Industrial Policy:

IP is rules regulations principles policies and procedures laid down by government for regulating developing and controlling industrial undertaking

in the country.

Also indicates large medium and small scale sectors.

OBJECTIVES:

• Achieving socialistic pattern of society.

• Control on concentration of economic power.

• Achieving industrial development.

• Reducing disparity in regional development.

• Providing opportunities for employment.

OBJECTIVES:

• Achieving self-sustained economy.

• Alleviating poverty.

• Building up large cooperative sector.

• Updating technology and modernization of industries.

• Liberalization and Globalization of economy.

INDUSTRIAL POLICY:

• Industrial Policy Resolution of 1948.• Industrial Policy Resolution of 1956• Industrial Policy Resolution of 1973 • Industrial Policy Resolution of 1977• Industrial Policy Resolution of 1980• Industrial Policy Resolution of 1991

Case on Birla corporation:

• This company manufactures cement jute products automobile components etc. By 2003-04 their sales short up by 10.6% to Rs. 1243.18 crore from the previous year . Profit after tax was rs.41.56 crore against Rs. 4.19 crore in 2002-03. This was achieved improved performance of cement division and by a well planned cost management.

Case on Birla corporation:• The cement division division alone contributed for 88.75% of the

company’s sales in 2002-03 and in 2003-04 they achieved higher capacity utilization. Total export increased to 48.19 corers in 2002-03.

• In 2003-04 jute export increased and the company had good performance rate. the automobile sector had to face a decline. Their calcium –carbide industry struggled much due to competition from low priced markets from China and Romania and duty free imports from Bhutan . Increase in power tariff also contributed much to their struggle.

• Taking into advantage , Birla Corporation has decided to expand capacity at its Durgapur Cement Plant by 1 million ton.

• They are also working hard to make the production capacity of Chanderia Cement 3 lakh tons per annum.

• Project are underway to set up a power plant of 27 MW as new industrial undertaking at M.P. and Rajasthan.

• Discuss the business activities of Birla Corporation on recent developments.

Industrial Policy 1948:

• Government recognised the need for mixed economy .• Reserved the national monopolies for Atomic Energy and Rail

and Road industry.

• Government had the right to initiate projects in 6 industries and they are:

• Coal iron and steel aircraft manufacturing ship building telephone and minerals.

• The government could regulate and license 18 other industries of national importance.

Industrial Policy Resolution 1956:

• Parliament accepted ‘the socialistic pattern of society’ as the basic aim of social and economic policy.

• These important developments necessitated a fresh statement of industrial policy of 1956.

• The resolution laid down 3 categories of industries.

• Schedule A:• The state government was responsible for them.

• Schedule B:• State owned companies.• Private enterprises only supplement the efforts.

Schedule C:

All the remaining industries and their future development would in general be left to the initiative and enterprise of the private sector.

Other features of the resolution are:

Fair and non-discriminatory treatment for private sector.

Encouragement to village and small enterprises.

Removing regional disparity.

Development of ancillary industries in areas where large industries were to be set up.

Industrial policy Statement 1977:Due to some disparities there were certain problems like:

Unemployment was increasing rural urban disparity widened and real investment stagnated.

The growth rate of industrial segment was not more than 3-4% per annum.

The incidence of industrial sickness also became widespread.

The concept of District Industrial Centers was introduced for the first time. Each district would have such a district centre which would extent all support and services required by small entrepreneurs.

Within the SSI sector , a new concept of the tiny sector was introduced.

TINY SECTOR: Industrial unit with investment in machinery and equipment of up to rs. One lakh and situated in a town with population less than 50,000. this concept was given by Karve Committee in 1967 with 47 products .

Industrial policy 1980:

Focused on the need for promoting competition in the domestic market, technological upgradation and modernization.Laid the foundation for increasingly competitive export base and for encouraging foreign-investment in high- tech areas. The policy suggested following measures:Effective operational management of public sector.Integrating industrial development in the private sector.Regularization of unauthorized excess capacity installed in the private sector.Encouragement of Merger and Acquisition of sick units.

Drawback: it underplayed the employment objective as was technology centric.

Industrial Policy 1991(july):Announced at the time of Mr. P.V. Narsimha Rao .The reforms in 1991 did make significant changes in industrial , trade and public sector policies.

Significant changes are:

Abolished licensing for all projects except in 18 industries.MRTP act amended to eliminate prior approval to large companies for capacity expansion.The requirement of Phased Manufacturing Programs discontinued for all new projects.Schedule A of industries reserved exclusively for state enterprises cut down from 17 to 8 .Schedule B of industries , where state enterprises were to acquire a dominant positions, abolished.Small scale enterprise allowed to offer up to 24% of share holdings of large enterprises.

Major issues covered by Industrial policy 1991 are:

Foreign Direct Investment:

Limit on foreign equity holdings raised from 40% to 51% in a wide range of industry.Foreign equity proposals need not be accompanied by foreign technology transfer agreement.Technology imports liberalized by increasing royalty limits.

Public Sector Policy:

Disinvestment in selected public sector enterprises to raise finances for development , bring in greater accountability and help create a new culture in their working for improved efficiency.Government equity ranging from 5% to 20% in 31 PSEs with ‘good track record’ disinvested to public sector mutual funds and financial institutions.

Trade policy:

Administered licensing of imports replaced by import entitlements linked to export earnings. These entitlements called exim scrips made freely tradable.

permission to import capital goods without ‘indigenous clearance’ provided import covered by foreign equity .

Scope of canalization narrowed. A process which exists for some categories - which means these can be imported only by designated agencies.

Current update:

A number of items like urea are canalized. This means they can be imported only by designated agencies like MMTC and STC, the government's trading arms. An item like gold, in bulk, can be imported only by specified banks like SBI and some foreign banks or designated agencies.

Environmental issues:

Government came up with environmental policy . The policies are implemented through various acts such as Wildlife protection act 1972.water (Prevention and Control of Pollution) Act 1974 .

Industrial Licensing:

• Licensing is a written permission issued by the central government to an industrial undertaking stating details like location, article to be manufactured , production capacity , and other relevant particulars including the validity period.

OBJECTIVES OF LICENSING

• To limit the capacity within the targets set by plans.

• To direct investments in industries according to plan priorities.

To regulate the location of industrial units so as to secure a

balanced regional development.

• To prevent monopoly.

To protect small scale industries against undue competition from large scale industries.

To foster technology and economic improvements in industries by ensuring units of economic size and adopting.

To encourage new entrepreneurs to start industrial units.

Industrial Licensing Policy:

Industries (Development and Regulation) Act 1951:

provisions of the Act were:No new industrial units could be established or substantial extension to existing plants be made without a license from central government.Government could take under its own management undertaking which failed to carry out its instructions in management and policies.This act also empowered the government to prescribe prices, methods and volume of production and channels of distribution.The act empowered the government to set up Development council for groups of industries.

New Industrial Policy and Procedure, 1970:

In February 1970 government announced its new industrial licensing policy which consisted of list of core industries in the economy (instructed by Industrial Licensing Policy Inquiry Committee). The industries were.

Agriculture input Non-ferrous metal petroleum Iron and Steel coal heavy industrial machinery

ship building

news print and electronics.

DISINVESTMENT in PUBLIC SECTOR:

• Needs of public sector:

• To increase the growth of core-sectors in the economy by creating a solid foundation in industrial growth.

• To serve the financial and technological needs of important sectors like Railways, telecommunication.

• To ensure easy availability of articles of mass-consumption and to check production of unimportant luxury articles.

Failing of PSU:

In spite of monopoly in certain areas PSUs are never profitable.

Facts and figures:

1997-98: Public Manufacturing Enterprises showed profitability of minus (-) 3.9%.

Reasons for failure of PSUs are

Low rate of return on investment, poor capacity utilization, declining contribution to national savings , red tapism.

Disinvestment:

• The main objective of DISINVESTMENT is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our PSEs.

• The policy of disinvestment aims at modernization of PSEs, creation of new assets , generation of employment and retiring of public debt.

• Privatization and Disinvestment: Privatization leads to change in management with change in

ownership whereas change in ownership is not a necessary condition in Disinvestment. It refers to dilution of the stakes of the government to a level where there is no change in control .

Disinvestment Procedure:

1. Proposal for disinvestment in any PSU are placed for consideration of Cabinet Committee on Disinvestment

(CCD).

2. An Advisor is appointed to invite Expression of Interest (EOI) from parties.

3. The prospective bidders undertake due diligence of the PSU.

4. Concurrently the task of valuation of the PSU is undertaken.

5.Calculation of reserve price of PSU is done using any of the 3 methods.

Discounted cash flow method. Asset valuation method, Balance sheet method.

6.Share purchase agreement is sent to prospective bidders for inviting the final binding bids.

7.The bids received are placed before the CCD for final approval. CCD then approves the final buyer.

After the transaction is complete the papers are forwarded to the Controller and Auditor General of India (CAG) for

undertaking the evaluation of disinvestment, He place it in the parliament and release it for public.

Merits of Disinvestment:

• To obtain release of large amount of public resources locked up in non-strategic Public sector units for re-employment in areas of higher social priority.

• Facilitates transferring the commercial risk to which the tax payer’s locked up in public sector is exposed to the private sector wherever they are willing to step in.

• More and more man-power is utilized which was dumped in PSU.

Disinvestment would expose privatized companies to market disciplines and help them to become self reliant.

Wider distribution of wealth by offering shares of privatized companies to small investors and employees.

Beneficial for capital market. Increase in floating stock

would give market more liquidity, give investors early exit options which will help raising of funds by privatized

companies for their projects .

Demerits of Disinvestment:

• The amount raised through disinvestment in the year 1991-2001 was only Rs.2051 cr which is very less amount.

• Only when the government ensures that the market system regulates privatized firms take care of public’s interest otherwise not.

• In most of the cases shares of disinvested PSU ‘s are by and large in the hands of institutions of with little floating stock.

• No monopoly is good only fair and full competition can bring relief to consumers.

Let us know…

• BALCO: Bharat Aluminium Company Ltd (BALCO)

• It is a fully integrated aluminium producing company set up in 1965 . The government of India had 100% stake in BALCO prior to disinvestment. In 1998, the disinvestment commission recommended 51% disinvestment in favour of strategic buyer along with transfer of management .Sterlite company acquired stakes in march 2001 for Rs. 551.50 crs.

VSNL: Videsh Sanchar Nigam Limited:

Govt. sold 25% of equity share holdings out of its total holdings of 52.97% in VSNL in 2002 . The total paid-up capital was rs. 285 crore ,the govt. holding being Rs.

151crs. Rs. 71.25 crs was sold to M/s Panatone (TATA group) at a price of Rs. 1439 crs. The govt. received

approx Rs. 3689crs. Thus govt. sold its shares at a price of Rs. 202 per share .

Some other privatized PSUs:

• Modern Food Industries Limited ( MFIL) : Hindustan Lever.• Computer Maintenance Corporation (CMC) : Tatas.• 9 Hotels of Indian Tourism Development Corporation (ITDC) • Indian Petrochemical Complex Limited (IPCL) : Reliance.• Maruti Udyog Limited (MUL) : Suzuki.• Hindustan Zinc Limited (PPC) : Ruia.• Paradeep and Phosphates Limited (PPC) • Hotel Corporation of India Limited (HCL)

Disinvestment and FDI• In India the success of disinvestment has depended on

domestic investment and foreign investors have kept away. On the contrary privatization has failed to attract FDI in India.

• The main reasons for failure are:• It took almost a decade to finalize disinvestment policy and

there is lack of transparency.• Till 1991 the policy was harped on controlling power and

protecting workers.• The disinvestment of 25% equity holdings of VSNL was decided

in 2001 but actual disinvestment took a year. Global investors wont wait for long.

• Globally M and A have been a major source of FDI inflows. In India regulatory laws make M and A’s low profile.

Modes of Disinvestment :

• Involving a change in ownership.

• Involving no change in ownership.

• No change:• 1. disinvestment deferred.• 2. no disinvestment.

• Closure of Assets.

In the budget 2000-01 , the main elements of the disinvestment policy were enunciated , which are as follows:

Restructure and Revive potentially viable PSEs.

Closedown PSE’s which cannot be reviewed.

Bring down government equity in all non-strategic PSE’s to 26% or lower if necessary.

Fully protect the interest of workers.

Use the entire receipt from disinvestment and privatization for meeting expenditure in social sector .

Setting up Ministry of Disinvestment (Department of Disinvestment was set up in December 1999 and is made a full fledged Ministry under Government of India)

by: Megha Mathur

International Trade Theories

Absolute Advantage Theory:

(Adam Smith) It is always advantageous for a country to specialize in

production of commodities in which it can produce efficiently

A country tends to specialize in production of commodities in which it has absolute advantage.

Adam Smith said - each nation should specialize in producing things it has an "absolute advantage" . The theory of "Absolute Advantage" seems to make

sense in situations where the circumstances of the geographic and economic environment are relatively

simple and straight forward - example: - Switzerland and watches, Canada

and cereal grain.

An Example:

• India needs 30 man-hours to produce one quintal of rice whereas Bangladesh needs 50-man hour. The cost of production of rice is much more in Bangladesh as compared to India. India thus has an absolute advantage in production of rice. In case of jute India needs 60 man hours while Bangladesh needs 20- man hour to produce one quintal of jute. Thus Bangladesh has an absolute advantage in jute production.

• Country Rice Jute• India 30 60• Bangladesh 50 20

Demerit of Absolute Advantage theory:

• There will be no ground of trade between both the countries unless they have absolute advantage or absolute disadvantage in production of at least one commodity.

Comparative Advantage

Given by Mr. Ricardo.

Suggests the possibility of gainful trade between 2 countries even if one has absolute advantage in the production of both the commodities.

So long the countries have comparative advantage in the production of commodities, specialization & trade between them would always be possible & advantageous to all of them.

In 1817, David Ricardo looked at Adam Smith's theory and

suggested that

"there may still be global efficiency gains from trade if a country specializes in those products that it can produce

more efficiently than other products - regardless of whether other countries can produce those same

products even more efficiently"

Example:Country Rice JuteIndia 30 60Bangladesh 50 80

India can produce both the goods more efficiently i.e. at a lower cost compared to Bangladesh . But her own relative efficiency is evidently greater in rice production because of her cost of production is just half her cost of jute.

India has competitive advantage in rice production because she needs only 60%(30/50) of her rice production in Bangladesh.

Gain from Foreign Trade in comparative advantage:

• Let us assume that there is no trade between India & Bangladesh. Both countries produce both the goods –rice and jute and consume their total produce.

• Country Rice JuteIndia 30 60Bangladesh 50 80

• The domestic exchange rate in India & Bangladesh will be as follows:• India:• 1 qtl of Rice: 30/60 = .5 qutl of jute• 1 qtl of Jute: 60/30 = 2qutl of rice

In Bangladesh:

1 qtl of Rice: 50/80 = .625 qutl of jute

1 qtl of jute: 80/50 = 1.6 qutl of rice

internal exchange rate:

INDIARice = Jute

1 = .52 = 1.0

BANGLADESH Rice = Jute 1 = .625 1.6 = 1.0

Let us know suppose that India specializes in Rice production & Bangladesh in Jute production & they trade their surplus trade produce to one another. Which country will gain would depend on the comparison of Internal & External exchange rates.External rate is greater than Internal rate the countries will gain.

Distribution of gains:the gainful exchange rate for India ranges between 500 kgs to 625 kgs of jute for 1 quintal of rice.

the gainful exchange rate for Bangladesh ranges between 1.6 to 2 quintals of rice for 1 quintal of jute.

Critical appraisal of the theory:

• Labor is not homogeneous: labor is not similar throughout the world.it varies in skills & productivity. Due to a high degree of specialization ,labor is not interchangeable, thus wage differential is quite likely in short run.

• Labor is not the only factor: the factor combination varies from one industry to other depending on the state of technology in the country. Production may be capital intensive or it may be labor intensive.

• Demand side ignored: this theory concentrates only on supply side.it suggests that exchange rates based on comparative advantage would be advantageous to the trading partners.

Factor Endowment Theory:

This theory explains how a country has a competitive advantage .

A country should export products that use extensively its relatively abundant factors, &

import products that use intensively its scares factors.

The Theory of Factor Endowments suggested you should trade in the products which you can make from the production factors and resources you naturally possess. So for Canada this means we should trade in lumber and minerals and grain since we naturally possess these resources in large quantities. Following this theory it would then make sense for Canada to import citrus fruits since our climate does not naturally give us weather to allow this food to grow without expensive greenhouses. This theory was espoused by Heckscher and Ohlin.

Heckscher and Ohlin Theorems:

Theorem I: A country tends to specialize in the export of a commodity whose production requires intensive use of its abundant resources and imports a commodity whose production requires intensive use of its scares resources.

Theorem II: (Factor-pricing Equalization Theorem): The international trade equalizes the factor prices between the trading nations. In the absence of foreign trade it is quite likely that factor prices are different in different countries.

The Heckscher and Ohlin theory assumes a model of two countries (A & B) two commodities (X & Y) and two factors labour (L) & capital (K) with following assumptions:

There is perfect competition in both product and factor markets in both the countries.Factors labour and capital are fully mobile between the industries X and Y in the country but completely immobile between the countries.

Factors Labour and Capital in both the countries A & B are homogenous.Factor supply is given & factors are fully employed.Production technology for commodity X is labour-intensive and for Y it is capital-intensive.The demand conditions for goods X and Y are identical in countries A & B.There is no transportation cost, nor is there any trade barriers.

Factor abundance & Factor price ratio criterion

• Two important aspects are:• Factor abundance: (1) factor ratio criterion I.e. labor capital ratio or

capital labor ratio.(l/k or k/l) (2) factor price ratio criterion I.e.( Pl/Pk ratio or Pk/Pl ratio).

• Comparing two countries A & B.• A is labor abundant & B is capital abundant.• A is labor abundant if:

• L LA B

KA K B

Or when we include the price ratio criterion it becomes:

•PL PL

•PK PKA

A B

B

Criticisms of the theory

• It relies on the assumption that difference in relative factor price reflects difference in relative factor endowment.

• Assumes that production techniques are same in two different countries.

• Assumes constant returns to scale in both the countries.

• Assumption of no transportation cost is vague.

WORLD TRADE ORGANIZATION

• What is the WTO?• The World Trade Organization (WTO) is

the only global international organization dealing with the rules of trade between nations. signed by the bulk of the world’s trading nations. The goal is to help producers of goods and services, exporters, and importers conduct their business.

The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that

trade flows as smoothly, predictably and freely as possible.

Brief history:• GATT led to the establishment of the World Trade Organization (WTO) on

January 1, 1995.• After the conclusion of eighth GATT round of talks (1986-1993), known as

the Uruguay Round. India was a founder-member of GATT, which began with just 23 members.

• Its successor, the WTO, has 151 member countries. That’s nearly the whole world (Russia is among the few major economies left out).

• Functions of WTO:

• Administering & implementing the multilateral trade agreements which together make up the WTO.

• Acting as a forum for multilateral trade negotiations.• Overseeing national trade policies.• Cooperating with other international institutions involved in global

economic policy-making.

LOGO of WTO

Trade Negotiations Committee

Essentially, the WTO is a place where member governments go, to try to sort out the trade problems

they face with each other.

At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations.

But the WTO is not just about liberalizing trade, and in some circumstances its rules support maintaining trade barriers — for example to protect consumers, prevent the spread of disease or protect the environment.

WTO agreement consists of 29 legal texts –covering everything from agriculture to textiles & clothing , from services to government procurement.

• WTO is the embodiment of the Uruguay Round results & the successor to GATT.

• The main purpose of GATT & WTO is to have trade without discrimination.

General Agreement on Trade & Tariffs

As per its article 1: the famous “Most Favored nation” MFN clause, members are bound to grant to the products of other members treatment no less favourable than any other country.

A second form of non-discrimination known as ‘national treatment’ , requires that once goods have entered a market, they must be treated no less favourable than the equivalent domestically produced goods.

Apart from the revised GATT (known as GATT 1994) several other WTO agreements contain important provisions relating to MFN & national treatment.The GATS (General Agreement on Trade & Services) requires members to offer MFN treatment to services & service suppliers of other members.

‘Comparative Advantage’ – all countries which they can employ to produce goods & services for their domestic markets or to compete overseas.

WTO, Is not a free-trade institution . It permits tariffs & other forms of protection but only in limited circumstances.

Difference between GATT & WTO• GATT

• A set of rules/agreement with no institutional foundation, only a small associated secretariat.

• Was on provisional basis.

• Was applied only to trade of merchandise goods.

• Settlement system was not clear.

• WTO• It is permanent institution with

its own secretariat.

On permanent basis.

Covers trade in services & trade related aspects of intellectual property.

Dispute settlement is fast & thus less susceptible to blockages.

IMF

• The International Monetary Fund (IMF) is an organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

What does the International Monetary Fund do?

The IMF is the world's central organization for international monetary cooperation. It is an organization in which almost all countries in the world work together to promote the common good.

The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other. This is essential for sustainable economic growth and rising living standards.

To maintain stability and prevent crises in the international monetary system, the IMF reviews national, regional, and global economic and financial developments. It provides advice to its 184 member countries, encouraging them to adopt policies that foster economic stability, reduce their vulnerability to economic and financial crises, and raise living standards, and serves as a forum where they can discuss the national, regional, and global consequences of their policies.

The IMF also makes financing temporarily available to member countries to help them address balance of payments problems—that is, when they find themselves short of foreign exchange because their payments to other countries exceed their foreign exchange earnings.

And it provides technical assistance and training to help countries build the

expertise and institutions they need for economic stability and growth.

Member countries of IMF

Afghanistan, Algeria, Argentina, Australia, Austria, Belgium, Bolivia, Brazil, Burma, Burundi, Cameroon, Canada, Central African Republic, Ceylon, Chad, Chile, China, Colom bia, Congo, Congo (Brazzaville), Costa Rica, Cyprus, Dahomey, Den mark,Dominican Republic, Ecuador, El Salvador, Ethiopia, Finland, France, Gabon, Gambia, West Ger many, Ghana, Greece, Guatemala, Guinea, Guyana, Haiti, Honduras, Iceland

India, Indonesia, Iran, Iraq, Ire land, Israel, Italy, Ivory Coast, Jamaica, Japan, Jordan, Kenya, South Korea, Kuwait, Laos, Lebanon, Liberia, Libya, Luxembourg, Malagasy Republic, Malawi, Malaysia, Mali, Mauritania, Mexico, Morocco, Nepal, The Netherlands, New Zealand, Nicaragua, Niger, Nigeria, Norway, Pakistan, Panama,

Portugal, Rwanda, Saudi Arabia, Senegal, Sierra Leone, Singapore, Somali Republic, South Africa, Spain, Sudan, Sweden, Syria, Tanzania, Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Uganda, United Arab Republic, United Kingdom, United States, Upper Volta, Uruguay, Venezuela, South Viet Nam,

Yugoslavia, Zambia.

OBJECTIVES OF IMF

• Promote international monetary co-operation.• Facilitates the expansion & balanced growth of international

trade.• Promotes exchange stability.• Assists in establishing a multilateral system of payments in

respect of current transactions among member countries.• Assists in eliminating foreign exchange restrictions that

hamper the growth of world trade.• Make available the resources on temporary basis to members.• Shorten the duration & lessen the degree of disequilibrium in

the international balance of payments of members.

LOGO OF IMF

Organisation

• Board of Governors:• Consists of 1 governor.• He is usually the minister of finance or the central bank governor.• Has delegated all its powers to executive board except few reserved

powers.

• The executive board:• Consists of 24 members.• Responsible for conducting the business of the IMF .• The managing director serves as chairman.

• Managing director:• Selected by executive board.• Responsible for conducting the ordinary business of IMF.

Staff of international civil servants:

Consists of 24 IMF governors, ministers of other comparable rank.Normally meets twice a year in April or may.Responsible to guide the executive Board & to advice & report to the board on he issues related to the management of international monetary & financial system.

The development committee:

Consists of 24 members of the comparable rank of finance ministers or other officials.Meets at the same time as international monetary & reports to the Board of governors of the world bank IMF on development issues.

Financing facility of IMF

• Regular lending facilities:

• stand-by arrangement: to resolve the problem of balance of payment of a largely cyclical nature.

• EFF(extend fund facility):designed to correct BoP difficulties that stem largely from structural problems & take longer period to correct.

Special lending facility:Supplemental reserve facility: to help member countries experiencing exceptional BoP problem created by long & short term financing need resulting from sudden & disruptive loss of market

confidence.Contingent credit Lines: Intended to be a preventive measure . solely for members concerned about their potential vulnerability but facing crisis at the time of

commitment.Compensatory financing facility:

Another finance facility of IMF:

• Concessional lending facility: Poverty reduction & growth facilities programmes are expected to be based on strategy designed by the borrowing country to reduce poverty.

World Bank

• Was established in 1945.

• Also called International Bank for Reconstruction & Development (IBRD).

• Resources:• Subscribed by member

countries.• Retained earnings & flow

of repayments of loans.

Organisation:

Board of Governors.

Board of executive directors-21.

The Bank’s five directors are appointed by the five members having largest number of shares , rest are elected by Governors representing other member countries.

Objectives:• To assist in the reconstruction & development of

territories of the members by facilitating the investment of capital for productive purposes.

• To encourage the development of productive facility & resources in less developed countries.

• To promote private foreign investment by means of guarantees of participation in loans & other investment made by private investors.

• To promote the long-range balanced growth of international trade & maintenance of equilibrium in the balance of payment.

Financing policy:

• Structure adjustment lending: designed to achieve a more efficient use of resources & contribute to a more sustainable BoPs in maintenance of growth in the face of sever constraints.

Special Action Programme:

1.The bank should properly assess the repayment prospects of the loans. For the purpose, it should consider the availability of naturalresources & existing productivity plant capacity to exploit the resources , & open to the plant & the country’s post-debt record.

2.The bank should lend only for specific projects which are economically & tecnhnically sound & of a high –priority nature.

3.The bank lends only to enable a country to meet the foreign exchange context of any project cost . It normally expects the borrowing country to mobilize in domestic resources.

4. The bank does not accept the borrowing countries to spend the loan in a particular country. In fact it encourages the borrowers to procure machinery & goods for the bank’s financial projects in the cheapest possible market consistent with satisfactory performance.

5. The bank indirectly attaches special importance to the promotion of local private enterprise.

6.It is the bank’s policy to maintain continuing relations with borrowers with a view to check the progress of projects &

keep in touch with the financial & economic development in borrowing countries . This also helps in the solution of any

problem , which might arise in the technical & administrative fields.

WTO & INDIA

• Problems which are faced by India in WTO & its Implementation:

There are several problems facing these Multilateral Trade agreements:

• - Predominance of developed nations in negotiations extracting more benefits from developing and least developed countries

• - Resource and skill limitations of smaller countries to understand and negotiate under rules of various agreements under WTO

• - Incompatibility of developed and developing countries resource sizes thereby causing distortions in implementing various decisions

• - Questionable effectiveness in implementation of agreements reached in past and sincerity

-Non-tariff barriers being created by developed nations. - Regional cooperation groups posing threat to utility of WTO agreement itself,

which is multilateral encompassing all member countries

- Poor implementation of Doha Development Agenda - Agriculture seems to be bone of contention for all types of countries where

France, Japan and some countries are just not willing to budge downwards in matter of domestic support and export assistance to farmers and exporters of

agriculture produce.

- Dismantling of MFA (Multi Fiber Agreement) and its likely impact on countries like India

- Under TRIPS question of high cost of Technology transfer, Bio Diversity protection, protection of Traditional Knowledge and Folk arts, protection of Bio Diversities and geographical Indications of origin, for example Basmati, Mysore Dosa or Champagne. The protection has been given so far in wines and spirits

that suit US and European countries.

Implications for India It appears that India does not stand to gain much by shouting for agriculture reforms in developed countries because the overall tariff is lower in those countries. India will have

to tart major reforms in agriculture sector in India to make Agriculture globally competitive. Same way it is questionable if India will be major beneficiary in dismantling

of quotas, which were available under MFA for market access in US and some EU countries. It is likely that China, Germany, North African countries, Mexico and such

others may reap benefit in textiles and Clothing areas unless India embarks upon major reforms in modernization and up gradation of textile sector including apparels.

Some of Singapore issues are also important like Government procure, Trade and Investment, Trade facilitation and market access mechanism.

In Pharma-sector there is need for major investments in R &D and mergers and restructuring of companies to make them world class to take advantage. India has

already amended patent Act and both product and Process are now patented in India. However, the large number of patents going off in USA recently, gives the Indian Drug companies windfall opportunities, if tapped intelligently. Some companies in India have

organized themselves for this.

IMF & INDIA

• India needs to tighten its monetary policy even though the impact of surging oil and food prices being felt globally is “not so big” in the country.

If food prices rise further and oil prices stay the same, some governments will no longer be able to feed their people and at the same time maintain stability in their

economies.

The fact that it had a near doubling of oil prices over a period of year is going to impact the current account, the official said.

The impact of rising prices is most acute for import-dependent poor and middle-income countries confronted by balance of payments problems, higher inflation, and worsening poverty, the IMF study warned.

From April through July, the first four months of the current fiscal year,

merchandise exports grew 21 percent from a year ago. In addition, India's outsourcing revenue is growing at about 30 percent as western firms continue to shift more back-office

operations and software development work to tap India's low-cost labor.

FDI & Economic Development

• Meaning of FDI:

• Foreign direct investment is that investment, which is made to serve the business interests of the investor in a company, which is in a different nation distinct from the investor's country of origin.

Foreign direct investment may be classified as Inward or Outward.

Foreign direct investment, which is inward, is a typical form of what is termed as 'inward investment'. Here, investment of foreign capital occurs in local resources.

Foreign direct investment, which is outward, is also referred to as “direct investment abroad”. In this case it is the local capital, which is being invested in some foreign resource. Outward FDI may also find use in the import and export dealings with a foreign country. Outward FDI flourishes under government backed insurance at risk coverage.

Economic Development

• A functioning business sector, access to good-paying jobs and the availability of affordable credit to spur entrepreneurship and employment - all necessary ingredients to building healthy, stable communities.

• Basic economic programs, range from building roads to making of $60 million in loans, alleviate poverty and give people the tools they need to build sustainable economies.

FDI & Economic Development

• Foreign direct investment has a major role to play in the economic development of the host country. Over the years, foreign direct investment has helped the economies of the host countries to obtain a launching pad from where they can make further improvements.

This trend has manifested itself in the last twenty years. Any form of foreign direct investment pumps in a lot of capital knowledge and technological resources into the economy of a country.

This helps in taking the particular host economy ahead. The fact that the foreign direct investors have been able to play an important role vis-à-vis the economic development of the recipient countries has been due to the fact that these countries have changed their economic stances and have allowed the foreign direct investors to come in and improve their economies.

It has often been observed that the economically developing as well as underdeveloped countries are

dependent on the economically developed countries for financial assistance that would help them to achieve some

amount of economical stability. The economically developed countries, on their part, can help these countries financially by investing in these countries. This financial assistance can be channelized into various sectors of the economy. The channelization is normally done on the basis

of the requirements of particular sectors.

It has been observed that the foreign direct investment has been able to improve the

infrastructural condition of a country. There is ample scope of technological development of a country as well. The standard of living of the

general public of the host country could be improved as a result of the foreign direct

investment made in a country. The health sector of many a recipient country has

been benefited by the foreign direct investment. Thus it may be said that foreign direct investment plays an important role in the overall economic

and social development of a country.

It has been observed that the private sector companies are not always interested in undertaking activities that help in improving the

infrastructure of the country. This is because the gains form these infrastructural activities are

made only in the long term; there are no short term benefits as such. This is where the foreign direct investment can come in handy. It can also assist in helping economically underdeveloped countries build

their own research and development bases that can contribute to the technological development of the country. This is a very crucial

contribution as most of these countries are not able to perform these functions on their own. These assistances come in handy, especially

in the context of the manufacturing and services sector of the particular country, that are able to enhance their productivity and

ultimately advance from an economic point of view.

At times foreign direct investment could be provided in form of technology. Else, the money that comes in a country

through the foreign direct investment can be utilized to buy or import technology from other countries.

This is an indirect way in which foreign direct investment plays an important part in the context of economic

development. Foreign direct investment can also be helpful in assisting the host countries to set up mass educational

programs that help them to educate the disadvantaged sections of the society. Such assistance is often provided by

the non-governmental organizations in the form of subsidies. The developing countries can also tackle a

number of healthcare issues with the help of the foreign direct investment.

India & FDI

• Increase in total FDI: 46.8% * Rise in foreign equity: 36% * Reinvested foreign earnings and other capital: $3.2 billion * Total FDI earnings (inward) in Apr-Jan 2005-06: $5.7 billion * Total FDI earnings (outward) increase: 2000-01: $757 million 2004-05: $2.4 billion

Types of FDI in INDIA• There are two types of FDI:

* Greenfield investment: It is the direct investment in new facilities or the expansion of existing facilities. It is the principal mode of investing in developing countries like India.

• * Mergers and Acquisition: It occurs when a transfer of existing assets from local firms takes place.

FDI is not permitted in the following industrial sectors:

* Arms and ammunition. * Atomic Energy. * Railway Transport. * Coal and lignite. * Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

Almost a third share of the investment in India is by NRI.

* According to the latest Reserve Bank of India figures, outflows through various NRI deposits

schemes amounted to $903 million since May 2004, as against net inflows of $1.2 billion in the

corresponding period last year.

FDI BOOM in INDIA

• India is now the third most favored destination for Foreign Direct Investment (FDI), behind China and the USA, according to an AT Kearney survey that tracked investor confidence among global executives to decide their order of preferences. * India's share of global FDI flows rose from 1.8 per cent in 1996 to 2.2 percent in 1997.

• FDI in India in 1997-98 was lower at U.S.$ 5,025 million compared to U.S.$ 6,008 million in 1996-97 because of a decline in portfolio investment. Although foreign direct investment (FDI) increased by 18.6 per cent from U.S.$ 2,696 million in 1996-97 to U.S.$ 3,197 million in 1997- 98

• International developments continue to attract capital flows into India in 1998-99 as well.

Presented by:

Ms. Megha Mathur