 percent over the previous year.
The actual growth achieved during 1974-79 was 4.9% per
annum.
Annual Plan (1979-80)
The annual plan outlay for 1979-80 was a sum of Rs.12, 177
crores. It was a rural oriented plan. The actual outlay on agriculture
and allied sectors and irrigation and flood control was 27% of the total
outlay
Sixth Plan (1980-81-1984-85)
The Janata Government, which formulated the sixth plan,
instead of the GNP approach to development, sought to achieve higher
production targets with concomitant increase in employment
opportunities for the poorest section of the society. Though the
emphasis on irrigation and power and the shift in approach to
development was laudable, the government lacked political will to
forge ahead.
The Congress Government on assuming power in 1980
formulated a new sixth plan, with a strategy to move simultaneously
to strengthen the infrastructure for both agriculture and industry in
order to achieve rapid economic growth. Within agriculture, emphasis
was on rural development - the outlay was increased from 2% to
5.5%. Special programmes were designed to provide increased
employment opportunities in the rural areas and unorganized sector
and meet the minimum basic needs of the people.
This plan was formulated after taking into account the
achievements and shortcomings of the past three decades of planning.
For the Sixth Plan actual expenditure stood at Rs. 109,291.7 crores
(current prices) as against the envisaged total public sector outlay of
Rs. 97,500 crores (1979-80 prices) accounting for a 12 per cent
increase in nominal terms. The average annual growth rate for the
Sixth Plan works out to 5.2 per cent, which is equal to the targeted
growth rate for the plan period.
Rs bn
Overall outlay
1,851.8
Public outlay
1,104.7
Agriculture
136.2
Irrigation
109.3
Power
184.6
Village, small industries
19.5
Organized industries, mining
272.9
Transport & communications
176.8
Social services etc
205.4
Financing of public outlay
Current revenue balance
Public enterprises
18.9
58.1
Additional resource mobilization
329.7
Market borrowings (net)
247.0
Small savings
99.1
Other resources
113.2
Deficit financing
156.8
External assistance (net)
85.3
Private investment
747.1
Agriculture & allied
161.0
Industry & minerals
303.2
Power
1.9
Transport & communications
33.9
Others
247.
As the base year of 1979-80 for the Sixth Plan was abnormally
poor, the growth rate could be so high and impressive. Food output
was 14.6 crores tones in 1984-85. Consumption of fertilizers increased
from 53 lakh tones to 82 lakh tones in 1984-85.
Industrial output increased by 5.5 per annum that was less
than the target of 7%. There was total trade deficit of Rs.28,558
crores during 1980-85, which created a lot of strain on the balance of
payments position of the country. Deficit financing was 2.5 times the
target set for the purpose. Poverty ratio came down from 48% in
1977-78 to 37% in 1984-85.
Seventh Plan 1985-90
It envisaged an aggregate outlay of Rs. 348,148 crores with a
public sector outlay of Rs. 180,000 crores ended with an average rate
of growth of the gross domestic product (GDP) at 5.3 per cent per
annum, which was well above the targeted rate of 5 per cent.
The final year of the Seventh Plan (1989-90) saw the growth of
national income by 4% largely contributed by the secondary
(manufacturing) and services sector. The annual average growth of
the Seventh Plan has been put at 5.3%, almost equally the growth
rate of the Sixth Plan.
To reduce unemployment and consequently, the incidence of
poverty, special programmes like Jawahar Rozgar Yojana were
launched in addition to the existing programmes. Due recognition was
accorded to the role small and food processing industries can play in
this regard. The total expenditure during the entire Seventh Plan stood
at Rs.2, 18,729.62 crores (current prices) as against the envisaged
total public sector outlay of Rs 1,80,000 crores resulting in a 21.52
percent increase in nominal terms.
The first three years of the seventh five-year plan saw severe
drought conditions, despite which food grain production grew 3.2%.
Policies were aimed at rapid growth in food grain production, higher
employment levels etc. Several special programmes like Jawahar
Rozgar Yojana were introduced. Social sectors like welfare, education,
health, family planning, employment etc. that were accorded low
priority in the earlier plans, got a higher outlay - 21.6% in the seventh
plan. Industrial growth also accelerated during this plan period to
8.7% pa. Rural electrification increased significantly and covered 81%
of the villages by the end of the seventh plan. Actual public sector
expenditure in the seventh plan increased by 21.5% against the
envisaged outlay.
Rs bn
Overall outlay
3,895.8
Public outlay
2,214.4
Agriculture
280.4
Irrigation
165.9
Power
385.6
Village, small industries
32.5
Organized industries, mining
491.0
Transport & communications
379.7
Social services etc
479.2
Financing of public outlay
Current revenue balance
(145.9)
Public enterprises
243.9
Additional resource mobilization
425.4
Market borrowings (net)
574.0
Small savings
204.0
Other resources
402.9
Deficit financing
346.7
External assistance (net)
199.1
Private investment
1,681.5
Agriculture & allied
340.5
Industry & minerals
621.7
Power
4.2
Transport & communications
180.2
Others
534.9
The Seventh Plan also saw increasing strains on Balance of
Payments, Budgetary Deficits, Price Levels, etc. The Government from
home and abroad achieved the growth on the basis of increased
borrowings. There was greater resort to deficit financing during the
Seventh Plan.
Annual Plans (1990-92)
The Eighth Five Year Plan (1990-92) could not take off due to
the fast changing political situation at the center. The new
government, which assumed power at the center in June 1991,
decided that the Eighth Five Year Plan would commence on 1 April
1992 and that 1990-91 and 1991-92 should be treated as separate
Annual Plans. Formulated within the framework of the Approach to the
Eighth Five Year Plan (1990-95), the basic thrust of these Annual Plans
was on maximization of employment and social transformation.
Eighth Plan 1992-97.
The Eighth Plan was launched immediately after a severe
balance of payment crisis, which was accentuated by the Gulf War in
1990. Several structural adjustment policies were introduced in order
to put the country on a higher growth path and remedy the precarious
balance of payments situation. These included a substantial
devaluation in the value of rupee, dismantling of licensing
requirements, reducing trade barriers, reforms in the financial sector
and tax systems. The plan targeted an annual growth of 5.6% in GDP
and 7.5% pa in industry, while keeping inflation under control. Higher
growth rates were envisaged in most of the sectors - manufacturing,
agriculture, foreign trade, etc.
The Eighth Plan has recognized the need for a re-orientation of
planning in keeping with the process of economic reforms and
restructuring of the economy. Though a tangible change in the ongoing
development process can be effected only over a period of time, the
review of initial experience enables us to discern the direction of
change and emerging criticalities with a view to identifying the
measures to be adopted.
The Eighth Plan emphasizes human development as the main
focus of planning, a large economic space for the private sector,
physical and social infrastructure development by the public sector
(allowing at the same time the private sector to participate), and a
greater role to the market to infuse economic efficiency even in the
working of public sector.
The Plan proposed a growth rate of 5.6% per annum on the
average during the Plan period. An investment of Rs. 798,000 crores
at 1992-93 prices was projected for the five-year period 1992-97. Out
of this, public sector investment was Rs. 361,000 crores (45%).
Adding to this the current outlay came to Rs. 434,000 crores.
Consistent with the expected resource position, the size of the Plans of
the states and the union territories was projected at Rs. 1,86,325
Rs bn
Overall outlay
8,711.0
Public outlay
4,341.0
Agriculture
628.7
Irrigation
265.5
Power
810.5
Village, small industries
Organized industries, mining
Transport & communications
Social services etc
63.3
751.0
810.4
1,011.6
Financing of public outlay
Current revenue balance
Public enterprises
Additional resource mobilization
Market borrowings (net)
Small savings
Other resources
Deficit financing
External assistance (net)
Private investment
350.1
1,481.4
2,022.6
200.0
287.0
4,370.0
Agriculture & allied
968.0
Industry & minerals
1,524.0
Power
101.2
Transport & communications
397.1
Others
1,379.
Crores and the Central Plan at Rs. 2,47,865 crores. This outlay was
divided between the Centre and the States in the ratio 58.5: 41.5.
Ninth Plan (1997-2002).
The Ninth Five Year Plan (1997-2002) was launched in the
fiftieth year of India’s independence. The specific objectives of the
Ninth Plan as endorsed by the National Development Council in its 48th
Meeting are: (I) priority to agriculture and rural development with a
view to generating adequate productive employment and eradication
of poverty; (ii) accelerating the growth rate of economy with stable
prices; (iii) ensuring food and nutritional security for all particularly the
vulnerable sections of the society, (iv) providing the basic minimum
services of safe drinking water, health care facilities, universal primary
education, shelter and connectivity to all in a time bound manner, (v)
containing the growth rate of population, (vi) ensuring environmental
sustainability of the development process through social mobilization
and participation of people at all levels, (vii) empowerment of women
and socially advantaged groups such as SC, ST and OBC and Minorities
as agents of socio-economic change and development, (viii) promoting
and developing people’s participatory institutions like Panchayati Raj
institutions, cooperatives and self-help groups, and (ix) strengthening
efforts to build self-reliance
The Ninth Plan envisages an average target growth rate of 6.5
per cent per annum in GDP as against the growth rate of 7 percent
approved earlier in the Approach Paper. The scaling down of the target
was necessitated by the changes in the national as well as global
economic situation in the first two years of the Ninth Plan. During
1997-98, the first year of the Ninth five Year plan, there was a slow
down in the growth rate of Indian economy to 5.1 percent. In the
second year of the plan, he economy grew by about 6.8 percent and
anticipated growth rate for 1999-2000 would be about 5.9 percent.
The growth rate during the first three years of the Ninth Plan
was 5%, 6.8% and 5.9% respectively as against the annual growth
rate target of 6.5%. The average inflation rate measured by changes
in WPI was 4.8% in 1997-98, and 6.9% in 1998-99 and declined to
about 3% in 1999-2000.
REFERENCE
1. Agrawal, A.N. and Hari Om Varma (eds): India Economic Information
Yearbook 1996. Delhi: National, 1996, pp. 366, Rs. 350.00, ISBN 81214-0490-8
2. Chattopadhyay, Manbendu et al.: Planning and Economic Policy in
India:Evaluation and Lessons for the Future. Delhi: Sage, 1996, pp.
215,
3. Tata Services: Statistical Outline of India, 1996-1997. Mumbai: Tata
Services Ltd, 1996, pp. 272, Rs. 120.00
4. R.C.Agrawal, “Economics of Growth and Planning”, Agra, 2002
5. WWW.Planning Commission.nic.in
EARLY INITIATIVE OF ECONOMIC REFORMS
As the Janata government first collapsed, because of its internal
divisions, and then lost in the Elections, Mrs Gandhi and her Congress
parry returned to power at the beginning of 1980 with a massive mandate
and they now carried further the logic of the economic policies that were
initiated in 1974. The hallmark of these policies was pragmatism and the
shedding of ideology.
The ideological orientation of the party's parliamentary delegation
and party organization had undergone fundamental change, as few ardent
leftists remained with Mrs Gandhi; her cabinet was bereft of any
committed socialists. Beyond the change in the party's ideological
orientation, however, what underlay the program and the erosion of
ideology in the posture of the new government was the economic situation
that it inherited from the Janata Party. Outstanding Among its features was
inflation over the preceding year of some 20 percent. But inflation was, in
turn, a manifestation of serious deterioration in the economy; there were
serious shortages of essential commodities such as coal, steel and cement.
There was also grave impairment, or even breakdown, of the infrastructure
in respect of power and transport. Besides, after the drastic price hikes in
oil by OPEC in country was confronted with an enormous crisis in its
balance of payments, with the oil important bill as a proportion of export
earning from 30.4 per cent for 1978-79 to 53.7and 90.0 per cent for 197980 and 1980-81(GOI 1983).
LIBERALIZATION AND STRICT CONTROL ON PUBLIC SECTOR
The imperative of expanded production, both to relieve domestic
shortages and to increase exports, resulted in new policy initiatives.
However, if the old formula had been that the public sector was both an
instrument of socialism and of faster economic development, that sector
was no longer perceived as the engine of growth. Most striking for the
leader ship was the public sector to generate economic surpluses for new
investment, which was attributed to its inefficiency, even as the public
sector represented half the enter capital investment in the organized
industrial sector. The leadership's perception of the performance of the
public sector was critical to the change in economic policy. To the extent
that perception coincided with reality , it confirmed the observation of the
Scandinavian scholar Knud Erik Svendsen in another context that' the
worst enemy of socialist policy in any . country is bad economic
performance' (cited in Tordoff and Muzrui 1972:423). In the circumstance,
the leadership perforce had to turn to the corporate private sector. But is
doing so, it undertook no overthrow of the existing framework of the
economy; no denationalization of the public sector was contemplated.
Rather, it made changes at the margin to accommodate itself to its new
compulsions. There were several areas in which policies underwent
modification, or indeed reversal. Such modification was manifest in
respect of (1) some liberalization of the economy, which earlier had been
marked by pervasive control and restrictions; and (2) a tougher attitude
toward performance in the public sector and resistance to taking over to
sick firms in the private sector.
DEREGULATION AND COMPETITION
Deregulation and competition were the new watchwords of the
government in order to expand production. No doubt, the IMF-, which
provided India a massive loan of over $5 billion to cope with its
impending balance of payments crisis-also, favoured this course. But the
impact of the IMF was to influence marginally the balance of opinion
within the government in that direction, for the regime was oriented that
way in any case. There was a time government leaders had threatened
penalties for enterprises that exceeded their licensed capacity. But now the
regime adopted a more position attitude, though still with the framework
of bureaucratic control and monitoring, toward increased in the private
sector. In1975. Similarly compelled by the need to expand production, the
government had already allowed automatic expansion of capacity by 5per
cent annually or 25 per cent over a five -year period in respect of 12
engineering industries out of a list of some 40 core industries; this
expansion was over and above the normal 25 per cent expansion allowed.
In 1980, the government made this facility available to the other
remaining included in the of core industries, such as chemicals, drugs,
Ceramics and .a more dramatic shift in industrial policy followed Mrs
Gandhi's declaration to make 1982 'the year of productivity'. This
declaration in itself reflected the dominant newfound pragmatic thrust in
the government's economic policy. As India today (15 February 1982: 6271) expressed it, ' right now, the mood of the government is not to be
unduly bothered about theoretical issues - about distributive justice and
socialism and such other relics from the bygone eras'.
ECONOMIC PRAGMATISM (1982)
The new Industrial Policy, which was announced in April
1982, was immediately hailed by the industry-controlled press as
'economic pragmatism' and 'dilution of dogma'. It incorporated two new
measures. One, it accepted the principle of automatic expansion of
licensed capacity by one-third over the best production level in the
preceding five years rather than just one-fourth as before. Two, it enlarged
the list of core industries that would be open to large industrial house and
FERA companies. The second measure was considered to mark a
significant departure from the earlier posture of the government, which
had sought to bar the expansion of big business. Again, the government
opened to the private sector areas of industrial activity, such as power and
oil exploration, that were earlier closed to it. Still again, to help
manufacturers generate resources for modernization and expansion by
preemption of what was being cornered by middlemen into the black
economy, the government abolished administered prices in respect of pig
iron; similarly, it decreed partial decontrol in relation to cement. All these
measures reflected a realization on the part of government that it could not
impose restrictions that inhibited the functioning of the private sector and
at the same time expect industrial growth; they also reflected the
realization of the futility of negatively identifying socialism with the
imposition of controls on the private sector. Furthermore , the government
sought to create a more favourable climate for investment by business
through its annual budgets, which sought to provide incentives to
encourage savings and direct them to productive investment. In addition,
the government adopted a more liberal policy on the import of raw
materials, spare parts and technology import was reflected in the increased
number of technical collaboration proposals approved; this new posture
reflected the government's fear of increasing technological obsolescence
that hampered the country in competing in word markets. The literal
overthrow of past economic orthodoxy in restrictions on import of
technology and the size of undertaking became especially manifest in
respect of electronics and telecommunication, where earlier positions were
reversed in 1983 to favour liberal import of technology, economic size
units, and participation by big business. Needless to say, the new trends in
policy were welcomed by big business.
SMALL LIBERALIZATION
Liberalization in the 1980s has often been
considered to be a worldwide trend, inaugurated among the industrial
democracies by Ronald Reagan in the us and Margaret Thatcher in the UK
and, among the communist countries, by Deng Xiaoping in China and
Mikhail Gorbachev in the Soviet Union, with the rest of the world
following in imitation. The evidence presented here demonstrates that the
origins of liberalization in India lay in its own specific experience in the
early 1970s, even though later it may have left encouraged in that path by
the worldwide trend. However, Mrs Gandhi's policy changes were not
proclaimed as heralding liberalization as such. With her shrewd political
sense, she sought to avoid-unsuccessfully-attacks by the left, through
proclaiming that these gradual and pragmatic measures within the
traditional socialist framework were necessary either because of a crisis
situation or because India had achieved self-reliance through the policy
regime fostered by Nehru and her Mrs Gandhi's approach was essentially
one of introducing liberalization in small installments by stealth.
LIBERALIZATION IN THE ABSENCE OF CRISIS (1985-90)
Following the death of Mrs Gandhi, her son and political successor
made liberalization the center-piece of his political programme,
holding it forth as an essential requirement of the modernization
thrust to carry India into the 21st century as advanced industrial
power. Fortunately for him, he also received the most powerful
electoral mandate in India’s history, largely out of sympathy for
his mother’s martyrdom and the fear of national disintegration. His
position was truly path - breaking, for he was the first prime
minister, indeed anybody in high office, to openly espouse
liberalization, at least at the beginning of his tenure. In a series of
highly visible and salient actions, the Rajiv Gandhi administration
seemed to launch India on a new economic course, which not only
marked an acceleration of the liberalization policies adopted by
Mrs Gandhi earlier but also aimed for the first time to take the
country out of inherited socialist framework altogether.
Ambitious as his vision was, however, Rajiv Gandhi did not as yet
envisage a paradigm shift and an overthrow of the old system, rather he
aimed for incremental revisionist change with the overall framework of
that system.
It is important to note that Rajiv Gandhi
took to the new course when India faced no immediate economic crisis.
The absence of an economic crisis is, the most distinctive aspect of his
liberalization effort compared to all other earlier policy shifts. This was in
large measure the result of Mrs Gandhi's legacy; she had left behind an
enormous food buffer stock, a comfortable foreign exchange reserves
position, a functioning public distribution network for basic commodities
for large segments of the population, and a break with the Hindu rate of
growth through sustaining a growth rate of over 5 per cent for a decade. At
the same time, the economic crisis perhaps also explains why,
notwithstanding the apparently dramatic measures undertaken, the
liberalization effort undertaken soon stalled.
Rajiv Gandhi's liberalization was, in considerable part, a reflection
of his personal orientation; modern technology and computers fascinated
him. But he was also inspired by the seeming success of the earlier
liberalization policies and coincidentally by the realization that, despite it,
India’s growth rate had been insufficient to make a dent on domestic
poverty even as country was becoming increasingly marginalized
internationally.
The situation of marginalization had become increasingly
unacceptable to the new leadership, and Rajiv Gandhi sought to reinterpret
the concept of self -reliance, which as India’s overall national aim in the
past had, in the main, been interpreted to mean that the country ought to
produce domestically whatever it could, regardless of considerations of
cost. As paraphrased by L.K.Jha (1987:26), the new prime minister
thought: 'self - reliance for a country like India cannot have the limited
meaning of the country not being influenced one way or another by
external economic forces. It should instead be measured in terms of India's
contribution to the shaping of the international economic forces'. In his
own words Rajiv Gandhi stated in the seventh plan: 'self-reliance does not
mean autarky. It means the development of a strong, independent national
economy dealing extensively with the world, but dealing with it on equal
terms' (GOI 1985:v).
The root cause for India's existing
marginalization was quite correctly, ascribed to economic inefficiency;
that in turn was laid at the door of the poor functioning of the mammoth
public sector which dominated the organized economy and of the complex
regulatory framework. As a consequence, the government decided to rely
on the private sector as the growth mechanism of the future, while
reorienting the public sector to facilitate expansion of the private sector.
To allow the private sector to function adequately as a growth mechanism,
it then moved to reduce the plethora of regulatory controls except those
that were necessary for strategic purposes in other words, to go in for
further liberalization, domestically for now, externally only later.
The new policies represented continuity
with the process of change that had been under way for a decade. But they
represented a marked shift as well. First there was an accentuation of the
pace of change. Moreover such change was proclaimed boldly and
forthrightly and its irreversible nature was underline ; as L.K.Jha (1985:
97-98) pointed our, important as the changes under Mrs Gandhi were
'liberalization was still being looked upon more as an exception than a
ruling principle', while 'Rajiv Gandhi and his government have shown a
much deeper commitment to liberalization'. Second the changes took place
along a considerable front in several areas of economic life , they followed
several serious inquiries and studies and they occurred within a finite
period of time. As a consequence, they added in the aggregate to a broad
package, constituting as it were a distinctive economic model or strategic
economic design with its own coherent underlying philosophy, even
though one was not explicitly articulated. Third the policy changes w ere
presented without being masked by any pretence or rhetoric about
socialism, as had been the pattern in the past.
RELIANCE ON PRIVATE SECTOR
The key feature of the changes was reliance
on the private sector-instead of the public sector- as the mechanism for
economic growth in the future and the provision of the required resources
and appropriate environment to facilitate its performance. The public
sector would be expected to play a complementary but subsidiary role to
the private sector, concentrating on the core sector, primarily
infrastructure. Designed to influence both the supply side and demand
side, the changes were particularly manifest in three areas: taxation,
industrial licensing and trade policy.
In respect of taxation, the noteworthy event was the budget
presented in March 1985 which rather than raising additional resources
through increased direct taxation, reduced such taxation substantially. It
lowered corporate taxes so as to bring them more in line with other
capitalist economies, with the nominal tax rate being lowered by 5
percentage points from 57.7 per cent to 52.5 per cent; estate duty was
totally abolished while wealth tax was severely cut. Again the budget
raised the exemption limit for personal taxation from Rs. 15,000 to Rs.
18000 and reduced personal taxation by 20 to 30 per cent (so that the
marginal tax rate - which at one time had stood at 97.7 per cent - came
down from 62 per cent to 50 per cent).
MODIFICATION IN THE EXISTING LAWS
In relation to licensing, the basic intent was
to remove barriers to entry and to achieve economies of scale by
expanding capacity levels. The more significant changes - which centred
on redefining big business deli censing, broad banding and automatic
capacity expansion - were: (1) raising the level of assets that had brought
firms under the purview of MRTP from Rs 200 million to Rs 1,000
million, thus drastically reducing the number of firms under MRTP
restrictions and giving more freedom to many large business houses; (2)
deli censing of 25 broad categories of industries including scooters,
motorcycles, mopeds etc and over a wide area plus another 82 bulk drugs
and related drug formulations; (3) permitting MRTP companies to obtain
licenses for 27 industries with out being subjected to MRTP restrictions;
(4) deli censing of 22 industries for MRTP and FERA companies when
located in back ward areas; (5) broad banding of product-mix for 28
industry groups that continued to remain under the licensing regime, in
order to provide greater flexibility to entrepreneurs with licenses; (6)
automatic permission to expand capacity by one-third per year and (7)
removal of virtually any upper limits on capacity in non-consumer
electronics and permission for liberal import of technology and foreign
collaboration in electronics.
DECONTROL OF CEMENT
Cement was decontrolled and a number of
units were sanctioned additional licensed capacities in the private sector.
NEW TEXTILE POLICY
New Textile Policy (1985) virtually
abolished the distinction between the mill, power loom and handloom
sectors, as well as did away with the distinction between natural and
synthetic fibre for licensing purposes.
NEW EXIM POLICY
Export-Import Policy (1985) was announced
whose basic aims were: (a) to facilitate production through easier and
quicker access to imports; (b) to bring about import continuity and
stability to EXIM Policy; (c) to strengthen export production base; and (d)
to facilitate technological up gradation.
ELECTRONICS INDUSTRY
The electronics industry was freed from the
MRTP restrictions. The entry of FERA companies was also welcomed in
this area.
In regard to trade policy, with its major aim
the thoroughgoing technological modernization of industry in order to
exports, the new administration relaxed the restrictive trade in the first of
1985, and adopted a more liberal policy toward imports of capital goods,
technology and raw material inputs. Many categories of industrial
machinery were simply put on open general licence, thus no more
requiring specifics for import, even as customs duties were lowered
sharply. In the case of capital goods for projects, customs duties were
drastically slashed from 105 per cent ad valorem to 45 per cent, but were
even severer in the case of particular industries, such as fertilizer projects
(0 per cent) and power projects (25 per cent). In regard to technology and
computer systems, the government raised the upper limit for each case of
import from $ 0.5 million to $ 10 million. In respect of electronics, the
government declared, in a reversal of its past posture, a literally open door
policy in relation to foreign investment. It is noteworthy that liberalization
at this stage was essentially limited to internal competition rather than
exposing the economy to external competition and to reliance on domestic
entrepreneurs rather than foreign direct investment
.
Although liberalization was welcome to the upper and middle
classes, by the same token it made the government politically vulnerable
as it came to be -identified with the rich. The trade unions and the
communist parties were especially opposed to liberalization, holding it to
constitute the overthrow of established national policies and surrender to
imperialism. Surprisingly, the first sections challenge to the government
came from key segments within the congress party, where concern
mounted at handicap of being labeled a party for and no longer for poor’
(India Today, 31 may 1985:5). In the face of a virtual party revolt in may
1985, the government beat a hasty retreat, proclaiming once again
unequivocally its commitment to socialism’. However, the government’s
concession was merely rhetorical and it remained steadfast in its
determined course. A more forceful challenge to the government came in
early 1986 from the middle class, which raised a storm of protest in
reaction to the raising of public sector goods to mobilize resources. The
experience chastened the government even as enthusiasm for Rajiv
Gandhi dimmed among the middle class. The government then began to
moderate its policy posture in order to have corresponded with its political
compulsions to maintain support among key groups. The emphatic
liberalization policy that was proclaimed in the first budget thus soon
became moderated and attenuated, indeed arrested. Instead of new
initiatives, the government now only fine-tuned its policies and modified
them to cope with the objections of particular groups.
Particularly striking was the failure of the Rajiv Gandhi
government to reform the public (nayar 1992). It promised a white paper
on reforming the public sector, but failed to bring it out. It tried to
privatize a single chronically loss -making commercial enterprise,
Scooters India limited, but was unsuccessful. The public sector seemed
politically unassailable because of its association with the ideological
legacy of Nehru. More importantly, there were key massive and powerful
veto groups with concrete material interests, lodged inside the state in the
form of bureaucracy and public sector labour that opposed privatization or
reform of the public sector. Besides, Rajiv Gandhi became politically
preoccupied with fending off charges of corruption, especially in regard to
defence purchases. In the final analysis, his liberalization effort amounted
to only tinkering with the existing system.
Despite his failure on the public sector and
on a deeper liberalization, however, Rajiv Gandhi changed the nature of
the debate on the economy where, as against the earlier ideological
hegemony of socialism and mercantilism, it now became legitimate to
regard liberalization as an appropriate alternative economic strategy. Even
though he lost the 1989 elections, perhaps for causes unrelated to the
economy, he was to leave behind the legacy of his 1991 election
manifesto, which the congress party posthumously took to be a mandate
for a paradigm shift to liberalization. Meanwhile, the national front that
came to power in 1989 was as a coalition government, unstable and
divided over issue of economic policy; however, it contained a strong
impluse for further liberalization of industrial policy; which proved
abortive because of the front break-up.
The economy saw a slight acceleration in the annual
growth rate, from 5.4 percent during the sixth plan (1980-1985) under Mrs
Gandhi to 5.8 percent during the seventh plan (1985-90) under Rajiv
Gandhi. No doubt, some improvement in productivity as a result of the
several doses of liberalization since 1974 played a part in the better
economic performance during the 1980s. However, a major factor in the
higher growth rate was that the state followed an imprudent expansionary
policy, relying for investment and populist subsidies - in a shift from its
traditional fiscal deficits and external commercial borrowings in the
absence of adequate concessional aid. Thus, while Latin America was
coming to term with its devastating debt problem in the 1980s, India was
in the process of quickly buying its way into it, banking on its good credit
rating at time. A future crisis was thus being quietly put in place through
fiscal profligacy. The higher growth rate on the back of fiscal deficits was
in the long term unsustainable. The gathering crisis can, however, be
rationalized in more positive terms by the argument that it was better to
have deliberately introduced dynamism, even if risky, into the economy
than to have accepted a low-level equilibrium, which was not necessarily
risk-free. The argument is strengthened by the consideration that crisis,
whether induced or otherwise, seems to have been essential for economic
policy reform in India. Nonetheless, the gathering crisis finally exploded
when the gulf war in 1991 aggravated the already serious balance of
payments problem that was developing in 1990. The crisis led to a
paradigm shift to a market model under a new government, marketing a
break with the earlier model of self reliance launched with the Second
Plan.
The policy of economic liberalization launched in 1991 often
appears as a dramatic act that suddenly catapulted India in a
paradigm shift from the mercantilist-socialist path, which had been
sustained for three and half decades since 1956, to a liberal marketoriented course that integrated India into the global economy. The
reality, however, is that the mercantilist-socialist model was in
trouble from the very beginning. Indeed, the history of that path is
marked by a series of recurrent crises, the resolution of which was
attempted initially through oscillation between economic
liberalization and economic radicalism and then through
progressive increases in economic liberalization.
When India started our with its ISI strategy - focused on heavy
industry and its ownership by the state- in the context of a
democratic political system, there was no existing model of such a
mixed economy to follow. India thus did not have the advance
benefit of the experience of an existing model to draw on in
determining the ambition and scale of the industrialization effort
that would be consistent with the requirements, on the one hand, of
legitimacy within a democracy in which the bulk of the population
lived at subsistence level and on the other, of advancing national
autonomy and welfare in the shortest possible time. Necessarily,
therefore, there were imbalances between the economic strategy
and the political system. It is instructive nonetheless that, viewed
from a long - range perspective, the Indian leadership attempted,
not always successfully or in timely fashion, to react to perceived
shortcomings in the economic strategy. There was thus a learning
process involved for the leadership as it experimented with
different policies, discovering on the way their respective costs and
evaluating their acceptability or not to key groups in society as
well as assessing the capacity of the state to implement them.
As the leadership attempted to arrive at an accommodation
between economic strategy and political system, it encountered intrusive
foreign. Intervention in its policy-making process during the mid-1960s.
This was a period in which India was subjected to tremendous pressures
by the US. These pressures did not have to do with economic policy
reform alone; rather, India's foreign policy of non-alignment, particularly
in respect of Vietnam, was implicated as well. Therefore, it seems that
those who facilely suggest that India should have moved to an exportoriented strategy fail to appreciate that, first, it would not have been easy
to give up the inward-oriented heavy strategy because it was invested with
ideology and second, that India would also have had to give up its foreign
policy, independence in order to gave access to the markets of the West,
particularly the US. The export-oriented policies of the Asian tigers did
not simply stand in isolation as economic policies but were part of a large
integration of these states into the foreign policy orbit of the US.
The economic policy reform that was
generated in the mid-1960s in the cause of economic liberalization could
not be sustained (except in agriculture), primarily because its foreign
sponsorship proved unacceptable to nationalist and leftist forces within the
country, Indeed, the consequence of foreign sponsorship was rejection of
the reform and a swing to the radical left. Only when this radical course
had been exhausted and had proven patently counter productive that the
leadership picked up the thread of liberalization again in the mid-1970s,
this time on the basis of its own assessment. It is fair to acknowledge that
when the national interest demanded change, Mrs Indira Gandhi broke
with the radical course and started India even if hesitantly on the trajectory
of economic liberalization. This break with the course of the past was later
carried forward incrementally by her and her son and successor, Rajiv
Gandhi.
In general it is manifest that the process of
economic policy reform in India, even when it need has become apparent,
has been stretched over a long period of time. That has patently to do with
the difficulty of enacting reform in democracy. The state under
democracy, as in India , has policy flexibility (Nayar 1992) than do
authoritarian regimes, such as those in East Asia. However , democracy
does not altogether preclude reform, but it often requires a crisis to push it
through, and even then there are limits to it, as is made evident by the
liberalization undertaken in 1991.
REFERENCES
1. B. R. Nayar, “Globalization and Nationalism”, Sage, New Delhi, 2001
2. Bhagwati, Jagdish: “India in Transition: Freeing the Economy”. Delhi:
OUP, 1993, pp. 108, Rs. 95.00, ISBN 0-19-563637-6
3. Bhattacharya, B.B.: “India's Economic Crises: Debt Burden and
Stabilization.” Delhi: BR, 1992, pp. 190, Rs.75.00 (PB), ISBN 81-7018714-1
4. Bhorali, D. (ed): “Structural Reforms in Indian Economy”. Delhi: Mittal,
1995, pp. 256, Rs. 250.00, ISBN 580-9
5. Kapila, Raj and Uma Kapila (eds): “Understanding India's Economic
Reforms: The Past, The Present and the Future”. 6 vols. Delhi: Academic
Foundation, 1996, pp. 2182, Rs. 7500.00 (set), ISBN 81-7188-105-X
6. Prasad, S. and J. Prasad: “New Economic Policy: Reforms &
Development”. Delhi: Mittal, 1993, pp. 294, Rs. 295.00, ISBN 530-2
7. Ramachandran, K.S.: “Economy Under Reforms”. Delhi: Konark, 1996,
Rs. 295.00
Fiscal Stabilization
The term ’Fisc’ in English language means
‘treasury’. Hence policy concerning treasury or government exchequer is
known as ‘Fiscal Policy’.
PAUL SAMUELSON –
tax policy.
fiscal policy means public expenditure and
MUSGRAVE –
Fiscal policy is concerned with those aspects
of economic policy, which arise in the operation of the public budget.
Broadly speaking, Fiscal Policy
refers to a variety of activities of the government related to taxing
and spending, borrowing and lending, and buying and selling.
FISCAL POLICY
Budgetary Policy
Taxation
Public Debt
Public Expenditure
OBJECTIVES OF FISCAL POLICY IN INDIA
(A)
ECONOMIC STABILIZATION
(B)
ECONOMIC GROWTH
(C)
BREAKING THE VICIOUS CIRCLE OF POVERTY
(D)
PROVIDE EMPLOYMENT
(E)
ACCELERATE THE SAVING, INVESTMENT AND CAPITAL
FORMATION
(F)
BRING STABILITY IN PRICES
(G)
ESTABLISH BALANCE IN FOREIGN TRADE
(H)
REDUCE INFLATION PRESSURE
(I)
REDUCE WEALTH AND INCOME INEQUALITIES.
ROLE OF FISCAL POLIC
POLICYY IN INDIA
a) Promotion &Acceleration of Capital Formation - It performs the task in
two ways; (I) by expanding investment in public & private enterprises; (II) by
directing flow of resources from socially less desirable to more desirable
investment.
b) Fiscal Policy and Mobilization of Resources - For mobilizing resources,
the following fiscal means may be used; (I) taxation (II) public borrowings
(III) deficit financing (IV) stimulating of private savings (V) profits of public
enterprises
c) Removal of unemployment - For dealing with unemployment, policy of
increased capital formation and planned development is undertaken
d)
Promotion and maintenance of economic stability.
e)
Redistribution of national income.
f)
Promotion and maintenance of price stability.
FISCAL IMBALANCE IN INDIA BEFORE REFORMS
GROSS FISCAL DEFICIT IN 1975-76 WAS 4.1
PERCENT OF GDP BUT IT ROSE TO 7.5 PER
CENT IN 84-85 AND TO 8.3 IN 1990-91 AS
SHOWN BY THE FOLLOWING TABLE:
Year
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
Budgetary
Deficit
0.7
1.6
2.0
2.8
1.7
1.4
2.4
Revenue
Deficit
1.2
1.8
2.2
2.7
2.7
2.7
2.6
Gross Fiscal
Deficit
6.3
7.5
8.3
9.0
8.1
7.8
7.9
Primary
Deficit
4.0
5.0
5.5
5.8
4.7
4.2
3.9
1990-91
1991-92
2.1
1.1
3.5
2.6
8.3
5.9
4.3
1.6
The proximate cause of India’s economic crisis in 1991 lies in the
large and persistent macroeconomic imbalances that developed over the
1980s. A detailed examination of government expenditures over the
1980s suggests that the root cause of the financial crisis was the large and
growing fiscal imbalance. Large fiscal deficits emerged as a result of
mounting government expenditures, particularly during the second half of
the 1980s. These deficits led to high levels of borrowing by the
government from the Reserve Bank of India, with an expansionary impact
on money supply leading directly to high rates of inflation. Deeper
reasons for the fiscal crisis, however, would extend to the overall structure
of the economy, which has yielded insufficient growth rates for a number
of decades. At the core of increased government spending in the 1980s
was a political response to slow growth, which prompted governments in
the 1980s to take ‘expansionary’ measures. These expansionary measures
were inevitable short lived, since they did not go to the fundamental
causes of slow growth.
FISCAL DEFICIT
The gross fiscal deficit of the government rose steadily over the
1980s, reaching 10 percent of GDP in 1990-1 (see Table I). For the centre
along, gross fiscal deficit stood at 8.4 percent of GDP in 1990-1 (see Table
II). Since these deficits had to be met by borrowings, the internal debit of
the government accumulated rapidly, rising from 35 percent of GDP at the
end of 1980-1 to 53 percent of GDP at the end of 1990-1.
Table - I
Combined Deficits of Central and State Governments
(PERCENT OF GDP)
19901
19912
1992-3
1993-4
19945
19956
19967
19978
Gross Fiscal
Deficit
10.0
7.4
7.4
8.8
7.5
7.1
7.0
7.5
Net Primary
Deficit
4.9
3.1
2.6
3.7
2.2
1.9
1.7
1.4
Revenue Deficit
4.5
3.6
3.4
4.5
3.9
4.4
3.5
4.0
As a result, interest payments increased from 2 percent of GDP and
10 percent of total central government expenditure in 1980-1 to 4 percent
of GDP and 20 per cent of total central government expenditure in 1990-1.
EXPENDITURE GROWTH
In order to analyze the trends in India’s overall government
expenditure between 1981-2 and 1997-8, this period may be divided into
three sub-periods (i) 1981-86, (ii) 1986-1990, (iii) 1990-97. During the
first sub-period, from 1981-2 to 1986 –7, expenditure growth rate was
steady and showed a significant acceleration to average 7.6 per cent per
year with the result that expenditure – GDP ratio during these five years
increased from 24.5 percent in 1981-2 to 30.5 per cent in 1986-7.In the
second phase, from 1986-7 to 1990-1, expenditure – GDP ratio rose
further from 30.5 per cent to 36.6 per cent. In the third phase, from 1990-1
to 1997-8 expenditure-GDP ratio, it has declined from 36.6 per cent to
32.3 per cent in 1997-8. Corresponding to the three periods mentioned
above, expenditure growth could be explained by the state of the economy
and particularly by the stringency of resource constraint.
The first phase (1981-2 to 1986-7) is marked by significant
acceleration in the rate of growth of expenditures. One may
attribute this partly to the increased growth of government revenues
resulting from the shift in the period from import quotes to import tariffs.
The rise in expenditures outfaced the fast-rising revenues, partly as
government spending was increased to stimulate the economy. In turn
growing interest payments on the public debt also added to overall levels
of government expenditure, in an adverse feedback of the expansionary
fiscal policy.
The second phase (1986-7 to 1990-1) was characterized by two
important factors, first, current expenditures had to be increasingly
financed out of borrowed resources and in order to maintain relative price
stability; governmental borrowing beyond a certain level could not be
sustained. In fact annual increase in the net liabilities of the government
reached the highest level of 12 percent of GDP in 1986-7, and in the same
year the RBI's net credit to government was also the highest, at close to 5
per cent of GDP. (See Dandekar, 1992). Second as a result of the
implementation of the recommendations of the Fourth Pay Commission,
the compensation of government employees increased substantially. Both
central and state government employees had pay revisions in 1987-8 and
1988-9 respectively. The effect of pay revisions in the state alone is
estimated to have increased total wages and salaries by 18 per cent. In
addition the unprecedented drought of 1987-8 not only necessitated
diversion of resources to meet relief expenditures, but also decelerated
growth of revenues to average 5 per cent year after 1896-7.
The third phase (1990-1 to 1997-8) is the period when a process of
fiscal stabilization was initiated in response to the 1991 economic crisis.
The decline in expenditure – GDP ratio during this period, from 36.6 per
cent in 1990-1 to 32.3 per cent in 1997-8, is due to the 3.0 per cent decline
in total central government expenditure, that is from 19.6 per cent of GDP
in 1990-1 to 16.6 per cent of GDP in 1997-8, and over the same period,
total expenditure of the state governments has declined from 17.0 per cent
to 15.7 per cent thereby resulting in a decline
Table- II
CENTRAL GOVERNMENT FINANCE
(Rs. Billion)
1990-1
19912
1992-3
1993-4
1994-5
1995-6
1996-7
19978
1.
T
otal
Expendit
ure
1053
1114
1225
1419
1607
1830
2010
2352
2.
R
evenue
Expendit
ure
735
823
927
1082
1221
1435
1589
1822
3.
C
apital
Expendit
ure
318
291
299
337
386
394
420
530
4.
T
otal
Receipts
940
1046
1103
1309
1563
1672
1877
2352
5.
R
evenue
Receipts
550
660
741
755
888
1008
1262
1385
6.
T
ax
Revenue
430
501
540
534
674
811
937
991
7.
N
on-tax
Revenue
120
160
200
220
236
291
325
393
8.
C
apital
Receipts
390
385
362
554
686
652
615
967
9.
P
SE
Equity
Disinvest
ments
NA
30
20
0.48
56
13
50
NA
10.
R
ecovery
of Loans
57
60
64
62
63
74
75
94
11.
B
orrowing
& other
Liabilitie
s
333
295
279
493
517
590
556
NA
12.
R
evenue
186
163
186
327
341
355
326
436
Deficit
(2-5)
(Per cent
of GDP)
3.5
2.6
2.6
4
3.3
3
2.6
3.1
13. Fiscal
Deficit
(11+12)
446
364
402
603
577
640
667
863
(Per cent
of GDP)
8.4
5.9
5.7
7.4
6.1
5.8
5.2
6.1
14. GDP at
current
Market
Prices
5355
6167
7059
8097
9536
10985
10985
1149
2
Of 4.3 percentage points in overall expenditure –GDP ratio. It is
significant to note that of the 3.0 per cent decline in central government
expenditure, compressing capital expenditure has reduced as much as 2.2
percentage points, or in other words, the government has chosen soft
options and avoided any significant adjustment on the side of current
expenditure (known as revenue expenditure in Indian budgetary parlance).
REVENUE EXPENDITURE
Revenue expenditure has risen twice as fast as total expenditure,
although much of this reflects rising interest payment. These
predominantly consist of interest payments, subsidies, public
administration, and defence expenditure. Revenue expenditure of state
governments, on the other hand, has been rising particularly because of the
increase in wages and salaries after the implementation of the forth pay
commission’s recommendation. The growing current expenditure, and
resultant governments dissaving, termed revenue deficit, is likely to
reduce national saving rates and therefore the sustainable national
investment rate as a percent of GDP. Cross country evidence puts the
reduction of national saving for each percent of GDP in government
dissaving at around 0.5 percents. Reduction in government dissaving
(i.e.revenue deficit) is therefore a key area for action.
The overall increase in government expenditure as a percent of
GDP has come from the increase in current expenditure, and that the
largest increase in current expenditures has come about on account of
increase in interest payments, the expenditure on interest payments as a
proportion of GDP increased from 1.9 percent of GDP in 1980-1 to 4.0
percent in 1990-1 and to 4.6 percent of GDP in 1997-8. as a proportion of
total expenditure, interest payments increased from 11.7 percent in 1980-1
to 20.4 percent in 1990-1, and to staggering 17.9 percent in 1997-8. The
increase in the interest payments is attributable both to an increase in the
volume of indebtedness of the government relative to GDP and to an
effective rise in interest rates on government borrowings. In addition to
rising interest payments, rising subsidies during the 1980s also played role
in the expansion of current expenditure. Subsidies rose from 1.4 percent of
GDP in 1980 to 2.3 percent of GDP in 1991, before falling to 1.4 percent
of GDP in 1997.
Large and persistent fiscal deficits in India are a serious cause for
concern. Despite seven years of fiscal consolidation efforts, fiscal deficit
remains high and poses grave threats for the future. As a ’Revenue
Deficit’ denotes the difference between revenue receipts and revenue or
current expenditure. 2.1 per cent in 1995-6 and 2.0 per cent of GDP in
1997-8. Central government subsidies have been reduced from 2.3 per
cent of GDP to 1.4 per cent of GDP and defence expenditure has declined
from 2.0 per cent of GDP to 1.9 per cent of GDP (see Table III). Interest
payment of course has risen not declined, from 4.0 per cent of GDP in
1991 to 4.6 per cent of GDP in 1997-8.
Table - III
Revenue Budget of the Central Government
(Percent of GDP)
19901
1991-2
19923
1993-4
19945
19956
19967
19978
Revenue
Receipts
10.3
10.8
10.5
9.4
9.6
10.0
9.9
9.8
Tax Revenue
8.1
8.1
7.7
6.7
7.1
7.4
7.3
7.0
Corporation Tax
1.0
1.3
1.3
1.3
1.4
1.5
1.5
1.5
Income Tax
1.0
1.1
1.1
1.1
1.3
1.4
1.4
1.3
Customs duties
3.9
3.6
3.4
2.8
2.8
3.2
3.4
2.9
Union Excise
duties
4.6
4.6
4.4
4.0
3.9
3.7
3.5
3.4
Non-tax
Revenue
2.3
2.6
2.8
2.7
2.5
2.6
2.6
2.8
Revenue
Expenditure
13.8
13.4
13.1
13.5
12.8
13.1
12.4
12.9
Interest
Payments
4.0
4.3
4.4
4.6
4.6
4.7
4.7
4.6
(Average rate on
interest)
8.2
8.4
8.7
9.2
9.3
9.7
-
-
Defence
Expenditure
2.0
1.7
1.7
1.8
1.7
1.7
1.6
1.9
Grants to States
2.5
2.6
2.5
2.7
2.1
2.1
2.0
-
Subsidies
2.3
1.6
1.7
1.6
1.4
1.2
1.3
1.4
Revenue Deficit
3.5
2.6
2.6
4.0
3.3
3.0
2.6
3.1
(SOURCE: ECONOMIC SURVEY, GOVERNMENT OF INDIA, VARIOUS ISSUES).
Further progress is needed in reductions in each of the four main
areas of current spending. With respect to internal public debt, there is one
important deux ex machina that could substantially ameliorate that fiscal
situation. Privatization of public enterprises could raise significant funds
as a percent of GDP, which could be used to buy down the public debt.
Not only would the stock of debt itself be reduced, but also the interest
costs of servicing the debt would surely decline as the debt stock itself was
brought under control. The cash value of these enterprises vastly exceeds
the percent value of profit flows that the state now collects on these assets.
Public sector profits are dissipated in poor productivity, over manning,
excessive public sector salaries, soft budget constraints, sale of the
enterprises to private sector buyers, if used to buy down the public debt,
would yields annual saving in interest cost that for exceeds government
revenues that the claimed by virtue of state ownership of the asserts. (This
is especially true in view of the fact that many enterprises with significant
positive market value are actually loss markers in current cash flow, under
state management).
PRIVATIZATION OF PSUs
A substantial amount of interest savings on the India’s internal
debt could be generated if the government were to undertake extensive
privatization of central public sector enterprises. According to the
economic survey, 1996-7, at least 25 per cent of outstanding marketable
debt (largely made up of market loans, special bearer bonds, and 91-182day treasury bills). could be retired by selling the economic assets of the
government. However, this estimate is based on the book value of assets,
and consequently, it would be much higher when converted into current
value. Besides the sale of these assets could retire more of the total
liabilities depending upon the mode and timing of such a sale. The central
government currently has equity holdings in 240 enterprises, 27 banks,
and 2 large insurance companies.
Further spending cuts could come from liquidation of loss-making
enterprises that have no positive net market value. As shown in Table IV,
there were 104 losses – making enterprises in 1992 accounting for a total
loss of Rs. 39.5 billion. Liquidation of these would imply a rise in
domestic savings by about 0.3 per cent of GDP. (Saving, of course, would
be higher if there is salvage value in part or all of some of these
enterprises.) To capture these savings would require implementation of an
‘exit policy’ to allow the government to close down these loss-making
enterprises.
Table -IV
Number of Loss-making Public Sector
Enterprises and
Total Amount of Losses Incurred
Unit
1980
1986
1990
1992
Number of Operating Enterprises
No
168
214
236
246
Number of Loss-making
Enterprises
No
74
100
109
104
Total Capital Employed
Rs.bn
182
518
1017
1469
Losses of Loss-making Enterprises
Rs.bn
7.6
17
30.6
39.5
REDUCTION IN GOVERNMENT SUBSIDIES
Reduction in central government subsidies is
another area of expenditure control. While central government subsidies
have declined from a total of 2.3 per cent of GDP in 1990-1 to 1.4 percent
of GDP in 1997-8, there is still room in reducing these further, especially
those that do not benefit the poor. The subsidy bill of the central
government is almost entirely made up of fertilizer and food subsidy.
Fertilizer subsidy, for instance could be phased out over the medium term,
and simultaneously during this period the government could initiate a well
targeted and time – limited programme to compensate poor farmers for
their loss of income. Government expenditure could be cut by about 0.6
per cent of GDP by eliminating fertilizer subsidy.
Table- V
FOODGRAINS ALLOCATION AND OFF-TAKE UNDER PDS (MILLION TONNES)
Wheat
Rice
Allocation
Off-take
Allocation
Off-take
1990-1
9.5
7.0
9.6
7.8
1991-2
10.3
8.8
11.3
10.1
1992-3
9.2
7.4
11.4
9.5
1993-4
9.5
6.1
12.4
9.0
1994-5
10.8
5.1
13.3
8.0
1995-6 P
11.3
5.2
14.6
9.4
1995-6 A
Apr-Dec
8.2
3.6
10.8
6.9
1996-7 P
Apr-Dec.
7.8
6.0
11.2
8.2
(SOURCE : ECONOMIC SURVEY, GOVERNMENT OF INDIA, VARIOUS ISSUES )
Limiting access to the current food subsidy
system could also make additional expenditure cuts. Subsidies arise from
the difference between issue price and operation costs of the Food
Corporation of India (FCI). Through a public distribution system (PDS)
the government supplies six key essential commodities at below market
rates to the consumers, with access to the system being universal. Foodgrains (mainly rice and wheat), sugar, edible oils, kerosene, and soft-coke
are sold to the public through a network of fair price shop (FPS), also
popularly known as ration shops. The PDS aims at insulating the
consumer from the impact of rising prices of these commodities and
maintaining the minimum nutritional status of the population. Typically,
each FPs is required to serve a population of 2,000. As of end March
1994, there were 424,000 FPSs, of which 324,000 were located in rural
areas and 100,000 in urban areas.
As Table V shows, PDS off-take (amount sold by FPSs) has been
declining over the last few years. To a large extent, this is explained by the
reduced use of the PDS by consumers. Balakrishnan and Ramaswami
(1996) suggest the consumers perceive grain from open market outlets to
be of higher quality than the grain available at FPSs even though the
government does not set out to supply lower quality grain. The poor
quality of wheat and rice sold in FPSs is one of the main reasons for the
shift in preference of consumers towards purchase of food grains from the
open market. This is particularly so in the case of wheat in wheat –
consuming states. Whenever the government raises issue price, PDS offtake falls as consumers exit into the open market. An overhauling of the
PDS needs to be done in order to cut government expenditure on food
subsidy. The exclusion of the non-poor from the PDS will help improve
targeting of the poor and also cut government expenditure of food subsidy.
For some time now the issue of limiting the open-ended subsidy on
account of FCI operations has been discussed in the government, through
no concrete action has been taken. The government could save as onethird of the expenditure on food subsidy if it were to target access to the
PDS for the very poor (mainly rural) recipients. Thus savings could come
to around 0.2 per cent of GDP. According to the revamped public
distribution system ( RPDS), however, wheat and rice will be provided at
half price to about 320 million people living below the poverty line. As a
result the food subsidy bill of the government is likely to go up further by
Rs.24 billion, taking total food subsidy of Rs. 83 billion.
The central government brought out a
discussion paper in May 1997 on Government Subsidies in India, which
provides a comprehensive estimate of the explicit and implicit subsidies.
The paper reports that the total magnitude of subsidies given by central
and state governments was Rs. 1372 billion during 1994-5 constituting
14.4 per cent of GDP, comprising Rs. 430 billion of central subsidies and
Rs 942 billion of state subsidies. The subsidies of the centre and state on
non-merit goods and services (such as agriculture and allied activities
irrigation , power, industries and transport) amounted to 10.7 per cent of
GDP. The average all-India current recovery rate for non-merit goods and
services was placed at 10.3 per cent in 1994-5, with the recovery rate for
the centre being slightly higher at 12.1 per cent than 9.3 per cent for states.
The paper suggests reforms in the current
subsidy regime with the objective of reducing the overall scale of
subsidies. These reforms will help make subsidies transparent and for
well-defined economic objectives. Subsidies as per the paper should focus
on final goods and services with a view to maximizing their impact on the
target population at the minimum cost. The existing subsidy rate for nonmerit goods and services for centre and states together is nearly 90 per
cent of the cost. Bringing this down to 50 per cent could reduce subsidies
on non-merit goods and services from 10.7 per cent of GDP to about 6.0
per cent of GDP and thereby reduce the combined fiscal deficit of the
centre and states from 6.5 per cent of GDP in 1996-7 to less than 2 per
cent of GDP. The paper suggests setting a target for reducing the subsidy
rate for non-merit subsidies to 50 per cent in a three-year period and
further to 25 per cent in the next two years. The key to subsidy reduction
lies in phase increase in user charges in sectors such as power transport,
irrigation, agriculture and education.
REDUCTION OF GOVERNMENT EXPENDITURE
Reducing the size of public administration could also cut
government spending. One way to achieve a reasonable degree of success
in this direction might be a freeze on new employment, matched by
normal attrition through retirement and death. Existing functions could
easily be met through modest improvements in computerization and
information systems. On an average, about 125,000 central government
employees are taken off the government payroll each year due to these
reasons. Implementation of such an approach over a period of four year
could result in a reduction in central government employment by
approximately 12.3 per cent or a reduction of around half a million
employees from the present total of about 4 million. On an average, the
government could save about 4 billion every year on account of reduced
wages and salaries and the associated reduction in operating expenses.
After a period of four years, this would imply annual savings of roughly
0.3per cent of GDP. Obviously, bolder if less politically palatable
solutions could result in even larger savings.
Although the Fifth Pay Commission has recommended a
reduction of 30 per cent in government workforce over a ten-year period,
the central government did not accept this recommendation. On the
contrary, the government has accepted the recommendation relating to
higher salaries for its employees, which means higher expenditure per
year, or roughly 0.9 per cent of GDP. In fact the government has agreed to
even higher levels of salaries than the Pay Commission had recommended.
As with the central government, state governments too
need to reduce their expenditure levels. While the ratio of state
expenditure to GDP has witnessed a decline over the last few years,
expenditure levels are still pretty high, and therefore need to be reduced.
As a proportion of GDP. total expenditure of state governments has gone
down from 17 per cent in 1990-1 to 15.7 percent in 1997-98. Reduced
state expenditures could translate into saving at the central level through
reduced transfer payments to the states.
The Fifth Pay Commission has recommended an over
threefold increase in basic pay, increase in retirement age from 58 to 60
years, 30 per cent cut in the workforce over a ten-year period, abolition of
350,000 vacant posts, substantial hike in allowances net of taxes, higher
interest payments on provident fund and pensions and employment on
contract basis wherever possible for government employees. The
commission has recommended revised pay scales with effect from 1
January 1996. 15.7 per cent in 1997-8. Reduced state expenditures could
translate into saving at the central level through reduced transfer payments
to the states.
Current expenditure of state governments will rise still
further since a number of state governments have agreed to revise
employee salaries in accordance with the Fifth Pay Commission’s
recommendations. Although the Pay Commission’s recommendations are
for central government employees only, once the salaries of central
government employees have been revised, state governments are under
increasing pressure to revise the salaries of their employees as well.
State governments too should reduce the size of their public
administration in order to cut current expenditure. With a policy of not
filling vacancies arising due to retirement, resignation, or death, the size of
the civil service would reduce on its own. State governments too should
reduce the size of their public administration in order to cut current
expenditure. With a policy of not filling vacancies arising due to
retirement, resignation, or death, the size of the civil service would reduce
on its own. Therefore, after four years of attrition, saving on public
administration at the state level would amount to roughly 0.5 per cent of
GDP. Instead of cutting public administration expenditure the Fifth Pay
Commission’s recommendations are expected to raise the nondevelopmental expenditure on administrative services is budgeted to rise
by 44.3 per cent on account of the revision of pay scales of government
employees following the Fifth Pay Commission awards.
According to estimates of a study by the Planning Commission,
should all state governments raise salaries of their employees in line with
the Fifth Pay Commission’s recommendations, then the states will have to
shell out an additional Rs. 1000 billion as salaries and wages over the next
five years. Planning Commission estimates also include higher salaries for
quasi-government employees, including staff of public sector governments
spend around 60 paise of every rupee earned as revenue on wages and
salaries. In particular states like Maharashtra (with 2.2) million
employees), Andhra Pradesh (1.1 million employees). West Bengal
(950,000 employees), Gujarat (620,000 employees), and Kerala (520,000
employees) are likely to the hardest hit by these awards.
SUBSIDIES
In order to prune state government spending levels further,
there is need to reduce subsidies to state public enterprises. In particular,
subsidies provided to irrigation and power enterprises have a strong
bearing on the state budgets. In fiscal year 1994-5,state government
expenditure on account of bridging the gap between their operation and
maintenance (O&M) expenditure and the recovery of user charges on
water was Rs 94.3 billion, about 1-percentage point of GDP. The gap
arises due to the fact that state government do not align their water charges
in accordance with O&M costs. Besides, a number of state governments
levy a fixed, very small water charges (grossly inadequate when compared
to the cost of providing water) thereby unable to achieve high collection
rates of water charges. In the event of water charges being aligned with
rising costs, public saving could rise by as much as 1 percentage points of
GDP.
REFORMS IN THE POWER SECTOR
Over the tears, states have also been providing large-scale
financial assistance to state electricity boards (SEBs). The SEBs are
responsible for generating and distributing power, settings profiles, and
collecting revenues. Almost all of them make losses and some are even
unable to pay for the coal or fuel they purchase. This is due to the fact that
SEBs implement social subsidy policies of state governments, leading to
inefficient pattern of energy consumption and even to non-recovery of
their own coasts. Also there is a lot of theft of power from distribution
networks, which is classified in official statistics as transmission and
distribution (T&D) losses. The Indian power sector has not been able to
match the growing need for greater power generating capacity. Over the
next five years, it needs to add 35,000 to 50,000 MW of the capacity
depending on the growth rate of the economy, whereas it added no more
then 20,000 MW over the last five years. The root cause of this inability to
expand capacity is the financial sickness of the SEBs.
Since SEB electricity charges are set much
below cost for the agricultural sector, unit revenue realization from
agricultural sector is none of the SEBs covers a reasonable fraction of the
unit average costs incurred by the SEBs. As a result, the SEBs make huge
losses and are in financial disarray. Further, for a variety of reasons, the
SEBs have continued to suffer from high transmission and distribution
losses, placed around 21 percent
According to the revised estates of 1996-7,
in absolute terms the commercial losses of the SEBs stood at Rs 109
billion. 9 the hidden subsidy for the agriculture and domestic sectors has
increased from Rs 72 billion in 1991-2 to Rs 192 billion in 1996-7 and is
projected to further go up to Rs 215 billion in 1997-8. State governments
come to the rescue of the SEBs by providing them with revenue subsidy
along with capital transfers, which include loans and equity.
The present structure of tariffs in electricity, involving
extensive cross-subsidization for agriculture, has imposed a
disproportionate burdens on paying customers. This has led to decline in
consumption of power by high-tension users with serious financial
consequences for the SEBs. With the present level of technical and
organizational performance, most SEBs are losing about 50 paise to 1
rupee for every KWHR of power sold. In addition, there is hardly any cap
on O&M expense.
Under these circumstances, the SEBs need to revise their
tariff rates in line with the costs. They incur in production and distribution
of electricity, in particular for the agricultural sector and minimize T&D
losses. This, is turn would allow state governments to withdraw financial
support to the SEBs, and would enable private investors to enter the
electricity market on a much larger scale. As a result, state governments
could save Rs 17 billion in direct revenue subsidy, about 0.2 per cent of
GDP, and at least twice that amount more, if loans and equity are also
discontinued. Thus we put the overall saving from SEB reform at around
0.6 per cent of GDP. These measures will not only help restore the
financial health of the SEBs but would also relieve the states of a burden
that they should not be bearing.
Despite tariff revisions undertaken by several Sibs (Andhra
Pradesh, Mariana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, and
Rajsthan) none of the SEBs qualify for loans from the Power Finance
Corporation (PFC) since they are not in a position to meet the PFCs
mandatory requirement of a 3 per cent rate of return. In 1995-6 only the
Tamil Nadu and Himachal SEBs recorded a 3 per cent rate of return. In
order to meet the PFC’s mandatory requirement, three state governments
had taken retrospective measures such as writing off loans to their
respective SEBs. Similarly, the Kerala State Planning Board had decided
to make allocations totaling Rs.310.5 million to compensate the Kerala
SEB for subsidized sale of power to the industrial and agricultural sectors.
Such actions on the part of state governments are not solutions to the
SEBs. Financial problems. The state governments have to put an end to
bailing out the SEBs. What is required at a minimum instead is that the
SEBs should be converted into corporations and should raise their tariff
rates in line with their cost structure. 13 More extensive reforms would
involve a regulatory overhaul of the entire system, to allow private
electricity producers to enter the grid on a competitive market basis. These
changes would be instrumental in helping cut state government
expenditures.
TAX REFORMS
One of the key elements of India’s economic reforms has
been the reform of the tax system. It was recognized early that a larger
collection of tax revenues could not be achieved by high rates of taxation,
which tend to encourage evasion, but by a tax system that is simple to
administer has moderate rates of taxation, and relies upon a broad tax
base. Over the last seven years the government has pursued a strategy of
tax reform, which by and large is based on the recommendations of the
Tax Reform Committee (TRC), chaired by Professor Raja. J.Chelliah. 14
Broadly the TRC proposed that while the share of customs duties in total
taxes should be reduced the share of direct taxes be raised. 15 Besides,
larger revenues need to be mobilized via excise duties by transforming
them into a system of value-added tax (VAT). We stress again, however
that no realistic growth – oriented solution to India’s fiscal problems can
be achieved only be raising tax revenues as percent of GDP. For a country
at India’s income levels, tax rates and revenues are already very high
compared with those in the fast growing economies.
The government announced a number of taxes cut in the
union budget for 1997-8. The maximum marginal rate of personal income
tax was reduced from 40 per cent to 30 per cent. The corporate income tax
for domestic companies was reduced to 35 per cent and the surcharge of
7.5 per cent was abolished (see Table VI for tax rates). Corporate tax rate
on foreign companies was reduced from 55 to 48 per cent. (The 1998-9
budget has not changed any of these tax rates) In comparison with India’s
corporate tax rate of 35 per cent corporate tax rate in Singapore is 27 per
cent; Thailand 30 per cent; and Malaysia and South Korea 34 per cent. In
order to discourage tax evasion, raise India’s competitiveness and to
reduce tax arbitrage opportunities, the government should reduce
corporate tax rate further. Broadly these rates need to the aligned with
those prevalent in the neighboring East Asia countries
TABLE VI
TAX RATES
1990-1
1994-5
1996-7
1997-8
Budget 19989
Import Duties
Average Rate
(Import weighted)
87
33
22.4
20.3
-
Maximum Rate
400
65
50
40
40
Excise Duties
Maximum Rate
105
70
50
50
50
Personal Income
Tax
Maximum Rate
54
40
40
30
30
Corporate Tax Rate
54
46
46
35
35
The central government introduced a new tax ‘ Minimum
Alternate Tax (MAT) to be levied on companies. In case where the total
income of a company as computed under the Income Tax Act after
availing of all eligible deductions, is less than 30 per cent of books profit
and shall be charged to accordingly. Companies engaged in the power and
infrastructure sectors will however, be exempt from the levy of MAT. A
system of credit has been introduced with respect to the payment of MAT
in the union budget for 1997-8. When a company pay MAT, the tax credit
earned by it shall be allowed to be carried forward for a period of five
assessment years and in the assessment year when regular tax becomes
payable, the difference between regular tax and tax computed under MAT
for that year will be set off against the MAT credit available. Accordingly,
every company including zero tax companies would have to pay income
tax of not less than 10.5 per cent on its book profits.
As noted earlier the union budget for 1998-9 has made no
changes in personal and corporate tax rates. However the exemption limit
on personal income tax has been raised of Rs, 50,000 and the standard
deduction on salaries exceeding Rs, 500,000 has been withdrawn. with a
view to widen the personal income tax net a scheme was introduced in
1997-8 to cover twelve important cities where if an individual fulfilled
two of four criteria, he/she would be obliged to file an income tax return.
The 1998-9 budget has enlarged the scope of this scheme.
Tax revenues of central and state governments have been
around 15.5 per cent of GDP between 1993 and 1996 but have fallen in
1997-8 because both customs and excise collections have witnessed a
major decline (see Table VII) . The revenue shares of the central and state
governments were approximately equal after the statutory sharing of
income tax and excise duties. While the states used to receive 85 per cent
of income tax collection and 45 per cent of excise duty collection from the
centre, these percentages were changed in 1995-6 on the recommendations
of the Tenth Finance Commission (TFC). The TFC has reduced the share
of income tax for the states to 77.5 percent and has offset the reduction by
increasing excise share to 47.5 percent.
For the central government, the ratio of gross tax revenues to GDP
fell from 10.8 per cent in 1990-1 to 9.5 percent in 1997-8. In between
these had recovered to 10.1 per cent in 1995-6 and this recovery in tax
revenue collections was largely due to improved collections of direct taxes
which increased from 2.1 per cent in 1990-1 to 3.0 per cent in 1995-6. 19
During this period, average buoyancy of personal income taxes as
measured by the ratio of change in tax revenue to change in GDP at
current prices, rose from an average of 1.1 per cent in 1986/7-1990/1 to
1.5 per cent during 1991/2-1995/6. Similarly, the buoyancy of corporate
tax revenues rose from an average of 0.8 per cent to 1.6 per cent over the
same period. As a proportion of gross tax revenue of the central
government direct taxes have risen from 19 per cent in 1990-1 to 35.9 per
cent in 1997-8, whereas indirect taxes have declined from 79 per cent to
about 64 per cent over the same period (see Table VIII).
TABLE-VII
REVENUE OF CENTRAL AND STATE GOVERNMENT
(Percent of GDP)
1990-1
1991-2
1992-3
1993-4
1994-5
1995-6
1996-7
19978
Total tax
Revenues
16.2
16.7
16.3
15.2
15.7
15.7
15.5
15.2
Central Taxes
(gross)
10.8
10.9
10.6
9.5
9.8
10.1
9.9
9.5
Income Tax
1.0
1.1
1.1
1.1
1.3
1.4
1.4
1.3
Corporate Tax
1.0
1.3
1.3
1.3
1.5
1.5
1.5
1.5
Excise
4.6
4.6
4.4
4.0
3.9
3.6
3.6
3.4
Customs
3.9
3.6
3.4
2.8
2.8
3.2
3.4
2.9
States Share of
Central Taxes
2.7
2.8
2.9
2.8
2.6
2.7
2.6
2.7
Central Taxes
(net)
8.1
8.1
7.7
6.7
7.2
7.4
7.3
7.0
5.7
State Taxes
5.4
5.8
5.7
5.7
5.9
5.6
5.6
Sales Tax
3.4
3.5
3.4
3.4
3.1
3.1
3.2
3.1
Non-tax
Revenue
2.2
2.6
2.8
2.7
2.5
2.5
2.5
2.4
(Source: Economic Survey Government of India, various issues and Public Finance Statistics.)
With regard to indirect taxes of the central
government, there has been reasonable progress in the reform of customs
duties and union excise duties, though the reform in far from complete.
The aim of import tariff reforms has been to reduce the costs of imported
intermediate and capital goods to the economy and gradually to lower the
unduly high level of protection provided to Indian industry, to promote
competition, strengthen export competitiveness and benefit domestic
consumers , through better quality and lower cost goods. As well have
suggested in Bajpai and Sachs (1997), the continued and rapid
liberalization of trade is crucial to enhanced growth prospects. Customs
duties, though lowered in the last seven years, still remain much above the
levels prevailing in India’s competitor countries and consequently
continue to block India’s attractiveness as an export platform for labourintensive manufacturing production .As against reducing tariff levels
further, the 1998-9 budget has imposed an additional non-modvatable levy
of 4 percent on all imports with specific objections. In addition, consumer
goods imports are still restricted, and therefore largely unaffected by tariff
charges.
Reforms in the area of domestic commodity taxation were initiated
in the budget for the fiscal year 1993-4.The objective was to simplify and
rationalize the then existing excise-modified value-added tax (modvat)
system. Modvat was introduced with effect from March 1986 through the
1986-7 union budget. Under the modvat scheme, credit of duty is allowed
on inputs, which are used either for producing excisable finished products
or intermediate products. over the years, the ambit of modvat has been
extended
to include more commodities/sectors.
TABLE VIII
REVENUE SHARES OF CENTRAL GOVERNMENT
(In percent of gross tax revenue)
Total
Direct
Taxes *
1990-1
1991-2
1992-3
1993-4
1994-5
19956
1996-7
19978
19.1
22.6
24.3
26.8
29.2
30.2
30.2
35.9
Income Tax
9.3
10
10.6
12.0
13.0
14.0
14.2
13.1
Corporate
Tax
9.3
11.7
11.9
13.3
15.0
14.8
14.4
15.0
Total
Indirect
Taxes **
78.9
75.5
73.7
71.6
70.6
69.6
69.6
63.9
Excise
Duties
42.6
41.7
41.3
41.8
29.0
36.1
35.0
33.4
Customs
Duties
35.9
33.0
31.9
29.3
40.5
32.1
33.3
28.7
However ,the transformation of the existing modvat into a fullfledged value added tax (VAT) up to the manufacturing stage has a long
way to go . Excise duty reform measures undertaken by the government
include cuts in the number of ad valorem rates, reduction in the dispersal
of excise rates, phasing out of excemption notification, switch over from
specific to ad valorem rates, extension of the modvat scheme to other
commodities, most notably capital goods and petroleum products, and
simplification of the procedure for valuation of excise duty.
Briefly put, the increase in share of direct taxes, and decline in
indirect taxes clearly indicates that the strategy of tax reforms followed
since 1991 is basically working. However, much more remains to be done
in the area of tax reforms, both direct and indirect. We suggest some
measures for improving the yield of direct taxes, both with regard to
personal income and corporate taxes.
In order to augment revenue from personal income tax, the
government needs to further broaden the base of tax -paying population.
Base widening can be done in two ways: first, Bringing in large number of
potential tax payers into the tax net, and second, eliminating the numerous
exemptions and deductions provided in computing taxable income to serve
non-tax objectives. Attempts have been made to broaden the base with a
scheme of presumptive taxation for shopkeepers and other retail traders ,
persons engaged in a vocation or in running of an eating place, and small
road transport operators ,hiring ,operating or leasing one transport
vehicle24. Subsequently, a new estimated income scheme for contractors
(with a turnover of up to Rs 4 million )and for truck owners (who own up
to 10 trucks )was also introduced.
In view of size of India’s unorganized sector, presumptive taxation
is particularly suitable since tax evasion is rampant and enforcement cost
are very high . Apart from its administrative ease ,the presumptive
approach can raise both equity and efficiency , by collecting taxes from
those who never paid them earlier , but in a nearly lump-sum manner .
Presumptive taxation in some form or other has been introduced in a
number of countries including France ,Israel ,Mexico , and Turkey .
The results of presumptive taxation schemes have not been encouraging,
and we do not expect significant results in the future. Nonetheless we
believe that on balance the India government should continue to improve
design and enforcement of the scheme. No doubt a major reason for
people not opting for the scheme is the wide spread fear of getting into
the clutches of income tax authorities once a statement has been filed.
Therefore the relationship of presumptive tax to the rest of the tax system
needs to be clarified and adjusted. In addition, it would be worthwhile to
extend the estimated income scheme further so as to cover a wider range
of activities.
Removing the exemptions and deductions, which are allowed on
various grounds of social and economic policy, could also do base
broadening. While several incentive provisions have been withdrawn quite
a few still remain. Besides there are a number Of tax concessions provided
through different sections of the Income Tax Act, which could be
removed. These measures would help provide a ground for further
lowering of tax rates. In addition, there is a case for levying tax on the rent
– free or concessional –rent residential accommodation provided to the
employees of the government and the public sector. Similarly, since
restrictions on salary levels in the private sector have been removed, fringe
benefits provided to the employees in the private sector too need to be
taxed as well.
With a view to mobilize larger tax revenues, state
governments need to levy tax on agricultural income. Small and marginal
farmers with little or no landholdings could be exempted from paying
income tax by having an exemption limit. Over the last three decades or so
incomes in the agricultural sector, especially for the large landowners have
risen considerably. While this is generally true for the country as a whole ,
however it is particularly so in the following regions: the Punjab-HaryanaWestern Uttar Pradesh belt; deltaic West Bengal; and coastal Andhra
Pradesh, Tamil Nadu, Kerala and coastal and eastern Karnataka. The state
governments need to design tax systems which are simple to administer,
have moderate rates taxation and rely upon a broad tax base.
As with personal income tax, in the area of corporate
taxation too there is need to increase the number of tax-paying
companies. There are a large number of companies which pay
substantial dividends without paying any corporate income tax.
These were often reported as ‘zero-tax’ companies. The incentives
provisions provided in tax laws were used by such companies to
show that they had no taxable profits. However, with the process
of elimination of incentives getting under way it the ‘zero-tax’
companies would disappear, but they have not. With continuing
prevalence of ‘zero-tax’ companies, there is need to introduce a
minimum tax in order to increase fairness and revenue buoyancy of
the income tax.
The introduction of MAT is a step in the right direction,
nevertheless it will not be able to tackle issues related to under – reporting
of profits due to manipulations in transfer pricing. Similarly, MAT will
not be applicable if these in no taxable income, or in other words, it
companies were to post losses under both the Companies Act and Income
Tax Act. Corporates that the enough investments every year to allow for
depreciation provisions could very well show a zero taxable incomecompanies Act and in their books and thereby show zero book profits. 30.
In our view, Mat may serve its purpose better if levied on gross corporate
assets as against being levied on book profits. Rajaraman and Koshy
(1996) suggest that additional revenue in the range of Rs 100-70 billion, or
about 1.0-1.7 per cent of GDP could be mobilized based on realistic
assumptions about coverage and a rate of return in the range of 1.6 – 2.0
per cent on the book value of assets.
With regard to indirect taxes, while it is true that in the last
seven year import duties have been brought down considerably,
India needs to reduce them much further so as to bring them in line
with the levels prevailing in other Asian economies. In the world
Economic Forum’s compilation of tariff policies in fifty-three
leading countries, India has stood out as having the highest tariff
rates in the sample, While the TRC has recommended that average
tariff rate be brought down to per cent, however, we are of the
view that this would certainly be a thoroughly inadequate extent of
reduction. Most importantly, tariff rates on imported capital goods
used for export and on imported inputs into export production
should be duty free. In addition, there is the remaining issue of
liberalizing consumer goods imports. There are several Reasons
why such liberalization has not been undertaken so far. Among
others, there are certain misconceptions, fears, and a lack of
appreciation of the beneficial impact of liberalizing consumer
goods imports. High protection to the consumer goods industries
tends to divert resources to inefficient production, leads to higher
prices and the absence of international competition lead to little or
no quality up gradation in major consumer sectors.
The other important area of reform in indirect taxes is domestic
commodity taxation. The current system, as mentioned earlier, is based on
the excise-Modvat framework. Reforms in this area are required to
transform this system into a full-fledged value-added tax at the central
level covering all commodities and services. VAT has emerged as the
major instrument of taxation in a large number of countries since it is not
only practicable, but also avoids cascading. Overtime efficiency gains.
VAT has been working well in federations including Brazil, Canada,
Germany, Italy and Mexico. In fact, in Canada and Italy the centre and
states have entered into agreements, which, without any amendments in
their constitutions, allow them to follow a VAT with ‘equalization’
enabling transfers to provinces. Besides, VAT is currently being
introduced in China, Pakistan,and Thailand, among others.
The transformation to a VAT at central government level needs to
be supplemented by reform of indirect taxes at state level too. With a
complex and inefficient state sales tax regime, and a lack of harmonization
between central and state taxes, the indirect tax system as whole remains
complex and distortionary. The states have a number of sales tax rates,
ranging from 6 in Orissa to 22 in Gujarat (see Table 3.13). While some
states have begum to reform their sales tax systems in gradual manner,
however, most of the others have yet to initiate tax reforms. In 1993,
Kerala and Tamil Nadu introduced VAT – type taxes on some
commodities . In 1995, Andhra Pradesh introduced a VAT on 19 items.
Besides some states such as Madhya Pradesh, Uttar Pradesh
Table - IX
NUMBER OF SALES TAX RATES IN SELECTED STATES.
1991-2
State
Number
Andhra Pradesh
13
Bihar
16
Gujarat
22
Haryana
9
Kerala
15
Madhya Pradesh
16
Maharashtra
10
Orissa
6
Punjab
9
Rajasthan
13
Tamil Nadu
16
Uttar Pradesh
11
West Bengal
16
, and West Bengal have also begun to streamline sales tax administration.
REFERENCES
1. Vinayakam, N. (ed): “Globalization of Indian Economy”. Delhi: Kanishka, 1995,
pp. 226, Rs. 395.00, ISBN 81-7391-082
2. Joseph, Mathew: “Exchange Rate Policy: Impact on Exports & balance of
payments”. Delhi: Deep & Deep, 1992, pp. 300, Rs. 275.00, ISBN 81-7100-390-7
3. Joshi, Vijay and I.M.D. Little: “India's Economic Reforms 1991-2001”. Delhi:
OUP, 1996, pp. 282, Rs. 395.00, ISBN 0-19-829078-0
4. Bhattacharya, B.B.: “India's Economic Crises: Debt Burden and Stabilization”.
Delhi: BR, 1992, pp. 190, Rs.75.00 (PB), ISBN 81-7018-714-1
5. Bhorali, D. (ed): “Structural Reforms in Indian Economy”. Delhi: Mittal, 1995,
pp. 256, Rs. 250.00, ISBN 580-9
6. Venkateshwaran, R. J.: “Reforming Indian Economy: The Narasimha Rao and
Manmohan Singh Era”. Delhi: Vikas, 1995, pp.134, Rs.195.00, ISBN 81-2590043-8
7. Mathur, B.L. : “Economic Policy and Performance”, Delhi, Discovery,2001
INFLATION CONTROL MEASURES
Simply put, inflation is a situation in the economy where, there is
more money chasing less of goods and services. In other words, it means
there is more supply/availability of money in the economy and there is less
of goods and services to buy with that increased money. Thus goods and
services commands a higher price than actual as more people are willing
to pay a higher value to buy the same goods. In this inflationary situation,
there is no real growth in the output of the economy per se. It’s simply
more money chasing few goods and services.Eg: With Rs. 100 you can
buy 5kgs of apple when the inflation is say, zero. Now when the inflation
rate is 5%, then you will need Rs. 105 to buy the same quantity of apples.
This is because there is more money chasing the same produce.
TYPES OF INFLATION
While there are many types of inflation the prominent ones are:
Modest Inflation
(2-3%)
Creeping Inflation
(5-!0%)
Running Inflation
(Over 10%)
CONTROL OF INFLATION
The following are the tactics used to control inflation: i
)Control the supply of money in the economy; by using monetary policy
and fiscal policy, ii)Encourage measures to increase the productivity in the
economy,iii) Use government borrowing programs to suckout the excess
liquidity in the economy, iv) Use CRR/SLR margin requirements to
maintain the required liquidity in the economy etc. v) Changes in the
interest rates in the economy to ensure correct liquidity
MEASUREMENT OF INFLATION
Consumer Price Index (CPI) – This measures the consumer prices
of a basket of commodities in different cities.
Wholesale Price Index (WPI) – This measures the different prices
of a basket of commodities in the wholesale markets. The basket is
broadly made up of Primary products, Fuel products, and manufactured
products.
SOURCES OF INFLATION
There are two major set of factors which are believed to cause
inflation. These are associated with demand pull and cost push theories. In
principle, there are no disputes as far as this classification and taxonomy
go because the question of what does or does not enter the two sides of the
market is still open ended. But in practice since the two does not operate
in watertight compartments, it is empirically nearly impossible to identify
whether a particular inflation impulse may come from the demand side
and then generate reactions that get entangled on to the supply side.
In Indian the emphasis in academic circles as well as in policy for
a has been not only on demand pull but more specifically also on the role
of monetary expansion in a monetarist tradition.An early exception to this
has been the work of Raj (1966) who analysed price behaviour in terms of
Keynesian inflationary gap. Over the last two decades, however, the pure
monetarist model has been questioned by academics on analytical as well
as on empirical grounds. Policy makers as well as casual empirical
researchers and of course, some academics do continue to think in terms
of a monetarist framework. It is now believed that the assumption that the
level of activity in the economy is always at its maximum capacity level,
which is basic to the monetarist model, is no longer valid-as it perhaps was
during the fifties and sixties. An implication of this empirical judgement is
that inflation cannot be exclusively explained in terms of demand pull
factors and much less be related to money supply growth by means of a
rule of thumb.
Another point relevant in this context is that undoubtedly, the
economy has grown quite complex since the late sixties and is now much
more characterized by price rigidities than it was ever before. This is
partly a natural consequence of the proliferation of modern large scale
economy, particularly in agriculture. In earlier phase, such intervention
was confined largely to the industrial sector only. Thus the flex-price
segment of the economy has contracted and fixed price segment expanded.
For effective policy formulation it is extremely important to have a
proper understanding of the structure of economy. The new policy regime
aimed at structural adjustments and stabilization on the one hand makes it
necessary to be able to predict, howsoever accurately, what the levels of
growth and inflation are going to be and on the other hand renders our past
experience less relevant as a guide to future developments. All the same,
the experiences of the eighties with some modifications shoild be
meaningful for the ensuing years.
In the context of inflation our immediate concern is to identify
whether prices are subject to cost-push or demand pull factors. Needless to
say that money supply growth, howsoever, quantified;would form one and
perhaps an important factor in the latter category. Policy evaluation is
clearly and critically dependent on this basic judgement. It appears that
over the last decade and half the cost-push factors have played a far
greater role than what is usually recognized by the policy makers. One
cost push factor which had traditionally been given much prominence and
remains important in western industrialsed economies is the wage cost,
i.e.,movements in the nominal wage rate relative to those in the
productivity of labour. While this is important in case of India, as in most
other developing countries, many other factors have assumed as much, if
not greater in recent years. These include import prices –particularly of
oil, Government determined procurement and issue prices of agricultural
products and administered prices of critical imtermediaries either
produced or marketed by the government. It should be noted that even if
import costs do not rise much in dollar terms they would acquire a cutting
edge in the face of devaluation-particularly if it is sharp and frquent.
In recent years, a number of researchers have empirically
examined questions relating to the price behaviour and inflation using
sophisticated econometric methods. The focus has mainly been on the role
of money supply and cost factors in the determination of price behaviour.
Balakrishnan (1991) comes to the sharp consolation that money supply
growth is of limited relevance in explaining price movements in India
during the seventies and eighties. On the other hand, Ray and
Kanagasabapthy (1992) and Nag and Samanta (1994) examine the
problem from a time series point of view emphasizing the need for a
sophisticated time series analysis. In contrast to the conclusions drawn by
Balakrishnan both these studies argue that monetary credit policy has a
definite though not an exclusive role in dealing with inflation.
COSTS OF INFLATION
Inflation affects virtually every aspect of economic life, although
the degree with which such effects are felt depends on the severity of
inflation itself and the availability of inflation protection measures. It is
instructive to list here a few adverse consequences of inflation on
production decisions. Firstly, high rates of inflation create uncertainty
about future inflation and adversely affect production decisions. This is
major source of distortion in the allocation of resources in the economy.
Secondly inflation reduces the information content of price signals and
distorts relative price signals through which resources are allocated among
different industries, Thirdly inflation uncertainty encourages substitution
of nominal assets into real assets and may shorten the optimal contract
length. Forms are discouraged from undertaking long run contracts, which
increases contracting costs and adversely affects investment prospects.
Fourthly, increased inflation uncertainty is observed to be associated with
accumulation of unproductive inventories and build-up of buffer stocks
firms. Finally, in the presence of non-neutral tax laws, inflation adversely
affects after tax profits which acts as a disincentive for capital
accumulation in the economy. Inflation also causes uncertainty on the
financial system and the growth of domestic savings. Increased inflation
uncertainty is associated with high inflation risk premia in the financial
markets, overshooting of real interest rates and increased chances of
systemic risk for the financial system. A stable price environment is
particularly important in the early stages of financial liberalization, for
keeping the interest rate risk under control which might dampen further
liberalization efforts.
There is also a fiscal cost of inflation, which must be weighed
against the revenue motives behind the inflation tax. Inflation affects fiscal
balance in several ways. It adversely affects fiscal deficit when elasticity
of expenditure to inflation is higher than that of revenue. A more
significant impact of inflation arises from its effects on interest rates and
the dynamic sustainability of a fiscal situation. High rates of inflation
signal the weak resolve to control inflation and imply higher expected
inflation in future.
Apart from these economic costs, inflation has much wider social
implications in developing economies, like India on account of its adverse
impact on the real income of the poor, who are largely unprotected from
price rise. The adverse distributional implications of even a moderate
inflation is significantly high in India in comparison to the output gains of
the inflation.
INFLATION AND GROWTH IN OTHER COUNTRIES
A comparison of inflation and growth performance of developing
countries in the 1990s indicates that by and large the countries which grew
TABLE – I
INFLATION AND REAL GDP GROWTH IN SELECTED COUNTRIES
REAL GDPGR O WTH
Developing
Average
Average
Average
Countries
1970-79
1980-89
1990-94
China
7,6
9.4
10.2
India
3.6
6.0
6.1
Malaysia
8.1
5.8
8.6
Singapore
9.5
7.3
8.3
Thailand
7.4
7.3
8.9
DEVELOPED
USA
3.2
2.6
2.3
UK
2.4
2.4
0.8
Germany
3.1
1.9
2.6
France
3.7
2.4
1.1
INFLATION
Average
Average
1970-79
1980-89
1.8
13.7
8.6
12.6
5.5
8.2
5.9
8.3
8.0
8.4
COUNTRIES
7.09
5.55
12.63
7.44
4.88
2.91
8.9
7.38
RATE
Average
1990-94
9.2
10.5
3.8
2.9
4.9
3.6
4.6
2.5
2.6
At faster rate during this period are those that kept a tight control on
inflation. Table I shows that four fastest growing countries of 1990s,
namely China, Thailand, Malaysia and Singapore registered a growth rate
of 8.4 percent during the period 1990-94 with a mean inflation rate of
about 6.0 percent. Among these, the consistently high performing
economies such as Malaysia, Singapore and Thailand showed inflation
rate comparable to those of developed countries while their growth rate
ranged from 8 to 9 percent.
INDIAN SCENARIO
The decade of 1980s began with a double digit inflation in two
successive years. For the remaining years, the rate moved into single digit
but remained all along significantly above five percent. The early years of
1990s witnessed a turmoil in the economy. The inflation rate was 10.3
percent in 1990-91, 13.7 percent in 1991-92, 10.1 percent in 1992-93, 8.35
in 1993-94, 10.90 in 1994-95, 7.80 in 1995-96.
TABLE – II
MONEY SUPPLY, INFLATION AND GROWTH
Year
GROWTH
RATE
Real GDP
Inflation(WPI) Money
Supply
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
4.32
10.65
6.89
5.37
0.80
5.10
5.00
7.20
8.21
7.38
7.46
10.32
13.73
10.00
8.35
10.90
16.00
17.80
19.40
15.10
19.30
15.70
19.30
17.50
MOVING AVERAGE (3 years)
Real GDP
Inflation
Money
Growth
( WPI )
Supply
Growth
6.42
7.11
17.47
7.29
7.68
17.73
7.64
8.39
17.43
4.35
10.50
17.93
3.76
11.35
16.70
3.63
10.69
18.10
5.77
9.75
17.50
6.43
9.02
16.67
Table II presents data on both the annual and three year moving
average trends in real GDP growth, inflation and money supply growth in
India from 1987-88 to 1994-95. The table suggests that while there has
been a large year to year variation in all three variables, whenever there
was a large increase in the money supply.
MONETARY POLICY IN INDIA
The monetary policy in India is aimed at I) to regulate money
growth so as to maintain a reasonable degree of price stability and II) to
ensure adequate expansion in credit to assist economic growth. The
objective of price stability has assumed additional significance in the
context of the current phase of macroeconomic reforms and the critical
need to maintain the internal and external stability in the economy. This
does not however mean that the growth objective has become less
important for monetary policy. Creating a stable price environment that
would reduce uncertainty and improve efficiency of resource use is itself
regarded as important in achieving a faster rate of economic growth.
The monetary policy in the post 1991 reform period has undergone
a noticeable transformation both in terms of institutional setting in which
monetary policy operates and the instruments used to exercise control. The
most important changes in the institutional arrangements have occurred in
the area of improving the degree of monetary control in the economy,
through reforms such as the phased abolition of the system of ad hoc
treasury bills that results in automatic monetization of the budget deficit,
promotion of a market for government securities, easing of external policy
constraints on banks, such as high cash reserve and statutory liquidity
ratios and deregulation of interest rates in the economy. These institutional
changes have been accompanied by a distinct shift from direct quantitative
controls to indirect monetary controls. The reliance on open market
operations and the gradual reduction of governmental pre-emption of
resources have enhanced the efficacy with which monetary policy is able
to pursue its ultimate objective.
Thus the ongoing macroeconomic reform process has underlined
the importance of maintaining price stability in the economy in the context
of the significant degree of openness achieved in the Indian economy, both
in terms of external orientation and liberalization of the domestic financial
sector. Interest rate flexibility requires that there is reasonable degree of
price stability to dampen adverse inflation expectations. There is also a
considerable concern now to align domestic prices with those of our
export competitors to ensure a competitive exchange rate in the economy.
Maintenance of fiscal sustainability is also conditional on price stability
because of the dynamic implications of inflation for the interest rate and
future debt servicing burden on the budget.
REFERENCE
1.
2.
3.
4.
C. Rangarajan, “Development, Inflation and Monetary Policy” in
India’s Economic Reforms & Development edited by I.J.Ahluwalia and
I.M.D.Little
Bimal Jalan, “India’s economic Policy”, Viking, New Delhi, 1996
V..Agnihotri & H. Ramachandran, “Dimensions of the New
EconomicPolicy”, Concept, New Delhi, 1996
A.N.Agrawal & Hari Om Varma, “Indian Economy Statistical
Yearbook”, National , 1998
Balance of Payment Management
For a country trying to industrialize with the help of
imports of capital goods and technology and not capable of enlarging its
export base quickly balance of payments difficulties are common
economic problems. Policies to manage the balance of payment constitutes
a core of economic policy which tried to achieve fast rate or growth and
development of the economy. Section I, we review the experience of
India’s balance of payment during the first two five year plans. Section II
describes the behaviour of balance of payments during the third, fourth
and fifth five year plans. Section III deals with India’s balance of
payments during 1980s covering the sixth and seventh five year plans. In
section IV, we discuss the onset of economic crisis and reforms in trade
and payment policies in1990s. Section V discuss the recent trends in
India’s balance of payments and the policy emphasis given in recent years.
Section VI provide concluding observations.
Section 1
India did not experience any serious balance of payment
difficulties during the First plan period. When the First five-Year plan was
drafted, there was an optimistic climate for receiving foreign aid, loans,
and substantial sterling balances were accumulated in favour of India in
London. The Korean War boom in 1951-52 had also given a fillip towards
expansion of exports to a record level of Rs. 749.5 crores during 195152.Besides, there were other reason, viz, the existing excess capacities and
elasticities of the productive system shortfall of expenditure in parts of the
plan and a record bumper harvest in 1953-54 and almost as goods as that
in1954-55 resulted in substantial decline in foodgrain imports. Total food
imports during the plan period were only three million tones as compared
to nine million tonnes anticipated.The saved foreing exchange worth more
than. Rs. 300 crores. Moreover, as percentage of national income, import
along with exports constituted a relatively small elements of national
income of India. Over the years, India’s exports of commodities and
services as percentage of world export and as percentage of her GNP had
fluctuated between 1.97 per cent, and 4 to 7 per cent, respectively and
imports between 6 to 10 per cent of GNP. These figures, however,
somewhat underestimated the importance of imports and exports and the
growing gap between them.
The availability of the United States Wheat Loan in 1951-52 and
the large increase in domestic output thereafter, the abatement of
inflationary pressures within the economy and the low levels of
machinery and capital goods imports almost until the last year year
of the first plan, all taken together, contributed to the unexpectedly
stable balance of payment position in the first plan period. As a
result of these development, the foreingn exchange reserves
declined by only Rs. 138 crores as against the expected decline of
rs. 290 crores over the plan peried.
The trade deficit which averaged a little more than 100 crores per
annum was financed largely by invisible earnings and private
transfer payment. With the relatively by comfortable level of
sterling balances. Accumulated in the pre-indipendence perid, the
first plan was indifferent to exports and the very small deficit on
current accounts less than Rs. 10 crores per annum was in turn
financed by inflows of foreign aid and in the main, by a rundown
of the county’s stock of overseas asssets. With the increase in
imports outpacing that of exports, a deficit in the balance of trade
of Rs. 542 crores was covered by Rs. 500 crores of earnings from
invisible leaving only a marginal deficit of payment .
The second five-Year plan adopted a strategy of import
substituting industrialization in the heavy capital goods sector of the
Indian economy with the explicit lead role of the public sector investment
in the so-called commanding heights of the economy’ under the influence
of a structural model of the Feldman-Mahalanobis viariety. Since India
was industrially backward at the time of initiating the Second plan, such a
programme of heavy industry led growth inevitably resulted in the spurt in
the demand for imports of machinery, equipment and other intermediate
inputs during this plan period. On the other hand India exports much were
predominantly primary products, could not expand much during this
period to finance this upsurge in imports requirements. This was mainly
due to low income elasticities of consumer demand for agricultural
commodities in the advanced industrialized countries of the world, and the
gradual displacement of the demand for primary raw materials exported by
India in the industrial uses of these countries due to technological
improvements. As a result, our balance of payments position turned for the
worse and a payment crisis developed since 1957 in effect, this was party
due to the neglect of the foreign exchange constraint in our plan
formulation, and over export demands abroad. Thus, in contrast to the
comfortable position in the First- five Year plan, the balance of payments
position in the Second plan period turned adverse, showing deficits for
all the years, and we witnessed a mounting deficit in the balance of trade
of Rs. 467 crores per annum on an average during the entire plan period.
On an average, average during the period stretching from 1951
to1961, India had a deficit to the extent of Rs. 400 crores a year—
the value of imports being near Rs. 1000 crores a year and exports
roughly Rs. 600 crores. The balance had been covered by running
down forex reserves which had come down fromRs,1,400 crores in
1951 to less that reserves, our dependence of foreign loans had
become greater. For ten year i.e, during the first two plan periods,
exports from India remained practically stagnant at about Rs. 600
crores . as national income increased during the two plan periods
and exports remained stagnant exports remained stagnant, exports
as a percentage of national income declined. This was rather
paradoxical. Internal saving increased from 5 per cent to 10 during
the two plan periods whereas exports as percentage of national
income began to decline. This was contrary to the experiences of
countries like Germany and Japan for whom the ratio of export to
national income actually rose during this period. India ‘s share in
expandiate post-war period to less than one per cent during this
period .
SECTIONII
According to the plan documents, exports and imports during the
Third plan were targeted for Rs. 3,700 crores and rs. 5,750 crores
respectively Against this the actual export earnings amounted to
Rs. 3,735 crores and thus matched the plan targets. However, the
import payments totaled to Rs. 6,118.6 crores exceeding the target
of Rs. 5,750 crores to Rs, 369 crores . This was necessitated
mainly due to increasing defence requirements owing to the
outbreak of war with Chaina in 1962 and with Pakistan in 1965,
and party due to large food imports to match the predicament of
the worst drought that brke out in 1965 . The debt servicing
charges also started making their impact on India’s balance of
payments from this plan period. The payments on this account rose
from a negligible Rs. 23.8 crores in the First Plan and Rs. 119.4
crores in the second plan to Rs 542.6 crores in the Third Plan.
After several years of stagnation at about Rs. 650 crores
covering the two plan periods, export had shown a welcome
increase only in the early year of the Third plan. However,
during the latter half of the third plan the progress came to an
abrupt end despite an increase in the coverage of schemes for
export promotion. What was more disturbing was the fact that our
traditional export of tea and jute goods required much help and
there was persistent demand for increases in incentives that were
beign given. That was not surprising as domestic inflation had
been making serious inroads into the competitive power of our
export. A stage had been reached where export subsidies had
tobgiven practically for all export items even to circumstances, a
formal devaluation was the only straightforward case to offset the
impact of inflation was the only straightforward case to maintain
the export at the existing kevel. In such circumstances a formal
devaluation was the only straightforward case to offset the impact
of inflation on the external sector of the economy and end of era
of dual exchange rates owing to the plethora of export subsidies
and controls.
Import during the first year of Third plan amounted to rs.
1092 crores, well below the level of Rs. 1122 crores during 1960-61.
However, since then imports recorded a sustained rise and totaled to Rs.
1223 crores during 1963-64, Rs. 1349 crores during 1964-65 and Rs .
1409 crores during 1965-66. The net total current account deficit
comprising merchandise plus non-monetary gold movement
plus
invisibles during the third plan came to Rs. 1972.5 crores as follows : Rs
306.4 crores in 1961-62 , Rs 354croes in 1962-63 Rs 349.40 crores 196364, Rs. 452.00 crores in 1964-65 and Rs 510.70 crores in 1965-66 . In
spite of the modest growth in export earning which displayed a distinct
break from stagnation in exports during the 1950s, the trade deficit stayed
at the earlier level.
It would be observed form the above comparative figures that an
adverse balance of payments persisted throughout the third plan
period and constituted a serious pressure on foreign exchange
reserves The most significant feature of payment persisted
throughout the third plan period and constituted a serious pressure
on foreign exchange reserves. The most significant feature of this
plan period is that Indian export for the first time displayed a
growth of dynamism due to increase in the production base both
agriculture and industrial and a generally favourable climate of the
international trade as well as a number part of a deliberate police
package promote export through setting of board of trade, export
councils and trading corporation. In contrast to the stagnation that
persisted during the decade 1951-60 averaging Rs. 606 crores a
year during the First plan period and Rs 609 crores a year during
the Second plan period the level of exports rose at an annual
compound rate of 4.1 per cent from Rs. 642 crores in 1960-61 to
Rs 806 crores in 1965-66. However the entire BoP deficit was
financed by foreign aid inflows as there was every little amount of
surplus on invisible account and forex reserves.
The economic crisis of 1965-66was further deepened by the
Pakistani attack of September 1965 which led to further commitment to
defence expenditure and reduced the flow of foreign aid. This had severe
adverse effect on balance of payment with the necessity of large scale food
import , forming about one third of import bill Although the broad strategy
for the management of the balance of payment remained unchanged in
the 1960s, there was a growing recognition by the planners that import
substitution could not provide a complete solution to Idia’s balance of
payments problems. As a result, there was increased emphasis on export
promotion within the framework of overall development strategy. The
need for increased export earnings became all the more urgent since the
quantum of aid, particularly n-project aid that was not large enough to
enable India to import adequate aid that was not large enough to enable
India to import adequate quantity of raw materials needed for a full
utilization of its growing industrial capacity To meet this situation the
government undertook a number of institution and fiscal measures to restimulate the exports, for example setting up the Board of Trade Export
promotion Councils and the Mineral and Metals Trading corporation
council and the mineral and metals trading Corporation announcement of
import entitlements against export of certain manufactured and processed
products and extension of incentives in the form of withdrawal of import
duty and refund of excise duty to a number of commodities, establishment
of the Marketing Development fund to enable the Export promotion
Council to explore and develop foreign markets for Indian commodities
.There was also increased emphasis on bilateral trade and payment
arrangement with the countries of Eastern Europe. Simultaneously the
system of granting
indirect export subsidies through the import
replenishment scheme was extended to embrace a large segment of
exports of non-traditional products. Moreover India major creditor led by
the world Bank strongly felt tight import controls and a haphazard growth
of indirect export subsidies propelled by India’s strategy of import
substitution would be unnecessarily wasteful and inefficient . It was in
response to such pressures and reason that the Indian rupee was devalued
on June 6, 1966 to strengthen and enhance the competitive power of
exports and to bring in stability as to provide a solution to the trade and
payments problems . The par value of the rupee was reduced by 36.5 per
cent involving a rise of 57.5 per cent in the price of foreign exchange in
terms of the Indian rupee.
However , presumably because of low elasticities and nonprice competitive factors devaluation did not lead to any substantial
increase exports. The export performance was thus not very much
encouraging. Against the level of Rs. 806 croes attained in 1965-66, it
slumped to 1152 crores in 1966-67. However it partially recoverd to Rs
1199 crores in 1967-68 and regained adverse trade balance during this
peried amounted to Rs. 2286 crores. The widespread crop failure in 196566, 15-20 per cent below the level of 1964-65 and also the none-too-good
harvest during 1966-67, the consequent increase in cereal during imports
by as much as Rs. 144 crores to Rs. 651 crores during 1066-67, the
scarcity of raw material and other inputs adversely affecting the
agricultural and industrial activities and constraining the export potential,
on balance contributed to this wide trade trade deficits.
India’s balance of payments remained comfortable during
the 1970s covering almost fourth and fifth plan period despite
some major adverse incidents. Positive earnings from the current
account were reported only twice during 1975-76; otherwise BoP
in India, whenever viewed from the national income measurement
side, constitutes a very feeble position and continuous story of
deficits if we take the whole period stretching from the beginning
of the planned economy development upto the perdent time
(Chatterjee and Karmakar, 1990). It was for the first time since the
beginning of her planned economic development that the Indian
economy, in the early 1970s almost succeeded in overcoming the
chronic and persistent balance of payments difficulties that
prevailed in the earlier two decades. After the devaluation and
onset of industrial recession, India achieved ad even balance of
trade in 1970 By 1972-73 India had a small surplus of Rs. 104
crores in the balance of trade and the net aid inflow reached its
lowest level in two decades. But this happy mirror soon faded out.
In October 1973 and January 1974, OPEC announced dramatic
increase it the price of crude oil. The price of Saudi Arabian crude
oil, for instance was raised from $ 2.69 per barrel in the middle of
1973 to $ 11.65 per barrel in early 1974. India as one of the poor
oil importing countries, was severely affected by this suddedn rise
in oil price. It direct impact was naturally frlt on the balance of
payments with severity in a number of ways:
(a)
The massive escalation in the foreign exchange
expenditure on oil import was accompanied by a hike in the share of crude
oil and petroleum products in India’s import bill from 11 per cent in 197273 to 26 per cent in 1974-75.
(b)
There were substantial increases in India’s import bill
on account of fertilizers and other and other oil-based chemicals .
(c)
There was import of large quantities of foodgrains
owing to successive shortfalls in agricultural production roughly during
this time. A staggering sum of foreign exchange was thus required by
India to import petroleum fertilizers and foodgrains . As a result, the share
of these three items in the total import bill which had been less than 25 per
cent in the early 1970, rose to more than 50 per cent 1974-75.
Moreover, the continuation of factors like the refugee
problem and the war with Pakistan in 1971, adverse agricultural seasons in
1973-74 also led to a critical situation in the balance of payments in 1974
when India had to spend almost two third of its export revenue just to meet
the import cost of crude oil.
Indeed it was hard time for the economy. But the economy,
however, managed to get rid of the balance of payments crisis which
surfaced in 1974-75 and within two years the trade deficit was not only
covered but for the first time since the inception of the planning, India’s
balance of payments showed a surplus at the start of the fifth plan period
(1964-75 to 1978-79). During 1976 there was a large favourable swing in
the merchandise trade account, from a deficit of Rs. 675 crores in 1975 to
a surplus of Rs. 249 crores. This was brought about by an impressive
growth of for per cent in export, while imports remained more of less
stationary. The net surplus on invisibles, other than official transfers
increased sharply from Rs . 520 crores ton Rs 930 crores, and the official
transfers nearly quadrupled from Rs. 61 crores to Rs. 239 crores. As a
result, the balance on net current account swung from a deficit of Rs.
644.5 crores in 1974-75 to a sizable surplus of Rs 294.2 crores.
As a result of the factors set out above the massive trade
deficit of 1974-75 and 1975-76 was turned into a very thin trade surplus
in 1976-77 : the current account was in surplus in 1977-78 But this was
not all. Foreign exchange reserves began to pile up at an extremely rapid
rate to rapid rate an unprecedented levels within a short exchange reserves
inclusive of SDRs. Stood at $ 5486.6 million providing for over seven
months imports. The data for this pried clearly show that, in the late
1970s, the chronic shortage of foreign exchange and the paucity of
reserves was turned into a paradox of plenty . India’s holdings of SDRs
peaked at 529 crores of Rupees in 1979-80 . The interesting feature of this
period is that, on the one hand the economy tried to tide over payments
difficulties arising out of oil crisis of 1973 and early 1974, whilr at the
same time it began to accumulate a large of foreign exchange reserves.
This period (1976-77 to1979-80) also saw the beginning of
important change in the import policy was introduced in 1978-79
when all items were listed under the open general licence
(OGL)category and could be freely imported for domestic
production There were also some changes in the industrial
licensing system which facilitated expansion of output in important
sectors.
At the end of 1970s the scenario on the external front changed
dramatically. The trade gap had widened dangerously and the stock of
foreign exchange reserves which was ten times what it was the beginning
of the decade had been reduced to a considerable extent continued over
the entire decade. Now it is obviously important to examine these changes
in the BoP situation and to analyse the underlying situations that persisted
in the 1980s.
SECTION III
To a considerable extent the payments crisis of 1979-80
was the outcome of the increase in oil crisis and deterioration in India’s
international terms of trade. After the price hike in 1973, price of crude
oil increased only from $ 11.65 per barrel in 1974 to 13 per barrel in 1978
but was almost trebled to $ 35 per barrel in1979. This second oil price
hike together with worst drought in 1979-80 the historical coincidence
within the economy had an unfavourable impact on India’s BoP which
spilled over into the 1980-81 Following the second oil price hike of197980 foreign trade deficit widened sharply to about 4.4 per cent of GDP in
1980 –81 and Rs. 3369 crores in 1979 and further to Rs 5967 crores in
1980 –81 and Rs. 6121 crores in 1981-82 India’s imports of Petroleum
Oil and Lubricants (POL )rose from Rs 1677 crores in 1978-79 to Rs
3146 crores in 1979-80 and Rs 5215 crores in 1980-81. The increase in
POL imports . This was followed by the second round effect on non-POL
imports. The full impact of the price increase was felt in the fiscal year
1980-81 when POL import absorbed nearly 75 per cent of the export
earnings and accounted for 46 per cent of the imort bill. Thus the increse
in world prices of oil was major factor underlying India’s massive import
bill for oil in 1980-81 Moreover there was also a substantial reduction in
the domestic production of crude oil on million tonnes at the beginning of
Sixth plan period.
Export performance during theperiod recorded a volume
growth of just little over 3 per cent. Net invisibles receipts continued to
provide support to the balance of payments largely in the forms of
earnings from tourism and the sustained buoyancy of private transfers.
However, the sharp widening in the merchandise trade deficit resulted in a
turn around in the current account balance from a surplus in 1977-78 to a
deficit in 1981-82 of the order of US $3.166 million ie; the orderof1.8
per cent of GDP and foreign exchange reserves declined to a considerable
extent .The trade
deficit shot up to Rs. 5967 crores in 1980-81 and
further to Rs 6120 crores in 1981-82.
Faced by the prospect of prolonged balance of payments
difficulties the Government of India entered into an arrangement with the
International Monetary fund (IMF ) under the Extended fund Facility (EFF
) which enabled India to draw up SDR 5 billion record breaking loan over
a period of four fiscal years from 1980-81 to 1984 –85 for amelioration of
BoP difficulties. India, however drew only SDR 3.9 billion and the
arrangement was terminated in my 1984 on India’s request because of the
improvements in the BoP in 1983-84 . The INF helped India to maintain
reserves at comfortable level in the first half of 1979-80 (Jalan,1992) .
During 1982-83 to 1984-85 almost coincident with the
Sixth Five-Year Plan a reprieve came . There was a dealing in the overall
growth of import .The discovery of crude oil at Bombay high met
consumption requirement. The current fell to 1.2% GNP. India was able to
accumulate foreign exchange reserves. Though the Bop issues during the
Sixth plan was satisfactorily settled mainly on account of restriction of
POL import the trade deficit had widened since 1984-85 despite deep
depreciation of the exchange rate.
However the second half of the 1980s ie; during the entire seven
plan period (1985-86 to 1989-90) witnessed the building up of tremendous
strain on Bop in spite of the robust export growth (only the exports of
manufactured goods jumped from 63 to 237 billion rupees from 1985 to
1991 ) .They increased the share in total export from 58 to 73 per cent.
The problem was rooted in the continuing high average trade deficits
because of a sharp decline in the import bill and a large loan repayment to
the IMF to the tune of Rs. 1749 crores (Rs. 1549 crores under the EFF
and Rs. 202 crores in respect of the INF Trust Fund loan) and a the sharp
decline in the role of the invisibles in financing these deficits [Economic
survey 1989-90] To an extent the spillover of essential import
necessitated by the 1987-89 drought, a rise in the international prices of
certain commodities and large import of capital goods had contributed to
the rise in import bill. The increase in the import bill was also attributable
to liberal import permitted by the government to encourage exports to
improve efficiency and upgrade technology standards and generally to
create competitive conditions for the domestic manufacturing firms. Nonoil imports have grown at a rate of 19.3 per cent per annum in rupee terms
and at 14.7 per cent per annum in US dollar terms during the first four
years of the Seven plan with the income elasticity of non-oil import
nearing 2.0 during the period . Because of a tremendous increase in
domestic demand the volume of net POL imports continued to rise from
12.4 million tonnes in 1984-85 to 23.5 million tonnes in 1989-90 (the
share of import of petroleum items in total imports was 25 per cent in
1985 as well in 1990).
As for export , we can say that recovering from the
stagnation in 1985-86 the volume growth of export in the succeeding four
years ranged between 10 t0 12 per cent annum on an average. The share of
manufacturing export rose 56 per cent in 1980-81 to 75 per cent 1989-90
moreover the various policy initiatives fiscal reliefs including complete
exemption of export profits from income or corporation tax rate of interest
and themonetary concessions relaxation in industrial controls liberal
access to industrial raw materials and capital rate for the rupee had been
put in place so as to make India’s exports truly competitive.
But overall, the picture was dismal Party as a result of the
faster growth of import (the period when the trade regime had
comparatively more liberalized and partly due to rising debt service
burden (during the seventh plan SDR 2752 million was repaid to the IME
on account of EFF drawals the current account deficit a average $ 5.8
billion or 2.4 per cent of GDP during the seventh plan period (G>C Da
Costa, 1988). It is worth noting that the current account deficit as a
percentage of GDP exhibited an average of 1.2 of per cent in the sixth
plan. The period also marked a deterioration in fiscal imbalance as the
ratio of fiscal deficit to GDP rose from 6.3per cent in the first –half of
the Eighties to 8.2 per cent during the 1985 –90 The widening investmentsavings gap which reflected the steady deterioration of the budgetary
position had its expected cumulative impact on the trade balance and
overall balance of payments. The successive import liberalization
measures since 1978-79 contributed to the emergence of the trade gap.
Net invisible earnings which had a positive balance of Rs. 3630
crores in 1985-86 in financing trade deficit lost their buoyant largely on
account of rising interest payments on foreign debt . The share of net
invisibles declined from 62.6 per cent during the sixth plan to 29. 6 per
cent during the seventh plan correspondingly net inflows on the capital
account of the Bop played a growing role in financing the trade deficit .
The huge current account deficit had to be financed
by substantial inflows of capital in the form of loans from multilateral and
bilateral sources, commercial borrowings inflows of funds from non
resident Indians the Non-Resident Account (NRERA) and the foreign
Currency Non-Resident Account (FCNRA). This increased India’s
external debt from 36000 crores at the end of 1985 to Rs. 84000 crores at
the end of march 1990 . Financing pattern of current account deficit was
more limited in the seventh plan as compared to the end of March 1990.
Financing pattern lof current account deficit was more limited in the
seventh plan as compared to the sixth plan period . in the sixth of 55 per
cent by external assistance and 28 per cent by IMF resources Non
Resident deposits formed 17 per cent of the total financing. In the seventh
plan loan under external assistance from
multilateral and bilateral
sources was 29 per cent commercial borrowings provided 25 per cent non
resident deposits 23 per cent and other capital transactions 13 per cent.
The remaining 10 per cent was financed from the country’s reserves.
In retrospect the 1980s was characterized by the emergence of
severe macro-economic imbalances which made the old economic order
unsustainable . The causes generally cited for the unprecedented crisis
might be grouped under two major aspects the first relating to the overall
plan strategy and the second to the macro-economic mismanagement of
the economy during the sixth and seventh plans the factors that
contributed to the first aspect were excessive regulation and quantitative
controls on investment imports and credits an in ward-looking trade
strategy and large scale investment in the public sector at the Government
initiated several measures of import and industrial liberalization for which
imports had increased rather sharply in the second half of the 1980s in
rupee terms.
To understand what went wrong during the last two plans other
than overall plan strategy it appears to look for the most important factors
like .
( i ) poor performance of the public sector in respect of
savings;
( ii ) The rapid rise in the foreign debt due to a fairly steep
rise in the investment saving gap.
(iii )A sharp rise in the fiscal deficits as a ratio of GDP ;
( iv ) An increase in the monetized deficit and
(v ) Financial reprssion.
An increase in both the fiscal and monetized deficits, raised
inflationary pressusre private investment and growth and widened the
current account deficit. While the rise in prices was due to the generation
of excess demand the problem on the balance of payments front was
created through ( I ) the spillover of part of additional domestic
absorption into imports and exports; and (ii ) the switching of expenditure
both at home and abroad, as the real exchange rate rose with inflation .
What was of greater significance in the medium term was that under a
regime of financial repression and preferred allocation of credit of
financial repression and preferred allocation of
credit to the
government and priority sectors the crowding out of private investment
due to the increase in the fiscal deficit tended to raise the overall capital
output ratio and reduced private savings. This had an adverse effect on
economic growth.
It may be noted that one important feature of the period (1980-81
to 1989-90) was that there was a gradual decline in the flows of
concessional assistance to India , principally from the world Bank
group. The invisibles account also deteriorated as the interest
payments service external borrowing acquired a rising trend.
Private transfers stagnated with sharp rise in trade deficit declined
leading to greater dependence on inflows of external capital Net
invisibles which financed nearly half of the trade deficit during
1981-82 to 1984-85 contributed only 8 per cent towards financing
the Bop deficit in 1990 –91 while on the other hand the credits
from the declined. The International Development Association
(IDA ) on soft terms declined sharply. The debt service payment
on sharply from US $ 371 million in 1984 to US$ 1347 million in
1990.
Several interesting observations follow from our analysis of India’s
trade balance In the seventies we observe high growth of the
volume of export coupled with moderate increases in the volume
of import. Because of the helpful trends in respect of exports and
imports the country trade balance retained its healthy character in
spite of the sharp fall in the terms of trade from the peak of 116.6
in 1972-73 to the low of 72.3 in 1979-80 By contrast in the
Eighties due to the high growth of the Indian economy and to the
lower relative price of imports , but largely in response to the more
liberal import export growth fell the tremendously but import rose
sharply .
In the result, the large current account deficit particularly after
1984-85, have had to be financed by substantial inflows of capital by way
of large commercial borrowing and NRI deposits both of which carried
very high interest rates. And in 1980s as a whole almost the entire
incremental deficit (in dollar terms) was financed through nonconcessional loans on market terms. By contrast, almost the entire deficits
were financed in the 1970s (particularly in the period 1970-71 to 1976-77)
largely through the inflows of concessional assistance, which kept the debt
servicing burden low. Thus as regards the source of financing there was a
major difference in the nature of balance of problem between the 1970s
and the 1980s.
Another important difference is that in contrast to the 1970s
period, the macro-economic policy in 1980s was highly expansionary.
Deficits in revenue accounts rose from 1.5 percent in 1980-81 to 2.7
percent in 1988-89 and further to 3.2 percent in 1989-90. The combined
fiscal deficit of the Central and the States, which reflect the overall
financial position of the Central government, increased from 6.2 percent of
the GDP in 1975-76 to 12.1 percent in 1990-91. While this was less than 6
percent in the 1970s, these burgeoning deficits represented a breakdown in
the financial discipline of the government and a dominance of populist
policies.
In the 1970s, the smooth adjustment in the external sector
following the oil price hike was attributable not only to remittances, but
also to larger inflow of external resources, a dramatic increase in the net
invisibles, other than transfer payments and above all to the management
of the balance of trade which transformed a large deficit into a modest
surplus. For another there was a discernible shift in the industrialization
strategy which diluted the emphasis on import substituton.
In the 1980s, however, the balance of payment factor was not even
permissive. Import liberalization was substantially sustained in spite of the
difficult payment situation. The stagnation and decline in remittances was
compensated for by the large net inflows in the form of repatriable
deposits during the second half of the 1980s. Thus, it was possible that
capital flows from the migrants helped sustain the import liberalization
which began in the late 1970s.
In the context of the Balance of Payment, the financial flows
arising out of international labour migration : remittances inflows (whi9ch
constituted unregulated transfers) and in the form of repatriable deposits
were large and acquired significant dimensions from the mid 1970s
onwards. The significance of remittances declined in the second half of the
1980s as compared to the 1970s and the decline in magnitude of these
financial flows was quite pronounced by the end of the 1980 decade.
By the end of the 1980s, remittances had fallen to one-eighth of the
export earnings and less than one tenth of the import bill. Even these
remittancs were to finance a large part of the balance of trade deficits (30
percent) and more than 50 percent of the burden of debt servicing. The
decline in the remittances contributed in the worst form not only on the
balance of payments scenario but also through it on the economy as a
whole.
There was a dramatic increase in capital flows from the migrants in
the form of repatriable deposits during the 1980s. the total amount
outstanding in such repatriable deposits from migrants rose fromm US $
1.3 billion at the end of 1980-81 to 10.4 billion at th end of 1989-90.
These capital inflows continued to be as important as the net aid inflows in
financing a part of the current account deficits during the second half of
the 1980s
S E C T I O N IV
The fact that India’s BOP problem has assumed the nature of a
crisis of an unmanageable proportion became well established by the close
of the eighties itself. The third oil shock and the Gulf Crisis of the second
half of 1990-91 added to the fire. The immediate impact was the rise in the
oil import bill. It also resulted in the decline of workers’ remittances to the
tune of about 25 billion rupees from April to July 1991 as well as
additional burden on repatriating and rehabilitating about 150,000 NRIs
from the affected zones in West Asia. The loss of Indian exports to west
Asia was estimated to amount to 5 billion rupees while the rise of oil price
enhanced the cost of imports. As a consequence of the rise in the price of
oil as well as certain other oil related imports, the trade deficit amounted
to hefty 106 billion rupees by March 1991.As this could no longer be
matched by ‘invisibles’, India was on the verge of bankruptcy. Since there
was a deterioration in invisible account also, the overall net current
account deficit in 1990-91 was $ 9680 million. The process of
liberalization seemed to be doomed, but on the other hand the situation
also did not permit any attempt at turning the clock back to protectionism.
In the First Year under the New Economic Policy (NEP), the net
current account deficit has fluctuated widely – it increased from Rs.
2237.3 crores to Rs. 12763.40 crores i.e., a rise by three times. However in
the nest period, the deficit had fallen. The reason for these fuctuations
seemed to be rooted in the trade deficit which had fluctuated widely. In
1990-91, the trade balance was Rs. 6495 crores and it increased to Rs.
14100.9 crores in 1992-93 (an increase by three times). However by 199394, the deficit had decreased to Rs. 7484.3 crores.
An important reversal was that the net invisibles, which had turned
negative in 1990, became positive in 1990-91. According to the Economic
Survey 1993-94, the surplus on invisible account was generated through a
two-fold increase in net private transfer and 50 percent increase in the
surplus on travel account.
During 1992-93, over-all export performance subdued with a
growth rate of 3.1 percent in US dollar terms over the years. Exports to the
General Currency Area, however , exhibites resilience in the face of
recession in industrial countries and social disturbances, which affected
transport activities in Bombay. The exports rose by 10.4 percent during
1992-93. Exports to the Rupee Payments area, mainly to the erstwhile
USSR, fell by 62 percent in dollar terms and acted as a drag on the overall
exports. The invisible accounts recorded a deterioration as travel receipts
continued to suffer from a decline in tourist arrivals. Private transfers
remained broadly stable. On the other hand, there was a rise in the outgo
on interst payments. As a result the current account deficit which had
shrunk to $ 2.1 billion in 1991-92 rose to $ 4.9 billion or 2.1 percent of the
GDP in 1992-93. It is worth noting that a current account deficit of more
than 2 percent of the gross domestic product (GDP) is considered to be
unsustainable (Economic Survey, 1994-95, p.84) The deficits on current
account were financed through a a combination of traditiona financing
sources and exceptional financing.
During 1993-94, a distinctive improvement in the BOP occurred.
A robust export growth of 20 percent in dollar terms, fall in international
prices of crude oil and the continuing slack in non-POL imports had
resulted in a sharp contraction in the merchandise trade deficit. The
decline in the international interest rates has also provided a measure of
savings in invisible account. Strong growth in remittances in response in
response to the introduction of the market determined exchange rate had
helped to counteract the deceleration in earning from tourism. At the same
time, significant developments in the capital account had taken place.
There was clearly a perceptible shift in the financing pattern in favour of
non-debt creating foreign investment flows.. Non-resident deposits had
yielded net inflows. As a result there had been a build up of foeign
currency assets of the RBI. The foreign currency assets had risen about 7
times during 1991-91 to US $ 15.07 billion at the end of 1993-94. Those
rose further to US$ 20.81 billion at the end of 1994-95.
During 1994-95, India’s external sector required a distinct
resilience and it was the strength of the current account which
underpinned the health of the BOP. During the year, the demabd for
imports rose significantly to record growth of 21.7 percent in US dollar
terms as per data of the Ministry of Commerce. The non-POL imports also
surged. The large increase in imports was comfortably accommodated by
the robust performance of current earnings, both on merchandise and
services. Exports on merchandise in particular, continued to build upon the
high growth witnessed in 1993-94 and rose by 18.22 percent during 199495 to US $ 26.2 billion. As regards the direction of exports, while west
Asia and North America remained important destinations for the Indian
exports. Exports to Russia and Africa have indicated higher growth. A
significant improvement has also occurred with regard to the performance
of invisibles, after the introduction of a market determined exchange
regime. During 1994-95, there was larger inflows of remittances from
Indians working abroad. The performance of exports and invisible
earnings enabled the financing of the surge in imports. Although the
current account deficit widened from US $ 315 million in 1993-94 to
about US $ 1700 million in 1994-95, it remained comfortable at only
about 0.6 percent of the GDP.
There was also a continued accumulation of reserves. By the end
of March 1995, the foreign exchange reserves including gold reached an
unprecented level of US $ 25.2 billion, equivalent to around 10 month of
imports, reflecting thereby a sustained improvement in the current account
balance and strong capital flows. The export performance of 1994-95
benefited from the recovery in world trade, a conducive policy
environment and a stable exchange rate.
During 1995-96, the level of foreign currency assets at US $ 17.04
billion was equivalent to 4.9 months of imports of goods and 3.8 months
of goods and services. Although the level of reserves was comfortable,
there is need for a further build up in reserves to have greater flexibility in
exchange rate management to absorb any unanticipated external shocks, to
facilitate India’s move towards full capital account convertibility and to
impart confidence in the international investor community about the
soundness of India’s Balance of Payments.
Post –Liberalization has witnessed several improvements in the
BOP front. This might be attributed partly to the depreciation of rupee,
almost 100% against US dollar. But several other factors also contributed.
First the domestic industrial recession had curbed the import demand and
encouraged exports. Second, eight consecutive good monsoons had
minimized the imports of agricultural commodities. Third, oil price had
very much subdued after the Gulf Crisis. As a result imports of petroleum
and oil products which used to account for nearly 40 percent of total
imports during the late 1980s accounted for only 20 percent during 199394. However despite the improvement, the current account balance
continued to be negative.
The overall growth momentum achieved in the post liberalization
era was sustained during 1996-97. In order to consolidate the gains arising
from liberalization and sustain the tempo of reforms several policy
measures were initiated by the Government of India. These policies were
aimed at fiscal consolidation, prudent measures, to pursue a low and stable
rate of inflation and effective foreign exchange management. Exports and
imports registered modest growth of 4.1 percent and 5.1 percent
respectively. The higher growth of imports than exports, resulted in
widening the trade deficit to US $5442 milion during 1996-97 from US $
4881 million during 1995-96. Notwithstanding this, the current account
deficit narrowed to 1 percent of GDP from 1.8 percent in the previous
year mainly on account of sharp increase in the surplus under the invisible
account.
The capital account continued to exhibit buoyancy during the
financial year 1996-97 in tune with the compositional drift towards equity
flows. Net capital flows amounted to US $ 10525 million during 1996-97
which more than doubled from that of the preceding year. The narrowing
of the current account deficit coupled with the doubling of capital inflows
in a large overall surplus of US $ 6795 million during 1996-97 in contrast
to a deficit in the previous year. With IMF repurchases amounting to US $
977 million, the RBI’s foreign exchange reserves (excluding valuation
changes) increased by US $ 5818 million. At the end of March 1997, the
foreign exchange reserves at US $ 26243 million were equivalent to 7
months of imports. India’s foreign exchange reserves comprising foreign
assets of the RBI, gold held by the RBI and SDRS held by the
Government of India increased from US $21687 million (Rs 74384 crores)
as at the end of March 1997. This increase during 1996-97 was mainly on
account of the increase in the foreign currency assets.
The process of liberalization was strengthened further during 199697. Measures were initiated to boost the industry and the trade sector. To
this end the budget 1996-97 made several policy pronouncements. Steps
aimes at liberalization of exports and imports and streamlining the foreign
investment in the economy were undertaken by the government. During
the Ninth Five Year Plan, the Ministry of Commerce has set a target of
attaining an export level of US $ 90-100 billion by the year 2002 and
achieving a 1 percent share in the world trade. Against this background,
the structural reforms package initiated in 1991 was further strengthened
by a new EXIM Policy (1997-2002) announced in March 2002.
The policy endeavoured to make trade regime more market
determined :
1. By accelerating the country’s transition to a globally
oriented vibrant economy with a view to deriving
maximum benefits from expanding global market
opportunities
2. By stimulating sustained economic growth by providing
access to essential raw materials, intermediates,
components, consumables and capital goods required for
augmenting production
3. By accelerating the technological strength and efficiency of
Indian agriculture, industry and services, thereby improving
this competitive strength while generating new employment
opportunities and encouraging the attainment of
internationally accepted standard of quality and
4. By providing consumers with good quality products at
reasonable prices
FOREIGN EXCHANGE MANAGEMENT
MANAGEMENT
The main objective of foreign exchange management is to ensure
smooth and stable transaction in the foreign exchange market of its
currency vis-à-vis other principal currencies. It implies that at no point of
time, there should be a very wide gap between the demand and supply of
its currency. If this gap occurs an account of deficit in the current account,
it is removed by arranging a surplus on the capital account.
Conceptually, a unique definition of forex reserves is not available
as there have been divergence of views in terms of coverage of items,
ownership of assets, liquidity aspects and need for a distinction between
owned and non-owned reserves Nevertheless, for policy and operational
purposes, most countries have adopted the definition suggested by the
International Monetary Fund (Balance of Payments Manual, and
Guidelines on Foreign Exchange Reserve Management, 2001); which
defines reserves as external assets that are readily available to and
controlled by monetary authorities for direct financing of external
payments imbalances, for indirectly regulating the magnitudes of such
imbalances through intervention in exchange markets to affect the
currency exchange rate, and/or for other purposes.
The exchange of one country with the currency of another country
is called Foreign Exchange. It is the direct offshoot of international
trade. As different countries have their own respective currencies
live USA’s dollars UK’s pound sterling, Japan’s Yen and India’s
Rupee whenever goods are import ed from abroad say from USA
to India then rupee has to be exchanged with dollar this conversion
of rupee with dollar or Yen with pounds in known as Foreign
Exchange.
The standard approach for measuring international reserves takes
into account the unencumbered international reserve assets of the
monetary authority; however, the foreign currency and the securities held
by the public including the banks and corporate bodies are not accounted
for in the definition of official holdings of international reserves.
FOREIGN EXCHANGE AND RBI
In India, the Reserve Bank of India Act 1934 contains the enabling
provisions for the RBI to act as the custodian of foreign reserves, and
manage reserves with defined objectives. The powers of being the
custodian of foreign reserves are enshrined, in the first instance, in the
preamble of the Act. The ‘reserves’ refer to both foreign reserves in the
form of gold assets in the Banking Department and foreign securities held
by the Issue Department, and domestic reserves in the form of ‘bank
reserves’. The composition of foreign reserves is indicated, a minimum
reserve system is set out, and the instruments and securities in which the
country’s reserves could be deployed are spelt out in the relevant Sections
of the RBI Act.
In brief, in India, what constitutes a forex reserve; who is the
custodian and how it should be deployed are laid out clearly in the Statute,
and in an extremely conservative fashion as far as management of reserves
is concerned. In substantive terms, RBI functions as the custodian and
manager of forex reserves, and operates within the overall policy
framework agreed upon with Government of India.
NEED FOR HOLDING FOREIGN EXCHANGE
Technically, it is possible to consider three motives i.e.,
transaction, speculative and precautionary motives for holding reserves.
International trade gives rise to currency flows, which are assumed to be
handled by private banks driven by the transaction motive. Similarly,
speculative motive is left to individual or corporates. Central bank
reserves, however, are characterized primarily as a last resort stock of
foreign currency for unpredictable flows, which is consistent with
precautionary motive for holding foreign assets. Precautionary motive for
holding foreign currency, like the demand for money, can be positively
related to wealth and the cost of covering unplanned deficit, and
negatively related to the return from alternative assets.
From a policy perspective, it is clear that the country benefits
through economies of scale by pooling the transaction reserves, while sub
serving the precautionary motive of keeping official reserves as a ‘war
chest’. Furthermore, forex reserves are instruments to maintain or manage
the exchange rate, while enabling orderly absorption of international
money and capital flows. In brief, official reserves are held for
precautionary and transaction motives keeping in view the aggregate of
national interests, to achieve balance between demand for and supply of
foreign currencies, for intervention, and to preserve confidence in the
country’s ability to carry out external transactions.
Reserve assets could be defined with respect to assets of monetary
authority as the custodian, or of sovereign government as the principal.
For the monetary authority, the motives for holding reserves may not
deviate from the monetary policy objectives, while for government, the
objectives of holding reserves may go beyond that of the monetary
authorities. In other words, the final expression of the objective of holding
reserve assets would be influenced by the reconciliation of objectives of
the monetary authority as the custodian and the government as principal.
There are cases, however, when reserves are used as a convenient
mechanism for government purchases of goods and services, servicing
foreign currency debt of government, insurance against emergencies, and
in respect of a few, as a source of income.
POLICY OBJECTIVES OF FOREIGN EXCHANGE
It is difficult to lay down objectives in very precise terms, nor is it
possible to order all relevant objectives by order of precedence in view of
emerging situations, which are described later. For the present, a list of
objectives in broader terms may be encapsulated viz., (a) maintaining
confidence in monetary and exchange rate policies, (b) enhancing capacity
to intervene in forex markets, (c) limiting external vulnerability by
maintaining foreign currency liquidity to absorb shocks during times of
crisis including national disasters or emergencies; (d) providing
confidence to the markets especially credit rating agencies that external
obligations can always be met, thus reducing the overall costs at which
forex resources are available to all the market participants, and (e)
incidentally adding to the comfort of the market participants, by
demonstrating the backing of domestic currency by external assets.
At a formal level, the objective of reserve management in India
could be found in the RBI Act, where the relevant part of the preamble
reads as ‘to use the currency system to the country’s advantage and with a
view to securing monetary stability’. This statement may be interpreted to
hold that monetary stability means internal as well as external stability;
implying stable exchange rate as the overall objective of the reserve
management policy. While internal stability implies that reserve
management cannot be isolated from domestic macroeconomic stability
and economic growth, the phrase ‘to use the currency system to the
country’s advantage’ implies that maximum gains for the country as a
whole or economy in general could be derived in the process of reserve
management, which not only provides for considerable flexibility to
reserve management practice, but also warrants a very dynamic view of
what the country needs and how best to meet the requirements. In other
words, the financial return or trade off between financial costs and benefits
of holding and maintaining reserves is not the only or the predominant
objective in management of reserves.
EVOLUTION OF POLICY
FOREIGN EXCHANGE REGULATION ACT 1973
a) All non-banking foreign branches and subsidiaries with foreign equity
exceeding 40% had to obtain foreign permission for new undertakings, to
purchase shares or to acquire any company.
b) All external payments, had to be made by authorized dealer controlled by
RBI and F.E. rationed acc. to availability.
c) Exporters earning FE had to surrender earnings to authorized dealers and
get rupee in exchange.
d) Purchase & sale of foreign securities by Indians were strictly controlled.
FOREIGN EXCHANGE RESERVE CRISIS, 1991
a. Between 1985- 1990,fiscal and BOP deficits resulted in the
decline of F0REIGN EXCHANGE reserves to a dangerously low
level of $ 750 million (Rs 1500 crores).
b. India approached IMF for temporary accommodation, IMF
accepted India’s request with conditional ties.
c. GOI arranged to sale about 20 tonnes of confiscated gold for $
200 million to meet international obligations.
IMF CONDITIONALITIES
a. Devaluation of Rupee by 22 percent i.e., from Rs 21 to Rs 27 per
dollar
b. Drastic Reduction in import tariff from 130 percent to 30 percent
for all goods and putting them on OGL list
c. For compensating Government revenue, the excise duties should
be hiked
d. All government expenditure should be cut down by 10 percent
DUAL EXCHANGE SYSTEM IN 1991-92(LERMS)
a) GOI accepted the existence of two rates -the Official Rate of Exchange
(which was controlled) and the Market Rate of Exchange (which was free
to move or fluctuate according to market conditions).
b) All foreign exchange remittances into India earned through export of
goods or services or through inward remittances were allowed to be
converted into I) 60% @ market value ii) the balance 40% should be sold
to RBI through authorized dealers (AD) at official rate
FULL CONVERTIBILTY OF RUPEE ON CURRENT ACCOUNT
The existence of the dual/exchange rate hurt exporters and Indians
working abroad who had to surrender 40 percent of their earnings at the
official rate, which was lower than the market rate of exchange. It was to
remove this defect that the Government adopted full convertibility of the
rupee on trade account.
a) Indian exporters and workers abroad could convert 100 percent
of their foreign exchange earnings at market rate.
b) Secondly GOI introduced the convertibility of the Rupee on the
current account that is liberalize the access to foreign exchange for all
business transactions including travel education medical expenses etc.
COMMITTEE ON CAPITAL ACCOUNT CONVERTIBILITY (CAC)
Reserve Bank of India appointed the Committee on Capital
Account Convertibility headed by S.S.Tarapore, a former Deputy
Governor of RBI. The Committee on CAC emphasized the benefits of
CAC to India, viz., availability of large funds to supplement domestic
resources and thereby promote economic growth. Under the system of
CAC
a. Permission to issue foreign currency denominated bonds to local investors
to issue Global Deposition receipts (GDR), without RBI or government
approval
b. Indian residents would be permitted to have foreign currency denominated
deposits with banks in India, to make Financial capital transfers to other
countries with in certain limits to lave loans from non relations and others
up to ceiling of $ million.
c. Indian banks would be allowed to borrow from overseas markets for short
term & long term unto certain limits.
d. Banks & financial institutions would be allowed to operate in domestic
and international market.
The Tara Pore Committee reported that before adopting CAS India
should fulfill three crucial preconditions:
a) Fiscal deficit should be reduced to 3.5 %. The govt should also set up a
Consolidated Sinking Fund (CSF) to reduce Govt debt,
b) The Government should fix the annual inflation target 3 to 5 percent
c) Financial sector should be strengthened.
Apart from these three essential preconditions, the Tara pore
committee recommended that
a) RBI should have a monitoring exchange rate band of 5 percent around
Real Effective Exchange Rate (REER) and should intervene only when
REER is out side band.
b) The size of the current account deficit should be within manageable
limits and the debt rate should be gradually reduced from 25 percent to
20 percent of export earnings.
c) Forex reserves should be adequate i.e. in terms of import and debt service
payments forex reserves should range between $ 22 billion and & 32
billion.
d) The Government should remove all restriction on the movement of gold.
FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 1999
a) No person shall deal in or transfer foreign exchange or foreign security to
any person not being authorized person.
b) No person resident in India shall acquire hold own possess or transfer any
foreign exchange foreign security or any immovable property situated
outside India.
c) Any person may sell or draw foreign exchange to or from an authorized
person if such sale or drawal is a capital account transaction, provided
that the Central Government may in public interest and in consultation
with RBI, impose such reasonable restrictions for current account
transactions as may be prescribed.
d) Any person may sell or draw foreign exchange to or from an authorized
person for a capital account transaction. RBI, in consultation with GOI
may specify the class of capital account transactions which are
permissible, the limit up to which foreign exchange shall be admissible
for such transactions.
India’s approach to reserve management, until the balance of
payments crisis of 1991 was essentially based on the traditional approach,
i.e., to maintain an appropriate level of import cover defined in terms of
number of months of imports equivalent to reserves. For example, the
RBI’s Annual Report 1990-91 stated that the import cover of reserves
shrank to 3 weeks of imports by the end of December 1990, and the
emphasis on import cover constituted the primary concern say, till 199394. The approach to reserve management, as part of exchange rate
management, and indeed external sector policy underwent a paradigm
shift with the adoption of the recommendations of the High Level
Committee on Balance of Payments under the Chairmanship of Dr. C.
Rangarajan.
The Committee recommended that while determining the target
level of reserve, due attention should be paid to the payment obligations in
addition to the level of imports. The Committee also recommended that
the foreign exchange reserves targets be fixed in such a way that they are
generally in a position to accommodate imports of three months.
In the view of the Committee, the factors that are to be taken into
consideration in determining the desirable level of reserves are: the need
to ensure a reasonable level of confidence in the international financial
and trading communities about the capacity of the country to honour its
obligations and maintain trade and financial flows; the need to take care of
the seasonal factors in any balance of payments transaction with reference
to the possible uncertainties in the monsoon conditions of India; the
amount of foreign currency reserves required to counter speculative
tendencies or anticipatory actions amongst players in the foreign exchange
market; and the capacity to maintain the reserves so that the cost of
carrying liquidity is minimal."
With the introduction of market determined exchange rate as
mentioned in the RBI’s Annual Report, 1995-96 a change in the approach
to reserve management was warranted and the emphasis on import cover
had to be supplemented with the objective of smoothening out the
volatility in the exchange rate, which has been reflective of the underlying
market condition.
Against the backdrop of currency crises in East-Asian countries,
and in the light of country experiences of volatile cross-border capital
flows, the Reserve Bank’s Annual Report 1997-98 reiterated the need to
take into consideration a host of factors, but is noteworthy for bringing to
the fore the shift in the pattern of leads and lags in payments/receipts
during exchange market uncertainties and emphasized that besides the size
of reserves, the quality of reserves also assume importance. Highlighting
this, the Report stated that unencumbered reserve assets (defined as
reserve assets net of encumbrances such as forward commitments, lines of
credit to domestic entities, guarantees and other contingent liabilities)
must be available at any point of time to the authorities for fulfilling
various objectives assigned to reserves.
As a part of prudent management of external liabilities, the RBI
policy is to keep forward liabilities at a relatively low level as a proportion
of gross reserves and the emphasis on prudent reserve management i.e.,
keeping forward liabilities within manageable limits, was highlighted in
the RBI’s Annual Report, 1998-99.
The RBI Annual Report, 1999-2000 stated that the overall
approach to management of India’s foreign exchange reserves reflects the
changing composition of balance of payments and liquidity risks
associated with different types of flows and other requirements and the
introduction of the concept of liquidity risks is noteworthy.
While focusing on prudent management of foreign exchange
reserves in recent years, RBI’s Annual Report 2000-01 elaborated on
‘liquidity risk’ associated with different types of flows. The Report stated
that with the changing profile of capital flows, the traditional approach of
assessing reserve adequacy in terms of import cover has been broadened
to include a number of parameters which take into account the size,
composition, and risk profiles of various types of capital flows as well as
the types of external shocks to which the economy is vulnerable. Governor
Jalan’s latest statement on Monetary and Credit Policy (April 29, 2002)
provides, an up-to-date and comprehensive view on the approach to
reserve management.
LEVEL OF APPROPRIATE FOREIGN EXCHANGE
Basic motives for holding reserves do result in alternative
frameworks for determining appropriate level of foreign reserves. Efforts
have been made by economists to present an optimising framework for
maintaining appropriate level of foreign reserves and one viewpoint
suggests that optimal reserves pertain to the level at which marginal social
cost equals marginal social benefit. Optimal level of reserves has also been
indicated as the level where marginal productivity of reserves plus interest
earned on reserve assets equals the marginal productivity of real resources
and this framework encompasses exchange rate stability as the
predominant objective of reserve management. Since the underlying costs
and benefits of reserves can be measured in several ways, these
approaches to optimal level provide ample scope for developing a host of
indicators of appropriate level of reserves.
It is possible to identify four sets of indicators to assess adequacy
of reserves, and each of them do provide an insight into adequacy though
none of them may by itself fully explain adequacy. First, the money based
indicators including reserve to broad money or reserves to base money
which provide a measure of potential for resident based capital flight from
currency. An unstable demand for money or the presence of a weak
banking system may indicate greater probability of such capital flights.
Money based indicators, however, suffer from several drawbacks. In
countries, where money demand is stable and confidence in domestic
currency high, domestic money demand tends to be larger and reserves
over money ratios, relatively small. Therefore, while a sizable money
stock in relation to reserves, prima facie, suggests a large potential for
capital flight out of money, it is not necessarily a good predictor of actual
capital flight. Money based indicators also do not capture
comprehensively the potential for domestic capital flight. Moreover,
empirical studies find a weak relationship between money based indicator
and occurrence and depth of international crises.
Secondly, trade based indicators; usually the import-based
indicators defined in terms of reserves in months of imports provide a
simple way of scaling the level of reserves by the size and openness of the
economy. It has a straightforward interpretation- a number of months a
country can continue to support its current level of imports if all other
inflows and outflows cease. As the measure focuses on current account, it
is relevant for small economies, which have limited access and
vulnerabilities to capital markets. For substantially open economies with a
sizable capital account, the import cover measure may not be appropriate.
Thirdly, debt based indicators are of recent origin; they appeared
with episodes of international crises, as several studies confirmed that
reserves to short term debt by remaining maturity is a better indicator of
identifying financial crises. Debt-based indicators are useful for gauging
risks associated with adverse developments in international capital
markets. Since short-term debt by remaining maturity provides a measure
of all debt repayments to nonresidents over the coming year, it constitutes
a useful measure of how quickly a country would be forced to adjust in the
face of capital market distortion. Studies have shown that it could be the
single most important indicator of reserve adequacy in countries with
significant but uncertain access to capital markets.
Fourthly, more recent approaches to reserve adequacy have
suggested a combination of current-capital accounts as the meaningful
measure of liquidity risks. Of particular interest, is the Guidotti Rule,
which has received wide appreciation form many central bankers
including Alan Greenspan, postulates that the ratio of short term debt
augmented with a projected current account deficit (or another measure of
expected borrowing) could serve useful an indicator of how long a country
can sustain external imbalance without resorting to foreign borrowing. As
a matter of practice, the Guidotti Rule suggests that the countries should
hold external assets sufficient to ensure that they could live without access
to new foreign borrowings for up to twelve months. This implies that the
usable foreign exchange reserves should exceed scheduled amortisation of
foreign currency debts (assuming no rollover during the following year).
LEVEL OF FOREIGN EXCHANGE IN INDIA
The Indian approach to determining adequacy of forex reserves has
been evolving over the past few years, especially since the pioneering
Report of the High Level Committee on Balance of Payments, culminating
in Governor Jalan’s exposition of the combination of global uncertainties,
domestic economy and national security considerations in determining
liquidity at risk and thus assessing reserve adequacy. It is appropriate to
submit stylized facts in relation to some of the indicators of reserveadequacy described here without making any particular judgment about
adequacy.
The foreign exchange reserves include three items; GOLD, SDRS
and FOREIGN CURRENCY ASSETS. As on May 3, 2002, out of the US $
55.6 billion of total reserves, foreign currency assets account the major
share at US $ 52.5 billion. Gold accounts for about US $ 3 billion. In July
1991, as a part of reserve management policy, and as a means of raising
resources, the RBI temporarily pledged gold to raise loans. The gold
holdings thus have played a crucial role of reserve management at a time
of external crisis. Since then, Gold has played passive role in reserve
management.
The level of foreign exchange reserves has steadily increased from
US$ 5.8 billion as at end-March, 1991 to US$ 54.1 billion as at end-March
2002 and further to US$ 55.6 billion as at May 3, 2002. The traditional
measure of trade-based indicator of reserve adequacy, i.e., the import
cover (defined as the twelve times the ratio of reserves to merchandise
imports) which shrank to 3 weeks of imports by the end of December
1990, has improved to about 11.5 months as at end-March 2002. In terms
of money-based indicators, the proportion of net foreign exchange assets
of RBI (NFA) to currency with the public has sharply increased from 15
per cent in 1991 to 109 percent as at end-March 2002. The proportion of
NFA to broad money (M3) has increased by more than six fold; from 3 per
cent to 18 per cent.
The debt-based indicators of reserve adequacy show remarkable
improvement in the 1990s. The proportion of short-term debt (i.e., debt
obligations with an original maturity up to one year) to foreign exchange
reserves has substantially declined form 147 per cent as at end-March
1991 to 8 percent as at end-March 2001. The proportion of volatile capital
flows defined to include cumulative portfolio inflows and short-term debt
to reserves has lowered from 147 per cent in 1991 to 58.5 percent as at
end-March 2001. As part of sustainable external debt position, the shortterm debt component has decreased from 10 per cent as at end-March
1991 to 3 percent as at end-March 2001. Similarly, the size of debt service
payments relative to current receipts has decreased from 35 per cent in
1991 to 16 percent in 2001.
MANAGEMENT OF FOREX RESERVES IN INDIA
In India, legal provisions governing management of forex reserves
are set out in the RBI Act and Foreign Exchange Management Act, 1999
and they also govern the open market operations for ensuring orderly
conditions in the forex markets, the exercise of powers as a monetary
authority and the custodian in regard to management of foreign exchange
assets.
In practice, holdings of gold have been virtually unchanged other
than occasional sales of gold by the government to the RBI. The gold
reserves are managed passively. Currently, accretion to foreign currency
reserves arises mainly out of purchases by RBI from the Authorised
Dealers (i.e. open market operations), and to some extent income from
deployment of forex assets held in the portfolio of RBI (i.e. reserves,
which are invested in appropriate instruments of select currencies). The
RBI Act stipulates the investment categories in which RBI is permitted to
deploy its reserves. The aid receipts on government account also flow into
reserves. The outflow arises mainly on account of sale of foreign currency
to Authorised Dealers (i.e. for open market operations). There are
occasions when forex is made available from reserves for identified users,
as part of strategy of meeting lumpy demands on forex markets,
particularly during periods of uncertainty. The net effect of purchases and
sale of foreign currency is the most determining one for the level of forex
reserves, and these include such sale or purchase in forward markets
(which incidentally is very small in magnitude).
While operationally the level of reserves is essentially a result of
sale and purchase transactions, the level is also one of the objectives of
exchange rate policy, and the issue needs to be considered in the overall
context of exchange rate management. The market determines the
exchange rate, i.e. forces of demand and supply. The objectives and
purposes of exchange rate management are to ensure that economic
fundamentals are reflected in the external value of the rupee as evidenced
in the sustainable current account deficit. Subject to this general objective,
the conduct of exchange rate policy is guided by three major purposes:
first, to reduce excess volatility in exchange rates, while ensuring that the
movements are orderly and calibrated; second, to help maintain an
adequate level of foreign exchange reserves and third, to help eliminate
market constraints with a view to the development of a healthy foreign
exchange market. Basically, the policy is aimed at preventing destabilizing
speculation in the market while facilitating foreign exchange transactions
at market rates for all permissible purposes. RBI makes sales and
purchases of foreign currency in the forex market, basically to even out
lumpy demand or supply in the thin forex market; large lumpiness in
demand is mainly on account of oil imports, leads and lags. And external
debt servicing on Government account. Such sales and purchases are not
governed by a predetermined target or band around the exchange rate. The
essence of portfolio management of reserves by the RBI is to ensure
safety, liquidity and optimization of returns. The reserve management
strategies are continuously currency reviewed by the RBI in consultation
with Government. In deploying reserves, attention is paid to the currency
composition, duration and instruments. All of the foreign assets are
invested in assets of top quality while a good proportion should be
convertible into cash at short notice. The counter parties with whom deals
are conducted are also subject to a rigorous selection process. In assessing
the returns from deployment, the total return (both interest and capital
gains) is taken into consideration. Circumstances such as lumpy demand
and supply in reserve accretion are countered through appropriate
immunization strategies in deployment. One crucial area in the process of
investment of the foreign currency assets in the overseas markets, relates
to the risk involved in the process viz. credit risk, market risk and
operational risk. While there is no set formula to meet all situations, RBI
utilizes the accepted portfolio management principles for risk
management.
COST AND BENEFITS
First, a major question on the level of reserves relates to the scope
for measuring overall economic costs and benefits of holding reserves.
While concepts of marginal social costs, or opportunity costs are useful for
analytical purposes, computation is difficult though assessments are not
impossible.
Second, if it is assumed that the direct financial cost of holding
reserves is the difference between interest paid on external debt and
returns on external assets in reserves, such costs have to be treated as
insurance premium to assure and maintain confidence in the availability of
liquidity. The benefits of such a premium are not merely in terms of
warding off risks but also in terms of better credit rating and finer spreads
that many private participants may get while contracting debt. The costs of
comfort level in reserves are often met by some benefits, but both are
difficult to measure, in financial or economic, and in quantitative terms.
Third, if the level of reserves is considered to be significantly in
the high comfort zone, it may be possible to add greater weight to return
on forex assets than on liquidity thus reducing net costs if any, of holding
reserves.
Fourth, such calculations of costs of holding reserves by
comparing return on forex reserve with costs of external debt may imply
that contracting additional external debt has made addition to reserves. In
India, almost the whole of addition to reserves in the last few years has
been made while keeping the overall level of external debt almost
constant.
Fifth, the costs and benefits of adding or not adding to reserves
should be assessed with a medium-term view. For example, in case there
is uncertainty about capacity to acquire needed reserves at a later date, a
country may prefer to acquire them sooner than later. Indeed, an intertemporal view of the adequacy as well as costs and benefits of forex
reserves may be in order.
Finally, it is necessary to assess the costs of not adding to reserves
through open market operations at a time when the capital flows are
strong. In other words, the costs and benefits of forex reserves may have
something to do with the open market operations, both in money and forex
markets than merely the level itself. In brief, the costs and benefits arise as
much out of open market operations of the central bank as out of
management of levels of reserves.
The relationship between exchange rate policy and current account
of deficit more particularly, trade deficit is an area of concern in recent
time to decide the optimal exchange rate. However exchange rate is only
one of the factors, which influences the current account deficit. The
growth rate in exports and imports and the resultant trade balance are
determined by a host of factors including exchange rate. Several works
have examined this nexus between exchange rate and current account
balance. Theoretical studies such as Barra and) Hadar (1979), Barra and
ramachandran (1980), Das (1983), examined the risk in exchange rate and
volume of trade. The empirical works of Knack (1972), Ragman (1977),
Hooper and Kohl Hagan (1978), Sam anta (1988), and Nela Mukherjee
(1998), study the exchange rate uncertainty and its effects in foreign trade.
Thus these empirical works concentrate on the nexus between exchange
rate and its impact on foreign trade.
In the following space, attempt is made to study the impact of
variation in exchange rate and the policy thereon, on the direction of trade.
The focus is to ascertain the magnitude of variation in exchange rate of
Indian rupee vis-à-vis selected currencies for the period 1980-81 to 199798. Besides to examine the impact of variation in exchange rate on the
Balance of Trade of the nations selected for the same period.
recent exchange rate policy measures
Exchange rate obviously refers to the external value of a domestic
currency. The exchange rate system has undergone fundamental changes
the early 1990s coinciding with the introduction of economic reform
measures in India. The liberalized Exchange Rate Management system
(LERMS) was introduced in the first quarter of 1992. It marked a period
of transition from controlled exchange rate regime to a market-based
system. Under this system 60 per cent of the foreign exchange earnings
could be converted into rupee in the open market and the 40 per cent
should be surrendered to RBI for exchange at official rate.
With the introduction of LERMS, the RBI became obliged to
supply foreign exchange to the authorised dealers (Ads) only for the
import specific items to the extent authorised by the Ministry of Finance,
Government of India. They include petroleum products and other items
required for developmental purpose.
The dealings between RBI and ADs became more streamlined as
the latter are given more powers to implement LERMS. The exporters had
the advantages as well as disadvantages. The new exports had the
advantage in converting 60 per cent of their system where they had to get
100 per cent of their foreign exchange earnings at official rate. Thus the
Government tried to boost theexports on the one hand and levied a tax on
the other in the form of compulsory conversion of part of their export
earnings. This was used as a temporary devise to stabilize the Balance of
Payments and therefore foreign exchange was being purchased cheaply
from the exporters to replenish the declining Foreign. Exchange Reserves.
Modifications of LERMS under Unified Exchange Rate System
Substantial modifications were made in LERMS with effect from first
March 1993. The new system dispensed with the dual exchange rate
system replacing it by unified exchange rate system. Under these system
exporters earnings at official rate as it prevailed earlier. In the budget
1993-94, rupee was made fully convertible. Exporters could sell their
foreign exchange earning to ADs at market-determined rate of exchange.
How ever the RBI retained its right to intervene in the foreign exchange
market whenever the occasion warranted it. The RBI’s purchase of foreign
of foreign exchange market, whenever the occasion warranted helped to
build up the depleted reserves and stabilize the exchange rate.
Notwithstanding the intervention policy of the RBI, in the foreign
exchange market the economy experienced another problem called the
issue of overshooting as named by Dornbush . According to him tight
money higher demand for depreciation in exchange rate go together. A
high demand for credit and a collapse in stock prices intensified a situation
of tight liquidity. When the exchange rate started depreciation intervention
by RBI lowered further the liquidity. Thus the review of the exchange rate
policy clearly reveals the fundamental changes in the policy and the timely
intervention by RBI to stabilize the exchange rate besides promoting
exports and inflow exchange reserves.
VARIATIONS OF EXCHANGE RATES AND THE DIRECTION OF
TRADE
In this section an attempt is made to measure the variations in
exchange rate of India vis-à-vis other trading countries for the periods
1980-81 to 1987-88. In the same way the extent of variation in Balance of
Trade. India in respect of the trading countries is also examined to
ascertain the possible impact of exchange rate depreciation on our trade
deficit. It may be mentioned that the first time period may be called prereform and the second one as the post-reform period.
The data are based on Economic Survey Government of India RBI
Bulletin and national Income Accounts of India for the available period.
CMTE data on direction of Trade is used. Tables II and I present the threeyearly simply average figures of the exchange rate of Rupees selected
currencies. There are 15 currencies considered including the variations in
SDRs. It may be noted that the exchange rate depreciation of rupee vs.
American Dollar, British pound Sterling Deutsha Mark, Japanese Yen,
French Franc, Canadian Dollar is more sizable that those currencies of
other countries given in Table II. It may also be noted that Table I shows
the appreciation of currencies of developed economics and that of Table II
shows the appreciation in the currencies A striking economies against the
Indian Rupee of depreciation in SDRs against Indian Rupee.
Table – I
Exchange Rate of rupee versus Selected Currencies
Year
U.S.(dollar
)
British
(Sterling)
D(mark)
Japan(ye
n)
French(fr
anc)
Canada(d
ollar)
Italy(li
ra)
Trade
Balanc
e% of
G.D.P
1
2
3
4
5
198081to198
2-83
6.854
17.248
4.003
0.0383
6
7
8
9
1.508
7.329
0.008
-3.66
198384to198
5-86
11.488
15.710
4.161
0.0497
1.364
8.746
0.007
-2.83
198687to198
8-89
13.415
22.692
7.248
0.0618
2.167
10.394
0.015
-2.20
198990to199
1-92
19.688
34.208
11.717
0.1433
3.455
16.946
0.016
-1.43
199293to199
4-95
31.138
49.37
19.510
0.2843
5.702
23.873
0.021
-0.85
199596to199
7-98
36.150
58.180
22.722
0.3237
6.656
26.173
0.022
(SOURCE: ECONOMIC SURVEY, GOI, 1997-98)
TABLE – II
EXCHANGE RATE OF RUPEE VERSUS SELECTED COUNTRIES
Year
Turkis
h
(lira)
Indon
esian(
Rupia
h)
Brazili
an(Cr
yzado)
Mexic
ian
(Veso
s)
Korea
n(Wo
n)
Pakist
an(Ru
pee)
Thaila
nd(Ba
ht)
SDR
Trade
Balan
ce %
of
G.D.P
.
X
M
198081to1
98283
0.075
0.013
0.028
9
0.027
8
0.012
0.892
0.404
10.35
9
-5710
4.9
2
8.5
9
198384to1
98-86
0.031
0.011
0.007
0.058
0.014
0.798
0.466
11.93
2
-6734
4.6
5
7.5
1
198687to1
98889
0.014
0.009
0.812
0.011
0.017
0.769
1.201
17.27
7
-7472
4.6
9
6.8
9
198990to1
99192
0.007
0.012
2.204
0.007
0.028
0.883
0.780
26.50
0
-7342
6.4
3
7.8
6
19931994t
o199
4-95
0.002
0.015
14.17
5
6.905
0.039
1.112
1.234
42.27
3
-6778
8.3
5
9.2
1
199596to1
99798
0.007
0.31
34.82
7
4.715
0.42
0.955
1.159
51.48
8
20024
---
--
(SOURCE: ECONOMIC SURVEY GOI 1997-98)
The magnitude of depreciation in the Real as well as Nominal
Effective Exchange Rate ( REER & NEER ) of India during the reform
period is given in terms of indices in Table 4.The depreciation in NEER
with 1991-92 as base year is to the rune of 35 points and that of REER is
around 9 points. As the base shifts to the recent past, obviously, the extent
of depreciation becomes smaller. However when we compare the
depreciation in 1991-98 to that of the initial period 1990-91 the NEER
works out to be almost double though in terms of REE. It is around 35
points. It is also clear from the Table that though the RRER and NEER
deprecated, the extent of depreciation in the former is less than the latter.
The market intervention strategy of the RBI by way of selling and
buying the U.S. dollar in the open market is another factor to stabilize the
exchange rate. For example between 1997-98 and 1998-99 in almost all
the months the RBI has resorted purchase and sale of the U.S. dollar. The
net transactions in this connection for the period 1997-98 ranged between
$ 189 and $ 1393. During the period 1998-99 the same ranged between $
75 and $ 1760.
Table IIIA and IIIB present the data on the extent of appreciation
in the currencies of both developed and developing countries respectively,
of both developing countries respectively, for the sub-periods and overall
period mentioned above. In general, the extent of appreciation of these
currencies during the reform the extent of appreciation of these currencies
during the reform period (1989-98) seem to greater than what is seen
during the pre- reform period. It is also found that the appreciation in
Japanese Yen and French Franc is significant period between 1980-81 and
1997-98 ranges between 3.1 and 8.5 times (Yen).
TABLE –IIIA
APPRECIATION OF CURRENCIES RELATION TO INDIAN RUPEE
Developed Countries
1980-89
1989-98
U.S
Dollar
1.916
1.836
1980-98
5.274
British
Sterling
1.316
1.696
3.373
Deursha
Mark
1.811
1.939
5.676
Japan
Yen
1.613
2.258
8.452
French
Franc
1.356
1.926
4.165
Canada
Dollar
1.418
1.544
3.571
Italian
Lira
1.875
1.375
0.25
1.667
1.942
4.970
S.D.R.
(SOURCE: ECONOMIC SURVEY, GOI 1998)
TABLE -IIIB
APPRECIATION OF CURRENCIES IN RELATION TO INDIAN RUPEE
Developed
countries
1980-89
1989-98
1980-98
Turkish
Lira
0.186
0.186
0.09
Indonesian
Rupiah
0.692
2.583
2.38
Brazilian
Cruzado
9.123
15.807
391.32
Mexican
Pasos
0.039
673.57
15.02
Korean
Won
1.416
1.50
3.5
Pakistan
Rupee
0.862
1.08
1.07
Thailand
Baht
2.972
1.485
2.87
(SOURCE: ECONOMIC SURVEY, GOI 1998)
Table IIIB shows the extent appreciation in the currencies of
developing economies. The appreciation during the reform period is again
remarkable as noted in Table IIIA. Brazilian Cruzado and Mexican Pesos
show appreciable rise respectively during 1989-98 when compared to prereform period.
TABLE - IV
INDICES OF REAL EFFECTIVE EXCHANGE RATE (REER) AND NOMINAL
EFFECTIVE EXCHANGE RATE (NEER) OF INDIAN RUPEE
Year
Base: 1991-92
(Apr-Mar) =100
Base: 1993-94
(Apr-Mar) =100
Base: 1996-97
(Apr-Mar) =100
NEER
REER
NEER
REER
NEER
REER
1990-91
133.07
121.64
175.04
141.69
202.65
137.33
1991-92
100.00
100.00
131.54
116.48
152.29
112.89
1992-93
89.57
96.42
117.81
112.31
136.39
108.85
1993-94
76.02
85.85
100.00
100.00
115.25
101.33
1994-95
73.06
89.76
96.09
104.55
111.25
101.33
1995-96
66.67
86.33
87.69
100.56
101.52
97.46
1996-97
65.67
88.58
86.38
103.18
100.00
100.00
1997-98
65.71
91.71
86.43
106.08
100.06
102.82
(SOURCE RESERVE BANK OF INDIA BULLETIN: JAN.1999).
IMPACT OF EXCHANGE
DIRECTION OF TRADE
RATE
APPERECIATION
ON
As mentioned earlier, the exchange rate appreciation of other
currencies against Indian rupee should result in reduction of the trade
deficit, even thought 100 per cent of the variation in trade balance cannot
exclusively be explained by exchange rate variations. The curiosity here is
to understand to what extent the exchange rate management is effective.
Available data in this respect yield the following tendencies:
(1) Trade Balance (Deficit) Increases over the Year The trade
deficit of Deustsha, Japan, Australia and Belgium increases
both during the pre-reform and post-reform period
(2) Trade deficit Declines over the Years France, U.K. Canada
Brazil and Mexico are the countries which belong to this
category.
(3) Trade Surplus Increases. The balance of trade of India in
respect of U.S.A. Italy, Thailand Indonesia Netherlands,
Turkey and Pakistan increases after recording a trade deficit at
the initial years of the reform period. (4) A Fourth Category is
that of the Trade Balance becoming Negative after Initial
Surplus. The trade balance in respect of Switzerland and
Canada is an example of this type.
(4) From the above it is clear that the depreciation of Indian rupee
does not result in a uniform decline in trade deficit and the
resultant favourable balance of trade. On the other hand one
finds mixed responses such as a positive trade deficit in respect
of certain countries, surplus trade balance turning to be
negative and vice-versa in regard to certain other countries
taken up for study.
At this backdrop, we compare the magnitude of variation in trade
balance and that of exchange rate of for the available year as well as for
the available countries. Table5presents the relevant data with reference to
France, U.K. Japan U.S.A. Canada Italy, Belgium and Netherlands and
selected developing nations. In general, almost all the countries currencies
seem to have appreciated during the Post-reform period.
TABLE - V
VARIATION IN INDIAN TRADE BALANCE AND EXCHANGE RATE
In respect
of Country
Variation in
1980-81 to 1986-87
Direction
of
Change
Trade
Balance
1990-91 to 1997-98
Exchange
Balance
Direction of
Change
Trade
Balance
Excha
nge
Balan
ce
10.93
France
(-) Up
3.49
10.36
(-) Down
3.18
U.K.
(-) Up
2.64
1.32
(-) Down
3.95
1.70
Japan
(-) Up
8.19
1.61
(+) Up
2.26
6.98
U.S.A.
(-) Up
1.20
1.92
(+) Up
4.93
1.84
Canada
(-)
Italy
0.87
1.42
(-) Down
0.57
1.54
N.A
1.88
(+) Up
1.19
1.38
N.A.
Belgium
(-)
4.80
N.A.
(+)
1.11
Netherlands
(-)
2.55
N.A.
(+) Up
4.49
Turkey
N.A.
0.19
(+) Up
2.03
Indonesia
N.A.
0.69
(+) Up
12.05
0.19
Brazil
N.A.
9.12
(-) Down
0.98
2.58
South
Korea
N.A.
1.42
(+) Up
2.25
15.81
Mexico
N.A.
0.04
(-) Down
4.89
673.5
7
Pakistan
N.A.
0.86
(+) Up
1.29
1.08
N.A.
N.A.
(SOURCE: SURVEY, GOI, 1987-88,1995-96)
The trade balance particularly trade deficit has declined in regard
to France U.K. Japan Canada Brazil and Mexico. More interestingly trade
balance had turned to be positive from negative in respect of U.S.A. Italy,
Netherlands, Turkey Indonesia and Pakistan However, the trade balance
for the period 1980-81 to1986-87 is not available for the developing
nations and so comparison is not possible.
An important finding here is the welcome change in trade balance
in respect of the industrially advanced countries such as franc, U.K. Japan
U.K.A and Canada at the same time India’s trade balance in respect of
some of the developing nations like Brazil Korea and Mexico is not
favourable, even after the depreciation of Indian rupee against the
currencies of these nations. These favourable impacts of exchange rate
depreciation are also noticed (though this study does not measure its
magnitude) on the overall export growth rate and import growth rate.
Export growth rate was around 5 per cent and growth rate was around 9
per cent in early 1990 with was trade deficit at accounting for 4 per cent.
While export growth was around the same 5 per cent up to late 80s, the
growth rate of import declined to nearly 7 per cent. There, trade of imports
declined to nearly 7per cent Therefore trade deficit declined to 2 per cent
and the import growth rose up to 9.2 per cent as a result the trade deficit
became less that one per cent of GDP, However in late 1999s the trade
deficit
seems
to
have
crossed
one
per
cent.
The study brings out an important implication that exchange rate
management in India seems to have favourable impact on her trade
balance especially during the reform period. The favourable balance of
trade is greater in respect of selected developed nations than that of
developing countries. However to what extent the exchange rate can
account for this favourable trade balance needs to be explored. It leaves
another question unanswered namely the sustainability of the favourable
balance of trade.
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
SDR
GOLD
FC Assets
TOTAL
90- 92- 94- 96- 98- 20
91 93 95 97 99 0001
To conclude, the theory and practice of foreign exchange reserves
is as complex as any other contemporary economic issue. While it is not
easy to provide answers to all the questions raised in the recent debate on
foreign exchange reserves management policy, we in India have had Such
a Long Journey from the Agony of 1991 to the Comfort of today and this
has come about only by dint of hard work and implementation of Prudent
Policies which has made India, a respected model in the Emerging World.
REFERENCE
1.
Subarna K. Samanta (1998),” Exchange rate Uncertainty and
Foreign trade for a Developing Counter: An Empirical Analysis” The
Indian Economic Journal, Vol. 45 Jan March 1997-98 No.3,p.51
2.
Nseela
Mukhserjee (1998) “India’s Trade Policy and
Performance in the Nineties”, The Indian Economic Journal Vol. 45 Jan
March 1997-98, No, 3p.134
3.
Rangarajan C,, “External Payment lssues and the Exchange Rate
Management” in Indian Economic Essays on Money and Finance, U.B.S.P.D.
New Delhi, p. 240
4.
The Institute of Chartered financial Analysts of India (1994) “Trade
and Exchange State Policy “ p.322.
REMOVING CONTROL ON PRIVATE INVESTMENT
Over the years, India had accumulated a plethora of rules and
regulations to control the private investment. Such controls prevented
entrepreneurs from responding quickly and flexibly to market signals.
Reducing these controls was essential to create a more competitive
industrial environment. Much progress has been made in this area as far as
central government controls are concerned.
ABOLITION OF INDUSTRIAL LICENSING
Industrial licensing was a major instrument of control under which
central government permission was needed for both investment in new
units and also for substantial expansion of capacity in the existing units.
Licensing was responsible for many types of inefficiencies plaguing the
Indian industry. Industrial licensing stood in the way of open competition.
One of the first steps taken by the government was the abolition of
licensing system for all industries except six industries viz., alcoholic
beverages, cigars and cigarettes, aerospace and defence products,
hazardous chemicals and pharmaceuticals. Another major achievement
was the abolition of special permission needed under the MRTP Act for
any investment by the so-called ‘large houses’. This was specially
designed to control large private companies or companies belonging to
large groups, in addition to industrial licensing. It’s declared objective was
to prevent concentration of economic power but in practice it only served
as another barrier to entry, reducing potential competition in the system.
Abolition of these controls has given the Indian industry much greater
freedom and flexibility to expand existing capacity or to set up new units
in new locations of their choice.
In the pre-reform period, eighteen industries including iron and
steel, heavy plant and machinery, telecommunications and telecom
equipment, mineral oils, mining of various ores, air transport services and
electricity generation and distribution were reserved for the public sector.
But the list of eighteen has been reduced to just six covering industries
such as arms and ammunitions, atomic energy, mineral oils, atomic
minerals and railway transport.
The changes made in during the economic reform period stipulates
that all industrial undertakings are exempt from obtaining an industrial
license except for:
i.
Industries reserved for the public sector
ii.
Industries retained under compulsory licensing
iii.
items of manufacture reserved for the small scale sector
and
iv.
if the proposal attract locational restriction
The relaxation of restrictions and liberalization has resulted in the
inflow of private investment in areas such as steel, telephone services,
telephone services, telecommunications equipment, electricity generation,
petroleum exploration development and refining, coal mining, and air
transport. This was not possible in the presence of exclusive privileges of
the public sector
OPENING UP OF PUBLIC SECTOR INDUSTRIES
As a result of the opening of critical areas for private sector
participation, electrical power generation has been opened up for private
investment including foreign investment . Several state governments are
actively negotiating with various foreign investors for establishing private
sector power plants. The hydrocarbon sector, covering petroleum
exploration, production and refining has also been opened up to private
sector including foreign investment and has attracted significant investor
interest. Air transport, which until recently was a public sector monopoly,
has been opened up to private sector and some new entrants have begun
operations.. The telecommunication has also been opened up for certain
services such as cellular telephones.
RELAXATION IN SMALL SCALE SECTOR
Another area of restriction was the policy of reserving certain
items for production in the small-scale sector defined in terms of
maximum permissible value of investment in plant and equipment. The
policy protected small-scale units by barring the entry of larger units into
reserved areas and also prevents existing small-scale units from expanding
beyond the maximum permissible value of investment. Our country is
unique in adopting RESERVATION as an instrument for promoting
small-scale producers. The policy obviously entails efficiency losses and
imposes costs on consumers. Several committees have recommended
various degrees of dilution of the reservation policy. More recently, an
Expert Committee on Small Enterprises set up in 1995 recommended that
reservation should be completely abolished and efforts to support smallscale producers should focus instead on positive incentives and support
measures.
None of the governments coming to power in the post reform
period was inclined to introduce a drastic change in the existing policy on
small-scale industries. The United Front government in 1997 mitigated the
rigours of reservation by raising the investment limit for small-scale
industries from Rs 60 lakh to Rs 3 crore. It also removed 15 items from
the reserved list. The successor of United Front government , the BJP led
government has announced further de-reservation by de-listing farm
implements.
More reconsiderations are needed in the small-scale sector in areas
like garments, toys, shoes and leather products. These are areas with large
export potential but reservation prevents the development of domestic
units of the size and technology level that can deliver the volume and
quality needed for world markets. Some flexibility was introduced in 1997
by allowing larger units to be set up in these sectors provided they
accepted an obligation to export 50 percent of production.
ABOLITION OF MRTP ACT
Another area of restriction on investment and expansion by large
industrial houses through the Monopolies and Restrictive Trade Practices
Act (MRTP) was also eliminated. Prior to 1991, all firms and
interconnected undertakings with assets above a certain size, pegged at
Rs.100 crores in 1985, had been classified as MRTP units. These firms
required separate approvals besides obtaining an industrial license to
undertake new investments. The MRTP Amendment Bill removed the
threshold limits with regard to assets for defining MRTP or dominant
undertakings, thereby removing any special controls on large firms.
RADICAL RESTRUCTURING OF FOREIGN INVESTMENT
POLICY
The liberalization of controls over domestic investors has been
accompanied by a radical restructuring of the policy towards foreign
investment. Earlier, India’s policy towards foreign investment was
selective and was widely perceived by foreign investors to be unfriendly.
The percentage of equity allowed to foreign investors was generally
restricted to a maximum of 40 percent, except in certain high technology
areas. Foreign investment was generally discouraged in the consumer
goods sector unless accompanied by strong export commitments.
The new policy is much more actively supportive of foreign
investment in a wide range of activities. Permission is automatically
granted for foreign equity investment up to 51 percent in a large list of 34
industries. For proposals involving foreign equity beyond 51 per cent, or
for investments in industries outside the list, applications are processed by
a high-level Foreign Investment Promotion Board. The Board has
established a record of speedy clearance of applications and the total
volume of foreign equity approved in the first 24 months amounts to $3
billion. This compares with annual levels of approvals of only about $150
million only a few years earlier. Various restrictions earlier applied on the
operation of companies with foreign equity of 40 percent or more have
been eliminated by amendment of the Foreign Exchange Regulation Act.
All companies incorporated in India are now treated alike
irrespective of the level of foreign equity.
India has joined the Multilateral Investment Guarantee Agency
(MIGA) has recently concluded a bilateral Investment Protection
Agreement with the United Kingdom. Similar bilateral agreements
are being negotiated with other major investing countries.
RESTRUCTURING OF COMPANIES ACT
A comprehensive restructuring of the Companies Act is also
underway which aims at simplifying and modernizing this aspect the legal
framework governing the corporate sector.
It is important to note that the central government has tried to
remove restrictions to a large extent but the same is true of the state
governments. Investors complain of having to obtain a very large number
of state government approvals relating to the acquisition of land,
electricity, water connection, conformity with regulations regarding
facilities to be provided for labour, various safety and pollution related
clearances, etc. These controls are viewed as major impediments by both
domestic and foreign investors. Reforms to eliminate unnecessary controls
at state level are urgently needed to complement decontrol at the central
level.
REFERENCES
1. Competition in Indian Industries
:
N.
Ravichandran,
Vikas, New Delhi, 1999
2. Globalisation-Rough & Risky Road
:
B.N.Banerjee, Delhi,
1998
3. Agricultural Growth & Economic Reforms
R.Arunachalam, New
Delhi, 2002
4. “India’s Economic Reforms:An Appraisal”
Montek S. Ahluwalia,
in “India in the Era of Economic Reforms”, Sachs, Varshney, Bajpai
(edt.),OUP, New Delhi 2000
ANNEXURE – I
Following is the list of laws which have been amended after 1991 to implement
structural adjustment program in India.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Inland Waterways Authority of India Act, 1985
Inland Vessel Act
Foreign Exchange Regulation Act,1973
The Companies Act, 1956
Industrial Finance Corporation Act
Monopolies Restricted Trade Practices Act
Industrial Disputes Act
Indian Iron and Steel Company Act, 1972
IISCO Act, 1976
Indian Electricity Act
The Electricity (Supply) Act, 1948
Iron and Steel Companies and
Miscellaneous Provisions Act, 1978
Indian Trade Unions Act, 1926
Bank Companies Act, 1970
Indian Telegraph Act, 1885
Mines and Minerals (Regulation and Development) Act
Sick Industrial Companies Act, 1985
Employees Provident Fund Act
Merchant Shipping Act
ONGC Act 1959
Maternity Benefits Act, 1961
Air Corporation Act, 1953
OPENING THE ECONOMY FOR FOREIGN TRADE
One of the major policy shift contributing to greater competition
was the liberalization of external trade. The main idea behind this was to
reap potential benefits from greater integration with the world economy.
Besides India was also committed to liberalize its trade regime under the
WTO agreement. Unlike the effort to reduce controls on domestic
industry, which enjoyed wide support, there was less consensus on
external liberalization.
LIBERALISATION OF IMPORT CONTROLS
The complex import control regime earlier applicable to imports of
raw materials, other inputs into production and capital goods has been
virtually dismantled. Now all raw materials, other inputs and capital goods
can be freely imported except for a relatively small negative list.
Imports of manufactured consumer goods have generally been
banned except for limited windows for imports of those items as baggage
by returning Indians or under the facility for import of a specified list of
such goods against special import licenses given to exporters. In 1994-95
policy, the scope for consumer goods import against special import
licenses has been liberalized by considerably expanding the list of items
which can be imported against these licenses. The exclusion of consumer
goods from trade liberalization is an important restrictive element in trade
policy- and the Government has indicated that this too will be gradually
liberalized- but for all other sectors quantitative restrictions on imports
have been largely eliminated.
DISMANTLING QUANTITATIVE RESTRICTIONS
India’s trade policy regime before the reforms was heavily
dependent upon the use of quantitative restrictions (QRs) in the form of
import licenses, more than almost any other developing country. As
already described above the first phase of dismantling QRs occurred in the
first two years of the reforms when import licensing was virtually
abolished for imports of industrial raw materials, intermediaries,
components and capital goods. By 1993, these categories could be
imported freely subject only to the prevailing tariff levels. However
agricultural products and industrial consumer goods remained subject to
import controls. Import restrictions on agriculture were probably
redundant as India’s agricultural product prices were typically lower than
import prices and agriculture actually suffered from negative protection
via export controls. restrictions on imports of consumer goods on the other
hand provided substantial and open-ended protection for all industrial
consumer goods which account for about 25 percent of the manufacturing
sector in terms of value added.
Many analysts have criticized the infinite protection for consumer
goods while liberalizing other imports because it only distorts resource
allocation in favour of highly protected consumer goods industries and
away from basic and capital goods industries which are otherwise thought
to be strategically important. This was recognized at policy level and the
need to extend import liberalization to consumer goods as part of the
reforms was explicitly stated in the Eighth Plan as early as 1992.
Once the Balance of Payments improved, the QR regime was
challenged by India’s major trading partners as inconsistent with the
WTO. This led to protracted negotiations which culminated in the United
Front announcing in 1998, a plan to phase out QRs on all imports within a
period of six years. This was accepted by all the major trading partners
except the US. A three phase plan has been worked out with most QRs
being phased out in the first three years. QRs on agricultural products will
be phased out only at the end of the period. This commitment to phase out
QRs has been endorsed by the BJP government which took the first step
by removing QRs on 350 items in April 1998. This leaves about 2200
items subject to QRs to be removed over the nest few years. In August
1998, the government unilaterally removed QRs on 2000 of these items
for imports from the SAARC countries in order to boost trade in the
region.
LOWERING OF CUSTOM DUTIES
The removal of quantitative restrictions on imports has been
accompanied by a gradual lowering of custom duties. India’s customs
duties before the reforms were very high. The average rate of duty was as
high as 100 percent with substantial variations around this figure. The
Government has made a series of downward adjustment in customs duties
in each of the four budgets since 1991. The peak rate of customs duty
applicable to several items was over 200 percent in 1991. It was lowered
to 65 percent in 1994.
Other customs duty rates below the peak have also been lowered
especially the duties on capital goods. The rate of customs duty on capital
goods used to be as high as 90-100 percent in 1991 with concessional duty
imports of capital goods available only to 100 per cent export oriented
units. The duties on capital goods have now been lowered to a range from
20 percent to 40 percent. Tariff rates below the maximum have also been
lowered over the years bringing the import-weighed average tariff rate for
all products from 87 percent in 1990-91 to 30 percent in 1998-9.
Customs duties were steadily reduced in the first five years. Duties
continued to be lowered on a number of items in 1996 and 1997 but this
was offset to some extent by the imposition of a 2 per cent surcharge on
most imports in 1996 as a revenue raising measure, followed by another 3
per cent surcharge in 1997 to finance the burden of the large civil service
pay rise announced in that year. The Budget for 1998-99, presented by the
new BJP government, introduced an entirely new special customs duty.
TABLE - I
90-91
92-93
93-94
94-95
95-96
96-97
97-98
9899
Whole
economy
87
64
47
33
27
25
25
30
Agricutural
Product
70
30
26
17
15
15
14
16
Mining
60
34
33
31
28
22
22
20
Consumer Goods
164
144
33
48
43
39
34
39
Intermediate
Goods
117
55
40
31
25
22
26
32
97
76
50
38
29
29
25
30
200
110
85
65
50
52
45
45
Capital goods
Peak
Duty
Rates
of
( Source : World Bank )
Several industry associations had complained that domestic
producers were subject to certain local taxes, which were not balanced by
equivalent taxes on imports in the same way as excise duties on domestic
production are balanced by an equivalent ‘contervailing duty’ on imports.
It was argued that these local taxes had the effect of reducing the
protective element in the existing duty structure and in certain cases where
customs duty were low, the erosion was said to result in complete
elimination of protection. Responding to these demands a n additional on
imports to balance the incidence of local taxes was levied initially at 8
percent but quickly reduced to 4 percent. This duty was widely criticized
as signaling a retreat into protectionism, a charge vociferously denied by
the government which pointed to the fact that the 1998-9 budget also
reduced customs duties on a number of products and in this respect
continued the trend of tariff reduction of earlier years. The deadline for
zero duty treatment of a number of electronic products was also advanced
by two years signaling an acceleration of the process of opening up in this
area.
Despite the new duties introduced in the past two years, the
average rate of duty is much lower than in 1990-91 (Table-I).However
average tariff levels in India are much higher than in other developing
countries where tariff rates typically range between 5 and 15 percent.
Since consumer goods continue to be protected by QRs, the Tariff levels
understate the degree of protection for these items. The process of
reducing the tariff levels clearly needs to continue to complete the reform
process in this area.
There is a strong case for pre-announced timetable for future tariff
reductions. The Congress Government had indicated that tariffs would be
brought down to levels comparable with other developing countries but
had not specified either the final structure of tariffs or time-frame for
reaching it. The United Front Government stated that it would move to
Asian levels of tariff structure by 2000 but the exact tariff structure was
left undefined except in the case of hydrocarbons where a terminal year
structure for 2002 has been indicated and for information technology
related products where India has accepted the ITA-1 commitments. The
BJP-led government has stated that it favours ‘calibrated globalization’
which implies that the process of reducing tariffs will continue but again
no specific time frame has been spelt out. Many scholars have expressed
the view that gradualism in tariff reduction is justifiable but there is no
reason why it should lead to uncertainty about the future and that a clearer
indication of target levels over the next three to five years would help
investors making new decisions on new investments.
India’s tariff reduction programme though still incomplete has
certainly created a more open economy, with significant beneficial effects
as Indian firms are being pushed to restructure their operations to become
more competitive. The fact that protectionist noises from some segments
of industry has increased in recent years indicates that this process is
beginning to bite. Banks and financial institutions are also increasingly
assessing the viability of new projects on the basis that the economy will
continue to open up and tariffs will be reduced further. The pace of
transition has been slow and beset with gradualist strategy.
TRANSFORMATION OF EXCHANGE RATE POLICY
Exchange rate policy has gone through a series of transitional
regimes since 1991 leading to a total transformation at the end of three
years.
The reforms began with a devaluation of about 24 percent in July
1991 in a situation in which extensive trade restrictions were still in place.
The devaluation was accompanied by an abolition of export subsidies to
help the fiscal position and an offsetting increase in export incentives in
the form of special incentive licenses (Eximscrips) given to exporters to
import items which were otherwise restricted. These licenses were freely
tradable and commanded a premium in the market depending upon the
excess demand for restricted imports.
The system was modified in March 1992 by the introduction of an
explicit dual exchange rate system simultaneously with the dismantling of
licensing restrictions on the import of raw materials, other inputs into
production and capital goods. These items were made freely importable
against foreign exchange obtained from the market at a market-determined
floating exchange rate. Imports of certain critical items such as petroleum,
essential drugs, fertilizer and defence related imports were paid for by
foreign exchange made available at the fixed official rate. The demand for
foreign exchange at the official rate to pay for these imports was met by
requiring exporters to surrender 40 per cent of their export earnings at the
official rate. The remaining 60 percent of export earnings was available to
finance all other imports, all other transactions and debt service payments
at the market rate.
This dual exchange rate system was again a short lived transitional
arrangement to a unified floating rate which was announced in March,
1993. After a year’s experience with the unified rate, the Government in
March 1994, announced further liberalization of payment restrictions on
current transactions and stated its intention of moving to current account
convertibility. Capital controls, however, remain in place. Following this
decision a number of steps have been taken to liberalize exchange
restrictions on current account transactions. The United Front government
in 1997 announced that the Foreign Exchange regulation Act of 1973
would be repealed and replaced by a more modern Foreign Exchange
Management Act (FEMA) but the government fell before this could be
done. It is a measure of the continuity in policy that FEMA was
subsequently introduced in 1998 by the successor BJP-led coalition.
In a short space of two and half years the trade and payments
system has moved from a fixed and typically overhauled exchange rate
operating in a framework of substantial trade restrictions and export
subsidies, to a market determined exchange rate within a framework of
considerable liberalization on the trade account and the elimination of
current restrictions.
WTO AGREEMENT AND FOREIGN TRADE
India has also undertaken a major commitment to liberalize its
trade regime under WTO Agreement. India had agreed to bind tariff rates
to lower levels than those prevailing at the time of signing of the
Agreement (viz., 1994 ) for a large number of commodities. Tariff rates on
most of the commodities have been brought well below the bound rates by
1998-99 except for 40 commodities. The non-tariff barriers (NTB) on the
remaining items are being phased out by March 2001 although the earlier
plan was for phase out by 2003
TRADE WITH SOUTH ASIAN COUNTRIES
India is liberalizing her trade with South Asia on a fast track than
all trade. India has unilaterally removed all quantitative restrictions on
imports of around 2300 items from SAARC countries in 1998.
negotiations on exchange of trade preferences have been undertaken with
SAARC trade partners under three rounds of SAPTA
REFERENCES
1. Industrial Economics
: Francis Chernilum, Bombay, 1992
2. Competition in Indian Industries : N.Ravichandran, (edt.),N.Delhi, 1999
3. India Five Years of Stabilization & Reforms and the Challenges Ahead :
World Bank, Washington, 1999
4. India in the era of Economic Reforms : Sachs,Varshney& Vajpayee,OUP
New Delhi, 2000
REINFORCEMENT QUIZ –I
1.
Bretton Woods Conference in 1944 resulted in the formation of
a) IMF b) WTO c)WHO d) UNESCO
2.
‘Budget Deficit’ means
a) less spending than receipt b) spending equal to receipt
c) more spending than receipt d) spending without any receipt
3.
‘Devaluation’ is a reduction in
a) gold stock
b) internal value of currency
c) foreign value of currency d) none of these
4.
Foreign Exchange is used for making international payments
through
a) rupee
b) dollar
c) pound
c)foreign currency
5.
Deficit Financing started in India in
a) Second Five Year Plan
b) Third Five Year Plan
c) First Five Year Plan
d) Fourth Five Year Plan
6.
Rupee was first devalued in
a) 1956
1966
7.
b) 1960
c) 1962
Annual Plan 1966-69 was caused by
a) 1965 War
b) severe drought
a&b
d)
c) both
8.
“GARIBI HATAO” slogan was introduced in
a)
Fourth Plan b) Fifth Plan c) Sixth Plan d) Fourth
Plan
9.
“Jawahar Rozgar Yojana” was launched during
a)
Fifth Plan b) Sixth Plan c) Seventh Plan d) Eighth
Plan
10.
“LIBERALIZATION” of Indian economy was started by
a) Rajiv Gandhi b) Indira Gandhi c) Vishwanath Pratap Singh d)
Charan Singh
11.
Fiscal Deficit rose to 10% in
a) 1988
b) 1989
c) 1990
d) 1991
12.
Fifth Pay Revision Committee recommended a reduction of 30%
over
a) 5 years
b) 10 years
c) 15 years
d) 20 years
13.
Fifth Pay Commission recommended revised pay-scale from
a)1st Jan.1996 b) 1st April 1996 c) 1st March 1996 d) 1st
February,1996
14.
In 1996-97, the commercial losses of SEBs stood at
a) Rs.105 billion b) Rs. 100 billion c) Rs.108 billion d) Rs.109
billion
15.
TAX REFORMS COMMITTEE was chaired by
a) Manmohan Singh b) Bimal Jalan c) Raja J Chelliah d)
M.S.Ahluwalia
16.
Inflation between 5 to 10% is called
a) modest inflation b) stagflation c) creeping inflation d)
running inflation
17.
Inflation reached 13.73% in
a) 1989
b) 1990
c) 1991
18.
19.
20.
Capital Account is concerned with
a) services
b) merchandise
d) 1992
c) economic transaction
Reserve Bank of India Act was passed in
a) 1932
b) 1933
c) 1934
d) 1935
FERA was passed in
a) 1971
b) 1972
d) 1975
c) 1973
21.
The total allocation for public sector in Eighth Five Year Plan is
a) Rs. 432,100 crore b) Rs. 434,105 crores c) Rs. 434,100 crores
d) Rs. 433,100 crores
22.
The Price Rise has been a continuous phenomenon since
a) First Plan b) Second Plan
c) Third Plan c) Fourth Plan
23.
24.
The period 1956 to 1973 witnessed
a) rapid price rise
b) gradual price rise c) no price rise
Inflation is caused by
a) increase in money supply b) increase in production
c)
decrease in production
d) both a & c
25.
Maximum aid to India is provided by
a) UK b) USSR
26.
27.
c) USA
d) Japan
Indian Economy is the most appropriately described as
a) Socialist
b) Mixed
c) Capitalist d) None of these
Socialist Pattern comes through
a) Free Economy
b) Mixed economy c) Public Sector d)
None of these
28.
Which of the following is not a feature of developing economy
A0 high rate of population b) high rate of unemployment c)
mass poverty d) high capital formation
29.
Indian Economy is now described as
a) developed economy
b) developing economy
backward economy d) none of these
c)
30.
Which of the following does not contribute to the development of
Indian economy
a) population growth b) rising industrial output
c) modern
technology
d) all of these
31.
Industries (Development & Regulation) Act was implemented in
a) 1950
b) 1951
c) 1952
d) 1953
32.
MRTP was passed in
a) 1966
b) 1967
c) 1968
d) 1969
The Plan Holiday refers to
a) 1965-68
b) 1966-69
c) 1967-70
d) 1978-80
33.
34.
What is the correct duration of the First Plan
a) 1947-52
b) 1950-55
c) 1951-56
d) none of these
35.
The major emphasis of the Third Plan was on
a) adult education
b) green revolution c) food for work d)
making India self-reliant
36.
The correct duration of the Third Plan is
a) 1960-65
b) 1961-66
c) 1958-62
d) 1959-62
37.
The concept of rolling Plan was accepted in
a) 1975
b) 1976
c) 1977
d) 1978
38.
The Five Year Plans were first abandoned in
a) 1965
b) 1966
c) 1967
d) 1970
39.
40.
41.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
The First Plan set the goal of doubling 1950-51 national income by
a) 1955-56
b) 1960-61
c) 1965-66
c) 1971-72
Unemployment in India is due to
a) poor manpower planning b) population explosion
c)
inappropriate educational system
d) none of these
Fill in the blanks in the following sentences:
If an institution does not receive deposits but only lends money, it
will be called a _______________ institution.
A bank is called a _____________ of credit.
A commercial bank finances _____________ trade of a country.
______________ credit is an arrangement by which the banks
agree to lend money up to a specified limit.
Under an ________________ arrangement, a depositor can draw
by cheque, more than the deposited amount to his credit.
Banks also give financial help to customers by ________________
their bills of exchange.
_______________ functions are those services which are rendered
by the banks as the agents of their customers.
If liquidity preference is high, the capacity of the banks to create
credit is _____________.
Before lending money a bank has to keep a fixed percentage of
cash reserves so that it can meet its liability of making daily
payments. This reserve is called _________________.
The apex bank of a country is known as its ________________.
42. Write True or False against each statement.
(a) It is the exclusive privilege of a central bank to issue notes.
(b) Bank credit is created on the basis of initial deposits.
(c) Money is issued by the Central Bank against national
product, reserves of gold, reserves of foreign exchange and
foreign securities.
(d) Only the central bank of a country is responsible for credit
control.
(e) Cheques are commonly used in developing countries for
daily purchases.
(f) Creation of credit depends on the assumption that the
banking system in the country is well developed and
majority of the people do their business through banks.
(g) Deposit creation = 100/CRR X Original Deposits
(h) A Cheque book is issued to a borrower so that he can cash
his fixed deposits.
(i) A loan is usually granted by a bank against the personal
security, furnished by the borrower.
(j) Credit creation indirectly extends liquidity to holders of
illiquid securities
43.
Fill in the blanks in the following sentences by choosing
words from the list below.
IMF, Central Bank, Clearing house, subsidiary functions,
bank rate, time, Interest rate, liquid, deposit, exchange
i. The Central Bank of a country is a member of the
_________________.
ii. The Central bank of a country performs _________________
depending on the peculiar social-economic conditions prevailing in
a country.
iii. The rate of which first class bills are discounted by the central
bank is called the _________________
iv. The exchange rate is generally fixed by the
______________________.
v. A central bank provides __________________ facility to the
commercial banks.
vi. Bank rate and _______________ are directly related to each other.
vii. Fixed deposit is also called _________________ deposit.
viii. “Every loan creates a __________________.
ix. Bills of exchange are very _________________ by nature.
x. Foreign trade of a country is mostly financed by the
________________ banks
44.
The following are some banking terms which are jumbled up.
Correct the names in each case.
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
45.
YTLLAILBL
AGROMTGE
TSSAE
HASC RSEREEV OITRA
SSPA OOBK
DNESROE
ECNANIFER
SOPEDIT
YTRCESUI
YTDIUQUILI
Are the following balance sheets correct ?.
A) The total amount of money in circulation is Rs. 10,000 and the
banker knows that it has to keep 10% of its deposits as reserves to
meet demand from customers.
Liabilities (Rs.)
Assets (Rs.)
Deposits (original) 10,000
Cash in hand 10,000
Deposits (Credit balance of borrowers)
Loan to clients 9000
9000
19,000
19,000
B) The above balance sheet still shows loan able funds. Further
expansion of the balance sheet will be as follows:
Liabilities (Rs.)
Assets (Rs.)
Deposits (Original) 10,000
Cash in hand 10,000
Deposits (Deposited by the payees of the
Loan to clients
first borrowers Cheques) 9,000 deposits
9000 + 8100 = 17100
(Credit balance of borrowers) 8,100
27,100
27,100
46.
Put a tick mark against the correct option in each case.
a) The monopoly of note issues rest with the
i. Central Bank
ii. Commercial Banks
iii. Exchange Banks
b) Credit rationing as a method of credit control is a
(a)
Qualitative Measure
(b)
Quantitative Measure
(c)
Both
c) Every country has
I. One Central Banks
II. Two Central Banks
III. No fixed number
d) When the Central bank purchases securities from commercial
banks, credit
i.
Contracts
ii.
Expands
iii.
Is not affected
e) Every Indian commercial bank knows by experience that it has to
keep a certain cash reserve against liabilities. A Commercial bank
has to keep
i. 20%
ii. More than 5%
iii. 10% approximately
f) The banking system of keeping cash reserves against liabilities
i. Reduces
ii. Increases
iii. Neither increases nor decreases the mobility of capital
g) A bank overdraft is allowed when the customer has
i. Current account in the bank
ii. Fixed account in the bank
iii. Need not have any account
h) The higher the liquidity preference the
i. Lower is capital formation
ii. Higher is capital formation
iii. No impact
i) The Indian money market is based on
i. The European model
ii. Japanese model
iii. None of the above
j) The Central Bank acts as to
i. Accepting House
ii. Clearing House
iii. Discount House for commercial banks
ANSWERS TO REINFORCEMENT QUIZ –I
1- A
2- C
3- C
4- D
5- C
6- D
7- C
8- B
9- C
10-
B
11-
C
12-
B
13-
A
14-
C
15-
C
16-
C
17-
C
18-
C
19-
C
20-
C
21-
C
22-
B
23-
B
24-
D
25-
C
26-
B
27-
B
28-
D
29-
B
30-
A
31-
B
32-
D
33-
B
34-
C
35-
D
36-
B
37-
C
38-
B
39-
D
40-
D
41(a) MONEY LENDING
(b) RESERVOIR.
(c) INTERNAL
(d) CASH
(e) OVERDRAFT
(f) DISCOUNTING
(g) AGENCY
(h) LOW
(i) CASH RESERVE RATIO
(j) CENTRAL BANK
42(a) TRUE
(b) TRUE.
(c) TRUE
(d) FALSE
(e) FALSE
(f) TRUE
(g) TRUE
(h) FALSE
(i) FALSE
(j) TRUE
43.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
INTERNATIONAL MONETARY FUND
SUBSIDIARY FUNCTIONS
BANK RATE
CENTRAL BANK
CLEARING HOUSE
INTEREST RATE
TIME DEPOSIT
DEPOSIT
LIQUID
EXCHANGE
44.
(a) LIABILITY
(b) MORTGAGE
(c) ASSET
(d) CASH RESERVE RATIO
(e) PASS BOOK
(f) ENDORSE
(g) REFINANCE
(h) DEPOSIT
(i) SECURITY
(j) LIQUIDITY
45.
A) CORRECT.
B) CORRECT
46.
(a) i
(b) ii
(c) i
(d) ii
(e) iii
(f) ii
(g) i
(h) iii
(i) iii
(j) i
ENDING THE PRICE CONTROL REGIME
Reducing price control is a familiar component of market-oriented
reforms. India also took steps to minimize the price control under the
Economic Reforms started in 1990-91.
Price control was abolished at an early stage of the reforms in
some key industries, viz. iron & steel, coal, phosphatic and potassic
fertilizers, newsprint, naphtha, lubricating oils and molasses. Price control
on pharmaceuticals was not abolished but its coverage was reduced in
1995 from 143 basic drugs to 76.
However price control remains in place in three major areas i.e.,
hydrocarbons, electricity and nitrogenous fertilizers introducing serious
distortions in the system. Interestingly though price decontrol is clearly a
part of domestic liberalization, which enjoys wide support in principle,
there is great reluctance across all parties to implement it in practice.
DECONTROL OF HYDROCARBON PRICES
The petroleum sector was fully state owned at the start of the
reforms with the state also controlling imports of crude oil and production.
Prices were determined by a complex administered price mechanism
(APM ) under which domestic producers of crude and natural gas were
paid at controlled prices, which were much lower than the world market
prices. Refineries also received controlled prices for their products based
on the cost of crude oil supplied to them plus a refining margin for each
refinery based on plant specific refining costs.
However there was substantial cross subsidization across products
with kerosene and diesel being under priced and gasoline and aviation fuel
were overpriced. The inefficiencies in this system were extensive. Under
pricing of crude oil discouraged exploration. Cost based product prices
paid to the oil refineries gave them little incentive to reduce costs. Severe
under pricing of kerosene led to pervasive black marketeering and
adulteration of diesel & petrol with kerosene. since consumer prices were
not adjusted frequently in accordance with the world market prices, the
system often generated deficits in oil sector accounts. The controlled price
regime was particularly unsuitable for attracting private investment in
either production or refining since private investors expected an assured
structure of market related prices.
In a major decontrol drive initiative, the United Front Government
in 1997 announced a phased deregulation of petroleum prices to be
completed by 2002. The first step in 1997 was to fix domestic prices of
diesel, fuel oil and LSHS on the basis of import parity with monthly
adjustments to reflect changes in import prices. Domestic crude oil and
natural gas prices as well as petroleum product prices paid to refineries
will be progressively adjusted within an APM framework to reach import
parity prices by the year 2002 at which point they will be deregulated.
Import parity pricing for crude and products is feasible only if the customs
duty structure is rationalized to avoid anomalies in the present structure,
where customs duty on crude oil is higher than on many products.
TABLE – I
GLOBAL TOP TEN OIL MARKETS
COUNTRY
Oil Consumption ( MT)
China
India
USA
Canada
South Korea
France
Italy
Germany
Japan
Russian Federation
Total World
226.9
97.6
897.4
82.9
101.8
95.1
93.0
129.5
253.5
123.5
3,503.6
Five Year Cagr
(%)
7.1
6.0
2.1
1.7
1.4
1.3
-0.5
-0.8
-1.1
-3.3
1.6
The government has announced a duty rationalization and the
structure of customs duties in this sector to be achieved by 2002 has been
published though the annual phasing to reach that level has not been
announced.
The administered price mechanism has been ended in April 2002.
But unlike telecom sector, there has not been any drastic decline in
petroleum prices. The Ministries of Finance and Petroleum are still in
control through changes in duties and taxes.
In pricing terms the biggest legacy of administered pricing is the
artificial price difference between petrol and diesel prices. Internationally,
the two products are priced almost the same. However in India the
difference has been artificially maintained with petrol at about Rs. 30 per
litre while the same quantity of diesel costs about Rs.17. Over the years
this has led to drastic change in demographics of vehicle usage. There has
been obvious skew towards diesel vehicles.
In an ideal free market scenario, the prices of products should also
have varied depending on where they are produced and sold. However the
petroleum prices were artificially kept uniform all over the country
through the oil pool. With the dismantling of the pool and the APM, prices
of some products at coastal locations should have been substantially lower
than inland prices because of imports. But the exim policy has not allowed
free import of petro products. Imports would have pressured oil companies
to match their prices to those of importers or parallel marketers.
Kerosene which meets the fuel and lighting requirements of the
poor will continue to be subsidized but the subsidy will be made explicit
and met from the budget. Similarly naphtha which at present is supplied
at subsidized price to the fertilizer industry, will be provided only at
normal decontrolled price, requiring either an increase in fertilizer prices
or an increase in fertilizer subsidy from the budget. The transfer of these
subsidies of the budget will impose a severe fiscal burden but a successful
transition to market prices in this important sector will be a major
achievement with significant efficiency gains.
CONTROL OVER ELECTRICITY PRICES
Pricing of electricity is subject to regulatory control in most
countries but the way it has operated in India is seriously flawed.
Electricity prices charged to consumers are fixes by state governments and
have been set very low for certain categories of consumption such as
households and agricultural users and this is one of the major reasons for
the poor financial conditions of state electricity boards ( SEB ). The SEBs
are expected to earn a rate of return of 3 percent on capital employed but
they actually earn a negative rate of –13.7 per cent with total losses
amounting to Rs 10,000 crore. Or about 0.8 per cent of GDP. This is one
of the main reason why public investment in this sector has fallen below
target. It is also the reason why it is difficult to encourage private
investment in electricity generation since private investors are deterred by
high risks of non-payment by financially weak SEBs which are the sole
buyers.
A shift to a rational system of setting electricity tariff is essential if
investment in power, whether public or private is to take place. The
primary responsibility for such reforms rests with the state governments
but the central government has an important to play. In 1995, the Congress
government announced a National Minimum Action Plan for power which
sought to depoliticize electricity tariffs by entrusting tariff fixation to an
independent State regulatory Commission with terms of reference which
would ensure that tariffs must cover costs and earn a 3 percent return. The
plan sought to limit the extent of price distortion through cross subsidy by
stipulating that the maximum under pricing allowed to any category of
consumer should not exceed 50 percent of the cost of production nor
should any consumer be charged more than 50 percent above the cost of
production. The successor United Front government introduced legislation
to set up a Central Electricity Regulatory Commission but was not able to
get it passed by parliament. The BJP government in 1998 was able to get
parliamentary approval for a modified Central Electricity Regulatory
Commission Act which sets up a central statutory commission to regulate
all interstate sales and transmission of electricity and set tariffs in such
cases.
The Act also provides for separate State Regulatory Commission
to be set up by individual states which will regulate the electricity sector
within a state and fix all the tariffs. Though the establishment of State
level Commission is not mandatory it is expected that a large number of
states will enact the necessary legislation setting up state level
commissions.
Another important step forward in electricity sector reforms was
the passage of the Electricity Transmission Act in 1998 which opened
transmission for private investment. The process of reform in the power
sector has made good progress in some states. Orissa was the first to
restructure its power sector by setting up a state level regulatory
commission for fixing tariffs and unbundling the monolithic SEB into
separate, transmission, and distribution corporations. It is currently
engaged in privatizing distribution. Andhra Pradesh, Haryana and
Rajasthan are considering similar reforms.
PRICE CONTROL ON NITROGENOUS FERTILIZER
Nitrogenous fertilizer is another important industry where prices
continue to be fully controlled. Fertilizer factories are paid a cost based
plant specific producer price and the government fixes a low consumer
price for farmers. The difference between producer and consumer prices is
met by a budgetary subsidy which amounts to about 0.7 percent of GDP.
The cost-based, producer-price system provides insufficient incentive for
cost reduction. Underpricing of nitrogenous fertilizers for farmers is also
leading to wasteful use of fertilizers. The resources absorbed by the susidy
have also increased consistently over time
FOREIGN DIRECT INVESTMENT
Foreign Investment can be defined as the acquisition by
governments, institutions or individuals in one country of assets in
another. Foreign investment covers both direct investment and
portfolio investment and includes public authorities, private firms
and individuals. For a country in which savings are insufficient
relative to the potential demand for investment, foreign capital can
be a fruitful means of stimulating rapid growth. In addition, direct
investment may be a means of financing a balance of payments
deficit. Direct investment often involves the setting up of
subsidiary companies for the domestic production of goods, which
previously were imported from the parent company.
There are two types of competition among countries to attract FDI.
These are Rules-Based forms of competition and the Incentives-Based
forms of competition.
Rules-Based forms of competition are a broader and more
heterogeneous group of government actions and include: changes
in the rules on workers’ rights; protection of the environment;
signing of regional-integration treaties with neighboring countries;
greater protection of intellectual property rights; strengthening the
rule of law & improved judicial systems; the establishment of
“export-processing zone’s or special economic zones” with distinct
legislation from the rest of the country; the privatization of stateowned enterprises; market deregulation; and the liberalization of
trade and investment policies.
Incentives-Based forms of competition refer to fiscal and
financial incentives. Common fiscal incentives include: a reduction in the
base income tax rate a particular category of investors must pay; tax
holidays; exemptions from import duties or duty drawbacks; accelerated
depreciation allowances; investment and re-investment allowances;
specific deductions from gross earnings for income-tax purposes; and
deductions from social security contributions.
The most important financial incentives are grants; subsidised
loans and loan guarantees. These incentives are frequently targeted for
specific purposes, such as grants for labour training, wage subsidies,
donations of land and/or site facilities, rebates on the cost of electricity
and water, and loan guarantees for international lines of credit. Other
incentives include government provision or subsidisation of “dedicated”
infrastructure such as railroads, roads, industrial sites, sewage treatment
facilities and the like built specifically for the investment project.
Decisions to invest abroad usually have two sets of components.
One depends upon firm/industry-specific factor and the other on
the host-country factors. The former are largely responsible for the
decision to undertake the investment and the latter influence the
destination of the investment. Firms invest outside their home
country for one of three reasons: to exploit a natural resource
available in the host country, to get access to the host country’s
protected market, or to maintain international competitiveness in
the face of rising cost of labour and other non-tradable in the home
country. These three types of investments can be referred as
natural resource seeking, market-seeking and export-oriented FDI.
Natural resource-seeking FDI, which consists of investment in
areas such as mining, oil and gas extraction, etc., is probably the
earliest type of foreign investment. Natural endowment is the
primary determinant of such
investments.
The economic reforms in India encouraged foreign direct
investment (FDI) and portfolio flows with positive results in both fields.
Free trade in goods and free flow of capital especially FDI are the two
keystones of the international economic order being established by the
International Monetary Fund (IMF), World Bank and the World Trade
Organisation(WTO). Attracting FDI has become a policy priority in many
countries both developed and developing.
At the global level, there has been a FDI boom since 1991. The
annual growth rate of FDI inflows into developing countries has
surpassed that of the earlier period. Another feature of this boom was the
private inflow of capital from the industialised countries to developing
countries. At the beginning of decade under review, the private and
official flows were the same. Five years later, private flows dwarfed
official flows.
Before further study of this subject it is proper to understand the
meaning of ‘Foreign Direct Investment’. According to the definition given
by the IMF, FDI consists of both new equity capital and reinvested
earnings. It also includes short term and long term borrowings that may
have been part of the original investment package or subsequently
undertaken by the affiliate.
In India the direct foreign investment has taken place in the
following categories: a) branches of foreign companies operating in India,
b) foreign controlled rupee companies and c) Indian companies in which
25 percent or more of the equity capital is held by a single investor abroad.
Portfolio Investment includes the non-resident share holding which is less
than 25 percent of the total value of ordinary shares and preference shares
and debentures owned by non-residents.
Going slightly into the background of Indian Economy, the
Government of India adopted a cautious, selective and regulated approach
to foreign investment in 1970s. The government tried to regulate FDI in
India through three principal regulations : i ) the Industrial Development
and Regulation Act (IRDA,1951) ;ii ) the Monopolies and Restrictive
Trade Practices Act (MRTP,1969) and iii ) the Foreign Exchange
Regulation Act (FERA,1973).
IRDA stipulated an elaborate licensing system for the
establishment of new industrial units or expansion of existing units.
MRTP was introduced in 1970s to safeguard against the concentration of
economic power and restrictive trade practices. FERA was designed to
control foreign investment and restrict the operation of the foreign
companies like limiting the participation of the foreign companies up to 40
percent of paid-up capital. Making an exception, companies involved in
selected activities such as export activities, involving sophisticated
technology and skill were allowed higher equity participation up to 74
percent.
The Industrial Policy statement of 1977 further tightened the
foreign exchange transactions by prohibiting foreign collaborations in
certain industries like metallurgical, chemical, rubber, drugs,
pharmaceuticals, etc because the government thought that indigenous
technology in these fields was fully developed.
But the policy makers started to ponder over the strict policy of
1970s which had failed to step up the volume and proportion of her
manufacturing exports This led to a realization that international
competitiveness of Indian goods had suffered a setback from growing
technological obsolescence and inferior product quality range and high
cost which in turn were due to highly protected local market. This led to
policy reorientation focused on “growth with productivity” which
manifested in the form of moderate liberalization and halfhearted opening
of the economy to the external world.
Under the new policy evolved in 1980s, investment from Oil
Exporting Developing Countries (OECDs) which were flush with funds in
the wake of first oil shock were permitted up to 40 percent of the total
equity in selected industries without any transfer of technology. Approval
system was streamlined. A “fast channel” was set up in 1988 for
expediting the clearance of FDI proposals from major investing countries.
A degree of flexibility was introduced in the policy concerning foreign
ownership and exception from the general ceiling of 40 percent on foreign
equity was allowed on merits of each individual cases. Another
development was to encourage foreign investment in the unit’s set-up in
the Free Trade Zone (FTZs) and 100 percent Export Oriented Units
(EOUs). In short, 1980s witnessed a gradual but certain easing restrictions
on foreign investment flows.
As already discussed, India underwent a major macro-economic
crises characterized by high inflation, large fiscal and current account
deficit and burgeoning internal and external debt. In fact there was a steep
fall in foreign exchange reserves to about $1billion hardly sufficient to
meet our two weeks imports. This macro economic instability compelled
the Government of India to embark on a comprehensive macrostabilisation measure and structural adjustment programme with economic
reforms.
Structural Adjustment Programme(SAP) comprised several major
policy initiatives. One of them was pertaining to the foreign direct
investment (FDI). Under the new FDI policy, three tier system for
approval of foreign investment was proposed, namely a) Reserve Bank of
India b) Secretarial for Industrial approvals (SIA) and c) Foreign
Investment Promotion Board (FIPB). The RBI is empowered to accord
sanction to foreign investment proposals in cases where foreign equity
participation does not exceed 51 percent of foreign equity in 35 selected
priority areas like heavy industries, transportation, chemicals (other than
fertilisers), drugs and pharmaceuticals, food processing industries and
tourism.
Apart from RBI’s automatic approvals, other proposals that
involve foreign equity participation of 51 percent or more were
considered on merit by the SIA within the general policy framework. FIPB
was specially created to invite negotiate and facilitate substantial
investments by international companies that would provide access to state
of the art technology and world markets.
The role of Foreign Direct Investment was further emphasized in
the Minimum Common Programme (CMP) of the United Front
Government which envisaged the country’s needs and the capacity to
absorb FDI to the tune of at least $10 billion a year. Accordingly FIPB
was reconstituted and a Foreign Investment Promotion Council (FIPC) to
promote and approve FDI.. Moreover the automatic approval list was
expanded from 35 to 51 industries for proposals up to 51 percent equity
participation. Another list of nine industries were added for automatic
approval up to 74 percent.
Apart from foreign investment policies, a number of other
measures were instituted which had a direct bearing on investment flows.
Such measures were related to industrial licensing quantitative import
controls and tariff rationalization, market determined exchange rate
arrangements, etc. Briefly speaking, the main features of the FDI policy
included transparency in approval mechanism, speedy disposal of the
applications for approvals, enhanced scope for alliances between the
Indian and foreign enterprises, and a larger role of market forces in
shaping foreign collaboration agreements.
The process of approving FDI was expedited by providing a
window of automatic approval of FDI under the new policy. Foreign
investment proposals, which are not eligible for the automatic route, can
obtain approval from an inter-ministerial body FIPB. Approvals from
FIPB are generally seen to have been speedily and liberally given. Despite
widespread concerns about the liberal attitude of BJP towards foreign
investment, the BJP government continued this system and has announced
its intention to expedite clearances and also to set up such mechanism to
help translate approvals into actual investment decisions.
TABLE – I
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
199798
Total Approval
of FDI
325
1781
3550
4332
11245
11142
15752
FDI
129
315
586
1314
2133
2696
3197
FII
4
4
2047
1742
2065
1946
956
240
1520
2082
683
1366
645
GDRs issued
abroad
by
Indian Cos
( All Figures in US $ million)
Table I above shows results achieved by the new policy. Total
approvals of FDI have increased fro $325 million in 1991-2 to nearly $16
billion in 1997-8. Actual inflows are much lower reflecting the lag
between approvals and inflows, but even these have increased from a
negligible level of $133million in 1991-2 to over $3billion in 199798.This may not compare favorably with many other countries which have
undertaken economic reforms but in indicates a dramatic increase from the
earlier levels and is still growing.
Going by the earlier trends, direct investment rose marginally from
Rs.913 crores in 1974 to Rs.920 crores in 1977 and then declined there
after. The downward trend in 1978 and 1979 was the result of the
restrictions imposed by the Foreign Exchange Regulation Act, 1973. As
shown by Table II below, the poor inflow of FDI was also caused by
limitations of human capital resources, underdeveloped indigenous market
coupled with lower purchasing power , etc.
TABLE – II
Year
1974
1977
1978
1979
1980
1986
1987
1988
1990
Direct
Investment (in
crores)
913
920
876
875
983
1557
1742
1991
2705
% in total investment
47
39.5
39.5
40.6
42.1
15.8
13.1
12.1
13.7
The table further shows the increased flow in 1980s which was
marked by a substantial increase in capital flows by Rs 1712 crores from
Rs933 in 1980 to Rs.2705 crores in 1990. Partial liberalization policy
effected during this period along with accumulated productive capabilities
in the economy and further supported by expanding market as well as
improved infrastructure have been identified as the possible factors that
gave a fillip to foreign direct investment in India.
Another remarkable change indicated by Table II is the percent
decline of share of FDI in total foreign investment in Indian Economy
from around 40 percent in seventies to 13.7 percent in 1990. Massive
increase in commercial borrowing and other investment in the latter half
of 1980s due to low servicing cost may be a reason for the decline.
TABLE – III
(Amount in US $ million)
Year
Total Investment
Direct Investment
Percentage Share
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
559
4153
5138
4892
6133
5385
2401
5181
315
586
1314
2144
2821
3557
2462
2155
56.351
14.11
25.57
43.83
46.00
66.05
102.54
41.59
2000-01
2001-02
5099
5952
2339
3904
45.87
65.59
(Source: Economic Survey 2002-03)
The post reform period witnessed a major inflow of FDI, which
increased from US $315 million in 1992-93 to US $ 3557 in 1997-98. In
1998 the inflow was restricted to $ 2462 million only but that was mainly
due to sluggishness in international capital flows. Despite the fall in FDI
flows in late 1990s, the post reform period witnessed an impressive
growth of 49 percent when compared to the growth of 12.4 percent in
1980-81. Another significant indicator is the increased share of FDI in
total foreign investment in India .in the post reform period. This
constituted only 14.11 percent in 1993-94, which gradually rose to the
extent of 65.59 percent in 2001-02.
The economy was also opened to portfolio investment in two
ways. In 1993, Foreign Institutional Investors (FIIs) meeting certain
minimum standard standards were allowed to invest in Indian equity and
later also in debt instruments through secondary market procedures in the
stock market. Over 500 FIIs are now registered with the Security and
Exchange Board of India (SEBI) and around 150 are active investors. A
second window for portfolio investment was provided by allowing Indian
companies to fresh equity abroad through the mechanism of Global
Depository Receipts (GDR). This enabled the Indian companies to raise
resources from passive investors in world markets instead of seeking
active investors as is the joint venture partners. Portfolio investment has
expanded rapidly in the post reform period.
Despite the often-expressed concern about the volatility ad
unreliability of portfolio capital flows, India’s experience in this area has
been fairly encouraging. Inflows of portfolio capital have fluctuated but
they did not turn negative even in 1997-98 during East Asian Crisis. The
cumulative inflows of portfolio capital since the reforms began exceed $15
billion.
TABLE – IV
Year
Percentage of GDP
Percentage of GCF
1951-55
1956-60
1961-65
1966-70
1971-75
1976-80
1981-85
1986-90
0.26
2.26
2.36
1.90
0.80
-0.50
1.44
2.45
1.77
15.80
15.55
11.56
4.66
-2.72
6.94
10.70
1991-95
1997-98
1.39
0.87
5.57
2.74
(Source: RBI )
The economic significance of FDI can be gauged by visualizing its
share in the Gross Domestic Product (GDP) and Gross Fixed Capital
Formation (GCF) as demonstrated in Table IV.
It is important to note that the actual inflow of FDI is lagging far
behind approvals granted ranging from 13 percent to 47 percent of
approvals during 1991-98. This is shown by Table V on the next page.
Several factors are responsible for this. Some of them include lack of a
transparent incentive mechanism, administrative hurdles, political
inexpediency, etc. But the foremost bottleneck is infrastructure constraint
on production process. The government needs to make administrative
process more transparent, concentrate on infrastructure sector and build up
a political consensus to ensure a stable FDI policy.
In the pre reform period, the larger share of the FDI was
concentrated in manufacturing industries, which increased its share from
68 percent in 1974 to 87 percent in 1988. Within the manufacturing sector,
plantations, chemicals and engineering industries accounted for over 60
percent of direct investment. The choice of these industries was obviously
dictated by their profitability, which is higher than in other industries.
TABLE – V
Year
Approvals
Actual Inflows
Actual flow as % of
approvals
1991
1992
1993
1994
1995
1996
1997
1998
325
1781
3559
4332
11245
11142
15752
6975
155
233
574
958
2100
2383
3330
2330
47.7
13.7
16.1
22.1
18.7
21.4
21.1
32.0
TOTAL
55111
11963
21.7
( Source: RBI)
In the post reform period, however, major inflows of actual FDI
were witnessed in the sectors of engineering, chemicals and allied
services, electronics and electrical equipments, finance as well as
computers.
While liberalizing inflows of FDI and portfolio capital, other
elements of the capital account remained subject to controls though the
controls were more flexibly administered. Corporations and individuals
need government permission to borrow abroad and such permission is
granted within a framework, which places a cap on total external
borrowing and also ensure minimum maturity period for each borrowing.
This policy has helped control India’s exposure to external debt and in
particular to avoid a build-up of short-term debt.
Foreign investors are allowed to repatriate dividends and capital
freely buy Indian residents are not free to take the capital out of the
country, a restriction that makes it easier to avoid panic overreaction in
foreign exchange markets.
In 1996, the Government appointed a Committee on Capital
Account Convertibility to advise on the transition to full capital
account convertibility. The Committee recommended moving to
capital account convertibility over time I a phased manner but
emphasized that certain preconditions must be established first.
These include a moderation in the rate of inflation, a reduction in
the fiscal deficit to 3 percent and also considerable strengthening
of the domestic banking system to deal with stresses created by an
open capital account.
The FDI distribution in different states depended on the prevailing
image of different states. Most FDI-friendly states bagged maximum of
foreign investment. Table VI below shows that Maharashtra dominated the
TABLE - VI
States
FDI
Maharashtra
Karnataka
Tamil Nadu
Gujrat
Andhra Pradesh
West Bengal
Haryana
Punjab
27905
15785
13595
10902
8661
7675
2931
1926
FDI followed by Karnataka, Tamil Nadu and Gujrat during the
period 1991-99.
Sectorwise break-up of foreign direct investment and technical
collaboration approved during the post-policy period (August 1999 to
January 1999) can be seen in Table VII.
TABLE – VII
Areas
Fuels
Telecommunications
Transportation
Service Sector
Metallurgical
Electrical
Equipment
Food Processing
Hotel & Tourism
Others
Percent
collaboration
32.11%
17.83%
6.85%
6.32%
6.00%
5.14%
of
foreign
4.4%
1.80%
19.27%
There are several factors, which affect the flow of FDI in India.
Market forces have critical impact on the inward flow of FDI into
the country. The Huge domestic market of India acts as a positive
incentive for foreign investment since a higher GNP per capita
implies a wider domestic market for the product and hence
improves the prospects of profitability for the foreign investor. The
investors also like a destination where economy is recording a
dynamic growth.
There is hardly any need to mention that probability of investment
is also related to the availability of factors of production and their costs to
investing firms. Added to this is the availability of skilled labour, both
technical and managerial also makes a country very attractive to foreign
investors. The low level of wages in a developing country also provides
attraction for FDI inflows.
Another factor crucial for FDI in a developing country is the
availability of infrastructure. It is often discussed that bottlenecks
in this field have slowed down the pace of FDI. The same factor
also accounts for widening of gap between actual and approved
FDI flows. Since the infrastructure in developing countries is
generally made by the government agencies, this measure also
reflects the role of public policies in improving the investment
climate.
Apart from the factors mentioned above other variable like the rate
of exchange, openness of the economy, the rate of inflation, the gross
fiscal deficit and debt service ratio are also expected to influence the
inflows of FDI.
REFERENCES
1. “Foreign Direct Investment in Asia”: B.Goldar, & E.Ishigami,
EPW,Vol.XXXIV,No.22
2. “Foreign Direct Investment in India Policy”:K.G.Ramakrishnan &
J.P.Pradhan, Productivity, vol.41,No.3,pp.456-62
3. “Trends in Foreign Direct Investment” : K.T.Getha, Services Sector in
Indian Economy, Deep & Deep, 2002
4.”India’s Economic reforms An Appraisal” : Montek Singh Ahluwalia,
India in the Era of Economic Reforms,OUP,New Delhi,1999
PSU REFORMS AND DISINVESTMENT IN INDIA
In the sixties and seventies the public sector policy has
been largely guided by the Industrial Policy resolution of 1956 which gave
the public sector a strategic role in the economy. Massive investments
have been made over the past decades to build the public sector, which
had a commanding role in the economy. Many key sectors of the economy
are today dominated by mature public enterprises that have successfully
expanded production; opened up new areas of technology and built up a
reserve of technical competence in a number of areas.
According to Economic Survey, 1999-2000, there were 236
Central Government Undertakings, excluding banks, financial institutions
and departmental undertakings like the Railways, Ports etc in 1998. Their
number has increased from 5 in 1950-51 to 236 in 1998 with rise in
investment from RS. 29 crores in 1957 to Rs. 223047 crores in 1998.
Public Enterprises Survey, 1997-98 gives some interesting
information regarding the pattern of investment. Bulk of the investment is
in those producing and selling goods; at the end of March 1998, 65.5
percent of investment was in these industries. Even here, bulk of the
investment (about 55 percent) is in basic industries like steel, coal, power,
petroleum, etc. Nearly 32 percent of investment is in enterprises rendering
services; of these, the most prominent are financial services (15.1 percent)
TABLE – I
GROWTH OF INVESTMENT IN CENTRAL GOVERNMENT ENTERPRISES
YEAR
1951
1961
1980
1990
1998
NO OF UNITS
5
47
179
244
236
TOTAL INVESTMENT IN CRORES
29
950
18,150
99,330
2,23,047
(SOURCE; PUBLIC ENTERPRISES SURVEY, 1997-98)
The giant top 10 enterprises in the Central Public Sector (Table II)
accounted for a total investment of Rs. 98,280 crore on 31 st March 1998 (
48% of total investment of Rs. 2,04,050 crores in 240 enterprises)
In terms of investment, the National Thermal Power Corporation
Ltd. Tops the list of top 10 enterprises in the central public sector in India,
closely followed by SAIL. But in terms of gross turnover in 1997-98, the
Indian Oil Corporation tops the list with a total turnover of Rs. 59,220
crores followed by Bharat Petroleum Corporation (Rs. 20,700 crores) and
Food Corporation of India (Rs. 19,820 crores)
TABLE – II
TOP TEN ENTERPRISES IN TERMS OF INVESTMENT
Serial
Number
Name of the Enterprises
Investment in
crores on
31.3.98
1
2
3
4
5
6
7
8
9
10
TOTAL
NTPC
SAIL
ONGC
Indian Railway Finance Corporation
Power Grid Corporation of India
National Hydro Electric Power Corporation
Rashtriya Ispat Nigam Ltd.
National Power Corporation
MTNL
Rural Electricity Corporation
16,180
15,140
10,600
9,500
8,630
8,620
7,870
7,450
7,180
7,110
98,280
( SOURCE: PUBLIC ENTERPRISES SURVEY, 1997-98 )
However, after the initial exuberance of the public sector entering
new areas of industrial and technical competence, a number of problems
began to manifest themselves in many enterprises. Problems were
observed in terms of low productivity, poor project management skills,
over-manning, lack of technological up gradation, inadequate attention to
R & D and low priority to human resource development.
Oil and Natural Gas Corporation (ONGC) has the largest net worth
of more than Rs.30,000 crore. Indian Oil is, by far, the largest PSU in
terms of sales. It has revenues of more than Rs.1,20,000 crore (almost
20% of the total revenues of all central government PSUs). Besides the
usual suspects like Hindustan Petroleum (HPCL) and Bharat Petroleum
(BPCL), the other large revenue generators are Food Corporation of India
(FCI) and National Thermal Power Corporation (NTPC).
NTPC has the second highest net worth of Rs. 25,8220 crore
among all central PSUs with revenues of Rs.20,393 crore. The National
bank for Agriculture and Rural Development (NABARD) follows next
with a net worth of Rs.22,829 crore. The Coal India is seventh in terms of
net worth with more than Rs.8,800 crores. In terms of profits, the biggest
PSU is again ONGC. NTPC and Indian Oil follow it. Power Grid
Corporation made a net profit of Rs. 742 crore, while NABARD had a
profit of Rs.1,309 crore much more than that of IDBI and ICICI
combined.
The government owned Indian Airlines and Air India are making
losses but the Airport Authorities of India (AAI) and Pawan Hans seem to
be making decent profits. While AAI made a net profit of Rs.214 crore for
the year 2001 on revenues of Rs.1,867 crore, Pawan Hans made a profit of
Rs. 50 crore. In comparison, Air India and Indian Airlines posted a loss of
Rs. 40 crore and Rs. 159 crore respectively for 2001. Around 150 PSUs
were loss making with a combined loss of around Rs. 13,000 crore in
2001.
Fertilizer and coal companies seem to be the biggest drain on the
government. The largest loss maker was Bharat Coking Coal with a loss of
Rs. 1,276 crore for 2001. It is followed by Fertilizer Corporation of India
(with a loss of Rs. 949 crore), Eastern Coalfield (with a loss of Rs. 917
crore) and Central Coalfield (with a loss of Rs. 792 crore). Other large loss
making PSUs are Hindustan Photo Films, Konkan Railway, and National
Jute Manufacturers Corporation.
The public sector unit with the highest borrowing (excluding banks
and financial institutions) was Food Corporation of India with borrowings
of Rs 22,240 crore for the year 2001. This figure is almost equal to its
revenues of around Rs.28,000 crore. SAIL comes next with borrowings of
Rs. 13,930 crore. It is followed by Thermal Power Corporation of India
with Rs 9,805 crore. Nuclear Power Corporation, Fertilizer Corporation,
Air India, Konkan railway and Rashtriya Ispat Nigam were the other PSUs
having large borrowings
NEW INDUSTRIAL POLICY OF 1991
To improve the performance of the public sector, the Government
of India announced in July 1991 the New Industrial Policy, which
contained the following decisions pertaining to the public sector:
1. Portfolio of public sector investments will be reviewed with a view
to focus the public sector on strategic, high tech and essential
infrastructure. Whereas some reservation for the public sector is
being retained, there would be no bar for area of exclusivity to be
opened up to the private sector selectively.
2. Public enterprises that are chronically sick and which are unlikely
to be turned around will, for the formulation of
revival/rehabilitation schemes, be referred to the BIFR.
3. In order to raise resources and encourage wider public
participation, a part of the government’s share-holding in the
public sector would be offered to mutual funds, financial
institutions, general public and workers.
4. Boards of the PSUs would be made more professional and given
greater powers.
5. There will be a greater thrust on performance improvement
through the MOU system through which managements would be
granted greater autonomy and will be held accountable. Technical
expertise on the part of the Government would be upgraded to
make MOU negotiations and implementation more effective.
Till the end of March 1998, 62 PSUs have been referred to BIFR,
which has so far approved revival packages in respect of 21 PSUs.
TABLE – III
TOP TWENTY COMPANIES BY PROFITS
Name of Company
In Crores
ONGC
5,229
NTPC
3,734
Indian Oil
2,720
SBI
1,604
MTNL
1,557
Nabard
1,310
GAIL
1,126
HPCL
1,088
Nuclear Power Corp. 825
BPCL
820
Power Grid Corp.
Neyveli Lignite
Northern Coalfields
IDBI
Nalco
742
726
703
691
656
Power Finance Corp.
604
SIDBI
477
Oil India
PNB
ICICI
467
464
455
OMPANIES BY LOSSES
Name of Company
Fertiliser Corp. of India
Hindustan Fertiliser Corp.
Rashtriya Ispat Nigam
Bharat Coking Coal
Indian Bank
Eastern Coalfields
National Jute Mfg
Indian Drugs & Pharma
Hindustan Photo Films
National textile Corporation
(Mah.North)
Cement Corp. of India
United Bank of India
Heavy Engineering Corp.
Konkan railway Corp
Mining & Allied Machinery
Corporation
National Textile Corp.(South
Maharashtra)
National Textile
Corp.(WB,Assam,Orissa)
National Textile Corp.(UP)
Hindustan Shipyard
National Textile
Corp.(Gujarat)
In Crores
6,853
6,150
4,907
4,066
3,883
3,846
2,763
1,675
1,475
1,430
1,422
1,359
1,342
1,302
1,285
1,271
1,166
1,158
1,090
1,021
DISINVESTMENT OF PUBLIC SECTOR SHAREHOLDING
The Government has gone in for a programme of disinvestments of
public sector enterprises. The 1991 Industrial Policy Statement envisaged
the disinvestments of a part of the government shareholding in selected
PSUs to provide financial discipline and improve their performance. In
1991-92 budgets, the Government announced the intention of partial
disinvestments in selected PSUs in order to raise resources, encourage
wider public participation and promote greater accountability. Up to 20%
of the Government equity in 31 selected enterprises was offered to Mutual
Funds/Investment Institutions, workers and general public.
Disinvestments are a process of transferring public ownership to
private, either partially or through the sale of equities. It is also understood
as “rolling back of government investment in economic activity. It implies
shifting of control or ownership of means of production from the state or
bureaucracy to common people.
There have been some attempts to identify privatization with
disinvestments and vice-versa. But many scholars have not considered
such interpretation proper. Privatization generally means 100% transfer of
ownership and asset to private parties but anything short of 100%
generally refers to disinvestments.
India’s approach to public sector reforms has been very cautious
than that of other developing countries. The Government of India avoided
the radical approach of privatization of commercially viable enterprises
and closure of unviable enterprises. Everything began very cautiously with
primary focus on increasing functional autonomy of the public sector
undertakings to improve their efficiency. In the 1990s, another element
was added with disinvestments involving sale of a portion of the
government equity in public sector enterprises while retaining majority
control with the government.
The development of public sector enterprises was seen as
appropriate policy to bring about improved economy. At that time there
appeared to a broad consensus around the world accepting public sector
enterprises as an inevitable part of the economy .While public sector
contributed significantly to the developmental efforts, low rates of return
on such investments and the inability of the governments to finance the
growing demands of such industries changed the consensus in favour of
economic liberalization and privatization from 1970s onwards in most of
the countries.
Such public enterprises could not have been developed by the
private sector in 1940s and 1950s because there was not enough money in
the market and entrepreneurship was also very limited. This led the
government to use high rates of taxation and deficit financing to develop
public sectors. Sometimes the government had to step in as a rescue
mission because the closure of such enterprises would have resulted in the
loss of jobs. Another rationale for public sector was the belief that the state
investment in core sector of the economy was necessary for the economic
development of those sectors and the country.
In 1948 Industrial Policy Resolution, the manufacture of arms and
ammunition, production and control of energy, ownership and
management of railways became the state monopoly. Six basic industries
viz., aircraft manufacture, ship building, mineral oil, manufacture of
telephone, telegraph and wireless were developed by the state. Other areas
were left open to the private sector.
Within a decade, another policy statement was issued in April
1956, to give orientation to what is known as “mixed economy” concept.
This Policy Resolution categorized three groups, industries exclusively
reserved for development by the state viz., arms and ammunition, heavy
casting and forging, heavy plant and machinery required for iron and steel
production and mining, heavy electrical, coal and lignite, zinc, copper,
lead, aircraft, ship-building and telecommunication equipment. Industries
which would progressively be state owned and in which state would
therefore take the initiative in establishing new undertakings but in which
private enterprise would also supplement the efforts of the state. These
included aluminum, fertilizers, other minerals, machine tools, Ferro-alloys
and tools, basic and intermediate product required by chemical industries,
antibiotics and other essential drugs, synthetic rubber, chemicals and
transport. The remaining industries were open for private sector.
The need of disinvestments and privatization arose out of the
feeling that private ownership leads to better use of resources and their
more efficient allocation. Throughout the world, the preference for market
economy received a boost because it was realized that the state could no
longer meet the growing demands of economy and the state shareholding
inevitably had to come down. The ‘state in business’ argument thus lost
out and also the presumption that direct and comprehensive control over
the economic life of citizens from the central government can deliver
better results.than those liberal systems that directly responds according to
market driven forces.
WTO commitments have made the world a global village and
unless industries including public industries do not quickly restructure,
they would not be able to survive. Public enterprises because of the nature
of their ownership can restructure slowly. Besides techniques are now
available to control public monopolies like power and telecom where
consumer interests can be better protected by regulation, competition and
investment of public money to ensure protection of consumer interests is
no longer a convincing argument.
PRIMARY OBJECTIVES OF DISINVESTMENT
Some of the primary objectives of disinvestments in India are as
follows:
1.
To reduce the financial burden of the state and to fill the
fiscal deficit.
2.
To release large amount of public resources locked up in
non-strategic PSEs for redeployment in areas that are
much higher on social priority such as public health,
family welfare, primary education etc.
3.
To reduce the public debt that is threatening to assume
unmanageable proportions
4.
To release other tangible and intangible resources such
as large manpower currently locked up in managing the
PSEs and their time and energy for redeployment in
areas that are much higher on the social priority but are
short of such resources.
5.
To restructure the public enterprises.
The main criterion for disinvestments in India includes:
1.
2.
3.
5.
Extent
of restructuring required and the potential for
improving share value
The permissible extent of disinvestments with reference to the
classification of industry as core and non-core
The size of the company and the phasing of disinvestments
4. Equity Fund Mobilisation of the concerned unit
Categorization of industry as high, medium or low potential
The policy of the Government on disinvestment has evolved over a
period. The disinvestments process started in India in 1991, when the
Government declared to disinvest 20% of its share in favour of private
sector in 1992. The policy, as enunciated by the Chandrashekhar
Government, was to divest up to 20% of the Government equity in
selected PSEs in favour of public sector institutional investors. The
objective of the policy was stated to be to broad-base equity, improve
management, enhance availability of resources for these PSEs
The Industrial Policy Statement of 24th July 1991 stated that the
Government would divest part Government holdings in selected PSEs but
did not place any cap on the extent if disinvestments. Nor did it restrict
disinvestments in favour of any particular class of investors.
In the Budget Speech of 1001-92, the cap of 20% for
disinvestments was reinstated and the eligible investors' universe was
again modified to consist of mutual funds and investment institutions in
the public sector and the workers in these firms. The objectives too were
modified, the modified objectives being: "to raise resources, encourage
wider public participation and promote greater accountability".
In 1992, the Ministry of Finance set up a Committee under Mr
V.Krishnamurthy, the then member of the Planning Commission to study
the disinvestments business. However the Government reconstituted the
Committee in November 1992 with Dr C. Rangarajan as its Chairman. Its
major term of reference was to suggest modus operandi of disinvestments.
The Rangarajan Committee recommendations emphasized the need
for substantial disinvestments. It stated that the percentage of equity to be
divested could be up to 49% for industries explicitly reserved for the
public sector. It recommended that in exceptional cases such as enterprises
which had a dominant market share or where separate identity had to be
maintained for strategic reasons, the target public ownership level could
be kept at 26%, that is disinvestments could take place to the extent of
74%. In all other cases, it recommended 100% divestment of government
stake. Holding 51% or more equity was recommended only for the six
scheduled industries namely the following:
1.
2.
3.
4.
5.
6.
Coal and Lignite
Mineral Oils
Arms, ammunition and defence equipment
Atomic energy
Radio-active minerals
Railway transport
The central government also drew up a Common Minimum
Programme in 1996. The highlights of the programme were as follows:
1.
2.
3.
4.
To carefully examine the public sector non-core strategic
areas
To set up a Disinvestments Commission for advising on
disinvestments related matters
To take and implement decision to disinvest in a
transparent manner
To see the aspect of job security, opportunities for retaining
and redeployment.
The Committee favored the setting up of an independent regular
commission on disinvestments. Accordingly in 1996, the Five Member
Disinvestments Commission was set up under the chairmanship of Mr
G.V. Ramakrishna to monitor the progress of disinvestments and to take
necessary measures and report periodically to the Government on
Disinvestments Progress. The Commission has placed before the
government twelve reports, giving a complete roadmap to disinvestments
process in India. It made recommendations on 58 public sector
undertakings and construed specific disinvestments strategy.
Pursuant to the above policy of the United Front Government, the
Disinvestment Commission made recommendations on 58 PSEs. The
recommendations indicated a shift from public offerings to strategic / trade
sales, with transfer of management, as the following table shows :
Mode of disinvestment recommended
Number of PSEs
A. Involving change in ownership / management
1 . Strategic sale
2 . Trade sale
29
08
B. Involving no change in ownership
/ management Offer of shares
05
C. No change
1. Disinvestment deferred
2. No disinvestment
11
01
D. Closure / sale of assets
04
GRAND TOTAL
58
In its first budgetary pronouncement (1998-99), the current
government decided to bring down government shareholding in the PSUs
to 26% in the generality of cases thus facilitating ownership changes as
recommended by the Disinvestments Commission. It however stated that
the Government would retain majority holding in PSEs involving strategic
considerations and that the workers would be protected in all cases.
The policy for 1999-2000 was to strengthen strategic PSUs,
privatize non-strategic PSUs through gradual disinvestments or strategic
sale and devise viable rehabilitation strategies for weak units. For the first
the Government of India highlighted ‘Privatization’.
On 16th March 1999, the Government of India classified Strategic
and Non-Strategic Areas. The Strategic Areas were identified in the
following fields:
a)
Arms and Ammunitions along with allied items of defence
equipment, defence aircraft and warships
b)
c)
Atomic Energy (except in the areas related to the
generation of nuclear power and applications of radiation
and radio-isotopes in agriculture, medicine and nonstrategic industries)
Railway transport
All other public sector enterprises were called non-strategic. For
the non-strategic public sector enterprises, it was decided that the
reduction of government stake to 26% would not be automatic and the
manner and pace of doing so would be worked out in case to basis. It was
also decided that a decision in regard to the percentage of disinvestments
i.e., Government stake going down to less than 51% or to 26% would be
taken on the following considerations:
a)
Whether the Industrial Sector requires the presence of the
public sector as a countervailing force to prevent concentration of private
hands and
b)
Whether the Industrial Sector requires a proper regulatory
mechanism to protect the consumer interests before Public Enterprises are
privatized
Now the Disinvestments Commission has been abolished on 30th
November 1999 and in its place, the Government has set up a Department
of Disinvestments (DOD). Currently the DOD has been given the
responsibility for preparing a feasible Disinvestments Policy for India
based on the experience of the past decades as well as the
recommendations of the Disinvestments Commission.
The highlights of the policy for the year 2000-01 were that for the
first time the Government announced that it was prepared to reduce its
stake in the non-strategic PSEs even below 26% if necessary. The main
elements of the disinvestments policy are to structure and revive
potentially viable PSEs, to close down PSEs which cannot be revived, to
bring down Government equity in all non-strategic PSEs to 26% or lower,
to fully protect the interests of workers, to emphasize increasingly on
strategic sales of identified PSUs and to use the entire receipt from
disinvestments for meeting the expenditure in social sectors, restructuring
of the PSUs and returning public debt.
Other highlights of the policy for the year 2000 - 01 were as
follows:
To restructure and revive potentially viable PSEs;
To close down PSEs which cannot be revived;
To bring down Government equity in all non-strategic
PSEs to 26% or lower, if necessary;
To fully protect the interests of workers;
To put in place mechanisms to raise resources from the
market against the security of PSEs' assets for providing an
adequate safety-net to workers and employees;
To establish a systematic policy approach to disinvestment
and privatisation and to give a fresh impetus to this
programme, by setting up a new Department of
Disinvestment;
To emphasize increasingly on strategic sales of identified
PSEs;
To use the entire receipt from disinvestment and
privatisation for meeting expenditure in social sectors,
restructuring of PSEs and retiring public debt.
In the address to the Parliament in February 2001, the President
said "The public sector has played a vital role in the development of our
economy. However, the nature of this role cannot remain frozen to what it
was conceived fifty years ago - a time when the technological landscape,
and the national and international economic environment were so very
different. The private sector in India has come of age, contributing
substantially to our nation-building process. Therefore, both the public
sector and private sector need to be viewed as mutually complementary
parts of the national sector. The private sector must assume greater public
responsibilities just as the public sector needs to focus more on achieving
results in a highly competitive market. While some public enterprises are
making profits, quite a few have accumulated huge losses. With public
finances under intense pressure, Governments are just not able to sustain
them much longer. Accordingly, the Centre as well as several State
Governments are compelled to embark on a programme of disinvestments.
The President further said, “the Governments' approach to PSUs
has a three-fold objective: revival of potentially viable enterprises; closing
down of those PSUs that cannot be revived; and bringing down
Government equity in non-strategic PSUs to 26 percent or lower. Interests
of workers will be fully protected through attractive VRS and other
measures. This programme has already achieved some initial successes.
The Government has decided to disinvest a substantial part of its equity in
enterprises such as Indian Airlines, Air India, ITDC, IPCL, VSNL, CMC,
BALCO, Hindustan Zinc, and Maruti Udyog. Where necessary, strategic
partners would be selected through a transparent process".
Disinvestments in India was initially motivated largely by the need
to raise resources for the budget. Equity sales took place intermittently
through the post-reform years. By !997-98 the government had sold
varying proportions of equity ranging from 5 percent to 49 per cent in fifty
public enterprises generating a total of Rs 8400 crore for the budget. The
Table IV on the following page reveals the actual disinvestments from
1991-92 to 1999-2000.
TABLE –IV
DISINVESTMENTS IN INDIA FROM 1991-92 TO 1999-2000
Year
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
No of PSEs in
which
equity
sold
47
35
13
05
01
01
05
03
03
Target Receipt
for the year
(Rs. In Crores)
2500
2500
3500
4000
7000
5000
4800
9006
10000
10000
Actual
Receipts
(Rs. In Crores)
3,038
1,913
-48
5,607
1,397
455
912
5,376
2,600
2,500
The table above shows that the Government has failed to raise the
budgeted disinvestments in the capital market and the progress has been
very slow. There are many reasons for this slow progress but the most
important one is the non-acceptability of PSU shares in the capital market.
However the February 2001 trends of disinvestments really zoomed with
the announcement of the government to divest stake in VSNL and CMC.
As a result Governments wealth jumped by a whopping Rs 4000 crores in
a single trading session.
Montek Singh Ahluwalia has observed that the disinvestments
efforts led to improved performance of public sector. Available data on the
financial performance of the public sector enterprises in the post reform
period show that the profitability of the public sector enterprises as a
whole has improved. Gross profit (before deduction of interest) was 10.9
percent of the capital employed in 1990-91 and increased to 16.1 per cent
in 1995-96. Since the economic environment became much more
competitive over this period, it is reasonable to assume that increased
profitability reflects improvements in operational efficiency.
The second report of the Narasimhan Committee suggested the
reduction of Government holding in the public sector banks below 51%. In
accordance with the government has decided to disinvest 5 public sector
banks. The equity would be divested through initial public offers, the only
mode of disinvestments permitted by the Nationalized Banks under the
existing policy.
TABLE – V
PSUs APPROVED FOR DISINVESTMENT
Serial
No
1.
2.
3
4.
5.
6
7
8
9
10
11
12
13
14.
15
16
17
18
19
20
21
22
23
24
25
26
27
Public
Enterprise
Name of
Sector
Air India Ltd. (AI)
Bharat Brakes & Valves Limited (BBVL)
Bharat Heavy Plates & Vessels Ltd (BHPV)
Bharat Pumps and Compressors Ltd (BPCL)
Engineering Projects (India) Ltd. (BPCL)
Hindustan Cables Ltd (HCL)
Hindustan Copper Ltd (HCL)
Hindustan Insecticides Ltd. (HIL)
Hindustan Organic Chemicals Ltd. (HOCL)
Hindustan Salts Ltd. (HSL)
Hindustan Zinc Ltd (HZL)
Indian Airlines (IA)
Indian Petrochemicals Corporation Ltd (IPCL)
Indian Tourism Development Corporation
(ITDC)
Instrumentation Ltd. (IL)
Jessup & Company Ltd (Jessup)
Madras Fertilizers Ltd (MFL)
Maruti Udyog Ltd (MUL)
Minerals and Metal Trading Corporation of
India Ltd. (MMTC)
MSTC Ltd
National Fertilizers Ltd (NFL)
NEPA Ltd
Praga Tools Ltd
Scooters India Ltd
Sponge Iron India Ltd (SIIL)
State Trade Corporation (STC)
Tungbhadra Steel Product Ltd (TSPL)
Similarly the Government has decided to sell stake into auto major
Maruti Udyog Ltd (MUL) which is a 50:50 joint venture with Suzuki of
Japan. A panel has been formed to recommend optimal ways of
disinvestments in Maruti. The options range from selling the entire stake
to Suzuki to buying out Suzuki, from selling to second company to
divesting to public. Suzuki has no first right to refusal and Indian bidders
will be given preference. But most unfortunately, Maruti’s market share in
the market has declined from 70% to 50% with the arrival of other
international carmakers on the Indian scene.
Oil was initially kept out of the purview of disinvestments, but the
Government of India has already announced that oil is going to be
deregulated from April 2002. Thus the petrol prices are going to be
deregulated and many private players are going emerge in the marketing
of petroleum products. Similarly there are other examples in cases of
power, telecommunication, airways, defence equipments, star hotels and
even in the so called higher education where the government is
increasingly allowing the private parties.
The Government of India recently made few changes in the
purchase preference policy (PPP) for central PSUs. In the modified form,
a 20% minimum value addition criterion by way of manufacturing and or
services has been included as a prerequisite for PSUs to avail of the
purchase preference. Under the purchase policy, a central public sector
enterprise is provided the option of matching the lowest bid in any tender
with a higher bid up to 10% on a preferential basis.
The joint venture companies where government holding directly or
indirectly through a central PSU is 51% or more and JVs, which are arms
of central PSUs with the majority stake with the parent will also be
eligible for purchase preference.
BENEFITS OF DISINVESTMENT
The success of the disinvestments process is being considered not
only as a boost to the agenda of economic reforms, but is also important
from the financial angle. This is because receipts from disinvestments can
play a crucial role in government finances, considering the fact that there
could be a hefty outflow on account of the drought like situation in the
economy.
Collections from the disinvestments process are on the rise. During
2000-01, the government was able to raise a sum of Rs 1,873 crore from
the disinvestments process. This figure shot up to Rs. 3,436 crore in the
next year 2001-02. But the important part is that with just less than half
the financial year through, the collection figure has already reached
Rs.3,190 crore in current financial year 2002-03.
In the current financial year(2002-03), the month of May witnessed
a lot of action. Rs 2,576 crore was raised through big ticket disinvestments
like the sale of IPCL to reliance for Rs. 1,491 crore and picking up of
Maruti Udyog’s stake by Suzuki. In
the case of
Maruti the
disinvestments proceeds
TABLE - VI
SALE HARVEST OF THE PSU
COMPANY SOLD
MONTH
BUYER
EQUITY
SOLD
( %)
INCOME FROM
SALE(Rs.Cr.)
Modern Food Industry
January
2000
Hindustan Lever
74
105.45
Lagan Jute Machinery
Co.
July 2000
Murlidhar Ratanlal Exports
74
2.53
BALCO
Feb 2001
Sterlite Industries
51
826.50
Kochi Refineries
Mar.2001
Bharat Petroleum Corp.
659.1
Chennai Petroleum Corp.
Mar.2001
Indian Oil Corporation
509.3
Bongaingaon Refinery
Mar.2001
Indian Oil Corp.
CMC
Sept2001
Tata Sons
51
Hindustan Teleprinters
Oct.2001
Himachal Futuristic
74
55.00
Hotel Airport Mumbai
Oct.2001
A.L.Batra
100
83
Hotel Juhu
Oct.2001
Tulip Hospitality
100
153
Hotel Rajgir (Bihar)
Oct.2001
Impec Travels
100
6.51
Hotel Ashok Bangalore
Nov.2001
Bharat hotels
On lease
39.41
Hotel Bodhgaya Ashok
Nov.2001
Lotus Nikko Hotels
100
2.01
Hotel Hassan Ashok
Nov.2001
Malnad Hotels
100
Temple
Bay
Beach Resort
Nov.2001
GR Thanga Maligai
6.8
3.9
Ashok
Hotel Ashok, Agra
Nov.2001
Mohan Singh
Juhu Centaur Hotel
Nov.2001
Tuli Hospitality Services
Hotel Madurai Ashok
Jan.2002
Sangu Chakra Hotels
Hotel Laxmi Vilas
Jan.2002
Bharat Hotels
Hotal Centaur
Feb.2002
Al Batra Group
VSNL
Feb.2002
Tata Group
IBP
148.8
152.00
2.51
153.0
100
5.48
7.5
83.0
25
3,689.00
Feb.2002
IOC
33.58
1,153.68
Feb.2002
Zuari Maroc Phosphates
Ltd
74
151.70
Jessop & Co.
Feb.2002
Rula Kotex
72
18.18
Hindustan Zinc Ltd
Feb.2002
Sterlite Industries
26
445.00
Mamallapuram
Beach Resort
Feb.2002
GR Thanga Maligal
100
6.80
Hotel Agra Ashok
Feb.2002
Mohan Singh
100
3.93
Qutub Hotel, Delhi
Feb.2002
Sushil
Gupta
Consortium
100
35.67
Paradeep
Ltd.
Phosphates
Ashok
&
Lodhi Hotel, Delhi
Feb.2002
Silverlink Holdings
100
76.22
Indian
petrochemicals
Corporation Ltd
May 2002
Reliance Industries
26
1490.84
Maruti Udyod Ltd
May 2002
Suzukui Motor Corp
49.74
1000.0
Hotel
Ashok,Kolkata
June 2002
Bright Enterprises
100
20.01
June 2002
Loksangam Hotels
100
17.40
100
4.00
Airport
Hotel Auragabad Ashok
Hotel Manali Ashok
June 2002
Auto Impex Ltd
Hotel Khajuraho Ashok
July,2002
Bharat Hotels
Hotel Varanasi Ashok
July,2002
Ramnath Hoels
9.1
Hotel Kanishka
July,2002
Nehru Palace Hotels
96.0
Hotel Indraprastha
July,2002
Moral
Trading
Investment
Chandigarh Project
July 2002
Taj GVK Hotels & Resort
2.2
&
45.0
17.3
consist of the ‘renunciation’ premium given by Suzuki Motor to the Indian
Government. All other disinvestments, except for the sale earlier in several
oil companies where a PSU picked up the stake, were effected by the
competitive bidding process through sale of the government’s stake to a
strategic partner along with transfer of management control.
In addition, an amount of Rs. 170 crore was raised in the month of
July through the sale of hotels across the country. In April 2002, the sale
of Hindistan Zinc was responsible for the large inflow of Rs. 445 crore.
The current financial year (2002-03) shows a divergence from the earlier
trend because more private participants have managed to pick the large
disinvestments. This is unlike the earlier situation where public sector
players mainly picked up the big sell-offs.
After the sale of Modern Industries and BALCO, average wages of
these companies rose by Rs. 1600 and Rs.2700 per month after
privatization. Secondly, turnover of Paradeep Phosphates has soared three
times in three months and of Modern Foods by 94% in 18 months after
their sales, Thirdly, the Government of India has earned Rs.10087 crores
in the past nine months by disinvestments; Fourthly, PSU shares increased
by 75% on Stock Markets since January creating crores of rupees in
wealth.
REFERENCES
1.
India in the Era of Economic Reforms: J.D.Sachs, A.Varshney,
Nirupam Bajpai (edit.), N.D.,
1999
2. What is India’s Privatization Policy: P.Trivedi, EPW, May 29
3.
India’s Economic Reforms: An Appraisal: M.S.Ahluwalia in
A.Varshney, J.D.Sachs, N.Bajpai (ed.) India in the Era of Economic
Reforms, OUP, New Delhi, 1999
4. Economic Liberalization and its: Ashok Mathur & P.S Raikhy
Implications for Employment
(Edt.).Deep & Deep,N.Delhi
2002
5. Government of India (website): Ministry of Disinvestments
INFRASTRUCTURAL DEVELOPMENT IN REFORMS
After a swift recovery from the 1991 crisis, economic growth
accelerated to 7 percent per year in the three years ending in 1996-7.
These successes notwithstanding, there are some deficiencies which could
limit the effectiveness of the reforms. Acceleration of growth to higher
levels entails massive requirements for infrastructure services such as
electric power, roads, ports, railways, telecommunication, etc.
POWER
Since independence, India has seen a phenomenal growth in
installed capacity and electricity generation (mainly thermal, hydel and
nuclear).Total installed capacity is 83,288MW. Some 65 per cent is owned
and operated by the State Electricity Boards (SEBs), and 29 per cent by
corporations set up by the Central Government. Prominent among these
are the National Thermal Power Corporation (NTPC) which uses coal and
gas-fired units, National Hydroelectric Power Corporation (NHPC),
National Lignite Corporation (NLC) and Damodar Valley Corporation
(DVC) which generates both coal based and hydel power. NTPC is the
largest among these, owning some two-thirds (17,000 MW) of the total
capacity of central undertakings.
Nuclear stations under the Central Government-owned Nuclear
Power Corporation account for 2 per cent of installed generating capacity,
and four private distributors own the remaining 4 per cent. The public
sector Power Grid Corporation of India Ltd (PGCIL) is in charge of interstate transmission.
In spite of the massive growth in generation capacity, severe power
shortages persist throughout India. Energy deficiency is approximately 11
per cent and peaking shortage 18 per cent. Capacity addition has fallen far
short of consumption growth. The gap between demand and supply has
widened over the last five years and is expected to increase in the short
term.
Domestic, industrial and irrigation sector consumers utilise over 85
per cent of India's electrical energy. Per capita consumption has grown
from 15.6 KwH in 1950 to 314 KwH currently, but this is still much lower
than consumption standards prevailing in developed economies.
According to the 15th Electrical Power Survey conducted by the
Central Electricity Authority (CEA), demand is expected to rise at a rate
of 7.5 per cent per annum over the next decade. The energy
requirement376.7 billion KwH in 1995-96 was assessed to be 502.3 billion
KwH in 1999-2000.
Over the next 10 years, the minimum capacity addition needed is
estimated to be over 83,000 MW. At an average cost of US$1 million per
MW, the investment called for is US$83 billion. If the investment required
in transmission and distribution are taken into account, the total figure
rises to US$143 billion. A majority of this amount will have to be funded
by the private sector, both domestic and foreign.
The two key legislations regulating the electricity sector in India are:
1. The Indian Electricity Act, 1910 (IEA), which provides for the
following :
Grant of licenses;
Power to control the distribution and consumption of energy;
Submission of the licensee's accounts;
Control over the laying down and placing of electric supply lines
and other works; and
•
•
•
•
Control over the supply, transmission and use of energy by non-licensees.
2. The Electricity (Supply) Act, 1948 (ESA), which controls :
Powers and duties of the SEBs and generating companies;
According approvals for the establishment, acquisition or
replacement of power stations;
•
Terms, conditions and tariffs relating to the sale of electricity; and
•
Submission of accounts by the SEBs, generating companies,
licensees.
•
•
Other key legislations are the Companies Act, 1956, the Water
(Prevention and Control of Pollution) Act, 1974, and the Air (Prevention
and Control of Pollution) Act, 1981.
Apart from the Ministries of Power in the Central and state
governments, key bodies comprising the institutional framework of the
power sector are :
•
The Central Electricity Authority (CEA), a body constituted under
the ESA, which is responsible for developing a sound, adequate,
uniform policy for the control and utilisation of national power
resources. It is also responsible for the techno-economic appraisal
of the project reports for proposed generating stations.
•
•
SEBs have the following broad functions: to generate, transmit and
distribute electricity in coordination with generating companies,
the Government and any other relevant agency.
The 19 SEBs account for 95 percent of total retail electricity sales,
and 65 per cent of generating capacity. Each operates within a
State of the Union; eight smaller states have electricity
departments under the state governments, instead of SEBs.
OIL AND NATURAL GAS
The origin of the oil industry in India can be traced back to the last
part of the 19th century when petroleum was discovered in Digboi in
north-east India. After independence, the industry which had Burmah
Shell, Esso and Caltex as major players was nationalised. Every activity
exploration, development, production, refining, marketing, distribution
was controlled by the various national oil companies.
Since India's economic liberalisation programme started, however,
the Indian oil and gas sector has gone through some very fundamental
changes.
India is endowed with 26 sedimentary basins totalling around
1.784 million sq. km. of which offshore area (up to 200-m isobath water
depth) amounts to 0.3 million sq. km. Another about 1.35 million sq. km.
of sedimentary area lies in Deeper offshore areas beyond 400-m isobath.
Most of the basins are under various stages of active and/or reconnoitary
exploration. The basins have been classified into four categories based on
geological knowledge of the basin, the presence or indication of
hydrocarbons
and
the
current
status
of
exploration.
India has been gradually moving away from its traditional administered
pricing regime a retention price concept under which oil refineries, oil
marketing companies and pipelines are compensated for operating costs
and are assured a 12 per cent post-tax return on net worth to marketdetermined, tariff-based pricing.
Free imports are now permitted for almost all petroleum products,
except motor spirit and diesel. Free marketing of imported kerosene,
liquified petroleum gas (LPG) and lubricants by private parties is
permitted. All petroproducts will eventually be taken out of the
administered pricing regime, in a phased manner, and the system will be
replaced by a progressive tariff regime to provide a level playing field for
new investors in a freer and more competitive market.
For the gas fields being developed in the private sector, the
promoters are free to market the gas at market prices. The Government has
contracted to purchase some of the gas from fields being developed by the
private and joint sectors. In such cases, fuel oil-linked gas prices have
been agreed upon.
ROAD
At almost 3.3 million km, India's road network is one of the largest
in the world. However, the accelerating pace of industrialisation is
creating greater demand than ever before for more and better
roads. While freight and passenger traffic have jumped 67 and 65
times respectively between 1951 and 1995, the length of the road
network has gone up only seven times. In the same period, the
number of registered vehicles has risen 92 times, and is estimated
to reach 54 million by the year 2001. But the National Highways,
which carry nearly 40 per cent of the country's total road traffic,
constitute only 1.6 per cent of the total road network. Clearly,
India's road sector offers enormous investment opportunities
The principal legislations governing the National Highways are the
National Highways Act, 1956 and The National Highway
Authority Act, 1988. The former was amended in June 1995 to
permit private participation in the sector. All policy matters
relating to National Highways are decided by the Government of
India's Ministry of Surface Transport. Ministry of Surface
Transport and the National Highway Authority of India (NHAI)
are the implementing agencies for private sector participation
policies for the National Highways. State Highways, district roads
and village roads are the responsibility of the state governments.
The Government has announced a set of guidelines for
development of highways, including a series of measures to attract
private investment in the sector. The following two principles will
be followed while identifying National Highway projects open to
private investment. · The project should be able to yield adequate
economic and financial internal rates of return. · The project has to
be approved by the Ministry of Surface Transport. The
Government's Implementing Agency (IA) for these projects will be
MOST and NHAI. The Government has constituted a highpowered committee to regulate BOT terms, including fair and
equitable allocation of risks between the participants, and to
address issues which arise in the course of implementation and to
finalise Model Concession Agreement for BOT projects.
TELECOMMUNICATION
Investment in the sector in the five years ended March 1997
averaged Rs 70 billion annually, and is likely to rise rapidly. The private
sector component in investment in telecommunications has been
increasing progressively.
Eightyfour per cent of all basic telephone connections are in urban
India, and a third of these are in the six largest metropolises. But a clear
progressive shift in demand is visible from the metropolises to other large
urban centres, and also medium and small towns. Present urban teledensity
is 34 per 1000 of population; rural: 2 per 1000. The Government plans to
put one public telephone in every village by the end of 1997.
Basic Telephone Services The Government of India's Department
of Telecommunications (DoT) has, till recently, been the sole basic service
providerbarring Delhi and Mumbai, which are served by the government
undertaking Mahanagar Telephone Nigam Ltd (MTNL)and also the
monopoly long-distance operator. Basic services have now been opened to
competition. One private operator has been allowed into each of two
circles; other circles, for which private operators have been selected
through a bidding process, may follow soon.
Cellular Telephony Privatisation commenced with the grant of
eight licenses for four metro cities at two per city. Therefater, 33 cellular
mobile service licenses restricted to two operators per circlehave been
issued to 13 companies for 18 circles, and services have started in 10 cities
in nine circles.Currently, there are around 300,000 cellular telephones in
the four metropolises of Delhi, Mumbai, Calcutta and Chennai alone.
Thereafter 33 Services are expected to begin in several more cities and
circles by mid-1997.
Radio Paging There are currently around 480,000 pagers in use in
India. Licenseslimited to two to five operators per city, and two to three
per circlehave been issued to 19 companies for 27 major cities. Another 31
licenses have been issued for 18 circles and services are expected to
commence very soon.
MTNL Mahanagar Telephone Nigam Ltd, the government
undertaking offering basic telecom services in the cities of Delhi and
Mumbai, accounts for one-fourth of the total telecom revenues of the
country.
To improve the quality and reach of its services, MTNL plans to
install new exchanges capable of handling 300,000 additional telephone
lines, set up small exchanges at the premises of bulk consumers like highrise buildings, replace all existing mechanical exchanges with digital
exchanges, introduce value-added services and enhance the utilisation of
the newly-introduced Integrated Services Digital Network.
MTNL is looking at a 15 per cent increase in the number of
telephone lines in 1997-98 for Delhi and Mumbai. It is likely to start
Wireless in Local Loop (WLL)-based basic telecom services by mid 1997.
The WLL infrastructure is being supplied by Qualcomm Inc, USA. The
DoT and MTNL are planning to secure a Rs 4 billion (US$114 million)
loan from the Asian Development Bank for the development of the
telecom sector.
VSNL Government undertaking Videsh Sanchar Nigam Ltd
(VSNL) will enjoy a monopoly in international telecom services in India
till 2004. VSNL provides international telex, telegraph and telephone,
home country direct telephone, Internet, data network management
teleconferencing and Intelsat business services. International connectivity
is achieved mainly through four gatewaysDelhi, Mumbai, Calcutta and
Chennai.
VSNL proposes to invest Rs 20 billion (US$ 571 million) on
Inmarsat Mini M, connection to the Fibre Optical Link Around the Globe
(FLAG), inter-country satellite services, satellite-based paging services
and the initiation of the submarine optical fibre technique.
VSNL and ICO Global Communications have recently signed an
agreement to establish a satellite access mode in India for providing global
mobile personal communications. It has also tied up with British Telecom
to provide better international communication.
VSNL holds nearly 95 per cent of the Indian Internet connectivity
market. The DoT is about to announce a policy under which India will
have multiple Internet Service Providers (ISP). VSNL will provide
connectivity to private ISPs as well as function as a local service provider.
Under the Indian Constitution, only the Government of India (with
Parliament's approval) can legislate in the area of telecommunications.
Current legislations applicable to the sector are the Indian Telegraphs Act,
1885, the Indian Wireless Telegraph Act, 1933, and the Presidential
Ordinance, 1996, setting up the Telecom Regulatory Authority of India
(TRAI). The Ordinance will now be placed before Parliament for
ratification.
The sector is administered centrally through the Department of
Telecommunications in the Ministry of Communication. For purposes
ofservice provision, the country is divided into 'circles', corresponding
generally to the territories of the states of the Union. Long-distance
transmission is grouped into four 'regions'. Basic services in the
metropolises of Delhi and Mumbai, and international connections were
corporatised in 1985 in the form of the MTNL and VSNL respectively.
The Government of India has so far divested 35 per cent of MTNL's
equity, and has, in March 1997, diluted its ownership of VSNL from 82
per cent to 65 per cent by issuing Global Depository Receipts. Further
MTNL divestment is likely in 1997-98.
The TRAI has been partially constituted in March 1997 and is
expected to be fully functional shortly. Responsibilities entrusted to the
TRAI include tariff fixation, access charge revenue sharing between the
DoT and the private operator, dispute settlement and consumer protection.
Licensing, setting of standards and spectrum management will remain
with the Ministry of Communications. The establishment of the TRAI is a
crucial step in the "reform" process: it divests the DoT of several
regulatory functions it has exercised all along on behalf of the
Government of India, and brings its service-providing and tariff-setting
under the regulatory jurisdiction of an independent agency.
The expansion of the Indian telecommunications sector will be
guided by the National Telecom Policy (NTP) approved by the
Government of India in 1994. The NTP set the basic aim of providing
telephone connections on demand. Its other specific targets:
•
Every Indian village to be covered by the telephone by
1997.
In urban areas, a public call office (PCO) per every 500
persons by 1997.
•
Special emphasis on quality of services.
•
All value-added services available internationally to be
introduced in India.
•
Private sector companies to be licensed to provide basic
telephone services.
•
Financial resources to be augmented through methods like
leasing, delayed payment arrangements, build-operate-transfer (BOT),
build-lease-transfer (BLT).
•
Pilot projects to be encouraged to access new technologies
and new systems in both basic and value-added services.
•
CIVIL AVIATION
India's air traffic is highly concentrated around the gateway
airports. The top five airports at Mumbai, Delhi, Chennai, Calcutta and
Bangalore handled 74 per cent of the total traffic in 1995-96. The next 10
airports at Hyderabad, Thiruvananthapuram, Goa, Ahmedabad, Guwahati,
Kochi, Kozhikode, Jaipur, Varanasi and Nagpur account for 16.3 percent.
Airport revenue at present is primarily contributed by 30 airports. The
remaining 62, on an average, handle less than two aircraft landings or 45
passengers (both departing and arriving) in a day.
Civil aviation activities can be broadly classified into three areas:
operational, infrastructural and regulatory-cum-developmental. On the
operational front, Air India Ltd provides international air services. Indian
Airlines Ltd had a monopoly in domestic air services, but since the
opening up of this area to private operators, it has been joined by several
private airlines. Pawan Hans Ltd supplies helicopter support services
primarily to the petroleum sector. Air India, Indian Airlines and its
subsidiary Alliance Air, which also provides domestic services, and
Pawan Hans are government-owned. Infrastructural facilities are supplied
by the Airports Authority of India (AAI), which was formed in April 1995
through the Airports Authority of India Act, by merging the separate
'national' and 'international' airport authorities that existed earlier.
The monopoly of public sector air carriers was ended by repealing
the Air Corporation Act, 1953 on March 1, 1994.The main statutes
currently applicable to the sector are The Aircraft Act, 1934, The Aircraft
Rules, 1937, and The Air Corporations (Transfer of Undertakings and
Repeal) Act, 1994.The regulatory and development functions are looked
after by the Ministry of Civil Aviation and the offices of the Directorate
General of Civil Aviation (DGCA).
The Ministry of Civil Aviation is responsible for the formulation of
national policies and programmes for development and regulation of civil
aviation and for devising and implementing schemes for the orderly
growth and expansion of civil air transport. Its functions also extend to
overseeing the provision of airport facilities, air traffic services, and
carriage of passengers and goods by air.
Apart from the public sector undertakings and the DGCA, the
Ministry also controls the Bureau of Civil Aviation Security.
The DGCA is responsible for :
Regulation of air transport services to, from and within India;
Registration of civil aircraft in India;
Formulation of standards of airworthiness for civil aircraft
registered in India and grant of certificate of airworthiness;
•
Licensing of pilots, aircraft maintenance engineers and flight
engineers;
•
Licensing of aerodromes in India;
•
Coordinating regulatory functions with the International Civil
Aviation Organisation.
•
•
•
Following the opening up of air cargo services to private operators
in 1990, several private international airlines have begun to operate cargo
flights. The result is an improvement in the availability of timely cargo
services at competitive rates, decline in cargo rates and increase in the
volumes handled by as much as 15 to 20 per cent a year.
A similar "open skies" policy was introduced for passenger traffic
in 1994, which ended the monopoly of public sector domestic and
international carriers. Currently, seven scheduled private operators and 22
non-scheduled operators are allowed to operate these services. In just over
two years, the private operators' marketshare of domestic passenger traffic
has risen to around 40 per cent. Overall capacity has risen significantly,
and consumer choice and competition has led to enhanced service quality.
The entry of private airlines has more than doubled the rate of passenger
air traffic growthabout 10 per cent in 1992-96 compared with 5 per cent in
the 1980s.
Airport infrastructure Airport capacity in India is low, in
comparison with several East Asian coutries. However, the Government
has taken several measures to support the development of adequate airport
infrastructure, like the opening of airport construction to the private sector
and the merging of the domestic and international airport authorities to set
up the AAI. The latter is now responsible for providing infrastructural
facilities, with the aim of accelerating integrated development and
expanding and modernising the operational, terminal, and cargo facilities
in line with international standards.
The airports are managed by two divisions of the AAI: the
International Airports Division (IAD) and the National Airports Division
(NAD). The former manages, operates and develops the five international
airports at Delhi, Mumbai, Calcutta, Chennai and Thiruvananthapuram. It
has undertaken the construction of terminal complexes at various
international airports, and improvements and upgradation of runways and
terminal buildings. The NAD looks after domestic airports, and has
undertaken a number of projects to improve services and upgrade
facilities.
The Government has traditionally had a monopoly in building
airports, from conception to delivery, with business assured from national
carriers, which were also monopoly users. However, given the heavy
investments needed, private entrepreneurs have now been invited to
participate. The government is encouraging private sector participation in
construction and operation of new airports using the BOT approach. This
has set the stage for the commercialisation and partial privatisation of
major airports, and the development of a landlord-coordinator role for the
various airport authorities similar to that envisioned for the seaports.
PORT
India has 11 major ports and 139 operable minor ports.
The major ports account for nearly 95 per cent of the total traffic handled,
which in 1996-97 was approximately 227 million tonnes. This figure is
pro jected to rise to 390 million tonnes by 2000-01 and to over 650 million
tonnes by 2005-06. While traffic growth has been on the upswing over the
last few years, the commodity composition has also undergone substantial
change, reflecting the rapid industrialisation of the Indian economy.
The total capacity of the major ports is currently 215 million tonnes.
Overall port capacity required to handle the projected traffic is estimated
to be 325 million tonnes in 2000-01 and 540 million tonnes in 2005-06.
Additional capacity of 138 million tonnes needs to be commissioned by
2000-01, and 215 million tonnes between 2001-02 and 2005-06 to handle
the projected growth. In 2005-06, the traffic-to-capacity ratio is expected
to be 1.207 as against the current 1.147 . Though most Indian ports are
operating at more than 100 per cent of their rated capacity, there is still
considerable scope for increasing capacity utilisation and efficiency levels.
Indian port productivity may still not measure up to acceptable
international standards, but efficiency indicators like the Average Ship
Turn Around (ASTA) and the Average Ship Berth Output (ASBO) have
been improving rapidly over the last decade. The ASTA fell from 11.9
days in 1984-85 to 6.9 days in 1993-94, with the ASBO moving from
2,314 tonnes per day to 3,990 tonnes. The average per-berthing delay too
has come down from 3.6 to 1.8.
The principal legislations governing Indian ports are The Indian
Ports Act, 1908, and The Major Ports Trust Act, 1963. The Indian Ports
Act confers the power of administering major ports to the Central
Government. Otherthat is, minorports are the responsibility of the state
governments, excluding matters pertaining to public health. The Act lays
down rules for safety of shipping and conservation of ports. Besides, it
regulates matters pertaining to the administration of port dues, fees and
other charges.
The Major Ports Trust Act provides that the administration, control
and management of major ports lies with the respective Port Trusts. The
existing legal framework permits the involvement of the private sector in
select areas of port development and maintenance. A number of new
policy initiatives have been announced by the Government recently to
usher in greater autonomy and clearly define commercial and legal
relationships in these areas.
Recognising the need for major expansion of India's port
infrastructure to handle increased foreign and coastal trade, the
Government has thrown open the sector to private participation. The
objectives: to introduce competition in port services, improve efficiency,
productivity and quality of service; reduce the gestation period for setting
up new facilities; and bring in the latest technology and management
techniques.
The Ministry of Surface Transport has released the revised
guidelines to be followed by the Port Trusts for private sector participation
in the development of major ports. The following areas have been
identified for privatisation, or investment by the private sector:
These areas are indicative in nature; individual major ports can
expand the scope of these activities after consultation with the Central
Government. Each port may identify specific projects for implementation
through private sector participation.A number of states have also invited
private investors to develop minor ports. The terms and conditions for
these are decided by the respective state governments.
URBAN INFRASTRUCTURE
The 1991 Census of India estimated that 217 million Indians live
in urban areas. Urban India comprises less than 30 per cent of the
country's population, but contributes more than 50 per cent of the GDP.
The figure is estimated to go up to 60 per cent by 2001. With the resultant
pressure on basic urban amenities and facilities growing rapidly, the
investment requirements in the sector are estimated to be of the order of
Rs 2,800 billion (US $80 billion) in the period 1995-2005.
Based on 1991 population, India's utilizable water resources
amount to 1288 cubic metres per capita per year. However, water
resources are not evenly distributed throughout the country.
India's total water demand is projected to be about 1050 b.c.m. by
the year 2025 as compared to 552 b.c.m. in 1990, Demand in urban and
industrial areas is likely to increase by 3 times by the year 2025. Of India's
3768 towns and cities, 71 Class-I cities have waste water collection and
treatment facilities to some extent. Water resources management and
pollution control has significant scope for improvement.
The coverage in terms of population with organised sewerage
systems in Class-I cities ranges from 50% to 70% in different towns and
cities. Basic sanitation facilities have reached to around 50% of the urban
population. For achieving 100% coverage of urban population with water
supply and sanitation facilities by the year 2021, the investment needed
would be of the order of US$ 43 billion for water supply and US$ 16.03
billion, for sewerage sanitation and drainage US$ 24.00 billion and for
solid waste management US$ 3.23 billion. Demand is rising at an
enormous pace. Waste collection systems in most Indian cities need to be
formalised and professionalised.
Vehicle ownership is rising rapidly, with the two-wheeler
population growing the fastest, at 17 per cent a year. India needs speedy
efficient transportation alternatives vis-a-vis private vehicles. By the year
2001, the number of vehicular trips to be catered to will be about 99
million per day. About 70 million of these will be by mass transport.
Assuming that half of these are by rail-based systems, 35 million trips
need to be by road-based systems.
A government-sponsored study has estimated investment needs of
US$ 2.6 billion for various segments of road infrastructure for the 300
Indian cities which constitute nearly two-thirds of the urban population.
The Indian urban infrastructure reform programme is designed to improve
use of the existing resource base and strengthen it, and make it more
efficient through private sector participation.
Urban services in India have been traditionally provided by citylevel agencies, usually financed through loans and grants from Central and
state governments. States like Andhra Pradesh, Kerala, Tamil Nadu,
Karnataka and Gujarat have set up Infrastructure Finance (or
Development) Corporations to act as nodal agencies for implementing
infrastructural and urban development programmes in the states. At the
Central Government level, the Ministry of Urban Affairs and Employment
has the overall responsibility for urban infrastructure development.
Realising the need to restructure municipal bodies delivering urban
services, the Government has recently amended the Indian Constitution to
give local bodies the status of a third-tier government, thus providing them
greater operational autonomy.
The National Water Policy, announced in 1987, emphasises that
drinking water should be given top priority from any water resources
compared to other uses. Efforts initiated during the International Drinking
Water Supply and Sanitation Decade (1981-90) through enhanced
investment in the sector had led to a perceptible improvement in the
coverage of the country's urban population with water supply and
sanitation facilities. As reported by States and Union Territories, by March
1997, 90% of the urban population had access to drinking water facilities
and 49% with sanitation facilities.
Urban infrastructure projects are eminently suitable for publicprivate partnerships. Arrangements such as Build-Own-Operate (BOO),
Build-Own-Operate-Transfer
(BOOT),
Build-Own-Lease-Transfer
(BOLT), are promising options.
The Central and state governments welcome private initiatives and
public-private participation in sectors like water supply, sanitation, public
transport, and township and land development. The Indian Government
stands committed to provide support in the form of equity contribution, a
package of concessions, dedicated levies to repay loans, and a transparent
regulatory framework.Private investors are encouraged to negotiate the
concessions required to make their investments safe and paying.
One significant fact that investors should consider is that local
agencies in India have shown phenomenal progress in the recovery of
costs of services and some have achieved full cost recovery. The city of
Visakhapatnam in Andhra Pradesh offers a good example of how crosssubsidisation between consumer groups can make water supply systems
run on commercial principles. The municipal corporation of Ahmedabad
in Gujarat has performed a remarkable turnaround from a perennially lossmaking body to a highly profitable organisation and has already launched
the country's first Municipal Bond.
Water Supply
Privatisation could be introduced in case of new townships and
projects for planning, designing, source development, execution of works,
operation and maintenance including billing and collection. In case of
metros and mega cities, water supply augmentation schemes for source
development, conveyance of raw water, its treatment and bulk supply to
the city water supply authorities, maintenance of pumping stations, water
treatment plants and city distribution systems can be undertaken by private
agencies.
Sewerage
Similarly, in case of sewerage and sewage treatment, works such
as maintenance of pumping stations, sewage treatment plants and city
sewerage systems could also be taken up. Keeping in view the ever
increasing demands for fresh water, the private agencies may also install
tertiary treatment plants for reuse and recycling of sewage and industrial
effluents
for
various
non-domestic
uses.
SOLID WASTE MANAGEMENT
Solid Waste Management is another activity which could be taken
over profitably by the private sector provided resources recovery is
contemplated to make the system self-sufficient and financially viable. In
addition, efforts should be made to manufacture various equipment and
machinery such as pipes, pumps, quality control equipment and machinery
required in the water and wastewater treatment plants etc. within the
country by various foreign manufacturing concerns in collaboration with
the Indian companies as joint ventures for the Indian market.
Urban Public Transport
India has 23 metropolitan cities. The number is likely to go up to
40 by the year 2001. All offer attractive investment opportunities in public
transport. Citywise studies have been carried out for Delhi, Bangalore,
Calcutta, Chennai, Hyderabad, Mumbai, Ahmedabad, Jaipur, Surat,
Jammu, Nagpur, Vijayawada, Lucknow, Cuttack and Bhubaneshwar.
India welcomes private investment in Mass Rapid Transit Systems
(MRTS) and Light Rail Transit Systems (LRTS). Governmental support
for such projects may include rights for development of property,
foregoing returns/ dividends on any investments made by the Government,
the availability of budgetary sources for part-repayment of loans and tariff
agreements.
The proposed Mass Rapid Transit System for Delhi offers good
potential for public-private partnerships and the project is already in an
advanced stage of planning. Bangalore and Hyderabad are also planning
rail-based public transit systems.
ROADS, BRIDGES, FLYOVERS
Bypasses to large cities and bridges are investment opportunities.
There exists tremendous potential for private investment in construction
and maintenance of ring roads, arterial and sub-arterial roads, bridges,
flyovers and other facilities in cities.
HOUSING
The National Housing Policy, 1998 has been formulated to address
the issue of sustainable development of infrastructure and for strong
public-private partnership for shelter delivery. Private investment in the
sector is brisk and the opportunities are unlimited. The Government would
provide fiscal concession to carry out legal and regulatory reforms and
create
and
enabling
environment.
As per the action plan under the 2 million Housing Programme,
Ministry of Urban Affairs and Employment has embarked upon
facilitating construction of 7 lakh additional housing units in urban areas
every year. HUDCO is entrusted with financing 4 lakh units and balance 3
lakh units per year will be met other HFIs recognised by National Housing
bank, Cooperative Sector and Corporate Sector. As on 30.03.99, HUDCO
has sanctioned schemes for construction of over 4 Lakh houses under the 2
million Housing Programme.
The Urban Land (Ceiling and Regulation) Act, 1976 was repealed
through an ordinance notified on 11.01.99. This has since been approved
by parliament and the Repeal Act notified on 22.03.99. Government has
issued detailed guidelines to all State governments and Union Territories
to protect the interests of people belonging to Economically Weaker
Section and Lower Income Group.
The Ministry of Urban Affairs and Employment offers incentives
to non-resident Indians and foreigner of Indian Origin as well as Overseas
Corporate Bodies that are predominantly owned by them, for investment
in Housing and Real Estate Sector.
LAND AND TOWNSHIP INFRASTRUCTURE DEVELOPMENT
Returns on projects for development of land in extended areas of
large cities and new townships can be well above 20 per cent. A package
of concessions is being worked out.
INSURANCE SECTOR REFORMS
Many do not understand the word “insurance” and the need for
insurance. Even among the insured, the understanding of the insurance is
very poor. ‘Insurance’ means a system of insuring property, life, one’s
person etc against loss or harm arising in specified contingencies as fire,
earthquake, flood, accident, death, disablement or the like in consideration
of a payment proportionate to the risk involved.
A breadwinner needs insurance to protect his family against his
untimely demise or disablement. A trader needs insurance to protect his
properties against their sudden loss due to any reason such as fire ,
earthquake, nature’s vagaries, and theft. An insurance company makes
promises to meet contingencies and to indemnify the insured against risks,
which are specifically agreed to between the parties to be covered. The
traditional insurance products are Whole Life Assurance and Endowment
Assurance. Now there are many insurance products such as Money Back,
Term Assurance, Annuity, Pension Plan, etc.
H I S T O R Y O F I N S U R A N C E C O M P A N I E S : The
Indian insurance companies have not always been under state control. It
was in 1956 that the life insurance companies were nationalized. In 1971
the administration of non-life sector insurance sector companies was taken
over to be followed by their total nationalization from 1.1.73.
There were 245 life insurance companies and 107 non-life
insurance companies. Together they had Rs. 88.6 crores as on 31.12.57
and Rs.389.7 crores as on 31.12.73 respectively as their premium income.
The figures under the state control show that the business has developed in
a sustained manner. If the insurance premium is taken as indicator of this
growth it has reached the extent of Rs.19,274 crores on the life side and
Rs. 7,647 crores on the general insurance side in 1998. In some years, the
growth has been in the region of about 18 to 19% per annum but in the
recent years this has tapered off and the same has come down to 15 % per
annum.
Among the companies mentioned above, there were both Indian
and foreign companies. The main feature of the pre-nationalised insurance
sector was the utilisation of the insurance sector as a backup or extension
by the large and well known industrial houses of this country. Where
industries have provided a ready market for property risks being covered ,
it was a natural extension that many of them would like to have their
extensions in the banking and the insurance fields as well. Many of the
financial institutions which are large sized and important today have had
their beginnings in this manner.
CLASSIFICATION OF INSURANCE BUSINESS : The insurance
business is classifiable into three significant areas. The first and foremost
is the business generation mode where companies engage themselves in
the selling of policies and collection of premiums. The second or
intermediate stage is that of maintenance efforts to see that the companies
retain the business that has been developed and service the clients. The
third and final stage is that of payment of claims by the companies.
IMPACT OF NATIONALISATION : As already mentioned,
insurance constitutes a national monopoly. The insurance organization
comprises two state owned monolithic institutions, viz., Life Insurance
Corporation of India (LIC), and General Insurance Corporation (GIC).
The LIC was set up in 1956 as a result of the amalgamation of 245
insurance companies and it is governed by the Insurance Act of 1956. The
GIC was formed in 1973 as a government company (holding company)
with four subsidiaries, viz., (1) The National Insurance Company Ltd.,
Calcutta; (2) New India Assurance Company Ltd. Bombay ; (3) Oriental
Fire and General Insurance Company Ltd. New Delhi ;(4) United India
Fire and General Insurance Company Ltd., Madras.
The insurance companies provide a variety of insurance cover,
mobilize enormous resources for the development of the economy,
provide subsidized insurance cover, subsidized resources to priority areas
of development and benefits to customers by arranging better and more
services for their needs. There has been a rapid growth in the volume of
LIC’s business. New policies issued every year is now of the order of Rs 1
crore and the number of policies in force are 5.7 crore. The premium
income mopped up during 1995-96 alone amounted to Rs. 14,182 crore
and the total income, including investment was Rs.22,047 crore. The
corporate tax paid by the LIC was one of the highest. It was to the extent
of Rs. 583 crores.
DEFICIENCIES OF THE INSURANCE SECTOR : The Committee
on Insurance Reform ( known as Malhotra Committee ) identified many
deficiencies in the insurance sector such as 1) Customer Dissatisfaction, 2)
Huge size of the LIC, 3) Poor productivity, 4) Lack of Flexibility.
CUSTOMER DISSATISFACTION : Like banking insurance is a
service industry but the investment policy followed by LIC is not
determined by the best interests of policy holders. The company is not
conscious of its responsibility to act in the spirit of a trustee for the policy
holders in the management of their funds. The net yields on LIC
investment are considerably lower as compared to the yield/return on other
saving media.
HUGE SIZE OF LIC : The structure of the LIC and the way of its
functioning does not provide sufficient assurance that the organsation can
handle efficiently the vast potential growth in business. Owing to the
hierarchical functioning of central office and zonal offices, decision
making has slowed down. Hence restructuring LIC into small
organizations would help.
POOR PRODUCTIVITY : Over the years the staff unions have
performed a role in improving the terms and conditions of services of their
members. Hence a number of restrictive practices have grown which
constrained the efficient and economical functioning of the organization.
The organization is characterized by excessive staff who aspire for
promotion to the next rank once in every five years. It is found that 40% of
the office cadre possess cars in hire purchase terms on interest free loans
and also substantial allowances.
LACK OF FLEXIBILITY : Operational flexibility and ability to
respond to changing condition is constrained. At present the LIC has a
capital of Rs.5 crore, contributed entirely by central government. For an
organization of the size of LIC the amount is inadequate. The Malhotra
Committee recommended to raise the capital to Rs.200 crore of which
government holding should be 50%, the remaining being held by public at
large including the company employees.
RECOMMENDATIONS OF MALHOTRA COMMITTEE : In 1994,
the R N Malhotra Committee recommended that the insurance sector be
opened up to private competition, first domestically and then
internationally. The Committee has suggested that entry of foreign
insurance companies be allowed on a selective basis. The committee had
said that multinationals would be required to float an Indian company for
this purpose, preferably in a joint venture with an Indian partner. It had
further suggested that the initial start-up capital for a new company should
not be less than Rs 100 crore and the promoters’ holding should not
normally exceed 40 percent and be less than 26 percent of the equity. The
Committee further recommended comprehensive computerization for
handling business at all levels, for pricing products and improving
customer services and for developing effective management system.
INSURANCE BILL : The Insurance Regulatory & Development
Authority Bill, 1999 as passed by both Houses of Parliament was notified
on 29th December, 1999. The Act provides for the establishment of a
statutory Insurance Regulatory & Development Authority to protect the
interest of holders of insurance policies and to regulate, promote and
ensure orderly growth of the insurance industry. It also amends Life
Insurance Corporation Act, 1956, General Insurance Business
(Nationalisation) Act, 1972 and brings in consequential provisions in
Insurance Act, 1938 with a view to cease the exclusive privilege of LIC
and GIC in life and non-life insurance business respectively.
The Authority issued regulations on 15 subjects which included
appointed actuary, actuarial report, insurance agents, solvency margin, reinsurance, registration of insurers, obligation of insurers to rural and social
sector, investment and accounting procedure. The Authority is likely to
issue further regulations on brokers and re-insurance- life. During the year
1999-2000, the total new business under individual assurances was
Rs.91,213.42 crores under 169.77 lakh policies. The growth of new
business over the last year is 21.11% by sum assured and 14.37% by no.
of policies. The total premium income of the Corporation is Rs.24,630.37
crores representing a growth of 21.23% over previous year. The total
income of the Corporation is Rs. 27,849.76 crore representing 21.21%
TABLE - I
INSURANCE IN RURAL SECTOR
RURAL BUSINESS
% OF RURAL BUSINESS TO
TOTAL BUSINESS
Year
Policy
(in
lakhs)
Sum Assured
(in crores)
Policy
Sum Assured
1970
4.61
251.764
33.00
24.54
1975
5.72
464.27
31.85
26.37
1980
5.91
603.77
28.20
22.09
1985
9.52
1569.62
35.26
29.20
1990
30.48
8086.35
41.23
34.33
1995
49.02
21571.00
45.10
39.10
1996
52.57
21263.59
47.70
41.00
1997
60.33
24278.73
49.20
42.80
1998
68.40
27550.69
51.40
43.30
1999
81.23
35372.94
54.70
47.00
increase over last year. The Life Fund of LIC as at 31st March, 2000 has
exceeded Rs.1,50,000 crores representing a growth rate of over 20% over
the last year. The gross yield earned on the mean Life Fund during 19992000 was 12.08%. There were 9.16 crore individual insurance policies in
force as on 31st March, 1999 with Rs.4,57,435 crores of sum assured. The
penetration in terms of Premium Income as a percentage is 1.22% of
Gross Domestic Product. Table I shows the growth of insurance sector in
rural sector during the reform period.
BENEFITS OF INSURANCE SECTOR REFORMS : Insurance
sector reforms is likely to bring the following benefits :
INCREASED INSURANCE COVERAGE : Insurance reforms is
likely to lead to deeper and wider insurance coverage providing security to
hundreds of millions of additional people. International experience with
liberalisation of insurance sector indicates a tremendous possibility of
spurt in business. In Korea, Taiwan and Sri Lanka, within 3-4 years of
opening up insurance business grew by three times the rate of GDP at a
compounded growth rate of around 18%
Liberalisation invariably has resulted in higher premium income as
a percentage of GDP and thereby expanding the market for insurance. Life
Insurance Premium income as a percentage of GDP is low at 0.5% in India
as compared to 0.9% in Thailand, 1.5% in Taiwan, 2.6% in Korea and
3.3% in Australia.
INCREASED PENSION COVERAGE : The pension schemes in most
of the developed countries are voluntary with notable exceptions of
countries like Switzerland, Australia, France, Chile and Singapore. Even
though pension system in developed countries are voluntary, these
countries have built huge pension funds which have contributed to high
domestic savings, infrastructure development adequacy of social security
after retirement and development of capital markets.
Table II on next page clearly indicates the insufficiency of India
pension funds to act as a cushion for social security of the old. India has
the highest number of people above 60 years of age among the 14
countries in the World Development Indicators shown in Table III but its
pension assets per person rank last in the study. The main reason being the
coverage of pension plan in India covers only 8% of the working
population.
INCREASED CONSUMER FOCUS : Competition will give Indian
consumer a choice when he is considering purchasing an insurance or
pension product or service
TABLE - II
Country
Assets of Pension
Funds ($ bn.)
Pension Funds as
a % of GDP
Coverage %
Nature of Pension
Plan
USA
2915
43
46
voluntary
UK
643
55
50
voluntary
Germany
59
3
42
voluntary
Japan
182
5
50
voluntary
Canada
187
28
41
voluntary
Netherlands
145
77
83
voluntary
Sweden
87
28
90
ATP Compulsory
ITP Voluntary
Denmark
22
15
50
Voluntary
Switzerland
173
69
90
compulsory
Australia
62
19
92
compulsory
France
22
2
100
compulsory
Chile
15
35
100
compulsory
Singapore
60
13.8
100
compulsory
INCREASED EMPLOYMENT : No clear examples of increased
employment due to reform in the insurance sector can be cited but the
experience in Asian countries would indicate substantial direct
employment growth. For example in Malaysia, employment increased
from 14,500 in 1992 to 19,500 in 1996 and in Thailand it rose from 22,000
in 1992 to 34,000 in 1996.Assuming a 25% growth in employment
opportunities in the insurance sector, one may expect an additional 2 lakh
jobs in nest five years.
IMPROVED SERVICES : Currently life insurance in India is largely
drive by tax incentives and sold on the basis of personal relationship.
These factors will continue to be key elements in the consumer decision
making process but reforms particularly the participation of the new
insurance companies is likely to make it insurer’s need-driven exercise.
BEST GLOBAL MANAGEMENT PRACTICES & TECHNOLOGY:
Currently GIC remits as much as 16% of their premiums offshore as
reinsurance. This creates a drain on foreign-exchange reserves and is
essentially an export of capital in what is already a starved economy. The
entry of new insurance companies into the Indian market will help to stem
the tide of the outflow and develop the indigenous capacity and strength of
Indian market.
LONG TERM INVESTMENT CAPITAL IN INDIA : In a capital
starved economy like ours, long term capital is very important. As per
Malhotra Committee’s recommendations, new insurance companies are
expected to invest Rs 100 crores and in future they will have to be
prepared to invest an additional Rs 100 crores or more to comply with the
solvency requirements.
TABLE - III
Country
USA
Population of 60 &
above
42.08
Assets of Pension
Funds ( $ bn.)
2915
Pension Fund per an
old individual($000)
69.27
UK
9.44
843
68.11
Germany
16.40
59
3.59
Japan
25.00
182
7.28
Canada
4.80
187
38.96
Netherlands
2.70
145
53.7
Sweden
1.98
87
43.94
Denmark
o.95
22
23.16
Switzerland
1.40
173
123.57
Australia
2.70
62
22.96
France
11.60
22
1.89
Chile
12.60
15
1.19
Singapore
2.70
60
22.22
India
74.32
35
0.47
LONG TERM SAVINGS FOR THE ECONOMY : Reforms in the
insurance sector is expected to generate additional funds for the
infrastructure investment. Insurance companies will also bring long-term
capital investment.
Fears have been expressed in many quarter that insurance is such a
delicate subject that any misapplication of mind or mismanagement of
companies could lead to total financial loss and disaster. It will not only
lead to disaster of the companies but to the total ruin of the country as a
whole and also of the millions of customers which the insurance
companies cater. Life time savings would be lost and people who had
hoped for a prosperous future based on the promises of the insurance
companies would have to run from pillar to post to secure themselves
against vagaries of the future. It is not without this recognition that all over
the world the industry is regulated. Even in India, the Insurance Act of
1938 contains within itself various provisions which are relevant for the
safe and sound management of an insurance company. Apart from
prescriptions of various rules to see to it that an insurance company is
adequately capitalized, there are provisions which prevent any group of
persons from taking hold of the management of insurance company, there
are provisions which are sacrosanct and require an insurance company to
keep a deposit which is not part of its working capital. There are
requirements that at all time, the insurance companies must maintain their
solvency.
REFERENCE
1. N. Rangachari, “The Indian Insurance Industry” in P. Mohan Rao
(edt.), “Financial System and Economic Reforms”, Deep & Deep,
New Delhi,2002
2. G. Karunakaran Pillai, “Insurance Regulatory Authority Bill and its
Impact”, in P. Mohan Rao (edt.), “Financial System and Economic
Reforms”, Deep & Deep, New Delhi, 2002
3. B. N Banerjee, “Globalisation, Rough and Risky Road”, New
Delhi,1998
4. Montek Singh Ahluwalia, India’s Economic Reforms in Jeffrey D.
Sachs, Ashutosh Varshney, & Nirupam Bajpai (edt.),”India in the Era
of Economic Reforms”,OUP, New Delhi, 2000, pp.26-80
CAPITAL MARKET REFORMS
Many changes took place in the capital market since the advent of
economic reforms. The most striking development during this period was
the abolition of the office Controller of Capital Issues, which regulated the
pricing of initial public offerings. The simultaneous setting up Securities
and Exchange Board of India (SEBI) as the regulator of capital markets, of
the National Stock Exchange (NSE) a fully electronic order book driven
exchange with a clearing corporation and a share depository introduced a
great degree of transparency in the operations.
With the growth of industries, the number of companies accessing
the capital market and the quantum of resources that have been raised has
shown an exponential growth. Correspondingly it increased the
importance and responsibility of stock exchanges. The Indian Stock
Market got impetus once the Indian Companies Act, 1856 was passed. An
informal Association formed in 1875 was called “Native Share and Stock
Brokers’ Association” which later came to be known as Bombay Stock
Exchange. Afterwards other stock exchanges were promoted at other
places to promote regional growth. By the end of December, there as
many as 24 stock exchanges in India.
BIRTH OF NATIONAL STOCK EXCHANGE : Bombay Stock
Exchange enjoyed a dominant position in terms of the trading volumes
and in the number of scrips that were traded daily. This may be due to the
pressure of major financial and investment distributors in Mumbai. But the
late 1980s witnessed a phenomenal growth in the Indian Capital marketboth in the number of companies listed and the amount of resources
mobilized through initial public offers (IPO). Any IPO to be effectively
marketed in those days should have been listed in Bombay Stock
Exchange(BSE). The volume of secondary market transaction in BSE was
also way ahead of the volumes in other stock exchanges. BSE brokers
were assured of huge amount of trading business from the rest of the
country. This led to a situation where the BSE broker lost sight of
Fairness, transparency and business ethics and they gave a raw deal to
customers in share trading. All these factors culminated in the birth of
National Stock Exchange (NSE) in 1993-94.
The technology of trading has been modernized in NSE. It
introduced on-line electronic trading in 1994 through V-SAT (Very Small
Aperture Terminal ) technology. The system allows brokers located in
about four hundred (400) Stock Exchange and Non-Stock Exchange
centers across the country to trade in a single unified market. It provides
automatic matching of buy and sell orders with price time priority and
ensures transparency for investors and assurance of the best price.
Competitive pressure has led the Bombay Stock Exchange to introduce an
on-line trading system in 1995 with linkages to brokers all over the
country.
Other special features have been State-of-Art information
technology, a demutualised exchange mechanism and an exclusive
Wholesale Debt Market Segment. NSE’s IT set-up is the largest by any
company in India. It can handle up to one million trades per day using
satellite communication technology. The ownership of NSE is with IDBI
and other financial institutions. The trading rights are given to brokers
who do not have any control in the management of exchange. Other stock
exchanges are directly or indirectly owned and managed by the brokers.
TABLE - I
DISTRIBUTION OF V-SATS IN INDIA
STATES
NO. OF CITIES/TOWNS
TOTAL V-SATS
Andhra Pradesh
49
182
Assam
3
8
Bihar
8
29
Delhi
1
414
Goa
1
5
Gujrat
35
225
Haryana
21
68
Himachal Pradesh
2
3
Jammu & Kashmir
2
9
Karnataka
16
93
Kerala
47
120
Madhya Pradesh
20
87
Maharashtra
16
883
Orissa
5
13
Punjab
26
106
Rajasthan
23
99
Tamil Nadu
31
178
Uttar Pradesh
41
183
West Bengal
8
211
Pondicherry
1
3
SECURITIES AND EXCHANGE BOARD OF INDIA: The Securities
and Exchange Board of India (SEBI) was given statutory powers in 1992.
It has laid down a structure of regulations governing various participants
in the capital markets, including rules for insider trading, takeovers and
management of mutual funds. These rule are now in operation. The stock
exchanges, which were earlier dominated by brokers and lacked effective
supervision, are now much better governed. The focus of the new
regulations is to ensure investor protection through transparency and full
disclosure. SEBI’s functions are :
• Regulating the business in stock exchanges and any other
securities markets
• Registering and regulating the working of collective
investment schemes, including mutual funds
• Prohibiting fraudulent and unfair trade practices relating to
securities markets
• Promoting investor’s education and training of
intermediaries of securities markets
• Prohibiting insider trading in securities, with the imposition
of monetary penalties, on erring market intermediaries
• Regulating substantial acquisition of shares and takeover of
companies
ESTABLISHMENT OF NATIONAL SEURITIES DEPOSITORY LTD.:
Before the reforms shares were issued in the physical form and title was
transferred by the seller to the buyer to buy physical delivery of shares
along the transfer deeds. This process continued till the buyer wanted his
name to be registered as a shareholder. This involved physical transfer of
securities which is costly, inefficient and risky. Transfer of ownership
involves long delays in many cases. If the signature of the transferor was
different, companies found it difficult to register shares in the names of
transferees. As a result, the company does not recognize the transferees as
the owners of the share and he will not be eligible for any corporate
benefits like dividend, bonus shares. All these were made worse by the
circulation of forged, stolen and mutilated shares. There were thousands of
such cases, which could not be redressed by any agency. This led to the
promulgation of the Indian Depositories Ordinance in 1995 and setting up
of the National Securities Limited (NSDL). NSDL was set up by IDBI
(Industrial Bank of India), the largest financial institution of India, UTI
(Unit Trust of India), the largest investment institution of India and NSE
(National Stock Exchange), the largest stock exchange of India.
In 1996, NSDL commenced operations offering investors the
facility of holding securities in dematerialized form and settling trades
through book entries in the depository, eliminating delays and
uncertainties in the transfer of ownership. The volume of business done by
the Depository has expanded rapidly. In June 1997, only 48 companies
with a market capitalization of Rs.94,000 crore had signed up enabling
their securities to be dematerialized. By June 1998, this had increased to
198 companies with market capitalization of Rs. 2,88,000 crore. Thus the
value of securities actually dematerialized increased from Rs 2518 crore to
Rs 35,000 crore in twelve month period.
Highlights of NSDL as on December 30, 2000 were :
• Demat facilities are available for 2291 companies
• DP services are provided in 1886 locations across the
country
• 3.44 mllion accounts have been opened within the country
and abroad
• 29,360 million shares with a value of Rs. 3754 billion have
been dematerialized
• 10 Stock Exchanges including NSE and BSE have linked
up with NSDL to facilitate trading and settlement of demat
securities.
A competitor to NSDL in the form of CSDL (Central Depository
Service Limited) commenced operations in March 1999. CDSL is
promoted by Bombay Stock Exchange Bank of India, Bank of Baroda,
State Bank of India and HDFC (Housing Development Finance
Corporation) Bank.
PRIMARY MARKET CHANGES: There is a thriving market for
public issues in India. The instruments commonly offered are equity,
debentures and a variety of convertibles including debentures bundled
with warrants. Both private and public sector companies make public
issues. Every month roughly 130 issues take place. Unlike many other
countries, where issues are privately placed, public issues in India are
directly marketed to retail investors all over the country.
Once the Securities and Exchange Board of India (SEBI) was
given the authority to regulate the capital market, SEBI allowed the Free
Market Pricing System. Under this the Lead Merchant Banker in
consultation with the company decided the price. The justification of the
issue price has to be clearly explained in the prospectus. The logic in SEBI
permitting such a system is that the investor is given all the required
information to enable him to take an informed decision and the investor is
likely to reject issues, which are overpriced.
SECONDARY MARKET REFORMS: Private Mutual Funds have
been permitted and several like Morgan Stanley, have already been set up.
All mutual funds are allowed to apply for firm allotment in public issues.
Mutual funds were allowed to underwrite public issues in order to improve
the MF’s scope of investment. SEBI introduced regulations governing
substantial acquisition of shares and takeovers. Conditions were laid down
for disclosure and making mandatory public offers to shareholders. This
will protect the rights of minority shareholders and provide an exit route to
them at a fair and transparent price. The procedure for lodging of
securities for transfer was eased considerably for institutions with the
introduction of ‘jumbo’ transfer deeds and consolidated stamp duty
payment.
At present numerous mutual funds exist, including private and
foreign companies. A variety of schemes exist, both open end and close
end. All mutual funds are allowed to apply for firm allotment in public
issues. The functioning of mutual funds is regulated by SEBI regulations
which require that all MFs should be established as trusts under the Indian
trusts Act, while the actual management activity is conducted from a
separate Asset Management Company (AMC). The minimum net worth of
an AMC or its affiliate must be RS.50 million to act as a manager in any
other fund. MFs can be penalized for defaults including non-registration
and failure to observe rules set by their AMCs. MFs dealing exclusively
with money market instruments have to be registered with the RBI. All
other schemes floated by MFs are required to be registered with SEBI.
FOREIGN INVESTMENT IN CAPITAL MARKETS : Until 1992, the
only entry available to Indian Capital Market for the foreign investor was
through listed country funds. The first offshore-fund of this type was
launched by the UTI in London in 1986, followed by others.
Indian companies are now also allowed to raise equity capital in
the international market through the issue of Global Depository Receipts
(GDRs). GDRs are designated in dollars and are not subject to any
ceilings on investment. Settlement of transfer of GDRs is linked to the
international settlement systems like National Securities Clearing
Corporation in the USA and Euroclear in Europe.
There were 323 foreign institutional investors (FIIs) and 29 foreign
brokers operating in India in 1994. The opening up of the stock market to
FII investment in 1992-93 has led to a surge in FII inflows. It increased
from $4 billion in 1992-93 to $3197billion in 1997-98. This represented a
diversification of the portfolio of international investors into India, one of
the emerging markets. FIIs may invest only in:
• Securities in the primary and secondary markets, including
shares, debentures and warrants of companies listed or to
be listed on a recognized stock exchange in India,
• Units of schemes floated by domestic Mutual Funds
including the Unit Trust of India, whether listed on a stock
exchange or not
BOOK BUILDING : Under the process of book building, the
company seeking to raise resources appoints a lead merchant banker as
Book Runner. The Book Runner files the draft copy of the prospectus with
SEBI without mentioning the issue price. He forms a syndicate of 25 to 50
members and the draft prospectus is circulated among them, apart from the
other stockbrokers, mutual funds and FIIs. Book Runner builds the Book
based on interest indicated by the syndicate members at different issue
prices. Book Runner closes the books in consultation with the issuing
company taking into account the amount required and price preferences
indicated. Final prospectus is prepared with the issue price with the
Registrar of Companies.
This process of book Building is fair to both the issuer and final
investor. The issue price for equity share or rate of interest in the case of
bond/debenture is market determined, in a very transparent manner. It
gives satisfaction to both the parties that they have got a fair deal. It also
saves the company the huge expenditure involved in the public issue and
also the time factor. SEBI has permitted 100% resource raising by way of
Book Building. Earlier SEBI guidelines stipulated a public issue for 25%
of total resources to be raised and allowed Book Building to the extent of
75%.
The capital market in India has undergone a rapid transformation.
The introduction of internet trading, rolling settlement, abolition of par
value system and entry of information technology companies would
further help the expansion of securities market. The reforms already
introduced by the SEBI encompass a wide range of issues in the securities
market. But there is a need for continuous efforts to bring about further
transformation and improvement in its infrastructure and microstructure so
that the market becomes safer, fair, efficient, competitive and attractive for
investors, issuers and institutions.
SEBI’s FUTURE PLANNING : The SEBI’s efforts in the future will
be directed to:
i.
Achieve complete and full implementation of corporate
governance framework
ii.
Further strengthen the rolling settlement system
iii.
Further strengthen the clearing and settlement system and
speed up the process of dematerialisation and dematerialised trading
iv.
Set up a risk management group to further refine the
existing margining system with a view to reducing the transaction cost
without affecting the safety and addressing the risk arising from market
volatility
v.
Encourage wider use of internet for trading and other
activities in the securities market
vi.
Continue efforts for bringing uniform by-laws for stock
exchanges
vii.
Increase the role of venture capital funds
viii.
Strengthen the process of book-building
ix.
Enhance the role of market making
x.
Implement derivative trading on the exchanges
xi.
Continue upgrading and widening the disclosure norms for
the protection of the investors
xii.
Strengthen the surveillance and monitoring system at the
exchanges
xiii.
Develop programme for investor education to enhance the
awareness of securities market
xiv.
Measures to strengthen links with stock exchanges and
regulatory authorities in foreign countries
REFERENCES
1. K. T. Rengamani, “Radical Changes in the Capital market” in P. Jegadish
Gandhi & P. Ganesan (edt.), “Services Sector in the Indian Economy”,
Deep & Deep, New Delhi, 2002
2. Montek Singh Ahluwalia, India’s Economic Reforms in Jeffrey D. Sachs,
Ashutosh Varshney, & Nirupam Bajpai (edt.),”India in the Era of
Economic Reforms”,OUP, New Delhi, 2000, pp.26-80.
3. http.//www.nse.co.in
4. http.//www.sebi.gov.in
BANKING SECTOR REFORMS
The Indian financial sector includes a network of financial
institutions and a wide range of financial instruments. Commercial and
cooperative banks perform many kinds of business such as short-term
credit, merchant banking, mutual funds, leasing, venture capital, factoring
and other financial services. To support these, there is a wide network of
cooperative banks and cooperative land development banks at the state,
district and sub-division/sub-district levels. It is estimated that commercial
and cooperative banks hold around two thirds of the total assets of the
Indian financial system. The structure of the Indian financial sector is
given in Table I below.
TABLE - I
INDIAN FINANCIAL SECTOR
DEVELOPMENT BANKING
COOPERATIVE BANKS
NATINALIZED BANKS
BANKING INSTITUTIONS
COMMERCIAL BANKS
PRIVATE BANKS
NON-BANKING FINANCIAL
REGIONAL RURAL BANKS
FOREIGN
BANKS
In March 1996, there were 293 commercial banks in India of
which 196 were regional rural banks (RRB) with 14,459 branches. The
banking sector spanned 63,026 offices of which 32,995 offices were
located in rural areas. There were 16,400 offices in metropolitan and urban
areas. The total deposits of the scheduled commercial banks stood at Rs.
577,959 crores as on 27th February 1998.
The range of services offered by the Indian banking industry can
be classified under two broad headings (A) Consumer Banking (B)
Corporate Banking.
CONSUMER BANKING : This includes savings and checking
accounts fixed deposits and various loans like auto, housing, education
etc. ATMs and credit cards are value added services.
CORPORATE BANKING : This includes capital loans to
corporates, trade financing, opening of Letters of Credit, issuing
guarantees, cash management, project financing and treasury operations
for foreign exchange marketing and trading activities.
EVOLUTION OF THE BANKING SECTOR
The evolution of the banking sector in India can be traced into the
following five phases :
• Initial Years ( Prior to 1950 )
• Foundation Phase (1950-69 )
• Expansionary Phase ( 1969-85 )
• Consolidation and Diversification Phase ( 1985-91 )
• Financial Reform Phase ( Post 1991 )
Initial Years : A number of joint stock banks came into being on the
crest of the Swadeshi Movement, which began in India in 1905. Since
that year there was an outburst of banking activity in India. The rapid
stride made by the Indian joint stock banks is shown in Table II.
TABLE – II
Name of Banks
No of Banks
No. of Banks
1905
1910
Deposits
( In Lakhs)
1905
Deposits
( In Lakhs )
1910
Presidency Banks
3
3
2538
3658
Indian Joint Stock
Banks
9
16
1199
2566
The
Banks
10
11
1704
2479
Exchange
The expansion of internal and foreign trade, the increase in public
debt, the substantial rise in bank deposits and other war time and post war
financial developments brought the question of the amalgamation of
Presidency Banks to the forefront. It was also feared that if they did not
combine their resources, a time might come when any foreign bank might
succeed in making a strong foothold in India. The Imperial Bank of India
Act provided an agreement between the bank and the secretary of state,
which was signed on January 27, 1921. By this agreement, the bank was
required to act as bankers to the government for a period of ten years and
to open 100 new branches within five years.The Imperial Banks, the
Exchange Banks and the Joint Stock Banks formed the crux of Indian
banking from 1920-30.
Later a Banking Enquiry Committee was formed. It made its
recommendations in 1930. Some of the important recommendations were
the establishment of the Reserve Bank, removal of restrictions of the
foreign exchange business of the imperial bank, promulgation of Special
bank Act, etc. Accordingly the Reserve Bank Bill was introduced in the
Legislative Assembly in September, 1933. In April 1935, the Reserve
Bank began to function.
Foundation Phase : During the foundation phase, covering the
period from 1950 to 1969 , legislative framework was prepared for
facilitating reorganization and consolidation of the banking system. This
phase witnessed the rapid growth of bank deposits. The ratio of bank
deposits in national income rose from 14.7 in 1960 to 16.6 in 1969, This
growth was due to spread of the banking habit, expansion of the branch
network and increase in interest on bank deposits. This phase also saw the
emergence development banks and cooperative banks
Expansionary Phase :Government intervention in the banking
sector had its origin in nationalist thinking. Colonial banking was
perceived to be biased in favour of working-capital loans to trade and
large capitalist enterprises and against common man. This combined with
socialist ideology culminated in nationalization of 14 banks on 19th July
1969. With the nationalization of these fourteen banks, the Government
came into control of 83 percent of bank deposits. This put the government
in a dominant position in the field of finance. In 1980, six more banks,
each with deposits of Rs 200 crores and above, were nationalized. In this
way the government further extended the area of public control over
country’s banking system.
Consolidation and Diversification Phase : The government took
a number of policy initiatives in 1980s aimed mainly at consolidation and
diversification. There was a series of structural reforms which provided
banks with different avenues for investing their surplus money, borrowing
for their immediate emergency requirements, or providing services to the
clients. Among these measures, the prominent one is the policy to pursue
the development of the money market by introducing new financial
instruments and strengthening the existing ones. New instruments
included 182-day Treasury Bills, Certificates of Deposits (CD),
Commercial Paper (CP), and Inter Bank Participation Certificates (IBPC).
New institutions such as Discount and Finance House of
India(DFHI) and Small Industries Development Bank of India (SIDBI)
were also established. DFHI paved the way for development of active
money market.
Financial Liberalisation Phase : Considerable progress was
achieved in terms of geographical reach of the banking sector, profitability
and efficiency levels have been very low especially in the case of public
sector banks not to speak of quality of service. The banking sector was
burdened with non performing assets (NPAs) of around 17%. Regulation
had a stranglehold on all aspects of the banking sector including entry of
the players, interest rates and credit allocation. The loan melas, priority
sector lending and a host of such schemes contributed to the low
profitability of the banking sector.
By the beginning of 1990s many public sector banks became
unprofitable and undercapitalized. The root cause of this was the excessive
emphasis given to social banking goals like widening the reach of banking
services. The crucial elements like capital adequacy, profitability and low
NPAs had to take a back seat. In such a situation, depositor and investors
were losing confidence in the banking sector.
Against this backdrop, the Narasimhan Committee was constituted
to examine the relevant aspects of the structure, organization,
functions and procedures of the financial system and make
recommendations. In 1991, the Narasimham Committee’s major
recommendations were as follows: (a) establishment of a four-tier
hierarchy for the banking structures with 3 or 4 large banks
including the State Bank of India at the top and rural banks at the
bottom; assigning supervisory functions over banks and financial
institutions to a separate autonomous body sponsored by the.
Reserve Bank of India (c) phased achievement of 8 percent capital
adequacy as recommended by the Basle Convention in 1988; (d)
phased reduction in statutory ratio starting from 1881-92; (e)
deregulation of interest rates on the basis of guidelines provided by
the Chakrabarty Committee; (f) competition among the financial
institutions which would adopt a syndicated approach rather than a
consortium approach; (g) prudential guidelines to be formulated to
govern the functioning of financial institutions; (h) proper
classification of assets and full disclosure and transparency of
accounts of the banks and financial institutions.
CASH RESERVE RATIO (CRR): Cash Reserve Ratio (CRR) is the
one which the banks have to maintain with itself in the form of cash
reserves or by way of current account with the Reserve Bank of India
(RBI), computed as a certain percentage of its demand and time liabilities.
The objective is to ensure the safety and liquidity of the deposits with the
banks. The RBI pays a nominal interest rate on the cash reserves
maintained by the banks. Needless to say this rate is much less than the
market rate. Increased CRR levels result in an increased proportion of the
banks’ resources lying as idle cash.
Since 1972, the CRR has been more actively used in upward
direction. It was raised in stages from 3 percent in 1972 to 11percent in
1988. In 1989 it was raised by another 4 percent. Now the CRR over the
past years have been reduced gradually to the current level of around 10%.
STATUTORY LIQUIDITY RATIO (SLR): Banks are required to
maintain a certain proportion of their demand and time deposits in the
form of gold or unencumbered approved securities. The RBI is
empowered to impose an SLR up to 40 percent. Under the directive of the
finance ministry RBI raised the SLR ratio to acquire funds to help the
government to finance its consumption/non-development expenditure. The
SLR has been raised in stages from 20 percent in 1963 to 38.5 percent in
1990. In accordance with the recommendations of the Narasimhan
Committee, it has been reduced to 28 percent.
REGULATION OF INTEREST RATES : Interest rates have been
almost completely decontrolled since 1991 when both the interest rate on
government debt as well as the deposit and lending rates of commercial
banks were strictly controlled. Mandatory requirements for investment by
banks in low interest securities have been sharply lowered and the market
on the basis of periodic auctions conducted by the RBI now determines
interest rates on government securities. Deposit rates have been
completely deregulated and lending rates have also been largely
deregulated.
PRUDENTIAL NORMS AND CAPITAL ADEQUACY NORMS :
Prudential norms and standards relating to capital adequacy, income
recognition, asset classification and provisioning have been upgraded.
Indian banks are required to achieve capital adequacy norms of 10% risk
weighted assets by the year 2000. This is higher than the 8% percent
which is prescribed by the Basle Committee.
The government has done its part by injecting more capital into the
banks; enabling them to conform to capital adequacy standards. A sum of
Rs.11,300 crores has been provided by the Government in the union
budgets toward recapitalisation of public sector banks.
REGULATION AND SUPERVISION : In this area, the committee
had recommended that an autonomous Department of Supervision should
be set up under the RBI and that the supervision should be separated from
the traditional central banking functions of the RBI. A major breakthrough
in the supervisory mechanism of the financial system was the constitution
of the Board of Financial Supervision (BFS) in 1994 under the aegis of
the RBI
The first step towards a new strategy for strengthening the
supervision of banks under the direction of the BFS has been the
introduction in February 1995 of an off-site monitoring system by the
Department of Supervision. This system is based on a package of
prudential supervisory reports to be filed by banks on a quarterly basis and
is to be introduced in two stages.
UNIFORM ACCOUNTING PRACTICES : The generous attitude
of the banks towards unpaid loans had covered their balance sheets in red
and increased their NPAs. Banks however did not worry about this, as
they were mainly concerned with growth in deposits and advances and not
with the recovery of loans. In order to ensure that Indian banks followed
accounting practices that were in line with global standards, the committee
had recommended that uniform accounting practices should be adopted.
Banks have also been forced to follow prudential norms w.r.t. income
recognition, asset classification and provisioning as part of the changes in
accounting practices.
REDUCTION OF NON-PERFORMING ASSETS : There has also
been a directed effort towards reducing the percentage of the NonPerforming assets of the banks. This is particularly important as an
increasing proportion of NPAs decreases the profitability of banks. The
fall in NPAs during the Reform Period is shown in Table III.
TABLE - III
Year
Gross NPA
Gross NPA as % of Gross
advance
Net NPA
Net NPA as % of
net advances
1993
39,253
23.2%
NA
NA
1994
41,041
24.8%
NA
NA
1995
38,385
19.5%
17,567
10.7%
1996
41,661
18%
18,297
8.9%
1997
47,300
15.7%
22,340
8.1%
1998
50,815
14.4%
23,761
7.3%
1999
58,722
14.7%
28,020
7.6%
2000
53,066
13%
26,596
7%
2001
56,608
13%
27,856
7%
COMPETITION IN BANKING SYSTEM: competition in the
banking system has increased significantly as new private sector banks
have been given licences and foreign banks have been allowed to expand
much more liberally than in the past. The share of business of private
sector banks and foreign banks has increased from around 10.6 percent in
1991-92 to 17.6 percent in 1996-97. Public sector banks still dominate the
system, but greater competition among public sector banks still dominate
the system, but greater competition among public sector banks is
beginning to make an impact on their behaviour.
NARASIMHAM COMMITTEE RECOMMENDAIONS(PhaseII):
The second report (1998) of the committee has reiterated many of
its previous recommendations. It has also suggested some new ones in the
light of seven years of post reform experience. More than anything else
the second phase of banking reforms is a precursor to full convertibility on
the capital account which is expected to be operational from the year 2000
in a phased manner. The major recommendations of this phase are:
Reducing government stake in banks to 33% : The committee has
recommended reduction of government stake to the extent of 33%. This is
good as the current limit of holding restrict the ability of banks to tap the
capital market. This has resulted in the appointment of Chairman and
Managing Directors by the Board of the Banks.
Increasing Capital Adequacy Norms to 10% by 2002 : The limit of
10% is more than the Basle Committee requirements of 8%. This has been
done because the Indian experience shows that a little more of capital
adequacy is desirable in the interest of the financial strength of the
banking system.
Conversion of weak banks into narrow banks : The concept of
narrow banking implies that a bank will only lend to a specific sector
which is very credit worthy. Doing so will help the weak banks in
reducing their level of NPAs.
Asset Reconstruction Companies to issue NPA swap bonds : The
assets which have been identified as doubtful or loss making, can be
transferred to an Asset Reconstruction Company which in turn issues NPA
swap bonds to banks. The ARC will be allowed to file suits in debt
recovery tribunals for recovery.
Depoliticisation of appointments in boards : This recommendation
is intended to help improve the flexibility and autonomy of banks. It will
also encourage professionalism in bank management and board
appointments.
By and large banking sector reforms in India have proceeded in
four major directions. Firstly, effort has been made to set the policy
conditions right and removing the operational constraints of the financial
system. The medium term target of 25 percent and 10 percent set for CRR
and SLR respectively have been by and large achieved. But these ratio
levels are still higher than what would perhaps look ideal in the
international context. Our relatively high reliance on the cash-reserve ratio
has been necessitated by the needs of monetary policy operations.
The second directional change has been in the area of creating a
more competitive environment in financial sector through reform
measures such as relaxation of entry and exit norms, reduction in public
ownership in banking industry and letting banks access capital market for
meeting their fund requirement. The main objective of this change is to
bring out the best result in terms of pricing and quality of banking services
over a period of time.
The third important direction of change has been the strengthening
of market institutions and allowing greater freedom to financial
intermediaries. These reforms have taken the form of gradual
liberalization of interest rates, development of money, capital and debt
markets and giving operational flexibility to banks in management of their
assets. In simple terms, these changes imply greater degree of exposure of
individual financial institutions to domestic and international economic
environment.
The fourth important element of reform concerns the safety aspects
of the financial system. Successive reform initiatives in this area
have been aimed at prescribing certain prudential standards for the
financial system and addressing certain structural weaknesses
which could minimize their recurrence in future. Measures such as
income recognition norms, asset classification, meeting capital
adequacy standards through recapitalisation and devising a
supervisory framework are steps in the direction of ensuring the
safety of the financial system.
As a result of the reforms, the net profit of the scheduled
commercial banks as a percentage of their total assets has been changed
from a negative figure of –1.0 percent on an average during 1992-93 to a
positive of 0.5% during 1994-95 to 1997-98.In the case of most public
sector banks business per employee and profit per employee have shown
improvement in the recent period.
.
REFERENCES
1. Sawan Malik, The Indian Banking Industry, in N. Ravicnhandran(edt.)
“Competition in Indian Industries: A Strategic Perspective” ,Vikas,
1999,pp.47-84.
2. Rakhal Datta, Development in the Banking Sector, in Alak Ghosh &
Raj Kumar Sen (edt.)”Money, Banking and Economic Reforms”,Deep
& Deep, New Delhi 2002, pp.243-260.
3. Montek Singh Ahluwalia, India’s Economic Reforms in Jeffrey D.
Sachs, Ashutosh Varshney, & Nirupam Bajpai (edt.),”India in the Era
of Economic Reforms”,OUP, New Delhi, 2000, pp.26-80.
4. Bimal Jalan, Towards a More Vibrant Banking System in P.Mohan
Rao(edt.)“Financial system and Economic Reforms”, Deep & Deep,
New Delhi, 2002, pp.349-360.
IMPACT OF ECONOMIC REFORMS ON INDIAN ECONOMY
The growth rate of India’s GNP for the second half was of 1980s
was 5.8 percent per annum. Compared to that for the post reform period
excluding 1991-92 as year of exceptional crisis, the average for 92-98
comes to 6.5% per annum. The average rate for the 1993 to 1998-98
period (based on the new series of GDP) comes to 6.8 percent.
Similarly the trend rate for the post reform period estimated at 6.9
percent is higher than 5.5 percent applicable for the 1980s. The post
reform growth therefore has been at least 1.1 percentage point higher than
the average rate achieved during the pre-reform period. The average rates
reflect the robust growth performance recorded by Indian economy during
the first five years after the initiation of reforms.
There was a sharp upturn in GDP growth in 1998-99, which
reversed the deceleration in growth seen in 1997-98. GDP (at factor cost)
growth accelerated to 6.8 per cent in 1998-99 from 5 per cent in 1997-98 .
The primary supply side factor for the recovery was agriculture. GDP
from the agriculture and allied sectors, which had fallen by 1.9 per cent in
1997-98 recovered dramatically to grow by 7.2 per cent in 1998-99. GDP
from agriculture & allied sectors hence contributed 1.9 per cent points to
the overall growth rate of 6.8 per cent in 1998-99. As in the previous year
GDP from "public administration and defence" contributed 0.7 per cent
point to the overall GDP growth rate in 1998-99. This was primarily
because of the wage increase for government employees consequent to the
Fifth Central Pay Commission’s recommendations. The wage increase
was largely implemented by the Central Government in 1997-98 and by
the Sate Governments in 1998-99.
Unlike in 1997-98, when the GDP from manufacturing had led to a
substantial decline in GDP growth; the growth rate of manufacturing at 3.6
per cent in 1998-99 was only 0.4 per cent point less than the year before.
GDP from electricity, gas and water supply and from trade, hotels and
transport grew faster in 1998-99 than the year before, while mining and
quarrying suffered decline, construction and financial services showed
marked deceleration. In 1999-2000, the GDP growth rate was 6.4 percent.
To some extent the recent slow down could be on account of the
contagion effect of the east Asian crisis on India indirectly and economic
sanctions imposed on India in May 1998 following Pokharan II by major
industrial countries. In large part the recent slow down reflects the effect
of industrial recession that started in the year 1996-97. Thus the
sustainability of average growth rates recorded in future has to be
evaluated in terms of the trends with respect to revival of industrial
growth.
TABLE–I
ANNUAL GROWTH RATE OF GNP AT FACTOR COST
Year
Old Series at 80-81 prices
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-20001
6.9
5.2
0.5
5.2
6.2
7.8
7.4
7.7
New Series at 1993-94 prices
7.2
7.5
8.2
4.8
6.4
6.2
INDUSTRIAL GROWTH RATE
The average growth rate of industry in the post reform period at
8.1 percent was only marginally higher from 7.94 percent averaged during
the second half of 1980s. Actually the industrial growth rate has shown a
healthy accelerating trend over 1992-93 to 1995-96 period with growth
rates rising steadily from 4.4 percent for 1992-93 to 6.9, 9.3 and 12.7
percent in subsequent years.
T A B L E – II
INDUSTRIAL GROWTH RATE PERCENTAGE
Year
Growth %
Year
Growth %
1991-92
1992-93
1993-94
1994-95
1995-96
0.66
2.39
5.93
8.4
12.82
1996-97
1997-98
1998-99
1999-2000
2000-2001
5.56
6.58
However since 1996 growth rates of the secondary sector have
decelerated during the subsequent years to 6.0 percent and to 6.2 percent
in 1997-98. The estimated growth rate for industry in 1998-99 was even
lower at 4.6 percent. It is clear that the Indian industry entered into a
recessionary phase since 1996. The recovery of the GDP growth rate to
6.0 percent in 1998-99 is actually on account of a healthy 7.6 percent
growth recorded by the primary sector. Industry sector recorded only 4.6
percent rate of growth during 1998-99 compared to 6.2 percent in the
previous year. The services sectors’ growth performance has also
decelerated since 1995-96. The key reason for a slow down in industrial
growth has been the significant fall in public investment levels that have
occurred during 1990s especially since 1995 as seen later.
Recent trends and surveys do indicate that the industry may finally
be coming out of the recession in the second half of 1999-2000. The
growth rate of industrial production during April-September 1999 has
been 6.4 percent for the corresponding period in 1998. Similarly the
growth rates of basic, intermediate and capital goods industries picked up
in first 6 months of the year 1999-2000 which again suggests impending
recovery of industrial growth.
A survey conducted by CII also finds that 46 out of 84 segments
show a 10 percent or higher growth during April-November 1999 led by
strong recovery of transport economic sector. Another indication of future
growth of industrial production can be had from the trends in growth of a
composite index of infrastructure sectors comprising electricity, coal,
saleable steel, cement, crude and petroleum refinery products.
After near stagnation in 1999-2000 and negative growth of 0.2
percent in 2000-01, the agriculture sector is likely to attain a
growth rate of nearly 6 percent in 2001-02. One of the reasons for
this is that spatial distribution of the monsoon rainfall in 2001 was
one of the best in recent years. This is reflected in the adequate
rainfall received by seventeen districts belonging to the states of
Madhya Pradesh, Rajasthan, Gujarat, Uttar Pradesh, Haryana,
Kerala, Orissa, Punjab, Tamil Nadu, Chhatisgarh and Himachal
Pradesh, which had suffered from deficient rainfall in the previous
two years.
AGRICULTURAL SECTOR
Over the period 1990-1997-98, the growth rate of foodgrain
production can be seen in Table III. The foodgrain production has
increased except in 1995-96 when it dropped to 180.4 million
tonnes from the previous year’s figure of 191.5 million tonnes and
in 1997 when it dropped to 192.4 million tonnes from the previous
year’s figure of 199.4 million tonnes. In 1998-99, the production
again increased to 202.5 million tonnes.
The foodgrains output in 2001-02 was likely to be 209.2 million
tonnes, an increase of more than 13 million tonnes over the previous year.
Late winter rainfall in the North-West India in February together with a
long cold spell may help raise foodgrains production even to 212 million
tonnes in the current year.
T A B L E – III
FOODGRAIN PRODUCTION DURING REFORM PERIOD
Year
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
Foodgrain
Production
171.04
176.39
168.39
179.48
164.26
191.5
Year
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-2001
Foodgrain
Production
180.42
199.44
192.43
202.5
With early estimate of foodgrains growth at 6.8 per cent, together
with commercial crops exhibiting an improved performance and other
sub-sectors of agriculture like animal husbandry, fisheries etc. maintaining
steady rates of growth, the overall growth rate for agriculture production
in 2000-2001 was likely to be close to 6 per cent.
FOREIGN DIRECT INVESTMENT
Liberalisation of FDI policy regime was an important aspect of the
reforms. The approvals of the FDI inflows since the liberalization of
policy in 1991 reveal dramatic jump. Compared to approvals of FDI
totaling $200 million in 1991, US $14.6 billion worth of FDI inflows have
been approved in the year 1997. In 1998, however, the magnitude of
approvals declined to US $7.8 billion, partly on account of the east Asian
crisis. The approvals, however, have been slow in materializing into actual
inflows and are still much lower than FDI inflows. Actual inflows in 1997
amounted to $3.2 billion declining to $2.3 billion in 1998
However, all the expansion in the magnitude of FDI inflows could
not be attributed to the reforms alone. The recent expansion of FDI
inflows in part reflects the dramatic expansion in the global FDI flows to
developing countries from about $ 35 billion per year on average during
1987-92 to $ 166 billion in 1998.
The bulk of the approved inflows in the 1990s have been directed
to non-manufacturing sectors bringing the share of manufacturing down
from 85 percent in the stock of FDI in 1990 to just 35 percent in
cumulative approvals. Infrastructural sectors such as energy (29 percent)
and telecommunication services (20 percent) account for bulk of the
approvals. These sectors had not been open to FDI inflows before and
hence the inflows directed to them could not be attributed to policy
liberalisation.
T A B L E – IV
FOREIGN DIRECT INVESTMENTS IN INDIA
Year
Total Investment
Direct
Investment
Percentage Share
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998
559
4153
5138
4892
6133
5285
2401
315
586
1314
2144
2821
3557
2462
56.351
14.11
25.57
43.83
46.00
66.05
102.54
The post reform period witnessed a major inflow of FDI, which
increased from US $315 million in 1992-93 to US $ 3557 in 1997-98. In
1998 the inflow was restricted to $ 2462 million only but that was mainly
due to sluggishness in international capital flows. Despite the fall in FDI
flows in late 1990s, the post reform period witnessed an impressive
growth of 49 percent when compared to the growth of 12.4 percent in
1980-81. Another significant indicator is the increased share of FDI in
total foreign investment in India .in the post reform period. This
constituted only 14.11 percent in 1993-94, which gradually rose to the
extent of 66.05 percent in 1998.
FISCAL ADJUSTMENT AND STABILISATION
A key aspect of the structural adjustment programmes is to restrict
the fiscal deficits of the governments. In the second half of 1980s, the
fiscal imbalance worsened with average fiscal deficit rising to 8.2 percent
of GDP compared to 6.3 percent in the early 1980s(Economic Survey,
1992-93). Compared to this, the average fiscal deficit in the post reform
period has been 5.7 percent of the GDP. This suggests that the government
has succeeded in managing the fiscal situation quite well
In fact the revenue deficit which represents the gap between
revenue receipts and revenue expenditure has increased in the post reform
period (at 2.9 percent) on average compared to an average of 2.6 during
the second half of 1980s. This implies that the government has been
unable to contain its current expenditure. Therefore, fiscal deficit has been
contained either by reducing capital investment or by raising capital
receipts such as borrowings or disinvestments of public sector holdings of
the government. A rising level of revenue deficit has thus been sustained
with government borrowings of the scale of the revenue deficit to finance
its consumption expenditure rather than producing a revenue surplus to
finance capital expenditure in social sectors (and defence), which do not
yield a future flow to the exchequer.
Fiscal adjustment has been achieved by squeezing public
investment rather than government consumption. Capital expenditure as a
proportion of total government expenditure has declined steadily from
30.18 percent in 1990-91 to 21.8 percent in 1998-99. As a proportion of
GDP, capital expenditure has come down from 5.5 percent to 3.6 percent
during the same period. The sharp decline in government capital
investment especially since 1995 has been held responsible for industrial
recession. Concerns have been expressed about the decline in budget
support for key infrastructure sectors such as energy, transport, and
communication not only in terms of proportion of GDP but even in
nominal terms. The relative neglect of infrastructure sectors has resulted in
a widening gap between demand and supply of infrastructural services,
which may adversely affect future growth prospects.
TRADE
Liberalisation of the trade regime since 1991 has led to the
proportion of trade in GNP going up steadily from 14.1 percent in
TABLE–V
MAJOR INDICATORS OF INDIA’s FOREIGN TRADE
YEAR
EXPORTS
IMPORTS
BALANCE
TRADE
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
18145
17865
18537
22238
26331
31795
33470
35006
33659
24073
19411
21882
23306
28654
36675
39132
41485
41858
-5927
-1545
-3344
-1068
-2324
-4880
-5663
-6478
-8199
OF
GROWTH
EXPORTS
9.2
-1.5
3.8
20.0
18.4
20.8
5.3
4.6
-3.9
OF
1990-91 to 18.2 percent in 1998-99(see Table V). Indian economy is
therefore more deeply integrated with world economy than it was in 1991
as a result of high rates of growth of both exports and imports in the first
half of 1990s.
In the early post-reform period, there was considerable buoyancy
in exports during 1993-94 to 95-96 period when the annual growth rate of
exports averaged at nearly 20 percent in US dollar terms. However the
export growth rate has slowed down considerably since 1996-97. Indian
exports recorded just 5.3 and 4.6 percent growth in 1996-97 and 1997-98
respectively. In 1998-99, exports actually declined by 3.9 percent. Yet the
average growth rate of exports in US dollar terms during 1992-93 to 199899 at 9.8 percent is higher compared to 8.2 percent achieved in the 1980s.
The recent decline in the growth rate of exports is on account of a
combination of factors. The decline in the growth of world trade since
1996 is one such factor. The east Asian crisis has also put a strain on
India’s exports not only by shrinking demand in the affected countries but
also by adversely affecting international competitiveness of India’s
exports due to sharp depreciation of east Asian currencies. India’s
competitiveness has also been adversely affected by the failure to diversify
the commodity concentration of India’s exports has increased with a 9
percent rise in the share of top six commodity group of exports in total
exports between 1987-88 and 1998-99.
IMPACT ON TRADE
First Liberalisation and the Transition Phase (1966-1990)
The second half of the 1960s witnessed still more significant policy developments marked
by the devaluation of Rupee on June 6, 1966 (by 57.6 per cent from Rupees 4.76 to 7.50 per
US Dollar). The devaluation was accompanied by various policy reforms such as the removal
of a number of cash subsidy schemes for exports, abolition of import entitlement schemes
and the reduction in import duties so as to streamline the existing complex network of export
incentives. Besides, the countervailing export duties were imposed on a number of traditional
export goods in which India was deemed to have a monopoly power with a view to offset the
effects of devaluation on traditional exports with low price elasticities of demand in the
international market.The devaluation package of June 1966 was the first attempt to
introduce reforms and liberalise the economic system However, the effects of Rupee devaluation
were partially offset by both impositions of countervailing duties on traditional exports as well as
the removal of import entitlements and other subsidies on various non-traditional exports.
Bhagwati and Srinivasan (1975) have estimated the net effective devaluation and argued that “the
total net devaluation on the (visible) trade account therefore may be approximated as amounting
to: 21.6 for exports and 42.3 for imports. For the entire current account (including invisibles), the
estimates are: 22.3 per cent for receipts and 44.8 per cent for payments” (Bhagwati and
Srinivasan, 1975, p.97). Nayyar (1976) provides commodity-wise account of the estimates of net
devaluation for exports, and finds that the imposition of export duties reduced the de facto
devaluation for most traditional exports to a range of 15-25 per cent, as against the de jure
devaluation of 57.6 per cent. The contraction in the effects of gross devaluation caused by the
removal of export subsidies and imposition of import tariffs in-built in the reform package, was
further accentuated by the rising domestic inflation engendered by two consecutive droughts
(1965,1966). These droughts induced recession in agro-based industries due to shortage of raw
materials, and resulted in a price rise with adverse effects on traditional exports. The
simultaneous onset of various events such as the Indo-Pakistan war (1965) and the
suspension of aid (1965) put substantial pressure on the external sector. The severe shortage
of foreign exchange resulted in a rise in premia on import entitlements (abolished in 1966)
and it reached as high as 100 per cent in many cases. As a result of these circumstantial setbacks
combined with the reduced net effective devaluation, the liberalisation reforms of 1966 could not
be sustained and were only short-lived. The removal of export subsidies and the reduction in
import tariffs (duties) could not be resisted and were soon reintroduced, in a reformulated
manner, along with the subsequent addition of some more schemes with major emphasis on the
promotion of non-traditional exports. These schemes included the (i) cash assistance schemes
(August 1966), (ii) import replenishment schemes11(August 1966), (iii) duty drawback
schemes12 and (iv) preferential import licensing scheme (April 1968). Bhagwati and Srinivasan
(1975) estimate the range of effective equivalent export subsidies resulting from various schemes
so as to measure the degree of effective export incentives. These estimates indicate that since
devaluation the export incentives averaged around 50 to 90 per cent on an ad valorem basis for
the non-traditional export groups including engineering goods, chemicals, plastics, sports goods,
paper products and processed foods. All these incentive schemes during the 1960s helped to
diversify the structure of exports in favour of non-traditional items and encouraged the growth of
real exports to breakway from the stagnation of the 1950s. The real exports recorded a growth
rate of 3.3 per cent in the 1960s (Table 3). In the commodity-wise analysis of India’s exports,
Nayyar (1976) finds tha the exports of engineering goods grew very rapidly in the 1960s and
India’s performance compared quite well with that of other developing countries. However, many
of the engineering firms were characterised by foreign collaboration agreements with restrictive
clauses for export for a period of nearly 5 to 10 years. In the absence of these collaboration
agreements, unfettered exports could have performed still better. Frankena (1972) analyses
various restrictions on exports by foreign investors and finds that discrimination against
exports by foreign collaborators was a significant export barrier.
The subsidisation schemes largely ignored the traditional exports and instead focussed on
the non-traditional exports and, within the non-traditional export group, mainly on a more
narrow range of engineering goods, chemicals, plastics, sports goods, paper products and
processed foods. Nayyar (1976) argues that subsidisation was concentrated on a small range
of non-traditional manufactured exports, so that other new and dynamic exports were not even
developed. The benefits of various subsidisation schemes in terms of the departure from
stagnation in the 1950s, were quite disproportionate to the heavy cost involved in terms of the
diversion of domestic resources with heavy opportunity cost. These subsidisation policies
instituted in the 1960s (and continued in the 1970s) were characterised by a heavy resource
cost in terms of the diversion of domestic resources to ththirty four firms, Staelin (1974) for forty
two sectors and Bhagwati and Srinivasan (1975) for sixty five sectors. The general conclusion of
these studies is that the subsidisation and export incentives schemes involved substantial cost in
terms of use of domestic resources. Another major problem was the lack of uniformity across
schemes. Bhagwati and Srinivasan (1975) argue that export promotion policies were inefficiently
designed and implemented with little economic rationale. The cost of export incentives and
subsidies provided to exporters was not only high, but was also quite disproportionate to their
foreign exchange earnings. The rates of cash subsidies paid to exporters as a proportion to the
f.o.b value of their exports were characterised by little relation to the estimated rates required to
bridge the gap between exports prices and domestic costs. In many cases, the domestic costs were
less than the f.o.b prices and still the subsidies were provided on such goods.The late 1970s
marked the beginning of the thinking and debate on the need for experimentation with market
forces and change in inward-oriented policy regime. The Government of India instituted three
consecutive committees to review and suggest measures to reform the existing trade policy
framework and these committees included the Alexander Committee (1978), the Dagli
Committee (1979) and the Tandon Committee (1980). The Alexander Committee (1978)
recommended the (i) modifications in the methods for computing cash assistance, (ii)
amalgamation of cash assistance with duty drawback for the products for which the combined
rate was less than 25 per cent and the (iii) simplification of import licensing system as well as the
reduction in the role of licensing system. The subsequent Dagli Committee (1979) recommended
the removal of anomalies embedded in the administration of subsidies and the Tandon Committee
(1980) emphasised the efficiency aspects of exports.The efforts for domestic deregulation
continued in a slow but steady manner with the simplification of the licensing system and
relaxation of some quantitative controls on imports.
Many intermediate goods import items required for domestic production were shifted
from the restricted list to the easily importable Open General License (OGL) list. However, some
of the forward steps towards market-oriented economy were accompanied by the counteractive
steps. The shift in some of the items from restricted to OGL list was accompanied by the higher
tariff rates. With a view to further examine the trade policy framework, the Government of India
instituted two more consecutive committees including the Hussain Committee (1984) and the
Narasimham Committee (1985). The Hussain Committee (1984) recommended a phased
reduction in effective protection (rather than nominal protection) and a harmonization between
trade and other economic policies. The Narasimham Committee (1985) recommended not
encouraging the import substitution activities, which do not save foreign exchange.
SECOND LIBERALISATION AND THE RECOVERY PHASE (1991 ONWARDS)
Tariff Structure and Protection Rates
The gradual reform process started since the late 1970s could not make any discernible
progress and, at the beginning of the 1990s, tariff rates in India stood highest compared to other
countries. The maximum tariff rate of 250 per cent and import weighted tariff rate of 87 per cent
were, in fact, not only the highest, but also more than double the tariff rates in other countries viz.
Mexico, Brazil, Korea and Indonesia. Accordingly, tariff collection rate in India was also the
highest at 47 per cent as compared to only 5 per cent in Mexico and Indonesia each and 6 per cent
in Korea. At the beginning of the 19notable feature of tariff structure in India is the existence of a
wide variety of tariff rates across various commodities. The high dispersion points towards the
multiplicity of tariff rates and this multiplicity is characterised by bureaucratic and discretionary
delays. The tariff restrictions on consumer goods understate the extent of protection, as consumer
goods imports subject to quantitative restrictions generally do not appear in the import basket. On
the contrary, statutory tariff on other goods including especially the intermediate and capital
goods overstate the extent of protection due to subsidies and other concessions provided to
exporters. The consumer goods industries enjoyed the highest protection with effective tariff rates
being the highest at 191.8 per cent, followed by the intermediate goods (with effective tariff at
148.0 per cent) and the capital goods (with effective tariff at 87.1 per cent) industries. The similar
structure is indicated by the nominal tariff rates. The tariff restrictions on imports were also
supplemented with the quantitative restrictions through the introduction of import licensing
system. The basic criteria underlying the import policy framework was the essentiality and
indigenous availability of goods. Both these quantitative and tariff restrictions on imports
immuned the domestic manufacturing sector from competition, sheltered inefficiency and
produced an in-built bias against export-oriented industries. The inefficiency in import-intensive
industries could be passed on in the form of higher domestic prices without the fear of
competition from imports. This resulted in a rise in general cost structure of industry, and exports
actually suffered from negative effective protection. In the literature, such import substitution
strategies characterised by high tariff rates along with quantitative restrictions on imports, are
associated with the (i) directly unproductive profit-seeking activities which involve a heavy cost
in terms of the diversion of resources from productive to unproductive activities.In view of the
perverse effects of import substitution policies, a phased reduction in tariff rates constituted one
of the major thrust areas in the structural reforms of July 1991. As a sequel to such reform
agenda, the tariff rates displayed marked reduction and by 1995-96 (or 1994-95) these rates were
less than half their levels (and in some cases one-third of their levels) in 1990-91. Apart from
reduction in the magnitude of tariff rates, the tariff structure is also simplified by reducing the
multiplicity of tariff rates so as to avoid the bureaucratic and discretionary delays. Accordingly,
the dispersion (standard deviation) of tariff rates has shown significant declines in 1995-96 as
compared to 1990-91. However, despite a marked reduction in tariff rates, the consumer goods
industries still continue to be characterised by highest tariff rates as compared to other sectors. A
phased reduction in import tariffs was also accompanied by the reduction in export subsidies. The
central government subsidies on export promotion and market development which continued to
rise and reached the peak of 22.55 per cent of total subsidies in 1990-91, displayed a marked
deterioration in subsequent period to 14.35 per cent in 1991-92, 6.80 per cent in 1992-93, 5.17
per cent in 1993-94, 4.37 per cent in 1994-95 and 2.54 per cent in 1995-96.
Performance of External Sector in the 1990s
The policy measures adopted since the structural adjustment programme of July
1991have resulted in improvements in the external sector scenario of the economy. Total export
recorded a substantial growth of 13.97 per cent during 1990-91 to 1995-96 (Table 3). The share
of exports in GDP which hovered around 5 per cent until the late 1980s, increased to 7.50 per
cent during the 1990s (1990-91 to 1995-96). Real imports witnessed a relatively higher growth of
16.24 per cent during 1990-91 to 1995-96. As a result, trade balancecontinued to be characterised
by deficit; though at a somewhat reduced scale.The foreign currency assets, which constitute
more than 80 per cent of the foreign exchange reserves, have shown more than twelve-fold
increase from US$ 2.2 billion in 1990-90s, mean tariff rate for the whole economy was 128 per
cent. An analysis of sectoral distribution of tariff rates indicates that the highest protection was
accorded to consumer goods industries with mean tariff rate on consumer goods being highest at
142 per cent, followed, in descending order, by protection to intermediate goods industries (with
mean tariff at 133 per ce91 to US$ 26.5 billion in 1997-98. As a result of the improvement in
foreign exchange reserves, the foreign exchange reserves cover of imports has shown a nearly
three-fold increase from 2.5 months in 1990-91 to 7.3 months in 1997-98. The foreign exchange
reserves constitute an important part of reserve money and hence have implications for the money
supply. Therefore, an increase in foreign exchange reserves should be allowed up to certain
desirable or optimum level. The determination of optimum level of foreign exchange reserves
remains a subject of debate and discussion. Traditionally, the optimum level of foreign exchange
reserves has been linked to the import requirements defined in terms of the number of months of
import cover of these reserves. However, such approach can be inadequate when a large number
of liabilities arise for discharging short-term debt obligations.Recently, a High Level Committee
on Balance of Payments (1993) (Chairman: Dr. C. Rangarajan) has observed that“It has
traditionally been the practice to view the level of desirable reserves as a percentage of the annual
imports, say reserves to meet three months’ imports or four months’ imports. However, this
approach would be inadequate when a large number of transactions and payment liabilities arise
in areas other than import of commodities. Thus, liabilities may arise either for discharging shortterm debt obligations or servicing of medium term debt, both interest and principal. Hence, the
Committee recommends that while determining the target level of reserves due attention should
be paid to the payment obligations in addition to the level of imports” (Rangarajan Committee
Report,1993, p.15).
The recent experience of East-Asian countries also shows that the countries with large
level of reserves could not escape the crisis. In view of this, the emphasis has recently shifted
from measuring the optimum level of reserves only in terms of their import cover to the short
term liabilities, and more particularly to the short term debt.Recently, there has been an increase
in emphasis on non-debt creating flows with the simultaneous reduction in emphasis on debt
creating flows. The main purpose of such emphasis on non-debt creating flows has been to build
up the adequate level of reserves without allowing the growth of external debt especially the short
term external debt. The ratio of non-debt capital flows to total capital flows has sharply increased
from 1.2 per cent in 1990-91 to as high as 48.2 per cent in 1997-98; the average ratio being 47.6
per cent during the period. The short-term debt as a percentage of foreign exchange assets has
shown a sharp decline of 8.6 folds from 147.0 per cent in 1990-91 to 17.0 per cent in 1997-98.
Similarly, the share of short-term debt in total external debt has also shown a significant decline
from 10.2 per cent in 1990-91 to 5.4 per cent in 1997-98. Total external debt to GDP ratio
declined from 27.3 per cent in 1990-91 to 23.8 per cent in 1997-98. Debt service ratio decelerated
from 35.2 per cent in 1990-91 to 19.5 per cent in 1997-98.
A related aspect of debt analysis is the sustainability of external debt. Indebtedness is
assessed by expressing the ‘debt stock’ and ‘debt service’ as a ratio to (i) GNP (GDP) and
that to (ii) exports of goods and services or the broader concept of current receipts.
GNP(GDP) measures the total income generated in the economy, while the
exports/current receipts show the foreign exchange available to the economy to service its
debt. The external debt (as well as the present value of debt service) as a ratio to exports
has been the highest in Indonesia followed by India. However, external debt (as well as
the present value of debt service) as a ratio to GNP has been the lowest in case of India as
compared to other Asian countries. Similarly, the ratio of short term debt to total external
debt is also relatively lower,and this shows that India kept its short term debt at the low as
compared to other Asian countries.Apart from the improvements in foreign exchange
reserves and external debt situation discussed above, there has been a substantial increase
in the inflow of foreign investment innt), capital goods industries (with mean tariff at 109
per cent) and agro industries (with mean tariff at 106 per cent) during 1990-91. A similar
sequence of sectoral protection holds in terms of import weighted tariffs. Ae export sector
with heavy opportunity cost. The amount spent on the provision of India from US$ 0.1
billion in 1990-91 to US$ 5.0 billion in 1997-98. A large part of foreign investment took
place in the form of portfolio investment which increased from US$ 0.3 billion in 199293 to US$ 3.3 billion in 1996-97, followed by a decline to US$ 1.8 billion in 1997-98.
The portfolio investment is restricted to only select players viz. foreign institutional
investors(FIIs). As compared to portfolio investment, the foreign direct investment is an
important vehicle for private investment, and this showed a relatively lesser increase
from US$ 0.1 billion in 1990-91 to US$ 2.5 billion in 1996-97 and then to US$ 3.2
billion in 1997-98.
POLICY MEASURES AND COVERAGE
Similar to the liberalisation reforms of June 1966, the reforms of July 1991 are based on
virtually the similar standard policy measures characterised by the devaluation of the Rupee and
the removal of export subsidies and reduction in import tariffs, though in a more comprehensive
and elaborate form as a natural response to the more developed and complex economic system as
compared to that in the 1960s. However, the nominal degree of two-step devaluation of Rupee at
18-19 per cent in July 1991 amounts to around one-third of the nominal devaluation of Rupee at
57.6 per cent in June 1966. Besides, as compared to the reforms of June 1966 which were
restricted to the external sector, the reforms of July 1991are more comprehensive and cover both
external and domestic sectors; though the major attention was given to the external sector. These
reforms (of July 1991) are carried out in a phased and more systematic manner.
ENTRY OF MULTINATIONAL COMPANIES AND FOREIGN INVESTMENT
The main distinctive feature of present reforms (of July 1991) is the allowance for the
entry of certain multinational companies and foreign investment which might not have been
included in the earlier reform package (of June 1966) owing to the then recent liberation from the
colonial regime and the implied political implications and apprehensions. The main purpose of
allowing for the entry of certain multinational companies (MNCs) and foreign and especially the
foreign direct investment (FDI) is to infuse competition in the industrial sector,and it can be
further extended to argue for the spillover effects. The literature is replete with studies analysing
the (i) demonstration effects, (ii) diffusion effects, (iii) concentration and competition effects, (iv)
productivity and spillover effects and the (v) backward and forward linkage effects of MNCs and
FDI
SUSTAINABILITY OF REFORMS
The reforms of June 1966 were very short-lived and could not be sustained even beyond
a few months and, for the reasons discussed earlier, removal of export subsidies and reduction
in import tariffs were soon reintroduced in a reformulated manner, while the reform process of
July 1991 (and subsequent) has so far been sustained. The major focus of reform
measuresadopted so far has been on reforming external sector and adopting supply-side
measures.The first phase of reforms is now virtually over, and Second Narasimham Committee
Report (April 1998) prepares an agenda and marks the beginning of second phase of reforms with
greater focus on banking and financial sector reforms.various subsidies to the export sectorshow
the extent of diversion of resources.
The foregoing analysis shows that until recently one of the characteristic features of
India’s trade policy framework was the continued reliance on relative price factors either through
the provision of export incentives and subsidies and the imposition of import tariffs
(supplemented with quantitative restrictions) or through the devaluations of exchange rate.The
export policy was characterised by the provision of export incentives and subsidies mainly to
manufacturing sector, while import policy was marked by high quantitative and tariff restrictions
on imports. The policy efforts to affect relative prices of exports and imports were supplemented
by a general deterioration in real exchange rate especially after a switch from fixed to floating
exchange rate regime in the early 1970s.The main problem of trade in a small open economy like
India seems to be a problem of production and hence domestic supply and demand constraints,
rather than the problem of external demand constraints. In the theoretical literature, the small
open economies are shown to be facing a sufficiently elastic (if not perfectly elastic) demand
curve in the international trade market. The lack of sufficient supply not only imposes the
constraints on exports, but also accentuates the need for imports to match the growing demand in
a vastly populated country like India. It is perhaps in recognition of this that, in addition to the
demand-side relative price factors, simultaneous efforts were also continued to develop
productive capacity through the development of directly productive industrial (especially since
the second plan) and agricultural (especially since the green revolution of the mid-1960s) sectors
as well as the indirectly productive infrastructural service sector.However, despite these
developmental and trade strategies, the trade and payments balances continued to show
deterioration during all the five year plans (except for a brief period of current account surpluses
in the mid-1970s), and such situation reached its zenith when the current account deficit, as a
proportion to GDP at current market prices, soared to 3.2 per cent in 1990-91 which was quite
unsustainable. This finally led India to embark on thestructural reforms in July 1991 with
immediate resort to the demand-side measure of devaluation, followed by the adoption of various
supply-side measures to increase efficiency and productivity in the economy. These reforms have
helped the economy to recover from crisis, build up its foreign exchange reserves (to comfortable
level), improve its external debt situation and attract foreign investment.While the trade policy
reforms of the 1990s have shown substantial improvements in theexternal sector scenario, the
future trade policy framework needs to lay further emphasis on the supply side factors with
recognition of quality of output and control of inflation. An increase in supply of (quality) output
would not only enable to increase exports and reduce imports, but would also help to contain
inflation. It is well documented in the theoretical literature that the trade flows are determined,
inter alia, by the ‘real’ rather than the ‘nominal’ exchange rate.Therefore, the control of inflation
would help to arrest any de facto appreciation of real exchange rate and hence can have
favourable effects on the balance of trade in India. The other major thrust areas for policy actions
should include (i) improving and streamlining the export and import procedures by further
bringing down the administrative controls, (ii) further liberalising foreign trade sector, (iii)
accelerating the pace of economic growth, (iv) cautiously pursuing the policy of capital account
convertibility in coordination with appropriate macroeconomic and exchange rate policies, and
also with concurrent reforms in other related sectors, (v) building a sound and resilient financial
and more particularly the banking sector; as such sector is the conduit for foreign exchange
transactions, (vi) continuing the Reserve Bank intervention in foreign exchange market to avoid
any disruptive volatility in exchange rate, and (vii) evolving the policy framework to safeguard
against any speculative attacks on foreign exchange reserves.
IMPACT ON AGRICULTURE
During the last decade there has been a major shift in economic
policies in our country. It is not only because several policy measures
aimed at liberalisation and globalistion were initiated during this period –
the trends towards debureaucratisation and ‘opening up’ of the economy
were already set in during the 1980s. The real difference between the
current reform process and the earlier measures is that the former
challenges the very basis of planning and policy making which guided.
Indian economic development since Independence. A faith in central
control on the allocation of resources, “commanding heights” to the public
sector, inward looking approach and, key role assigned to bureaucracy to
implement development strategies were the principal features of the earlier
approach to development. These were seriously challenged with the
initiation of the new reform process. We do have vestiges of the old
structure, and more so the old attitudes, at different levels and in different
areas of our economy and polity, but for good or bad a new chapter has
been opened in our economic policies and development strategies. It is
something which we cannot ignore whatever might be our ideological
predilection. Basic tenets of the current economic reforms, liberalisation
and globalisation, are accepted by a large number of developing countries.
In essence, Indian government’s approach in this regard is not dissimilar
to the policies pursued by a number of countries who have opted for what
has comet to be known as “structural adjustment”.However, a
distinguishing feature of our experience has been a sequential, and a
cautious,
approach to reforms.
Accelerated, if not triggered, by the balance of payment crisis of
1991 it was natural to institute reforms in the foreign trade sector in the
first place. Such reforms also became necessary with our acceptance of a
world trade regime under the aegis of an international authority. Reforms
in the foreign trade sector were followed by domestic reforms,i.e., doing
away with a large number of centralised controls and regulations as well
as different forms of restrictive trade practices; in other words,
dismantling of ‘permit quota raj’. These were followed by reforms in
financial sector, with more autonomy being extended to the financial
institutions. The entry of foreign capital was liberalised and made less
discriminatory. There was also pious resolution to curtail fiscal deficit.
More importantly, the policy makers in our country have so far resisted
the so-called“ comprehensive approach” to reforms, engulfing all sectors
in one sweep. The second distinguishing feature of Indian reform process
is the slow and halting manner in which reforms were executed. The
pressure exerted by some quarters to hasten the pace of reforms was
resisted. Again, as in sequencing, the slow pace of reforms was not a part
of pre-planned *design. Several ad-hoc decisions were taken, and as is
expected in competitive politics, several compromises were made. But the
dominant trends in the reform process, at least in retrospect, seem to be on
the lines I have described above. The main reasons for following such
sequential and cautious approach, in my view, have to be sought in the
compulsions of a democratic, multi-party, polity where a measure of
consensus building is imperative before any drastic step can be taken. One
fact, however, is clear, i.e., India did not suffered from major dislocations
as have been faced by several other countries in the initial phase of
reforms, e.g.sharp decline in GDP and employment, raging inflation and
collapse of institutions. On all these counts, we have come out more or
less unscathed. It is different, and a debatable, issue whether due to these
reforms the rate of growth has been accelerated, and whether the plight of
the vulnerable sections has become less serious. On these matters jury is
still out The first phase of reforms was relatively easy as the required changes in
trade, finance and fiscal areas were known. In the second phase, issues of equity,
regional and sectoral allocation, good governance, institutional changes etc. have
become more prominent. Hard decisions on competition policy, labour
policy,disinvestment and privatisation will have to be taken. The sections of
population who will be adversely affected are numerically important, better
organised and articulate. They are capable to shift negative consequences of
reforms on those who are poor, unorganised and handicapped.
Reforms in Agriculture
Even in the backdrop of the slow pace of reforms in the country, policy changes
in agriculture were still slower. There were sufficient reasons to take a more
cautious approach to economic reforms in this sector. In the first place, there
were no serious distortions in agriculture as were evidenced in industrial sector.
Aggregate measure of support calculated by various scholars, though yielding
different results, did not suggest any gross distortion either in positive or in
negative terms. A more sensitive indicator, the inter-sectoral terms of trade,
although adverse to agriculture was gradually improving in favour of agriculture.
Reforms in non-farm sectors, and better alignment of Indian currency had a
salutary impact on agriculture. Besides, it was recognised that non-price
measures, such as development of technology and creation of infrastructure, were
more important for agricultural growth than the market oriented measures. In any
case, a large section of population in agriculture had very weak linkages with
the markets both as producers and as consumers. Those who had such linkages
were fairly articulate and would not yield any advantages which they might be
extracting from the system. Government was also extra careful as nothing could
be done that might jeopardize Food Security. Finally, agriculture being a state
subject, in forging and implementing policies for this sector states had a larger
say. Most of the states were dragging their feet in implementing reforms in the
non-agricultural sectors. They were more than lukewarm when it came to reforms
in agriculture. Mainly for these reasons no drastic policy changes could take
place during the first phase of reforms. Nevertheless, certain irritants and obvious
distortions were sought to be removed. The most important among these being
the abolition of zonal restrictions on the movement of agricultural commodities,
especially foodgrains. Even after the abolition of zones, occasionally state
governments did impose movement restrictions. But, the fact that India was a
single market for agricultural commodities was by and large well established.
The other direction in which economic reforms got a fillip was in the
area of privatization. Private agencies were given larger scope, in the distribution
of inputs, provisions of some of services and in agricultural extension. Also,
controls were relaxed for a few commodities, such as non-nitrogenous fertilizers.
In line with general trade reforms, there was liberalisation of imports as well as
exports of agricultural commodities to a certain extent.
Before we think of the second round of reforms in agricultural sector, we
should bring some of the measures already initiated to their logical conclusion.
For example, monopoly of Cotton purchase in Maharastra, or food rationing in
Calcutta are clearly anomalous in the present context. Irrational levies on sugar
or rice milling have not served any useful purpose. They have added to price
discrimination, clandestine trade, risk and uncertainty. Use of Essential
Commodities Act, in most of the circumstances is a panicky reaction rather than
a part of a well though-out strategy. Some of he road blocks have to be removed
before we think about significant changes in the policies.
Now a time has come to make a comprehensive review of the
government policies in agricultural sector. This is mainly because of the changes
in the external environment, especially after our joint WTO. There are also
important changes in the internal environment; the country has been transformed
from a deficit country to self-sufficient, in fact, marginally surplus, in the staple
foodgrains. Yet dependence of work force on agriculture has not declined in any
remarkable way; nor the incidence of rural poverty is significantly reduced.
Recent stagnation in agricultural productivity, in the face of rising demand, is
another worrisome feature. The building up of foodgrain stocks to an
unsustainable level is another indicator which puts a question mark on the
validity and efficacy of our price and subsidy policies. The growing burden of
subsidies contributing to mounting fiscal imbalance and crowing-out public
investment in agriculture is another area of concern. These are basically
symptoms of an underlying rot. A serious look at the agriculture policies is,
therefore, urgently called for. In a meaningful way, success or failure of our
economic reforms can be clearly judged as to what is happening in the sector on
which largest number of people are dependent for their livelihood, and which still
has significant impact on other sectors of the economy.
It will be an over – simplification if we were to assume that these and
other problems of growth and equity can be resolved only by policy initiatives.
However, economic policies have an important role, and if used judiciously can
supplement or support of support technological and institutional developments.
While discussing the economic policies for agriculture, The macro policy
reforms such as attempts to curtail budgetary deficits or realign the value of
domestic currency, have profound impact on agricultural sector.
Function-less intermediaries, protection to tenants, rationalization of
different systems of land tenure, and imposition of ceiling on land holdings. A
few states took the process Further. Consolidation of fragmented holding was a
feature of reforms in some states. Similarly, West Bengal’s move of giving
protection to share croppers, well known as “Operation Barga,” extended
the provisions for the protection to tenants to the share croppers. The
loopholes in the legislation, tardy implementation and consequent evasion
of some of the provisions, especially in the ceiling reforms are well known
and well documented. However, it will be wrong to conclude that land
reforms did not make any impact on our agrarian structure. Following
these reforms agrarian system witnessed several important changes.
Enlargement of land holdings beyond the ceiling was halted; phenomenon
of absentee landlords was severely weakened; due to tenancy reforms greater
convergence of ownership and management took place; more or less uniform
land system (approximating to the ryotawari system) emerged throughout the
country. Mainly due to land reforms, a middle peasantry sharing the
characteristics of capitalist farmers emerged in large parts of the country.
It is now well established that the Green Revolution in the sixties and the
seventies was largely carried out by this section of peasantry. These are no mean
achievements. Whatever might have been the equity implications of these
reforms, they could not contribute to the overall growth in agricultural
productivity. This was evident from the fact that generation of agriculture surplus
was restricted to a relatively small number of medium to large holdings in well
endowed regions. A large number of agricultural holdings remained deficit, at
best self sufficient. The surplus generated in agriculture was not large enough to
give boost to a speedy diversification from farm to non-farm sector, or transform
our agriculture into a high-value agriculture. In view of low-value agriculture on
a large number of holdings, it is now suggested in some quarters that more
capital needs to be injected in farming to raise productivity, and the ceiling on
farm holdings is the major bottle-neck for high capital investment in agriculture.
This proposition is seriously flawed on several counts. There is no evidence to
suggest that small size of holdings per se have inhibited high-value agriculture.
Most of our vegetable and horticulture farms, as well as those growing
specialized crops are small to medium farms. Economics of scale especially in
the high-value crops are availed not at the production level but at the processing
stage. Such economics can be enjoyed by the small farmers through contract
farming. There are the examples of East Asian countries, including China, to
illustrate the point.
We too have large number of examples of contract farming systems in
high value crops. Sugarcane farming in the areas covered by sugarcane
cooperatives in Maharashtra is one such example of production on small holdings
and efficient processing in large size, sophisticated, factories. Similar example in
the face of even greater handicaps is provided by the dairy farming in the
cooperative sector, especially in Gujarat. Away from home, the Felda scheme of
Malaysia, encouraging production of oil palms on small holdings and processing
in high-tech processing plants, or for that matter small tea garden schemes in
Kenya, illustrate that production and processing of high-value crops can be
delinked, and that crops can be grown or animals can be raised very effectively
on the small farm. Further, value addition can be done in technically
sophisticated, capital-intensive processing units. To the extent such processing is
organized by the farmers cooperatives, not only the growers benefit, spill-over
effects in the region as a whole are also quite remarkable, as is evidenced in
several parts of our country. At this stage of development there are important
reasons for desisting from any move to relax ceiling on farm holdings. The
obvious danger of such a relaxation in the present circumstances is that it may
lead to dislocation of large number of people from the farm lands to who system
will not be able to provide meaningful alternatives. They will be swelling the
army of landless workers. Also, the motives for those asking for relaxation of
where large and long gestating investment may be needed, provided it can be
ensured that the land will be sued for agricultural (including animal husbandry)
purposes, and that it will not be used as a tax shelter. We should learn from the
past experience when several attempts were made to defeat ceiling legislation by
people who had no intention of engaging themselves in agriculture by posing as
agriculturists.
Once the needed resilience is imparted to our rural economy, we can
review the question of ceiling on the farm lands. There is, however a clear and
convincing case for liberalizing tenancy provisions. A time has come when we
should allow the lease market to function. By putting restrictions on leasing-out
the land we are forcing people, especially those owning marginal holdings, to
continue with the ownership of plots without any prospect of a fair return to their
asset. At the same times we are depriving other small farmers to supplement their
holdings and make them viable. Relaxing tenancy law will have positive impact
on both the groups. We can introduce safeguards to ensure that the investment in
land by the tenant is compensated, and that land owner does not lose his/her
ownership right. This single move will impart the needed flexibility in the land
market. In any agenda of economic reforms for agriculture unfreezing of the
lease market should be given a high priority.
III. Policies on Agricultural Prices and Subsidies
(a) Agricultural Price Policy
The objectives of price policy as propounded in our country from time to time are
multiple and often conflicting. There is a need to take a serious look at the scope,
instruments and institutions of agricultural price policy. Currently, agricultural
prices policies comprise of a minimum support price to ensure that producers of
certain commodities, mainly cereals, are not put to loss should the market price
fall below a certain level; a procurement price (which is now the same as
minimum support price, though earlier it was different) which entitles producers
of certain commodities – again, mainly cereals – to sell all their produce at a
price declared in advance by the government; a buffer stock to cushion the
country from any large shortfall in food grains production; a public distribution
system to distribute procured food grains at an issue price, generally, lower than
the market price, to the vulnerable sections of the consumers. This policy
structure had served well in the period when objective was to close the gap
between demand and supply of food grains from domestic production.
The goal of food self-sufficiency was reached by the late 1980s, mainly
due to the ‘Green Revolution’. Price policies assured the producers that they
would not be ‘out of business’ if they accepted new technology and production
would increase to the extent that the price in the free market would drastically
fall. The minimum support prices-later the procurement prices acted as cushion
against price-induced risk. Since then situation has changed, and several
distortions have crept in due to this system. The more important among these are.
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The concept of minimum support price which was originally based on
the “paid out”, or variable cost of productions was enlarged to take into
account full cost of production – in the farm management parlance from
A2 cost to cost C.
Principle of fixing minimum support prices mainly on the “cost-plus”
basis got established.
Due to the pressure from the vocal and organised large farmers’ lobby,
all types of farm expenditure, incurred or imputed, were added to costof-production for the purpose of fixing the minimum support price. This
escalated the minimum support price which had to be increased year
after year.
The distinction between procurement prices and minimum support prices
was first blurred and later abolished, and all quantities of foodgrains,
mainly cereals, offered for sale by farmers were procured at the enhanced
“minimum support” prices.
Continuous rise in procurement prices on the one hand, and obligation to
purchase all grains offered by the farmers at that price, led to
accumulation of stocks of wheat and rice ceilings, and for permitting
entry of large corporate units on farm lands are not above suspicion.
Could it be to use it as a safety valve to escape from income tax? Or the
objectives is, at least in the areas in the vicinity of the urban centers, to
indulge in land speculation? There is some force in the argument for
relaxing ceiling in case of uncultivated waste land Through a series of
land reforms major changes in the land relations were attempted in our
country. Land reforms are a state subject. However, similar reforms were
implemented all over the country, and that too more or less in the same
sequence. They comprised of abolition of much above what is required
for Public Distribution System. Today, food grains stocks stand at a
staggering figure of 40 million tonnes and if the policies are not changed
they will further accumulate.
The operation of procurement and public distribution is handled by a topheavy institution, namely FCI, in collaboration with similar
bureaucratically managed institutions the state level. Only in a few cases
cooperative institutions are associated with these operations. As a result,
cost of procuring and distributing food grains is very high and escalating.
With mounting subsidies resulting from high minimum support prices
and higher cost of procurement and distribution, foodgrains distributed
through the public distributing system(PDS) had to be released at
progressively high issue prices defeating its purpose, i.e. to issue food
grains to the vulnerable sections below the market prices.
Today, we are in a strange situation. The surplus farmers and their
spokespersons are asking for, and actually getting, progressively higher
procurement prices on the plea of the rise in the cost of production, while
the attempt to curtail subsidies are mainly directed to raise issue prices of
the grains released through PDS. The net result is that expected offtake
from public distribution system is declining and the stocks are rising at
the unsustainable level. A time has come to seriously think about
dismantling the “high-cost high- subsidy” regime which is eating into the
vitals of our agriculture economy by diverting resources from more
productive use, such as investment in research and extension and
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creating better rural infrastructure. While it will need serious thinking
and elaborate consultation, some considerations for forging a ‘new price
and subsidy policy regime’ may be as follows:
Policy of minimum support prices could continue till we are able to
have comprehensive coverage through crop insurance and more crops are
brought under forward marketing. But support should be restricted to a
few important commodities, and should be in the nature of assurance
against recouping variable costs of production. To mitigate or at least
minimize price-induced risk, greater recourse should be taken to crop
insurance and forward trading.
Crops which can be considered as price leaders, or the crops for which
technological breakthrough is imminent, ought to be covered under the
minimum price support. The other candidates for the support prices
would be the crops grown in the high-risk environment where the
producers of the designated crops deserved to be given an assurance of
guaranteed prices. In all these cases, minimum support prices should be
treated as a transient measure i.e. till we are able to evolve a viable crop
insurance and or forward trade programme.
The procurement operations could aim at basically two different
objectives viz., (a) to purchase minimum necessary stocks fro open
market - or by imports - to meet the needs of truly vulnerable sections
and, (b) to influence the open market prices by mopping up or releasing
the grains as the situations warrant. This operation will be in nature of
“open market operation”, with explicit aim of restraining food grains
prices in a narrow band.
The decisions involving the amount of food grains (or any other
commodity) to be procured, price at which to procure, place from where
purchases may be made, etc. should be carried out on commercial
considerations. Decisions on the markets and the timing of the operations
should also be left to the judgement of the procurement authority. There
is no compelling reason to announce all these decisions beforehand.
Procurement operations are in the nature of market operations. The
authorities have to pre-judge the markets and act accordingly.
Public Distribution System should be made ‘primarily’ a responsibility of
the states. There should be a greater coordination between the price policy and
the trade policy which, at present, are executed in a parallel fashion. The
importance of coordination between various policy instruments becomes obvious
with the emphasis on export promotion on the one hand the commitment to food
security on the other. The current spectacle of export of certain commodities at
one point of time and import of the same commodities at a loss, to meet domestic
demand only after a few months, would be repeated more often if trade and price
policies are not properly matched. To conclude, time has come to take a serious
look at the scope, instruments and institutions of agricultural price policy. There
is a need to recognize that the price policy is a weak instrument for income
transfers; our capacity to offer minimum support prices for a large number of
commodities is limited; instrument of minimum support prices has to be used
sparingly; greater reliance needs to be placed on crop insurance and on forward
markets; procurement operations need to be made more business like; need for
dovetailing agriculture and trade policies is urgent; FCI should be decentralized
and debureaucratised; states should be make major stakeholders in Public
Distribution System.
(b) Input Subsides.
A disturbing feature of agricultural policy in our country is the large and growing
amount of input subsidies. Theses subsidies are progressively losing their
relevance and are becoming an unbearable fiscal burden. Input subsidies were
justified on the ground that the agricultural producers, as much as consumers of
the agricultural products are poor, and it is the state’s obligation to subsidize the
poor producers as well as poor consumers. This has come to be known as ‘cheap
– input cheap – output policy’. The argument of subsidies leading to increase
in the use of inputs and consequently resulting in improved productivity was
added to it. These, then, were the main argument for the introduction and
continuation of subsidies in agriculture. A policy of subsidizing inputs can be
justified if
• Introduction of a new input warrants sharing of risks by the state;
• Use of subsidized inputs ensure continuous increase in productivity
which is shared both by the producers and consumers;
• Subsidizing inputs is the only way to transfer income to the poor
producers;
• In case of heavily traded products, the trading partners are resorting to
overt or covert subsidization and there is no other way for redressal. A
close scrutiny at the functioning of the subsidy regime in agriculture
suggests that none of the arguments for input subsidization apply in the
present circumstances. Neither fertilizers, nor irrigation, nor for that
matter power, is an unfamiliar input. Increasing use of the subsidized
inputs is not contributing to productivity at the margin. Reserve seems to
be true. Marginal productivity of fertilizers and water applications is
declining largely because of weaknesses in the organization and
functioning of the extension system. There are better ways of transferring
incomes to the producers i.e. by improving income terms of trade. Only
justification for subsidies is, and that too in the case of heavily-traded
agricultural produce, when our trading partners are not playing according
to the rules of game. Even in that case we have to take recourse first to
WTO provisions since we and practically all our trading partners are
members of the same. A determined move needs to be made to dismantle
subsidy regime in agriculture.
It should be recognized, however, that our system has been addicted
to subsidies. Also, in case of some major subsidies, irrigation and power
in particular, while the Centre has a limited role, the states have to take
initiative. Action is needed in following directions to enable us to‘retreat
without disarray’.:
• A cap on the subsidies should be put in the current year’s budget.
• A phased programme of progressively withdrawing subsidies should be
announced.
• Amount thus saved from input subsidies should be earmarked as addition
to the funds for strengthening rural infrastructure, research and
extension.fact, states should be encouraged to give responsibility for
Public Distribution to lower tiers of the Panchayati Raj System, i.e. upto
the village panchayat level. Centre should be responsible for
coordinating and balancing demand and supply of the state level PDS
operations targetted at vulnerable sections, and that too for few essential
commodities.
• Well defined measures should be taken to improve efficiency and
plugging leakages in input supplies.
• States should be impressed on the need for cost recovery, particularly in
irrigation and power. None of these are likely to prove easy options. But
continuing the same regime will make future tasks all the more difficult.
(c) Agricultural Trade Policies
With the establishment of the World Trade Organization (WTO) in 1995 a major
change has taken place in international trade scenario. The agreement to establish
WTO which was signed by over 100 countries has by now been subscribed by
virtually all the remaining countries except China, which also is likely to join the
organization within a short period of time. The Uruguay Round of trade
negotiations which paved the way for the establishment of WTO, for the first
time brought agriculture in the discipline of GATT. These agreements (by now
20 or so) are fairly complicated; in fact, a delight for the lawyers! However, in
essence they cover three basic areas: (I) market access, (ii) export competition,
(iii) domestic support. The intent of these agreements is to facilitate the process
of trade liberalization and provide a mechanism for arbitration. The most
important feature of WTO is that the signatories abide to treat all members as
“most favoured nation”, without an discrimination. There is an apprehension in
the country that the WTO agreements may be against the interest of India.
Initially at least this is not so. The conditions spelled out for a free and
liberal trade in WTO charter already existed in India. The country was not
violating any of these initial conditions. For example, both the product specific
subsidies (i.e. market access) and non- product subsidies (i.e. on inputs) were
deem to be negative in case of India and therefore, no major change was need
from WTO side in these regards. The stipulated process of tariffication is gradual
and gives ample scope for adjustment. The ceiling on tariffs proposed by India
and accepted by WTO are fairly high; for example, 100 per cent on primary
products, 150 per cent on processed products, 300 per cent on edible oils. The
country can also take advantage moderate the tariff structure to an extent.
Compared to the developed countries, time for adjustment Thus, initially at least,
there are no major handicaps faced by India; on the other hand there are the
possible advantages of a freer but more disciplined trade regime. Only snap is
that developed countries are not playing fair. In this context, the recent
developments have to be carefully watched. These include developed countries
insistence on bringing non-trade issues, such as issues of environment and
labour, as part of trade negotiations; inclusion of various types of “blue boxes”,
“green boxes” and “amber boxes” which provide possibilities of direct income
transfer to the producers, particularly in developed countries; non- tariff
restrictions in the grab of sanitary and phytosantitory requirements. While
vigilance on all these fronts has to be there, we have to be prepared also for the
next round of negotiations. It needs to be stressed that till now our joining WTO
has not constrained us in pursuing agricultural trade policy which is
advantageous for the country in the long run. There is enough space for us to
design and take appropriate measures. One of the major issues in agricultural
trade policy is our stance on food self-sufficiency. There is a pressure from
several quarters to wean away from this policy which was till lately the
overarching objective of agricultural policies, not only in India but also in several
other medium and large countries. The widespread move towards globalization
on the one hand, and secular decline in the foodgrains prices at the international
level on the other, have been advanced as the arguments to forsake food self
sufficiency as a national objective, and organize production on the basis of
comparative costs. This proposition is flawed on several counts. In the first place,
the notion of comparative advantage (often represented by the border prices) is,
at best, a static concept. It does not take into account the dynamic role of
technological and institutional measures. It also in the domestic prices, enhance
risk and uncertainty for the domestic producers as well as consumers. Advocacy
of unrestricted exposure to international markets ignores the fact that a large
majority of rural producers depend on foodgrains production as their main source
of livelihood; and, it overestimates the resilience of the system to compensate
these producers from heavy and sudden dislocations. Thus, the assumptions on
the basis of which plea for abandoning the food self sufficiency is made are not
borne out by the facts, not at least in a large and poor country such as India. For
some time to come we have to stick to the objective of food self-sufficiency. As I
have mentioned elsewhere, food self-sufficiency is not an article of faith. Once
our livelihood and consumption patterns change, with small number of workers
engaged in food production and small percentage of expenditure spent on food,
and more resilience is imparted to the economic actors, we can think of
reviewing the policy of food self-sufficiency.To take a doctrinaire approach on
‘free’ trade in foodgrains would amount to jeopardizing one of the essential
attributes of food security, i.e., adequate and dependable availability of
foodgrains at reasonable prices, and will compromise the prospect of livelihood
of those producers who themselves are inherently food insecure. At the same,
food self-sufficiency should not be interpreted as an invitation to autarky. It
simply connotes a trade strategy which would not expose the vulnerable sections
of producers as well as consumers to avoidable shocks from external trade.
While there is a little justification on foodgrains imports to meet the domestic
requirements to any significant extent, there is no firm basis to consider the
possibility of foodgrains emerging as major exports either. With the satisfactory
growth in foodgrains production in the 1970s and the 1980s an euphoria has set
in certain policy making quarters, and it is suggested that determined efforts
should be made to register India as an important exporter of foodgrains. This
euphoria is, to a large extent, unwarranted. It should be remembered that we are
lagging behind out targets of foodgrains production. Even from the point of
comparative advantage India loses out to other main producers of wheat as well
as a coarse cereals. Rice is the only cereal in which the domestic-foreign price
ratio has remained in country’s favour in most of the years. However, both the
demand and supply aspect of rice suggest that large export of this commodity is
not in the interest of the country. Marketable surplus in rice is limited, and price
elasticity of rice is very high. This means that a small drawal from the domestic
markets would give rise to disproportionately high prices. Rice is the staple food
of the majority of the people. Even a small rise in the price will affect the living
standard of large vulnerable section. Considering all these factors, , the present
policy of self-sufficiency in foodgrains should continue. If due to rise in
productivity possibility of genuine ‘surplus’ becomes imminent, then the strategy
should be divert the resources to commercial crops, or even out of the
agricultural sector, rather than to take a chance with basic commodities such as
foodgrains. This, of course, does not preclude ‘switch’ trade to meet requirement
for particular grains; nor it excludes international trade in foodgrains at the
margin. The criteria by which we should judge the export-political of an
agricultural commodity could be: (a) the place of the commodity in the
consumption pattern of the people, especially the poorer sections; (b) supply and
price elasticities; (c) the ratio of export price and the domestic price; and (d)
future demand/supply prospects in the international markets. These criteria
should be kept in the forefront while deciding the strategy of international trade
in agricultural commodities. Until recently, agricultural trade policy was
designed to pursue twin objectives, namely food self-sufficiency and promotion
of exports of the so called “commercial crops” e.g. cotton, jute, tobacco etc.
Export orientation for the later group of crops is justified as they satisfy basic
conditions to qualify as export crops as suggested above viz: (a) there is genuine
and growing surplus after meeting domestic requirements, (b) ratio of export to
domestic prices is favourable, (c) there is growing international demand. There
is, another are of potential growth in agricultural exports where India can exploit
the international markets to its advantage mainly because of its diverse soil and
climatic conditions. This is constituted by the “dynamic”commodities (i.e.
commodities which are occupying progressively large space in international
assumes ability for quick and frequent shifts in cropping pattern by domestic
producers to adjust to the changes in international prices. Wide swings in inter
year and intra year fluctuations in the international prices of foodgrains, greater
in magnitude than the fluctuations in the domestic prices, enhance risk and
uncertainty for the domestic producers as well as consumers. Advocacy of
unrestricted exposure to international markets ignores the fact that a large
majority of rural producers depend on foodgrains production as their main source
of livelihood; and, it overestimates the resilience of the system to compensate
these producers from heavy and sudden dislocations. Thus, the assumptions on
the basis of which plea for abandoning the food self sufficiency is made are not
borne out by the facts, not at least in a large and poor country such as India. For
some time to come we have to stick to the objective of food self-sufficiency. As I
have mentioned elsewhere, food self-sufficiency is not an article of faith. Once
our livelihood and consumption patterns change, with small number of workers
engaged in food production and small percentage of expenditure spent on food,
and more resilience is imparted to the economic actors, we can think of
reviewing the policy of food self-sufficiency.To take a doctrinaire approach on
‘free’ trade in foodgrains would amount to jeopardizing one of the essential
attributes of food security, i.e., adequate and dependable availability of
foodgrains at reasonable prices, and will compromise the prospect of livelihood
of those producers who themselves are inherently food insecure. At the same,
food self-sufficiency should not be interpreted as an invitation to autarky. It
simply connotes a trade strategy which would not expose the vulnerable sections
of producers as well as consumers to avoidable shocks from external trade. While
there is a little justification on foodgrains imports to meet the domestic
requirements to any significant extent, there is no firm basis to consider the
possibility of foodgrains emerging as major exports either. With the satisfactory
growth in foodgrains production in the 1970s and the 1980s an euphoria has set
in certain policy making quarters, and it is suggested that determined efforts
should be made to register India as an important exporter of foodgrains. This
euphoria is, to a large extent, unwarranted. It should be remembered that we are
lagging behind out targets of foodgrains production. Even from the point of
comparative advantage India loses out to other main producers of wheat as well
as a coarse cereals. Rice is the only cereal in which the domestic-foreign price
ratio has remained in country’s favour in most of the years. However, both the
demand and supply aspect of rice suggest that large export of this commodity is
not in the interest of the country. Marketable surplus in rice is limited, and price
elasticity of rice is very high. This means that a small drawal from the domestic
markets would give rise to disproportionately high prices. Rice is the staple food
of the majority of the people.Even a small rise in the price will affect the living
standard of large vulnerable section. Considering all these factors, I would
suggest that, we should continue with the policy of self-sufficiency in foodgrains.
If due to rise in productivity possibility of genuine ‘surplus’ becomes imminent,
then the strategy should be divert the resources to commercial crops, or even out
of the agricultural sector, rather than to take a chance with basic commodities
such as foodgrains. This, of course, does not preclude ‘switch’ trade to meet
requirement for particular grains; nor it excludes international trade in foodgrains
at the margin. The criteria by which we should judge the export-political of an
agricultural commodity could be: (a) the place of the commodity in the
consumption pattern of the people, especially the poorer sections; (b) supply
and price elasticities; (c) the ratio of export price and the domestic price; and (d)
future demand/supply prospects in the international markets. These criteria
should be kept in the forefront while deciding the strategy of international trade
in agricultural commodities. Until recently, agricultural trade policy was
designed to pursue twin objectives, namely food self-sufficiency and promotion
of exports of the so called “commercial crops” e.g. cotton, jute, tobacco etc.
Export orientation for the later group of crops is justified as they satisfy basic
conditions to qualify as export crops as suggested above viz: (a) there is genuine
and growing surplus after meeting domestic requirements, (b) ratio of export to
domestic prices is favourable, (c) there is growing international demand. There
is, another are of potential growth in agricultural exports where India can exploit
the international markets to its advantage mainly because of its diverse soil and
climatic conditions. This is constituted by the “dynamic” commodities (i.e.
commodities which are occupying progressively large space in international.
IMPACT ECONOMIC REFORMS ON SMALL SCALE SECTOR
In 1966, the small-scale enterprises were defined as undertakings
with a fixed capital investment of less than Rs.7.5 Lakhs and ancillaries
with a fixed capital investment of Rs 10 Lakhs. Investment implies
investment in fixed assets in plant and machinery, whether held in
ownership term or by lease or by hire purchase. In 1975, this limit was
revised to Rs.10 Lakhs for small enterprises and Rs 20 Lakhs in case of
ancillaries. Subsequently under the Industrial Policy Statement of 1980,
this limit was further raised to Rs 20 Lakhs in case of SSI and Rs. 25
Lakhs in case of ancillary units. In case of tiny units, the limit of
investment has been raised from Rs 1 Lakh to Rs 2 Lakhs. In March 1985,
the Government once again revised the investment limit of SSI to Rs. 35
Lakhs and for ancillary units to Rs. 45 Lakhs.
As per the Industrial Policy Statement of May 1990, the
investment ceiling in plant and machinery for small scale industries (fixed
in 1985) has been raised from Rs 35 Lakhs to Rs 60 Lakhs and
correspondingly for ancillary units from Rs. 45 Lakhs to Rs 75 Lakhs.
Investment ceiling with respect to tiny units has been increased from Rs 2
Lakhs to Rs % Lakhs. According to modified definition, an ancillary unit
is one, which sells not less than 50 percent of its manufacturers to one or
more industrial units.
During 1997, on the recommendation of Abid Hussain Committee,
the Government has raised the investment limit on plant and machinery
for small units and ancillaries from Rs 60/75 Lakhs to Rs. 3 crores and
that for tiny units from Rs 5 Lakhs to Rs. 25 Lakhs.
The Government in 2000 has reduced the investment limit on plant
and machinery from Rs 3 crores to Rs 1 crore, but the limit for investment
in tiny units has been retained as Rs 25 Lakhs.
Small Scale Industrial Undertakings: As per Government of
India Notification dated 10 December, 1997, an industrial undertaking in
whether held on ownership terms or on lease / hire purchase basis does not
exceed Rs. 3 crore was regarded as small scale industrial undertaking. The
Government of India has since decided to lower the investment ceiling
from Rs. 3 crore to Rs. 1 crore.
Women Entrepreneurs’ Enterprises: An SSI unit/industry
related service or business enterprise, managed by one or more women
entrepreneurs in Proprietary concerns, or in which she / they individually
or jointly have a share capital of not less than 51 per cent as Partners/Share
Holders/Directors of Private Limited Company/Member of Co-operative
Society is treated as women Entrepreneurs/Enterprise.
Small Scale (Industry related) Service and Business
Enterprises (SSSBEs): Enterprises rendering industry-related service /
business with investment up to Rs. 5 Lakhs in fixed assets, excluding land
and building, are called SSSBEs.
Export Oriented Units (EOUs): An unit with an obligation to
export at least 30 per cent of its annual production by the end of third year
India Notification dated 10 December, 1997, an industrial undertaking in
whether held on ownership terms or on lease / hire purchase basis does not
exceed Rs. 3 crore was regarded as small scale industrial undertaking. The
Government of India has since decided to lower the investment ceiling
from Rs. 3 crore to Rs. 1 crore.
Ancillary Industrial Undertaking: An industrial undertaking,
which is proposed to be engaged in the manufacture or production of
parts, components, Sub-assemblies, tooling or intermediates, Subassemblies, tooling or intermediates, or the rendering of services is termed
as ancillary undertaking. The ancillary undertaking has to supply or render
or render or propose to supply or render not less then 50 per cent of its
production or services, as the case may be, to one or more other industrial
undertakings. The investment in plant and machinery, whether held on
ownership terms or on lease or on hire purchase, should not exceed Rs. 1
crore.at the time of commencement of production and having investment
ceiling in fixed assets – plant and machinery-up to Rs. 3 crore is regarded
as an EOU.
The SSI sector in India covers a wide spectrum of industries
categorized under small, tiny and cottage segments ranging from small
artisans handicraft units to modern production units with significant
investments. This sector has acquired a prominent place in the socioeconomic development of the country as it not only acts as a ‘nursery’ for
the development of entrepreneurial talent, but also produces a wide range
of product, exceeding 7500.
The term Small Scale Industry evokes different meanings for
different agencies. The Planning Commission, Government of India,
views the entire Village and Small Industries (VSI) sector as a part of the
SSI sector. The National Sample Survey Organization under the Central
Statistical Organization (CSO), Government of India, defines the entire
industry sector in terms of organized and unorganized segments, as well as
in terms of industrial enterprises run by households and non-households.
The Central Excise Department, on the other hand, distinguishes SSIs on
the basis of the annual turnover of the units (up to a maximum limit of Rs.
3 crore). The industrial policy planners in the Small Scale industries Board
define SSI on the basis of investment in plant and machinery (an upper
limit of Rs. one crore).
Since independence, the Union Government aimed at promoting
industrial growth and determining a pattern of state intervention and
assistance has formulated a series of six Industrial Policy Resolutions/
Statements. While the Industrial Policy Resolution, 1948, spelt out the
framework of the basic and strategic industries to be established by the
State, the policy of supporting Cottage, Village and Small Industries took
shape in 1956, when the Government decided to initiate measures to build
the competitive strength of the small village industries. The 1956
Resolution underlined/recognized the role that the SSI sector could play in
providing employment opportunities, mobilizing local skills and capital
resources, and in the process integrating with the large industry sector.
The Industrial Policy Statement 1977 stressed on the wider
dispersal of cottage and small industries into rural areas and small towns.
The concept of District Industries Centres was also mooted so as to
provide services to small industries under one roof. The Industrial Policy
Statement released in 1980 was important from the point of view of
ancillarisation and creation of nucleus plants for the growth of the sector.
The Industrial Policy 1990 laid emphasis on the steps to enhance the
contribution of the SSI sector in overall exports, employment generation
and dispersal of industries in rural areas.
The Industrial Policy measures announced in 1991 contained a
special thrust on the promotion and strengthening of Small, Tiny and
Village Industries. Under the package of measures announced, the
investment limit for tiny industries was raised to Rs. 25 Lakhs million and
locational conditions were withdrawn. In order to boost the ancillarisation
and strengthening of the capital base, equity participation by other
industrial undertakings was permitted up to a limit of 24 per cent of the
shareholdings in SSIs. A new scheme of Integrated Infrastructure
Development for SSIs was provided for with the participation of State
Governments and Financial Institutions. A pro-active role for NonGovernmental Organizations ( NGOs) and Industry/ Trade Associations
was mooted. In 1997, there was a major upward revision in the investment
limit in Plant and Machinery for the purpose of defining SSI and Tiny
Sector units. The limit was brought up to Rs. 3 crore. But now, has been
brought down to Rs. One crore recently in December 1999.
EVOLUTION AND DEVELOPMENT OF SSI POLICY
Over the past five decades, government policies have been
formulated to develop a framework for the revival and development of
cottage, tiny, rural agro and small-scale industries. With a view to
determining the types of industrial units, which needed special support, it
was considered necessary to develop an appropriate classificatory
definition for SSI units under the Industries (Development and
Regulation) Act, 1951.
TABLE-I
YEAR
1950
1958
1959
CAPITAL
Capital Assets not exceeding Rs 5 Lakhs
Capital Investment of less than Rs.5 Lakhs
In capital investment, value of machinery to be taken
at original price paid irrespective of it being new or
old
1960
Gross Value of Fixed Assets up to Rs 5 Lakhs
Original Value of Plant & Machinery
Only
1966
1975
1980
1985
1991
1997
1998
Upto 7.5 Lakhs
Upto 10 Lakhs
Upto 20 Lakhs
Upto 35 Lakhs
Upto 60 Lakhs
Upto 3 Crores
Upto 1 Crores
GROWTH OF SMALL SCALE INDUSTRIES
The steady growth of small-scale industries has been one of the
most significant features of planned economic development. The smallscale sector has grown phenomenally during the last three decades and the
sector has played and has potential to play a vital role in the fulfillment of
our socio-economic objectives.
The total number of small-scale units in the country in 1998-99
was 31.21 lakh, compared to 20.82 lakh in 1991-92. Value of production
of small-scale units in 1998-99 aggregated to Rs. 5,27,515 crore. The
volume of employment in the small-scale sector stood at 171.6 lakh as of
end-March 1999. Exports from the SSI Sector accounted for about 35 per
cent of the country’s total exports. In 1998-99, SSI exports valued at Rs.
49,481 crore, increased by 11.4 per cent over 1997-98.
T A B L E – II
NO OF SSI UNITS WITH PRODUCTION AND EMPLOYMENT
No. of Units
(in Lakhs)
Production (Rs. in Crores)
At Current
Price
At 1990-91 price
Employment
(Lakhs nos.)
Export (Rs.
in Crores)
1991-92
20.82
178699
160156
129.80
13883
1992-93
22.46
209300
169125
134.06
17784
1993-94
23.88
241648
181133
139.38
25307
1994-95
25.71
293990
199427
146.56
29068
1995-96
27.24
356213
222162
152.61
36470
1996-97
28.57
412636
247311
160.00
39249
1997-98
30.14
465171
268159
167.20
44437
199899(P)
31.21
527515
288807
171.58
49461
(ANNUAL REPORTS 1998-99 & 1999-2000)
The Table III below gives the position with regard to flow of credit to SSI
Sector from Public Sector Banks: Credit to small scale industries has been
on the rise. It was 21561 in 1994, which rose to 25843 in 1995, 29485 in
1996, 31542 in 1997 and 38109 in 1996. The small-scale credit as
percentage of net bank credit has also shown appreciable increase from
15.30 percent in 1994 to 15.99 in 1996, to 16.6 in 1997 and 17.5 in 1998.
T A B L E - III
Net Bank Credit
1994
1995
1996
1997
1996
Net Bank Credit
1,40,714
1,69,038
1,84,381
1,89,684
2,18,219
Credit to SSI
21,561
25,843
29,485
31,542
38,109
SSI Account
(Lakhs)
30.19
32.25
33.77
31.44
29.64
SSI Credit as %
of Net Bank
Credit
15.30
15.29
15.99
16.6
17.5
(ANNUAL REPORTS 1998-99, 1999-2000)
CREDIT TO TINY SECTOR
The table below gives the status of credit flow to tiny sector since 1994.
T A B L E - IV
Net Bank credit
(Rs. Crores)
At the end
of March’
1994
At the end
of March’
1995
At the end
of March’
1996
At the end
of March’
1997
At the
end of
March’
1998
Net credit to tiny
sector
5869
7734
8183
9515
10273.13
The credit as %
of net SSI credit
27.22
29.93
27.76
30.20
27.00
(SOURCE: RBI)
The Small Scale Industries (SSI) sector plays an important role in
the industrial development of the country. This sector contributes nearly
40 percent of the total industrial output besides having a 35 percent share
in direct exports and plays very important role in generation of gainful
employment opportunities. The performance of the small-scale sector in
the spheres of production, employment and exports has been impressive.
In spite of liberalization and opening up of the economy, the small scale
sector has not only shown consistent growth in all the three spheres
mentioned above but also has generally out performed the large scale
sector
GROWTH OF SMALL SCALE INDUSTRIES
The growth of SSI has been one of the most significant features of
planned economic developments. The small-scale sector has grown
phenomenally during the last three decades and the sector has played and
has potential to play a vital role in the fulfillment of our socio-economic
objectives. The achievements relating to production, employments as well
as exports in the SSI sector are the following Table.V
Indian agriculture to a large extent is in the small farm sector (over
75 per cent of the farm holdings are small) and if employs about 65 per
cent of total work force. In the industry sector, large factories contribute
about 63 per cent of the Industrial output and employ about 28 per cent of
industrial labour force. The unorganized sector, mainly small and cottage
industries accounts for the rest. The employment composition
In the service sector is more or less the same as in the industrial
sector. In fact, small-scale sector forms a big segment of the Indian
economy. Hence the structural adjustment and globalisation of the Indian
economy have to be viewed in this context.
TABLE–V
YEAR
NO OF
LAKH
UNITS
PRODUCTION (RS.
CRORES)
EMPLOYME
NT
(Lakh Nos.)
EXPORT
(RS.CROR
E)
Current
Price
At 1990-91
Price
1991-92
20.82
178699
1992-93
22.46
209300
160156
129.80
13883
169125
134.06
17784
1993-94
23.88
1994-95
25.71
241648
181133
139.38
25307
293990
199427
146.56
29068
1995-96
1996-97
27.24
356213
222162
152.61
36470
28.57
412636
247311
161.00
1997-98
39249
30.14
465171
268159
167.20
44436
(ANNUAL REPORTS 1998-1999, 1999-2000)
CATEGORIES OF SMALL SCALE PRODUCERS
The small-scale producers fall into three broad categories viz., the
primary producers, the traditional producers and the modern small-scale
industries. Amongst the primary producers, small farmers constitute about
80 per cent of the farming community and operate up to 30 per cent area.
The total marketed surplus from agriculture does not exceed 30 per cent
of the produce.
Modernisation programme and Small
Farmers
The agriculture modernisation programme intends to declare agriculture as
an ‘industry’. A policy document in this regard was brought out in the
early 90s. The salient features are as follows.
(i) Improving crop yields through biotechnology and transfer of
knowledge to farms.
(ii) Focussing on selected crops where the country has comparative
advantage.
(iii) Reducing post harvest loss by linking farms with agro- technology
processing units, which in turn, establish forward linkages for agriculture.
(iv) Globalising agriculture through exports, under the multilateral GATT
agreement.
(v) Promoting the plantation and tree-crops as major industries.
(vi) Rationalising the existing price-subsidy regimes to promote
efficient use of scarce resources.
The new policy intends to raise farm product exports figure several
times more than in previous years. For this purpose, additional crops
identified include, fruits, flowers, vegetables, oilseeds and wheat, etc.
Several large companies, often of multinational origin, have begun to buy
food for processing, for sale on local as well as export markets. In some
cases, contract farming too is practised (e.g. promotion of tomato growing
by Pepsi Foods in Punjab).
Small farmers will remain outside the system of sophisticated
farming. The export policy is being promoted to an extent that experts are
finding the upper ceiling on land holdings as an impediment (quoted in
Business India, Dec.6, 1993). In coastal regions of Andhra Pradesh and
Tamil Nadu small scale paddy farmers are being displaced from their land
and they are becoming migrant labourers to give way to prawn farming by
large companies for export. Such a farming not only absorbs little labour,
but also ecologically degrades the earth by the inlet of brackish waters.
The agriculture modernisation programme has three ingredients_
(a) irrigation expansion, (b) rationalisation of the cropping pattern for
integration into the market and (c) use of fertilisers. The irrigation
schemes of the surface water are displacing a large number of small
peasants. The damming of the Armada River can well be quoted in this
regard. Moreover, the distribution system of the irrigation is of the type
that small farmers situated in the interiors get very little water.
Fertiliser subsidies are now being phased out, as a result their
prices have risen and many small farmers have reduced their use. The
small farmers for lack of enough land and inputs are not able to produce
cash crops as the large farmers can do and cannot integrate themselves
with the market system as the policy envisages. Agricultural prices
fluctuate largely and it is beyond the capacity of small farmers to wait or
transport their produce. Floor prices too are ineffective due to delay and
corruption of the procurement agencies.
The difficulties of small farmers were brought to notice and special
programmes SFDA, and MFALA were established. In 1980 they were
merged with other anti-poverty programmes.
Under SAP, the financial system has become tight and the priority
lending for the rural farm sector is now a subject of debate. There is a
proposition for closing loss making bank branches in rural area. The small
farmers are not going to gain with the new agricultural policies.
Rural Traditional Crafts
Traditional technology are labour intensive and since
independence stress has been laid on the development of crafts and tiny
industries, not only looking to the market demand but also to the
employment potential inherent in such industries. Total production by the
village industries in 1992-93 was of the order of Rs. 29 billion and
employed about 5 million persons, and the export out of it was of about
Rs. 80 millions.
The village industries are facing tough competition from the
modern manufacturing sector. Their survival is, however, protected due to
the state support, secondly, their goods are in demand in the fashion
markets and thirdly, their products finds markets where large-scale sector
products are not able to reach.
It is estimated that at least half a million handloom weavers have
been put out of job and are living at mere subsistence level. The size of the
modern sector is rising fast and is replacing the products of village
industries. On the other hand, the village industries are facing hard the
problem of credit due to financial sector reforms and credit squeeze. The
investment in the village industries sector never exceeded one per cent of
the total Five-year Plan outlays. Even this figure went down to 0.46 in
early 90s.
Khadi Sector employed about 1.4 million persons in 1992-93
(including full and part time workers). With the coming up of the synthetic
yarn the demand for Khadi weaving has come down. The mill or the
power-looms do even spinning of finer varieties. Production of polyester
mixed Khadi is very limited. As a result of this the earnings of Khadi
worker have reduced to Rs. 8 from Rs. 12 per day.
Pulse processing unit of village is manual and the output per day is
much lower as compared to large units with higher productivity. The
market is now controlled by the large power driven units and possessing of
rapid means of transports. As a result the cottage sector is almost
vanishing.
Similarly, the large-scale sector has begun to produce edible oils
priced differently for different sections of the society. While the capacity
of small oil extractors is extremely limited.
As far as soap industry is concerned it too has become financially
unviable. Only less than 10 per cent of the manufacture of soap is
contributed by the small sector for the consumption of the weaker sections
of the society and cheap laundries. The control of MNCs on the
manufacture of soaps and detergents has increased considerably with their
merger with major Indian companies. Till recently non-power using soap
and detergent industries were exempted from excise. Now a 10 per cent
excise duty has been imposed on them equal to that on the large
manufactures. The profitability of small units has, therefore, come down.
All these show how the open market policies have brought about
the village industries to a phase of tough competition with the large scale
units of production.
MODERN SMALL ‘Industries’
These are the units, which have a fixed capital not exceeding
Rs.6.5 million (7.5 million in the case of ancillaries). According to 1988
census an average unit had a plant and machinery size of about Rs.150
thousand, producing about Rs.700, 000 worth of commodities per annum
and employing on an average 6 workers per unit.
In the new economic policy reservations have been scrapped. Thus
exposing these units to competition. They are also not able to get the credit
easily and enjoy the benefits of transfer of foreign technology. Hence the
only alternative left is that the small firms work as the ancillaries and
service units. At the same time, however, the small units will have to
adopt developed technology to work as an efficient ancillary or service
unit. But the high technology needs highly skilled personnel whom the
small units may not be capable to employ due to the high payments
required to be made to them.
Hence with the restructuring of the small units, the relatively large
units among the small units category will be able to stand better chances
of survival.
Computer Industry
This is of recent origin in India. Parts of about 60 per cent of the
value of the computer are to be imported as the country does not possess
the technical expertise to make them (e.g. disk drives or memory chips) –
the manufacturers – big or small –m put them together as per stipulated
design. The small producers control about 5 per cent of the manufacturing.
To make up the scale disadvantage they employ less services are poor.
Some traders also devised the way of getting smuggled parts. In 1994-95
budget the customs duty on computer components have been reduced to
check smuggling.
Readymade Garments
Readymade garments are the largest foreign exchange earner. The
industry runs largely on sub-contracting basis. Exports therefore
mainly originate from the small sector. Export Promotion Council
has been set-up to distribute the quota among different exporters.
There are over 10,000 units registered with this Council of which
only about 250 are manufacturers. The others are merchantexporters who procure the produce from the small fabricating
units. Some problems have arisen with this industry too from the
new economic policy.
Firstly, the apparel producers are subject to MFA according to
which quotas are distributed to exporters. Before 1991, this was
distributed according to the volume and price but, subsequently a’
past performance entitlement’ was introduced (taking past 3 to 4
years of performance). In principle this proposition seems sound,
but in practice the relatively well-established units sell portions of
their quotas to others, encouraging black marketing. The new
entrants have to go through black marketing process.
Secondly, most of the trimming equipment is imported and is
subject to high customs duty. Concessional customs duty is allowed only
if the exporters are able to increase exports period of 5 years, which may
not be possible at occasions.
Thirdly, the export subsidy, which they got earlier, has been
withdrawn as a part of IMF conditional ties.
Lastly, due to export of 60-70 per cent of major yarn counts being
exported non-availability of fabric at appropriate prices also create a
problem.
Leather Garments
About 40 per cent of the product is exported. Hence it is also a
major export earner. Most of the leather goods manufacturers are
in small scale, they need be given proper incentives like tax reliefs,
stalls to advertise their products and simplification of importexport process of these goods.
New Entrepreneurial Spirit in the State
Once the direction of the state government’s economic and
industrial policies are clear the next step needed is the necessary
adjustment in the existing system of operation in order to make sure that
the flow of investment is properly made and utilised.
REFERENCES
1. P.N.Dhar, “Small Scale Industries”
2. Dhar & Lall, “The Role of Small Enterprises in Indian Economic
Development”
3. Report of the Village and Small Scale Industries Committee
4. Report of the All India Census of Small Scale Industrial Units (1987-88)
IMPACT ON SOCIAL SECTORS
Economic reforms influenced almost all fields of social sectors
including poverty, unemployment, services, education, health, and
women. There were some improvements in employment particularly in
services sector. But there has not been much improvement in health and
status of women. Many observers say that poverty increased in rural areas
but it declined in urban areas. All of them are being examined here one by
one.
EMPLOYMENT
The employment in the organized sector has grown. It is observed
from the Table I that since the government is withdrawing itself from
active participation in production activities, the growth of employment in
organized sector has remained very slow.
TABLE - I
Employment in organized sector
(EMPLOYMENT IN LAKHS)
YEAR
PUBLIC SECTOR
PRIVATE SECTOR
TOTAL
1990
1991
1992
1993
1994
1995
187.71
190.57
192.10
193.26
194.45
194.66
75.82
76.76
78.46
78.50
79.30
80.59
263.53
267.33
270.56
271.76
273.75
275.25
(SOURCE: ANNUAL REPORTS OF MINISTRY OF LABOUR, 1996-97)
The private sector has contributed predominantly to the increase in
employment in the organized sector except in the year 1993 under the
reforms regime. The growth rates of employment in the organized sector
are observed from the following Table II. The role of public sector has
reduced substantially.
TABLE - II
Public Sector
Private Sector
Total Organized Sector
1991
1.52
1.24
1.44
1992
0.80
2.21
1.21
1993
0.60
0.06
0.44
1992
0.62
1.01
0.73
1995
0.11
1.63
0.54
1996
0.19
5.62
1.51
1997
0.67
2.04
1.09
It has been observed that there was a marked change in the size
structure in 1980s and more so in 1990s. The size classes 50 to 500
employment gained while the size classes 2000 to 4999 and 5000+ lost
heavily. Since the factories in lower employment size classes are more
labour intensive, these changes in size structure has a favourable effect on
employment growth. In particular, it may be noted that size class 5000+ is
the most capital intensive (least labour intensive). The sharp decline in the
relative share of the size class in 1990s and the increase in the relative
shares of size classes 50 to 99, 100 to 199 and 200 to 499 must have made
a significant contribution to employment growth in this period.
It may be noted in this context that the economic policy regime has
a major influence on the size structure of industries. The change in the size
structure showing decline of big units and rise of small and medium units
is a correction of structural imbalance earlier.
The change in 1980s and 1990s, a decline in relative share of big
units and a rise in the share of small and medium size factories, is
arguably a correction of structural imbalance prevailing earlier. Since the
imbalance in size structure was largely a consequence of economic
policies, the correction that has taken place in the last two decades may be
attributed, at least in part, to change in economic policy especially the
liberalization of industrial and trade policies.
There were apprehensions that economic reforms would lead to the
reduction in employment growth. The data in Table III shows that
employment growth based on usual status declined during 1983-87 to 88
period but showed higher growth from 1990 onwards. Currently daily
status also shows that the growth of employment was over 2% in 1980s as
well as 1990s. This shows that employment has not declined in the post
reform period.
TABLE – III
RATE OF GROWTH OF EMPLOYMENT
PERIOD
RATE
OF
GROWTH
OF
EMPLOYMENT
Usual Status
Current Daily
Status
1972 –73 to 1977-78
1977-78 to 1983
1983 to 1987-88
1987-88 to 1993-94
2.73
2.17
1.54
2.43
0.92
2.08
2.89
2.52
EDUCATED UNEMPLOYMENT : Incidence of open
unemployment among the educated has always been high and continues to
be high though there has been a sharp long-term decline in the rates. The
decline has been the sharpest among female, especially in urban areas,
though incidence of unemployment among the educated females continues
to be higher than among the educated males. The sharpest long term
T A B L E - IV
1977-78
1983
1987-88
1993-94
10.9
35.0
8.5
22.2
11.5
34.9
8.3
21.9
8.9
25.0
6.9
21.1
12.8
41.5
7.3
21.1
15.0
37.3
7.4
21.0
13.4
32.3
6.4
20.5
EDUCATED
Rural Male
14.2
Rural female
45.7
Urban Male
9.8
Urban Female 40.0
GRADUATES AND ABOVE
Rural male
19.7
Rural Female
44.8
Urban Male
9.3
Urban Female 35.9
decline in incidence of unemployment among graduates has been
in the case of graduate females in urban areas while the rate of
decline has been the lowest in the case of graduates females in
rural areas. Table IV shows that incidence of educated
unemployment is higher in rural areas and among females in rural
as well as urban areas.
UNEMPLOYMENT BY INCOME: One of the ways of looking at
unemployment by income or expenditure criterion is to look at the
poverty ratio among the employed. The large gap between
unemployment rates by time criterion shows low earnings for
many of the workers. Distribution of employed across expenditure
classes (Table V) shows that poverty among rural and urban
workers declined over time. The proportion of poor among the
rural workers declined from 36 percent in 1987-88 to 35 percent in
1993-94. The rate of decline in the post-reform period was slower
than that for earlier periods. Poverty among urban workers,
however, declined faster than rural workers in the post reform
period.
TABLE–V
YEAR
1977-78
1983
1987-88
1993-94
Percentage Among Employed
RURAL
URBAN
51.81
37.99
45.25
39.69
38.02
36.94
35.25
30.61
QUALITY OF EMPLOYMENT: Security of employment can be
used as a proxy for quality of employment. NSS data provides
employment data for three categories viz., self-employed, regular and
casuals. The NSS data shows that the share of self employed and regular
wageworkers has been declining and casualisation of labour has been
increasing over time. The casualisation phenomenon got accentuated with
economic liberalization.
Ghosh estimates employment quality index (EQI) using the NSS
data for the period 1977-78 to 1993-94. The available EQI reveals that (a)
a quality of employment has been the highest in services and it has been
lowest in agriculture; (b) the quality of employment deteriorated in
aggregate economy and in all three sectors. (c) The deterioration has been
slower in services; (d) the deterioration has been higher for males as
compared to females for aggregate economy.
According to the data available for the real wages for the casual
workers over the period 1983 to 1993-94, indicates that real wages have
increased in 1990s but the rate of growth during 1988-94 has been lower
than those for earlier periods. The growth rate of real wages for tertiary
sector during 1987-88 to 1993-94 was the lowest among all sectors. The
data on real wages for agricultural labourers also shows that the growth
rate was lower in 1990s as compared to 1980s.
SERVICES
Broadly defined the services sector includes all economic activities
whose output is not a physical product. This sector encompasses the major
areas of trade (retail and wholesale), finance, insurance, communications,
public utilities, transportation, and government. Administration,
healthcare, education, business and personal services.
Economists say that as the economy develops, the share of the
primary sector in GDP declines and that of secondary and Tertiary Sector
increase. The growth of the services sector and its contribution to income
and employment generation are indices of economic development.
Primary Sector includes agriculture, forestry and fisheries.
Secondary sector includes mining, manufacturing and electric supply and
construction. Services cover trade, transport, communication, finance, real
estate and community, social and personal service.
The services sector in the Indian economy accounted for 28 per
cent of the GDP at constant prices in 1960-61. This share increased to 31
percent in 1970-71 and to almost 37 percent in 1980-81. This is as high as
47 percent in 1999-2000. This means that the services sector has been the
major beneficiary from the falling share of the agricultural sector.
TABLE - VI
SECTORAL SHARES OF GDP (Percentage)
Year
1950-51
1960-61
1970-71
1980-81
1989-90
1990-91
1997-98
1998-99
1999-00
Primary
55.80
45.80
44.50
38.10
32.40
30.90
26.74
26.82
25.50
Secondary
15.20
20.70
23.60
25.90
28.10
30.00
27.75
27.01
27.40
Services
29.00
33.50
31.90
36.00
38.50
39.10
45.50
46.17
47.10
The services sector as a whole was growing at more than 7 to 8
percent a year during 1990s. In 1997-98, the sub-sector public
administration and defence recorded a growth of as much as 20 percent.
This is because of the implementation of new pay scales.
Services sector provides a tremendous scope for employment at the
present stage of India’s development where the manufacturing sector, with
its preoccupation of modernizations, technological up gradation can at best
provide only a limited solution to the unemployment problem in the
economy. The excess growth of tertiary sector is attributed by some to
growing mobility due to expanding foreign trade, and tourism. Increasing
urbanization may be another cause for this phenomenon.
TABLE – VII
COMPOSITION OF SERVICES SECTOR AND CONTRIBUTION TO GDP
Year
Trade
Transport
Finance
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
12.02
12.07
12.36
12.04
12.05
12.26
12.29
12.80
12.41
12.52
12.52
12.50
12.75
12.77
13.44
4.67
4.77
4.96
4.91
5.08
5.32
5.46
5.42
5.21
5.30
5.26
5.51
5.57
5.66
5.47
8.81
8.81
9.13
8.82
9.01
9.12
9.41
9.91
9.76
10.13
10.23
11.12
10.98
11.42
11.73
Community
Services
10.48
10.48
10.70
10.24
10.56
10.79
11.15
11.49
11.03
11.17
11.05
11.40
11.40
11.46
10.68
Total
35.98
35.98
37.15
36.00
36.00
37.49
38.31
39.62
38.40
39.12
39.06
40.53
40.53
41.31
41.32
1995-96
1996-97
14.47
14.59
5.53
5.61
12.01
12.14
10.56
10.45
42.57
42.79
An examination of the services sector (Table VII) at the national
level reveals that trade and hotels, transport, finance and community band
social services are the major heads. Of the major four, trade and hotels
account for nearly one-third of the share of services sector throughout the
period, the share of the community services account for little short of one
third and the remaining two, namely, transport and finance sectors
together account for one-third of the services sector. Among the four, the
growth of finance sector is sizable from 9 percent of the GDP to nearly 12
percent in 1996-97.
TABLE - VIII
SECTORAL CONTRIBUTION TO GDP (1980-81 =100)
YEAR
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
AGRICULTURAL
& ALLIED
31.40
33.03
31.40
30.93
29.97
30.18
29.80
26.77
26.04
26.13
24.40
28.90
INDUSTRIAL
SECTOR
27.18
26.66
27.18
28.02
27.45
27.12
26.97
28.07
29.53
29.34
31.40
24.40
SERVICE
SECTOR
39.62
38.40
39.62
39.06
40.53
40.70
41.31
41.32
42.57
42.79
44.20
46.70
Table VIII given above shows that services sector made
improvements during 1990s but the industrial and agricultural sectors did
not make much headway.
IMPACT ON POVERTY
Ever since the introduction of economic reforms, there has been a
debate whether the reform measures have adverse effects on poverty.
According to some researchers, reforms would benefit the poor in the
medium and long run, although they may have adverse effect in the short
run [Bhagwati and Srinavasan, 1993; Tendulkar 1998; Joshi & Little
1997]. Some others argue that the reform package has internal
contradictions and it might have adverse effect on the poor in both short
and long run [Nayyar 1993;Ghosh1995; Bhaduri1996].
The pro-reformers argue that reforms would increase efficiency
and higher growth and in turn reduce poverty. It is also argued that one
has to look at counterfactual situation while analyzing the impact of
reforms. According to them, the strategy of the 1980s(public expenditure
led growth) is not sustainable and there is no alternative to reforms. They
also argue that intensification of reforms (second generation) is needed to
have a significant impact on the growth and the poor. On the other hand,
anti-reformers argue that economic reforms would adversely affect the
poor and one can have alternative strategy to the economic policies, which
are being followed, in the country.
Change in poverty can be assessed with the help of National
Sample Survey (NSS) consumer expenditure. One can also examine the
poverty situation indirectly by looking at the trends in employmentunemployment and real wages of the workers.
India is perhaps the only developing country, which has the longest
time series of national household surveys starting from the early 1950s.
Till 1973-74, NSS data were available annually. Between 1972-73 and
1993-94, five quinquennial surveys have been carried out with a large
sample size of ten households per sample village. The remaining NSS
rounds in the 1980s and 1990s are based on the so-called ‘thin’ sample of
two households per sample village. The ‘thin’ samples are good enough to
provide reliable estimates at the all India level and the variance may be
high at the state level.
The trends during the first 24 years of pre-reform period (1951 to
1973-74) shows that the (a) rural poverty varied between 44 percent and
64 percent and (b) urban poverty varied between 36 percent and 53
percent without any significant trends. However, both rural and urban
poverty ratios showed a decline in the late 1970s and in the 1980s
POVERTY IN THE POST REFORM PERIOD
Since the introduction of economic reforms in 1991, Datt’s
estimates for the period 1973-74 to 1978 (Table-IX) show that rural
poverty declined in the 1980s and it has not declined in the 1990s as
compared to 1990-91.On the other hand, urban poverty declined
significantly in the 1990s. Gupta’s estimates also show similar trends on
rural poverty. However, in 1998 the rural poverty increased to around 45
percent. His studies also indicate that probably growth was not trickling
down in 1990s.
As shown in Table X below, poverty declined by 3.1 percent and
employment growth was 1.6 percent in 1980s with a GDP growth of about
5.6 percent. In the 1990s, the same growth of GDP and low growth of
employment were associated with an increase in poverty. Based on these
results, Gupta recommends positive employment generation policy among
the rural poor, e.g., by different direct poverty alleviation programmes like
T A B L E – IX
Datt’s
Rural
50.60
45.31
38.81
39.23
39.06
34.30
36.43
37.42
43.47
36.66
41.02
37.15
35.78
Year
1977-78
1983
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1997
Estimates
Urban
47.96
35.65
32.29
36.20
36.60
33.40
32.76
33.23
33.73
30.51
33.50
28.04
29.99
Rural
45.65
39.09
33.70
35.04
41.70
37.27
38.03
38.29
38.46
S. P. Gupta’s
Urban
40.79
38.20
36.00
35.29
37.60
32.30
34.24
30.05
33.97
Estimates
Total
44.48
38.86
34.28
35.11
40.70
35.07
36.98
36.08
37.23
(SOURCE: Estimates based on NSS Data on consumer expenditure)
PDS, IRDP, etc especially in the short run. Gupta, however, finds lower
progress in urban poverty than those of Dutt.
TABLE–X
CHANGES IN POVERTY, EMPLOYMENT AND GDP
YEARS
CHANGES IN
POVERTY RATIO
EMPLOYMENT
GDP GROWTH
1983 TO 1990-91
1990-98
-3.1
+2.7
1.6
1.1
5.6
5.7
Looking at estimates based on quinquennial surveys for the pre and
post-reform period. The estimates based on expert group method and
approved by the Planning Commission are presented in Table XI. It shows
that the 1980s recorded faster decline in rural poverty and the decline
slowed down considerably after the introduction of reforms. On the other
hand, urban poverty showed faster decline in the post reform period.
Three conclusions may be derived from the foregoing assessment
of all India’s poverty situation. They are as follows: (a) rural and urban
poverty increased during the first two years of the reform period; (b) the
phenomenon of faster decline of poverty in the 1980s has been halted in
the post 1991 period. Comparing 1987-88 and 1993-94, the rate of decline
of poverty has been much slower as compared to that of 1980s. (c) Urban
poverty declined much faster than rural poverty in the post-reform period.
TABLE – XI
PERCENTAGE OF POPULATION BELOW THE POVERTY LINE
RURAL
Year
Poverty
Ratio
1977-78
1983
1987-88
1993-94
53.0
45.7
39.1
37.3
Annual
Decline
URBAN
Poverty
Ratio
Annual
Decline
45.2
-3.24
40.8
-2.25
-3.41
38.2
-1.45
-0.78
32.4
-2.71
(SOURCE: ECONOMIC SURVEY, 1997-98)
TOTAL
Poverty
Ratio
Annual
Decline
51.3
44.5
38.9
36.0
-3.11
-2.95
-1.29
EMPLOYMENT GROWTH
There were apprehensions that economic reforms would lead to
reduction in employment growth. But data in Table XII show that the
employment growth based on usual status declined during 1983-87 to 88
but it showed higher growth during 1987-88 to 1993-94. Current daily
status also shows that the growth of employment was over 2 percent in the
1980s as well as in the early 1990s. Thus there was no sign of decline in
the growth of employment at the aggregate level in the post reform period.
TABLE – XII
RATE OF GROWTH OF EMPLOYMENT
PERIOD
RATE
OF
GROWTH
OF
EMPLOYMENT
Usual Status
Current Daily
Status
1972 –73 to 1977-78
1977-78 to 1983
1983 to 1987-88
1987-88 to 1993-94
2.73
2.17
1.54
2.43
0.92
2.08
2.89
2.52
FACTORS RESPONSIBLE FOR CHANGES IN POVERTY
IN POST 1991
It has already been narrated that rural poverty increased in the first
two years of the post-1991 period. Three factors, viz., reform
measures, poor agricultural performance and increase in food
prices could be responsible for a significant rise in rural poverty
during the first few years of the reform period. The agricultural
production declined in 1991-92 due to les rainfall in certain
regions. In several states, food grains production, particularly the
coarse grains declined. The decline in the production could have
been partly due to stagnant fertilizer consumption which in turn
was due to rise in fertilizer prices. The consumption of chemical
fertilizers during the period 1990-91 to 1993-94 has been stagnant
around 12.5 million tonnes. The increase in fertilizers prices could
be attributed to the reform measures. The fertilizer consumption
seems to have gone down in many states during the initial years of
the reform period due to increase in fertilizer prices. The decline or
stagnancy in fertilizer consumption is given as one of the reasons
for the poor performance in agriculture in the 1990s.
Another major reason for increase in poverty of the rural areas
could be increase in procurement prices. There was 12 percent and
17 percent rise in rice procurement prices and around 20 percent in
wheat procurement prices in 1991-92 and 1992-93. Large and
small farmers who have marketable surplus gain from the rise in
food prices. The marginal farmers and landless labourers lose in
the short run because they are net buyers of food. Even in the long
run it is not clear whether real wages of labourers catch up with the
rise in food prices.
The economists, however, hold different views on the factors
responsible for the increase in poverty in the post reform period.
One view is that the steep rise in rural poverty is to be attributed
basically to factors that are not linked directly to economic reforms
such as a dip of 2.5 percent in agricultural output in 1991-92, the
depletion of government food grain stocks, the rise in procurement
prices of food grain, etc. Similarly Joshi and Little (1996) argue
that the stabilization was part of the rise in rural poverty. They say
that structural reforms are not responsible for the changes in the
post-reform period. According to them, one has to distinguish
between stabilization and structural reforms in analyzing poverty.
Dutt and Ravallion also indicate that the joint effect of the crisis
and stabilization accounted for at most 36 percent of the increase
in poverty rate in 1992 and a smaller share of the increase in the
depth and severity of poverty.
A number of case studies carried out by the Indian economists and
social scientists for the World Bank suggest that poverty is
unlikely to have increased in the post-reform period. In addition,
trends in variables such as wages for agricultural labourers,
agricultural production, overall growth and inflation suggest that
the incidence of poverty might in fact have declined [World Bank,
1996].
EDUCATION
At the advent of independence, the literacy rate was 18.33 percent
(male literacy rate was 21.16 percent and female literacy rate was 8.86
percent). It was only in 1991 that the number of literates exceeds the
number of illiterates when India crossed the half way mark, achieving
literacy rate of 52.21 percent (male literacy was 69.1% and female literacy
rate was 39.4 percent)
Econometric studies conducted in India have shown that on an
average one percent increase in GNP of the country led to about 1.25
percent rise in educational expenditure. This shows that educational
expenditure is elastic with respect to income. Therefore it became
necessary that more than 10 percent of the total expenditure should be
T A B L E – XIII
PERCENTAGE OF BUDGETARY ALLOCATION FOR
EDUCATION
Financial Year
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
Total Plan Outlay
(In Crores)
72852.4
88080.7
98167.3
107380.4
129188.6
139625.9
Expenditure
on
Education (Crores)
2619.4
3147.3
3940.0
5355.7
7346.1
8208.2
%
Of
Outlay
3.6
3.6
4.0
4.9
5.7
5.8
Plan
Invested on educational development if the target of 8 percent
growth rate of GDP is to be achieved. However the total
expenditure from education that is presently met out is only 3-4
percent of the total budgetary expenditure (Table XIII). Again the
increment in the percentage of budget allocation, which has been
shown by the table, XIII after 1995-96 is due to the enhancement
of the salaries based on the recommendations of the Fifth Pay
Commission. Studies are there which show that nearly 80 percent
of the budget goes on the salaries leaving very small amount for
development and maintenance of infrastructure and buildings.
In fact, the primary education system in the country is today in a
state of chaos. While there has been significant expansion in the field of
education in quantitative terms, the quality of the education provided
leaves much to be desired. The proper academic culture is lacking in our
educational institutions. The subsequent cut in the plan outlay has also
affected and unless the ways and means are not devised, the programme of
education for all is likely to be adversely affected.
Despite government efforts at universalizaion of elementary
education, half the Indian population continues to be illiterate and twothird of women are illiterate. Although literacy has increased to 52% in
1991 but the number of illiterates has increased from 301.9 million in
1981 to 328.9 million in1991.
Literacy among the females is much lower than males – 61% of
Indian women are illiterate as against 36 percent males. Despite the
significant achievement in higher education and the quantitative expansion
of our educational infrastructure including technical education, the goal of
universal free primary education still eludes the children.
The primary enrolment ( Table XIV ) which reached an all time
high of 101 percent in 1990-91 declined to 89 percent in 1996-97, of
which girls enrolment stood at 76.2 percent in 1996-97 as against 85.6
percent in 1990-91. Similarly, middle level enrolment has also declined by
5.2 percent points to 54.9 percent against girls, enrolment of 44.3 percent
in 1996-97. It is only at higher secondary level – that the enrolment figure
increased from 19.1 million in 1990-91 to 27 million in 1996-97.
T A B L E – XIV
ENROLMENT OF STUDENTS
1996-97
110.4
(89.0)
GIRLS
47.9
(76.2)
Middle
41.1
(54.9)
GIRLS
16.4
(44.3)
High/Higher 27.0
Secondary
Primary
1990-91
97.4
(101.0)
40.4
(85.6)
34.0
(60.1)
12.5
(46.1)
19.1
1980-81
73.8
(80.5)
28.5
(64.1)
20.7
(41.9)
6.3
(28.6)
11.0
1970-71
57.0
(76.4)
21.3
(59.1)
13.3
(34.2)
3.9
(20.9)
7.6
[Figures in brackets show percentage of gross enrolment in Classes I-V (6-11 years) and
VI-VII (11-14 years) to total population]
Co
ming to the expenditure, the current expenditure on education
increased much faster (2.3 times) as compared to capital
expenditure (1.64 times) during 1991-98. During 1991-92 and
1994-95, the capital expenditure on education actually registered a
decline, which is not in line with the educational sectors
requirement for school building and other assets.
Ev
en with regard to technical education which is supposed to be
another priority sector in education from the point of view of
economic development, allocations seems to have suffered in the
course of economic reforms. For example the annual rate of
growth of expenditure on technical education by central and state
governments was around 13.3 percent during the pre-reform period
of 1987-90 which declined to 10.6 percent during the reform
period.
Share of technical education in the budget expenditure on
education of central governments has also shown a declining trend.
The share was around 22 to 29 percent during the pre-reform
period of 1971-91, which declined to around 18.4 percent during
the reform period.
In case of state government, the share has marginally increased
during the reform period from 2.9 percent to 3.1 percent. The
planned expenditure on technical education in relation to total plan
outlay has declined from 17 percent during 1952 to 14 percent
during the eighth plan period.
Micro level studies of the cuts on non-plan expenditure on
education have shown that many schools have not been able to
recruit teachers and fill the vacancies. As a result, class sizes are
bulging, leading to pupil-teacher ratio.
The maintenance and upkeep of the infrastructure in educational
institutions has been very poor. P. R. Panchmukhi has commented
in Economic and Political Weekly that it is becoming worse in
recent years because of the cut on non-plan expenditure, which are
primarily targeted towards maintenance.
WOMEN
In most countries of the world--if not all--women form
disadvantaged section vis-à-vis men. India is no exception. If the country's
economy has to fight an unequal battle with the developed countries in the
international market, its society is doubly burdened by the inequities
suffered by women, enhanced by the effects of this unfavourable
competition. It is true that a section of Indian women--the elite and the
upper middle class-- have gained by the exposure to the global network.
More women are engaged in business enterprises, in international
platforms like the Inter-Parliamentary Union, and have greater career
opportunities as a result of international network. Freer movement of
goods and capital is helpful to this section. In India statistics show that
unemployment rate for educated women (and for that matter for educated
men as well) has declined considerably throughout the late 1970s to early
1990s, though it is still very high. It was 22.36% of the total female
population in 1993-4, vis-a vis 41.89% in 1977-78.
W O M E N’S E M P L O Y M E N T
In 1987-88, female work participation rate in rural areas was 32.3
percent, whereas it was only 15.2 percent in urban areas. The observation
in regard to female work participation in non-agricultural sector reveals
that in 1981 out of women employees, 2.3 percent were in technical jobs,
0.1 percent in managerial functions, 0.7 percent in clerical jobs and 1.9
percent in service sectors. The census data 1991 reveal that in the primary
sector. Female work participation stood at 81.09 percent while it was only
8.07 percent in secondary sector and it was 10.84 percent in tertiary sector.
According to 1981 population census, more women when
compared to men can be seen in the activities of beedi making, match
boxes making, the work which are associated with tobacco processing,
cotton ginning, cashew nut and fish processing works. Most of the women
workers are seen as servant maids, midwives, nurses, teachers and the
activities that are associated with the preservation of food-grains.
In spite of recognition of the fact that improvement in the sources
of income of women as a source of attaining women empowerment, they
are discriminated against in the sphere of employment. The discrimination
takes the form of wage discrimination. Further they have been given the
works, which are associated with low status and low earnings. Usually
they can be seen as casual labour in unorganized sector, which is not
covered by welfare laws. It is quite normal that they are subjected to
frequent displacement.
Many scholars have expressed that the sole aim of privatization
and liberalization policies is to maximize profit, which naturally lessens
the employment opportunities in general. Moreover they take measures to
extract more amount of surplus labour by raising working hours and by
work intensification. They do not prefer to take women employees, as it
requires the creation of certain facilities at the work place, which
necessitates some amount of expenditure.
Since globalization is introducing technological inputs, women are
being marginalized in economic activities, men traditionally being offered
new scopes of learning and training. Consequently, female workers are
joining the informal sector or casual labour force more than ever before.
For instance, while new rice technology has given rise to higher use of
female labour, the increased work-load for women is in operations that are
unrecorded, and often unpaid, since these fall within the category of home
production activities. Application of commercial chemical inputs
(fertilizers and other plant treatment), essential for new (HYV) rice
technology, are done exclusively by men
SAP (Structural Adjustment Policy) has led to the unemployment
of a large number of men, and has increased frustration, tension and a fear
of job insecurity; women are being made to pay the social cost. Family
violence has increased, rape has become an everyday event, and dowry
deaths (a fall-out of consumerism) are escalating.
W O M E N’S H E A L T H
The economy, strained to the utmost under the challenges of
globalization, is unable to bear the burden of necessary health-care and
educational expenses. The weaker sections, especially the women, are
denied the physical care they deserve. Maternal mortality is extremely
high, anemia is common and women die in large numbers from
communicable diseases while increasing use of amniocentesis is killing
yet-to-be born women in mothers' wombs. 40% women are illiterate, and
dropout rate among girls in schools is excessive. Sky rocketing food prices
and export-oriented cropping pattern in agriculture contributes to women's
declining access to food and nutrition. The less than satisfactory public
distribution system deteriorates under the SAP, and brings extra sufferings
to women, especially to women heading households (and women-headed
households are on the increase in India).
The implementation of liberalized policies compels the
government to reduce expenditure on welfare programmes particularly on
health. Consequently the government hospitals and infrastructure facilities
available in them go waste. These hospitals came into existence to meet
the health needs of common man. The liberalization policies transform
them into useless entities. The situation compels the people to go to
private hospitals. This has been reflected in the enormous rise in the
number of hospitals, super-specialty hospitals in the private sector. There
has also been mushroom growth of diagnosis laboratories. In order to
utilize the installed capacity of the hospital including laboratory to full
extent, every patient is forced to undergo various tests. Consequently,
disease diagnosis itself is becoming costly. In these conditions, health
facilities are in the reach of poor people in general and women in
particular.
As a part of privatization, government is withdrawing itself from
the economic activities. Consequently the drugs and pharmaceutical
companies of the government, which are aimed at the welfare of the
common man, are at the verge of closure and there is a growth in the
Multinational Corporations whose aim is the maximization of profits.
Consequently there is a possibility of danger in terms of rise in the prices
of life saving drugs. The privatization also results in the production of
harmful drugs.
The death rate for 1991 in India is 10 (per 1000 persons), which is
close to 9. for the populations in the developed, industrialized countries
[World Bank 1993]. However, this does not mean that the health status of
people is the same or even comparable. The infant mortality rate (DYIR)
for, 1991 in India is 90 whereas the lowest known IMR in the world (in
Japan) is 5 (per 1000 live births). Similarly the mortality rate among
children below age five in India is 124. Reported estimates for deaths due
to maternal causes in India vary from 390 to 2000 (per 100,000 live
births). Deaths due to maternal causes have virtually disappeared in the
developed industrialized countries.
Such comparisons discuss only the deaths, not the poor health or
the morbidity situation of the people. For instance, for each maternal death
in India it is reported that 17 women suffer serious health damage. (Dutta
1980). Such a morbidity pattern is not prevalent in the developed
industrialized countries. To understand the morbidity conditions there is a
need to review some of the work of nutritionists and other health scientists
and to undertake appropriate research. The 'World Health Organization
(WHO) has developed an index known as disability adjusted life years
(DALYs). This index measures the loss of life years due to deaths earlier
than the expected life span. Of the total DALYs lost in India, 56 per cent
are lost in ages under 15 years. In contrast, in the developed industrialized
countries, the loss of DALYs in ages under 15 is only 8 percent. Most of
the DALYs lost in the developed industrialized countries are in advanced
ages (World Bank 1993). In simple term this means, that of those who die
in India, more than half die, even before they have reached adulthood.
People in the West not only live much longer, but the majority of them
live until old age.
TABLE XV
RATIO OF DEATHS OF FEMALES TO MALES
Age Groups
Ratio
0-4
1.11
5-14
1.22
15-34
1.31
35-49
0.72
50+
0.86
Besides the anomalous pattern of deaths by ages, differences also
prevail between the deaths of men and women. Women are generally
believed to be biologically stronger, and given equal chances of survival,
women live longer than men. In developed industrialized countries women
have lower death rates at all ages. In contrast among Indian women death
rates higher than those for men till their reproductive Ages are over. Till
1971 this limit was up to age 44 years. Ever since the FP programme has
been aggressive in India, a change in the pattern of children has occurred
through terminal methods for women at an earlier age. It is now observed
that until the age of 35; women experience higher death rates in
comparison to men. Beyond 35, that is, after the completion of women's
reproductive career is over, it is the men in India who have higher death
rates as compared to the women.
With higher death rates for the younger ages, it is observed that
age-group-wise the number of persons goes on decreasing as the age
advances. In other words, the larger number of persons is in the younger
age group. Since women have higher death rates in younger ages, their
numbers in the population decrease more in comparison to men.
Consequently in India there are fewer women in the population then men.
Expressed as 'sex ratio', the number of women per 1000 men in the
population is low in India. Over years the sex ratio of the Indian
population has shown a declining trend. In 1901 there were 971 women
per 1000 men, and by 971 this ratio came down to 931. The census of
1981 showed an improvement and the ratio was 934. However recent
figures available (for 1991) show that the sex ratio in India is 929.
The state's undue emphasis on population control also reduces the
access of women to health care services, especially in the crucial years of
pregnancy and childbirth. When health workers are busy cultivating
family planning cases, it is difficult to imagine that women will feel
comfortable seeking antenatal or post-natal care from them. The watereddown programme of maternal and child health (MCH) suffers a major
obstacle. With regard to quality of service, even the record of the favoured
'family planning' programme is unsatisfactory. The Indian Council of
Medical Research reported a study of 43,550 hospital deliveries where 52
of the women had given birth after sterilization (33 tubectomies and 19
vasectomies) [ICMR 1990]. Another 22 women reported having
conceived while using an intra-uterine device [ICMR 1990].
Locations of the PHCs also make it difficult for women to avail of
health services. The OPD of most PHCs functions between 8:00 am and
12:00 noon and reopens from 4:00 to 6:00 pm. PHCs serve several
villages and villagers have to commute to reach to the PHC. Often state
transport buses do not reach the PHC village well in advance for patients
to receive medical treatment and often the last bus from the village leaves
before the OPD closes. Both patients as well as many of the PHC staff
(including the doctor, sometimes to whom the government provides
residential quarters near the PHC) travel by the same bus to and fro, and
so the delivery of health care suffers. Short supply of health personnel and
of drugs, makes the journey to the PHC futile. [Avasthi et al, 1993]
W O M E N’S E D U C A T I O N
Education is considered an index of development; accessibility of
education to a particular class can be used as a symbol to estimate the
status of that class. From this point of view this is an accepted reality that
women are backward in this regard. Literacy rate of women in 1951 was
8.86 percent. After four decades i.e., in 1991 it has been increased to 39.29
percent. In 1991, the women literates without any formal education were
8.6 percent.
It
is usually uncommon to send the girl child to school. In 1993-94,
only 55.2 percent of girls who are in the age group of 11-13 years
could go to school. Further dropout rate is relatively higher among
female children. It is 39.05 percent in 1993-94 and at the stage of
secondary education it is as high as 74.54 percent. As regards
university education, the number of female students per every 100
male students is 64.7 percent in arts, 49.1 percent in science, 36.5
percent in commerce, 12.5 percent in technical courses including
engineering and 57.5 percent in medicine.
REFERENCES
1. B.N.Singh, M.P.Srivastava & N.Prasad , “Indian Economy in 21st Century”, New
Delhi, 2000
2. R. V. Vaidyanatha Aiyyar, “Education and Economic Reforms Process”, in
Dimensions of the New Economic Policy, vol. II, New Delhi, 1996
3. Tendulkar, S.D., and L.R.Jain: "Economic Growth and Equity: India 1970-71 to 1988-89",
Indian Economic Review, vol. XXX, No. 1.pp.19-49
4. Jalan, B.: “India's Economic Crisis”, Oxford Univ. Press, Delhi. , 1991
5. Deepak Lal, “Economic Reforms and Poverty Alleviation” in India’s Economic
Reforms & Development, New Delhi, 1999
6. S.D.Tendulkar, “India’s Economic Policy Reforms & Poverty”, in India’s
Economic Reforms & Development, New Delhi, 1999
7. C.H.Hanumantha Rao,”Economic Reforms & Poverty Alleviation in India”, New
Delhi, 1996
8. Shubhashis Gangopadhyay & Wilima Wadhwa (edt.),”Economic Reforms for the
Poor”,New delhi,2000
9. S. Mahendra Dev, “Economic Reforms, Poverty, Income Distribution and
Employment”, in Economic Political Weekly, March 4, 2000.
10. V.M.Rao, “Economic Reforms and the Poor”, Economic and Political weekly, July
18, 1998
11. R. Dutt, “Second Generation Economic Reforms”, Deep and Deep, New Delhi,
2002
12. Ashok Mathur & P.S. Raikhy, “ Economic Liberalization and its Implications for
Employment”, New Delhi, 2002
13. B. N. Singh, “Economic Reforms & Employment in India : Problems &
Prospects” in Indian Economy in 21st Century, Delhi 2002.
IMPACT ON FOOD SECURITY
WORLD DEVELOPMENT REPORT defined food security as
access by all people at all times to enough food for an active healthy life.
FOOD & AGRICULTURE ORGANISATION (FAO) defined
food security as” ensuring that all people at all times have both physical
and economic access to basic food they need”.
STAATZ (1990) defined food security as “ the ability to assure, on
a long term basis to a timely reliable and nutritionally adequate supply of
food.
The following important points emerge from the above definitions:
a. Food Security involves physical availability of food to the entire
population in a country
b. For healthy life, the food available should be adequate in quality as
well quantity to meet nutritional requirement
c. A nation may acquire self-sufficiency in food at a point of time,
but the concept of food security necessitates that timely, reliable and
nutritionally adequate supply of food should be available on a longterm basis. This implies that a nation has to ensure the growth rate in
food supply so that it takes care of the increase in population.
The concept of food security has been discussed mostly in making
available minimum quantity of food grains to the entire population. In this
sense the concept is narrow. But in a dynamic and developing economy,
the concept of food security undergoes a change with the stage
development reached by society. From this point of view, the following
stages of food security may be visualized:
1. The basic need from the point of view human survival is to make
an adequate quantity of cereals available to all.
2. In the second stage, food security incorporates not only cereals but
also pulses.
3. In the third stage, food security includes cereals, pulses, milk and
milk products.
4. In the fourth stage, food security includes cereals, pulses, milk,
milk products, vegetables and fruits, fish, eggs and meat.
MAIN COMPONENTS
i)
Promoting domestic production to meet the demands of the
growing population
.
ii)
Providing minimum support prices for procurement and storage of
food items.
iii)
Operating a Public distribution system.
iv)
Maintaining buffer stocks so as to take care of natural calamites.
DEMOGRAPHIC SITUATION
India is the second most populous country in the world. With 2.4
percent of world's land area, it supports 16 percent of world's population.
In spite of being one of the first developing countries to adopt the family
planning programme, the population explosion continues unabated, with
population equivalent to Australia's being added every year. A small ray
of hope is that the growth rate of population has declined for the first time
in recent years from 2.2 percent to 2.14 percent during the decade 19811991. However, even if the growth rate is reduced to 1.6 percent, the
population might cross one billion marks by 2000 AD. The main reason
for such population growth has been, "the fall in the crude death rate from
22.8 (per 1000 population) in 1951 to 10.2 in 1989, is greater than the fall
from 41.7 to 30.5 in the birth rate, during the same period." (RGI of India,
1991). "The fertility rate and mortality level on the one hand and age
distribution of the population on the other are such that even after attaining
NRR: 1 by 2000 AD, the Zero growth rate of population may be achieved
only after several decades". (Ministry of Health & F.W., Annual Report
1993-94). The burgeoning population not only marginalizes the
achievements that the nation has made on the economic front but also does
not allow the country to substantially enhance the Food and Nutrition
security of the people.
PER CAPITA INCOME
It is extremely important for household food security in a lowincome country like India that the growth rate of per capita income is
substantial and its distribution among households is commensurate with
prevailing disparities in incomes. However, it is imperative that there is
sustained and substantive growth in the first instance, otherwise the
country can neither have distributive mechanisms nor can it find resources
for poverty alleviation and food security programmes. The growth in percapita incomes in India has not been what one would have desired,
although it has also not been too insignificant. Index number of the per
capita Net National Product, which was 100 in 1950-51 at 1980:81 prices,
is estimated to have risen to 196.6 during 1992-93, thereby registering an
average increase of 2.36 percent per annum. During last five-year period
between 1988-89 and 1992-93, the average annual growth, however,
declined to 1.0 per cent. In fact, 1990-91 was a year of crisis for Indian
economy, with overall economic growth declining to 1.1 percent in 199192. The programme of stabilization and economic reform measures helped
restore economic growth to 4 percent in 1992-93". (Economic Survey,
1993 94) In any case, these modest growth rates in per capita income or in
the economy as a whole, coming as they were on an already poor base
were not good enough to leave a strong impact on the food and nutritional
well being of the poor households and but for the existence of extensive
rural development programmes backed with a massive public distribution
system, the quality of life of the poor households could not have been
maintained at the existing levels. Matters were certainly helped by a
quantum jump in food grains production in 1988-89, when it reached the
level of around 170 million tonnes against around 140-143 million tonnes
high of previous two years. Food grains production thereafter remained
between 170 to 180 million tonnes during the next four years. The index
of industrial production also rose from 180.9(Base: 1980-81) in 1988-89
to 212.4 in 1991-92, registering an average annual growth rate of 4.3 per
cent. (Economic Survey, 1993-94)
FOOD SECURITY AT MACRO LEVEL
BANISHMENT OF RAW HUNGER AND STARVATION
Famines, the extreme form of hunger and starvation, were a regular
feature in India's history, the last one being the great Bengal famine,
which is known to have consumed around 3.5 million lives. At the time of
independence in 1947, India started with a handicap as far as food security
was concerned, with India getting 75 percent of the cereal production and
82 percent of the population of the undivided country. However, the food
and agriculture policy; the PDS and employment generation programmes;
the enterprise and hard work of the Indian farmers; the development of
new high yielding varieties by scientists and the transfer of new
agricultural technology with arrangements for supply of inputs by
agricultural administrators, saw to it that India was never again ravaged by
famines. The country developed the capacity to meet the challenges posed
by sharp decline in harvests due to droughts and other natural calamities.
The last drought of 1987, considered one of the most severe of the
century, was faced with country's own food and other resources and it was
ensured that food grains were made available in each nook and corner of
the country through public distribution system and food for work
programmes. No part of the country suffered from starvation, even during
the worst period of drought. The country has, thus, made substantial
progress in improving the food security, at least in ensuring that no
household is required to face hunger and starvation.
SELF SUFFICIENCY IN CEREALS
The country has achieved self-sufficiency as far as the requirement
of cereals is concerned. The food policies, including maintenance of
national buffer, have seen to it that year-to-year fluctuations in the
production of cereals are taken care of, without any adverse impact on
cereal availability and prices. Import of cereal has become an occasional
affair; the last imports having been made in 1988 and 1992. Even when
imports are required to be made, these constitute hardly 1.5 percent of the
indigenous production. The comfortable situation, as far as availability of
cereal is concerned, has been discussed in chapter IV. The requirement
and availability of cereals has been determined under two scenarios. The
first one uses the ICMR (1990) standards of deduction factor from
production to availability for consumption and norms for daily per capita
requirement and the second one uses the standards adopted by the InterMinisterial Working Group set up by the Ministry of Agricultural (April
1994) for the same two parameters. The data has been analysed for the
triennial 1991-93; under the first scenario, with stiffer standards, it is
found that the total availability of cereal during the three years period was
369.60 million tonnes against the requirement of 389.91 million tonnes,
the satisfaction ratio being about 95%. Under the second scenario, net
availability of cereals has been found to be 412.79 million tonnes against
the requirement of 364.38 million tonnes, giving a satisfaction ratio of
113.4%. Even if the mid-view is taken, it appears that availability of
cereals during this latest biennium at the national level has been quite
satisfactory.
CONSUMPTION OF CEREALS AND ENERGY
The surveys conducted by the National Nutrition Monitoring
Bureau (NNMB) of the National Institute of Nutrition (NIN) during the
two sets of periods, 1975-79 and 1988-90, indicate that the daily per
consumption unit intake of cereal has been more than recommended
dietary intake of 460 gm/cu/day. It was found to be 504 gm during the first
survey period and 490 gm during the second (1988-90). Even at 490 gms,
the average intake of cereals is about 6.5 percent higher than RDI. The
average intake of energy at 2280 kcal was, found to be slightly less than
recommended 2400 kcal/cu/day (for male sedentary workers). The
working group set up by the Min of Agriculture (April 1994) has,
however, found that on an average, 1501 kcal of energy is. available from
cereals alone. It has further been indicated that considering the availability
of energy from other foodstuffs, including food from animal source, the
overall energy availability from all the foodstuffs is 2400 kcal, against the
weighted average per capita requirement of 2200 kcal for the entire
population. It, therefore, appears that availability of energy also is quite
satisfactory.
CONSUMPTION OF PULSES & PROTEIN
The consumption of pulses, which is the most important source of
protein in India's predominantly vegetarian society, is, however, found to
be less than RDI levels. The main reason for this is stagnating production
of pulses and consequent decline in the per capita availability. Access to
available pulses is further impaired due to their high cost. The intake of
pulses between two NNMB surveys has come down from 36 gm to 32
gm/cu/day, against the ICMR norm of 40 gms/cu/day. The Working
Group of Min. of Agriculture has, however, found that taking into
consideration availability of protein from various food stuffs, the total per
capita availability comes to 54.9 gm against the weighted average per
capita requirement of 50 am. This may have happened due to substantial
increase in the production of milk, eggs, mutton, fish etc. But unlike
cereals, the average protein consumption at macro level does not indicate
the required consumption at household levels also, as there could be over
consumption of protein rich foodstuffs unlike that of cereals. It is also
necessary to look at Net Protein Utilization against the background of
predominantly cereal-based diets of Indians.
CONSUMPTION OF OTHER FOOD STUFFS & NUTRIENTS
It has also been brought out from available data that production,
availability and consumption of other food stuffs like vegetables,
milk/milk products, Fats/oils, roots/ tubers etc. is below what is
nutritionally required. There has been hardly any change in the
consumption of various foodstuffs between 1975-79 and 1988-90, with
marginal decline in pulses and slight increase in green leafy vegetables
and fats/oils with substantial increase in sugar/jaggery. In case of intake of
nutrients also, the situation remains more or less same between the two
periods. Intake of energy, protein, iron and Thiamine remained more or
less unchanged but equal to or higher than RDI levels. Vitamin 'A',
Vitamin 'C' and Riboflavin remained below RDI levels and more or less
unchanged except Vitamin 'A', which showed a welcome increase. The
overall poor status of nutritional security thus did not show any marked
sign of improvement, mainly because of burgeoning population and
purchasing power of poor households not keeping pace with rising prices.
HOUSEHOLD FOOD SECURITY
IMPROVEMENT IN POVERTY SITUATION
There has been a progressive decline in the prevailing poverty in
India, which must have left its positive impact on household food security.
The proportion of population below poverty line declined from 51.5
percent in 1972-73 to 29.4 percent in 1987-88. The decline has been
observed in both rural and urban areas, although it was substantially
higher (51 percent) in urban areas as compared to rural areas (38 percent).
It only confirms that the problem of household food security is much more
serious in rural areas, requiring special and enhanced efforts for enabling
the poor households in rural areas to generate a certain minimum level of
income. Large variations have been seen within states, the range being
from 7.2 percent in Punjab to 44.7 percent in Orissa. The decline in
poverty has, however, been noticed in all states, the credit for which, in
large measure, goes to various employment generation and asset building
programmes in rural development sector, existence of PDS which helps in
keeping a check on prices if not fully meeting the food grains requirement
of poor and special nutrition programmes aimed at the most vulnerable
groups.
CONSUMPTION OF CEREALS & OTHER NUTRIENTS
NNMB surveys, though a little outdated with last repeat survey
having been done during 1988-90, show that in spite of more than RDI
level consumption of cereals at macro level, certain groups of households
like no-land and agricultural labourers in rural areas and slum dwellers in
urban areas are able to consume much less than the national and even state
level intake of cereals. However, situation may have improved now, with
substantially stepped up outlays in rural development sector and
agricultural production, including food from animal sources, having gone
up substantially during last few years and fresh surveys, as and when
published, may demonstrate this. However, the very absence of any
reports of hunger or scarcity conditions from any part of the country
indicate that the household food security, at least limited to cereals or
staple diets, has improved significantly. As regards consumption of pulses,
other foodstuffs and various nutrients, the consumption of lower per capita
income households in rural areas and low-income occupation groups and
slum dwellers in urban area is less than the averages at macro level. Thus,
while security of cereals for even poor households seems to be quite
satisfactory, the nutrition security at household level is still a distant
dream.
PUBLIC DISTRIBUTION SYSTEM
This biggest grain distribution programme in the world, though it
still suffers from non-targeting to poor and allowing some benefits to be
used by non-poor, has contributed substantially to assuring food security
to trillions of households, especially during periods of stress. The
programme has recently been revamped in 1750 Blocks, covering poor
and disadvantaged tribal, hilly, drought prone and decertified areas. It is
expected that with such revamping, no household will be left uncovered,
monthly entitlement of rations will go up, they would get food grains at
prices even lower than normal PDS and consequently the food security of
households living in these poor areas will improve. The next step, strongly
recommended by the author in a study report presented to the Minister,
Civil Supplies, Consumer Affairs and Public Distribution in Sept. 1993, is
to keep only poor households under the converge of PDS to make it a
sharper instrument of household food security.
Public Distribution System has been revised recently. Some of the
main features of the system are the following:
INCREASED ALLOCATION FOR BPL FAMILIES: Allocation of wheat
& rice BPL families has been raised from 10kg 20 kg in the year 2000.
The quantity was again raised to 25 kg (Wheat=15 Kg. Rice=10 Kg.)
HIKE OF APL FOODGRAINS: The central Issue Price of APL families
are almost double of BPL rates. For wheat. The rate for BPL is 4.20 but
that of APL is 8.40. Similarly rice for BPL is 5.89 but that of APL is Rs
11.78.
CHANGES IN DESTRIBUTION OF SUGAR: FOR BPL
FAMILIES THE MONTHLY ALLOTMENT HAD BEEN
INCREASED FROM 375 GMS PER HEAD TO 454 GM PER
HEAD (RISE BY 21%) AND PRICE OF SUGAR HAD BEEN
RAISED FROM RS 12.00 TO RS 13.00 NO SUGAR FOR APL
FAMILIES.
TABLE - I
Old Rates (1998)
APL
BPL
New Rates (2000)
APL
BPL
Revised Rates (2002)
APL
Wheat
6.82
2.50
Rice
9.05
3.50
Sugar
12.00
12.00
8.40
4.20
11.78
5.89
-13.00
6.10
8.30
BPL
4.15
5.65
13.50
ONE OF THE IMPORTANT MEASURES TAKEN
UNDER ECONOMIC REFORMS HAS BEEN GRADUAL
REDUCTION OF SUBSIDY TO TIDE OVER THE PROBLEM
OF FISCAL DEFICIT. AS A RESULT THE PRICES OF PDS
WAS
IMMEDIATELY
AFFECTED
AND
WAS
ACCORDINGLY INCREASED. THE REVISED PRICES ARE
SHOWN BY TABLE I.
I)
II)
III)
By eliminating Subsidy on APL, The Government hopes to save Rs
4360.
By doubling grain allocation for BPL Families FCL us expected to
save Rs 1078 crores by way of reduction of buffer stock.
As a consequence of all these steps the total annual food subsidy is
expected to decline from Rs 9138 crores .to 8,124 CRORES.
Some of the important results of the PDS are being given
below:
The dependence of the poor on the PDS in rural areas for many
commodities is less than 16 percent. This means that dependence of the
rural poor on the open market is much higher than on the PDS for most of
the commodities. Similarly urban poor also depends to a substantial extent
on the open market to meet their requirements.
The TPDS has made the programming very restrictive even all the
BPL families are not getting benefit because of cards.
The price of APL Rice is Rs.11.78 and that of wheat is Rs 5.89,
which is very close to the market rate. Such cardholders are not inclined to
receive their quota because they get better quality at the same price. Sugar/
kerosene is now denied to them
.
PDS outlets supply very inferior grain to ration cardholders who
the poor consumers are forced to accept but this does not improve their
health.
Food security system has been able to meet big natural calamities
like Gujarat earthquake; Orissa super cyclone etc. country did not need to
import food grains.
India was able to event famines and other acute food scarcities
because of food security system
The central government fixes better procurement prices for wheat
/rice so that formers get good prices for their produce.
The PDS has helped the people a) by keeping a lower price .b) by
releasing grain for open market.
DIRECT ATTACK ON MALNUTRITION
It is also necessary to launch a direct attack on malnutrition by
providing supplementary nutrition to vulnerable groups like children up to
6 years of age, expectant and nursing mothers. Of the many important
programmes in this area, the Integrated Child Development Services
Programme is the most important and biggest and seeks to provide a
package of integrated services consisting of supplementary nutrition,
health check up and educational services to children up to six years and
expectant/nursing mothers. The programme now includes 3066 projects
with 19.5 million children and mothers receiving supplementary nutrition.
An evaluation of the programme has revealed that in ICDS areas IMR,
immunization coverage, Vit 'A' prophylaxis programme, the nutritional
status of children and percentage of low birth weight children was
significantly better than other areas. The programme, therefore, appears to
be contributing significantly to food and nutrition well being of the poorer
household, although there are many areas where the programme needs to
be improved. The ICDS programme as of 1996 covers 4,200 blocks with
5.92 lakh anganwadis in the country. The number of beneficiaries shot up
to 18.5 million children and 3.7 million mothers in 1996.
The other programmes like Special Nutrition Programme, Balwadi
Nutrition Programme, Creches for Children of working and ailing women,
Wheat based nutritional programme, World Food Programme, CARE
assisted nutrition programme, Tamil-Nadu Integrated Nutrition Project
etc. are all attempting to directly intervene and improve the food and
nutritional status of the vulnerable categories in poor households.
MID-DAY MEAL PROGRAMME
Mid-day Meal Programme was introduced for children between
ages of 2-14 attending balwadis/schools at the expense of Rs.0.44 to 0.90
per beneficiary. The programme does not cover poor children not
attending school. This programme has been renamed as Nutritional
Support to Primary Education and implemented in 1975 to universalize
primary education. By March 1997, the programme covered 5.57 crores
children in 4,426 blocks.
To sum up food security seems to have improved in India, both at
the national and the household levels. The trends in consumption of
energy and protein during the fifteen years covered by surveys conducted
by NNMB, FNB and NSSO have been positive but modest. This progress,
especially in consumption pattern of poorest households like landless
agricultural labourers and in reduction in proportion of severely
malnourished pre-school age children has been achieved in the face of
burgeoning population. These surveys covered a period only up to 198890. A recent exercise undertaken by the Ministry of Agriculture (April.
1994) has indicated that because of an improvement in the availability of
various foodstuffs, including those from animal source where a major
breakthrough seems to have been achieved, a comfortable picture is
noticeable as far as availability of energy and protein is concerned. India
can legitimately take pride in the fact that in spite of a history of famines
and 16 to 18 million people being added to its already huge population, it
has developed the capacity to ensure that no household is again required to
face famines, widespread hunger and starvation. Whatever the data and
their analysis may indicate, the fact remains that no manifestation of raw
hunger and starvation is there since it just cannot go unnoticed in India
with a press and host of political parties out to pull up the government at
the very first opportunity. The food, at least of cereals, availability is thus,
quite comfortable. The availability and consumption of at least staple diets
and through them at least energy, appears quite satisfactory at this
juncture. Unfortunately such an optimistic picture is not available when
one looks at the nutritional well being of all the households. A
nutritionally balanced diet is still a far cry for millions of poor families,
their present income levels are too low to register their demands on
agricultural sector and induce that sector, which still has tremendous
untapped potential.
REFERENCES
1. Vinayakam, N. (ed): “Globalization of Indian Economy”. Delhi: Kanishka, 1995, pp.
226
2. Cassen, Robert and Vijay Joshi (eds): India: The Future of Economic Reform. Delhi:
OUP, 1996, pp. 374
3. Chadha, G.K.: Policy Perspectives in Indian Economic Development. Delhi: HarAnand, 1994, pp. 227
4. Chattopadhyay, Manbendu et al.: Planning and Economic Policy in India: Evaluation
and Lessons for the Future. Delhi: Sage, 1996, pp. 215
5. Dreze, Jean and Amartya Sen: India: Economic Development and Social Opportunity.
Delhi: OUP, 1996, pp. 292Gedam,
5. Ratnakar: Economic Reforms in India: Experiences and Lessons.,
Delhi: Deep & Deep, 1996, pp.292
REINFORCEMENT QUIZ –II
1. Give the opposites of the following terms:
8
(a) Direct tax
(b) Progressive tax
(c) Impact
(d) Elastic tax
(e) Evadable tax
(f) Arbitrary tax
(g) Compulsory payment
(h) Productive tax
2. Fill in the blanks in the sentences below with the right words: 10
Compulsory, Honesty, Disparities, Saving, Unjust, Arbitrary,
Common, Incidence Impact, Quid pro quo, Expenses.
a.
A direct tax is a tax on ___________________________.
b.
A high income tax is a disincentive to _____________________.
c.
A tax is a __________________ payment.
d.
Progression reduces _____________________ in wealth.
e.
Regressive taxes are _____________________ in principle.
f.
Shifting starts with ____________________ and ends in
________________.
g.
Taxes confer __________________ benefit upon the residents of a state.
h.
Taxes are intended to meet the general __________________ of the
government.
i.
The essence of a tax is the absence of any direct _______________
between the tax payer and the government.
j.
The rate of income tax is ___________________.
3. Fill in the blanks in the following statements:
10
a. National income is a comprehensive index of the state of an economy and
a measure of its ________________ over a period of time.
b. Per Capita income = ?/Population
c. National income estimates in India are published annually by the
_____________.
d. The _____________________ method of estimating NI measures the sum
total of the incomes received by the individuals of the country.
e. Developing countries have a large _______________________ sector
which is composed of goods and services which are not bought or sold for
money.
f. Low per capita income results in less ______________ power of people.
g. Excess population on land a causes _____________ unemployment in
agriculture.
h. When a person is willing to work and is physically fit and qualified for the
job but fails to find work it is called ________________ unemployment.
i. It is difficult to calculate the value of __________________ in the custody
of the producers for computing NI.
j. There are not accepted standard rates of _______________ applicable to
the various categories of machines for the purpose of calculating NI.
4. The following economic terms are jumbled up. Write the correct terms:
10
a. DESOLC
YMONOCE
b. LANOITAN
DNDIVIDE
c. TORNEVNIIES
d. AEGW
NMLMOPEYET
e. EUBLOD
ITNOOCNG
f. MIES
EHSINIFD
DOOG
g. RSNATERF
TNMYAPE
h. DESIUGSID
TYOLPMENUMEN
i. NOICIRPEDATI
j. LDOHEUOHS
ROTESC
5. Put a tick mark against the correct options:
10
a. National income is the total flow of goods and services produced in an
economy.
i.
In one year
ii.
In two years
iii.
In any indefinite time period
iv.
None of the above
b. National Income may be defined from the
i.
Production viewpoint
ii.
Distribution viewpoint
iii.
Disposition viewpoint
iv.
All the above.
c.
Indian economy is an example of
i.
Closed economy
ii.
Open economy
iii.
None of the above
d. An economy consists of
i.
Consumption sector
ii.
Production sector
iii.
Government sector
iv.
All the above
e. Transfer payment include
i.
Old age pension
ii.
Unemployment benefit
iii.
Interim Relief
iv.
All the above
f. Self-employed labourers are those who
i.
Work for others
ii.
Work for themselves
iii.
Are self-made
iv.
None of the above
g. The formula for GNP is
i.
GNP = NNP + Depreciation
ii.
GNP = NNP – Depreciation
iii.
GNP = NNP X Depreciation
h. Investment expenditure as one component of the expenditure method
include
i.
Private Investment
ii.
Government Investment
iii.
Net Foreign Investment
iv.
All the above.
i. A non-monetized sector exists in:
i.
Developed countries
ii.
Developing countries
iii.
Both the above
j. National Income is
i.
Real Indicator
ii.
Rough Indicator
iii.
Very precise indicator
iv.
No indicator at all, of economic welfar
6.
The Industrial Policy announced on May31, 1990 raised the
investment limit for small-scale sector from Rs.35 lakh to Rs.
a. 45 lakh B. 60 lakh C. 75 lakh D. 90
lakh
7.
in India, the largest number of workers are employed in
A.
Sugar industry
B.
Iron and Steel industry
C.
Textile industry
D.
Jute industry
8.
ICICI is the name of
A.
Financial institution
B.
Chemical industry
C.
Cotton industry
D.
Chamber of commerce and industry
9. In which year was IDBI delinked from RBI and made and autonomous
corporation?
A.
10.
1967
B. 1970
C. 1973
ICICI is the name of
A.
Financial institution
B.
Chemical industry
C.
Cotton industry
D.
Chamber of commerce & industry
D. 1976
11.
IDBI is a
A.
Bank B. Board
C. Bureau
D. Corporation
12. Prior to July 24, 1991 the MRTP Act applied to an undertaking owing
assets worth more than
A.
Rs.25 crore B. Rs.50 crore
D. Rs.100 crore
13.
A.
C. Rs.75 crore
The Tenth Finance Commission was appointed in
April 1993 B. June 1992 C. June 1991 D. April 1990
14.
A.
Ad Valorem means, according to
Valid rule
15.
B. existing rules
C. Value
. MODVAT scheme is aimed at
A.
Raising the prices of luxury goods.
B.
Lowering the prices of goods of every day use.
C.
Avoiding repeated payment of duty from the row materials stage to
the final product and thus, reduces the burden of duty, on the final
product.
D.
None of these.
16.
. The Wanchoo Committee (1971) probed in
A.
D. excise rules
Direct taxes B. indirect taxes C. Agricultural holding tax D.
Non tax revenue
17. . The Choksi Committee was appointed to recommended measures to
simplify the existing
A. Indirect tax laws
B. Sales tax laws
C. Direct tax laws
D. Corporation tax laws
18.
The Rangarajan Committee was set upon
A. Deficit financing
B. PSU disinvestments
C. Devaluation of rupee
D. Gold bank scheme
19. The private taxation process in mixed economy such as India
includes
A.
Denationalization & entry of private sector industries into the areas
excessively reserved for the state sector.
B.
Transport of management and control of public sector undertaking
to public sector.
C.
Limiting the scope of the public sector.
D.
All the above.
20.
. The Agricultural Price Commission was set up in
A. 1947
21.
B. 1951
C. 1965
D. 1974
The new name of Agricultural Prices Commission is
A. Rural Prices Commission
B. Agriculture Costs Commission
C. Commission for Agricultural Costs and Prices
D. None
22.
The ‘Slack Season’ for the Indian economy is
A. June to September
B. Jan. to April
C. April to August
D. Aug. to December
23.
Contribution of agriculture in the total exports of India is
A.
18%
24.
B.19%
C. 17%
D. 20%
The new CRR announced by the RBI is
A.
10%
25.
B. 9.5%
C. 10.5%
D. 9%
Which is the largest stock exchange in India?
A.
National Stock Exchange
B.
Mumbai Stock Exchange
C.
Calcutta Stock Exchange
D.
Delhi Stock Exchange
26.
A registered company can be declared sick by the
A. Industrial dispute panel
B. Judiciary
C. Board for Industrial and Financial Reconstruction (BIFR)
D. Both B and C
27.
‘Right Issue’ means
A.
Preferential state issue
B.
Equity share issue
C.
Bond issue
D.
A and C
28.
QR on 350 items was removed in
A. 1996 B. 1997 C. 1998 D. 1999
29.
QR on 2000 items was removed in
A. 1996 B. 1997 C. 1998 D. 1999
30.
The peak rate of customs duty on several items before 1991
was over
A. 100%
B. 150%
C. 200%
D. 300%
31. The customs duty was lowered in 1994
A. 50%
B. 55%
C. 60%
D. 65%
32. Foreign Exchange Management Act was passed in
A. 1997
B. 1998
C. 1999
D. 2000
33. The petroleum prices have been deregulated in
A. Jan.2002 B. Feb. 2002 C. March 2002 D. April 2002
34. Life insurance companies were nationalized in
A. 1950 B. 1955 C. 1956 D. 1958
35. The LIC was set up in 1956 with a amalgamation of
A. 240 companies B. 245 companies C. 250 companies D. 255 companies
36. The reform committee on insurance reform is known as
A. Manmohan Committee B. Rangarajan Committee C. Malhotra
Committee D. Goyal Committee
37. The Insurance Regulatory Bill was passed in
A. 1998
B. 1999
C. 2000
D. 2001
38. The predecessor of Bombay Stock Exchange was known as
A. Broker’s association B. Shares association C. Stock Exchange
association D. Native Share and stock broker’s association
39. V-Sat is known as
A. Vertical Satellite B. Very Small Aperture Terminal C. Visual Satellite
D. Volatile Satellite
40.
The Indian Stock Market was opened to foreign institutional
investors (FII) in
A. 1992
B. 1993
C. 1994
D. 1995
41. The report on employment opportunities was prepared by
A. Ahuwalia committee B. Manmohan committee C. Mukherjee
committee D. Malhotra committee
42. The number of commercial banks in 1996 was
A. 290
B. 291
C. 292
D. 293
43.
as
A.
B.
C.
D.
The first bank in India introduced by the British was known
Imperial Bank of India
East India Company bank
Impress of India Bank
Royal British Bank
44. The Reserve Bank of India started to function in
A.
1930 B. 1935
C. 1940
D. 1945
45. The number of banks nationalized in first phase was
A.
14
B. 16
C. 18
D. 20
46. The first nationalization of banks was done in year
A.
1967
B. 1969
C. 1971
D. 1972
47. The second phase of nationalization of banks was done in
A.
1978 B. 1980
C. 1982
D. 1984
48. The total number of banks nationalized in second phase was
A. 4
B. 6
C. 8
D. 10
49. The interest rate of the Banks were deregulated since
A. 1990
B. 1991
C. 1992
D. 1993
50. The Indian Electricity Act was passed in
A. 1905
B. 1910
C. 1915
D. 1920
51. The Electricity Supply Act was passed in
A. 1940
B. 1942
C. 1948
D. 1952
52. The National Highways Act was passed in
A. 1955
B. 1956
C. 1957
D. 1958
53. The Privatization in Telecommunication started in the area of
A. Basic Telephone services
B. Cellular Telephone services
C. Radio Paging services
D. WLL
54. The Indian Telegraph Act was passed in
A. 1880
B. 1875
C. 1885
D. 1890
55. The Indian Wireless Telegraph Act was passed in
A. 1930
B. 1931
C. 1932
D. 1933
56. The Telecom Regulatory Authority of India was introduced in
A. 1992
B. 1994
C. 1996
D. 1998
57. The law which banned the entry of private airlines was
A. Air Corporation Act 1953
B. Air Route Act 1955
C. Indian Air Space Act 1945
D. Indian Air Act 1960
58. The Private Sector in Civil Aviation was allowed in
A. 1992
B. 1993
C. 1994
D. 1995
ANSWERS TO REINFORCEMENY QUIZ – II
1.
a.
Indirect Tax
b.
Regressive Tax
c.
Incidence
d.
Inelastic tax
e.
Non-evadable tax
f.
Certain tax
g.
Optional Contribution
h.
Unproductive tax
2.
(a) HONESTY
(b) SAVING
(c) COMPULSORY
(d) DISPARITIES.
(e) UNJUST
(f) IMPACT, INCIDENCE
(g) COMMON
(h) EXPENSES
(i) QUID PRO QUO
(j) ARBITRARY
3.
(a) ECONOMIC GROWTH
(b) NATIONAL INCOME
(c) CENTRAL STATISTICAL
ORGANISATION
(d) INCOME
(e) NON-MONETIZED
(f) PURCHASING POWER
(g) DISGUISED
(h) OPEN
(i) INVENTORIES
(j) DEPRECIATION
4.
(a) CLOSED ECONOMY
(b) NATIONAL DIVIDEND
(c) INVENTORIES
(d) WAGE EMPLOYMENT
(e) DOUBLE COUNTING
(f) SEMI-FINISHED GOOD
(g) TRANSFER PAYMENT
(h) DISGUISED UNEMPLOYMENT
(i) DEPRECIATION
(j) HOUSEHOLD SECTOR
5.
(a) i
(b) iv
(c) ii
(d) iv
(e) iv
(f) ii
(g) i
(h) iv
(i) ii
(j) ii
6. B.
7.
C
8.
A
9.
D
10. A
11. A
12. A
13.
B
14. C
15. C
16.
A
17. C
18. B
19. D
20. C
21. C
22. A
23. A
24.
A
25. A
26. D
27.
B
28. C
29. C
30. C
31. D
32. C
33. D
34. C
35. B
36. C
37. B
38. D
39. B
40. A
41. A
42. C
43. A
44. B
45. B
46. B
47. B
48. A
49. B
50. C
51. B
52. B
53. C
54. D
55. C
56. A
57.
C
SECOND GENERATION REFORMS
The "SECOND GENERATION" reforms are aimed at
"ensuring that the State fulfills its proper role in a market economy, by
creating a level playing field for all sectors and implementing policies for
the common good, particularly social policies that will help to alleviate
poverty and provide more equal opportunity". These reforms focus on 4
areas in particular:
The financial system - paying greater attention to the
soundness of banking systems and encouraging greater transparency,
better data dissemination and the liberalization of capital accounts;
•
"Good governance" - by reducing corruption, encouraging
transparency of public accounts, improving public resource management
and the stability and transparency of the economic and regulatory
environment for private sector activity;
•
Composition of fiscal adjustment - reducing unproductive
expenditures such as military spending and focusing spending on social
sectors; and
•
Deeper structural reform - including civil service reform,
labour market reform, trade and regulatory reform, and agrarian reform.
•
IMF VIEWPOINTS ON SECOND GENERATION
These new reforms are intended to build on the IMF's more
traditional measures which focus on achieving balance of payments
viability, reducing government deficits, trade liberalization, freeing
upraises and reducing the role of the state. As Camdessus argues "we have
learned that this first generation of reform is not, by itself, enough either
to accelerate social progress sufficiently, or to allow countries to compete
more successfully in global markets". It would appear that the IMF views
itself no longer as simply an institution to achieve macroeconomic
stabilization objectives but is focused much more on structural issues,
issues which have previously been the remit of the World Bank. There has
been long-standing agreement between the two institutions, based on their
expertise and theoretical foundations that the IMF will focus on
macroeconomic issues and likewise the World Bank would deal with
structural issues. It is unclear on what grounds the IMF justifies this latest
move. Indeed, if the Fund broadens its remit to cover these deeper
structural issues then it raises again the question of why there is a need for
two separate institutions. A merging of the two might even bring some
benefits if IMF'staff then had poverty reduction, not current account
liberalization and low inflation, as their primary goal.
CONCEPT
REFORMS
OF
SECOND
GENERATION
Finance Minister Yashwant Singh in his budget speech
2000-01 stated very clearly that the Government intends to carry forward
the process of implementation of the Second Generation Reforms.
Elaborating on the philosophy of the Second Generation Reforms, he
stated; “Growth is not just an end in itself. It is the critical vehicle for
increasing employment and raising the living standards of our people,
especially of the poorest. Sustained, broad-based growth, combined with
all our programmes for accelerating rural development, building roads
promoting housing, boosting knowledge-based industries and enhancing
the quality of human resources, will impart a strong impetus to
employment expansion. There can be no better cure for poverty than this
in our country.” For implementation, the Finance Minister laid down the
following objectives:
1.
Strengthen the foundations of growth of our rural economy,
especially agriculture and allied activities.
2.
Nurture the revolutionary potential of the new knowledge-based
industries such as InfoTech, biotechnology and pharmaceuticals.
3.
Strengthen and modernize traditional industries such as textiles,
leather, agro processing and the SSI sector.
4.
Mount a sustained attack on infrastructure bottlenecks in power,
roads, ports, telecom, railways and airways.
5.
According the highest priority to human resource development and
other social programmes and policies in education, health and other social
services, with special emphasis on the poorest and weakest sections of
society.
6.
Strengthen our role in the world economy through rapid growth of
exports, higher foreign investment and prudent external debt management.
7.
Establish a credible framework of fiscal discipline, without which
other elements of our strategy can fall.
BACK-GROUND
The “First Generation Reforms” initiated in 1991 were crisisdriven. The crisis in the balance of payments and mounting fiscal deficits
(both at the level of the Central and State Governments) prompted the
Congress-led Government under the stewardship of Mr. PV Narasimha
Rao to initiate economic reforms. At that time, the term “First Generation
Reforms” was not used, but after a decade of the working of the reform
process, there is talk about “Second Generation Reforms”. By implication,
it is being made out that the earlier phase of reforms was ‘First Generation
Reforms”.
The basic question which is more in the nature of semantics,
relates to the use of the word ‘generation”. The word ‘generation’,
according to the concise oxford Dictionary implies the average time in
which children are ready to take the place of their parents, usually
reckoned at about 30 years. The word ‘generation’ is also used with
reference to technology development, for instance, fourth generation
computer. This marks a significant and critical stage of technological
development. Obviously, the use of the term ‘generation’ does imply a
time dimension. It is equally true that it does imply a significant change.
For instance, the use of the term, ‘generation gap’ does imply a significant
change in the pattern of thinking between the children and their parents.
Since economic reforms were born out of an economic crisis, the
prevailing thinking among the people, the Government and the policy
makers had a keen desire to go in for a programme of structural
adjustment which should help to strengthen the process of stabilization by
pulling the economy out of the crisis of balance of payments and fiscal
deficits. Nearly a decade of th4e working of economic reforms has
brought about a significant stabilization of our economy. The growth rate
of the GDP during 1993-94 to 1997-98 has averaged to more than 7 per
cent annum. Even during 1998-99, the GDP growth was estimated to be
6.8 per cent and during 1999-2000, it was 6.4 per cent. Thus, the Indian
economy has crossed the barrier of Hindu rate of Growth as propagated by
Prof. Raj Krishna. Secondly, the country has been able to build a foreign
exchange reserve of the order of US $ 32.4 billion in 1998-99 and thus is
not threatened with the problem of paying for her imports. Thirdly, the
country has been able to manage its external debt, which stood as US $
98.2 billion in 1999, but the short-term debt was only of the order of US $
4.3 billion. Thus the country has not fear of defaulting on its external
obligations. Fourthly, the average export-import ratio has improved to 87
per cent for the period 1992-93 to 1998-99. This is really a healthy sign.
This ratio had slumped to 74 per cent during 1987-88 to 1990-91. Fifthly,
wholesale price index during 1995-96 to 1999-2000 has shown a very
modest increase of 3.54 per cent annum on the average. During 19992000, the economy witnessed WPI increasing by only 3.3 per cent. Lastly,
on the question of reducing fiscal deficit of the Central Government,
performance has not been up to the mark and fiscal deficit which was 6.3
per cent of GDP in 1993-94, came down to 4 per cent in 1996-97, but
again rose gradually to 5.6 per cent in 1999-2000 and is expected to be
around 5.1 per cent during 2000-01. But for the fiscal deficit, which has
evaded an effective downtrend, it can be reasonably established that
stabilization of the economy has been achieved as a result of economic
reforms and the country should shift gears of the economy from a crisisdriven economic reforms to development-driven economic reforms.
Finance Minister Yashwant Sinha, therefore, asserted in his budget speech
on 29th February 2000: “I propose to put India on a sustained, equitable
and job-creating growth path of 7 to 8 per cent year in order to banish the
scourge of poverty from our land within a decade. The next 10 years will
be India’s decade of development.”
The use of the term ’Second Generation Reforms’ may be
considered appropriate in the sense in which the term ‘Second
Generation/third Generation Computers’ is used, and thus it may be
considered as a watershed so as to transform the reform process from a
crisis-driven to a development-driven reform. In that sense the time
dimension may be ignored. But if instead of a qualitative change, the
reform process only implies the intensification of the marker forces, then
the use of the term ‘Second Generation Reforms’ may be considered
inappropriate. For instance, the ASSOCHAM document ‘Strategizing
Second Generation Fiscal Reforms’ (August 2000) only intensifies the
Liberalization, Privatization and Globalization (LPG) process and as such,
it would be more appropriate to describe it as ‘Second Phase of Economic
Reforms’, rather than ‘Second Generation Reforms’.
Whether one describes the rethinking on the reform process as
‘Second Generation Reforms’ or ‘Second Phase of Economic Reforms’ is
an issue related to semantics. The more important issue is whether there is
a basic need to rethink about the strategy of development as being
propagated now under economic reforms. If this is so, the process of
implementation of a decade of reform measures must be kept in view.
SECOND GENERATION REFORMS AND NEW POLICY DIRECTIONS
Human Development Report (1999) states: “Competitive markets
may be the best guarantee of efficiency, but not necessarily of equity.
Liberalization and privatization can be a step towards competitive markets
–but not a guarantee of them. And markets are neither the first nor the last
word in human development.”
“When market goes too far in dominating inwards of and political
outcomes, the opportunities and rewards of globalisation spread unequally
and inequitably – concentrating power and wealth in a select group of
people, nations and corporations, marginalizing the others.”
Human Development Report has drawn attention to the fact that
excessive faith in markets is not correct and markets, as instruments
should ultimately serve people and if they fail in this objective, societies
will have to sharpen other instruments to do the job.
The situation as it obtains in India has keen highlighted by India
Development Report (1999-2000) prepared by Indira Gandhi Institute of
Development Research, Mumbai.
One of every three persons in India is officially poor, and two of
the three are undernourished. If you count those who are deprived of safe
drinking water, adequate clothing or shelter, the number is considerably
higher. Finally, if you also include people who are ‘above’ the officially
defined poverty line, but are vulnerable, in the sense of not being insured
against rising prices, unemployment, illiteracy, declining incomes, old age
and disease, you get a huge majority.” This being the state of affairs, the
need for rethinking on economic reforms becomes a necessity.
Analysis about the working of economic reforms in India
introduced in 1991 reveals that so far as spread of the reform process has
been narrow, limited to the corporate sector of the Indian economy. It has
neither touched agriculture nor small-scale industry. Unless the secondgeneration reforms enlarge their spread to agriculture and small industry,
the much talked about expansion in employment will not be realized. It is
only through expansion of employment and improvement in quality of
employment that dents can be made on poverty reduction. For this
purpose, instead of industry-first strategy, agriculture and rural
development strategy should get priority.
According to World Development Report (2000-2001), in India, in
1997 (using $ 1 per day as the measure for international poverty line), 44.2
per cent of the population was living below the poverty line. In absolute
terms, the number of poor was 419 million, which works out to be 35 per
cent of the total poor in the world – a very grim scenario indeed.
Whereas policies will have to emphasize higher growth rates since
they are essential for poverty reduction, it has to be simultaneously
ensured that higher growth rate is accompanied by job creation at a rate
higher than the rate of growth of labour force. For this purpose, labour
intensive sectors like micro-enterprises; small and medium entrepreneurs
will have to be encouraged by providing credit and other support
measures.
Another method of enhancing the capabilities of the poor by
investing in their health and education can also enable them to take
advantage of the newly emerging areas of employment. Special measures
should be designed to promote skills among the poor in formation
technology, biotechnology and other sunrise industries; In other words,
conditions shall have to be created for pro-poor growth in India.
In the post-reform period (1991-97), expenditure on education
declined to 3.62 per cent of GDP, although it touched 4.39 per cent of
GDP in 1989-90. Besides this, percent pupil expenditure at all levels, more
especially at the elementary education level, has shown serious
deterioration in the average annual growth rates.
Data about health expenditure indicates that family planning effort
was strengthened at the cost of expenditure on public health. Plan
expenditure in health improved from 3.34 per cent in the Fourth Plan and
thereafter declined in the three plans to 3.1-3.2 per cent, to pick up to 3.42
per cent in the Eighth Plan.
Expenditure on water supply and sanitation, which was as low as
0.56 per cent of GDP in the First Plan, increased to 2.77 per cent during
the Fifth plan, to rise further to 3.85 per cent of GDP in the Eighth Plan.
Consequently, 98.1 per cent of the rural and 90.2 per cent of the urban
population has been covered with drinking water supply in 1999.
However, much remains to be done in sanitation facilities since they
covered 49 per cent of urban and 9 per cent of the rural population.
The net housing shortage between 1997 and 2000 is estimated at
18.77 million – 8.46 million new houses and 10.31 million kutcha
unserviceable houses. The regional dimension reveals that Bihar accounts
for nearly one-third of the housing shortage in the country, followed by
Andhra, Pradesh, Assam, Uttar Pradesh and West Bengal according for
another 44.7 per cent of the housing shortage. Despite the fact the Ninth
Plan proposes to build 10.95 million houses, a residual gap of 7.82 million
houses will still remain in 2002. Investment in housing should be stepped
up still further so as to provide shelter for all, equipped with reasonable
facilities like toilets, kitchens and living space.
A review of the economic reforms reveals that whenever
expenditure reduction was undertaken social sector comprising health,
education, housing and welfare of the poor had to bear the brunt because
social sector is considered as a ‘soft sector’.
Although reduction of fiscal deficits was one of the major
objectives of the reform process, a review of the fiscal deficits of the both
the Centre and the States reveals that after remaining subdued at a
moderate level, fiscal deficits again became larger towards the close of the
nineties. The proximate causes of continuing fiscal deficits are growth of
expenditure as a result of the recommendation of the Fifth Pay
Commission, rising trend of interest burdens as a result of resort to higher
borrowings, growth of subsidies and failure of the Government to reduce
them due to the pressure of powerful lobbies. On the revenue side,
reduction of rates of taxes 9personal and corporate taxes and excise and
custom duties) did not result in more than proportionate increase in tax
revenues. Laffer’s hypothesis was not found valid in India. Regarding
non-tax revenues, investment in public enterprises did not yield good rate
of return. Central Public Sector Undertakings yielded a rate of return of
5.21 per cent in 1998-99, which was below the cost of funds. But the
situation was much worse in the case of SEBs and SRTUs. Recovery of
cost of both social and economic services provided by the State was
extremely low. Failure of revenues to increase and inability to control
expenditure resulted in fiscal deficits becoming larger. Governments
followed policies of shortsighted populism and this manifested in the
tendency to use funds intended for capital expenditure to meet revenue
expenditure.
Second generation Reforms should aim at reduction of fiscal
deficit of the Centre to 3 per cent of GDP and of States to 2 per cent of
GDP. For this purpose, it would be necessary to achieve zero revenue
deficits during the next four years.
To achieve zero revenue deficit, it would be necessary to (i)
control administrative expenditure, (ii) reduce subsidies on non-merit
goods, (iii) improve cost recovery of services provided by the State, (iv)
undertake disinvestments of loss-making enterprises, (v) improve working
of SEBs and SRTUs, (vi) reduce public debt to scale down interest burden,
(vii) widen tax base through agricultural taxation of services and (viii)
tighten tax administration to plug tax evasion.
The Government should pass Fiscal Responsibility Act so as to
introduce fiscal discipline. However the success of the Act will depend on
the extent to which the Government at the Centre and the States abide by
its directions.
In short, the objective of Second Generation Reforms should be
growth with social justice. Although lip sympathy has been paid to a
policy of pro-poor growth, very little effective action programme has been
undertaken so far,. Second Generation Reforms should, therefore,
seriously take up programmes of enlarging employment, reducing poverty
and building capabilities of the poor. The strategy of growth will have to
be altered suitably to meet this social objective. NDA Government and
Second Generation Reforms.
NDA Government and Second Generation Reforms
On May 9,2001, the NDA Government opened wide its doors for
foreign capital and also permitted private sector participation in a number
of hitherto public sector exclusive domain areas.
Firstly, it decided to end the status of defence industries as an
exclusive domain of the public sector. Defence production was opened up
for Indian private sector with unto 26 per cent foreign equity.
Secondly, FDI limit has been raised to 49 per cent in banks.
Thirdly, 100 per cent foreign investment on domestic route has
been allowed in pharmaceutical sector, airport, and townships.
Fourthly, mass rapid transport systems have for the first time been
thrown open to 100 per cent foreign investment on the automatic route in
all metros.
Fifthly, the hotel and tourism industry will be allowed to have 100
per cent FDI though automatic route.
Sixthly, in the telecom sector, FDI up to 74 per cent has been
permitted to Internet service providers.
Seventhly, as a sop to NRI investors, the Government has made all
investment made by them in foreign exchange fully repatriable. This is a
departure from the past when NRI investments were not repatriable in
foreign exchange.
Eighthly, the National democratic Alliance government recently
allowed foreign direct investment to the extent of 26 percent in
Indian newspapers and periodicals dealing with news and current
affairs with certain terms and conditions. It would be mandatory
for at least one resident Indian shareholder to have a significantly
higher holding than 26 percent to ensure that foreign participants
did not exercise undue managerial and editorial influence by
dispersing Indian shareholding in the newspapers. The cabinet
decision of 1955, which had debarred FDI in the print media, has
also been modified to allow publication of Indian editions of
foreign owned specialty magazines, periodicals and journals on a
case-to-case basis. According to this decision, a maximum of 74
percent foreign investment, including FDI, will be allowed in
organizations bringing out scientific, technical and other specialty
magazines, journals and periodicals.
Lastly, in another remarkable and historical decision, cent percent
FDI has now been allowed in tea industry.
The basic purpose of opening up doors for both Indian and foreign
capital appears to be to reverse the deceleration in FDI flows so as to
achieve the target of $ 10 billion foreign investment per annum. By
boosting up FDI investment, the Government hopes to achieve an annual
GDP growth of 8 per cent in the Tenth Plan. Prime Minister Atal Bihari
Vapayee outline an eight point agenda to attain eight percent growth rate.
They are as follows:
Implementation of policies and programmes
Speed up economic reforms with govt. withdrawing from
production barring a few strategic sectors
Government will shoulder dominant responsibility for physical and
social infrastructure
Speed up employment oriented growth
Remove imperfections in the financial markets
Channel higher rate of savings into productive investments
Reduce and re-target subsidies to reduce fiscal deficit
Launch initiative for accelerated completion of railway projects
that are critical and remunerative
Vajpayee emphasized the need to enable the poor and the
unorganized sector to have access to savings, credit and insurance
services.
REFERENCE
1.
2.
3.
4.
5.
6.
7.
Report of the Eleventh Finance Commission
Ruddar Dutt, “Economic Reforms in India”, 2000
The Hindu, “Survey of Indian Industry”, 2001
Govt of India, “Speech of the Fin.Minister on Budget 2000-01”
World Bank, “World Development Report”, 2000-01
UNDP, “Human Development Report”.
Panchmukhi P.R., “Social Impact of Economic Reforms in India: A
Critical Appraisal”, Economic & Political Weekly, March 410,2000
IMPACT OF ECONOMIC REFORMS ON STATES
India embarked on a process of economic policy reforms in mid1991 in response to a fiscal and balance of payments crisis. While the
Centre has undertaken a series of reform measures in fiscal policy, trade
and exchange rate policy, industrial policy, foreign investment policy and
so on, the State Governments have yet to implement a wide array of
reform measures in order to attain high rates of State Domestic Product
(SDP) growth. The reform process so far has concentrated at the Central
level. India has yet to free up its State Governments sufficiently so that
they can add much greater dynamism to the reforms. Greater freedom to
the States will help to foster greater competition among themselves. The
State Governments need to be viewed as potential agents of rapid and
salutary change.
While some healthy competition is evident among the three
southern States of Andhra Pradesh, Karnataka and Tamil Nadu, most of
the rest are yet to begin competing with one another. Brazil, China and
Russia are examples where regional governments have taken the lead in
pushing reforms and prompting further actions by the Central
Government. In Brazil, Sao Paulo and Minais Gerais are the reform
leaders at the regional level; in China, the coastal provinces and the
provinces farthest from Beijing, are in the lead; in Russia, reform leaders
in Nizhny Novgorod and in the far-east have been major spurs to reforms
at the Central level.
India's overall growth rate can be substantially stepped up should
the Centre decentralize economic policy-making and allow the States to
take crucial economic decisions on their own. Crucial fiscal, infrastructure
and regulatory decisions on economic management remain at the Central
level. Essentially what this centralized system of governance implies is
that the States have very little jurisdiction in, or control over, policy and
regulatory decisions which would make them more attractive to
prospective foreign investors. A gradual process of decentralization has
begun because regional political parties have been lending support in the
formation and running of the Government at the Centre. This is a healthy
development. Greater decentralization of decision-making will lead to
greater competition among the States and therefore to higher efficiency
and productivity in these regions. Coalitions made up of regional parties
can exercise a great deal of influence in policy-making at the Centre.
Policy-making at the sub-national level is essential for the State
Governments to be able to follow development strategies suitable to their
socio-economic, cultural and geographic characteristics. Coastal States,
for example, can follow a more focused export-led growth strategy, or
States with a large pool of trained manpower, such as IT professionals in
Tamil Nadu or Karnataka, can lay more emphasis on IT and the service
sector.
The reforms at the State level have been rather slow moving. There
are several reasons. First, limited decentralization of decision- making has
meant that the States lack the authority to formulate and implement
policies, which are under the control of the Centre. Second, unlike the
Centre, the State Governments do not have sufficient institutional back up.
Third, due to the short-terms of office that the State Governments have
been holding, they are governed by short-term political considerations.
Chief Ministers have changed frequently thereby leading to policy
discontinuity (since 1967, Chief Ministers, on an average, have been in
office for only 2.65 years). For instance, Uttar Pradesh has seen 27
Governments in 44 years. Fourth, populist policies have always been
preferred to harsh reform measures. Subsidies on rice, urban transport,
water; electricity and so on are persisted with to advance the political
interests of the party in power.
A few of the States - Andhra Pradesh, Gujarat, Karnataka,
Maharashtra and Tamil Nadu - have been more reform-oriented. But
Haryana, Kerala, Orissa, Madhya Pradesh, Punjab, Rajasthan and West
Bengal have a lot to catch up with. Bihar and Uttar Pradesh are even
further behind.
The States may be classified into three categories:
REFORM-ORIENTED STATES: Andhra Pradesh, Gujarat, Karnataka,
Maharashtra and Tamil Nadu;
INTERMEDIATE REFORMERS: Haryana, Orissa and West Bengal;
LAGGING REFORMERS: Assam, Bihar, Kerala, Madhya Pradesh,
Punjab, Rajasthan and Uttar Pradesh.
Real annual average growth rates of per capita gross SDP bear
testimony to the fact that our group of reform-oriented States is also the
fastest growing in the post-reform period. Interestingly enough, amongst
the southern States, both in Karnataka and Tamil Nadu, per capita incomes
began to surge and exceed the national average since 1991-92. On the
other hand, the lagging reformers, Bihar, Madhya Pradesh and Uttar
Pradesh, and, to a certain extent, Orissa have lagged far behind the allIndia average, as also the growth of SDP per capita of other States.
State run PSUs are apparently a big drain on the respective
governments. Almost half of the 210 odd state PSUs make losses. These
PSUs had a combined net loss of Rs 286 crore in 2001, along with
accumulated losses of Rs.4600 crore. Tamil Nadu leads with as many as
seven PSUs (mostly belonging to the State Transport) having the largest
accumulated losses.
In contrast to their counterparts at the center, state PSUs are quite
small. Their combined revenues amounted to about Rs 33,000 crore in
2001. Tamil Nadu has the largest number of PSUs with 55 units. It is
followed by Kerala with 28 units and Gujrat 24. The largest state run PSU,
in revenue terms, was Karnataka Power transmission with revenues of Rs
5,565 crore in 2001. It is followed by another electricity company,
Haryana Vidyut Prasaran Nigam, with revenues of Rs. 3,311 crore. Two
PSUs from Tamil Nadu are involved in trading, namely the Tamil Nadu
State Supplies Corporation and the Tamil Nadu State Marketing
Corporation with revenues of Rs 3,221 crore and Rs. 2,876 crore
respectively, come next. Both are loss making.
In terms of profits, the largest state run PSU is the Gujrat State
Electricity Corporation (GSEC). It has a net profit of Rs. 91 crore on
revenues of just Rs. 350 crore. GSEC is followed by Tamil Nadu
Newsprint (with a profit of Rs. 76 crore) and Karnataka Power
transmission (with a profit of Rs. 75 crore). Together, the state PSUs
declared a dividend of around of Rs. 100 crore to their state government in
2001. The largest dividend payers include GSEC, Tamil Nadu Paper and
Gujrat Mineral development Corporation.
However most state run PSUs hardly make any profit. For
instance, 31 of the 55 PSUs belonging to the Tamil Nadu government are
making losses, while eight of the 11 units of West Bengal are in the red.
Nine of the 25 state run PSUs in Gujrat is making loss and only 16 are
registering profits. Five of the seven PSUs in Andhra Pradesh are in the
black. Haryana has the credit of having the biggest two loss making PSUs.
They are the Uttar Haryana Bijli Vitran Nigam (with losses of Rs 215.8
crore in 01) and the Dakshin Haryana Bijli Vitran (with losses of Rs.
264.3 Crores).
Domestic investment proposals and disbursal of funds for
investment (aggregate between August 1991 and December 1996) suggest
once again that the relatively fast- moving reformers have tended to attract
higher investments, both foreign and domestic. According to the data
made available by the Secretariat of Industrial Approvals in the Ministry
of Industry, the southern States accounted for more than 34 per cent of the
proposals approved in 1998. During January-December 1998, a total of
428 approvals were given for investments in Karnataka, Tamil Nadu,
Andhra Pradesh and Kerala. The west, accounting for around 21 per cent
of the total approvals throughout the country, follows the southern region.
This investment is in Gujarat, Maharashtra and Goa. On the other hand,
the States in the north and the east are far behind, except for investments
in Delhi.
GUJRAT
Gujarat, a small State in terms of population, received over a fifth
of private investment proposals, whereas Bihar with a tenth of India's
population barely managed a share of five per cent of such proposals.
Maharashtra and Gujarat account for 37 per cent of the total investment
proposals, while Bihar, Madhya Pradesh, Orissa, Rajasthan and Uttar
Pradesh, taken together, were able to attract only 26 per cent of the
investment proposals. Over the period from August 1991 to December
1996 the bulk of the investment proposals were concentrated in States
with a relatively high level of human development.
Govt. of Gujarat constituted a State Finance Commission (SFC) in
1992 to review the state of finances and recommend the measures to bring
in prudence and discipline in its management. In 1994, the Commission
submitted its report and devoted a full chapter on the ‘Divestment and
Privatization of State PSUs.’ This was supplemented by a study
undertaken by CRISIL on the State Owned Enterprises in Gujarat.
In 1996, the Cabinet approved the Public Sector Restructuring
Program (PSRP) based on the SFC recommendations on PSU
restructuring as well as considering the recommendations of Rangrajan
Committee. Proposals of SOE reforms, prepared by Technical secretariat
are submitted to the Finance Department that in turn submits them for
Cabinet sub committee consideration.
The main objective of the Public Sector Restructuring Program
(PSRP) is to reduce GOG’s participation in commercial sector and
increase private sector participation. PSRP is framed on the basic
principles:
1. The question to be asked is whether the undertaking is contributing to
the public good through its activities and whether the same thing
cannot be done in a more cost effective manner outside the
government.
2. Profitability along of a SOE cannot be considered a justification for
the existence of a SOE; such units should also be subjected to the same
‘touch-stone test’.
Under the PSRP, 24 SOEs out of 54 SOEs have been identified for
disinvestments and process has been initiated for disinvestments in 6 of
these 24.Virtually business operations of these SOEs have been
discontinued, employees have been given VRS, and at present the process
of winding up is going on.
GOG has successfully privatized Gujarat Tractor Corporation Ltd.
to India’s leading tractor manufacturers Mahindra and Mahindra. On
18.12.1999. 51% of GOG’s shares along with the management control
have already been transferred to M&M. Thereafter, another 9% of the
equity had been transferred. Rest of the equity would be transferred as per
the sales cum shareholders agreement. In case of Gujarat State Export
Corporation ltd. privatization process is in the final phase. In case of
Gujarat Communication & Electronics Ltd. GOG made two attempts of
privatization but it could not succeeded. Finally, GOG has taken a
decision to close down GCEL and provided VRS to all its employees.
The Government of Gujrat has also initiated partial disinvestments
of Gujrat Mineral development Corporation (GMDC), Gujrat State
Financial Corporation (GSFC), Gujrat Industrial Investment Corporation
(GIIC), and Gujarat Agro Industries Corporation Ltd. (GAICL). Besides
Merger of 4 SOEs with synergic activities has been approved. It is
expected that the whole exercise would be completed very soon. GOG has
decided to carry out financial and administrative restructuring exercise in
case of 10 SOEs.
Thus major components of the reform programme are: a) Reform
of State-owned enterprises through privatization, divestment, closure,
merger and restructuring. This component has been designed to reduce
and rationalise the State Government's role in a number of areas and to
curtail the financial burden of the SOEs on the State Government's Budget
and the banking system. B) Fiscal reforms that consist of measures to
reduce the State's fiscal deficit, including tax and expenditure reforms.
The key objective of this component is to support the fiscal adjustment
through design and implementation of tax and expenditure restructuring
and up gradation of the Finance Department's Budget policy formulation,
planning, management and control systems. c) Creating a policy
environment for private sector participation in the development of
infrastructure in the State. The primary idea in this segment is to enhance
the capacity of the Gujarat Industrial Investment Corporation so as to
promote infrastructure development and appraise, mobilise financing for,
and supervise the implementation of, infrastructure projects by the private
sector, especially in the roads and transport and port and power
infrastructure sub-sectors in the state; and d) Development of a core
investment program to ensure that sufficient funds flow into key areas of
the State's economy, i.e., the social and physical infrastructure sectors.
However, the State Government plans to continue with subsidized tariff
for agricultural and socially obligatory activities such as supply of
drinking water and street lighting and lighting for urban and rural poor
ANDHRA PRADESH
The state government's Andhra Pradesh Economic Reform
Program, which this operation supports, has three major components:
Fiscal reforms aim to restructure expenditures to meet
development priorities, achieve sustainable fiscal balances, and reduce the
burden of public debt.
Public expenditure management and financial accountability
reforms seek to improve budget formulation and budget execution to
strengthen the effectiveness, credibility, and efficiency of the budget
management system.
The state's governance reforms aim to improve the delivery of
public services, and enhance accountability of government to the public,
including administrative reforms, public enterprise restructuring, and
enhanced poverty monitoring.
The functioning of many State Level Public Enterprises
(SLPEs) in AP has been characteristics by insufficient growth in
productivity, inadequate resource generation, poor project management,
over manning, lack of continuous technological up gradation and problems
of sickness and stagnation arising out of excessive protection from
competition. The SLPEs received direct or indirect subsidiaries of about
1% of the State GDP. Out of 40 SLPEs in AP, 14 are reported to be nonworking and 25 are reported to have incurred losses as on 31.3.2000.
A Working Group was constituted in 1995 to
examine the working of SLPEs. It has given its recommendations in
respect of 30 SLPEs so far.
Government has introduced a three stage
examination – first by an Expert Committee, second by a Cabinet SubCommittee and finally by the Cabinet-for the reforms and restructuring to
be adopted in respect of each SLPE. The current policy is to implement
the option of closure only as a last resort after making every effort to turn
around the SLPE through restructuring or privatization.
To minimize the hardship to employees due to
restructuring and privatization, the Government issued guidelines in
January 1996 for a Voluntary Retirement scheme (VRS), based on the
VRS programme formulated by the GoI for Central PSEs. A State
Renewal Fund (SRF) created with an initial capital of Rs. 5 crore to
provide resources for the financing of VRS as well as for providing
retraining and redeployment support. Employees who do not qualify for
VRS are being given a minimum compensation of Rs. 30,000/- or who
qualify but do not take VRS will be compensation (equivalent to 15 days
of wages for each year of service plus other legal dues) under the
Industrial Disputes Act.
The Public Enterprises Reform Programme is a component of A.P.
Economic Restructuring Project, supported by World Bank. WB has
sanctioned about USD 26 million, including 10% contingency to finance
70% of the VRS to employees. The State Government will provide the
balance of the VRS amount and the terminal benefits.
Winding up/privatization has been approved for ANRICH,
Andhra Pradesh Fisheries Development Corporation, Allwyn Auto,
Republic Forge Company, Andhra Pradesh Small Scale Industrial
Development Corporation, Allwyn Watches Ltd., Andhra Pradesh State
Irrigation Development Corporation, AP State Agro Industries
Development Corporation, AP Electricity Transmission Development
Corporation, FEDCON and AP State Meat and Poultry Development
Corporation.
In April 2002, the Andhra Pradesh Government has
disinvested four units of Nizam Sugars Ltd. (NSL) and gave the nod for
the sale of eight sugar mills in the cooperative sector. VRS would be
introduced after identifying the excess staff. Nearly 50 per cent of the
total strength could be offered VRS. The new joint venture is proposed to
increase the combined production capacity of the four units from 7,500
metric tones to 10,000 metric tones in three years.
KARNATAKA
The state government's Karnataka Economic Restructuring
Program, which this Bank operation supports, has four main components:
Fiscal and public expenditure reforms include a multi-year
framework for fiscal adjustment, with the objectives of restoring the state's
financial health, creating additional fiscal space for high-priority
expenditures, and promoting more efficient and transparent management
of the government's financial resources.
Administrative reforms focus on the civil service, freedom of
information, service agencies, anti-corruption initiatives, decentralization,
and e-governance. The objective across these reform measures is to
improve the efficiency and transparency of government as it conducts its
business and delivers services.
The private sector development component focuses on improving
the business environment through deregulation and on privatization or
closure of public enterprises.
The poverty monitoring and statistical strengthening component
supports the better use of data in policy making through development of a
poverty and human development monitoring system, increased emphasis
on program evaluation, and strengthening of the state's statistical system.
Some of the concrete steps taken by the State Government to retain
the pre-eminent position of Karnataka in industrial growth are:
Simplified procedures and single window agency to clear
new projects with speed and efficiency
Exclusive Foreign Investment Promotion Board to swiftly
clear the projects with foreign investment of more than
Rs.500 million and with foreign equity above 51%. The
Board will also monitor project implementation.
Separate policies for infrastructure, information
technology, power generation, tourism etc. to expedite
action on these fronts.
Setting up growth centers in towns such as Hassan,
Dharwad, Raichur to support and supplement major
industries and ease pressure at the main metros.
Developing minor airports with private sector participation
Setting up special economic zone, for rapid development of
export-Import manufacturing activities.
Developing minor seaports and modernizing major
seaports.
Increasing power generation from the present 4000-mega
watts to 9000 mega watts.
Out of the 80 SLPEs in Karnataka, 37 are reported to have incurred
losses as on 31.3.2000 and 12 are reported to be non-working. The
Government has identified certain identified SLPEs for restructuring /
disinvestments / privatization. It has introduced the system of MoU on an
experimental basis for selected SLPEs. The Datar Committee (1989),
striking a note of concern on the performance of SLPEs, presented in its
report a comprehensive scheme of disinvestments, privatization and
mergers. The Linn Committee, which was set up by the Government,
categorized SLPEs into certain groups, and suggested their privatization,
restructuring, closure and merger. However, due to various constraints, the
Government could not implement these recommendations.
Presently, 9 SLPEs are sick and have been referred to the
BIFR. In addition, 6 SLPEs are under liquidation or closure. They are
Karnataka Inlands Fisheries Development Corporation, Mysore Match
Company, Karnataka Dairy Development Corporation Limited, Karnataka
Agro Proteins Ltd., Karnataka State Construction Corporation Ltd.,
Chamundi Machine Tools Ltd. Mangalore Chemicals & Fertilizers has
been privatized and its ownership transferred to the UB Group. Vikrant
Tyres has been sold to the J K Tyres. NGEF Ltd. is currently under the
process of privatization. Privatization of Mysore Lamp Works Ltd. is
under consideration. Privatization of distribution of power is being
examined and strategies being worked out.
MAHARASHTRA
Faced with a bitter battle with Enron's Dabhol Power Company
and an ailing economy, Democratic Front government in Maharashtra
embarked on implementing prudent fiscal reforms and tough
administrative measures in a bid to resurrect the state's prime position of
attracting maximum Foreign Direct Investment.
The state has obtained new investment amounting to more than $4
billion with approximately 500 foreign collaborations being signed for
implementing new projects in the state and projects with an estimated FDI
of Rs 450 billion were in various stages of implementation across
Maharashtra. An additional investment of approximately $40 billion is in
the pipeline, which is the largest amount granted to any state in India.
Under pressure from World Bank to implement power reforms, the
government announced trifurcation of MSEB. Patil went to the extent of
saying that government's prudent measures have brought down MSEB's
yearly losses to Rs 16 billion from Rs 28 billion incurred in the previous
fiscal.
The DF government mobilized revenue to the tune of Rs 40 billion
through a slew of austerity measures including freezing payment of
dearness allowance and bonus to its employees, cutting ministerial staff
and telephone bills and identifying surplus staff. The efforts resulted in the
deficit declining to Rs 35 billion in last two years from the previous Rs 90
billion. Maharashtra's borrowings currently stood at Rs 700 billion and as
the government has stood guarantor for these, it also has to pay the
interest.
The state has also managed to cut down administrative expenses
from the earlier 73 per cent to 48 per cent. The state, therefore, introduced
mid-term fiscal reforms, which are expected to accelerate the economic
growth.
Despite having the highest levy of sales tax, Maharashtra painted a
dismal picture, with collections dropping by Rs 6 billion in the first half
and may further decrease to Rs 14 billion, a fact attributed to global
recession by the state administration.
Out of 65 SLPEs in Maharashtra, 17 are reported to be nonworking and 43 are reported to have incurred losses as on 31.3.2000. The
Government has constituted a Cabinet Sub Committee to review the loss
incurring, non-viable SLPEs. An Advisory Board was set up in 1986 to
report on the working of SLPEs and make recommendations on their
restructing and privatization. The Board examined the working of 22
enterprises and made some recommendations.
Some of the recommendations were reduction of the Government
equity in SLPEs to 49% initially, and to 26% at later date, through
disinvestments. setting up of joint ventures by the Maharashtra Seeds
Corporation Ltd., closure of Overseas Employment & Export Promotion
Corporation Ltd,reduction of overheads, formulation of new marketing
strategies, development of new products, etc., by Maharashtra State Oil
Seeds. selling Maharashtra Electronic Corporation Limited as a going
concern or selling 51% of its shareholding to a strong private sector
partner / in the market / to the financial institutions / State Industrial &
Investment Corporation of Maharashtra Ltd, funding, restructuring and
privatization of Meltron, by disposing off Meltron Semi Conductors Ltd.
, building up core competence in the area of training and withdrawing
from agricultural activities in the case of Mahila Arthik Vikas Nigam.
Selling 51% of MAPCO shares to public, financial institutions, private
sector.restructing of the sick Maharashtra State Financial Corporation,
which
as
losses
of
Rs.
700
crores.
TAMIL NADU
An analysis of the economic and fiscal trends of Tamil Nadu since the
mid-1990s reveals some extremely disquieting features. The growth of
Gross State Domestic Product (GSDP) – the total value of goods and
services produced in an economy in a year -- has declined from 6.66
percent per annum during 1991-96 to 6.22 percent per annum during
1996-2001. The income from the primary sector (agriculture) experienced
a downward slide from 4.33 percent per annum to 2.66 percent per annum
during the corresponding period. The performance of the secondary sector
(industry) also dipped from 6.92 percent per annum during 1991-96 to
4.14 percent per annum during 1996-2001. However, in contrast to the
decelerating trends in the commodity producing sectors, the growth rate of
the tertiary or services sector has gone up from 8.07 percent per annum to
9.47 percent per annum during the same period due to the contribution
mainly of the private sector.
There has also been an unprecedented growth in the fiscal and
revenue deficit along with a marked acceleration in the non-developmental
expenditure of the Government during the last five years. These
imbalances have manifested themselves in the following:
The Gross Fiscal Deficit of the State increased only marginally
from Rs.1126 crores in 1990-91 to Rs.1255 crores in 1995-96 but then
grew alarmingly to a level of Rs.5781 crores in 2000-2001.
In absolute terms, the revenue deficit – gap between revenue
receipts and revenue expenditure – declined from Rs.553 crores in 199091 to Rs.311 crores in 1995-96 and rose sharply in the next five years to
Rs.3922 crores in 2000-01.
The 16.2 percent annual rate of growth of revenue receipts during
1991-96 declined to 11.7 percent during 1996-2001, without a
concomitant reduction in growth of revenue expenditure.
The average share of development expenditure in the budget
declined from 77.9 percent in 1991-92 to 57.8 percent in 2000-01.
The revenue deficit of the Government was 16 percent of the total
revenue receipts in 2000-01 as against 2.7 percent in 1995-96.
Medium Term Fiscal Reform Programme: The State Government
has prepared a Medium Term Fiscal Reform Programme, aimed at
bringing down the revenue deficit to zero and fiscal deficit to 2 percent of
the Gross State Domestic Product (GSDP) over a period of five years. A
Memorandum of Understanding is to be signed with the Union
Government to enable us to access funds to the tune of Rs.402 crores over
the next five years, from the Fiscal Reform Facility, constituted on the
basis of recommendations of the Eleventh Finance
Administrative Reforms: The salary and pension liabilities
comprise a major component of the total revenue expenditure of the State
Government. The Government has already announced our commitment to
a need-based reduction in the staff strength in a phased manner.
Guidelines for rationalization of the staffing pattern in the Government are
being evolved to ensure optimal utilization and deployment of manpower.
Zero-Base Budgeting and rationalization of subsidies, block
grants and grants-in-aid to institutions: All administrative departments
have been instructed to undertake a Zero-Base Budgeting exercise to
weed out schemes that have outlived their purpose. Such an exercise
will enable the transfer and relocation of resources from nonproductive schemes to the productive ones.
Untargeted and open-ended subsidy schemes have played havoc
with the finances of the State Government. All the departments have
been instructed to re-calibrate the existing schemes suitably to ensure
that the intended benefits are targeted to the needy and most deserving
sections of the population.
Debt Management: Long-term loans such as those extended by the
Central Government and other internal debt sources comprise nearly twothirds of the fiscal deficit of the State Government. The rest is financed
through public account balances, which include small savings and State
Provident Funds. The Government is very concerned over the
unprecedented growth in the outstanding public debt and interest payment
liabilities over the last few years.
The government plans to reduce its staff strength by 30 per cent
over a period of five years. A ban on recruitments is in place. Wherever
possible, drivers and security personnel, and even teachers, are to be
appointed on contract basis. Restrictions have been placed on travel
expenditure for government officers. The earned leave encashment facility
has been suspended.
Out of 59 SLPEs in Tamil Nadu, only 26 are profit making in
2000-01 and only 9 have declared dividend in 2000-01. S.V.S. Raghavan
Committee (1997) was set up for streamlining and restructuring SLPEs
and restructuring SLPEs and privatization process. The Commission
recommended setting up of a Tamil Nadu Public Sector Disinvestments
Commission. The Secretaries Committee headed by the Chief Secretary is
examining the recommendations of the Commission.
Closure of seven state corporations are in the process and the
Government of Tamil Nadu has decided to merge 21 State Transport
Corporations into 7 State Transport Corporations. Tamil Nadu
Corporation for Industrial and Infrastructure Development has been
merged with State Industries Promotion Corporation of Tamil Nadu
(SIPCOT).
UTTAR PRADESH
The Government of Uttar Pradesh has responded to its economic
and fiscal crisis by introducing multi-year reforms to restore fiscal
sustainability, improve governance, and accelerate economic growth.
Fiscal and governance reforms will bring about the enabling environment
for implementation of the state's multi-sector reform and investment
programs in the education, health, irrigation, power, road, and urban
sectors. The key objective of the proposed operation is not only to create
additional fiscal space over the medium term for well-targeted public
investments but also to “crowd in” private investments by changing the
negative perception of investors and donors about Uttar Pradesh. The
proposed operation is an integral part of the World Bank's assistance
strategy for UP, which encompasses a broad program of lending and nonlending assistance aimed at turning around the state's deteriorating
economic and developmental performance.
The Uttar Pradesh Fiscal Reform and Public Sector Restructuring
Loan/Credit (UPFRPSR), which is the first sub-national adjustment loan
in India, is expected to support Government of UP's efforts in initiating
multi-year reforms that are designed to stabilize the fiscal situation,
improve governance, and foster an enabling environment for structural
reforms and sectoral investments over the medium term. The UPFRPSR
is a single-tranche loan, the first in a series of loans that may follow
depending on Government of UP's success in implementing reforms, as
well as downstream lending in the power, water and irrigation, health,
education roads and urban sectors. The loan will strengthen the long-term
process of reorienting government towards its core functions and reducing
its role in the economy, improving civil service efficiency and
strengthening fiscal management and financial accountability.
The proposed operation would support Government of UP as it
implements a comprehensive set of reforms in the following areas: (i)
public expenditure management, (ii) tax policy and administration, (iii)
civil service, (iv) anti-corruption, deregulation, and decentralization to
local bodies, (v) public enterprise and privatization, and (vi) financial
management and accountability. The proposed loan would be disbursed to
the Government of India, with immediate transfer of the local counterpart
funds to Government of UP according to on-lending terms agreed with the
Bank.
The states have an increasingly important role in the ongoing
process of economic reforms and fiscal correction in India. They account
for about 40 percent of the consolidated public sector deficit and for more
than 50 percent of public spending in infrastructure and social services.
Successful economic reforms and fiscal correction in UP would contribute
to the overall fiscal correction in the country and are likely to have a
strong demonstration effect upon other states. The projected fiscal
correction would enable Government of UP to revamp its development
efforts, including sustaining further Bank-assisted investments and other
priority expenditures in infrastructure and the social sectors, by enabling it
to ensure the required counterpart funding during the project period, as
well as to adequately finance operation and maintenance expenses once
such projects are completed.
The recognition of the serious fiscal and governance issues faced
by the state on the part of civil service, the major political parties and the
public at large, together with a strong support from the Government of
India for the state's reform initiatives, is likely to lead to sustained reform
efforts provided that serious political instability does not return.
DISINVESTMENT: Reforms in the public sector in UP are going on since
1990, when the State Government sold U.P.Cement Corporation and Auto
Tractor Ltd., but the former was again taken over the Government. 10
Regional Development Corporations were closed including Martico, Film
Nigam and UP Brassware Corporation.
The State Industrial Policy of 1998 stated that it would ensure
functioning of Public Enterprises based on efficiency parameters, and
envisaged privatization of all public sector units, excepting Public utility
sector, in a phased manner. In pursuance of this Policy, the Government
constituted a Committee under the Chief Secretary to review the
functioning of all the State Public Enterprises. Consequent to this review,
a State Disinvestments Commission was constituted on 30.11.98.
The State Disinvestments Commission has become operational
from January 2000. The Commission has been entrusted with the task of
recommending the plan of action to facilitate restructuring, reorganization, privatization and closure of Public Enterprises.
The Government has issued an Uttar Pradesh Public
Enterprise/Corporation Reform Policy - 2000. The major elements of the
Reforms Policy are as follows:
1. Those activities, which are commercial in nature and in which
there is efficient private sector presence, will be privatized through
divestment or closure.
2. Those PEs which are involved in activities, which are not
commercial in nature, will be restructured, through mergers and reorganization, so that they cease to be dependent on Govt.
budgetary support.
3. The small size of SLPEs renders them incapable of facing the
competition following globalization and liberalization of the
economy. Hence, restructuring, divestment, privatization and
closure of activities will be undertaken in such a way so as to take
advantage of the economies of scale to create viable entities and
eliminate unviable ones.
4. Government is implementing the disinvestments and closure of 6
Public Enterprises totaling 20 separate units. 45 SLPEs were
referred to Disinvestments Commission. 22 have been examined
and recommendations sent to the State Government. These are
being processed. UPSEB is being revamped and 3 separate
companies have been formed as UP Water Electricity Nigam, UP
Electricity Production Nigam and UP Power Corporation.
ORISSA
Out of 68 SLPEs, 34 are non-working companies. Orissa is one of
the first states to privatize its PSU. Way back in 1991, the government
sold off the loss-making Charge Chrome Plant of Orissa Mining
Corporation to TISCO. The sale price of Rs. 156 crore was much higher
than the project cost. Soon after the takeover, TISCO increased the
capacity utilization from 75 percent to 100 percent in the second year. The
State Government has been the pioneer in privatization of the power
sector. 49% of Orissa Power Generation Corp. (OPGC) was sold to a
strategic investor -AES Corporation of USA -in 1997 for Rs 603 cr.
(fetching a premium of 155% over the book value of equity). 51% of
equity shares of the four distribution companies were sold to private
companies 1999-2000 for Rs. 159.01 cr. (against book value of Rs. 114.72
cr.)
Pursuant to the recommendation of a Cabinet Subcommittee (submitted and accepted in 1996), 11 enterprises (Orissa State
Commercial Transport Corp., Orissa State Leather Corp., Orissa
Instruments co. Ltd., Orissa leather industries Ltd., K.S. Refractory,
IPITRON Times, ELCOSMOS Ltd., ELCO Communication, S.N Corp.,
General Engineering & Scientific Works, ORICHEM) have been closed.
Orissa Leather Industries Ltd. and Orissa Pump &
Engineering Company Ltd. have been sold to private entrepreneurs.
Recently, the State Government has signed a MoU with the Ministry of
Finance, Government of India for Medium Term Fiscal Restructuring to
privatize 27 Government Companies.
The State Government is implementing a Public Enterprise Reform
Programme with financial assistance of Rs. 85 cr. from DFID of UK to
provide VRS and social safety net to the workers of SLPEs. 13,638
employees of the PSUs have been offered voluntary retirement/separation
under the programme so far. Under the Social Safety Net Programme
(SSNP), 4372 employees, who have voluntarily retired/separated, have
been provided in-depth counseling, 1086 employees have been provided
training and 1270 employees have been assisted secure re-employment.
HARYANA
The State Government is considering privatization and
restructuring, and reduction of its stake to 49% in some SLPEs. It is also
seriously considering the option of introducing user charges. Out of 27
SLPEs in Haryana, 2 are reported to be non-working and 11 are reported
to have incurred losses as on 31.3.2000. The State Government is
considering privatization and restructuring, and reduction of its stake to
49% in some SLPEs. It is also seriously considering the option of
introducing user charges.
A High Power Cabinet Sub Committee has been constituted. Based
on the decisions of the Cabinet Sub Committee, the following actions have
already been taken: Six rice mills and one oil mill owned by Haryana State
Cooperative Supply and Marketing Federation have been closed. A food
& fruit processing plant owned by Haryana Agro Industries Corporation
has been closed.
PUNJAB
Punjab is another state, which has embarked on economic reforms.
Loss making public sector enterprises are being identified and necessary
steps are being taken for their restructuring, privatization or outright sale.
25 SLPEs out of 53 in Punjab are reported to have shown losses as on
31.3.2000, and 23 SLPEs are reported to be non-working.
The Government has set up a State Disinvestments Commission
for Privatization of SLPEs and a Core Group for restructuring, reforms
and disinvestments of SLPEs and Apex Cooperative institutes. 5 SLPEs
have been closed down pursuant to the Government policy of closing
down chronically loss making non-core, non-strategic SLPEs. These are:
Punjab State Leather Development Corporation, Punjab State Hosiery &
Knitwear Development Corporation, Punjab Film & News Corporation,
Punjab Women & Children Development & Welfare Corporation, and
Punjab Poultry Development Corporation. It is actively considering
closure of 2 more SLPEs, namely, PUNWAC and PPDC.
Leasing out resorts to private parties, awarding management
contracts, is privatizing Punjab Tourism Development Corporation. The
privatization process for Amaltas Hotel, Ludhiana has also been set in
motion. Gradual disinvestments have been initiated in the non-strategic
subsidiaries of Punjab State Industrial Development Corporation. The
process of disinvestments in Punjab Communications has begun selling
the shares of the parent company to the highest bidder. . The parent
company's shareholding in Punjab Tractors Limited has been brought
down to 23.50% through a step strategy, i.e., issuing shares to public at
premium and selling the shares of the parent company to the highest
bidder.
CHHATTISGARH
The new state has set excellent example of fiscal conduct by taking
the following measures: (i) expenditure has been cap at 40%, (ii) overdraft
has been discontinued, (iii) budget deficit has been reduced to single digit
9%, (iv) fiscal deficit brought down to 4%, (v) growth in interest payments
to 5.6 percent.
Chhattisgarh government has recently passed “Chhattisgarh
Industrial Investment Act” which resulted in the formation of Chhattisgarh
Investment Promotion Board. The Act sets a time frame in which
clearances have to be provided by the state government. The results are
beginning to show. Within two months after passing the legislation,
MOUs were inked with Sterlite Industries owner BALCO to expand
capacity four times at the cost of Rs.6000 crore. JINDAL STEEL &
POWER LTD. plans to invest Rs.4500 crores in a new thermal power
project of 1000 MW. The state has signed MOUs for Rs. 25,000 crores of
projects.
MADHYA PRADESH
Madhya Pradesh has also made some beginning in the area of economic
reforms. Eight (8) SLPEs out of 26 in MP are reported to have shown
losses as on 31.3.2000, and 15 SLPEs are reported to be non-working. The
SLPEs in Madhya Pradesh employ about 1,00,554 people. Their
operational and financial performance has been extremely weak; the
accumulated losses are reported to be over Rs. 600 Crore. (Excluding
MPSEB which is incurring a loss of Rs.5 crore per day)
TABLE – I
STATE-WISE FOREIGN INVESTMENT APPROVED
(AUGUST 1991 TO NOVEMBER 2001)
State
ANDHRA PRADESH
No. of Approvals
Total
Tech
Amt. of FDI Approved
Fin
908
230
678
126035.44
ASSAM
17
13
4
14.95
BIHAR
46
22
24
7395.28
CHHATISGARH
44
29
15
6327.41
GUJARAT
1015
497
518
173643.27
HARYANA
745
281
464
31969.28
93
55
38
3630.90
HIMACHAL PRADESH
JAMMU AND KASHMIR
2
84.10
JHARKHAND
72
5
3
48
24
1438.15
KARNATAKA
1768
432
1336
210928.25
KERALA
241
61
180
14695.45
MADHYA PRADESH
219
70
149
91606.36
1111
2519
473667.42
1
31.85
4
529.60
MAHARASHTRA
3630
MANIPUR
1
-
MEGHALAYA
4
-
NAGALAND
2
1
ORISSA
136
49
87
82290.03
PUNJAB
174
54
120
19584.62
1
36.80
RAJASTHAN
311
99
212
26469.91
TAMIL NADU
1983
517
1466
225816.15
1
6.80
48
22
26
1256.49
UTTAR PRADESH
717
260
457
42902.99
WEST BENGAL
568
190
378
84652.06
8
137.87
TRIPURA
UTTARANCHAL
ANDAMAN & NICOBAR
ARUNACHAL PRADESH
CHANDIGARH
DADRA & NAGAR HAVELI
DELHI
GOA
2
1
8
-
2
-
43
9
2
110.60
34
1469.60
70
46
24
1239.80
1715
195
1520
331821.50
56
109
8795.88
LAKSHADWEEP
165
1
-
1
5.00
MIZORAM
1
-
1
15.22
PONDICHERRY
107
39
68
12387.94
DAMAN & DIU
39
14
25
552.20
5745
2501
3244
730636.86
20645
6905
13740
2712186.02
OTHERS (STATE NOT INDICATED)
GRAND TOTAL
The Government Policy on Public Sector Reforms and
Restructuring, which evolved from ADB's policy dialogue with the
Government, was approved in January 1998. This policy is being
implemented. The ADB supported reform agenda has taken up 14 SLPEs,
of which 8 are to be closed and 6 are to be restructured/disinvested. The
SLPEs for closure have made good process and VRS has been given to
employees.
More than 5,000 workers are likely to be affected by closure, etc.
The Government has set up a State Renewal Fund, made budgetary
allocation to settle workers' dues and is designing a Social Safety Net
Programme.
TABLE –II
LOSS MAKING PSUs OF THE STATES
NAME OF THE STATE PSUs
LOSS in
Rs.Crores
Dakshin Haryana Bijli Vitran Nigam
264.3
Haryana Vidyut Prasaran Nigam
248.0
Maharashtra State Textile Corporation
242.2
Pradesshiya Industrial & Inv. Corp. of U.P.
241.1
TN State Trans Corp (Madurai Div II)
219.0
Uttar Haryana Bijli Vitran Nigam
215.8
State Express Trans Corp (TN Div.I)
206.5
Tamil Nadu Industrial Investment Corp.
175.8
Andhra Pradesh State Financial Corp
147.2
Pondicherry Textile Corp
139.4
TN State Trans Corp. (Madurai Div.I)
127.6
Gujrat development Corp
125.4
Metropolitan Trans Corp (Chennai Div I)
124.5
Haryana State Minor irrigation
115.4
TN State Trans Corp (Kumbakonam Div-III)
98.4
TN State Trans Corp (Villupuram Div.III)
93.3
TN State Trans.Corp (Kumbakonam Div.I)
96.9
Travencore Rayons
92.9
Textile Corp of Marathwada
91.3
West Bengal Financial Corp
78.4
KERALA
On April 4, 2002, the Industries Minister, Shri P.K.
Kunhalikutty, released the UDF Government’s ‘Approach Paper for State
Level Public Enterprises’, which states that the Government would not
continue to prop up loss-making public sector entities. The Minister said
the target was to restructure 25 enterprises by June 2003. The nature of
the restructuring process would be decided on a case-by-case basis
through the Enterprise Reforms Committee (ERC) and State Planning Boards
and State Cabinet for the final decision. The restructuring process would
be a time-bound operation. The trade unions too had by now realized the
inevitability of addressing the problem of Kerala’s public sector
objectively.
The Chairman of the ERC, said that the Government had been
indirectly subsidizing the PSUs in the State. These units were running up
an annual loss of about Rs. 40,000 per employee. Public spending on
PSUs had to be reduced so that the savings achieved thus could be devoted
for poverty reduction and infrastructure development. He said the reform
programme for PSUs should be seen as a key component of an integrated
development policy.
WEST BENGAL
The Government of West Bengal has not been favourable to the
economic reforms but has made some beginning in this area. Out of 80
SLPEs in West Bengal, 54 are reported to have incurred losses as on
31.3.2000, and 3 are reported to be non-working. Thirteen different
electronic units of Webel Ltd. have been partially/wholly privatized.
Government has decided to privatize the Great Eastern Hotel.
Government is planning to improve working of SLPEs "to be
operated on a time - bound viability basis", such units being Electronics
Communications Systems Limited, Carter Poller Engineering Company
Limited, Indian Health Pharmaceuticals Limited, Durgapur Chemicals
Limited, National Iron & Steel Co.Ltd. Neo Pipes & tubes Company
Limited, Westinghouse Saxby Farmers Limited; West Bengal Sugar
Industries Development Corporation Limited; Shalimar Works Ltd.;
Engineering Products and Services Limited; West Bengal Live Stock
Processing Development Corporation Ltd.; West Bengal Film
Development Corporation Limited; West Bengal Industry Infrastructure
Development Corporation Ltd.; West Bengal State Leather Industries Ltd.;
Greater Calcutta Gas Supply; State Fisheries Development Corporation
Ltd; Burdwan Milk Supply Scheme Department; WB Mineral
Development & Trading Corporation Ltd.
Gluconate India Limited has been merged with Indian Health
Pharmaceuticals Limited, to form Gluconate Health Limited.
ASSAM
Assam has a total number of 49 Public Sectoe Enterprises with
total investment of Rs. 4058 crores and the net accumulated losses of these
SLPEs are Rs 3921 crores. Most of the SLPEs in Assam are performing
poorly; 25 SLPEs have not been able to finalise their accounts and 14 have
negative net worth with accumulated losses. Another 6 are running in loss.
A Committee on Fiscal Reforms (COFR) appointed by the State
Govt. with economists as members, also examined the matter on the
performance of the SLPEs, amongst others and made some
recommendations in December 2001:The COFR recommended reform;
revitalize/improvement of 24 SLPEs, sale/disinvestments/transfer/winding
up of 21 of SLPEs and did not make any suggestion on four others.
INITIATIVE OF THE CENTRAL GOVERNMENT
The Government of India has drawn up a scheme called the States’
Fiscal reforms Facility (2000-01 to 20004-05). To this end an
INCENTIVE FUND of Rs.10, 607 crores has been earmarked over a
period of five years to encourage states to implement monitorable fiscal
reforms.
Additional amounts by way of open market borrowings etc are
allowed if the state concerned has a structural adjustment burden
necessitating (i) voluntary retirement/severance payments for downsizing
Public Sector Enterprises (PSEs) and (ii) debt swap for bringing down
interest payments. Under this facility, the State Governments are invited to
draw up a Medium term Fiscal reforms Programme (MTFRP) with the
objectives of bringing down:
The consolidated fiscal deficit to sustainable levels by 2005;
The consolidated revenue deficit, so that in the aggregate, the
revenue deficit is eliminated altogether by 2005
The Debt/GDP ratio including contingent liabilities to sustainable
levels, both in terms of stability and solvency
The MTFRP of states combine policies in the following areas:
Fiscal Consolidation: These measures aim at improving tax and non-tax
receipts, reprioritization of expenditures, targeting non-merit subsidies and
phasing them out, etc
Public Sector Enterprises Reforms: These aim at winding up loss
making PSEs, privatization of PSEs, restructuring of such PSEs as are felt
to be absolutely necessary to continue in the public domain.
Power Sector Reforms: These aim at corporatization and unbundling of
the SEBs, 100 per cent metering up to 11 KV levels, implementing the
awards of the Electricity Regulatory Commissions, provision of lump-sum
subsidies from the State budget in such cases where the utilities’ losses are
phased out. The main monitorable milestone here is the gap between the
average cost of power/kwh and the average revenue realized/kwh(on a
cash basis). The utilities have been sensitized to eliminate this gap over
near the next 5 years.
Fiscal Transparency: These measures inter alia aim at full disclosure in
State budgets especially with regard to subsidies, guarantees and the level
of civil service employment.
:
REFERENCES
1. India in the Era of Economic Reforms: J.D.Sachs, A.Varshney, Nirupam Bajpai (edt.),
N.D., 1999
2. What is India’s Privatization Policy: P.Trivedi, EPW, May 29
3. India’s Economic Reforms: An Appraisal :I. J.Ahluwalia in A.Varshney, J.D.Sachs,
N.Bajpai (ed.) India in the Era of Economic Reforms, OUP, New Delhi, 1999
4. Economic Liberalization and its: Ashok Mathur & P.S Raikhy Implications for
Employment (Edt.). Deep & Deep, N.Delhi 2002
5. Government of India (website): Ministry of Disinvestments.
CONCEPT OF ECONOMIC REFORMS
1.
MEANING OF ECONOMIC REFORMS
ER REFERS TO THE BEHAVIOURAL PATTERN IN A GIVEN
ECONOMIC SYSTEM AND NOT JUST TO CHANGES IN
ECONOMIC POLICIES
INTERACTION
POLICY REFORMS
1.B
CHANGES IN ECONOMY
DIMINISHING ROLE OF BUREAUCRACY
1.C1.C- INCREASING ROLE OF
MARKET
BATES & KRUEGER : ER REFERS TO
SIGNIFICANT CHANGES IN A SIZEABLE
NUMBER OF ECONOMIC POLICIES
SUM-UP: FUNDAMENTAL CHANGES WITH RESPECT
TO THE EXTENT OF STATE INTERVENTION, FISCAL
STABILISATION, AND REMOVAL OR RELAXATION OF
CONTROLS GREATER RELIANCE ON MARKET
FORCES,FISCAL STABILISATION,AND
REMOVAL OR RELAXATION OF CONTROLS
2. INTERNATIONAL MONETRAY FUND
STABILISATION:
CORRECTION OF
IMBALANCES WHICH ARE UNSUSTAINABLE
MAIN
COMPONENTS OF STABILIZATION:
1.REDUCTION
OF BUDGET DEFICIT
2.EXCHANGE RATE REASSESSMENT
3.CREDIT CEILINGS
4.INTEREST RATE REVISIONS
5.REDUCTION
3.
OF PUBLIC EXPENDITURE
WORLD BANK
STRUCTURAL ADJUSTMENT
REFORM OF POLICY
REFORM OF
INSTITUTION
PRICE CONTROL POLICY
INSTITUTIONAL (PUBLIC SECTOR
INEFFICIENCIES)
PUBLIC SECTOR INEFFECIENCIES
1.
PUBLIC SECTOR INDUSTRIES
2.
BANKING SECTOR
3.
INSURANCE SECTOR
4.
INFRASTRUCTURE SECTOR
5.
CAPITAL MARKET DRAWBACKS
6.
PRICE CONTROL AREAS
7.
FOREIGN INVESTMENT
4.
BRETTON WOODS
ADVOCATED
PROCESS
OF
ECONOMIC
REFORMS
.
DEVALUATION:
Currency
to
promote
exports
DEREGULATION: of controls & restrictions
DEFLATION:
conditions of
to
control
inflationary
The economy
5. TARGET OF ECONOMIC
REFORMS
(5Is)
INTERNATIONAL ECONOMIC STABILITY
INVESTMENT
INEQUALITY -
Eradication
INSTITUTIONS-PSU & Control
Elimination
IDEOLOGY
6.
-
Neo-Liberalism
TWO STAGES OF ECONOMIC REFORMS
Two Stages of Economic Reforms
Stage I
Stage II
Priorities
• Reduce inflation
• Restore growth
• Improve social conditions
• Increase international
competitiveness
• Maintain macroeconomic
stability
Reform
Strategy
• Change macroeconomic
rules
• Reduce size and scope of
the state
• Dismantle institutions of
protectionism and statism
•
Create and rehabilitate institutions
• Boost competitiveness of the
private sector
• Reform production, financing,
and delivery of health care,
education, and other public
services
• Create "economic institutions of
capitalism"
• Build new "international
economic insertion"
Typical
Instruments
•
Drastic budget cuts and ta
x reform
• Price liberalization
• Trade and foreign
investment liberalization
• Reform of labor legislation and
practices
• Civil service reform
• Restructuring of government,
especially social ministries
• Overhaul of administration of
I. Principal
Actors
• Private sector
deregulation
• Creation of social
"emergency funds"
bypassing social ministries
• "Easier" privatizations
justice
• Upgrade of regulatory
capacities
• Improvement of tax collection
capabilities
• Sect oral conversion and
restructuring
• "Complex" privatizations
• Building of export promotion
capacities
• Restructuring relations between
states and federal government
• Prime Minister
• Economic cabinet
• Central Banks
• World Bank and IMF
• Private financial groups
and foreign portfolio
investment
• PM, FM, and cabinet
• Parliament
• Public bureaucracy
• Judiciary
• Unions
• Political parties
• Media
• State and local governments
• Private sector
Public Impact • Immediate
of Reforms
• High visibility
• Medium and long term
• Low public visibility
Administrative • Moderate to low
Complexity of
Reforms
• Very high
Nature
of • "Temporary
Political Costs
corrections" widely
• Permanent elimination of
special advantages for specific
groups
distributed among
population
Main
• Macroeconomic
• Institutional development
Governmental management by insulated highly dependent on midlevel
Challenge
technocratic elites
public sector management
IMPORTANT ECONOMIC TERMS
Administered Prices – Such prices are the outcome of the regulation and control
of the administrative machinery of the government. Normally fixation of the price is
left to the interplay of the forces of demand and supply in the market. When due to
scarcities or the excessive demand, the price that rules becomes high which the
consumers find it hard to pay, the government steps in as a special case to fix up
the prices of certain essential or scarce products.
Adjustment Program -A detailed economic program, usually supported
by use of IMF resources, that is based on an analysis of the economic
problems of the member country and specifies the policies being
implemented or that will be implemented by the country in the monetary,
fiscal, external, and structural areas, as necessary, to achieve economic
stabilization and set the basis for self-sustained economic growth.
Advalorem Duty – Duty or tax imposed on the goods is broadly divided under two
parts (1) SPECIFIC: it depends on the physical attributes of the commodity;
ADVALOREM: it depends on the value of the commodity e.g., when 5%
advalorem duty is imposed on tea, a superior brand of tea – like green Lipton or
red brook bond would pay higher duty as compared to the White Label Tea. In
contrast, specific duty would be per kg of tea leaves irrespective of its value.
Balance of Payments - A statement of all transactions of a country with the rest
of the world during a given period transaction may be in trade imports and export
of goods and services; movement of short-time.
Balance of Trade -Part of the nation’s balance of payments concerning import
and export A favourable balance of trade means that exports exceed import in
value an unfavourable balance of trade means imports exceed exports in value.
Breton Woods – An international conference held in 1944 at Breton Woods to
discuss the problem of making international payments. Discussions culminated in
the formation of International Monetary Fund in 1947 and the International Bank
for Reconstruction and Development.
Budget- In the middle ages, French merchants carried their money in a bougette,
or “little bag”. The work borrows from the Latin work bulga, meaning “a leather
bag”. Within the bag, one’s monetary resources were kept.
Budget constraint – The limit on the consumption bundles that a consumer can
afford.
Budget deficit – A shortfall of tax revenue from government spending.:an excess
of government spending over government receipts.
Budget surplus- an excess of tax revenue over government spending.
Capital Market - places where long term to capital assets such as bonds
debentures shares and mortgages are bought and sold.
Commercial banks - Institutions that create credit financial institutions that accept
deposit and give loans and perform of the financial functions. They create credit by
creating deposits on the basis of their cash reserves Generally the total credit
created is a multiple of the cash reserves .The ratio of cash reserves to total
deposits is prescribed by law
Cost –Push inflation - A situation of general rise in prices in which costs(
payment made to factor owners) increase faster than productivity or efficiency.
Familiar examples wage-push and profit-push inflation.
Credit instrument - A written document serving as either a promise or order to
transfer funds from one person institution to another
Creeping inflation- slow and persistent rise in general level of prices over a long
number of years
Currency - paper money excluding coins
Current Account – Term used in BOP means an account divided into
‘Merchandise’, Non Monetary Gold Movement, and Invisibles.
Current Assets - Cash and other assets that can be readily converted in to cash
Deficit Budget – Budget can show three positions – SURPLUS, DEFICIT,
BALANCED; when expenditure of the government exceeds revenue, it is called
deficit budget and it is made up by raising loans –short or long term or internal or
external.
Deposit- Deposit is created by putting together two Latin words ; de, a relatively
common prefix that means “away”; and positus, meaning “placed”.
.
Demand-Pull Inflation - A state of rising prices brought about by increase in
aggregate demand in the face of short supply.
Demand schedule – A table that shows the relationship between the price of a
good and the quantity demanded.
Depreciation – A decrease in the value of a currency as measured by the amount
of foreign currency it can buy.
Devaluation-: official reduction in the foreign value of domestic currency. For
example if the official rate of exchanged between rupees and dollars is rupees
7=1$ and the government reduces the value of rupee by making Rs. 10 =1$ this
will be devaluation . It is done to encourage the country’s export and discourage
imports.
Direct Tax - Tax that cannot be shifted; the burden of direct tax is borne by the
person on whom it is initially fixed. Example: personal income tax, social security
tax paid by employees, death tax, etc.
Disguised Unemployment - (under-employment): (1) A situation in less
developed countries where people are apparently employed but are actually
unemployed or under-employed; for example, in agriculture in India. (2) A situation
in advanced countries in which the employed resources are being employed in
uses less efficient than normal; or example, a doctor may be employed as a cab
driver or as a compounder.
Disinvestment - Reduction in the total stock of capital goods on account of failure
to provide for depreciation.
Economic goods - Scarce goods which command a price; opposite of free goods.
Economic Growth - Rate of increase of an economy’s real income over a period
expressed in terms of GNP or NNP as total or per capita.
Economic (Pure) Profit - Net revenue; receipts of the firm in excess of economic
costs including normal profits.
Economies of scale – The property that long-run average total cost falls as the
quantity of output increases.
Equity – The fairness of the distribution of well-being among the various buyers
and sellers.
Equity – The property of distributing economic prosperity fairly among the
member of society.
Excess Reserves - Reserves in excess of the bank’s legal reserves; this
determines bank’s additional lending power.
Excise Tax: Tax imposed on the manufacture, sale or the consumption of various
commodities such as taxes on textiles cloth, liquor, tobacco and petrol, etc
Explicit Cost: Money expenditure recorded I the firm’s account book; contrasted
with implicit cost.
Finance – Finance derives from the Latin and Old French word for fine, which
originally meant “end”. The French word for finance came to mean both “payment”
and “ending”, but in the 18th century the English adapted it to mean “the
management of money”.
Financial markets – Financial institutions through which savers can directly
provide funds to borrowers.
Financial system – The group of institutions in the economy that help to match
one person’s saving with another person’s investment.
First Generation Reforms: Conditionalities applied through IMF programmes,
which focus on macroeconomic reforms to achieve macroeconomic stability, such
as
liberalisation
of
the
exchange
and
interest
rates.
Fiscal Policy- Government’s expenditure and tax policy; an important means of
moderating the upswings and downswings of the business cycle.
Fixed Assets- Durable assets of a firm such as land, building, machinery,
furniture and transport, etc.
Fixed Costs- Costs that do not vary with the output; costs which r4main fixed
even when output changes. Example: interest on capital borrowed, property tax,
rental payment, staff, etc.
Foreign Exchange- Foreign currency and other papers used for making
international payments.
Foreign Exchange Rate- Prices of the domestic currency in terms of foreign
currencies.
Foreign Trade Multiplier - An import surplus or and export surplus has a
multiplier effect on changes in national income; magnified variations in national
income as a result ooh changes in exports or imports.
GATT: General Agreement on Tariffs and Trade. This was a dodgy international
body set in 1947, to probe into the ways and means of reducing tariffs on
internationally traded goods and services. Tariffs on primary products were
drastically slashed in 1964. Member countries signed the Uraguay Round
Agreement in 1994 and became the World Trade Organisation.
Gross Domestic Product (GDP) – The market value of all final goods and
services produced within a country in a given period of time.
Gross National Product (GNP) – The market value of all final goods and services
produced by permanent residents of a nation within a given period of time.
Hyper Inflation - A situation in which general prices are rising sharply with no or
little increases in output, also called ‘runaway’ ‘or galloping inflation’.
Indirect Tax - Tax which can be shifted to someone else other than the person on
whom it is initially imposed. Examples: excise duty, sales-tax, import duty.
Inflation – An increase in the overall level of prices in the economy.
Inflation rate – The percentage change in the price index from the preceding
period
.
Inflationary Gap -: Excess of aggregate demand from aggregate supply at full
employment, leading to inflation.
International Bank for Reconstruction and Development (World Bank): A
bank established by the UN in 1945 for reconstruction of economies in the postwear period, and to promote development of less developed countries. Loans are
generally given for infrastructural development. The bank fights shy of
development in the public sector in profitable fields.
International Monetary Fund :Established in 1944 by the UN to ensure
convertibility of the currencies and multilateral trade; to eliminate short-run
fluctuations in a nation’s economy due to changes in trade of speculative
movement of capital through exchange rate stabilization, and ensuring that
changes in the exchange rate of currency takes place with Fund’s approval.
Investment: Expenditure on creation of new productive assets and inventories by
households, private business firms and government.; spending on capital
equipment, inventories, and structures, including household purchases of new
housing.
Invisible – Invisibles are classified into services Comprising travel, transportation,
insurance, investment income, government not included elsewhere and
miscellaneous) and transit payments.
Less Developed ( Underdeveloped) Country: Countries with low productivity per
person; hence, low income per capita as compared to rich, developed countries.
Other characteristics are: (1) Low saving and investment; (2) High rate of
population growth; (3) over-whelming dependence upon agriculture and allied
occupations for employment and income generations; (4) Low levels of literacy; (5)
Low nutritional standards and standards of health; (6) Extensive disguised
underemployment; and (7) Heavy reliance on few items for export.
Liquidity - The ease with which an asset can be converted into cash. Money is
the most liquid asset;the ease with which an asset can be converted into the
economy’s medium of exchange.
Macroeconomics - Part of economic study which studies the economy as a
whole, as distinguished from the parts: aggregate demand, aggregate supply,
saving and investment; analyses the economic ‘forest’ as distinguished from the
‘trees’ that comprise the forest.
Marginal Cost - Change I total cost resulting from a unit change in output.
Marginal Cost Price - Price as determined by the point of equality of marginal
cost and marginal revenue.
Market Economy - Economy system in which the central problem of an economywhat, how and for whom-are decided by the operation of free market forces of
supply and demand.
Market price - The price which prevails in the market at any particular time.
Market Rate of interest -Money rate of interest that prevails in the market at any
particular time, as distinct from real rate of interest.
Microeconomics - Part of economic theory which deals with the individual parts
of the system such as individual households, firms or industries; distinguished
from macroeconomics; deals with the “trees” in the economy which is the “forest’.
Mixed Economy - An economy in which both the state and the private sector coexist; decisions on what, how and for whom are made partially by the market and
partially by the state or any other public authority; many consider it essentially a
transitory form.
Monetary Asset - Claim against a fixed amount of money, Examples: saving,
deposits, promissory notes, cash, bonus, accounts receivabl, etc Against each
asset there is an equal amount of liability.
Monetary Liability - Promise to pay a claim in a fixed quantity of money; against
each liability there is a corresponding monetary asset.
Monetary Policy - Policy through which the monetary authority (such as the
Reserve Bank of India or the Federal Reserve System in USA) which expands or
contracts the money supply, or makes credit cheap or dear; used as contracyclical policy.
Money – One of the responsibilities of the Roman goddess Juno was to warn the
Romans of impending danger. In this capacity, she was called Juno Moneta,
where the name Moneta derives from a Latin word meaning “warn”. As a tribute to
Juno, the Romans built a temple in the honor on Capitoline Hill, which later
became the place where coinage was kept. Becoming known also as the guardian
of finances, the name Moneta would evolve into our word money.
Monopolistic Competition - A market from with a large number or buyers and
sellers of a differentiated product; no carriers to entry of firms in the industry.In this
market form. the demand curve facing an individual seller in this market form is
negatively sloped.
Monopoly – In Greek, the word monopolion means “the right to exclusive sale”.
National Income (at factor cost) - Total of all incomes earned to factors of
production; distinguished from personal income; used in economic literature to
represent the outpur or income of an economy in a simple fashion.
Oligopoly – A market structure in which only a few sellers offer similar or identical
products.
Open economy – An economy that interacts freely with other economies around
the world.
Open-market operations – The purchase and sale of United States government
bonds by the Fed.
Poverty line – An absolute level of income set by the federal government for each
family size below which a family is deemed to be in poverty.
Poverty rate – The percentage of the population whose family income falls below
an absolute level called the poverty line.
Revenue –revenue was The word created by combining the Latin words re, which
means “Back”, and venio, which means “come”.
Real GDP – The production of goods and services valued at constant prices.
Real exchange rate – The rate at which a person can trade the goods and
services of one country for the goods and services of another.
Regressive tax – A tax for which high-income taxpayers pay a smaller fraction of
their income that do low-income taxpayers.
Reserves – Deposits that banks have received but have not lent out.
Reserve ratio- The fraction of deposits that banks hold as reserves.
Reserve requirements – Regulations on the minimum amount of reserves that
banks must hold against deposits.
Securities – The Latin words se and cura combine to form this word. Translated
literally, these words mean “without care”.
Stagflation – A period of falling output and rising prices.
STATUTORY LIQUIDITY RATIO (SLR) : Banks are required to maintain a certain
proportion of their demand and time deposits in the form of gold or unencumbered
approved securities. The RBI is empowered to impose an SLR up to 40 percent.
Under the directive of the finance ministry RBI raised the SLR ratio to acquire
funds to help the government to finance its consumption/non-development
expenditure.
Structural Adjustment – Refers to the action taken by the Govt. in response to
external and internal shocks so that on completion of structural adjustment
programme, the economy would regain the pre-shock growth path by removing
imbalances, distortiers, and debtedness.
Surplus – The word comes from two related French words : sur, which means
“over”; and plus, which means “more”.
Tariff- This word comes from an ancient Arabic term, tarrif, which means
“notification”; a tax on goods produced abroad and sold domestically.
Tax incidence – The study of who bears the burden of taxation.
Total revenue – The amount a firm receives for the sale of its output.
Total revenue – The amount paid by buyers and received by sellers of a good,
computed as the price of the good times the quantity sold.
Trade – When suppliers were less mobile, they walked between places where
their goods were sold. The Old English word for “tread” is trod, and the root of the
word trade.
Trade balance – The value of a nation’s exports minus the value of its imports,
also called net exports.
Trade deficit – An excess of imports over exports.
Trade policy – A government policy that directly influences the quantity of goods
and services that a country imports or exports.
World Bank: The WB is an international financial institution, owned by 181
member countries and based in Washington D.C. Voting power depends on
financial contributions, proportional to economic size of the country. So essentially,
the G8: Japan, Italy, Germany, US, UK, France, Canada, Russia countries hold
over 50% of the power within the World Bank.
It's main objective is supposedly to provide development funds to the Third World
nations in the form of interest bearing loans and technical assistance. The World
Bank has developed Structural Adjustment programs such as that implemented in
Argentina. Unlike the IMF, such programs actually encourage an increase in
Government spending and reforming institutional arrangements to support the
adjustment process. Otherwise, the program involves reducing tariffs, liberalising
trade and encouraging foreign investment
World price – The price of a good that prevails in the world market for that good.
World Trade Organisation (WTO): Geneva based watchdog and enforcer of the
1995 agreement on free trade ( see also GATT )
INTERNATIONAL EXPERIENCES OF REFORMS
ARGENTINA
I GROWTH OF GDP ROSE FROM
0.9 (82-86) TO 7.6 IN 1991-92
II INFLATION 315.5% IN 1982-86
BUT DECREASED TO 24. 9 % IN 199192.
III DECONTROL OF ALL EXISTING
CONTROLS
NIGERIA - I
BOLIVIA
CHILE
8.7
ABOLITION OF IMPORT LICENCES
- II
ABOLITION OF SUBSIDIES
- III
DECONTROL
I
GDP ROSE FROM –5.0 IN 1982-86
TO 1.7 % IN 1991-92
- II
INFLATION DECREASED FROM 765.5
IN 1982-86 TO 12.1 IN 1991-92
- I)
GDP ROSE FROM 2.0 IN 1982-86 TO
IN 1991-92
MEXICO
- II)
INFLATION DECREASED FROM 21.2
IN 1982-86 TO 15.4 IN 1991-92
- I)
GDP GROWTH ROSE FROM -2.6 IN
1982-86 TO 1.7 IN 1991
- II)
INFLATION DECREASED FROM 73.2
IN 1982-86 TO 15.5 IN 1991-92
KOREA
CHINA
–
- I)
FOREIGN EXCHANGE RESERVES
ROSE FROM $ 9 BILLION IN 1997 TO
$ 45 IN 1999.
- II)
REDUCTION OF SHORT TERM DEBT
FROM 44% TO 25 % OF THE TOTAL
DEBT.
-
FOLLOWING REFORM WERE MADE
A) COVERAGE
BROADENED
OF
VAT
B) INCOME TAX REDUCED FOR
LARGE & MEDIUM SIZE STATE
OWNED ENTERPRISES FROM
55% TO 33%
C) A UNIFORM INCOME TAX
D) EXPENDITURE AS PERCENTAGE
OF GNP DECLINED FROM 31%
TO 12 % DURING 1978 TO 1995.
(E)SHARE
OF
CAPITAL
INVESTMENT
IN
GOVT
EXPENDITURE FELL FROM 40.3
% IN 1978 TO 11.6 % IN 1995.
E) SOCIAL
EXPENDITURE
ON
EDUCATION,
HEALTH,
WELFARE INCREASED FROM
11.6%
OF
TOTAL
GVT
EXPENDITURE IN 1978 TO 23.5 %
IN 1995.
F) DECLINE OF INFLATION
U.K.
-I)
PRIVATISATION IS KEY WORD
-II)
STATE OF GOVT INDUSTRIES LIKE
BRITISH TELECOM & BRITISH GAS
-III)
PRIVATISATION OF BRITISH
AIRWAYS
-IV)
PRIVATISATION OF BRITISH
AIRPORT
AUTHORITY
-V)
NEWZEALAND
OTHER PRIVATISATION BRITISH LEY LAND ,
CABLE WIRELESS.
BRITISH RAILWAYS
HOTEL,
SEA PORTS,
NATIONAL FREIGHT
COMPANY,
- I)
SINGLE RATE VAT.
-II)
REDUCTION OF RULES
& REGULATIONS
-III) PRIVATISATION OF TRADING
ACTIVITIES
IV) REDUCTION TARIFFS
RESULTS
-I)
FISCAL SIMPLES
-II) REDUCTION IN INFORMATION.
POLAND
I.)
REFORMS STARTED IN 1989
II)
TRADE & PRICE LIBERALIZATION
III) REFORMS IN TAXES
IV) FISCAL DECENTRALIZATION
RESULTS
2.62%
I)
FISCAL DEFICIT DECLINED TO
II)
INFLATION FELL TO 18.5%
III) SHARE OF PRIVATE SECTOR TO
63%
IV) TRADE SHARE IN GDP ROSE TO
OVER 50% IN 1996
V)
FDI TOTALLED MORE THAN US $ 5
BILLIONS
VI) POLAND HAS BECOME A MEMBER
OF OECD IN 1996
ROMANIA
I)
STABILISATION PROGRAMME
STARTED IN FEBRUARY 1997
II)
STABILIZATION OF THE ECONOMY
AND FIGHT INFLATION
III) PROMOTION OF PRIVATE SECTOR
DEVELOPMENT
IV) PROTECTION THE POOR DURING
THE TRANSITION TO A MARKET
ECONOMY
V)
LIBERALIZATION OF FOREIGN
EXCHANGE MARKET
VI) SHARP TIGHTENING OF
MONETARY POLICY
RESULTS
I)
FISCAL DEFICIT DECREASED FROM
8.3% IN 1996 TO 3.7% IN 1997
FIVE YEAR PLANS
1)
FIRST FIVE YEAR PLAN (1951 – 56)
A.
FOCUS
–
INFRASTRUCTURE
SECTOR LIKE AGRICULTURE,
IRRIGATION,
POWER
AND
TRANSPORT.
B.
TOTAL OUTLAY – RS 2,378 CRORES
C.
MODEL - RUSSIAN MODEL
PROGRESS
PROGRESS
I. PRIVATE AIRLINES NATIONALISED IN 1953
II. PRODUCTION OF
STARTED IN 1954.
COMMERCIAL
VEHICLES
III. GOVT TAKES OVER IMPERIAL BANK OF INDIA
& RENAMED IT SBI IN DEC. 1954
IV. ICICI SET UP IN 1955.
V. LIFE INSURANCE NATIONALISED.
2)
65)
SECOND FIVE YEAR PLAN (1956 –
I. SPECIAL STRESS ON HEAVY INDUSTRIES
II. 1957- PACT WITH USSR FOR SETTING
HEAVY INDUSTRIES
UP
III. 1958 -HINDALCO IS SET UP .
IV. 1959- START OF INDIA’S FIRST TELEVISION
TRANSMISSION
V. 1959 -ONGC & IOC SET UP
VI. PRIVATE
SECTOR
LEFT
CONSUMER INDUSTRIES
TO
HANDLE
RESULTS :
VII. PRICE LEVEL INCREASES BY 30 %
VIII. BALANCE OF PAYMENT CRISIS STARTED
3)
AIMS-
THIRD FIVE YEARS PLAN
(1961(1961- 66)
INCREASE OF NATIONAL INCOME BY 5%
PER ANNUM
ACHIEVE SELF SUFFICIENCY IN FOOD
GRAINS
INCREASE OF PER CAPITA INCOME BY
17% FROM RS 330 TO 385.
1963
GOLD CONTROL ORDER COMES INTO
FORCE
1964 UTI & IDBI SET UP.
1965
1966
RESULTS
MINIMUM FOUR
INTRODUCED
PERCENT
START OF GREEN REVOLUTION.
AGRICULTURE PRODUCTION STAGNANT.
DEPENDENCE ON FOREIGN AID
BONUS
GROWING TRADE DEFICIT.
BALANCE OF PAYMENT MORE ADVERSE
4)
1969
ANNUAL PLANS (1966(1966-69)
FOURTEEN BANKS NATIONALISED
-MONOPOLIES & RESTRICTIVE TRADE
PRACTICES ACT PASSED.
RESULTS
DEFICIT FINANCING REACHED A LEVEL OF RS
676 CRORE
-
DECLINE IN
PRODUCTION
5)
AIMS
GROWTH
OF
INDUSTRIAL
FOURTH PLAN (1969(1969-74)
INCREASING NET DOMESTIC PRODUCT FROM
RS.38,306 CRORES IN 73-74
RATE OF GROWTH 5.7%
1969
–CENTRAL INSURANCE NATIONALISED .
1970
–OIL STRUCK AT BOMBAY HIGH
1971
–COAL MINES NATIONALISED
-FOREIGN EXCHANGE REGULATION ACT PASSED
RESULTS
RESULTS- GROWTH
OF 3.3%.
AGRICULTURAL GROWTH ONLY 2.8%
INDUSTRIAL GROWTH 3.9% AGAINST 8%
6)
FIFTH PLAN (1974 – 79)
AIMS
GROWTH RATE OF 5.5 %.
OBJECTIVES
TO ACHIEVE SELF-RELIANCE
TO CONTROL INFLATION
TO ESTABLISH ECONOMIC CONDITION
1972
IMPOSITION OF 12% CEILING ON DIVIDENDS.
1973
DECLARATION OF EMERGENCY
LAUNCHING OF 20 POINT PROGRAMME
1974
PRIVATE OIL COMPANIES NATIONALISED
URBAN LAND CEILING ACT PASSED.
1975
COKE & IBM ASKED TO LEAVE INDIA AFTER
THEIR REFUSAL TO REDUCE SHARE HOLDING IN
INDIAN SUBSIDIARIES TO 40%.
1976
RESULTS
DEMONETISATIONS OF RS 1000, RS 5,000, RS
10,000 NOTES.
I)
FOOD GRAINS TARGET ACHIEVED
II) REDUCTION OF FOREIGN ASSISTANCE
III) PLAN TERMINATED IN FOURTH YEAR IN
MARCH 1978
7)
OBJECTIVES
SIXTH PLAN (1980-85)
REMOVAL OF POVERTY
STRENGTHENING INFRASTRUCTURE
AGRICULTURE & INDUSTRY.
LIKE
1980
SIX MORE BANKS NATIONALISED
1981
MARUTI UDYOG SET UP
1983
SWARAJ PAUL MAKES A.BID TO TAKE OVER
DCM, ESCORTS.
13 TEXTILE MILLS NATIONALISED
- MARUTI 800 LAUNCHED
1984
ASSASSINATION OF INDIRA GANDHI
RESULTS
I) INDUSTRIAL OUPUT INCREASED BY 5.5 PER
ANNUM LESS THAN TARGET OF 7%
II) POVERTY RATIO CAME DOWN FROM 48%
IN 1977-78 TO 37% IN 1984-85
III) TRADE DEFICIT OF RS 28,558 CRORES
8)
AIMS
SEVENTH PLAN (1985 – 90)
-RAPID GROWTH IN FOOD GRAINS
- INCREASED EMPLOYMENT OPPORTUNITIES
1985
-INITIATION OF ECONOMIC REFORMS
1986
- SHIPPING
CREDIT
&
INVESTMENT
CORPORATION OF INDIA (SCICI) SET UP
1987
BIRLA GROUP DIVIDED AMONG SIX FAMILY
BRANCH
SECURITIES & EXCHANGE BOARD OF INDIA
(SEBI) COMES INTO EXISTENCE
1988
V P SINGH TAKES OVER AS PRIME MINISTER
RESULTS
FOOD GRAINS PRODUCTION GREW BY 0.6 %
INCREASE OF PUBLIC EXPENDITURE BY 21.5%
INCREASED BORROWINGS FROM ABROAD
9)
EIGHTH PLAN (1992-97)
AIMS :
-I) ANNUAL GROWTH THE RATE OF 5.6%.
RESULTS:
-I) ANNUAL GROWTH OF 7.2%
1992
I. DECONTROL OF PRICES OF STEEL & IRON
II.
SEBI ACT PASSED
III.
HARSHAD MEHTA ARRESTED IN RS
10,000 SECURITY SCAM
IV.
GOVERNMENT ALLOWS FII TO ENTER
STOCK MARKET
.
1993
V. RUPEE MADE CONVERTIBLE ON TRADE
ACCOUNT.
VI.
MOTOR CAR & CONSUMER GOODS DELI
CENSED
VII. COCA COLA MAKES A COMEBACK
1994
VIII. NATIONAL STOCK EXCHANGE COMES UP
IX
I A & AI CONVERTED INTO COMPANIES
1995
X
TELECOM OPENED TO PRIVATE SECTOR
XI
RBI DEREGULATES LENDING RATES
XII. NSE COMPUTERISES ITS TRADING
OPERATIONS
XIII OGL LEST EXPANDED FROM 43 TO 75.
1996
XIV. NSDL (NATIONAL SECURITIES
DEPOSITORIES LTD. )
XV. DISINVESTMENTS COMMISSION SET UP
TO FACILITATE DISINVESTMENTS OF
PSUS.
NINTH FIVE YEAR PLAN (1997(1997-2002)
OBJECTIVES
ACCELERATING ECONOMIC GROWTH
STABLE PRICES
ENSURING FOOD AND NUTRITIONAL
SECURITY
PRIORITY TO AGRICULTURE AND
RURAL DEVELOPMENT
STREGTHENING EFFORTS TO BUILD
SELF-RELIANCE
GROWTH RATE TARGET OF 6.5%
RESULTS
GROWTH RATES OF 5%, 6,8%, AND 5.9%
DURING FIRST THREE YEARS
INFLATION DECLINED TO 4.8% IN 1997-98
6.9% IN 1998-99, 3% IN 1999-2000
EARLY INITIATIVES O
OF
F ECONOMIC REFORMS
1)
BACKGROUND
PREDOMINANCE OF PUBLIC SECTOR
1969
14 BANKS NATIONALISED
1970
MRTP ACT ENFORCED
1971
GENERAL INSURANCE NATIONALISED.
1973
COAL MINES NATIONALISED
FERA PASSED.
1977
PRIVATE OIL COMPANIES NATIONALISED
1978
COCO COLA & IBM FORCED TO LEAVE INDIA.
1981
6 MORE BANKS NATIONALISED
1982
MARUTI UDYOG SET UP.
1983
13 TEXTILE MILLS NATIONALISED
1984
ASSASSINATION OF INDIRA GANDHI
2
SITUATION BEFORE 1980
1980
i. MOUNTING GOVT EXPENDITURE
RISING GOVT. EXPENDITURE
1980
1970
RISING GOVT.
EXPENDITURE
1960
1950
0
10000 20000 30000
1. INFLATION
20% in 19791979-80
III.
ADVERSE BOP
IN 1980 THERE
THERE WAS 130% INCREASE OF OIL PRICE.
IV.
FISCAL DEFICIT
5.4% IN 19811981-82
3)
A
BEGINNING BY MRS
GANDHI
1982 -YEAR OF PRODUCTIVITY
-NEW INDUSTRIAL POLICY .
B.
PRINCIPLE OF AUTOMATIC EXPANSION OF
LICENSED CAPACITY BY ONE THIRD
C.
ENLARGEMENT OF LIST OF CORE INDUSTRIES
OPEN FOR LARGE INDUSTRIAL HOUSES.
D.
OPENING OF POWER & OIL TO PRIVATE
SECTOR
E.
ABOLITION OF ADMINISTERED PRICE OF PIG
IRON
F.
PARTIAL DECONTROL OF CEMENT
G.
LIBERALITIES
MATERIALS
4)
I.
II.
IN
THE
IMPORT
OF
RAW
ER UNDER RAJIV GANDHI
GANDHI
REGIME
DECONTROL OF CEMENT
SANCTION OF ADDITIONAL
LICENSED CAPACITY IN PVT.
SECTOR
III.
ENLARGEMENT OF FREE SALE
SUGAR
IV.
BROAD BANDING OF LICENCES
INTRODUCED IN JANUARY 1985
V.
BROAD BANDING WAS
EXTENDED TO 25 CATEGORIES
OF INDUSTRIES
VI.
DECLICENSING OF 94 DRUGS
VII.
27 INDUSTRIES PLACED OUTSIDE
MRTP.
VIII.
NEW TEXTILE POLICY (1985)
WHICH ABOLISHED THE
DISTINCTION BETWEEN MILL,
POWER LOOM, AND HANDLOOM
SECTORS
IX.
ELECTRONICS INDUSTRY FREED
FROM MRTP ACT RESTRICTIONS
5)
RESULTS:
I.
II.
III.
NO DESIRED OUTCOME
BALANCE O TRADE DEFICIT
JUMPED FROM RS 5,930 CRORES
DURING (1980-85) TO RS. 15,890
CRORES DURING 1985-90 PERIOD.
DECLINE IN RECEIPT IN
INVISIBLE ACCOUNT FROM, RS
19,070 CRORES (1980-85) TO RS
15,890 CRORES DURING (1985-90)
IV.
LOAN TAKEN FROM IMF TO THE
TUNE OF $ 7 BILLION.
FISCAL STABILISATION
1.
MEANING
THE TERM ’FISC’ IN ENGLISH LANGUAGE
MEANS ‘TREASURY’. HENCE POLICY CONCERNING
TREASURY OR GOVERNMENT EXCHEQUER IS
KNOWN AS ‘FISCAL POLICY’.
PAUL SAMUELSON –
FISCAL POLICY MEANS
PUBLIC EXPENDITURE AND TAX POLICY.
MUSGRAVE –
Fiscal policy is concerned with those
aspects of economic policy, which arise in the operation of the public
budget.
BROADLY, The policies of
imposING taxation, taKing loans or deficit financing
are collectively known as ‘Fiscal Policy’.
2.
MAIN COMPONENTS
FISCAL POLICY
Budgetary Policy
3.
Taxation
Public Debt
Public Expenditure
OBJECTIVES OF FISCAL POLICY
(J)
ECONOMIC STABILIZATION
(K)
ECONOMIC GROWTH
(L)
BREAK THE VICIOUS CIRCLE OF POVERTY
(M)
PROVIDE EMPLOYMENT
(N)
ACCELERATE THE SAVING, INVESTMENT AND
CAPITAL FORMATION
(O)
BRING STABILITY IN PRICES
(P)
ESTABLISH BALANCE IN FOREIGN TRADE
(Q)
REDUCE INFLATION PRESSURE
(R)
REDUCE WEALTH AND INCOME INEQUALITIES.
4.
ROLE OF FISCAL POLICY IN INDIA
A.
PROMOTION &ACCELERATION OF CAPITAL
FORMATION
IT PERFORMS THE TASK IN TWO WAYS; (I) BY
EXPANDING INVESTMENT IN PUBLIC & PRIVATE
ENTERPRISES; (II) BY DIRECTING FLOW OF
RESOURCES FROM SOCIALLY LESS DESIRABLE TO
MORE DESIRABLE INVESTMENT.
B.
FISCAL
RESOURCES
POLICY
AND
MOBILIZATION
OF
FOR MOBILIZING RESOURCES, THE FOLLOWING
FISCAL MEANS MAY BE USED; (I) TAXATION (II)
PUBLIC BORROWINGS (III) DEFICIT FINANCING (IV)
STIMULATING OF PRIVATE SAVINGS (V) PROFITS OF
PUBLIC ENTERPRISES
C.
REMOVAL OF UNEMPLOYMENT
FOR DEALING WITH UNEMPLOYMENT, POLICY OF
INCREASED CAPITAL FORMATION AND PLANNED
DEVELOPMENT IS UNDERTAKEN
D.
PROMOTION AND MAINTENANCE OF ECONOMIC
STABILITY.
E.
REDISTRIBUTION OF NATIONAL INCOME.
F.
PROMOTION
STABILITY.
AND
MAINTENANCE
OF
PRICE
5.
FISCAL IMBALANCE IN INDIA
I)
GROSS FISCAL DEFICIT IN 1975-76 WAS 4.1
PERCENT OF GDP BUT IT ROSE TO 7.5 PER CENT
IN 84-85 AND TO 8.3 IN 1990-91.
FISCAL IMBALANCE
10
8
6
4
2
0
Budget Deficit
Rev.Deficit
Gross Def
1983- 1984- 1985- 1986- 1987- 1988- 1989- 199084
84
86
87
88
89
90
91
II)
EXPENDITURE GROWTH
EXPENDITURE GDP RATIO
40%
30%
1981-82
1986-87
20%
10%
0%
1990-91
1990-91
1986-87
1981-82
III) INTEREST PAYMENT
Year
1980-81
1990-91
6.
Percent of GDP
2
4
Percent of Expenditure
10
20
MEASURES OF FISCAL CORRECTION
REDUCTION OF FISCAL DEFICIT
1991-92 BUDGET ENVISAGED A REDUCTION
FISCAL DEFICIT FROM 8.4% OF GDP TO 6.5% IN 199192. THIS REQUIRED FISCAL CORRECTION OF RS.12,000
CRORES WHICH WAS SOUGHT TO BE ACHIEVED BY
5% CUT ON EXPENDITURE AND OTHER MEASURES
FOR RAISING REVENUE.
II.
Privatization of PSUS
25% OF DEBT CAN BE MADE UP BY SELLING PSUS.
1980
1986
1990
74
100
109
No of loss making enterprises.
Losses of loss making PSUs
(RS. Billion).
III
7.6
17
30.6
REDUCTION IN SUBSIDIES (1991= RS.12,158
CRORES)
REDUCTION IN SUBSIDY ON LPG
REDUCTION IN SUBSIDY ON HSD
REDUCTION IN SUBSIDY ON KEROSENE
REDUCTION IN SUBSIDY ON FERTILIZERS
REDUCTION IN SUBSIDY ON POWER
REDUCTION IN SUBSIDY ON TRANSPORT
REDUCTION IN SUBSIDY ON PDS
IV.
REDUCTION IN GOVT. EXPENDITURE
A)
REDUCTIONS OF 30% WORK FORCE IN 10 YEARS
ACCORDING TO FIFTH PAY COMMISSION.
B)
ABOLITION OF VACANT POSTS.
C)
FRESH RECRUITMENT TO BE LIMITED TO 1% OF
TOTAL CIVILIAN STAFF STRENGTH.
D)
FACILITY OF LTC TO CENTRAL GOVT. EMPLOYEES
TO BE SUSPENDED FOR 2 YEARS.
E)
DOWNSIZING OF MINISTER & DEPARTMENTS.
F)
RENT OF GOVT. ACCOMMODATION ENHANCED BY
50% FOR GROUP -A, 25% FOR GROUP –B, 15% FOR
OTHER.
G) POSTAL RATES REVISED MODERATELY TO OVERCOME
POSTAL DEFICITS.
H) REDUCTION OF CAPITAL ASSISTANCE TO NON-VIABLE &
INEFFICIENT
V.
TAX REFORMS
A)
TAX CUTS IN INCOME TAX IN 97-98, 98-99.
B)
REDUCTION IN CORPORATE TAX ON FOREIGN
COMPANIES.
C)
IMPOSITION OF MINIMUM ALTERNATIVE TAX (MAT) ON
COMPANIES.
D)
REDUCTION IN INTEREST RATES.
INFLATION CONTROL
1. CHANGES IN PRICE AND MONEY SUPPLY
Whole Sale Price
2
1989-90
1986-87
1984-85
1982-83
1980-81
Money Supply
CAUSES OF INFLATION
(A)
DEMAND PULL FACTORS:
I. MOUNTING GOVT. EXPENDITURE
1. 1950-51:
2. 1980-81:
3. 1999-00:
Rs.740 crores
Rs.37, 000 crores
Rs.5, 69,400 crores
II. DEFICIT FINANCING
1.
2.
3.
4.
5.
1983-84
1985-86
1986-87
1988-89
1990-91
-
6.3
8.3
9.0
7.8
8.3
DEFICIT FINANCING (1981-1995)
6.6
8
5.4
6
3.3
% 4
2
4.2
2.5
Revenue Deficit
Fiscal Deficit
0.2
0
1981-82
1990-91
1995-96
(III) MOUNTING GOVT. EXPENDITURE:
Expenditure-GDP Ratio
40%
30%
ExpenditureGDP Ratio
20%
10%
0%
1981-82
IV.
1986-87
1990-91
UNCONTROLLED GROWTH OF POPULATION:
TWO DECADES BACK – RATE WAS 14 TO 15 MILLION
At present growth – 18 to 29 milliON
THIS CAUSES DEMAND – SUPPLY GAP
(B)
(I)
COST-PUSH FACTORS:
FLUCTUATIONS IN FOODGRAINS OUTPUT:
YEAR
1978-79
1979-80
1983-84
1987-88
PRODUCTION (M.T.)
132
110
152
140
UPWARD REVISION OF ADMINISTRATED PRICES
(II)
(A) INCREASE OF PETROL PRICE IN 1988, 1990
(B) RISE IN PRICES OF COAL, FERTILIZERS,
CEMENT IRON & STEEL, POWER ETC.
(III)
(IV)
HIKE IN OIL PRICES & GLOBAL INFLATION
(A)
SHARP HIKE IN CRUDE PRICE IN 1973
(B)
130% HIKE BY OPEC IN 1980
(C)
GULF SURCHARGE IN 1990
INADEQUATE RISE IN INDUSTRIAL PRODUCTION
1965 – 1985
3.
4.
4.7 per annum
CONSEQUENCES OF INFLATION
(A)
INCREASE IN ECONOMIC INEQUALITY
(B)
ADVERSE EFFECT ON BALANCE OF PAYMENT
(C)
CHANGES IN RELATIVE PRICES
(D)
OBSTACLE TO DEVELOPMENT
CONTROL OF INFLATION
(A)
FISCAL MEASURES
(I)
REDUCTION IN WORK FORCE
(II)
RESTRAINT IN RECRUITMENT
(III)
DOWNSIZING OF MINISTRIES/DEPTTS
(IV)
REDUCTION OF CAPITAL ASSISTANCE TO NONVIABLE UNITS
RESULT – REDUCTION OF FISCAL DEFICIT FROM 8.4%
OF
GDP IN 1990-91 TO 6.2% IN 1991-92 & 4.9% IN 1992-93.
Fiscal Deficit of GDP
1991-92
8.40%
6.20%
4.90%
1992-93
1990-91
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Fiscal Deficit of GDP
(B)
MONETARY MEASURES
(I)
REDUCTION IN CRR WHICH RELEASED FUNDS
LOCKED UP WITH RBI FOR LENDING TO INDUSTRIES &
OTHER SECTORS
CRR
2001
1997
2001
1997
1993
1991
0%
CRR
1993
1991
5%
10%
15%
(II)
DECREASE OF SLR FROM 38.5% TO 27% IN MARCH
1997 AND 25% IN OCTOBER 1997 WHICH INCREASED THE
AMOUNT OF THE BANKS FOR ALLOCATION IN MORE
PROUCTIVE SECTORS LIKE AGRICULTURE & INDUSTRY.
(III)
INTEREST ON DOMESTIC TERM DEPOSITS ABOVE
ONE YEAR DECONTROLLED.
PRIME LENDING RATE OF SBI AND MOST OTHER
BANKS ON ADVANCES OVER RS.2 LAKHS REDUCED.
RATE OF INTEREST ON BANK LOANS ABOVE RS.2
LAKHS HAS BEEN FULLY DECONTROLLED.
(C)
SUPPLY MEASURES
(I)
FIXATION OF MAXIMUM PRICES BY APC
(II)
SYSTEM OF DUAL PRICES SUGAR/KEROSENE
(III)
INCREASE IN SUPPLY OF FOODGRAINS IN 95.96 –1 MT
RICE & 3.5 MT WHEAT BY FCI TO CHECK PRICE RISE.
(IV)
PDS SHOPS NUMBERING 4 LAKHS MAINTAINED TO
COVER THE POPULATION OF 500 MILLIONS
(D)
OTHER MEASURES
(A)
ADOPTION OF OGL FOR IMPORTING SUGAR,
PULSES, ETC.
(B)
ADJUSTMENT IN TRADE AND TARIFF POLICIES
(C)
SUBSTANTIAL REDUCTION IN EXCISE DUTIES.
5.
RESULTS OF INFLATION CONTROL MEASURES
INFLATION DURING REFORM PERIOD
15
10
5
20 00
00
-0
1
99
-9
9
8
98
-9
97
96
-9
7
6
-9
95
-9
5
4
94
-9
93
-9
3
2
92
-9
91
90
-9
1
0
BALANCE OF PAYMENT
1.
DEFINITION
THE BALANCE OF PAYMENTS OF A COUNTRY
IS A SYSTEMATIC RECORD OF ALL ECONOMIC
TRANSACTIONS BETWEEN THE RESIDENTS OF A
COUNTRY AND REST OF THE WORLD CARRIED
OUT IN A SPECIFIC PERIOD OF TIME. IT
PRESENTS A CLASSIFIED RECORD OF ALL
RECEIPTS ON ACCOUNT OF GOODS IMPORT AND
SERVICES RENDERED AND CAPITAL RECEIVED
BY RESIDENTS AND PAYMENTS MADE BY THEM
ON ACCOUNT OF GOODS IMPORTED AND
SERVICES RECEIVED FROM AND CAPITAL
TRANSFERRED
TO
NON-RESIDENTS
OR
FOREIGNERS.
2
BALANCE OF PAYMENT
CURRENT ACCOUNT
3
CAPITAL ACCOUNT.
CURRENT ACCOUNT: - THE CURRENT ACCOUNT IS
DIVIDED INTO ‘MERCHANDISE’, ‘NON –MONETARY
GOLD MOVEMENT’, AND INVISIBLES
INVISIBLES ARE FURTHER CLASSIFIED INTO
SERVICES (COMPRISING TRAVEL, TRANSPORTATION,
INSURANCE, INVESTMENT INCOME, GOVERNMENT
NOT INCLUDING ELSE WHERE AND MISCELLANEOUS)
AND TRANSIT PAYMENTS.
CAPITAL ACCOUNT –IT INCLUDES THOSE
ECONOMIC TRANSACTIONS WHICH RESULT IN
CHARGES IN FOREIGN FINANCIAL ASSETS AND
LIABILITIES.
CAPITAL
TRANSACTIONS
ARE
CLASSIFIED INTO THREE MAIN SECTORS VIZ,
PRIVATE, BANKING & OFFICIAL
4. INDIA’S BALANCE OF PAYMENT POSITION (195190)
BALANCE OF TRADE & BALANCE OF
PAYMENT
20000
0
-20000
51- 56- 61- 66- 69- 74- 80- 8555 60 65 68 73 78 84 89
BOT
BOP
-40000
-60000
5.
CAUSES OF ADVERSE BOP
A.
DEVELOPMENTAL IMPORTS: - POWER, AIRCRAFT,
DEFENCE, TRANSPORTS, ETC
B.
CONSUMER GOODS: - IMPORT OF SUGAR, PULSES,
EDIBLE OIL, ETC.
C.
DEFENCE EQUIPMENTS: - AIR FORCE PLANES, TANKS,
GUNS, SHIPS, SUBS.
D.
POL IMPORTS – PETROLEUM, LUBRICANTS, &OIL.
E.
EXTERNAL DEBTS – $ 98 BILLION THAT MAKES BOP
UNFAVOURABLE.
F.
INFLATIONARY PRESSURES
inflation
13.7
1991-92
12.1
9.1
1989-90
inflation
5.7
10.6
1987-88
0
5
10
15
G.
DISINTEGRATION OF USSR – EXPORTS TO
EAST EUROPEAN COUNTRIES & RUSSIA DECLINED
FROM 7 PERCENT DUE TO DISINTEGRATION OF
YUGOSLAVIA & USSR.
6.
FACTORS OF ADVERSE BOP DURING 1980 –
81 TO 1992- 93
I.
II.
LARGE SCALE TRADE DEFICITS
RISE OF IMPORTS IN US DOLLARS
III.
VOLUME OF NET POL IMPORTS INCREASED FROM
12.4 % IN 1984-85 TO 23.5% IN 1989-90
IV.
RISE IN DEFENCE EXPORTS FROM $ 1.2 BILLION IN
1985 –86 TO $ 3.1 BILLION BY 1989-90.
V.
EARNINGS FROM INVISIBLES DECLINED TO RS 1025
CRORE IN 1989-90.
VI.
7.
GULF CRISIS INCREASED TRADE DEFICIT TO RS 16,934
CRORES.
RANGARAJAN PANEL FOR CORRECTING BOP
A)
CAUTION AGAINST EXTENDING CONCESSION OR FACILITIES
TO FOREIGN INVESTORS.
B)
EFFORTS SHOULD BE MADE TO REPLACE DEBT FLOWS WITH
EQUITY FLOW.
C)
CODIFICATION OF EXISTING POLICY AND PRACTICES,
RELATING TO DIVIDEND REPATRIATION, DISINVESTMENTS,
EMPLOYMENT OF FOREIGN NATIONALS & SANCTION AS
ALSO SERVICING OF EXTERNAL AND COMMERCIAL
BORROWING.
D)
RECOURSE TO EXTERNAL DEBT FOR BOP SUPPORT SHOULD
BE DISCOURAGED UNLESS ON CONCESSIONAL TERMS.
E)
PHASING OUT EXCEPTIONAL FINANCING INCLUDING IMF
CREDIT BY TERMINAL YEAR OF EIGHTH PLAN.
F)
CURRENT ACCOUNT DEFICIT OF 1.6 PERCENT OF GDP
SHOULD BE TREATED AS CEILING RATHER THAN AS A
TARGET.
H)
MINIMUM FOREIGN EXCHANGE TARGET SHOULD BE
FIXED IN SUCH A WAY THAT THE RESERVES ARE
SUFFICIENT FOR THREE MONTHS.
8.
MEASURES TO CORRECT ADVERSE BOP
I.
TH
CONTROL OF FISCAL DEFICIT – DURING V
PLAN FISCAL DEFICIT WAS $ % OF GDP; THEN
BOP WAS RS 1404 CRORES.
II)
CONTROL OF INFLATION – RISE OF INFLATION
AGGRAVATES THE BOP SITUATION.
III)
LIBERALISATION OF EXPORTS & IMPORTS
IV)
DELICENSING OF INDUSTRIES
V)
PRIVATISATION & DISINVESTMENTS
VI)
FDI
VII)
DEVALUATION OF RUPEE BY 20 % IN JULY 1991.
VIII) EXPORT SUBSIDIES
IX)
LIBERALISED EXCHANGE RATE MANAGEMENT
SYSTEM (LERMS)
X)
EXTERNAL FINANCING – LOANS, GRANTS FROM
WB, IMF, ADB.
XI)
EXPORT PROMOTION –
1. SCHEMES FOR IMPORT OF RAW MATERIALS,
MACHINERY AND CAPITAL EQUIPMENT DUTY
FREE OR AT CONCESSIONAL RATES FOR
EXPORT UNITS.
2. FINISHED PRODUCTS OF EXPORT UNITS
EXEMPT FROM EXCISE & OTHER DUTIES.
3. FISCAL INCENTIVES SUCH AS DUTY
EXEMPTION SCHEME, CASH COMPENSATORY
SCHEME AND CONCESSION IN DIRECT TAXES.
4. SPECIAL RAIL AND SHIPPING FACILITIES
5. FORMATION OF FREE TRADE ZONES & SPECIAL
ECON. ZONE.
6. START OF PROCESSING ZONES
7. ESTABLISHMENT OF AGRICULTURAL EXPORT
ZONES (AEZ)
9.
STEPS TAKEN BY GOVERNMENT OF INDIA
SINCE 1991.
I.
AN EFFORT WAS MADE TO STEP UP EXPORTS SO
THAT A MAJOR PART OF THE IMPORT BILL IS PAID
FOR BY EXPORTS.
II. IMPORTS WERE
GRADATION.
LIBERALISED
FOR
TECHNOLOGICAL
UP
III. IN PLACE OF DEBT- CREATING FLOWS OF CAPITAL, NON – DEBT
CREATING INFLOWS SUCH AS FID AND PORTFOLIO INVESTMENT
WERE ENCOURAGED.
10
OTHER CONTRIBUTORY FACTORS
I. DOMESTIC INDUSTRIAL RECESSION HAD CURBED
THE IMPORT DEMAND AND ENCOURAGED EXPORTS.
II. EIGHT CONSECUTIVE GOOD MONSOONS HAD
MINIMIZED THE IMPORTS OF AGRICULTURAL
COMMODITIES.
III. OIL PRICES BECOME SUBDUED AFTER THE GULF
CRISIS.
IV. SHARP INCREASE IN COVERAGE OF IMPORT BY
EXPORT EARNINGS
V. REDUCTION IN DEPENDENCE EXTERNAL ASSISTANCE
AND EXTERNAL COMMERCIAL BORROWING.
FOREIGN EXCHANGE MANAGEMENT
1)
DEFINITION
The exchange of one country with the currency of
another country is called Foreign Exchange. It is the direct offshoot of
international trade. as different countries have their own respective
currencies live USA’s dollars UK’s pound sterling, Japan’s Yen and
India’s Rupee whenever goods are imported from abroad say from
USA to India then rupee has to be exchanged with dollar this
conversion of rupee with dollar or Yen with pounds in known as
Foreign Exchange .
2) RATE OF EXCHANGE RUPEE:
Rupee historically linked to British Pound Sterling
After SWW IMF directed India to maintain external value of
rupee in terms of gold or US $ , Rupee was linked with $ but
link with of continued.
3)
Rupee delinked with Pound and RBI began to fix exchange rate
of rupee with basket of currencies viz, pound, US Dollar, Yen
and Deutsche Mark
FOREIGN EXCHANGE REGULATION ACT 1973
All non banking foreign branches and subsidiaries with foreign
equity exceeding 40% had to obtain permission for new
undertakings, to purchase shares or to acquire any company.
All external payments, had to be made by authorized dealer
controlled by RBI and F.E. rationed acc. to availability.
o Exporters earning FE had to surrender earnings to
authorized dealers and get rupee in exchange.
o Purchase & sale of Foreign securities by Indians
were strictly controlled .
4 FOREIGN EXCHANGE RESERVE CRISIS, 1991
a) Between 1985- 1990,fiscal and BOP deficits resulted
in the decline of FE reserves to a dangerously low level of
$ 750 million (Rs 1500 croes).
b) India approached IMF for temporary accomodation,
IMF accepted India’s request with conditionalities.
c)
GOI arranged to sale about 20 tonnes of
confiscated gold for $ 200 million to meet international
obligations.
5) IMF CONDITIONALITIES
a) Devaluation of Rupee by 22 percent i.e., from Rs 21 to Rs
27 per dollar
b) Drastic Reduction in import tariff from 130 percent to 30
percent for all goods and putting then or OGL list
c) For compensating Government revenue, the excise duties
should be hiked
d) All government expenditure should be cut down by 10
percent
a.
FOREIGN EXCHANGE RESERVES OF INDIA
(Million Dollars)
Year
Gold
SDRs
1
1970-71
1980-81
1990-91
2
243
370
3496
3
148
603
102
Foreign
currency
assets
4
584
5850
2,236
TOTAL (2+3+4)
5
975
6823
5,834
7, DUAL EXCHANGE SYSTEM IN 1991-92
c) GOI accepted the existence of two rates the Official Rate
of exchange or market rate of exchange.
d) All foreign exchange remittances into India earned
through export of goods or services or through inward
remittances were allowed to be converted into I) 60% @
market value ii ) 40% should be sold to RBI through
authorized dealers (AD) at official rate
8. FULL CONVERTIBILTY OF RUPEE ON CURRENT
ACCOUNT
a) Indian exporters and workers abroad could
convert 100 percent of their foreign exchange earnings at
market rate.
e) Secondly GOI introduced the convertibility of the Rupee
on the current account that is liberalise the access to
foreign exchange for all business transactions including
travel education medical expenses etc.
9. COMMITTEE
ON
CONVERTIBILITY (CAC)
CAPITAL
ACCOUNT
a)
Permission to issue foreign currency denominated
bonds to local investors to issue Global Deposition
receipts (GDR), without RBI or government approval
b)
Indian residents would be permitted to have foreign
currency denominated deposits with banks in India, to
make Financial capital transfers to other countries with in
certain limits to lave loans from non relations and others
up to ceiling of $ 1 million .
c)
Indian banks would be allowed to borrow from
overseas markets for short term & long term upto certain
limits.
d)
Banks & financial institutions would be allowed to
operate in domestic and international market .
10. TARAPORE COMMITTEE
Tara Pore Committee recommended that before
adopting CAC India should fulfill three crucial
preconditions
d) Fiscal deficit should be reduced to 3.5 % . the govt
should also set up a Consolidated Sinking Fund (CSF) to
reduce Govt debt ,
e) The Government should fix the annual inflation target 3
to 5 percent
f) Financial sector should be strengthened.
Apart from these three essential preconditions ,
The Tara pore committee recommended.
e) RBI should have a monitoring exchange rate band of 5
percent around Real Effective Exchange Rate (REER) and
should intervene only when REER is out side band.
f) The size of the current account deficit should be within
manageable limits and the debt rate should be gradually
reduced from 25 percent to 20 percent of export
earnings.
g) Forex reserves should be adequate i.e. in terms of import
and debt service payments forex reserves should range
between $ 22 billion and & 32 billion.
h) The Government should remove all restriction on the
movement of gold.
10) FOREIGN EXCHANGE MANAGEMENT ACT (FEMA),1999
e) No person shall deal in or transfer foreign exchange or
foreign security to any person not being authorized
person.
f) No person resident in India shall acquire hold own
possess or transfer any foreign exchange foreign security
or any immovable property situated outside India.
c) Any person may sell or draw foreign exchange to or from
an authorized person for a capital account transaction.
11) DEFFERENCE BETWEEN FERA & IEMA
FERA
FEMA
1) All transactions in foreign
exchange & all transaction
with non residents were
absolutely prohibited
Non Residents were also not
permitted to have any
dealings
1)Restriction over dealings with non
residents and by non residents in
India have been substantially diluted
2) Provision of monetary penalty and
there is no punishment by way of
imprisonment for contravention of
any
provision.
The
only
under
which
2)
The
Enforcement circumstance
Directorate had power of imprisonment can be made is for
non-payment of such penalty.
arrest for forex violations
12)
RESULTS OF NEW FOREIGN EXCHANGE POLICY
(Million of US Dollar)
Year
GOLD SDR
TOTAL
3
FOREIGN
CURRENCY
4
1
2
1990-91
3,496
102
2,236
5,834
2000-1
2,725`
2
39,554
42,281
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2+3+4
TOTAL
Foreign
Currency
Assets
SDRs
GOLD
1990-91
2000-01
REMOVING CONTROL ON PRIVATE INVESTMENT
1.
RESTRICTIONS ON PRIVATE INVESTMENT
A.
VAST CONTROL AND REGULATORY STRUCTURE.
B
CONTROL OF PLANNING COMMISSIONS
THE PLANNING COMMISSION FIXED THE LEVEL OF
INVESTMENT AND THE OVERALL TARGETS FOR THE
PRIVATE SECTOR UNDER EACH FIVE YEARS PLAN.
C
INDUSTRIES (DEVELOPMENT & REGULATION ) ACT,
1951
IN 1951 THE GOVT PASSED THE INDUSTRIES
(DEVELOPMENT & REGULATION) ACT TO CONTROL AND
GUIDE THE DIRECTION OF PRIVATE INVESTMENT AND
ALSO THE GROWTH & DIVERSIFICATION OF PRIVATE
SECTOR UNITS.
D.
MONOPOLY & RESTRICTIVE TRADE PRACTICES Act,
1969
UNDER MRTP ACT, UNDERTAKINGS WHOSE ASSETS ARE RS
20 CRORES OR MORE (RAISED TO RS 100 CRORES IN
1985) HAD TO REGISTER THEMSELVES WITH MRTP
COMMISSION. THEY WERE REQUIRED TO TAKE
PERMISSION FROM THE GOVT. FOR SUBSTANTIAL
EXPANSION, ESTABLISHMENT OF NEW UNDERTAKING,
MERGER / AMALGAMATION ETC.
E.
INDUSTRIAL POLICY RESOLUTION OF 1956
SCHEDULE A OF THE POLICY INCORPORATED SUCH
INDUSTRIES AS ARMS & AMMUNITION, ATOMIC ENERGY,
HEAVY PLANTS & MACHINERY, HEAVY ELECTRICAL PLANT,
AIRCRAFT, RAILWAY, TELEPHONE, ETC. WHICH WERE
UNDER COMPLETE CONTROL OF THE STATE.
F.
RESTRICTION ON VILLAGE & SMALL SCALE
INDUSTRY
THE 1956 POLICY RESOLUTION ASSERTED THAT STATE
WOULD SUPPORT SSI BY RESTRICTING THE VOLUME OF
PRODUCTION IN LARGE SECTOR BY DIRECT SUBSIDIES &
RESERVATION IN SPHERES OF PRODUCTION
2.
TYPES OF CONTROL BEFORE 1991
A. CONTROL OVER INVESTMENTS
Section 21 of MRTP Act ; FERA.
B. CONTROL OVER PRODUCTION
The Industries (Development & Regulation Act ),1951.
C. CONTROL OVER IMPORTS
i.
ii.
Restriction started in 1956 –57
Classified into 4 items
a.
b.
c.
d.
BANNED ITEMS
CANALISED ITEMS
RESTRICTED ITEMS
OGL ITEMS
CANALISED ITEMS – IMPORTED THROUGH STC &
MMTC (Mineral & Metal Trading Corporation)
RESTRICTED ITEMS – NON ESSENTIAL ITEMS
D. CONTROLS OVER EXPORTS
1) EXPORT CONTROLS STARTED DURING SWW.
2)
EXPORT DUTIES AFFECTED
SEVERAL EXPORT COMMODITIES DURING 1950s
3)
IN 1966, EXPORT DUTIES WERE
LEVIED ON A NUMBER OF TRADITIONAL
EXPORT ITEMS
4)
PRIORITY
IN 1970S EXPORTS GOT HIGH
E. EXCHANGE CONTROL
I.
II.
FERA. 1973 REQUIRED THAT EXPORTERS
EARNING FE HAD TO SURRENDER EARNINGS
TO AD AND GET RUPEE IN EXCHANGE.
PURCHASE & SALE OF FOREIGN
SECURITIES BY INDIANS WAS STRICTLY
CONTROLLED.
3.
RECOMMENDATION OF RAGHAVAN COMMITTEE (2000)
1. SET
UP
A
NEW
AUTHORITY
CALLED
COMPETITION COMMISSION OF INDIA (CCI).
2. REPEAL MRTP ACT, 1969 & REPLACE IT WITH
INDIAN COMPETITION ACT.
3. CCI TO HAVE SUE MOTO POWERS
4. UNFAIR
TRADE
PRACTICES
TO
TRANSFERRED TO CONSUMER COURTS.
BE
5. STATE
MONOPOLIES,
GOVERNMENT
PROCUREMENT, AND FOREIGN COMPANIES TO
COME UNDER COMPETITION LAW.
4.
MEASURES TO FACILITATE PRIVATE INVESTMENT
A) DERESERVATION
THE 1956 INDUSTRIAL POLICY RESOLUTION HAD
RESERVED 17 INDUSTRIES FOR THE PUBLIC SECTOR
THE NUMBER OF SUCH INDUSTRIES HAS NOW BEEN
REDUCED TO 6. (ARMS, ATOMIC ENERGY, COAL,
MINERAL OIL, ATOMIC MINARALS, RAIL TRANSPORT).
B) LICENSING
INDUSTRIAL LICENSING WAS ABOLISHED FOR ALL
PROJECTS EXCEPT FOR A LIST OF 15 INDUSTRIES
RELATED
TO
SECURITY,
STRATEGIC
OR
ENVIRONMENTAL CONCERNS ETC
C) POLICY REGARDING SICK UNITS
THE 1991 INDUSTRIAL POLICY HAS BROUGHT THE
PSUS AT PAR WITH PRIVATE SECTOR UNIT. NOW
THE PUBLIC SECTOR UNITS HAVE ALSO BEEN
BROUGHT WITHIN THE JURISDICTION OF BOARD
FOR BIFR.
D) DERESERVATION OF SSI LIST
A. HIKE IN INVESTMENT LIMIT FOR SSI FROM
RS 60 LAKH TO RS 3 CRORES.
B. 15 OTHER ITEMS WERE ALSO REMOVED
FROM THE RESERVED LIST.
E) DISINVESTMENT OF SHARES
A. GOVERNMENT
EQUITY
IN
SELECTED
NUMBER OF PSUS IS BEING DISINVESTED.
F) DECANALISATION
GOVT. DECANALISED 16 EXPORT ITEMS AND 20
IMPORT ITEMS IN AUGUST 1991 WHICH
FACILITATED PRIVATE INVESTMENT.
5.
FOREIGN DIRECT INVESTMENT IN INDIA
FD- In-flow of Foreign Direct Investment in India from 1991 to 2000
Actual inflow of
FDI
Government's
Approval
RBI Automatic
Approval
NRI Schemes
Total
(Rs. billion)
2000
1991 1992 1993 1994 1995 1996 1997 1998 1999 (JAN)
1.9
4.8
9.9
15 38.7 57.6 101.3 82.4 61.9
2.6
1.6
3.5
0.5 2.4 3.6 5.3 6.2 8.7 6.1 7.6
1.5 5.6 11.1 19.7 20.6 10.4 3.6 3.5
6.8 17.9 29.7 63.7 84.4 120.4 92.1 73
1.9
0.2
4.7
OPENING OF ECONOMY FOR TRADE
1. PHASES OF INDIA’S TRADE POLICY: -
A. FIRST PHASE (1947 – 48 TO 1951 – 52): BY AND LARGE
IMPORT POLICY WAS RESTRICTIVE AND RESTRICTIONS
WERE ALSO PLACED ON EXPORTS IN VIEW OF DOMESTIC
SHORTAGES.
B. SECOND PHASE (1952 –53 TO 1956 –57): -THERE WAS
LIBERALISATION OF IMPORTS BUT NO APPRECIATION OF
EXPORTS. THIS CREATED SHORTAGE IN FOREIGN
CURRENCY RESERVES.
C. THIRD PHASE (1957 –58 TO 1965 –66): - PERIOD OF
RESTRICTIVE IMPORT POLICY AND IMPORT CONTROLS
SCREENED
THE
LIST
OF
IMPORTED
GOODS.
SIMULTANEOUSLY VIGOROUS EXPORT DRIVE WAS
LAUNCHED.
D. FOURTH PHASE (1966 – 67 TO 1974 –75): - DURING THIS
PERIOD, TRADE POLICY ATTEMPTED TO EXPAND EXPORTS
AND
LIBERALISED
IMPORTS.
GOI
UNDERTOOK
DEVALUATION OF RUPEE IN 1966 AS A MAJOR STEP TO
CHECK IMPORTS AND BOOST EXPORTS.
E. LAST PHASE (1975 –76 TO 1989 –90): - PHASE OF IMPORT
LIBERALISATION ALONG WITH EXPORT PROMOTION. NEW
EXIM POLICY LAUNCHED IN 1985 INCREASED EXPORTS BY
17 % FROM 1985 –86 TO 1989 –90 BUT IT FELL BY 9% IN 1990 –
91.
2. VALUE OF EXPORTS & IMPORTS (IN MILLION DOLLARS)
YEAR
1950-51
1960-61
1970-71
1979-80
1980-81
1985-86
1990-91
1991-92
3.
(I)
EXPORTS
1269
1346
2031
7947
8486
8904
18143
17865
IMPORTS
1273
2353
2162
11321
15869
16067
24075
19411
RESTRICTION ON TRADE
CONTROL OVER IMPORTS
TRADE BALANCE
-4
-1007
-131
-3374
-7383
-7162
-5932
-1546
FOREIGN EXCHANGE DIFFICULTIES LED TO IMPOSITION
OF RESTRICTION SUCH AS –
I.
BANNED ITEMS
II.
CANALISED ITEMS
III.
RESTRICTED ITEMS
IV.
OGL
A)
ITEMS
BANNED
ITEMS:
-
NO
IMPORTS WERE ALLOWED.
B)
CANALISED
ITEMS:
IMPORTS WERE ALLOWED THROUGH GOVERNMENT
AGENCIES LIKE STATE TRADING CORPORATION (STC) AND
MINERALS & METAL TRADING CORPORATION (MMTC).
C)
RESTRICTED
ITEMS:
SEVERE RESTRICTION WERE IMPOSED ON NON ESSENTIAL
ITEMS, SO THAT FOREIGN EXCHANGE COULD BE SAVED
FOR CAPITAL GOODS & OTHER ESSENTIAL IMPORTS
(II) CONTROL OVER EXPORTS
EXPORT CONTROL – STARTED DURING SWW
EXPORT DUTIES – AFFECTED SEVERAL EXPORTS.
WERE FORCED WITH EXPORT DUTIES.
EXPORT DUTIES –A NUMBER OF TRADITIONAL ITEMS
OF EXPORTS WERE FACED WITH EXPORT DUTIES.
MULTIPLE ORGANISATIONAL STRUCTURE –5
COMMODITY BOARDS & 19 EXPORT PROMOTION
COUNCILS ARE FUNCTIONING.
4) TRENDS IN PRE-REFORM PERIOD
I) IMPORTS
A) LARGE
SOURCES
OF
IMPORTS:
SINCE
INDEPENDENCE THE NUMBER OF COUNTRIES FROM
WHOM WE IMPORT HAS GONE UP.
B) LARGE IMPORTS FROM A FEW COUNTRIES: - A
MAJOR PART OF IMPORTS (52.4 % IN 1995 –96) COME
FROM DEVELOPED MARKET COUNTRIES BELONG TO
OECD (ORGANISATION FOR ECON. CORP. & DEV.)
C) VARIOUS SOURCES IMPORTED GOODS
(i) ARMS
RUSSIA
SWEDEN
UNITED KINGDOM
(ii) FOOD ARTICLES
U.S.A.
(iii)PETROLEUM
(iii)PETROLEUM
MIDDLE EAST
(iv)CIVILIAN AIRCRAFT
U.S.A.
II)
EXPORTS
A) LARGE OUTLETS FOR EXORTS
FRANCE
India exported to a number of destinations
like USA, Japan, EU, OPEC, etc.
B) LARGE EXPORTS TO A FEW COUNTRIES
As much as 55.7 % of exports go to OECD
countries (1995 –96). OPEC takes 9.7 % of
exports.
C) VARIOUS OUTLETS FOR VARIOUS GOODS
TEA, LEATHER, OIL CAKES -Eastern Europe
GARMENTS, PEARLS, PRECIOUS STONE,
ENGINEERING GOODS, COTTON, JUTE,
TEXTILES, ETC
-DEVELOPING COUNTRIES.
5.
NEW TRADE POLICY SINCE 1991
1)
RUPEE CONVERTIBILITY
LIBERALISED EXCHANGE RATE MECHANISM SYSTEM
(LERM) INTRODUCED IN 1992 –93, WHICH STARTED
PARTIAL CONVERTIBILITY, WAS OF THE RUPEE.
INDIA ACHIEVED FULL CONVERTIBILITY ON CURRENT
ACCOUNT IN AUGUST 1994 WHEN RBI FURTHER
LIBERALISED INVISIBLE PAYMENTS AND ACCEPTED
OBLIGATIONS UNDER ART. VII OF IMF.
2)
RUPEE DEPRECIATION
DEVALUATION OF 22% AGAINST
CURRENCIES IN JULY 1991.
3)
BASKET
SIMPLIFICATION OF IMPORT PROCEDURE
OF
FIVE
EXIM POLICY (1992 –97) HAS MADE ATTEMPT AT
SIMPLIFICATION OF IMPORT PROCEDURE. NOW ONLY
TWO TYPES OF IMPORT LICENCES ARE REGD AGAINST
SEVERAL LICENCES UNDER THE EARLIER REGION.
4)
FREER IMPORTS PROCEDURE
EXIM (1992 –97) REDUCED THE LIST OF “BANNED ITEMS”
TO JUST THREE.
IN 1996, THE GOVERNMENT REMOVED 40 ITEMS FROM
THE NEGATIVE LIST AND MADE IMPORTABLE.
SOME MORE ITEMS WERE TAKEN OFF THE RESTRICTED
LIST AND PLACED ON THE SIL LIST.
5)
DECANALISATION
IN AUGUST 1991, GOI DECIMALISED 16 EXPORT ITEMS
AND 20 IMPORT ITEMS.
EXIM POLICY (1992 –97) FURTHER DECANALISED A
NUMBER OF IMPORT ITEMS.
6)
MORE FACILITIES TO EOUs AND EPZs
EXIM (1992 –97) CONFERS HIGHER BENEFITS TO
100 % EXPORT ORIENTED UNITS (EOU). THE EOU &
EPZ SCHEMES HAVE NEW EXTENDED TO NEWER
ACTIVITIES.
7)
TRADING HOUSES
THE 1991 POLICY ALLOWED EXPORT HOUSES
AND TRADING HOUSES TO IMPORT A WIDE RANGE
OF ITEMS. THE GOVERNMENT ALSO PERMITTED THE
SETTING UP OF TRADING HOUSES WITH 51 %
FOREIGN
EQUITY
FOR
THE
PURPOSES
OF
PROMOTING EXPORTS.
8)
EXPORT PROMOTION CAPITAL GOODS SCHEME
THE EPCG SCHEME WAS REVAMPED
HAVING
ONLY
ONE
WINDOW
WITH
CONCESSIONAL DUTY OF 15 % & 25 %.
BY
A
THE 1994 –95 POLICY FURTHER SIMPLIFIED
THE EPCG SCHEME AND THIRD PARTY EXPORT
OBLIGATIONS.
9)
ENLARGEMENT OF DUTY EXEMPTION SCHEME
THE EXPORTERS HAVE BEEN GIVEN A CHOICE
TO OPT FOR ADVANCE IMPORT LICENCES UNDER
THE DUTY EXEMPTION SCHEME.
10)
DEEMED EXPORTS
EXIM (1992 –97) GAVE A NUMBER OF
BENEFITS LIKE DUTY EXEMPTION SCHEMES, DUTY
DRAWBACK SCHEMES, EXEMPTION FROM TERMINAL
EXCISE
11)
RATIONALISATION OFF TARIFF STRUCTURE
Trade Tariff
120%
100%
80%
60%
110%
85%
40%
20%
0%
Trade Tariff
65%
50%
40%
Pre 1993 1994 1995 1997
1993
6.
EXIM POLICY (1999 –2000)
7.
1.
894 ITEMS ADDED
TO FREE LIST OF IMPORTS AND AN ADDITIONAL 414
ITEMS PUT ON SPECIAL IMPORT LICENCE (SIL).
2.
ALL EPZ (EXPORT
PROMOTION ZONES) CONVERTED TO FTZ (FREE TRADE
ZONES).
3.
UNDER EPCG SCHEME, THE
THRESHOLD LIMIT FOR 2000 DUTY CAPITAL GOODS
REDUCED FROM RS 3 CRORES TO 1 CRORE FOR
CHEMICALS, PLASTICS AND TEXTILES.
4.
NO
ADDITIONAL
FORMS DUTY ON IMPORT OF CAPITAL GOODS FOR MARINE
AND ELECTRONICS SECTOR.
5.
THE THRESHOLD LIMIT FOR
RECOGNITION OF SERVICE EXPORT HOUSE HAS BEEN
FIXED AT 1/3 OF LEVEL PRESCRIBED FOR MERCHANDISE
GOODS.
6.
SSI EXPORTERS TO
GET TRIPLE WEIGHT AGE FOR RECOGNITION IN EXPORT
HOUSE, TRADING HOUSE, STAR TRADING HOUSE ETC.
7.
IMPORT
OF
CONSUMABLES REQUIRED FOR GAINS & JEWELLERY HAS
BEEN ALLOWED TO THE PREVIOUS YEAR.
EXIM POLICY (2000 –01)
1. SEZ
•
•
•
SEZ UNIT WOULD BE ABLE TO IMPORT
CAPITAL GOODS & RAW MATERIALS DUTY
FREE.
SEZ UNITS TO OBTAIN PRODUCTS FROM
DOMESTIC TARIFF AREA (DAT) WITHOUT
PAYING TERMINAL EXCISE DUTY.
SEZ UNIT TO BE 100% EXPORT –ORIENTED.
•
SEZ UNIT WILL BE DEEMED FOREIGN
TERRITORY FOR TRADE OPERATION
&
TARIFF.
2. ALIGNING EXIM PROCEDURES WITH WTO NORMS:
EXIM 2000 HAS REMOVED RS ON 714 ITEMS OUT
OF 1429 ITEMS BY MOVING THEM FROM SPECIAL
IMPORT LIST (SIL) TO OPEN GENERAL LICENCE
(OGL).
8
EXIM POLICY (2001 – 02)
I.
QRS TOTALLY REMOVED
IMPORT RESTRICTIONS OF REMAINING 715 ITEMS
HAVE BEEN REMOVED.
II.
IMPORT OF SECOND HAND GOODS
IMPORTS OF USED VEHICLES, MEAT & POULTRY
PRODUCTS, & TEXTILE ARTICLES HAVE BEEN
ALLOWED.
III.
FARM PRODUCTS
IMPORT OF FARM PRODUCTS SUCH AS WHEAT, RICE,
MAIZE, PETROL, HSD, AND ATF PERMITTED
THROUGH STATE TRADING AGENCIES.
IV.
BENEFIT TO AGRICULTURAL PRODUCTS
EPCG AND DUTY EXPANSION SCHEME (DES) HAVE
BEEN EXTENDED TO AGRICULTURAL EXPORTS.
V.
AGRI ECONOMIC ZONES (AEZ)
AEZ TO BE FORMATTED FOR PROMOTION OF
AGRICULTURAL EXPORTS.
VI.
SCOPE OF TARIFF & ANTI DUMPING
IT PROVIDES FOR CURBS LIKE ADJUSTMENT OF
TARIFF, IMPOSITION OF ANTI-DUMPING DUTIES IN
CASE FOREIGN PLAYERS INDULGE IN UNFAIR TRADE.
ANSWERS TO REINFORCEMENT QUIZ –I
43.
A
44.
C
45.
C
46.
D
47.
C
48.
D
49.
C
50.
B
51.
C
52.
B
53.
C
54.
B
55.
A
56.
C
57.
C
58.
C
59.
C
60.
C
61.
C
62.
C
63.
C
64.
B
65.
B
66.
D
67.
C
68.
B
69.
B
70.
D
71.
B
72.
A
73.
B
74.
D
75.
B
76.
C
77.
D
78.
B
79.
C
80.
B
81.
D
82.
D
83.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
MONEY LENDING
RESERVOIR.
INTERNAL
CASH
OVERDRAFT
DISCOUNTING
AGENCY
LOW
CASH RESERVE RATIO
CENTRAL BANK
84.
(a) TRUE
(b) TRUE.
(c) TRUE
(d) FALSE
(e) FALSE
(f) TRUE
(g) TRUE
(h) FALSE
(i) FALSE
(j) TRUE
43.
k. INTERNATIONAL MONETARY FUND
l. SUBSIDIARY FUNCTIONS
m. BANK RATE
n. CENTRAL BANK
o. CLEARING HOUSE
p. INTEREST RATE
q. TIME DEPOSIT
r. DEPOSIT
s. LIQUID
t. EXCHANGE
45.
k) LIABILITY
l) MORTGAGE
m) ASSET
n) CASH RESERVE RATIO
o) PASS BOOK
p) ENDORSE
q) REFINANCE
r) DEPOSIT
s) SECURITY
t) LIQUIDITY
45.
A) CORRECT.
B) CORRECT
46.
k) i
l) ii
m) i
n) ii
o) iii
p) ii
q) i
r) iii
s) iii
t) i
REINFORCEMENT QUIZ –I
85.
Bretton Woods Conference in 1944 resulted in the formation of
a) IMF b) WTO c)WHO d) UNESCO
86.
‘Budget Deficit’ means
a) less spending than receipt b) spending equal to receipt
c) more spending than receipt d) spending without any receipt
87.
‘Devaluation’ is a reduction in
a) gold stock
b) internal value of currency
c) foreign value of currency d) none of these
88.
Foreign Exchange is used for making international payments
through
a) rupee
b) dollar
c) pound
c)foreign currency
89.
Deficit Financing started in India in
a) Second Five Year Plan
b) Third Five Year Plan
c) First Five Year Plan
d) Fourth Five Year Plan
90.
Rupee was first devalued in
a)
1956 b) 1960
91.
c) 1962
Annual Plan 1966-69 was caused by
a)
1965 War b) severe drought
d) 1966
c) both a & b
92.
“GARIBI HATAO” slogan was introduced in
a)
Fourth Plan b) Fifth Plan c) Sixth Plan d) Fourth
Plan
93.
“Jawahar Rozgar Yojana” was launched during
a)
Fifth Plan b) Sixth Plan c) Seventh Plan d) Eighth
Plan
94.
“LIBERALIZATION” of Indian economy was started by
a) Rajiv Gandhi b) Indira Gandhi c) Vishwanath Pratap Singh d)
Charan Singh
95.
Fiscal Deficit rose to 10% in
a) 1988
b) 1989
c) 1990
d) 1991
96.
Fifth Pay Revision Committee recommended a reduction of 30%
over
a) 5 years
b) 10 years
c) 15 years
d) 20 years
97.
Fifth Pay Commission recommended revised pay-scale from
a)1st Jan.1996 b) 1st April 1996 c) 1st March 1996 d) 1st
February,1996
98.
In 1996-97, the commercial losses of SEBs stood at
a) Rs.105 billion b) Rs. 100 billion c) Rs.108 billion d) Rs.109
billion
99.
TAX REFORMS COMMITTEE was chaired by
a) Manmohan Singh b) Bimal Jalan c) Raja J Chelliah d)
M.S.Ahluwalia
100.
Inflation between 5 to 10% is called
a) modest inflation b) stagflation c) creeping inflation d)
running inflation
101.
Inflation reached 13.73% in
a) 1989
b) 1990
c) 1991
102.
103.
104.
Capital Account is concerned with
a) services
b) merchandise
d) 1992
c) economic transaction
Reserve Bank of India Act was passed in
a) 1932
b) 1933
c) 1934
d) 1935
FERA was passed in
a) 1971
b) 1972
d) 1975
c) 1973
105.
The total allocation for public sector in Eighth Five Year Plan is
a) Rs. 432,100 crore b) Rs. 434,105 crores c) Rs. 434,100 crores
d) Rs. 433,100 crores
106.
The Price Rise has been a continuous phenomenon since
a) First Plan b) Second Plan
c) Third Plan c) Fourth Plan
107.
The period 1956 to 1973 witnessed
a) rapid price rise
b) gradual price rise c) no price rise
Inflation is caused by
a) increase in money supply b) increase in production
c)
decrease in production
d) both a & c
108.
109.
Maximum aid to India is provided by
a) UK b) USSR
c) USA
d) Japan
110.
Indian Economy is the most appropriately described as
a) Socialist
b) Mixed
c) Capitalist d) None of these
Socialist Pattern comes through
a) Free Economy
b) Mixed economy c) Public Sector d)
None of these
111.
112.
Which of the following is not a feature of developing economy
A0 high rate of population b) high rate of unemployment c)
mass poverty d) high capital formation
113.
Indian Economy is now described as
a) developed economy
b) developing economy
backward economy d) none of these
c)
114.
Which of the following does not contribute to the development of
Indian economy
a) population growth b) rising industrial output
c) modern
technology
d) all of these
115.
Industries (Development & Regulation) Act was implemented in
a) 1950
b) 1951
c) 1952
d) 1953
116.
MRTP was passed in
a) 1966
b) 1967
c) 1968
d) 1969
The Plan Holiday refers to
a) 1965-68
b) 1966-69
c) 1967-70
d) 1978-80
117.
118.
What is the correct duration of the First Plan
a) 1947-52
b) 1950-55
c) 1951-56
d) none of these
119.
The major emphasis of the Third Plan was on
a) adult education
b) green revolution c) food for work d)
making India self-reliant
120.
The correct duration of the Third Plan is
a) 1960-65
b) 1961-66
c) 1958-62
d) 1959-62
121.
The concept of rolling Plan was accepted in
a) 1975
b) 1976
c) 1977
d) 1978
122.
The Five Year Plans were first abandoned in
a) 1965
b) 1966
c) 1967
d) 1970
123.
The First Plan set the goal of doubling 1950-51 national income by
a) 1955-56
b) 1960-61
c) 1965-66
c) 1971-72
124.
Unemployment in India is due to
a) poor manpower planning b) population explosion
inappropriate educational system
d) none of these
125.
c)
Fill in the blanks in the following sentences:
u.
If an institution does not receive deposits but only lends
money, it will be called a _______________ institution.
v.
A bank is called a _____________ of credit.
w.
A commercial bank finances _____________ trade of a
country.
______________ credit is an arrangement by which the
banks agree to lend money up to a specified limit.
Under an ________________ arrangement, a depositor
can draw by cheque, more than the deposited amount to his
credit.
Banks also give financial help to customers by
________________ their bills of exchange.
_______________ functions are those services which
are rendered by the banks as the agents of their customers.
If liquidity preference is high, the capacity of the banks
to create credit is _____________.
Before lending money a bank has to keep a fixed
percentage of cash reserves so that it can meet its liability
of making daily payments. This reserve is called
_________________.
The apex bank of a country is known as its
________________.
x.
y.
z.
aa.
bb.
cc.
dd.
126.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Write True or False against each statement.
It is the exclusive privilege of a central bank to issue notes.
Bank credit is created on the basis of initial deposits.
Money is issued by the Central Bank against national
product, reserves of gold, reserves of foreign exchange and
foreign securities.
Only the central bank of a country is responsible for credit
control.
Cheques are commonly used in developing countries for
daily purchases.
Creation of credit depends on the assumption that the
banking system in the country is well developed and
majority of the people do their business through banks.
Deposit creation = 100/CRR X Original Deposits
A Cheque book is issued to a borrower so that he can cash
his fixed deposits.
A loan is usually granted by a bank against the personal
security, furnished by the borrower.
Credit creation indirectly extends liquidity to holders of
illiquid securities
43.
Fill in the blanks in the following sentences by choosing
words from the list below.
IMF, Central Bank, Clearing house, subsidiary functions,
bank rate, time, Interest rate, liquid, deposit, exchange
xi. The Central Bank of a country is a member of the
_________________.
xii. The Central bank of a country performs _________________
depending on the peculiar social-economic conditions prevailing in
a country.
xiii. The rate of which first class bills are discounted by the central
bank is called the _________________
xiv. The exchange rate is generally fixed by the
______________________.
xv. A central bank provides __________________ facility to the
commercial banks.
xvi. Bank rate and _______________ are directly related to each other.
xvii. Fixed deposit is also called _________________ deposit.
xviii. “Every loan creates a __________________.
xix. Bills of exchange are very _________________ by nature.
xx. Foreign trade of a country is mostly financed by the
________________ banks
46.
The following are some banking terms which are jumbled up.
Correct the names in each case.
u) YTLLAILBL
v) AGROMTGE
w) TSSAE
x) HASC RSEREEV OITRA
y) SSPA OOBK
z) DNESROE
aa) ECNANIFER
bb) SOPEDIT
cc) YTRCESUI
dd) YTDIUQUILI
45.
Are the following balance sheets correct ?.
A) The total amount of money in circulation is Rs. 10,000 and the
banker knows that it has to keep 10% of its deposits as reserves to
meet demand from customers.
Liabilities (Rs.)
Assets (Rs.)
Deposits (original) 10,000
Cash in hand 10,000
Deposits (Credit balance of borrowers)
Loan to clients 9000
9000
19,000
19,000
B) The above balance sheet still shows loan able funds. Further
expansion of the balance sheet will be as follows:
Liabilities (Rs.)
Deposits (Original) 10,000
Deposits (Deposited by the payees of the
first borrowers Cheques) 9,000 deposits
(Credit balance of borrowers) 8,100
27,100
46.
Assets (Rs.)
Cash in hand 10,000
Loan to clients
9000 + 8100 = 17100
27,100
Put a tick mark against the correct option in each case.
u) The monopoly of note issues rest with the
i. Central Bank
ii. Commercial Banks
iii. Exchange Banks
v) Credit rationing as a method of credit control is a
(a)
Qualitative Measure
(b)
Quantitative Measure
(c)
Both
w) Every country has
IV. One Central Banks
V. Two Central Banks
VI. No fixed number
x) When the Central bank purchases securities from commercial
banks, credit
i.
Contracts
ii.
Expands
iii.
Is not affected
y) Every Indian commercial bank knows by experience that it has to
keep a certain cash reserve against liabilities. A Commercial bank
has to keep
iv. 20%
v. More than 5%
vi. 10% approximately
z) The banking system of keeping cash reserves against liabilities
iv. Reduces
v. Increases
vi. Neither increases nor decreases the mobility of capital
aa) A bank overdraft is allowed when the customer has
iv. Current account in the bank
v. Fixed account in the bank
vi. Need not have any account
bb) The higher the liquidity preference the
iv. Lower is capital formation
v. Higher is capital formation
vi. No impact
cc) The Indian money market is based on
iv. The European model
v. Japanese model
vi. None of the above
dd) The Central Bank acts as to
iv. Accepting House
v. Clearing House
vi. Discount House for commercial banks
ENDING THE PRICE CONTROL REGIME
1)
PRICE CONTROL
GOVERNMENT
PRIVATE
GOVT. REPRESEBTED BY MIN.
BOARD OF DIRECTORS
MANAGERS OF UNDERTAKING
.
ACTUAL PRICE
BOARD OUTLINE
MANAGING DIRECTOR
ADMINISTERED PRICES
SUCH PRICES ARE THE OUTCOME OF THE
REGULATION AND CONTROL OF THE ADMINISTRATIVE
MACHINERY OF THE GOVERNMENT.
NORMALLY FIXATION OF THE PRICE IS LEFT TO
THE INTERPLAY OF THE FORCES OF DEMAND AND
SUPPLY IN THE MARKET.
WHEN DUE TO SCARCITIES OR THE EXCESSIVE
DEMAND, THE PRICE THAT RULES BECOMES HIGH
WHICH THE CONSUMERS FIND IT HARD TO PAY, THE
GOVERNMENT STEPS IN AS A SPECIAL CASE TO FIX UP
THE PRICES OF CERTAIN ESSENTIAL OR SCARCE
PRODUCTS.
OBJECTIVES OF ADMINISTERED PRICES
THERE ARE TWO BASIC OBJECTIVES OF ADMINISTERED
PRICES:
1. TO FIX AND MAINTAIN THE PRICES OF
ESSENTIAL RAW MATERIALS SO AS TO AVOID
COST AND PRICE ESCALATION; THIS HAS
SPECIAL SIGNIFICANCE DURING A PERIOD OF
SHORTAGES AND RISING PRICES AND
2. TO
ENSURE
ECONOMIC
PRICES
TO
UNECONOMIC UNITS SO THAT THE LATTER
TOO CAN EARN PROFIT.
2)
FEATURES OF PRICING IN PUBLIC ENTERPRISES
A) PSU PRICE POLICY IS NOT GUIDED BY THE MOTIVE OF
MAXIMUM PROFIT AS IN CASE OF PVT.
B) PSU PRICING DEPENDS ON PROFIT TARGET FIXED BY THE
GOVERNMENT.
C) PSU PRICING IS ALSO GUIDED BY THE MONOPOLISTIC
NATURE OF ENTERPRISES E.G. RAILWAYS, COAL, STEEL ,
IA (TILL RECENTLY )
D) PSU PRICE IS ALSO DETERMINED BY VARIOUS
CONCESSIONS AVAILABLE TO THE GOVERNMENT OR BULK
CONTRACT OF PURCHASE (AS IN OIL ) .
E) PSU PRICE POLICY IS GUIDED BY SOCIAL COSTS SUCH AS
LABOUR FORCE, HOUSING, MEDICAL FACILITY, ETC
F) PSU PRICE POLICY DEPENDS ON EXTERNAL / INTERNAL
PRESSURES (E.G. WAR, KUWAIT)
3)
PRICE POLICIES OF PUBLIC ENTERPRISES IN INDIA
A) PROFIT AS THE BASIS OF PRICE POLICY : - PSUS FOLLOW A
POLICY OF PROFITABILITY.
B) NO PROFIT BASIS : - SOME PSUS ARE GUIDED BY “NO
PROFIT – NO LOSS ” PRICE POLICY. THE HINDUSTAN
ANTIBIOTICS AND THE HINDUSTAN INSECTICIDES HAVE
BEEN FOLLOWING THIS RULE.
C) IMPORT PARITY PRICE: - THOSE PUBLIC ENTERPRISES
WHOSE PRODUCTS ARE IN DIRECT COMPETITION WITH
IMPORTED GOODS HAVE ADHERED TO A POLICY OF
IMPORT PARITY PRICES.
E.G. HINDUSTAN SHIPYARD
LTD HAS ACCEPTED THE PRINCIPLE OF SELLING THE
SHIPS IN VISHAKAPATNAM SHIPYARD AT A PRIDE
APPROXIMATELY EQUAL TO THE COST OF BUILDING A
SIMILAR SHIP IN U.K.
4)
GUIDELINES ON PRICING POLICY
GOI HAS ISSUED THREE GUIDELINES ON PRICING POLICIES
FOR PSUS –
5)
A)
PUBLIC ENTERPRISES SHOULD BE ECONOMICALLY
VIABLE UNITS AND EFFORT SHOULD BE MADE TO
ESTABLISH THEIR PROFITABILITY AT THE EARLIEST.
B)
PRICES OF PSUS WILL BE GOVERNED BY PRICES
PREVAILING IN THE MARKET.
C)
PRICE OF MONOPOLISTIC / SEMI MONOPOLISTIC PSU
SHOULD BE ON THE BASIS OF LANDED COST OF
COMPARABLE IM PORTED GOODS.
RESULTS OF OLD PRICING POLICY
A) MINIMUM PROFIT MAKING PSUS. – PETROLEUM
INDUSTRIES, TELECOMMUNICATIONS, POWER, FINANCIAL
SERVICES.
B) LOSS INCURRING ENTERPRISES – TEXTILES, ENGINEERING,
FERTILISERS, CONSULTANCY SERVICE.
C) ACHIEVEMENT OF PROFITABILITY – ADMINISTERED PRICE
MECHANISM RATHER THAN BY EFFICIENCY OR
REDUCTION OF COST.
6)
SHORTCOMINGS OF PSUs
Mounting Losses –
1. SEBS
2. STATE ROAD TRANSPORT UNDERTAKINGS.
3. FERTILISERS
4. CONSULTANCY (MECON / CMPDI)
B)
OVER CAPITALISATION – INPUT OUTPUT RATIO
UNFAVOURABLE
1. HAL
2. HEC
3. FERTILISERS
C
)
Excess Manpower
4. MORE THAN REQUIRED
C)
DELAYED COMPLETION / INCREASED COST OF
CONSTRUCTION
1. TROMBAY FERTILISER TOOK 6-7 YEARS
2. REVISED COST OF 40 CRORES AGAINST
ORIGINAL OF 30 CRORES.
Political Factors 3. DECISION OF LOCATION OF PSU IS GUIDED BY
POLITICAL COMPULSION
4. MIG FACTORY – NASIK & KORAPUT LOCATED
AT 900 KMS. A PART
D)
LOW CAPACITY UTILISATION 75% AND ABOVE –
PSUS
58%
50 – 75%
- 13%
BELOW 50% - 29%
7.
DISADVANTAGES OF PRICE CONTROL
1. MOUNTING LOSSES
2. HARM TO CONSUMERS
3. FAILURE
TO
COMPETE
INTERNATIONAL MARKETS
IN
II. PHASED DEREGULATION OF OIL SECTOR
PHASE I. (1996 – 98) - DEREGINTATION OF NATURE
GAS PRICING PARTIAL DEREGULATION OF
MARKETING SECTOR WITH FREEDOM TO APPOINT
DEALERS AND DISTRIBUTORS
PHASE II. (1998 –2000) – PRICING OF INDIGENOUS
CRUDE ON BASIC OF FOB PRICE OF IMPORTED
CRUDE REDUCTION OF SUBSIDY ON KEROSENE,
LPG.
PHASE III. (2000 –02) - COMPLETE DEREGULATION
INCLUDING ATF, HSD, MS AND THE SUBSIDY ON
PDS
KEROSENE
&
DOMESTIC
LPG
BE
TRANSFERRED TO GENERAL BUDGET.
III. DECONTROL OF ELECTRCITY PRICES
A. CENTRAL ELECTRICITY REGULATORY COMMISSION ACT
TO DEPOLITICISE POWER TARIFF.
B. THE ACT ALSO PROVIDES FOR SEPARATE
ELECTRICITY REGULATORY COMMISSION.
STATE
C. ORISSA HAS TAKEN LEAD BY SETTING UP SUCH A
REGULATORY COMMISSION FOR FIXED TARIFFS
IV. DECONTROL OF FERTILISERS
THE
GOVERNMENT
FIXED
A
LOW
CONSUMER PRICE FOR FARMERS AND THE
DIFFERENCE BETWEEN PRODUCER &
CONSUMER PRICES IN NET BY BUDGETARY
SUBSIDY WHICH AMOUNT TO 0.7 PERCENT
OF GDP.
V. DECONTROL OF IRON AND STEEL
PRICE AND DISTRIBUTION CONTROLS OF
IRON AND STEEL WERE REMOVED IN
JANUARY 1992
12.
DECONTROL OF SUGAR
IN CASE OF SUGAR UNDER THE PUBLIC DISTRIBUTION
SYSTEM, SUGAR WILL CONTINUE TO BE SUPPLIED TO THE
RATION CARDHOLDERS IN THE SPECIAL CATEGORY
STATES, HILLY STATES, ISLAND TERRITORIES AND TO BPL
(BELOW POVERTY LINE)
13
DECONTROL OF DRUGS
THE GOVERNMENT INTENDS TO LESSEN THE
RIGOURS OF THE DRUG PRICE CONTROL MECHANISM,
MORE
ESPECIALLY
WHERE
IT
HAS
BECOME
COUNTERPRODUCTIVE. BUT TO PROTECT THE INTERESTS
OF WEAKER SECTIONS, GOVERNMENT WILL RETAIN THE
POWER TO INTERVENE COMPREHENSIVELY IN CASES
WHERE PRICES BEHAVE ABNORMALLY.
FOREIGN DIRECT INVESTMENT
1.
DEFINITION: ACCORDING TO DEFINITION GIVEN BY THE IMF, FDI
CONSISTS OF BOTH NEW EQUITY CAPITAL AND
REINVESTMENT EARNINGS. IT ALSO INCLUDES SHORT
TERM AND LONG TERM BORROWINGS THAT MAY HAVE
BEEN PART OF THE ORIGINAL INVESTMENT PACKAGE OR
SUBSEQUENTLY UNDER TAKEN BY THE AFFILIATE.
2.
3.
FEATURES: (A)
EQUITY /DIRECT INVESTMENT
(B)
BORROWING AS PART OF ORIGINAL
INVESTMENT.
DIFFERENCE BETWEEN FDI & FOREIGN CAPITAL: -
FOREIGN CAPITAL
FOREIGN DIRECT INVESTMENT
INVESTMENT
a. Foreign Aid
a. Borrowing as part of
original Investment
b. Commercial
Borrowing
c. Equity / Direct B .Equity / Direct
Investment
Investment
4.
CATAGORIES OF FDI
A. BRANCHES OF FOREIGN COMPANIES OPERATING IN
INDIA
B. FOREIGN CONTROLLED RUPEE COMPANIES
C. INDIAN COMPANIES IN WHICH 25 % OR MORE OF
THE EQUITY CAPITAL IS HELD BY A SINGLE
INVESTOR ABROAD.
5.
REGULTION OF FDI
A. INDUSTRIAL DEVELOPMENT
(IRDA, 1951)
B. THE
MONOPOLIES
PRACTICES ACT, 1969
&
&
REGULATION
RESTRICTIVE
ACT
TRADE
C. THE FOREIGN EXCHANGE REGULATION ACT, 1973.
A) IRDA
- STIPULATED ON ELABORATE LICENSING SYSTEM FOR THE
ESTABLISHMENT OF NEW INDUSTRIAL UNIT OR
EXPANSION OF EXISTING UNITS.
B) MRTP
- INTRODUCED
TO
SAFEGUARD
CONCENTRATION
OF
ECONOMIC
RESTRICTIVE TRADE PRACTICES.
C) FERA
- DESIGNED TO CONTROL FOREIGN INVESTMENT AND
RESTRICT THE OPERATION OF THE FOREIGN COMPANIES
LIKE LIMITING THE PARTICIPATION OF THE FOREIGN
COMPANIES UP TO 40 PERCENT OF PAID UP CAPITAL.
AGAINST
POWER
THE
AND
Exceptions
were
made
in
export activities, involving sophisticated technology
and skill were allowed higher equity participation
upto 74 percent.
6.
BENEFIT OF FDI
a. TOTAL RISK FACTOR WITH DONOR FOR DEVELOPING
NEW PRODUCTION LINE WITHOUT REPAYMENT
PROBLEM.
b. LATEST TECHNICAL & MANAGERIAL KNOW- HOW.
c. HIGH QUILITY GOOD & HIGH STANDERD BUSINESS
PRACTICES.
d. MARKETING FACILITIES
e. BETTER TRAINING FACILITIES.
7.
SHORT COMINGS OF FDI
f. LIMITED SPHERE
g. INCREASE IN DEPENDENCE
h. RESTRICTIVE CLAUSES LIKE THAT OF EXPORTS
i. OBSOLETE MACHINERY & UNSUITABLE
TECHNOLOGY.
j. EXCESSIVE FOREIGN PRESSURE
8.
CHANGE IN GOVERNMENT POLICY SINCE 1991
a.
b.
LIBERAL APPROACH: -
-
TRANSPARENCY IN APPROVAL MECHANISM
-
SPEEDY DISPOSAL OF FDI APPLICATIONS
-
SIMPLIFIED PROCEDURE OF APPROVAL
-
SHARE OF FOREIGN EQUITY CAPITAL RAISED
TO 100 %
-
PARTICIPATION IN CONSUMER GOODS TO
CAPITAL GOODS
-
MORE AREAS OPEN FOR INVESTMENT
THREE TIER SYSTEM OF APPROVAL
RBI -
ACCORDS APPROVALS FOR FOREIGN INVESTMENT
PROPOSALS INCREASE WHERE FOREIGN EQUITY
PARTICIPATION DOES NOT EXCEED 51% OF
FOREIGN EQUITY IN 35 SELECTED PRIORITY
AREAS.
SIA
(SECRETARIAT
FOR
INDUSTRIAL
APPROVALS) APPROACHES OTHER PROPOSAL
THAT INVOLVE 51 % OR MORE EQUITY
PARTICIPATION.
FIPB (FOREIGN INVESTMENT PROMOTION BOARD) –
INVITES
TO
NEGOTIATE
AND
FACILITATE
SUBSTANTIAL INVESTMENT BY INTERNATIONAL
COMPANIES THAT WOULD PROVIDE ACCESS TO
STATE OF THE ART TECHNOLOGY AND WORLD
MARKETS.
9.
FORMS OF INVESTMENT
I.
SET –UP OF PLANT
II.
INVESTMENT IN CAPITAL MARKET
III.
PURCHASE OF NEW SHARES OR EXISTING
SHARES
IV.
V.
VI.
INVESTMENT IN MUTUAL FUNDS SUCH AS UTI
DEPOSIT IN BANKS
LOAN FORM
10.
11
SOURCES OF INVESTMENT
•
OVERSEAS CORPORATE BODIES LIKE MNCS
•
FOREIGN INSTITUTIONAL INVESTORS
•
NON RESIDENT INDIANS
BENEFICIAL RESULTS
SEVERAL PARTICIPATING COUNTRIES
- USA,
FRANCE, UK, GERMANY,
JAPAN, CANADA,
NEATHERLANDS, SWEDEN, SWITZERLAND, ETC
Increase of foreign companies
NUMBER OF FOREIGN COMPANIES
3000
2000
1000
No. of Cos.
1990
1991
1992
1993
1994
1995
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
0
469
666
1520
1476
1854
2373
Rise in foreign investment
YEAR
TOTAL
INVESTMENT
DIRECT
INVESTMENT
1992-93
1993-94
1994-95
1995-96
1996-97
$559 Million
4153
5138
4892
6133
315
586
1314
2144
2821
1997-98
1998-99
5285
2401
3557
2462
SectOral Break up of FD
SECTORAL BREAK UP OF F.D.I.
FUEL
TELECOM
TRANSPORT
SERVICES
METALLURGY
PSU REFORMS & DISINVESTMENT
1.
BIRTH OF PSU
THE INDUSTRIAL POLICY RESOLUTION 1956 GAVE A
STRATEGIC ROLE TO THE PSUS.
2.
GROWTH
GOVERNMENT ENTERPRISES
OF
CENTRAL
YEAR
NO
UNITS
5
1951
47
179
244
236
240
1961
1980
1990
1998
1999
OF INVESTMENT
CRORES
29
IN
1992
1996
1998
4560
19,230
13,431
950
18150
99,330
2,23,047
2,52,554
RISING INVESTMENT IN PSEs
120000
crore (Rs.)
100000
Investment in
Crores
No of Units
80000
60000
40000
20000
0
1951 1961 1980 1990 1998 1999
3.
SHORTCOMINGS A.
MOUNTING LOSSES –
B
OVER CAPITALISATION – INPUT OUTPUT RATIO NOT
GOOD LIKE IN HEC, HAL, FCI.
C.
BAD PRICE POLICY – CONTROLLED PRICES
D.
SURPLUS MANPOWER
E.
UNDER UTILISATION OF CAPACITY
F.
INEFFICIENT MANAGEMENT
4. REMEDIES
A. REVIVAL OF SICK PSUS BY REFERRING THEM TO BIFR
B. VRS OFFERED TO REDUCE THE LOAD OF EXCESS
WORKS
C. DISINVESTMENTS
5. DEFINITION OF DISINVESTMENT
IT IS A PROCESS OF TRANSFERRING PUBLIC
OWNERSHIP TO PRIVATE EITHER PARTIALLY OR THROUGH THE
SALE OF EQUITIES. IN OTHER WORD IT IMPLIES SHIFTING OF
CONTROL OR OWNERSHIP OF MEANS OF PRODUCTION FROM
THE STATE TO COMMON PEOPLE.
PROCESS OF DISINVESTMENT
A.
LISTING OF AILING PSUS
B.
VALUATION OF ASSETS
C.
FIXATION
RESERVE PRICE
OF
MINIMUM
D.
CHOOSING
APPROPRIATE
DISINVESTMENTS
E.
FINALISING
MODALITIES
OF
TRANSFER
DIFFERENCE BETWEEN PRIVATISATION & DISINVESTMENT
PRIVATISATION
I) OPENING OF CERTAIN SECTOR
FOR PRIVATE
SECTOR
PARTICIPATION.
II) ALL INDUSTRIES EXCEPT SIX –
ARMS/MINERAL OIL AND RAIL
ARE OPEN FOR PRIVATISATION.
6.
I.
DISINVESTMENT
I) SALE OF GOVERNMENT EQUITY
IN
THE
EXISTING
PUBLIC
ENTERPRISES
II) ALL INDUSTRIES ARE NOT OPEN
FOR
DISINVESTMENTS.
THE
GOVERNMENT ANNOUNCES A LIST
OF SUCH UNITS FROM TIME TO
TIME.
PRIMARY OBJECTIVES
TO REDUCE THE FINANCIAL BURDEN & TO FILL THE FISCAL DEFICIT OF THE
STATE.
II. TO REDUCE LARGE AMOUNT OF PUBLIC RESOURCES LOCKED UP IN NONSTRATEGIC PSES FOR REDEPLOYMENT IN AREAS THAT ARE MUCH HIGHER ON
PRIORITY.
III. TO REDUCE THE PUBLIC DEBIT THAT IS THREATENING TO ASSUME
UNMANAGEABLE PROPORTIONS
IV. TO RELEASE OTHER TANGIBLE AND INTANGIBLE RESOURCES SUCH AS LARGE
MANPOWER PSES AND THEIR TIME AND ENERGY FOR REDEPLOYMENT IN
AREAS THAT ARE MUCH HIGHER ON THE SOCIAL PRIORITY.
v. TO RESTRUCTURE THE PUBLIC ENTERPRISE
7. MAIN CERITERION FOR DISINVESTMENT
8.
I.
EXTENT OF RESTRUCTURING REQUIRED AND
THE POTENTIAL FOR IMPROVING THE SHARE
VALUE .
II.
THE PERMISSIBLE EXTENT OF DISINVESTMENTS
WITH REFERENCE TO THE CLASSIFICATION OF
INDUSTRY AS CORE AND NON- CORE .
III.
THE SIZE OF THE COMPANY & THE PHASING OF
DISINVESTMENTS.
IV.
EQUITY FUND MOBILISATION OF CONCERNED
UNIT
V.
CATEGORISATION OF INDUSTRY
MEDIUM, OR LOW POTENTIAL
AS
HIGH,
REPORT OF THE RANGARAJAN COMMITTEE
THIS
COMMITTEE
WAS
ORIGINALLY
CONSTITUTED UNDER V. KRISHNAMURTY IN 1992 BUT
SUBSEQUENTLY RECONSTITUTED UNDER DR. C.
RANGARAJAN TO STUDY DISINVESTMENTS. THE MAJOR
RECOMMENDATIONS WERE –
A. DISINVESTMENT UP TO 74% IN SUCH INDUSTRIES
WHERE SEPARATE IDENTITY HAD TO BE
MAINTAINED FOR STRATEGIC REASONS.
B. IN OTHER CASES DISINVESTMENTS UP TO 100
PERCENT RECOMMENDED.
C. HOLDING
51%
OR
MORE
EQUITY
WAS
RECOMMENDED FOR INDUSTRIES NAMELY -
I. COAL & LIGNITE
II. MINERAL OILS
III. ARMS/ AMMUNITION
IV. ATOMIC ENERGY
V. RADIO ACTIVE MINERALS
VI. RAIL TRANSPORT
9.
DISINVESTMENT COMMISSION
IT WAS FORMED UNDER THE CHAIRMANSHIP OF
G.V. RAMKRISHNA TO MONITOR THE PROGRESS OF
DISINVESTMENTS
AND
TO
TAKE
NECESSARY
MEASURES. THE COMMISSION TABLED 12 REPORTS
CONCERNING 58 PSUS.
DISINVESTMENTS COMMISSION WAS ABOLISHED ON 30TH
NOVEMBER,1999.
10.
DEPARTMENT OF DISINVESTMENT
NOW
DOD
HAS
RESPONSIBILITY
OF
COMMISSION
11.
ASSUMED
THE
DISINVESTMENT
PROGRESS OF DISINVESTMENT
YEAR
1991-92
NO OF PSEs IN WHICH TARGET
RECEIPT
EQUITY SOLD
FOR
THE
YEAR
(CRORES)
47
2500
ACTUAL
RECEIPTS
(CRORES)
3038
1992-93
35
2500
1913
3500
Nill
1993-94
1994-95
13
4000
4843
1995-96
05
7000
362
1996-97
01
5000
380
1997-98
01
4800
902
1998-99
05
5000
5371
1999-00
03
10,000
1584
2000-01
03
10,000
1868
12.
PSUs APPROVED FOR DISINVESTMENT
I. AIR INDIA
II.
BHARAT BRAKES & VALUES LTD
III.
BHARAT HEAVY PLATES & VESSELS LTD
IV.
BHARAT PUMPS & COMPRESSORS LTD
V.
ENGINEERING PROJECTS (INDIA) LTD
VI.
HINDUSTAN CABLE LTD
VII.
HINDUSTAN COPPER LTD
VIII.
HINDUSTAN INSECTICIDES
IX.
HINDUSTAN ORGANIC CHEMICALS
X.
HINDUSTAN SALES LTD
XI.
HINDUSTAN ZINC LTD
XII.
INDIAN AIRLINES
XIII.
INDIAN PETROCHEMICALS CORPORATION
XIV.
INDIA
CORPORATION
TOURISM
XV.
INSTRUMENTATION LTD
XVI.
JESSOP AND COMPANY LTD
XVII.
MADRAS FERTILISERS LTD
XVIII.
MARUTI UDHYOG LTD
XIX.
NATIONAL FERTILISERS LTD
XX.
SCOOTERS INDIA & OTHERS.
DEVELOPMENT
INFRASTRUCTURE DEVELOPMENT
2.
MEANING
INFRASTRUCTURE IS AN UMBRELLA TERM FOR SEVERAL
ACTIVITIES. SUCH ACTIVITIES INCLUDE PUBLIC WORKS LIKE
RAILWAYS, ROADS, MAJOR IRRIGATION WORKS, ETC AND ALSO
PUBLIC UTILITIES LIKE POWER TELECOMMUNICATION,
SANITATION, SEWERAGE, ETC.
ALL SUCH FACILITIES AND SERVICES CONSTITUTE
COLLECTIVELY THE INFRASTRUCTURE OF THE ECONOMY. THEY
FACILITATE WORKING OF AN ECONOMY.
3.
INFRASTRUCTURE FACILITIES
(A)
ENERGY
(B) TRANSPORT
(C) COMMUNICATION
– COAL, ELECTRICITY, OIL, AND NON –
CONVENTIONAL SOURCES.
-RAILWAYS, ROADS, SHIPPING & CIVIL
AVIATION
-POST & TELEGRAPHS, TELEPHONES,
TELECOMMUNICATION
.
(D) BANKING, FINANCE, INSURANCE.
(E) SCIENCE & TECHNOLOGY.
(F) SOCIAL OVERHEADS: - HEALTH AND HYGIENE AND
EDUCATION.
4.
5.
ROLE OF INFRASTRUCTURE
A)
FACILITATES FUNCTIONING OF ECONOMY.
B)
PROMOTES DEVELOPMENT
C)
FACILITATES INVESTMENT
d)
REDUCES POVERTY.
SERIOUS SHORTCOMINGS
(A)
SMALL SIZE -
FOR
EVERY
250
PEOPLE
ONE
TELEPHONE IN INDIA ; 1.3 TO 1
TELEPHONE IN USA, SWEDEN ; 2 TO
1
IN
AUSTRALIA,
FRANCE,
GERMANY, JAPAN.
6.
(B)
INAPPROPRIATE MIX
ROADS DEVELOPED
INLAND WATER WAY UNDEVELOPED.
(C)
URBAN BIAS POWER,
TRANSPORT,
BANK,
SANITATION , MORE DEVELOPED IN
URBAN AREA
(D)
INEFFICIENT USE
ROADS
/
BRIDGES
/WATERWAYS ARE UNDER –USED;
MORE EMPHASIS ON RAIL.
REMEDIES: -
(A)
INCREASED INVESTMENT
(B)
EXPANSION OF INFRASTRUCTURE FACIELITIES
(C)
BETTER MAINTENANCE.
(D)
7.
IMPROVED PERFORMANCE (TAILORED TO PEOPLE’S
DEMANDS)
CHANGES IN POWER: -
New power Policy in 1992: AMENDMENT OF INDIAN ELECTRICITY ACT, 1910 & THE
INDIAN ELECTRICITY (SUPPLY) ACT, 1948.
New Package of Incentives: I.
II.
HIGHER DEBT EQUITY RATIO AT 4:1 FOR
FINANCING NEW SCHEMES.
GUARANTEED RETURN OF 16 PERCENT ON THE
PAID –UP AND SUBSCRIBED CAPITAL IN THE CASE OF
GENERATING COMPANIES.
III.
100 % EQUITY PARTICIPATION BY FOREIGN
COMPANIES.
IV.
REDUCTION OF IMPORT DUTY ON POWER
PROJECTS
V.
A 5 YEAR TAX HOLIDAY FOR NEW POWER
PROJECTS.
Results: -
I.
GOI RECEIVED 245 PROPOSAL FROM PVT
COMPANIES FOR CAPACITY ADDITION OF 93,660 MW WITH
A TOTAL INVESTMENT OF RS 3,39,700 CRORES; OF THIS 194
WERE FOREIGN PROPOSALS.
II.
19 PROJECTS (10,850 MW) ACCORDED TECHNO –
ECONOMIC ASSISTANCE.
III.
IV.
V.
VI.
8.
79 PROPOSALS (37,930 MW) ACCORDED
CLEARANCE IN PRINCIPAL.
5 PROPOSALS UNDER EXAMINATION.
14 POWER PROJECTS UNDER CONSTRUCTION
FOR A TOTAL CAPACITY OF ABOUT 3500 MW.
22 PROJECT PROPOSALS (5,375 MW) HAVE
BEEN APPROVED BY INDIAN FINANCIAL INSTITUTIONS.
CHANGES IN ROAD
(A) PRINCIPAL LEGISLATIONS - THE NATIONAL HIGHWAYS
ACT, 1956 THE NATIONAL HIGHWAY
AUTHORITY.
(b) MEASURES
I.
AMENDMENT IN NATIONAL HIGHWAY
ACT IN 1995
II.
THE GOVT HAS PROMULGATED A
SEPARATE ORDINANCE FOR LAND ACQUISITION FOR
CONSTRUCTION OF NATIONAL HIGHWAYS.
III.
THE GOVT HAS EXEMPTED PROJECTS
FOR WIDENING OF THE EXISTING NATIONAL
HIGHWAYS FROM FOREST AND ENVIRONMENTAL
CLEARANCES.
IV.
THE GOVT HAS SIMPLIFIED SEVERAL
PROCEDURES
OF
ROAD
CONSTRUCTION
&
DEVELOPMENT, E.G., FEASIBILITY STUDIES & DETAILED
PROJECTS REPORTS COSTING UPTO RS 100 CRORES CAN
BE APPROVED BY MINISTRY OF SURFACE TRANSPORT.
V.
THE GOVT HAS DECIDED TO LEVY A
USER FEE (TOLL) ON COMPLETED 4 –LANE SECTIONS
VI.
IN ORDER TO ENCOURAGE PRIVATE
SECTOR PARTICIPATION, THE GOVT OF INDIA HAS
PERMITTED THE NATIONAL HIGHWAY AUTHORITY TO
PARTICIPATE N THE EQUITY OF A COMPANY
PROMOTED BY THE PRIVATE SECTOR
vii.
THE
NATIONAL
HIGHWAY
AUTHORITY
WILL
CONSIDER
HELPING
ON
ENTREPRENEUR OVER COME PROBLEMS OF SHORT
TERM REPAYMENTS.
VIII.
AUTOMATIC APPROVAL IS GIVEN FOR
FOREIGN EQUITY PARTICIPATION UP TO 74 PERCENT IN
THE CONSTRUCTION OF ROADS AND BRIDGES .
IX.
THE GOVT HAS OBTAINED EXTERNAL
ASSISTANCE FOR THE IMPROVEMENT OF NATIONAL
HIGHWAYS THROUGH WORLD BANK, ADB,& OVERSEAS
ECONOMIC COOPERATION OF JAPAN.
9.
CHANGES IN TELECOMMUNICATION
i) MEASURES
II) NTP, 1994
- NATIONAL TELECOM POLICY, 1994
- NATIONAL TELECOM POLICY, 1997
A)
STRATEGIC & LUCRATIVE AREAS OF BASIC
TELEPHONE SERVICES OPEN TO THE PRIVATE
SECTOR.
B)
FOR VALUE ADDED SERVICES, GOVT HAS
PERMITTED MAX FOREIGN EQUITY OF 51 PERCENT
AND 49 % FOR CELLULAR MOBIL & RADIO PAGING .
C)
TELEPHONE
DEMAND BY 1997.
D)
SHOULD
BE
AVAILABLE
ON
ALL VILLAGERS SHOULD BE COVERED BY 1997.
E)
INSTALLATION OF ONE PCP PER 500 PERSONS
IN URBAN AREAS BY 1997.
F)
ENSURE INDIA’S EMERGENCY AS A MAJOR
EXPORTER OF TELECOM EQUIPMENT.
iii) NTP, 1999 –
iv) RESULTS -
A.
INTERCONNECTIVITY OF NETWORK FOR
DATA TRANSMISSION HAS BEEN PERMITTED.
B.
LICENCES
PROVIDERS (ISP)
C.
ESTABLISHMENT OF TRAI TO DETERMINE
AND REGULAR TELECOM TARIFF.
D.
FORMATION OF TELECOM
DISPOSAL
SETTLEMENT AND APPELLATE TRIBUNAL TO
ADJUDICATE DISPUTE BETWEEN A LICENSOR AND
LICENSEE.
TO
187
INTERNET
SERVICE
A ANNUAL GROWTH RATE OF PROVIDING NEW
TELEPHONE CONNECTIONS HAS BEEN INCREASING
STEADILY FROM ABOUT 10 % IN 1988 –89 TO 30 % IN
1999 –2000
B EXPORTS HAVE INCREASED TO RS 3750 CRORES IN
1999 –2000.
10.
CHANGES IN CIVIL AVIATION: MEASURES -
I)
(A)
REPEAL OF AIR CORPORATION ACT, 1953 IN
1994.
(B)
AIRPORT AUTHORITY OF INDIA ACT, 1995
Repeal of Act of 1953: IT ENDED THE MONOPOLY OF PUBLIC SECTOR AIR
CARRIERS NAMELY IA, AI FROM THE INDIAN SKIES.
II)
VIZ.,
AIRPORT AUTHORITY ACT, 1995: - IT HAS TWO DIVISION
I. INTERNATIONAL AIRPORT DIVISION (IAD) &
II. NATIONAL AIRPORT DIVISION.
PRIvAtE Participation
THE GOVT IS ENCOURAGING PRIVATE
SECTOR
PARTICIPATION
IN
CONSTRUCTION
AND
OPERATION OF NEW AIRPORTS USING BOT APPROACH.
11.
CHANGES PORT: - STEPS
I.
PRIVATE SECTOR PARTICIPATION IN
PORT OPENED .
II.
BOT (BUILD, OPERATE, & TRANSFER)
MODEL WILL GENERALLY BE USED FOR PRIVATE
SECTOR PARTICIPATION WITH ASSETS REVERTING
BACK TO PART TRUST AFTER THE CONCESSION
PERIOD.
III.
PRIVATE SECTOR PARTICIPATION TO
BE BASED ON OPEN COMPETITIVE BIDDING .
IV.
AUTOMATIC APPROVAL IS
ACCORDED
FOR
FOREIGN
EQUITY
PARTICIPATION UPTO 74 PERCENT IN
CONSTRUCTION ACTIVITIES IN THE
AREAS OF PORTS AND HARBOURS AND
UPTO 51 % FOR SUPPORT SERVICES
LIKE MAINTENANCE OF PORTS.
EX LICENCE FOR CONSTRUCTION
OF A TWO BERTH CONTAINER TERMINAL FOR
A PERIOD OF 30 YEARS ON BOT BASIC HAS
BEEN GIVEN TO P & O TRUST, AUSTRALIA
LED CONSORTIUM.
12.
PRIVATE INVESTMENT IN INFRASTRURE: SINCE
1991,
GOVERNMENT
STRATEGY
ATTACHES HIGH PRIORITY TO THE DEVELOPMENT
OF EFFICIENT INFRASTRUCTURE. SOME OF THE
IMPORTANT STEPS IN THIS DIRECTION ARE –
B THE
GOVERNMENT
SET
UP
THE
INFRASTRUCTURE
DEVELOPMENT
FINANCE COMPANY IN JANUARY 1997,
UNDER THE INDIAN COMPANIES ACT,
1997 WITH AN AUTHORISED CAPITAL
OF RS 5000 CRORES.
C THE GOVT ANNOUNCED A TAX HOLIDAY
TO
COMPANIES
DEVELOPING
MAINTAINING
AND
OPERATING
INFRASTRUCTURE FACILITIES SUCH AS
ROADS,
BRIDGES
AIRPORT
RAIL
PROJECTS, ETC.
D THE
GOVT
HAS
PERMITTED
IT
EXEMPTION ON DIVIDEND, INTEREST
OR LONG TERM CAPITAL GAINS EARNED
BY FUNDS OR COMPANIES SET UP TO
DEVELOP MAINTAIN AND OPERATE AN
INFRASTRUCTURE FACILITY.
E THE GOVT HAS RAISED THE CORPUS OF
NATIONAL HIGHWAY AUTHORITY OF
INDIA (NHAI) BY RS 200 CRORES TO
ENABLE IT TO LEVERAGE FUND FROM
DOMESTIC
AND
INTERNATIONAL
CAPITAL MARKET
F THE GOVT HAS ENHANCED TAX REBATE
LIMITS FOR INVESTMENT IN SHARES
AND
DEBENTURES
OFFERED
BY
INFRASTRUCTURE COMPANIES.
G THE ADB HAS PROVIDED A LOAN OF $
300 MILLION FOR THE PUBLIC SECTOR
INFRASTRUCTURE FACILITY (PSIF) IN
ORDER
TO
SUPPORT
PRIVATE
INFRASTRUCTURE
PROJECTS.
THE
MONEY WILL BE BORROWED BY ICICI,
SCICI
FOR
ON
LENDING
TO
INFRASTRUCTURE
COMPANIES
THROUGH
LONG
TERM
DEBT
INSTRUMENTS
–VIZ.,
BONDS,
DEBENTURES.
INSURANCE SECTOR REFORMS
1.
DEFINITION
MEANS A SYSTEM OF INSURING PROPERTY, LIFE, ONE’S
PERSON ETC. AGAINST LOSE OR HARM ARISING IN SPECIFIED
CONTINGENCIES AS FIRE, EARTHQUAKE, FLOOD, ACCIDENT,
DEATH, DISABLEMENT OR LIKE IN CONSIDERATION OF A
PAYMENT PROPORTIONATE TO RISK INVOLVED.
2.
HISTORY
(I)
LIFE INSURANCE COMPANIES WERE NATIONALIZED
IN 1956.
(II)
1971- TAKE OVER OF THE ADMINISTRATION OF NONLIFE SECTOR INSURANCE COMPANIES.
(III)
1973- TO ALL NATIONALIZATION
3. CLASSIFICATION OF INSURANCE BUSINESS:
INSURANCE BUSINESS
Business Generation
Payment of Clams
4.
5.
Maintenance Business
FUNCTIONAL AREAS
(A)
Business Generation- selling of policies and collection of premiums.
(B)
MAINTENANCE OF BUSINESS- THE COMPANIES TRY TO
RETAIN THE BUSINESS THAT HAS BEEN DEVELOPED.
(C)
PAYMENT OF CLAIMS- THE FINAL STAGE IN THE
WORKING OF INSURANCE COMPANIES IS THE
PAYMENT OF CLAIMS EITHER ON MATURITY OR
OTHERWISE.
SUBSIDIARIES OF LIC/GIC
INSURANCE SECTOR
Life Insurance Company
LIC International
LIC Nepal
General Insurance Company
LIC Housing Finance
Oriental Insurance New India Assurance Co National Insurance
LIC Mutual Fund
United India Assurance
6.
SECTOR:
DEFICIENCIES
OF
INSURANCE
(A)
CUSTOMER DISSATISFACTION – LIKE BANKING
INDUSTRY INSURANCE IS A SERVICE INDUSTRY BUT THE
INVESTMENT POLICY FOLLOWED BY LIC IS NOT
DETERMINED IN THE INTERESTS OF POLICY HOLDERS.
(B)
HUGE SIZE OF LIC – THE STRUCTURE OF THE LIC
AND THE WAY OF THE FUNCTIONING DO NOT PROVIDE
SUFFICIENT ASSURANCE THAT THE ORGANIZATION CAN
HANDLE EFFICIENTLY. THE VAST POTENTIAL GROWTH IN
BUSINESS.OWING TO HIERARCHICAL FUNCTIONING OF
CENTRAL OFFICE AND ZONAL OFFICES, DECISION MAKING
HAS SLOWED DOWN.
(C)
POOR PRODUCTIVITY – OVER THE YEARS THE
STAFF UNION HAVE PERFORMED A ROLE IN IMPROVING
THE TERMS & CONDITIONS OF SERVICES OF THERE
MEMBERS. HENCE, A NUMBER OF RESTRICTIVE PRACTICES
HAVE GROUND WHICH CONSTRAINED THE EFFICIENT AND
ECONOMICAL FUNCTIONING OF ORGANIZATION.
(D)
LACK OF FLEXIBILITY – THE OPERATIONAL
FLEXIBILITY AND ABILITY TO RESPOND TO CHANGING
CONDITION IS CONSTRAINED. AT PRESENT LIC HAS A
CAPITAL OF RS.5 CRORE, CONTRIBUTED ENTIRELY BY
CENTRAL GOVERNMENT.
7.
RECOMMENDATIONS
COMMITTEE:
(a)
OF
MALHOTRA
STRUCTURAL
(I) GOVT. STAKE IN THE INSURANCE COMPANIES BE BROUGHT
DOWN TO 50%
(II) GOVT. SHOULD TAKE OVER THE HOLDINGS OF GIC AND ITS
SUBSIDIARIES SO THAT THESE SUBSIDIARIES CAN ACT AS
INDECENT CORPORATIONS
(III) ALL THE INSURANCE COMPANIES SHOULD BE GIVEN
GREATER FREEDOM TO OPERATE.
(b)
COMPETITION
(I) PRIVATE COMPANIES WITH A MINIMUM PAID UP CAPITAL OF
RS.1 BILLION SHOULD BE ALLOWED TO ENTER THE
INDUSTRY.
(II) NO COMPANY SHOULD DEAL IN BOTH LIFE AND GENERAL
INSURANCE THROUGH A SINGLE ENTITY.
(III)
FOREIGN COMPANIES SHOULD BE ALLOWED TO ENTER
THE INDUSTRY.
(IV)
POSTAL LIFE INSURANCE SHOULD BE ALLOWED TO
OPERATE IN RURAL MARKET.
(V) ONLY ONE STATE LEVEL LIFE INSURANCE COMPANY SHOULD
BE ALLOWED TO OPERATE IN EACH STATE.
(c)
REGULATORY BODY
(I) THE INSURANCE ACT SHOULD BE CHANGED.
(II) AN INSURANCE REGULATORY BODY SHOULD BE SET UP.
(III)
CONTROLLER OF INSURANCE SHOULD BE MADE
INDEPENDENT.
(d)
INVESTMENT
(I) MANDATORY INVESTMENTS OF LIC LIFE FUND IN
GOVERNMENT SECURITIES TO BE REDUCED FROM 75% TO
50%
(II) GIC & ITS SUBSIDIARIES ARE NOT TO HOLD MORE THAN 5% IN
ANY COMPANY.
(e)
CUSTOMER SERVICE
(I) LIC SHOULD PAY INTEREST ON DELAYS IN PAYMENTS
BEYOND 30 DAYS.
(II) COMPUTERIZATION OF OPERATORS AND UPDATING OF
TECHNOLOGY TO BE CARRIED OUT IN INSURANCE
INDUSTRY.
8.
INSURANCE
REGULATION
DEVELOPMENT AUTHORITY (IRDA) ACT-
&
THIS ACT WAS PASSED IN 1999-2000 DESPITE OPPOSITION
FROM TRADE UNIONS AND LEFT PARTIES. THE IRDA ACT
ENDS THE MONOPOLY OF THE GOVERNMENT IN THE
INSURANC3 SECTOR BECAUSE IT SEEKS TO PROMOTE
PRIVATE SECTOR (INCLUDING LIMITED FOREIGN EQUITY)
IN THE INSURANCE SECTOR. IT GIVES PRIORITY IN THE
UTILIZATION OF POLICYHOLDER FUNDS FOR THE
DEVELOPMENT OF SOCIAL & INFRASTRUCTURE SECTORS.
9.
NEW ENTRANTS
Sr. No.
Date of Reg. Name of Company
1.
23.10.2000
HDFC STANDARD LIFE INSURANCE CO.
2.
15.11.2000
MAX NEW YORK LIFE INSURANCE CO.
3.
24.11.2000
ICICI PRUDENTIAL LIFE INSURANCE CO.
4.
10.01.2001
OM KOTAK MAHINDRA LIFE INSURANCE CO
5.
31.03.2001
BIRLA SUN LIFE INSURANCE CO.
6.
7.
12.02.2001
30.03.2001
TATA AIG LIFE INSURANCE CO.
SBI LIFE INSURANCE CO.
.
8.
9.
10.
11.
12.
13.
14.
15.
16.
10.
(A)
02.08.2001
03.08.2001
06.08.2001
23.10.2000
23.10.2000
04.12.2000
22.01.2001
02.05.2001
03.08.2001
IGN VESYA LIFE INSURANCE CO. PVT. LTD.
ALLIANCE BAJAJ INSURANCE CO. LTD.
MET LIFE INDIA INSURANCE CO.PVT. LTD.
ROYAL SUNDARAM ALLIANCE INSURANCE.
RELIANCE GENERAL INSURANCE CO. LTD.
IFFCO TOKYO GEN.INS.COM. LTD.
TATA AIG. GEN. INS. CO. LTD.
BAJAJ ALLIANCE GEN. INS. CO. LTD.
ICICI LOMBARD GEN. INS. CO. LTD.
BENEFIT OF INSURANCE SECTOR REFORMS
IMPROVED INSURANCE COVERAGE – INSURANCE REFORMS IS
LIKELY TO LEAD TO DEEPER AND WIDER INSURANCE COVERAGE
PROVIDING SECURITY TO HUNDREDS OF MILLION OF
ADDITIONAL PEOPLE.
(B) INCREASED PENSION COVERAGE – INDIA HAS THE HIGHEST
NUMBER OF PEOPLE ABOVE 60 YEARS OF AGE BUT IT PENSION
ASSETS PER PERSON IS VERY LOW. COVERAGE OF PENSION
PLAN IS ONLY 8% OF WORKING POPULATION BUT INSURANCE
REFORMS WAY LEAD TO IMPROVEMENT OR THIS FRONT.
(C)
INCREASED CONSUMER FOCUS – COMPETITION WILL GIVE
INDIAN CONSUMER A CHOICE WHEN HE IS CONSIDERING
PURCHASING OR INSURANCE OR PENSION PRODUCT.
(D)
INCREASED EMPLOYMENT – ADVANTAGE OF NEW COMPANIES
IN THIS SECTOR WAY LEAD TO EMPLOYMENT.
(E)
IMPROVED SERVICES – CURRENTLY LIFE INSURANCE IS
LARGELY DRIVEN BY TAX INCENTIVES AND SOLD ON PERSONAL
RELATIONSHIP BUT PARTICIPATION OF NEW PLAYERS IS
LIKELY TO MAKE AT INSURANCE NEED DRIVEN EXERCISE.
(F)
BEST GLOBAL MANAGEMENT PRACTICES
(G)
LONG TERM INVESTMENT CAPITAL
CAPITAL MARKETING R
REFORMS
EFORMS
1.
COMPOSITION
CAPITAL MAKET
Gill Edged
Market
Industrial
Securities
Market
Development
Financial
Institution
(DFIS)
New Issue Market
Old Issue Market
(Stock Exchange)
IFCI
SFCS
Merchant
Banks
ICICI
Mutual
Funds
IDBI
Leasing
Companies
Financial
Intermediaries
IIBI
UTI
Venture
Capital Companies
Others
3. PROBLEMS OF CAPITAL MARKET IN PRE- REFORM
PHASE
2. MONOPOLY OF BSE: IT WAS AN ASSOCIATION OF BROKERS
WHO IMPOSED ENTRY BARRIERS.
3. TRADING BY OUTCRY TRADING TOOK PLACE BY OPEN
OUTCRY, WHICH WAS BEYOND REACH OF USERS; HENCE
INVESTORS HAD TO PAY A HIGHER PRICE.
4. NO PRICE TIME PRIORITY: LACK OF PRICE TIME PRIORITY
DID NOT ENSURE BEST POSSIBLE PRICE.
5. MANIPULATIVE PRACTICES: A VARIETY OF MANIPULATIVE
PRACTICES PREVAILED SO THAT EXTERNAL USER OF A
MARKET OFTEN FORMED THEMSELVES AT LOSING END OF
PRICE MOVEMENTS.
RETAIL
INVESTORS,
5. SALE
AT
HIGHER
PRICE:
PARTICULARLY USERS OF THE MARKET OUTSIDE MUMBAI,
ASSESS MARKET LIQUIDITY THROUGH A CHAIN OF
INTERMEDIARIES CALLED SUB- BROKER. EACH SUB BROKER
INTRODUCED IN THE CHAIN A MARK-UP IN PRICE AND THE
INVESTOR THUS HAD TO PAY.
6. PECULIAR PRACTICES: A PECULIAR MARKET PRACTICE
CALLED BADLA ALLOWED BROKERS TO CARRY POSITION
ACROSS SETTLEMENT PERIOD. IN OTHER WORD, EVEN OPEN
POSITION AT THE END OF THE FORT RIGHT DID NOT ALWAYS
HAVE TO BE SETTLED.
7. UNRELIABLE ORDER EXECUTION: FLOOR BASED TRADING,
INEFFICIENCIES IN CLEARING LOW STANDARD OF
TECHNOLOGY AND ORGANIZATIONAL COMPLEXITY LED TO
AN ENVIRONMENT WHERE ORDER EXECUTION WAS
UNRELIABLE AND COSTLY.
4. ROLE OF CAPITAL MARKET IN INDIA’S GROWTH
I. MOBILISATION OF SAVINGS & ACCELERATION OF
CAPITAL FORMATION.
II. PROMOTION OF INDUSTRIAL GROWTH.
III. RAISING LING TERM CAPITAL.
IV. READY AND CONTINUOUS MARKET (THROUGH
STOCK EXCHANGE)
V. PROPER CHANNELISATION OF FUND.
Provision of a variety of services such as
A. GRANT OF LONG TERM & MEDIUM TERM LOANS.
C. ASSISTANCE IN PROMOTION OF COMPANIES (DONE BY
IDBI).
D. PARTICIPATION IN EQUITY CAPITAL.
E. EXPERT ADVICE ON MANAGEMENT OF INVESTMENT IN
INDUSTRIAL SECURITIES.
5. GROWTH OF CAPITAL MARKET IN INDIA
THE FIRST ORGANISED EXCHANGE IN INDIA WAS
ESTABLISHED IN
1887 AT BOMBAY. WHEN THE SECURITIES CONTRACT
(REGULATION)
ACT, WAS PASSED ONLY 7 STOCK EXCHANGES VIZ.
AHMEDABAD,
BOMBAY, CALCUTTA, MADRAS, DELHI, HAYDRABAD
AND INDORE.
No of Stock
Exchange
Listed
Companies
1975-76
8
1985-86
14
1994-95
21
1995-96
22
1997-98
22
1852
4344
7811
9100
9833
6. FACTORS CONTRIBUTING TO GROWTH OF CAPITAL
MARKET
A.
ESTABLISHMENT
OF
DEVELOPMENT
INDUSTRIAL FINANCING INSTITUTIONS.
Legislative Measures
I.
COMPANIES ACT, 1956.
BANKS
AND
II.
III.
B.
CAPITAL ISSUES (CONTROL) ACT 1947.
REPEAL OF ACT (1947) IN 1992.
GROWTH OF UNDERWRITING BUSINESS.
Growing public confidence
C.
INCREASING
AWARENESS
OPPORTUNITIES.
OF
INVESTMENT
Setting up of SEBI
D.
CREDIT RATING AGENCIES (CRISIL) CREDIT RATING
INFORMATION SERVICES OF INDIA.
7. BIRTH OF SECURITIES & EXCHANGE BOARD OF INDIA
(SEBI)
A.
PREDECESSOR OF SEBI
B.
RECOMMENDATION
C.
REPEALED ACT
D.
NEW BODY
OF
THE
CAPITAL
(CONTROL) ACT, 1947
REFORM – THE
COMMITTEE.
ISSUES
NARSIMHAM
THE
CAPITAL
(CONTROL) ACT
ISSUES
SEBI WAS ESTABLISHED IN 1988
BUT
GIVEN
STATUTORY
RECOGNITION IN 1992
FUNCTIONS–
II.
REGULATING
THE BUSINESS
EXCHANGE AND ANY OTHER
MARKET.
IN STOCK
SECURITIES
III.
REGISTERING & REGULATING THE WORKING
OF
COLLECTIVE
INVESTMENT
SCHEMES,
INCLUDING MUTUAL FUNDS.
IV.
PROHIBITING FRAUDULENT & UNFAIR TRADE
PRACTICES RELATING TO SECURITIES MARKETS.
V.
PROMOTING
INVESTORS
EDUCATION
TRAINING OF INTERMEDIARIES.
VI.
&
REGULATING SUBSTANTIAL ACQUISITION OF
SHARES AND TAKE OVER OF COMPANIES.
8. BIRTH OF NATIONAL STOCK EXCHANGE
NSE ,SET UP IN NOVEMBER IN 1992, WAS OWNED BY IDBI,
UTI AND OTHER PUBLIC SECTOR INSTITUTION. IT
COMMENCED ITS OPERATIONS IN 1994.
INNOVATIONS
:
A.
B.
THE PHYSICAL FLOOR WAS REPLACED BY
ANONYMOUS, COMPUTERISED ORDER MATCHING WITH
STRICT PRICE TIME PRIORITY.
THE LIMITATION OF BEING IN MUMBAI AND THE
LIMITATIONS OF INDIA’S PUBLIC TELECOM WORK WERE
AVOIDED BY USING SATELLITE COMMUNICATIONS. NOW
NSE HAS A NETWORK OF 2000 SATELLITE TERMINALS IN
INDIA
.
C.
NSE IS A LIMITED COMPANY AND BROKERS ARE
NOT OWNERS BUT FRANCHISEES. THEREFORE NSE’S STAFF
IS FREE OF PRESSURES FROM BROKERS AND IS ABLE TO
PERFORM REGULATORY AND ENFORCEMENT FUNCTIONS
MORE EFFECTIVELY.
D.
TRADITIONAL
PRACTICES
OF
UNRELIABLE
FORTNIGHTLY SETTLEMENT CYCLE WITH THE ESCAPE
CLAUSE OF BADLA WERE REPLACED BY A STRICT WEEKLY
SETTLEMENT CYCLE WITHOUT “BADLA”.
9. STRENGTHENING THE CAPITAL MARKET IN POST
REFORM PHASE
I.
AUCTION – THE AUCTION SYSTEM FOR THE STATE
OF GOVT OF INDIA MEDIUM AND LONG TERM SECURITIES
WAS INTRODUCED FROM JUNE 3,1992
II.
TREASURY BILL – 364 – DAY TREASURY BILLS
AUCTIONS WERE INTRODUCED FROM APRIL 28,1992 AND 91 –
DAYS TREASURY BILLS AUCTIONS FROM JANUARY 8,1993, 14DAY TREASURY BILLS WERE INTRODUCED ON JUNE 6, 1997
WHILE 182 DAY TREASURY BILLS WERE REINTRODUCED ON
MAY 26,1999.
III.
STCI – 601 SET UP THE SECURITIES TRADING
CORPORATION OF INDIA TO DEVELOP INSTITUTIONAL
STRUCTURE FOR A VIBRANT SECURITY MARKET WITH A
CAPITAL OF IS 500 CRORE.
IV.
PRIMARY DEALER – A SYSTEM OF PRIMARY
DEALERS WAS ESTABLISHED IN MARCH 1995 AND THE
GUIDELINES FOR SATELLITE DEALERS WERE ISSUED IN
DECEMBER 1996.
V.
OPEN THE MARKET OPERATIONS – MARKET
ORIENTATION TO ISSUE OF GOVERNMENT SECURITIES PASSED
THE WAY FOR RBI TO ACTIVATE OPEN MARKET OPERATIONS
AS A TOOL OF MARKET INTERVENTION.
VI.
LIQUIDITY SUPPORT - THE RBI STARTED PROVIDING
LIQUIDITY SUPPORT TO MUTUAL FUNDS DEDICATED
EXCLUSIVELY TO INVESTMENT IN GOVERNMENT SECURITIES.
VII.
- FOREIGN INSTITUTIONAL
ENTRY OF FIT
INVESTORS WITH 100 PERCENT DEBT FUNDS WAS PERMITTED
TO INVEST IN GOVT. SECURITIES AND TREASURY BILL.
VIII.
TDS EXEMPTION - THE INTEREST IN COME ON
GOVERNMENT SECURITIES WAS EXEMPTED FROM THE
PROVISIONS OF TAX DEDUCTION AT SOURCE (TDS).
10. PRIMARY MARKET REFORMS
I.
COMPANIES ISSUING CAPITAL IN THE PRIMARY MARKET
ARE NOW REQUIRED TO DISCLOSE ALL MATERIAL FACTS AND
SPECIFIC RISK FACTORS WITH THEIR PROJECTS, THEY
SHOULD ALSO GIVE INFORMATION REGARDING THE BASIC OF
CALCULATION OF PREMIUM.
II.
SEBI HAS INTRODUCED A COURT OF ADVERTISEMENT FOR
PUBLIC ISSUES FOR ENSURING FAIR AND TRUTHFUL
DISCLOSURES.
III.
THE GOVERNMENT HAS NOW PERMITTED THE SETTING UP
OF PRIVATE MUTUAL FUNDS AND A FEW HAVE ALREADY BEEN
SET UP.
IV.
UTI HAS NOW BEEN BROUGHT UNDER REGULATORY
JURISDICTION OF SEBI.
11. SECONDAY MARKET REFORMS
I.
SEBI HAS STARTED THE PROCESS OF REGUSTRATION
OF INTERMEDIARIES SUCH AS STOCK BROKERS AND SUBBROKERS.
II.
SEBI HAS NOTIFIED REGULATIONS ON INSIDER
TRAINING UNDER THE PROVISIONS OF SEBI ACT.
III.
SEBI HAS PROHIBITED “ RENEWAL ” OF
TRANSACTIONS IN ‘B’ GROUP SECURITIES, SO THAT
TRANSACTIONS COULD BE SETTLED WITHIN 7 DAYS.
IV.
THE GOVERNMENT HAS ALLOWED FII SUCH AS
PENSION FUNDS, MUTUAL FUNDS, INVESTMENT TRUSTS
ETC TO INVEST IN THE INDIAN CAPITAL MARKET
PROVIDED THEY ARE REGISTERED WITH SEBI, TILL 1995,
AS MANY AS 286 FIIS HAVE BEEN REGISTERED WITH SEBI
BANKING SECTOR REFORMS
1)
INDIAN FINANCIAL SECTOR
DEVELOPMENT
BANKING
COOPERATIVE BANKS.
BANKING INSTITUTION
COMMERCIAL BANKS.
NATIONALISED BANKS PRIVATE BANKS
NON-BANKING
FINANCIAL
REGIONAL RURAL
BANKS
FOREIGN BANKS
State Cooperative Banks
2)
Central Cooperative Banks Primary Credit Societies
BRANCH EXPANSION OF BANKS
AS
ON TOTAL NO OF RURAL
June 30
BRANCHES
BRANCHES
8,260
60,650
65,450
1969
1991
2000
1,860
32,750
32,710
RURAL BRANCHES
AS
PERCENTAGE
OF TOTAL
22
54
50
POPULATION
PER BANK
63,800
14,150
15,000
(SOURCE: ECONOMIC SURVEY 2000-01)
3)
PROFITABILITY OF BANKS IN INDIA (IN CRORES)
REPORTING BANKS
1991-92
1992-93
1993-94
1995-96
1999-2000
SBI Group -
244
280
356
793
2677
Public Sector Banks (19)
559
-3648
-4779
-1160
2437
Private Sector Banks (34)
77
60
149
557
1225
Foreign Banks (42)
320
-842
573
749
968
4)
FACTORS
LOSSES
BEHIND
I. DECADES OF NON COMMERCIAL ORIENTATION
II.
SECURITIES SCAM.
III.
INCOME FOR
COMMITTEE)
BANKS
DECLINING
(ACC. TO
INTEREST
NARASIMHAM
IV.
V.
VI.
INCREASING COST
OPERATION (NARASIMHAM COMMITTEE)
OF
HIGH
PROPORTION
OF
TOTAL DEPOSIT BEING IMPOUNDED IN CRR AND SLR.
HIGH
PROPORTION
DEPOSIT BEING ALLOCATED TO SOCIAL SECTORS
VII.
OF
INCREASING NUMBER OF
BAD LOANS.
5)
NARSIMHAM COMMITTEE REPORT (1991)
A)
STTUCTURAL REFORMS:
The Committee Recommended: -
I)
ESTABLISHMENT OF A FOUR-TIER
HIERARCHY FOR THE BANKING STRUCTURES
WITH 3 OR 4 LARGE BANKS INCLUDING SBI AT THE
TOP.
II)
8 TO 10 NATIONAL BANKS WITH A
NETWORK OF BRANCHES THROUGHOUT THE
COUNTRY ENGAGED IN GENERAL OR UNIVERSAL
BANKING.
III)
CONFINEMENT OF LOCAL BANKS
TO A SPECIFIC REGION.
B)
SLR & CRR
I)
REDUCTION OF STATUTORY
LIQUIDITY REQUIREMENTS FROM THE PRESENT 38.5 % TO
25 % IN NEXT FIVE YEARS FROM 1991.
II)
SIMPLIFICATION
STRUCTURE OF INTEREST RATES.
C)
OF
INTERSET RATES
I)
DECONTROL OF
INTEREST RATES ON GOVERNMENT DEBT AS WELL AS THE
DEPOSIT AND LENDING RATES OF COMMERCIAL BANKS.
II)
SIMPLIFICATION
OF STRUCTURE OF INTEREST RATES.
D)
DIRECTED CREDIT PROGRAMME
I)
DIRECTED CREDIT PROGRAMME SHOULD BE
REDEFINED TO INCLUDE ONLY THE WEAKEST SECTIONS OF
SOCIETY SUCH AS MARGINAL FARMERS, RURAL ARTISANS ,
VILLAGE AND COTTAGE INDUSTRIES, TINY SECTOR ETC.
II)
DIRECTED CREDIT SHOULD BE FIXED AT 10
PERCENT OF THE AGGREGATE BANKS.
6)
REFORMS OF THE BANKING SECTOR
i.
II.
REDUCTION OF SLR:
% TO 25 % .
SLR HAS BEEN REDUCED FROM 38.5
REDUCTION OF CRR: CRR REDUCED FROM 15% TO 14% IN
1993 AND THEN FROM 14 % TO 10 % BY MARCH 1997, AND
AGAIN FROM 10 % TO 7.5 % BY MAY 2001.
CHANGES IN INTEREST RATES: -
III.
A)
DECONTROL
ON DOMESTIC TERM DEPOSIT ABOVE ONE YEAR.
B)
REDUCTION
OF PRIME LENDING RATE OF SBI & OTHER BANKS
ORIGINAL ADVANCES OF OVER RS. 2 LAKHS.
C)
DECONTROL OF INTEREST RATES ON BANK LOANS
ABOVE 2 LAKHS.
IV. PRUDENTIAL NORMS
PRUDENTIAL NORMS REQUIRED BANKS TO MAKE 100 %
PROVISION FOR ALL NON PERFORMING ASSETS (NPA). AS
FUNDING FOR THIS PURPOSE WAS PLACED AT RS 10,000
CRORES, IT WAS PHASED OVER 2 YEARS, BANKS HAD TO
MAKE AT LEAST 30 % PROVISION DURING 1992-93 AND THE
BALANCE 70 % IN 1993 – 94.
V)
CAPITAL AQUEQUANCY NORMS
RBI FIXED 8% IN APRIL 1992 AND BY MARCH 1996, ALL
PUBLIC SECTOR BANKS HAD ATTAINED CAPITAL TO RISK
WEIGHTED RATIO OF 8 PERCENT.
VI)
FREEDOM OF OPERATION
SCHEDULED COMMERCIAL BANKS HAVE NOW BEEN GIVEN
FREEDOM TO OPEN NEW BRANCHES AND UPGRADE
EXTENSION COUNTERS
VII)
NEW PRIVATE SECTOR BANKS
TEN PRIVATE SECTOR BANKS HAVE ALREADY STARTED
FUNCTIONING.
7)
SECOND
REPORT
OF
NARASIMHAM
COMMITTEE (1998)
I.
NEED OF STRONGER BANKING SYSTEM -
THE NARASIMHAM
COMMITTEE HAS RECOMMENDED MERGER OF STRONG BANKS
FOR A STRONGER BANKING SYSTEM IN THE CONTEXT OF
CAPITAL ACCOUNT CONVERTIBILITY.
II.
REDUCTION OF GOVT STAKE TO 33% - THE COMMITTEE
RECOMMENDED REDUCTION OF GOVT STAKE TO THE EXTENT
OF 33 % .
III.
ENHANCEMENT OF CAN TO 10% - THE LIMIT OF 10 % IS MORE
THAN THE BASLE COMMITTEE RECOMMENDATION OF 8%.
IV
PUBLIC OWNERSHIP & REAL AUTONOMY - THE COMMITTEE
HAS RECOMMENDED A REVIVAL OF THE FUNCTIONS OF
BOARDS
SO
THAT
THEY
REMAIN
RESPONSIBLE
FOR
ENHANCING SHARE HOLDER VALUE THROUGH FORMULATION
OF CORPORATE STRATEGY.
V.
CONVERSION OF WEAK BANKS INTO NARROW BANKS : THE
COMMITTEE RECOMMENDED THE CONCEPT OF NARROW
BANKING TO REHABILITATE WEAK BANKS. NARROW BANKING
IMPLIES THAT WEAK BANKS PLACE THEIR FUNDS ONLY IN THE
SHORT TERMS IN RISK FREE ASSETS. THESE BANKS ATTEMPT
TO MATCH THEIR DEMAND DEPOSITS BY SAFE LIQUID ASSETS.
VI.
REVIEW AND UPDATE BANKING LAWS – THE COMMITTEE HAS
SUGGESTED THE URGENT NEED TO REVIEW AND AMEND THE
PROVISIONS OF RBI ACT, BANKING REGULATION ACT, SBI ACT ,
BANK NATIONALISATION ACT, ETC.
VII
8)
DEPOLITICISATION OF BOARD’S APPOINTMENTS
RECOMMENDATIONS ON THE BANKS IN 1991 AND 1998
1991 RECOMMENDATIONS
I.
MERGE
BANKS
1998 RECOMMENDATIONS
TO
REDUCE A) MERGE STRONG BANKS
NUMBERS
II. FREE BANK BOARDS FROM GOVT. B) FREE THE BOARD FROM GOVT.
INTERFERENCE
INTERFERENCE.
III. MOVE TO 3- TIER STRUCTURE
C) MORE TO 3- TIER STRUCTURE
IV FIXCAPITAL ADEQUACY AT 8%
D) REVIEW CAPITAL ADEQUACY
V.ENSURE AUTONOMY OF BANKS;
E) CONSIDER WHETHER AUTONOMY
WIND
IS
UP
BANKING
DIVISION
OF
MINISTRY OF FINANCE
8)
CONSISTENT
WITH
PUBLIC
OWNERSHIP.
FUTURE TRENDS
GOING BY THE EXPERIENCES OF COMMERCIAL BANKS IN OTHER
COUNTRIES THE FOLLOWING TRENDS MAY EMERGE IN INDIAN
BANKING .
A)
GREATER SPECIALISATION BY BANKS
AND IN DIFFERENT AREAS OF THE MARKET SUCH AS
RETAIL AGRICULTURE, EXPORT , SSI, AND CORPORATE
SECTOR.
B)
GREATER RELIANCE ON NON- FUND
BUSINESS
SUCH
AS
ADVISORY
AND
CONSULTANCY
SERVICES.
C)
GREATER
OVERLAP
IN
PRODUCT
COVERAGE BETWEEN COMMERCIAL BANKS AND NONBANK FINANCIAL INTERMEDIARIES.
D)
GREATER
DISINTERMEDIATION
ACCESSING
FINANCIAL
WITH
SECURITISED
DEBT
LARGE
COMPANIES
DOMESTICALLY
FROM FINANCIAL MARKETS ABROAD.
IMPACT ON INDIAN ECONOMY
1.
GDP GROWTH
8
7
6
5
4
3
2
1
19
91
19 -92
92
19 -93
93
19 -94
94
19 -95
95
19 -96
96
19 -97
97
19 -98
98
19 -99
99
=0
0
0
GDP Growth
Rate
GDP Growth
Rate
AND
Year
1990 –91
1991 –92
1992 –93
1993 –94
1994 –95
1995 –96
1996 –97
1997 –98
1998 –99
1999 –2000
GDP Growth Rate
5.2
1.5
4.5
6.0
7.0
7.3
7.5
5.9
6.8
6.4
2.
INDUSTRIAL GROWTH
Industrial Growth %
8.4
5.93
0
12.82
6.58
5.56
2.39
0.66
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
5
10
Industrial Growth %
15
Year
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
Growth Percent
0.66
2.39
5.93
8.4
12.82
5.56
6.58
CONCLUSIONS
A. ONLY 6 INDUSTRIES ARE UNDER COMPULSORY LICENSING.
B. ACCELERATION IN 93, 94, 95 TO 5.93, 8.4, 12.82.
C. REVERSIONARY PHASE SINCE 1996.
3)
GROWTH OF PSUs
PSUS GROSS PROFIT AS PERCENTAGE OF CAPITAL EMPLOYED
INCREASED TO 11.61 % IN 1993 –94; 15.88 % IN 1995 –96 AND 6.18 %
IN 1997 –98.
UPWARD TREND WAS OBSERVED IN NET PROFIT WHICH
INCREASED FROM 2.84 % IN 1993 –94 TO 6.15 PERCENT IN 1997 –98.
Year
1951
1961
1980
1990
1998
1999
No of units
5
47
179
244
236
240
Investment in crores
29
950
18,150
99,330
2,23,047
2,52,554
DISINVESTMENT
YEAR
No of PSES in
which equity sold
47
35
13
5
1
1
5
3
91-92
92-93
93-94
94-95
95-96
96-97
97-98
98-99
99-00
5
Target Receipt
(crores)
2500
2500
3500
4000
7000
5000
4800
5000
10,000
Actual Receipts
(crores)
3038
1913
Nil
4843
362
380
902
5371
1584
FOREIGN DIRECT INVESTMENT
FOREIGN DIRECT INVESTMENT
7000
5000
4000
DI
3000
PI
2000
Total
FDI
1000
-0
0
20
00
-0
9
19
99
-9
8
19
98
-9
7
19
97
-9
6
19
96
-9
5
19
95
-9
4
19
94
-9
3
93
-9
2
92
19
91
-9
-1000
1
0
19
Million Dollars
6000
19
4)
Year
Direct Investments ( $
Million)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
129
315
586
1314
2144
2821
3557
2462
2155
2339
6
Portfolio
Investment($Million)
4
244
3567
3824
2748
3212
1828
-61
3026
2760
Total Investment
133
559
4153
5138
4892
6133
5385
2401
5181
5099
FOREIGN TRADE
I. INDIA’S SHARE IN WORLD EXPORTS ROSE FROM 0.5
% IN 1985 TO 0.63 % IN 1998.
II. EXPORT –IMPORT RATIO IMPROVED FROM 91 –92 TO
95 –96.
US $ Million
GROWTH OF EXPORTS
0.66%
0.64%
0.62%
0.60%
0.58%
0.56%
0.54%
0.52%
0.50%
0.48%
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1990
Growth of Exports
7.
1998
AS % of World Exports
FOREIGN EXCHANGE MANAGEMENT
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
SDR
GOLD
FC Assets
TOTAL
90- 92- 94- 96- 98- 20
91 93 95 97 99 0001
8. AGRICULTURE
Foodgrains Production
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
208.87
203.612
192.26
199.44
Foodgrains
180.42
Production
191.5
164.26
179.48
168.39
million tonnes
Year
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
Food Grain Production MT.
171.04
176.39
168.39
179.48
164.26
191.5
180.42
199.44
192.26
203.612
208.87
9. EMPLOYMENT IN ORGANISED SECTOR ( IN LAKHS)
196
195
194
193
192
191
190
19
Year
89-90
90-91
91-92
92-93
93-94
94-95
95-96
96-97
97-98
98-99
99-00
Private
75.8
76.8
78.5
78.5
79.3
80.6
85.1
86.9
87.5
87.0
87.8
Public
187.7
190.6
192.1
193.3
194.5
194.7
194.3
195.6
194.2
194.1
192.8
(IN LAKHS)
90
88
86
84
82
80
78
76
74
72
91
19 -92
92
19 -93
93
19 -94
94
19 -95
95
19 -96
96
19 -97
97
19 -98
98
19 -99
99
-0
0
( IN LAKHS)
GROWTH OF EMPLOYMENT IN PVT. &
PUBLIC SECTORS
Private
sector
Oublic
S t
10.PERCENTAGE OF POPULATION BELOW POVERTY LINE
PERCENTAGE OF POPULATION BELOW
POVERTY LINE
25
20
15
10
5
0
19
8990
Year
1989 -90
1990-91
1991-92
1992-93
1993-94
1994-95
19
9091
19
9192
Rural
20.3
19.7
20.5
22.9
19.9
19.3
19
9293
19
9394
Urban
13.3
10.8
12.9
13.0
13.2
9.5
19
9495
Rural Poverty
Urban Poverty
Combined
18.5
17.4
18.5
20.3
18.1
16.6
11.
INFLATION DURING PRE REFORM PERIOD
INFLATION
13.7
15
10.3
10
Inflation
5
0
1990-91
1991-92
INFLATION DURING POST-REFORM PERIOD
INFLATION DURING REFORM PERIOD
-9
20 0 0
00
-0
1
99
8
98
-9
7
97
-9
-9
6
96
5
95
-9
4
94
-9
3
93
-9
-9
2
92
1
91
-9
90
IMPACT ON FOREIGN TRADE
9
16
14
12
10
8
6
4
2
0
(A)
EXPANSION OF FOREIGN TRADE
I)
HIGHER EXPORT GROWTH RATE –DURING 1980-81
TO 1990-91
THE AVERAGE ANNUAL GROWTH RATE OF EXPORTS WAS 8.2%,
WHICH INCREASED TO 9.8% DURING 1992-93 TO 1998-99. 1991-92
HAS BEEN LEFT AS EXCEPTIONAL YEAR.
250,000
200,000
150,000
100,000
50,000
0
19
9
11 0-9
99 1
3
19 -94
95
19 -96
97
19 -98
99
-0
0
In Crore Rupees
GROWTH OF EXPORTS
Growth
of
Exports
II)
LARGER IMPORTS – THE AVERAGE IMPORT
GROWTH OBSERVED DURING THAT 1990S IS 12 PERCENT
WHICH IS HIGHER THAN THAT OF 7.8% DURING 1980S. IT
INCREASED FROM $ 19,411 IN 1991 TO 36,678 IN 1995 AND TO
49,843 IN 2000-01.
60,000
50,000
40,000
30,000
20,000
10,000
0
19
91
-9
2
19
93
-9
4
19
95
-9
6
19
97
-9
8
19
99
-0
0
US $ Million
GROWTH OF IMPORTS DURING
REFORM PERIOD
IMPORTS
III)
SHARE IN WORLD EXPORTS – INDIA’S SHARE IN
WORLD EXPORTS DECLINED FROM 0.52 PERCENT TO 0.47 PER
CENT BETWEEN 1984 & 1987, BUT IT IMPROVED FROM 0.54% IN
1990 TO 0.64% IN 1998.( $17,975 MILLION TO 33,626 MILLION IN
1998 )
US $ Million
GROWTH OF EXPORTS
0.66%
0.64%
0.62%
0.60%
0.58%
0.56%
0.54%
0.52%
0.50%
0.48%
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1990
Growth of Exports
1998
AS % of World Exports
IV)
TRADE-GDP RATIO- ON AN AVERAGE BASIS,
EXPORT-GDP RATES INCREASED FROM 5.0% IN 1980S TO 8.2% IN
1990S. WHILE IMPORT-GDP RATES INCREASED FROM 7.7 PERCENT
IN 1980S TO 9.4 PERCENT IN 1990S.
TRADE-GDP RATIO
10%
8%
6%
Export-GDP %
Import-GDP %
4%
2%
0%
1980s
1990s
(B)
STRUCTURAL CHANGES IN EXPORTS:
I)
EXPORT OF MANUFACTURED GOODS – IN 1991-92, THE
SHARE OF MANUFACTURED GOODS IN TOTAL EXPORTS HAS
RISEN TO 73.6%, WHILE THAT OF PRIMARY GOODS WAS JUST
23.1%. THE TREND WAS REINFORCED IN 1990S. DURING 1987-88
TO 1990-91, THE SHARE OF MANUFACTURED GOODS IN
EXPORTS WAS 71.2% WHICH SOARED TO 75.4% DURING 1992-93
TO 1998-99. THIS MEANT A GAIN OF 4%.OVER THE SAME
PERIOD, THE SHARE OF PRIMARY GOODS FELL BY 2% FROM
24% TO 21.8%.
RISE OF MANUFACTURED EXPORTS
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
87-88 to
90-91
92-93 to
98-99
Manufactured
Goods
Primary Goods
IMPROVEMENT IN S0ME ITEMS- COFFEE,
PROCESSED FOOD, JUICE AND MISCELLANEOUS
PROCESSED ITEMS, RICE SPICES WORKS OF ART AND
OTHER ITEMS LIKE SUGAR, MOLASSES & RAW COTTON
SHOWED CONSIDERABLE IMPROVEMENT IN 1990S, IN
1980s. THE TOTAL EXPORT CARRYINGS FROM THESE
ITEMS DECLINED BY 2.9% IN 1980s BUT THEY
REGISTERED AN IMPRESSIVE 20.5% GROWTH RATE IN
1990S.
II)
TREMENDOUS GROWTH IN THREE ITEMS
– THE COMBINED SHARE OF THREE ITEMS-COFFEE, RICE AND
PROCESSED JUICE/FRUIT MORE THAN DOUBLED FROM 15.4%
IN 1990-91 TO 34.2% IN 1998-99 AND HENCE DESIGNATED
‘CRUCIAL EMERGING EXPORTS’.
EXPORTS OF COFFEE, RICE &
PROCESSED JUICE/FRUIT
1990-91
1998-99
III)
DECLINE OF ORES AND MINERALS –
REFLECTIVE A HEALTHY TREND, THE SHARES OF ORES AND
MINERALS IN TOTAL EXPORTS DECLINED FROM 5.5 IN 1980S
TO 3.5% IN 1990S. THE EXPORTS OF SEMI-FINISHED IRON AND
STEEL INCREASED MANIFOLD.
DECLINE IN ORES & MINERALS
!980-90
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1990-00
(C)
STRUCTURAL CHANGES IN IMPORTS
SHARP RISE IN IMPORT OF CAPITAL GOODS
In 1990s the import of capital goods recorded a sharp rIse of
56.9%. While that of rAw materials and intermediate goods rose by
39.7%.
ANNUAL GROWTH
PRODUCTS LOW-
RATE
OF
PETROLEUM
During, the period 1992-93 to 1998-99, the growth rate in oil
imports ranged between 33.4% in 1996-97 and a negative of 21.2% in
1998-99. Average annual growth rate of item during1992-99 was low
(4.6%).
LOWER IMPORTS OF CONSUMER GOODS
The share in imports of consumer goods dropped from 4.3%
during 1987-91 to 3.6% during 1992-99.
SURGE IN IMPORT OF GOLD/SILVER
FOLLOWING THE REPEAL OF GOLD CONTROL ORDER IN 1991,
A SERIES OF MEASURED WERE TAKEN TO LIBERALIZE IMPORTS
OF GOLD E.G., RETURNING NRIS HAVE BEEN ALLOWED TO
BRING 10KG. OF GOLD EFFECTIVE FROM OCT 1997. GOLD IS
ALSO IMPORTED THROUGH SIL (SPECIAL IMPORT LICENCE). ALL
THIS HAS LED TO RISE IN IMPORTS OF GOLD.
(D)
CHANGES IN DIRECTION OF TRADE
I) EXPORTS
DIRECTION OF EXPORTS DURING
REFORM PERIOD
II)
Japan
Developing
Countries
OPEC
Eurpean
Unon
U.S.A.
27.80%
26.70%
1.2
30.00%
1
25.00% 19.30%
0.8
20.00%
0.6
15.00%
9.90%
6.50% 0.4
10.00%
0.2
5.00%
0
0.00%
IMPORTS
COUNTRIES
1987 -91
1992 – 99
Developing
18.0
23.0
OPEC
14.5
21.9
OECD
59.4
52.1
Eastern European
8.1
2.9
IMPACT ON AGRICULTURE
1987-91
1992-99
2.
INCREASE IN AGRICULTURE PRODUCTION
Million Tonnes
AGRICULTURAL PRODUCTION
250
200
150
Agricultural
Production
100
50
0
1980-81 1990-91 1998-99
3.
DECREASE IN GROWTH RATE: -
Names
4.
Food grains
Pre Reform Period
1990 –91 over 1980 –81
3.1
Post Reform Period
1998 –99 over 1990 –91
1.7
Oil Seeds
7.1
4.1
Sugarcane
4.6
2.4
Cotton
3.4
3.4
Jute
1.2
0.7
LOW PUBLIC SECTOR INVESTMENT
GROSS CAPITAL FORMATION IN AGRICULTURE INDICATED
THAT PUBLIC SECTOR INVESTMENT (AT 1980 –81 PRICES), WHICH
HAD INCREASED TO RS 1,796 CRORES IN 1980 –81, INDICATED A
SHARP DECLINE AND AVERAGED ONLY RS 1,138 CRORES DURING
6 YEAR REFORM PERIOD (1991 –97).
5.
IMPORT OF FOOD GRAINS (IN CRORES): -
IMPORT OF FOODGRAINS
374
582
516
80 to 84
85 to 89
90 to 98
THIS RISE IN IMPORT OF FOOD GRAIN IS THE
INDICATOR
OF
LIBERAL
IMPORT
DUTY
RATES
INTRODUCED BY GOI DURING REFORM PERIOD.
6.
7.
IMPROVEMENT IN EXPORTS (IN CRORES): -
ITEMS
1985 –86
1990 –91
1998 –99
Rice
409
960
4,368
Tea
626
1,070
2,265
Coffee
265
252
1,728
RISE IN FERILISER IMPORTS ( IN CRORES)
Fertiliser Import
4,537
90 to 98
85 to 89
80 to 84
1,114
Fertiliser Import
698
The rise on Fertiliser import is also a consequence of liberalisation.
FOOD GRAIN PRODUCTION IN INDIA
FOODGRAIN PRODUCTION
Million Tonnes
8.
220
210
200
190
180
170
160
150
Foodgrain
Production
199091
199697
199899
199900
9.
BETTER AVAILABILITY OF FOOD GRAINS (GRAM PER CAPITA
PER DAY)
10.
600
500
300
200
100
0
STOCK OF CEREALS (IN MILLION TONNES): -
Date
1.7.1990
1.7.1991
1.7.1992
1.7.1993
1.7.1994
1.7.1995
1.7.1996
1.7.1997
1.7.1998
11.
Rice
Wheat
Gram
Pulses
Foodgrain
400
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
GRAM PER DAY PER CAPITA
AVAILABILTY OF FOODGRAINS
Rice
07.48
09.72
08.31
10.44
14.92
16.44
12.88
10.95
12.04
Wheat
13.15
11.04
06.74
15.22
17.78
19.22
14.13
11.42
16.48
GROSS CAPITAL FORMATION IN AGRICULTURE (1993 –94 PRICE):
YEAR
TOTAL
13523
PUBLIC
PRIVATE
( In Rupees Crores)
44677
9056
PUBLIC
PRIVATE
Percent Share
33.0
67.0
1993-94
1994-95
15021
4971
10050
33.1
66.9
1995-96
15876
4928
10948
31.0
69.0
1996-97
16610
4689
11921
28.2
71.8
1997-98
16344
4240
12140
25.9
74.1
1998-99
16457
3876
12581
23.6
76.4
PRODUCTION OF RICE AND WHEAT
PRODUCTION OF RICE & WHEAT
Million Tonnes
11.
100
80
60
40
20
0
91
86
74
70
76
55
54
36
RICE
WHEAT
1980-81
199091-
1998-99 1999-00
IMPACT ON SMALL SCALE SECTOR
1.
DEFINITION
1966 :
SMALL SCALE ENTERPRISES WITH A FIXED
CAPITAL INVESTMENT OF RS.7.5 LAKHS AND ANCILLIARIES
WITH A FUXED CAPITAL INVESTMENT OF RS. 10 LAKHS
1975 :
LIMIT RAISED TO RS. 10 LAKHS FOR SSI &
RS. 20 LAKHS FOR ANCILLIARIES
1985 :
LIMIT RAISED TO RS. 35 LAKHS & RS. 45
LAKHS FOR ANCILLIARIES
1990 :
LIMIT RAISED TO 60 LAKHS FOR SSI & RS.
75 LAKHS FOR ANCILLIARIES
LIMIT RAISED TO RS. 3 CRORES FOR
1997 :
SSI/ANCILLIARIES
2.
SMALL INDUSTRY
SMALL INDUSTRY
TRADITIONAL INDUSTRY BASED
BASED ON TRADITIONAL SKILL
AND TECHNIQUE
HANDICRAFT WITH HIGH SKILL
WORKMANSHIP
3.
MODERN SMALL SCALE INDUSTRY
WITH MODERN TECHNOLOGY
VILLAGE & HOUSEHOLD INDUSTRIES
PRODUCING COMMON CONSUMER
GOODS
MEASURES TAKEN FOR DEVELOPMENT OF SSI
(A) ITEMS FOR SSI
: THE NUMBER
OF ITEMS EXCLUSIVELY RESERVED FOR SSI IS NOW 800. IN
1997, SOME ITEMS HAVE BEEN DERESERVED
(B)
LIBERALISATION
LIBERALISATION OF FINANCIAL ASSISTANCE
PROCEDURE AND CONDITIONS OF FINANCIAL
ASSISTANCE FROM COMMERCIAL BANKS HAVE BEEN
LIBERALISED. SSI SECTOR RECEIVED 39.3 PERCENT OF
TOTAL PRIORITY SECTOR ADVANCES FROM PUBLIC
SECTOR BANKS IN 1999-2000
AGAINST 33.7% BY
AGRICULTURAL SECTOR.
(C) EXCISE CONCESSIONS : THESE CONCESSIONS
ARE GRANTED TO BOTH REGISTERED AND UNREGISTERED
UNITS ON A GRADED SCALE DEPENDING ON TURNOVER
UPTO RS. 300 LAKHS
(D)
D)
FULL EXCEPTION :
FULL
EXEMPTION
IS
GRANTED UPTO A TURNOVER OF RS. 30 LAKHS AND
CONCESSIONAL RATE OF EXCISE DUTY IS LEVIED FOR A
TURNOVER EXCEEDING RS. 30 LAKHS BUT NOT EXCEEDING
RS.75 LAKHS.
(E)
PURCHASE PREFERENCE : PRICE AND
PURCHASE PREFERENCE IS GRANTED TO PRODUCTS
MANUFACTURED IN THE SMALL SECTOR
(F)
CONSULTANCY SERVICES :
A
COMPREHENSIVE RANGE OF CONSULTANCY SERVICES
ARE PROVIDED TO SSI BY SIDO (SMALL INDUSTRIES
DEVELOPMENT ORGANISATION)
(G) STRENGTHENING OF FINANCIAL ASSISTANCE
-SMALL INDUSTRIES DEVELOPMENT FUND (SIDF)
-NATIONAL EQUITY FUND (NEF)
-SINGLE WINDOW SYSTEM
4.
NEW POLICY PACKAGES
THE PRIME MINISTER ANNOUNCED A NEW SSI POLICY ON
AUGUST 30, 2000 –
A. RAISING THE EXEMPTION LIMIT FOR EXCISE
DUTY FROM RS.50 LAKH TO RS. 1 CRORE
B. PROVIDING CREDIT LINKED CAPITAL SUBSIDY
OF 12% AGAINST LOANS FOR TECHNOLOGY
UPGRADATION IN SPECIFIED INDUSTRIES
C. RAISING THE LIMIT OF INVESTMENT IN
INDUSTRY RELATED SERVICE AND BUSINEESS
ENTERPRISES FROM RS 5 LAKHS TO RS. 10
LAKHS.
D. CONTINUATION OF ONGOING SCHEME OF
GRANTING RS.75,000 TO EACH SSI FOR
OBTAINING ISO 900 CERTIFICATE TILL XTH
PLAN
E. RAISING OF THE LIMIT FOR COMPOSITE LOANS
FROM RS.100 LAKHS TO RS. 25 LAKHS.
F. CONSTITUTION
OF
EXPERT
COMMITTEE
HEADED BY CABINATE SECRETEARY TO REVIEW
EXISTING LAWS AND REGULATIONS
G. RAISING THE FAMILY INCOME ELIGIBLITY
LIMIT FROM RS. 24,000 TO RS. 40,000 PER ANNUM
UNDER PMRY
H. CONDUCTING OF THIRD CENSUS OF SSI
5.
RESULTS:
(A)
RISE IN NUMBER OF UNITS
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
(B)
32.25
31.21
30.14
28.57
27.24
25.71
23.81
20.46
20.82
19.5
Series1
RISE IN PRODUCTION
RS CRORES
RISE IN PRODUCTION OF SSI
UNITS
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
90- 91- 92- 93- 94- 95- 96- 97- 98- 9991 92 93 94 95 96 97 98 99 00
(C)
GROWTH IN EMPLOYMENT
RISE IN SSI EMPLOYMENT
178.5
171.6
167.2
160.6
152.6
146.6
139.4
134.1
129.8
125.3
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1991-92
1990-91
0
50
100
150
200
Lakhs
(D)
IMPROVEMENT IN EXPORTS
GROWTH OF SSI EXPORTS
60,000
50,000
40,000
Rs.
30,000
Crores
20,000
10,000
0
90- 91- 92- 93- 94- 95- 96- 97- 98- 9991 92 93 94 95 96 97 98 99 00
(E)
HIGHER CONCENTRATION IN RESERVED ITEMS
THE GROWTH OF SSI IN TERMS OF NUMBER AND
OUTPUT IS MUCH HIGHER IN RESERVED ITEMS THAN
IN UNRESERVED ITEMS. OBVIOUSLY, THE POLICY OF
RESERVATION HAS POSITIVELY HELPED THE
GROWTH OF THIS SECTOR
(F)
ADVERSE EFFECT OF DERESERVATION
1997-98
1998-99
: ICE-CREAM, BISCUITS, SYNTHETIC
SYRUPS,
AUTOMOBILE
PARTS,
CORRUGATED PAPER AND BOARD,
VINEGAR,
POULTRY
FEED,
RICE
MILLING, ETC.
AGRICULTURAL IMPLEMENTS
THESE DECISIONS HAVE ADVERSELY AFFECTED THE SSI
(G)
FACTORS AFFECTING PERFORMANCE OF A FIRM
SKILLED
MANPOWER
AVAILABILITY
SUPLLIERS AND
SERVICE
PROVIDERS
ENTREPRENERIAL
VISION AND
COMPETENCIES
AVAILABLE
INFRASTRUCTURE
REGULATORY AND
FISCAL
ENVIRONMENT
IMPACT ON SOCIAL SECTOR
I)
POVERTY
RURAL URBAN POVERTY
60
40
20
0
Rural
Urban
19 19 19 19 19 19 19
90- 91- 92- 93- 94- 95- 9791 92 93 94 95 96 98
Year
1983
19861986-87
19871987-88
19881988-89
19891989-90
19901990-91
Rural
45.31
38.81
39.23
39.06
34.30
36.43
Urban
35’65
32.29
36.20
36.60
33-40
32.76
Year
1991-92
1992-3
1993-94
1994-95
1995-96
1997-98
Rural
37.42
43.47
36.66
41.02
37.15
35.78
Urban
33.23
33.73
30.51
33.50
28.04
29.99
RURAL POVERTY DECLINED IN 1980S BUT NOT IN 1990S URBAN
POVERTY DECLINED IN 1980S AND IN 1990S.
EMPLOYMENT IN ORGANISED SECTOR
Year
1990
1991
1992
1993
1994
1995
Public Sector
197.71 lakhs
190.57
192.10
193.26
194.45
194.66
Private Sector
75.82 lakhs
76.76
78.46
78.50
79.30
80.59
Total
263.63
267.33
270.56
271.76
273.75
275.25
EMPLOYMENT HAS BEEN INCREASING BUT THE GROWTH IN
ORGANIZED SECTOR HAS BEEN VERY SLOW.
EMPLOYMENT GROWTH RATE
Public Sector
1991
1.52
1992
0.80
1993
0.60
1994
0.62
1995
0.11
1996
0.19
1997
0.67
Private Sector
1.24
2.21
0.06
1.01
1.63
5.62
2.04
MOVEMENT OF EMPLOYMENT
( Percentage)
Organised Sector
1.73
1983to1990-91
0.6
1990-91 to 1997-98
V)
Unorganised Sector
2.41
1.1
EFFECT ON SERVICES
Year
1960-61
1970-71
1980-81
1989-90
1990-91
1997-98
1998-99
1999-00
Primary
45.80
44.50
38.10
32.40
30.90
26.74
26.82
25.50
Laundry
20.70
23.60
25.90
28.10
30.00
27.75
27.01
27.40
Services
33.50
31.90
36.00
38.50
39.10
45.50
46.17
47.10
Primary sector- Agriculture, Forestry Fisheries
Secondary sector – Mining, Manufacturing, Electricity, Construction
Services- Trade, Transport communication social Personal Service
VI)
SECTORAL SHARE OF EMPOYMENT TO GDP
Primary
Sector includes agriculture, forestry and fisheries...
sector includes mining, manufacturing and electric supply and
Secondary
construction.
Services cover trade, transport, communication, finance, real estate and
community, social and personal service
IMPROVEMENT IN SERVICES
50
40
Primary
30
20
10
Secondary
Services
0
89-90 90-91 97-98 98-99 99-00
VII). SERVICES CONTRIBUTION TO
GDP
CONTRIBUTION OF SERVICES SECTOR TO GDP
PERCENT
20
15
Trade
10
Transport
5
Finance
0
90- 91- 92- 93- 94- 95- 9691 92 93 94 95 96 97
VIII.
Communit
y Services
RURAL-URBAN POVERTY COMPARISON
DECLINE OF POVERTY
40
% 20
0
87-88
Rural
IX)
93-94
Urban
EDUCATION
10000
8000
6000
4000
2000
0
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Expenditur
e
Percentage
92- 93- 94- 95- 96- 9793 94 95 96 97 98
Year -
Total Plan outlay (crores)
72852.4
1992-93
88080.7
1993-94
D
98167.3
1994-95
u1995-96
107380.4
r1996-97
129188.6
i1997-98
139625.9
n
Reform period expenditure has increased’
X)
Expenditure on
Education ( crores)
2619.4
3147.3
3940.0
5355.7
7346.1
8208.2
% of plan
3.6
3.6
4.0
4.9
5.7
5.8
DECLINE IN SHARE OF TECHNICAL EDUCATION
The share was around 22 to 29 % during to reform period of
1971-91 which declined to 18.4 % during reform period.
XI) RISE IN STATE SHARE OF TECHNICAL EDUCATION
In case of state government, The share has marginally increased
form 2.9 percent during pre- reform period to 3.1 percent during reform
period-
XII)
IMPROVEMENT IN DRINKING WATER AND SANTIATION
Item/Area
Drinking water Rural
1985
56.3
1990
73.9
1995
82.8
Urban
Sanitation Facility Rural
Urban
72.9
0.7
28.4
83.8
2.4
45.9
84.3
3.6
49.98
XIII) IMPACT ON FEMALES
A)
Decline in unemployment of urban females (per 1000)
Year
199394
19992000
Males
56
RURAL
Females
56
72
70
(Source: NSS 55 Round 1999 –2000)
B)
Decline in Rural Unemployment
URBAN
Males
Females
67
104
73
94
Sector& Year
RURAL
1993-94
1999-2000
URBAN
1993-94
1999-2000
Secondary & Above
Graduate& Above
Males
Females
Males
Females
89
243
134
323
69
204
197
351
69
66
207
163
64
66
205
163
(Source : NSS 55th Round, 1999-2000.)
XIV) EXPANSION IN HEALTH SERVICES
25000
3000
2500
2000
1500
1000
500
0
20000
15000
10000
5000
0
1981
CHC
PHC
M.Colleges
C.H.C
P.H.C.
1992
1997
COMMUNITY HEALTH CENTRE
PRIMARY HEALTH CENTRE
IMPACT ON FOOD SECURITY
(A)
DEFINITION
WORLD DEVELOPMENT REPORT DEFINED
FOOD SECURITY AS ACCESS BY ALL PEOPLE AT ALL
TIMES TO ENOUGH FOOD FOR AN ACTIVE HEALTHY
LIFE.
FOOD & AGRICULTURE ORGANISATION (FAO)
DEFINED FOOD SECURITY AS” ENSURING THAT ALL
PEOPLE AT ALL TIMES HAS BOTH PHYSICAL AND
ECONOMIC ACCESS TO BASIC FOOD THEY NEED”.
STAATZ ( 1990) DEFINED FOOD SECURITY AS “
THE ABILITY TO ASSURE, ON A LONG TERM BASIS TO
A TIMELY RELIABLE AND NUTRITIONALLY
ADEQUATE SUPPLY OF FOOD.
(B) MAIN COMPONENT
V)
PROMOTING DOMESTIC PRODUCTION TO MEET
THE DEMANDS OF THE GROWING POPULATION
.
VI)
PROVIDING MINIMUM SUPPORT PRICES FOR
PROCUREMENT AND STORAGE OF FOOD ITEMS
.
VII)
OPERATING A PUBLIC DISTRIBUTION SYSTEM.
VIII)
MAINTAINING BUFFER STOCKS SO AS TO TAKE
CARE OF NATURAL CALAMITES.
(C)
PUBLIC
DISTRIBUTION SYSTEM
Procurement
of Food
Food Corporation
Block supply
Go down
States
Agencies
(D) COMPARATIVE ISSUE PRICE OF PDS (2000)
(2000)
Old Rates (1998)
APL
BPL
New Rates (2000)
APL
BPL
Revised Rates (2002)
APL
BPL
Wheat
6.82
2.50
Rice
9.05
3.50
Sugar
12.00
12.00
8.40
4.20
11.78
5.89
-13.00
6.10
4.15
8.30
5.65
13.50
(E) FEATURES OF REVISED PDS
I)
INCREASED ALLOCATION FOR BPL FAMILIES:
FAMILIES
ALLOCATION OF WHEAT & RICE BPL FAMILIES HAS BEEN
RAISED FROM 10KG TO 20 KG.
II)
HIKE OF APL FOODGRAI
FOODGRAINS
NS:
NS THE CENTRAL ISSUE PRICE
OF APL FAMILIES IS ALMOST DOUBLE OF BPL RATES. FOR
WHEAT. THE RATE FOR BPL IS 4.20 BUT THAT OF APL IS
8.40. SIMILARLY RICE FOR BPL IS 5.89 BUT THAT OF APL IS
RS 11.78.
III)
CHANGES IN DESTRIBUTION OF SUGAR:
SUGAR For BPL families
the monthly allotment had been increased from 375 gms per head to
454 gm per head ( Rise by 21%) and price of sugar had been raised
from rs 12.00 to Rs 13.00 No sugar for APL families.
(F)
RESULTS
I) INCOME TRANSFER TO POOR:
Y = R ( PM- PD )
Y = Income Gain
R = Quantity Purchased
PM = Price of the Market
PD = PDS Price
Following this methodology per capita gain as calculated by
experts is lower for poor in rural areas than in urban areas,
ii) EFFECT ON SUBSIDY:
1998
2000
PRICE
PRICE
of
of
APL APL -
Wheat
6.82
8.40
Rice
9.05
11.78
Sugar
12.100
----
IV)
BY ELIMINATING SUBSIDY ON APL , THE GOVERNMENT
HOPES TO SAVE RS 4360.
V)
BY DOUBLING GRAIN ALLOCATION FOR BPL FAMILIES
FCI IS EXPECTED TO SAVE RS 1078 CRORES BY WAY OF
REDUCTION OF BUFFER STOCK.
VI)
AS A CONSEQUENCE OF ALL THESE STEPS THE TOTAL
ANNUAL FOOD SUBSIDY IS EXPECTED TO DECLINE
FROM RS 9138 CRORES .TO 8,124 CRORES.
iii) LIMITED BENEFIT TO POOR FROM PDS
THE DEPENDENCE OF THE POOR ON THE PDS
IN RURAL AREAS FOR MANY COMMODITIES IS LESS THAN 16
PERCENT. THIS MEANS THAT DEPENDENCE OF THE RURAL
POOR ON THE OPEN MARKET IS MUCH HIGHER THAN ON THE
PDS FOR MOST OF THE COMMODITIES. SIMILARLY URBAN
POOR ALSO DEPENDS TO A SUBSTANTIAL EXTENT ON THE
OPEN MARKET TO MEET THEIR REQUIREMENTS.
(iv) LOW COVERAGE OF POPULATION
THE TPDS HAS MADE THE PROGRAMMING VERY RESTRICTIVE
EVEN ALL THE BPL FAMILIES ARE NOT GETTING BENEFIT BECAUSE
OF LACK OF CARDS TO ALL OF THEM.
(v) APL POPULATION NOT GETTING BENEFIT
THE PRICES OF APL RICE IS RS
11.78 AND THAT OF WHEAT IS
RS 5.89 WHICH IS VERY CLOSE TO THE MARKET RATE. SUCH CARD
HOLDERS ARE NOT INCLINED TO RECEIVE THEIR QUOTA BECAUSE
THEY GET BETTER QUALITY AT THE SAME PRICE. SUGAR/
KEROSENE IS NOW DENIED TO THEM
.
(vi)
NO IMPROVEMENT IN HEALTH
PDS OUTLETS SUPPLY COMPARATIVELY INFERIOR GRAIN TO
RATION CARD HOLDERS, WHICH THE POOR CONSUMERS ARE
FORCED TO ACCEPT, BUT THIS DOES NOT IMPROVE THEIR HEALTH.
(vii) HELP IN RELIEF WORK
FOOD SECURITY SYSTEM HAS BEEN ABLE TO MEET
BIG NATURAL CALAMITIES LIKE GUJURAT EARTHQUAKE,
ORISSA SUPER CYCLONE ETC. COUNTRY DID NOT NEED TO
IMPORT FOOD GRAINS.
(viii) MEETING
MEETING FOOD SCARCITIES
INDIA WAS ABLE TO OVERCOME FAMINES AND
OTHER ACUTE FOOD SCARCITIES BECAUSE OF FOOD
SECURITY SYSTEM
(ix)
BETTER PRICE TO PRODUCERS
THE CENTRAL GOVERNMENT FIXES BETTER PROCUREMENT
PRICES FOR WHEAT /RICE SO THAT FARMERS GET GOOD PRICES
FOR THEIR PRODUCE.
(x)
PRICE CHECK
A) BY KEEPING A LOWER PRICE.
B) BY RELEASING GRAIN FOR OPEN MARKET.
ANSWERS TO REINFORCEMENY QUIZ –
II
40.
a.
Indirect Tax
b.
Regressive Tax
c.
Incidence
d.
Inelastic tax
e.
Non-evadable tax
f.
Certain tax
g.
Optional Contribution
h.
Unproductive tax
41.
a. HONESTY
b. SAVING
c. COMPULSORY
d. DISPARITIES.
e. UNJUST
f. IMPACT, INCIDENCE
g. COMMON
h. EXPENSES
i. QUID PRO QUO
j. ARBITRARY
42.
a. ECONOMIC GROWTH
b. NATIONAL INCOME
c. CENTRAL STATISTICAL ORGANISATION
d. INCOME
e. NON-MONETIZED
f. PURCHASING POWER
g. DISGUISED
h. OPEN
i. INVENTORIES
j. DEPRECIATION
43.
a. CLOSED ECONOMY
b. NATIONAL DIVIDEND
c. INVENTORIES
d. WAGE EMPLOYMENT
e. DOUBLE COUNTING
f. SEMI-FINISHED GOOD
g. TRANSFER PAYMENT
h. DISGUISED UNEMPLOYMENT
i. DEPRECIATION
j. HOUSEHOLD SECTOR
44.
a. i
b. iv
c. ii
d. iv
e. iv
f. ii
g. i
h. iv
i. ii
j. ii
45. B.
46.
C
47.
A
48. D
49.
A
50.
A
51.
A
52.B
53.
C
54.
C
55.A
56. C
57.
B
58. D
59.
C
60.
C
61.
A
62.
A
63.A
64.
A
65.
D
66.B
67.
C
68.
C
69. C
70.
D
71.
C
72.
D
73.
C
74.
B
75.
C
76.
B
77.
D
78.
B
79. A
80.
A
81.
C
82. A
83.
B
84.
B
85.
B
86.
B
87.
A
88.
B
89.
C
90.
B
91.
B
92.
C
93.
D
94.
C
95.
A
96.C
REINFORCEMENT QUIZ -II
97. Give the opposites of the following terms:
a.
Direct tax
b.
Progressive tax
c.
Impact
d.
Elastic tax
e.
Evadable tax
f.
Arbitrary tax
g.
Compulsory payment
h.
Productive tax
8
98. Fill in the blanks in the sentences below with the right words: 10
Compulsory, Honesty, Disparities, Saving, Unjust, Arbitrary,
Common, Incidence Impact, Quid pro quo, Expenses.
a.
A direct tax is a tax on ___________________________.
b.
A high income tax is a disincentive to _____________________.
c.
A tax is a __________________ payment.
d.
Progression reduces _____________________ in wealth.
e.
Regressive taxes are _____________________ in principle.
f.
Shifting starts with ____________________ and ends in
________________.
g.
Taxes confer __________________ benefit upon the residents of a
state.
h.
Taxes are intended to meet the general __________________ of
the government.
i.
The essence of a tax is the absence of any direct _______________
between the tax payer and the government.
j.
The rate of income tax is ___________________.
99.
Fill in the blanks in the following statements:
10
a. National income is a comprehensive index of the state of an economy and
a measure of its ________________ over a period of time.
b. Per Capita income = ?/Population
c. National income estimates in India are published annually by the
_____________.
d. The _____________________ method of estimating NI measures the sum
total of the incomes received by the individuals of the country.
e. Developing countries have a large _______________________ sector
which is composed of goods and services which are not bought or sold for
money.
f. Low per capita income results in less ______________ power of people.
g. Excess population on land a causes _____________ unemployment in
agriculture.
h. When a person is willing to work and is physically fit and qualified for
the job but fails to find work it is called ________________
unemployment.
i. It is difficult to calculate the value of __________________ in the
custody of the producers for computing NI.
j. There are not accepted standard rates of _______________ applicable to
the various categories of machines for the purpose of calculating NI.
100.
The following economic terms are jumbled up. Write the
correct terms:
10
a. DESOLC
YMONOCE
b. LANOITAN
DNDIVIDE
c. TORNEVNIIES
d. AEGW
e. EUBLOD
NMLMOPEYET
ITNOOCNG
f. MIES
EHSINIFD
DOOG
g. RSNATERF
TNMYAPE
h. DESIUGSID
TYOLPMENUMEN
i. NOICIRPEDATI
j. LDOHEUOHS
101.
ROTESC
Put a tick mark against the correct options:
10
a. National income is the total flow of goods and services produced in an
economy.
(a)
In one year
(b)
In two years
(c)
In any indefinite time period
(d)
None of the above
b. National Income may be defined from the
(a)
Production viewpoint
(b)
Distribution viewpoint
(c)
Disposition viewpoint
(d)
All the above.
c.
Indian economy is an example of
(a)
Closed economy
(b)
Open economy
(c)
None of the above
d. An economy consists of
(a)
Consumption sector
(b)
Production sector
(c)
Government sector
(d)
All the above
e. Transfer payment include
(a)
Old age pension
(b)
Unemployment benefit
(c)
Interim Relief
(d)
All the above
f. Self-employed labourers are those who
(a)
Work for others
(b)
Work for themselves
(c)
Are self-made
(d)
None of the above
g. The formula for GNP is
(a)
GNP = NNP + Depreciation
(b)
GNP = NNP – Depreciation
(c)
GNP = NNP X Depreciation
h. Investment expenditure as one component of the expenditure method
include
(a)
Private Investment
(b)
Government Investment
(c)
Net Foreign Investment
(d)
All the above.
i. A non-monetized sector exists in:
(a)
Developed countries
(b)
Developing countries
(c)
Both the above
j. National Income is
(a)
Real Indicator
(b)
Rough Indicator
(c)
Very precise indicator
(d)
No indicator at all, of economic welfar
102.
. The Industrial Policy announced on May31, 1990 raised the
investment limit for small-scale sector from Rs.35 lakh to Rs.
45 lakh
B. 60 lakh C. 75 lakh D. 90
lakh
103. in India, the largest number of workers are employed in
E.
Sugar industry
F.
Iron and Steel industry
G.
Textile industry
H.
Jute industry
104. ICICI is the name of
E.
Financial institution
F.
Chemical industry
G.
Cotton industry
H.
Chamber of commerce and industry
105.
In which year was IDBI delinked from RBI and made and
autonomous corporation?
B.
1967
B. 1970
C. 1973
106. ICICI is the name of
E.
Financial institution
F.
Chemical industry
G.
Cotton industry
H.
Chamber of commerce & industry
107. IDBI is a
D. 1976
B.
108.
B.
Bank B. Board
C. Bureau
D. Corporation
Prior to July 24, 1991 the MRTP Act applied to an
undertaking owing assets worth more than
Rs.25 crore
Rs.100 crore
B. Rs.50 crore
C. Rs.75 crore
D.
109. The Tenth Finance Commission was appointed in
B.
April 1993 B. June 1992 C. June 1991 D. April 1990
110. Ad Valorem means, according to
B.
Valid rule B. existing rules
C. Value
D. excise rules
111. . MODVAT scheme is aimed at
E.
Raising the prices of luxury goods.
F.
Lowering the prices of goods of every day use.
G.
Avoiding repeated payment of duty from the row materials
stage to the final product and thus, reduces the burden of duty, on the
final product.
H.
None of these.
112. . The Wanchoo Committee (1971) probed in
B.
Direct taxes B. indirect taxes C. Agricultural holding tax D.
Non tax revenue
113.
. The Choksi Committee was appointed to recommended
measures to simplify the existing
E.
Indirect tax laws
F.
Sales tax laws
G.
Direct tax laws
H.
Corporation tax laws
114. The Rangarajan Committee was set upon
E.
Deficit financing
F.
PSU disinvestments
G.
Devaluation of rupee
H.
Gold bank scheme
115. The private taxation process in mixed economy such as India
includes
E.
Denationalization & entry of private sector industries into the areas
excessively reserved for the state sector.
F.
Transport of management and control of public sector undertaking
to public sector.
G.
Limiting the scope of the public sector.
H.
All the above.
116. . The Agricultural Price Commission was set up in
B.
117.
1947
B. 1951
C. 1965
D. 1974
The new name of Agricultural Prices Commission is
E. Rural Prices Commission
F. Agriculture Costs Commission
G. Commission for Agricultural Costs and Prices
H. None
118. The ‘Slack Season’ for the Indian economy is
E. June to September
F. Jan. to April
G. April to August
H. Aug. to December
119. Contribution of agriculture in the total exports of India is
B.
18%
B.19%
C. 17%
D. 20%
120. The new CRR announced by the RBI is
B. 10%
B. 9.5%
C. 10.5%
D. 9%
121. Which is the largest stock exchange in India?
E. National Stock Exchange
F. Mumbai Stock Exchange
G. Calcutta Stock Exchange
H. Delhi Stock Exchange
122. A registered company can be declared sick by the
Industrial dispute panel
A. Judiciary
B. Board for Industrial and Financial Reconstruction (BIFR)
C. Both B and C
123. ‘Right Issue’ means
E.
Preferential state issue
F.
Equity share issue
G.
Bond issue
H.
A and C
124. QR on 350 items was removed in
A. 1996 B. 1997 C. 1998 D. 1999
125. QR on 2000 items was removed in
A. 1996 B. 1997 C. 1998 D. 1999
126.
The peak rate of customs duty on several items before 1991
was over
A. 100%
B. 150%
C. 200%
D. 300%
127. The customs duty was lowered in 1994
B.
50%
B. 55%
C. 60%
D. 65%
128. Foreign Exchange Management Act was passed in
B.
1997
B. 1998
C. 1999
D. 2000
129. The petroleum prices have been deregulated in
B. Jan.2002 B. Feb. 2002 C. March 2002 D. April 2002
130. Life insurance companies were nationalized in
B. 1950 B. 1955 C. 1956 D. 1958
131. The LIC was set up in 1956 with a amalgamation of
B. 240 companies B. 245 companies C. 250 companies D. 255 companies
B.
B.
132. The reform committee on insurance reform is known as
Manmohan Committee B. Rangarajan Committee C. Malhotra
Committee D. Goyal Committee
133. The Insurance Regulatory Bill was passed in
1998 B. 1999
C. 2000
D. 2001
134. The predecessor of Bombay Stock Exchange was known as
B. Broker’s association B. Shares association C. Stock Exchange association D.
Native Share and stock broker’s association
135. V-Sat is known as
B. Vertical Satellite B. Very Small Aperture Terminal C. Visual Satellite
D. Volatile Satellite
136. The Indian Stock Market was opened to foreign institutional
investors (FII) in
A. 1992
B. 1993
C. 1994
D. 1995
137. The report on employment opportunities was prepared by
B. Ahuwalia committee B. Manmohan committee C. Mukherjee
committee D. Malhotra committee
138. The number of commercial banks in 1996 was
B. 290
B. 291
C. 292
D. 293
139.
The first bank in India introduced by the British was known
as
E. Imperial Bank of India
F. East India Company bank
G. Impress of India Bank
H. Royal British Bank
B.
140. The Reserve Bank of India started to function in
1930
B. 1935
C. 1940
D. 1945
141. The number of banks nationalized in first phase was
B. 14
B. 16
C. 18
D. 20
142. The first nationalization of banks was done in year
B. 1967
B. 1969
C. 1971
D. 1972
B.
143. The second phase of nationalization of banks was done in
1978 B. 1980
C. 1982
D. 1984
144. The total number of banks nationalized in second phase was
B.
4
B. 6
C. 8
D. 10
B.
145. The interest rate of the Banks were deregulated since
1990
B. 1991
C. 1992
D. 1993
146. The Indian Electricity Act was passed in
B.
1905
B. 1910
C. 1915
B.
D. 1920
147. The Electricity Supply Act was passed in
1940 B. 1942
C. 1948
D. 1952
148. The National Highways Act was passed in
B. 1955
B. 1956
C. 1957
D. 1958
E.
F.
G.
H.
149. The Privatization in Telecommunication started in the area of
Basic Telephone services
Cellular Telephone services
Radio Paging services
WLL
150. The Indian Telegraph Act was passed in
B. 1880
B. 1875
C. 1885
D. 1890
151. The Indian Wireless Telegraph Act was passed in
B. 1930
B. 1931
C. 1932
D. 1933
152. The Telecom Regulatory Authority of India was introduced in
B. 1992
B. 1994
C. 1996
D. 1998
153. The law which banned the entry of private airlines was
E. Air Corporation Act 1953
F. Air Route Act 1955
G. Indian Air Space Act 1945
H. Indian Air Act 1960
154. The Private Sector in Civil Aviation was allowed in
B. 1992
B. 1993
C. 1994
D. 1995
SECOND GENERATION ECONOMIC REFORMS
1.
DEFINITION
THE "SECOND GENERATION" REFORMS ARE AIMED
AT "ENSURING THAT THE STATE FULFILLS ITS PROPER ROLE
IN A MARKET ECONOMY, BY CREATING A LEVEL PLAYING
FIELD FOR ALL SECTORS AND IMPLEMENTING POLICIES FOR
THE COMMON GOOD, PARTICULARLY SOCIAL POLICIES THAT
WILL HELP TO ALLEVIATE POVERTY AND PROVIDE MORE
EQUAL OPPORTUNITY". THESE REFORMS FOCUS ON 4
AREAS IN PARTICULAR:
2.
FOUR AREAS OF REFORMS
•
THE FINANCIAL SYSTEM - PAYING GREATER
ATTENTION TO THE SOUNDNESS OF BANKING SYSTEMS
AND ENCOURAGING GREATER TRANSPARENCY, BETTER
DATA DISSEMINATION AND THE LIBERALISATION OF
CAPITAL ACCOUNTS;
•
"GOOD
GOVERNANCE"
BY
REDUCING
CORRUPTION, ENCOURAGING TRANSPARENCY OF PUBLIC
ACCOUNTS, IMPROVING PUBLIC RESOURCE MANAGEMENT
AND THE STABILITY AND TRANSPARENCY OF THE
ECONOMIC AND REGULATORY ENVIRONMENT FOR
PRIVATE SECTOR ACTIVITY
•
COMPOSITION OF FISCAL ADJUSTMENT REDUCING UNPRODUCTIVE EXPENDITURES SUCH AS
MILITARY SPENDING AND FOCUSING SPENDING ON SOCIAL
SECTORS; AND
•
DEEPER STRUCTURAL REFORM - INCLUDING
CIVIL SERVICE REFORM, LABOUR MARKET REFORM,
TRADE AND REGULATORY REFORM, AND AGRARIAN
REFORM.
3.
IMF’s VIEWPOINTS
THESE NEW REFORMS ARE INTENDED TO BUILD ON THE
IMF'S MORE TRADITIONAL MEASURES WHICH FOCUS ON
ACHIEVING
BALANCE
OF
PAYMENTS
VIABILITY,
REDUCING
GOVERNMENT
DEFICITS,
TRADE
LIBERALISATION, FREEING UPRAISES AND REDUCING THE
ROLE OF THE STATE. AS CAMDESSUS ARGUES "WE HAVE
LEARNED THAT THIS FIRST GENERATION OF REFORM IS
NOT, BY ITSELF, ENOUGH EITHER TO ACCELERATE SOCIAL
PROGRESS SUFFICIENTLY, OR TO ALLOW COUNTRIES TO
COMPETE MORE SUCCESSFULLY IN GLOBAL MARKETS".
IT APPEARS THAT THE IMF VIEWS ITSELF NO LONGER
AS
SIMPLY
AN
INSTITUTION
TO
ACHIEVE
MACROECONOMIC STABILISATION OBJECTIVES BUT IS
FOCUSED MUCH MORE ON STRUCTURAL ISSUES.
4. INDIAN VIEWPOINT
FINANCE MINISTER YASHWANT SINHA REFERRED TO
SECOND GENERATION REFORMS IN HIS BUDGET SPEECH
2000-01 AND STATED VERY CLEARLY THAT THE
GOVERNMENT INTENDS TO CARRY FORWARD THE
PROCESS OF IMPLEMENTATION OF THE SECOND
GENERATION REFORMS.
ELABORATING ON THE PHILOSOPHY OF THE SECOND
GENERATION REFORMS, HE STATED; “GROWTH IS NOT
JUST AN END IN ITSELF. IT IS THE CRITICAL VEHICLE FOR
INCREASING EMPLOYMENT AND RAISING THE LIVING
STANDARDS OF OUR PEOPLE, ESPECIALLY OF THE
POOREST”.
8.
STRENGTHEN THE FOUNDATIONS OF GROWTH OF
INDIAN RURAL ECONOMY, ESPECIALLY AGRICULTURE
AND ALLIED ACTIVITIES.
9.
NURTURE THE REVOLUTIONARY POTENTIAL OF THE
NEW KNOWLEDGE-BASED INDUSTRIES SUCH AS INFOTECH,
BIOTECHNOLOGY AND PHARMACEUTICALS.
10.
STRENGTHEN AND MODERNIZE TRADITIONAL
INDUSTRIES SUCH AS TEXTILES, LEATHER, AGRO
PROCESSING AND THE SSI SECTOR.
11.
MOUNT A SUSTAINED ATTACK ON INFRASTRUCTURE
BOTTLENECKS IN POWER, ROADS, PORTS, TELECOM,
RAILWAYS AND AIRWAYS.
12.
ACCORDING THE HIGHEST PRIORITY TO HUMAN
RESOURCE
DEVELOPMENT
AND
OTHER
SOCIAL
PROGRAMMES AND POLICIES IN EDUCATION, HEALTH AND
OTHER SOCIAL SERVICES, WITH SPECIAL EMPHASIS ON
THE POOREST AND WEAKEST SECTIONS OF SOCIETY.
13.
STRENGTHEN OUR ROLE IN THE WORLD ECONOMY
THROUGH RAPID GROWTH OF EXPORTS, HIGHER FOREIGN
INVESTMENT
AND
PRUDENT
EXTERNAL
DEBT
MANAGEMENT.
5.
FUTURE TARGETS
A REVIEW OF THE ECONOMIC REFORMS REVEALS
THAT WHENEVER EXPENDITURE REDUCTION WAS
UNDERTAKEN SOCIAL SECTOR COMPRISING HEALTH,
EDUCATION, HOUSING AND WELFARE OF THE POOR HAD
TO BEAR THE BRUNT BECAUSE SOCIAL SECTOR IS
CONSIDERED AS A ‘SOFT SECTOR’.
ALTHOUGH REDUCTION OF FISCAL DEFICITS WAS
ONE OF THE MAJOR OBJECTIVES OF THE REFORM
PROCESS, A REVIEW OF THE FISCAL DEFICITS OF THE
BOTH THE CENTRE AND THE STATES REVEALS THAT
AFTER REMAINING SUBDUED AT A MODERATE LEVEL,
FISCAL DEFICITS AGAIN BECAME LARGER TOWARDS THE
CLOSE OF THE NINETIES.
Second generation Reforms should aim at reduction of
fiscal deficit of the Centre to 3 per cent of DGP and of States to 2 per cent
of DGP. For this purpose, it would be necessary to achieve zero revenue
deficits during the next four years.
7.
NDA Government and Second Generation Reforms
FIRSTLY, IT DECIDED TO END THE STATUS OF
DEFENCE INDUSTRIES AS AN EXCLUSIVE DOMAIN OF THE
PUBLIC SECTOR. DEFENCE PRODUCTION WAS OPENED UP
FOR INDIAN PRIVATE SECTOR WITH UPTO 26 PER CENT
FOREIGN EQUITY.
SECONDLY, FDI LIMIT HAS BEEN RAISED TO 49 PER
CENT IN BANKS.
THIRDLY, 100 PER CENT FOREIGN INVESTMENT ON
DOMESTIC
ROUTE
HAS
BEEN
ALLOWED
IN
PHARMACEUTICAL SECTOR, AIRPORT, AND TOWNSHIPS.
FOURTHLY, MASS RAPID TRANSPORT SYSTEMS HAVE
FOR THE FIRST TIME BEEN THROWN OPEN TO 100 PER
CENT FOREIGN INVESTMENT ON THE AUTOMATIC ROUTE
IN ALL METROS.
FIFTHLY, THE HOTEL AND TOURISM INDUSTRY WILL
BE ALLOWED TO HAVE 100 PER CENT FDI THOUGH
AUTOMATIC ROUTE.
Sixthly, in the telecom sector, FDI up to 74 per cent has been
permitted to Internet service providers.
Seventhly, as a sop to NRI investors, the Government has made all
investment made by them in foreign exchange fully repatriable. This is a
departure from the past when NRI investments were not repatriable in
foreign exchange.
8,
FUTURE ACTION PLAN
(I)
CONTROL ADMINISTRATIVE EXPENDITURE,
(II)
REDUCE SUBSIDIES ON NON-MERIT GOODS,
(III)
IMPROVE COST RECOVERY
PROVIDED BY THE STATE,
(IV)
(IV) UNDERTAKE DISINVESTMENTS OF LOSSMAKING ENTERPRISES,
(V)
IMPROVE WORKING OF SEBS AND SRTUS,
(V)
REDUCE PUBLIC DEBT
INTEREST BURDEN,
(VI)
WIDEN TAX BASE THROUGH AGRICULTURAL
TAXATION OF SERVICES AND
TO
OF
SERVICES
SCALE
DOWN
(VIII) TIGHTEN TAX ADMINISTRATION TO PLUG TAX
EVASION.
IMPACT ON THE STATES
THE ECONOMIC REFORM OF THE STATES MAY BE
CLASSIFIED INTO THREE CATEGORIES:
REFORM-ORIENTED STATES: ANDHRA PRADESH, GUJARAT,
KARNATAKA, MAHARASHTRA AND TAMIL NADU
INTERMEDIATE REFORMERS: HARYANA, ORISSA AND WEST
BENGAL
LAGGING REFORMERS: ASSAM, BIHAR, KERALA, MADHYA
PRADESH, PUNJAB, RAJASTHAN AND UTTAR PRADESH
GUJRAT
MAIN COMPONENTS :
1. REFORM OF STATE-OWNED ENTERPRISES THROUGH
PRIVATIZATION, DIVESTMENT, CLOSURE, MERGER
AND RESTRUCTURING.
2. FISCAL REFORMS THAT CONSIST OF MEASURES TO
REDUCE THE STATE'S FISCAL DEFICIT, INCLUDING
TAX AND EXPENDITURE REFORMS
3. CREATING A POLICY ENVIRONMENT FOR PRIVATE
SECTOR PARTICIPATION IN THE DEVELOPMENT OF
INFRASTRUCTURE IN THE STATE.
4. DEVELOPMENT OF A CORE INVESTMENT PROGRAM
TO ENSURE THAT SUFFICIENT FUNDS FLOW INTO
KEY AREAS OF THE STATE'S ECONOMY, I.E., THE
SOCIAL AND PHYSICAL INFRASTRUCTURE SECTORS
No. of SLPEs
54
Investment (as on 31.3.2000)
Rs. 23438 crore
Net accumulated loss (as on 31.3.2000)
Rs. 965 crore
Identified for disinvestment
24
Process initiated for privatisation / liquidation / closure
5
MAHARASHTRA
MAIN STEPS TAKEN BY THE GOVERNMENT:
1. THE GOVERNMENT MOBILIZED REVENUE TO THE
TUNE OF RS 40 BILLION THROUGH A SERIES OF
AUSTERITY
MEASURES
INCLUDING
FREEZING
PAYMENT OF DEARNESS ALLOWANCE AND BONUS
TO ITS EMPLOYEES, CUTTING MINISTERIAL STAFF
AND TELEPHONE BILLS AND IDENTIFYING SURPLUS
STAFF.
2. THE STATE HAS ALSO MANAGED TO CUT DOWN
ADMINISTRATIVE EXPENSES FROM THE EARLIER 73
PER CENT TO 48 PER CENT.
3. OUT OF 65 SLPES IN MAHARASHTRA, 17 ARE
REPORTED TO BE NON-WORKING AND 43 ARE
REPORTED TO HAVE INCURRED LOSSES AS ON
31.3.2000.
No. of SLPEs
65
Investment
Rs. 19,186 crores
Identified for Disinvestment
6: (Meltron, MSEB, MSRTC, Maharashtra Small Scale Industry
Development Corpn., Western Mah. Dev. Corpn., Dev. Corpn. of
Konkan Ltd.,
Process Initiated
3: (Meltron, MSRTC, WMDC, DCKL)
TAMIL NADU
1. MEDIUM TERM FISCAL REFORM PROGRAMME: THE
STATE GOVERNMENT HAS PREPARED A MEDIUM
TERM FISCAL REFORM PROGRAMME, AIMED AT
BRINGING DOWN THE REVENUE DEFICIT TO ZERO
AND FISCAL DEFICIT TO 2 PERCENT OF THE GROSS
STATE DOMESTIC PRODUCT (GSDP) OVER A PERIOD
OF FIVE YEARS.
2. ADMINISTRATIVE REFORMS: THE SALARY AND
PENSION
LIABILITIES
COMPRISE
A
MAJOR
COMPONENT
OF
THE
TOTAL
REVENUE
EXPENDITURE OF THE STATE GOVERNMENT. THE
GOVERNMENT HAS ALREADY ANNOUNCED OUR
COMMITMENT TO A NEED-BASED REDUCTION IN THE
STAFF STRENGTH IN A PHASED MANNER
3. ZERO-BASE BUDGETING AND RATIONALIZATION OF
SUBSIDIES, BLOCK GRANTS AND GRANTS-IN-AID TO
INSTITUTIONS:
ALL
ADMINISTRATIVE
DEPARTMENTS HAVE BEEN INSTRUCTED TO
UNDERTAKE A ZERO-BASE BUDGETING EXERCISE TO
WEED OUT SCHEMES THAT HAVE OUTLIVED THEIR
PURPOSE.
No. of SLPEs
59
Investment (as on 31.3.2001)
Rs.6192.20 crores
Identified for disinvestment
13
UTTAR PRADESH
THE GOVERNMENT OF UTTAR PRADESH
DECIDED TO TAKE THE FOLLOWING STEPS:
HAS
(I)
PUBLIC EXPENDITURE MANAGEMENT,
(II)
TAX POLICY AND ADMINISTRATION,
(III)
CIVIL SERVICE,
(IV)
ANTI-CORRUPTION,
DEREGULATION,
DECENTRALIZATION TO LOCAL BODIES,
(V)
PUBLIC ENTERPRISE AND PRIVATIZATION, AND
(VI)
FINANCIAL MANAGEMENT AND ACCOUNTABILITY.
No. of SLPEs
45
Investment (as on 31.3.2000)
Rs. 24753.33 crore
Net accumulated loss (as on 31.3.2000)
Rs. 3109.77 crore
Identified for disinvestment
27
Process initiated
6
AND
KARNATAKA
THE STATE GOVERNMENT'S KARNATAKA
ECONOMIC RESTRUCTURING PROGRAM, WHICH THIS
BANK
OPERATION
SUPPORTS,
HAS
FOUR
MAIN
COMPONENTS:
1. FISCAL AND PUBLIC EXPENDITURE REFORMS
INCLUDE A MULTI-YEAR FRAMEWORK FOR FISCAL
ADJUSTMENT,
WITH
THE
OBJECTIVES
OF
RESTORING THE STATE'S FINANCIAL HEALTH,
CREATING ADDITIONAL FISCAL SPACE FOR HIGHPRIORITY EXPENDITURES, AND PROMOTING MORE
EFFICIENT AND TRANSPARENT MANAGEMENT OF
THE GOVERNMENT'S FINANCIAL RESOURCES.
2. ADMINISTRATIVE REFORMS FOCUS ON THE CIVIL
SERVICE, FREEDOM OF INFORMATION, SERVICE
AGENCIES,
ANTI-CORRUPTION
INITIATIVES,
DECENTRALIZATION, AND E-GOVERNANCE. THE
OBJECTIVE ACROSS THESE REFORM MEASURES IS
TO IMPROVE THE EFFICIENCY AND TRANSPARENCY
OF GOVERNMENT AS IT CONDUCTS ITS BUSINESS
AND DELIVERS SERVICES.
3. THE PRIVATE SECTOR DEVELOPMENT COMPONENT
FOCUSES
ON
IMPROVING
THE
BUSINESS
ENVIRONMENT THROUGH DEREGULATION AND ON
PRIVATIZATION
OR
CLOSURE
OF
PUBLIC
ENTERPRISES.
4. THE POVERTY MONITORING AND STATISTICAL
STRENGTHENING COMPONENT SUPPORTS THE
BETTER USE OF DATA IN POLICY MAKING THROUGH
DEVELOPMENT OF A POVERTY AND HUMAN
DEVELOPMENT MONITORING SYSTEM, INCREASED
EMPHASIS ON PROGRAM EVALUATION, AND
STRENGTHENING OF THE STATE'S STATISTICAL
SYSTEM
No. of SLPEs
80
Investment (as on 31.3.2000)
Rs. 21108.72 crores
Identified for Disinvestment
15
Process Initiated for liquidations / closure
6
ANDHRA PRADESH
THE STATE GOVERNMENT'S ANDHRA
PRADESH ECONOMIC REFORM PROGRAM, WHICH THIS
OPERATION SUPPORTS, HAS THREE MAJOR COMPONENTS:
1.
FISCAL REFORMS AIM TO RESTRUCTURE
EXPENDITURES
TO
MEET
DEVELOPMENT
PRIORITIES,
ACHIEVE
SUSTAINABLE
FISCAL
BALANCES, AND REDUCE THE BURDEN OF PUBLIC
DEBT.
2.
PUBLIC EXPENDITURE MANAGEMENT AND
FINANCIAL ACCOUNTABILITY REFORMS SEEK TO
IMPROVE BUDGET FORMULATION AND BUDGET
EXECUTION TO STRENGTHEN THE EFFECTIVENESS,
CREDIBILITY, AND EFFICIENCY OF THE BUDGET
MANAGEMENT SYSTEM.
3.
THE STATE'S GOVERNANCE REFORMS AIM
TO IMPROVE THE DELIVERY OF PUBLIC SERVICES,
AND ENHANCE ACCOUNTABILITY OF GOVERNMENT
TO THE PUBLIC, INCLUDING ADMINISTRATIVE
REFORMS, PUBLIC ENTERPRISE RESTRUCTURING,
AND ENHANCED POVERTY MONITORING.
4.
DECISION ON SLPES:
SLPES A WORKING GROUP
WAS CONSTITUTED IN 1995 TO EXAMINE THE
WORKING OF SLPES.
IT HAS GIVEN ITS
RECOMMENDATIONS IN RESPECT OF 30 SLPES SO
FAR.
No. of SLPEs
40
Investment (as on 31.3.2000)
Over Rs. 4,444 crore (in Paid-up
Capital)
Net accumulated loss
Rs. 2894 crore
Identified for Disinvestment
21
Process Initiated for liquidations / 21
closure
HARYANA
No. of SLPEs
27
Investment (as on 31.3.2000)
Rs. 4746 crore
Net accumulated loss (as on 31.3.2000)
Rs. 169 crore
Identified for disinvestment
8
Process initiated for liquidations / closure
2 (Haryana State Electricity Board, Haryana
Breweries Ltd.)
ORISSA
No. of SLPEs
68
Investment
Rs. 9795.59 crore
Net accumulated loss (as on 31.3.2001)
Rs. 1124.60 crore
Identified for Disinvestment
27 (including 11 subsidiaries)
Process Initiated for liquidations / closure
27
PUNJAB
No. of SLPEs
53
Investment (as on 31.3.2000)
Rs. 12425 crores
Net accumulated loss (as on
31.3.2000)
Rs. 847 crore
Identified for disinvestment
9
Process initiated
2 (Punjab State Electricity Board, Punjab
Roadways)
MADHYA PRADESH
No. of SLPEs
26
Investment (as on 31.3.2000)
Rs. 7922.87 crore
Identified for Disinvestment
14 (including ADB assisted programme)
Process Initiated
14
KERALA
KERALA
No. of SLPEs
109
Investment (as on 31.3.2001)
Rs. 9804.91 crores
THE CHAIRMAN OF THE ERC, SAID THAT THE GOVERNMENT HAD BEEN
INDIRECTLY SUBSIDIZING THE PSUS IN THE STATE. THESE UNITS WERE
RUNNING UP AN ANNUAL LOSS OF ABOUT RS. 40,000 PER EMPLOYEE.
PUBLIC SPENDING ON PSUS HAD TO BE REDUCED SO THAT THE
SAVINGS ACHIEVED THUS COULD BE DEVOTED FOR POVERTY
REDUCTION AND INFRASTRUCTURE DEVELOPMENT
WEST BENGAL
No. of SLPEs
80
Investment (as on 31.3.2000)
Rs. 14081 crores (excluding grants and borrowings)
Net accumulated loss (as on 31.3.2000)
Rs. 3382 crore
Identified for disinvestment
2
Process initiated
Webel Ltd. and Great Eastern Hotel
ASSAM
No. of SLPEs
49
Investment (as on 31.3.2000)
Rs. 4058 crore
Net accumulated loss (as on 31.3.2000)
Rs. 3921 crore
USER MANUAL
DAY-1
Concept of Economic Reforms
Some Basic Economic Terms
International Experiences of Economic Reforms
Five Year Plans
Early Initiative of Economic Reforms
-
Oht –a1
Oht –a2
Oht –a3
Oht –a4
Oht –a5
DAY-2
Fiscal Stabilization
Inflation Control
Balance of Payment Management
Foreign Exchange management
Removing control on Private Investment
Opening of Economy for Trade
Reinforcement Quiz I
Answers to RQ I
-
Oht –b1
Oht –b2
Oht –b3
Oht –b4
Oht –b5
Oht –b6
Oht –b7
Oht-b7(a)
Ending Price Control Regime
Foreign Direct Investment
PSU Reforms and Disinvestments
Infrastructure Development in Reforms
Insurance Sector reforms
Capital Market reforms
Banking Sector Reforms
-
Oht-c1
Oht-c2
Oht-c3
Oht-c4
Oht-c5
Oht-c6
Oht-c7
Impact on Economic Growth
Impact on Trade
Impact on Agriculture
Impact on Small Scale Sector
Impact on Social Sectors
Impact on Food Security
Reinforcement Quiz II
Answers to RQ II
-
Oht-d1
Oht-d2
Oht-d3
Oht-d4
Oht-d5
Oht-d6
Oht-d7
Oht-d7(a)
Second Generation Reforms
Initiative Taken in States
Group Presentation
-
Oht-e1
Oht-e2
DAY-3
DAY-4
DAY-5