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TRAINING COURSE ON ECONOMIC REFORMS COURSE GUIDE SRI KRISHNA INSTITUTE OF PUBLIC ADMINISTRATION RANCHI, JHARKHAND

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TRAINING COURSE ON ECONOMIC REFORMS COURSE GUIDE

SRI KRISHNA INSTITUTE OF PUBLIC ADMINISTRATION RANCHI, JHARKHAND

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I N T R O D U C T I O N

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.

A I M S The aims of the course are: 1. To impart knowledge about economic reform in India

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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 F A C I L I T A T O R Department of Personnel and Training Government of India, New Delhi S T Y L E O F T H E C O U R S E 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. T R A I N I N G M A T E R I A L S The course includes the following materials: 1. Trainer’s Process Sheet

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2. Handout

3. Reinforcement Quiz

4. Overhead Transparencies (OHT)

5. Power Point Presentations

6. Video Films O B J E C T I V E S 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

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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 A S S E S S M E N T

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

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S C H E D U L E

DAY AND TIME

C O N T E N T S OBJECTIVES

MONDAY 9,00-18.00

Introduction Concept of Economic Reforms Some Basic Economic Terms International Experiences of Economic Reforms Five Year Plans Early Initiative of Economic Reforms

1 2 22 3 4

TUESDAY 9.00-18.00

Fiscal Stabilization Inflation Control Balance of Payment Management Foreign Exchange management Removing control on Private Investment Opening of Economy for Trade Reinforcement Quiz

5 & 6 7 8 8 9 10

WEDNESDAY 9.00-18.00

Ending Price Control Regime Foreign Direct Investment PSU Reforms and Disinvestments Infrastructure Development in Reforms Insurance Sector reforms Capital Market reforms Banking Sector Reforms

11 12 12 12 13 14 15

THURSDAY 9.00-18.00

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

16 17 18 21 19 20

FRIDAY 9.00-17.00

Second Generation Reforms Initiative Taken in States Group Presentation Immediate Reaction Questionnaire

24 23 25

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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

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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

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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.

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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

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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

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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

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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

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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.

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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

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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.

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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

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Nature of Political Costs • "Temporary corrections" widely distributed among population

• Permanent elimination of special advantages for specific groups

Main Governmental Challenge • Macroeconomic management by insulated technocratic elites

• Institutional development 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 people-friendly 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.

R E F E R E N C E S

1. Arrow, Kenneth J. 1964. "The Role of Securities in the Optimal Allocation of Risk Bearing." Review of Economic Studies 31: 91-6.

2. Benhabib, Jess, and Jovanovic, Boyan. 1991. "Externalities and Growth Accounting." American Economic Review 81: 82-114.

3. Blanchard, Oliver, Dornbusch, Rüdiger, Krugman, Paul, Layard, Richard, and Summers, Lawrence. 1991. Economic Reform in the East. Cambridge, Mass.: MIT Press.

4. Blejer, Mario I., and Cheasty, Adrienne. 1989. "Fiscal Policy and Mobilization of Savings for Growth." In Mario I. Blejer and Ke-young Chu (eds.), Fiscal Policy, Stabilization, and Growth in Developing Countries. Washington, D.C.: IMF.

5. Calvo, Guillermo A. 1989. "Incredible Reforms." In Guillermo Calvo, Ronald Findley, Pentti Kouri, and Jorge Braga de Macedo (eds.), Debt, Stabilization and Development: Essays in Memory of Carlos Diáz-Alejandro. London: Blackwell Publisher.

6. Fanelli, J., Frenkel, R., and Rozenwurcel, G. 1990. "Growth and Structural Reform in Latin America: Where We Stand." Report prepared for UNCTAD. Buenos Aires: CEDES, October.

7. Greenwald, Bruce, and Stiglitz, Joseph E. 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets." Quarterly Journal of Economics 90: 229-64.

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8. Grossman, Gene M. 1990. "Promoting New Industrial Activities: A Survey of Recent Arguments and Evidence." OECD Economic Studies, no. 14 (Spring).

9. Haggard, Stephan, and Kaufman, Robert. 1989. "The Politics of Stabilization and Structural Adjustment." In Jeffrey D. Sachs (ed.), Developing Country Debt and the World Economy. Chicago: University of Chicago Press.

10. Haggard, Stephan, and Kaufman, Robert. 1991. "Economic Adjustment and the Prospects for Democracy." Paper presented at workshop "States, Markets and Democracy," University of São Paulo, July.

11. Haggard, Stephan, Kaufman, Robert, Shariff, Karim, and Webb, Steven B. 1990. "Politics, Inflation and Stabilization in Middle-Income Countries." Manuscript, World Bank, Washington, D.C.

12. Levine, Ross, and Renelt, David. 1991. "A Sensitivity Analysis of Cross-Country Growth Regressions." World Bank Working Paper WPS 609. Washington, D.C.

13. Lipton, David, and Sachs, Jeffrey. 1990. "Creating a Market Economy in Eastern Europe: The Case of Poland." Brookings Papers on Economic Activity, pp. 75-145.

14. Lucas, Robert E., Jr. 1988. "On the Mechanics of Economic Development." Journal of Monetary Economics 22: 3-42.

15. Marer, Paul. 1991. "The Transition to a Market Economy in Central and Eastern Europe." OECD Observer, no.169 (April-May).

16. Marsh, Robert M. 1988. "Sociological Explanations of Economic Growth." Studies in Comparative International Research 13: 41-76.

17. Marshall, T. H. 1964. Class, Citizenship and Social Development. New York: Doubleday. 18. Meyer, John W., Hannan, Michael T., Rubinson, Richard, and Thomas, George M. 1979.

"National Economic Development, 1950-70: Social and Political Factors." In John W. Meyer and Michael T. Hannan (eds.), National Development and the World System. Chicago: University of Chicago Press.

19. Miliband, Ralph. 1975. Parliamentary Socialism: A Study in the Politics of Labour. 2nd ed. London: Merlin.

20. Murell, Peter. 1991. "Can Neoclassical Economics Underpin the Reform of Centrally Planned Economies?" Journal of Economic Perspectives 5: 59-76.

21. Nelson, Joan (ed.). 1990. Economic Crisis and Policy Choice. Princeton, N.J.: Princeton University Press.

22. Newbery, David M. 1989. "Missing Markets: Consequences and Remedies." In Frank Hahn (ed.), The Economics of Missing Markets. Information and Games. Oxford: Clarendon Press.

23. Newbery, David M., and Stiglitz, Joseph. 1981. The Theory of Commodity Price Stabilization. Oxford: Oxford University Press.

24. Persson, Torsten, and Tabellini, Guido. 1991. "Is Inequality Harmful for Growth? Theory and Evidence." Working Paper no. 91-155. Department of Economics, University of California at Berkeley.

25. Przeworski, Adam. 1991. Democracy and the Market: Political and Economic Reforms in Eastern Europe and Latin America. Cambridge: Cambridge University Press.

26. Remmer, Karen L. 1986. "The Politics of Economic Stabilization: IMF Standby Programs in Latin America, 1954-

27. Remmer, Karen L. 1990. "Democracy and Economic Crisis: The Latin American Experience." World Politics 42, 3 (April).

28. Romer, Paul M. 1990. "Endogenous Technical Change." Journal of Political Economy 98: S7l-S103.

29. Stallings, Barbara, and Kaufman, Robert. 1989. "Debt and Democracy in the 1980s: The Latin American Experience." In Stallings and Kaufman (eds.), Debt and Democracy in Latin America. Boulder, Co.: Westview.

30. Tanzi, Vito. 1989. "Fiscal Policy, Stabilization and Growth." In Mario I. Blejer and Ke-young Chu (eds.), Fiscal Policy, Stabilization, and Growth in Developing Countries. Washington, D.C.: IMF.

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31. Williamson, John. 1990. "What Washington Means by Policy Reform." In Williamson (ed.), Latin American Adjustment: How Much Has Happened? Washington, DC.: Institute of International Economics.

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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

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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.

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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

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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

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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 standardized-budget 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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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/non-development 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”.

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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.

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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.

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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 )

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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.

A R G E N T I N A 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 1982-86 with its percentage rising to 316.5 but gradually the reforms came to the rescue and brought it down to 24.9 percent.

B R A Z I L 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.

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Privatisation was judicially inducted to improve efficiency of the public sector.

I N D O N E S I A 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

N I G E R I A 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.

T H A I L A N 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 agro-

industries. But protectionism adopted against it by industrially advanced

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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.

K O R E A

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.

C H I N A

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

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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 non-commodity 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 long-term 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

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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 micro-management 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 micro-management 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 non-state 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

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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

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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:

U N I T E D K I N G D O M

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.

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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

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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.

STRUCTURAL POLICIES : 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.

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

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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.

DEBT MANAGEMENT POLICIES : 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.

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: The workers are enjoying the following rights in United Kingdom: a. The Right of Association: Unionization of the work force in

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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

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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.

G E R M A N Y

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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

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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.

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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

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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.

J A P A N

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.

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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.

N E W Z E A L A N D

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.

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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 previously-persistent 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

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consumer price inflation has been among the lowest in the world since 1991.

3. 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.

4. 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.)

5. 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.

6. 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.

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R E F E R E N C E S

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 Overview”, Privatisation in the European Union, Theory and Policy Perspectives, Edited By: David Parker, London, 1998.

6. Tony Prosser and Michael Moran, Privatization and Regulatory Change in Europe, Edited By: Michael Moran and Tony Prosser, Open University Press, Buckingham-Philadelphia, 1994.

7. Paul J.J. Welfens and Piotr Jasinski, "Privatisation and Foreign Direct Investment in Transforming Economies", Dartmouth Publishing Company, England & USA

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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 4.6 Budgetary resources 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.

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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 8.6 Budgetary resources 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 1960-61 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.

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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 12.5 Village, small industries 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 0.5 Transport & communications 2.5 Others 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

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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 4.7 Power 12.1 Village, small industries 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

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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 bnOverall outlay 247.6Public outlay 157.8Agriculture 23.2Irrigation 13.5 Power 29.3Village, small industries 2.4 Organized industries, mining 28.6 Transport & communications 30.8Social 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 16.0Industry & minerals 25.6Power 0.8Transport & communications 9.2Others 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 1968-69 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%

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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 bnOverall outlay 664.7Public outlay 394.3Agriculture 48.7Irrigation 38.8Power 74.0Village, small industries 5.9Organized industries, mining 89.9Transport & communications 68.7Social services etc 68.3 Budgetary resources 321.2Of which Additional taxation 77.5Internal private savings 110.7External assistance 58.3Deficit financing 13.5Private 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.

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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.

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Rs bnOverall outlay 1,851.8Public outlay 1,104.7Agriculture 136.2Irrigation 109.3Power 184.6Village, small industries 19.5Organized industries, mining 272.9Transport & communications 176.8Social services etc 205.4Financing of public outlay Current revenue balance 18.9 Public enterprises 58.1Additional resource mobilization 329.7Market borrowings (net) 247.0Small savings 99.1Other resources 113.2Deficit financing 156.8External assistance (net) 85.3Private investment 747.1Agriculture & allied 161.0Industry & minerals 303.2Power 1.9Transport & communications 33.9Others 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.

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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 bnOverall outlay 3,895.8Public outlay 2,214.4Agriculture 280.4Irrigation 165.9Power 385.6Village, small industries 32.5Organized industries, mining 491.0Transport & communications 379.7Social services etc 479.2Financing of public outlay Current revenue balance (145.9)Public enterprises 243.9 Additional resource mobilization 425.4Market borrowings (net) 574.0Small savings 204.0Other resources 402.9Deficit financing 346.7External assistance (net) 199.1Private investment 1,681.5Agriculture & allied 340.5Industry & minerals 621.7Power 4.2Transport & communications 180.2Others 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.

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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

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Rs bnOverall outlay 8,711.0Public outlay 4,341.0Agriculture 628.7Irrigation 265.5Power 810.5Village, small industries 63.3Organized industries, mining 751.0Transport & communications 810.4Social services etc 1,011.6Financing of public outlay Current revenue balance 350.1Public enterprises 1,481.4Additional resource mobilization -Market borrowings (net) -Small savings 2,022.6Other resources -Deficit financing 200.0External assistance (net) 287.0Private investment 4,370.0Agriculture & allied 968.0Industry & minerals 1,524.0Power 101.2Transport & communications 397.1Others 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

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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.

R E F E R E N C E

1. Agrawal, A.N. and Hari Om Varma (eds): India Economic Information Yearbook 1996. Delhi: National, 1996, pp. 366, Rs. 350.00, ISBN 81-214-0490-8

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

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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 1979-80 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

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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: 62-71) 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

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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)

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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

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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

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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.

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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

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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.

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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 market-oriented 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

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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 export-oriented 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.

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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.

R E F E R E N C E S

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 81-7018-714-1

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

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Fiscal Stabilization

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 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 INDIAOBJECTIVES OF FISCAL POLICY IN INDIAOBJECTIVES OF FISCAL POLICY IN INDIAOBJECTIVES 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

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(I) REDUCE WEALTH AND INCOME INEQUALITIES.

ROLE OF FISCAL POLICROLE OF FISCAL POLICROLE OF FISCAL POLICROLE OF FISCAL POLICY IN INDIAY IN INDIAY IN INDIAY 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 Budgetary

Deficit Revenue Deficit

Gross Fiscal Deficit

Primary Deficit

1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90

0.7 1.6 2.0 2.8 1.7 1.4 2.4

1.2 1.8 2.2 2.7 2.7 2.7 2.6

6.3 7.5 8.3 9.0 8.1 7.8 7.9

4.0 5.0 5.5 5.8 4.7 4.2 3.9

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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)

1990-

1 1991-2

1992-3 1993-4 1994-5

1995-6

1996-7

1997-8

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

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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

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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 1991-

2 1992-3 1993-4 1994-5 1995-6 1996-7 1997-

8 1. T

otal Expenditure

1053 1114 1225 1419 1607 1830 2010 2352

2. Revenue Expenditure

735 823 927 1082 1221 1435 1589 1822

3. Capital Expenditure

318 291 299 337 386 394 420 530

4. Total Receipts

940 1046 1103 1309 1563 1672 1877 2352

5. Revenue Receipts

550 660 741 755 888 1008 1262 1385

6. Tax Revenue

430 501 540 534 674 811 937 991

7. Non-tax Revenue

120 160 200 220 236 291 325 393

8. Capital Receipts

390 385 362 554 686 652 615 967

9. PSE Equity Disinvestments

NA 30 20 0.48 56 13 50 NA

10. Recovery of Loans

57 60 64 62 63 74 75 94

11. Borrowing & other Liabilities

333 295 279 493 517 590 556 NA

12. Revenue

186 163 186 327 341 355 326 436

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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 11492

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

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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)

1990-

1 1991-2 1992-

3 1993-4 1994-

5 1995-6

1996-7

1997-8

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

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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 91-182- day 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

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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. Food-grains (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,

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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 off-take 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 one- third 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

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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 non-merit 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

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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 non-developmental 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

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(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

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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

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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 1998-9

Import Duties Average Rate (Import weighted)

87 33 22.4 20.3 -

Maximum Rate 400 65 50 40 40

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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

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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 1997-8

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

State Taxes 5.4 5.8 5.7 5.7 5.9 5.6 5.6 5.7 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 labour-intensive manufacturing production .As against reducing tariff levels further, the 1998-9 budget has imposed an additional non-modvatable levy

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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) 1990-1 1991-2 1992-3 1993-4 1994-5 1995-

6 1996-7 1997-

8 Total Direct Taxes *

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 full-

fledged 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.

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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

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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-Haryana-Western 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 income-companies 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

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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

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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.

R E F E R E N C E S

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 81-259-0043-8

7. Mathur, B.L. : “Economic Policy and Performance”, Delhi, Discovery,2001

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INFLATION CONTROL MEASURESINFLATION CONTROL MEASURESINFLATION CONTROL MEASURESINFLATION 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

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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

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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

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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

R E A L G D P G R O W T H I N F L A T I O N R A T E Developing Countries

Average 1970-79

Average 1980-89

Average 1990-94

Average 1970-79

Average 1980-89

Average 1990-94

China 7,6 9.4 10.2 1.8 13.7 9.2 India 3.6 6.0 6.1 8.6 12.6 10.5 Malaysia 8.1 5.8 8.6 5.5 8.2 3.8 Singapore 9.5 7.3 8.3 5.9 8.3 2.9 Thailand 7.4 7.3 8.9 8.0 8.4 4.9 D E V E L O P E D C O U N T R I E S USA 3.2 2.6 2.3 7.09 5.55 3.6 UK 2.4 2.4 0.8 12.63 7.44 4.6 Germany 3.1 1.9 2.6 4.88 2.91 2.5 France 3.7 2.4 1.1 8.9 7.38 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

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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

G R O W T H R A T E MOVING AVERAGE (3 years) Year Real GDP Inflation(WPI) Money

Supply Real GDP Growth

Inflation ( WPI )

Money Supply Growth

1987-88 4.32 8.21 16.00 6.42 7.11 17.47 1988-89 10.65 7.38 17.80 7.29 7.68 17.73 1989-90 6.89 7.46 19.40 7.64 8.39 17.43 1990-91 5.37 10.32 15.10 4.35 10.50 17.93 1991-92 0.80 13.73 19.30 3.76 11.35 16.70 1992-93 5.10 10.00 15.70 3.63 10.69 18.10 1993-94 5.00 8.35 19.30 5.77 9.75 17.50 1994-95 7.20 10.90 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

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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.

R E F E R E N C E

1. C. Rangarajan, “Development, Inflation and Monetary Policy” in India’s Economic Reforms & Development edited by I.J.Ahluwalia and I.M.D.Little

2. Bimal Jalan, “India’s economic Policy”, Viking, New Delhi, 1996 3. V..Agnihotri & H. Ramachandran, “Dimensions of the New

EconomicPolicy”, Concept, New Delhi, 1996 4. A.N.Agrawal & Hari Om Varma, “Indian Economy Statistical

Yearbook”, National , 1998

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Balance of Payment ManagementBalance of Payment ManagementBalance of Payment ManagementBalance 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 1951-52.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

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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

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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 .

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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 1963-64, 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 re-stimulate 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

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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 non- price 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 1965-66, 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

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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 1972-73 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

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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 of1979-80 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

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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. Non-oil 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

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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 investment- savings 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

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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.

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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 non-concessional 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

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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

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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 1993-94, 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.

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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 1994-95 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.

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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 1993-94. 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

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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 1996-

97. 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

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FOREIGN EXCHANGE MANFOREIGN EXCHANGE MANFOREIGN EXCHANGE MANFOREIGN EXCHANGE MANAGEMENTAGEMENTAGEMENTAGEMENT 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

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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.

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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

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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

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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

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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 1993-94. 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.

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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

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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,

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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

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liquidity at risk and thus assessing reserve adequacy. It is appropriate to submit stylized facts in relation to some of the indicators of reserve-adequacy 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 short-term 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

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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

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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.

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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 inter-temporal 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 1997-98. 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

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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 the exports 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

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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 pre-reform 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 three-yearly 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(yen)

French(franc)

Canada(dollar)

Italy(lira)

Trade Balance% of G.D.P

1 2 3 4 5 6 7 8 9 1980-81to1982-83

6.854 17.248 4.003 0.0383 1.508

7.329 0.008 -3.66

1983-84to1985-86

11.488 15.710 4.161 0.0497 1.364 8.746 0.007 -2.83

1986-87to1988-89

13.415 22.692 7.248 0.0618 2.167 10.394 0.015 -2.20

1989-90to1991-92

19.688 34.208 11.717 0.1433 3.455 16.946 0.016 -1.43

1992-93to1994-95

31.138 49.37 19.510 0.2843 5.702 23.873 0.021 -0.85

1995-96to1997-98

36.150 58.180 22.722 0.3237 6.656 26.173 0.022

(SOURCE: ECONOMIC SURVEY, GOI, 1997-98)

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TABLE – II

EXCHANGE RATE OF RUPEE VERSUS SELECTED COUNTRIES

Year Turkish (lira)

Indonesian(Rupiah)

Brazilian(Cryzado)

Mexician (Vesos)

Korean(Won)

Pakistan(Rupee)

Thailand(Baht)

SDR Trade Balance % of G.D.P.

X M

1980-81to1982-83

0.075 0.013 0.0289

0.0278

0.012 0.892 0.404 10.359

-5710 4.92

8.59

1983-84to198-86

0.031 0.011 0.007 0.058 0.014 0.798 0.466 11.932

-6734 4.65

7.51

1986-87to1988-89

0.014 0.009 0.812 0.011 0.017 0.769 1.201 17.277

-7472 4.69

6.89

1989-90to1991-92

0.007 0.012 2.204 0.007 0.028 0.883 0.780 26.500

-7342 6.43

7.86

1993-1994to1994-95

0.002 0.015 14.175

6.905 0.039 1.112 1.234 42.273

-6778 8.35

9.21

1995-96to1997-98

0.007 0.31 34.827

4.715 0.42 0.955 1.159 51.488

-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

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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 1980-98 U.S Dollar 1.916 1.836 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 S.D.R. 1.667 1.942 4.970

(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)

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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 pre-reform 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 RATE APPERECIATION ON

DIRECTION OF TRADE 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.

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(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

Variation in In respect

of Country 1980-81 to 1986-87 1990-91 to 1997-98 Direction

of Change

Trade Balance

Exchange Balance

Direction of Change

Trade Balance

Exchange Balance

France (-) Up 3.49 10.36 (-) Down 3.18 10.93 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 (-) 0.87 1.42 (-) Down 0.57 1.54 Italy N.A 1.88 (+) Up 1.19 1.38 Belgium (-) 4.80 N.A. (+) 1.11 N.A. Netherlands (-) 2.55 N.A. (+) Up 4.49 N.A. Turkey N.A. 0.19 (+) Up 2.03 N.A. 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 4.89 673.57

Pakistan N.A. 0.86 (+) Up 1.29 1.08

(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

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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.

05000

1000015000200002500030000350004000045000

90-91

92-93

94-95

96-97

98-99

2000-01

SDRGOLDFC AssetsTOTAL

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.

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R E F E R E N C E

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.

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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.

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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 small-scale producers should focus instead on positive incentives and support measures.

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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

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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

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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

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OPENING THE ECONOMY FOR FOREIGN TRADEOPENING THE ECONOMY FOR FOREIGN TRADEOPENING THE ECONOMY FOR FOREIGN TRADEOPENING 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

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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.

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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 98-

99

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

Capital goods 97 76 50 38 29 29 25 30 Peak Rates of Duty

200 110 85 65 50 52 45 45

( 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

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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.

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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

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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

R E F E R E N C E S

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

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REINFORCEMENT QUIZ REINFORCEMENT QUIZ REINFORCEMENT QUIZ REINFORCEMENT QUIZ ––––IIII 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 b) 1960 c) 1962 d) 1966

7. Annual Plan 1966-69 was caused by

a) 1965 War b) severe drought c) both a & b

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

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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 d) 1992

18. Capital Account is concerned with a) services b) merchandise c) economic transaction

19. Reserve Bank of India Act was passed in a) 1932 b) 1933 c) 1934 d) 1935

20. FERA was passed in a) 1971 b) 1972 c) 1973 d) 1975

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. The period 1956 to 1973 witnessed a) rapid price rise b) gradual price rise c) no price rise

24. 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

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a) UK b) USSR c) USA d) Japan

26. Indian Economy is the most appropriately described as a) Socialist b) Mixed c) Capitalist d) None of these

27. 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 c) backward economy d) none of these

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

33. The Plan Holiday refers to a) 1965-68 b) 1966-69 c) 1967-70 d) 1978-80

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

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39. 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

40. Unemployment in India is due to a) poor manpower planning b) population explosion c) inappropriate educational system d) none of these

41. Fill in the blanks in the following sentences: a. If an institution does not receive deposits but only lends money, it

will be called a _______________ institution. b. A bank is called a _____________ of credit. c. A commercial bank finances _____________ trade of a country. d. ______________ credit is an arrangement by which the banks

agree to lend money up to a specified limit. e. Under an ________________ arrangement, a depositor can draw

by cheque, more than the deposited amount to his credit. f. Banks also give financial help to customers by ________________

their bills of exchange. g. _______________ functions are those services which are rendered

by the banks as the agents of their customers. h. If liquidity preference is high, the capacity of the banks to create

credit is _____________. i. 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 _________________.

j. 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

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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) YTLLAILBL b) AGROMTGE c) TSSAE d) HASC RSEREEV OITRA e) SSPA OOBK f) DNESROE g) ECNANIFER h) SOPEDIT i) YTRCESUI j) 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

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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

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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

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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

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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

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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. INTERNATIONAL MONETARY FUND b. SUBSIDIARY FUNCTIONS c. BANK RATE d. CENTRAL BANK e. CLEARING HOUSE f. INTEREST RATE g. TIME DEPOSIT h. DEPOSIT i. LIQUID j. EXCHANGE

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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

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ENDING THE PRICE CONTROL REGIMEENDING THE PRICE CONTROL REGIMEENDING THE PRICE CONTROL REGIMEENDING 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

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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) Five Year Cagr (%)

China 226.9 7.1 India 97.6 6.0 USA 897.4 2.1 Canada 82.9 1.7 South Korea 101.8 1.4 France 95.1 1.3 Italy 93.0 -0.5 Germany 129.5 -0.8 Japan 253.5 -1.1 Russian Federation 123.5 -3.3 Total World 3,503.6 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

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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

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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

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FOREIGN DIRECT INVESTMENTFOREIGN DIRECT INVESTMENTFOREIGN DIRECT INVESTMENTFOREIGN 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 state-owned 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.

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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

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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

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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 macro-stabilisation 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.

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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 1997-98

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 GDRs issued abroad by Indian Cos

240 1520 2082 683 1366 645

( 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 1997-98.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.

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TABLE – II

Year Direct Investment (in crores)

% in total investment

1974 913 47 1977 920 39.5 1978 876 39.5 1979 875 40.6 1980 983 42.1 1986 1557 15.8 1987 1742 13.1 1988 1991 12.1 1990 2705 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

1992-93 559 315 56.351 1993-94 4153 586 14.11 1994-95 5138 1314 25.57 1995-96 4892 2144 43.83 1996-97 6133 2821 46.00 1997-98 5385 3557 66.05 1998-99 2401 2462 102.54 1999-00 5181 2155 41.59

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2000-01 5099 2339 45.87 2001-02 5952 3904 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 0.26 1.77 1956-60 2.26 15.80 1961-65 2.36 15.55 1966-70 1.90 11.56 1971-75 0.80 4.66 1976-80 -0.50 -2.72 1981-85 1.44 6.94 1986-90 2.45 10.70

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1991-95 1.39 5.57 1997-98 0.87 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 325 155 47.7 1992 1781 233 13.7 1993 3559 574 16.1 1994 4332 958 22.1 1995 11245 2100 18.7 1996 11142 2383 21.4 1997 15752 3330 21.1 1998 6975 2330 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.

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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 27905 Karnataka 15785 Tamil Nadu 13595 Gujrat 10902 Andhra Pradesh 8661 West Bengal 7675 Haryana 2931 Punjab 1926

FDI followed by Karnataka, Tamil Nadu and Gujrat during the

period 1991-99.

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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 Percent of foreign collaboration

Fuels 32.11% Telecommunications 17.83% Transportation 6.85% Service Sector 6.32% Metallurgical 6.00% Electrical

Equipment 5.14%

Food Processing 4.4% Hotel & Tourism 1.80% Others 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

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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

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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 NO OF UNITS TOTAL INVESTMENT IN CRORES 1951 5 29 1961 47 950 1980 179 18,150 1990 244 99,330 1998 236 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,

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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 NTPC 16,180 2 SAIL 15,140 3 ONGC 10,600 4 Indian Railway Finance Corporation 9,500 5 Power Grid Corporation of India 8,630 6 National Hydro Electric Power Corporation 8,620 7 Rashtriya Ispat Nigam Ltd. 7,870 8 National Power Corporation 7,450 9 MTNL 7,180 10 Rural Electricity Corporation 7,110 TOTAL 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

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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.

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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 OMPANIES BY LOSSES Name of Company In Crores Name of Company In Crores ONGC 5,229 Fertiliser Corp. of India 6,853 NTPC 3,734 Hindustan Fertiliser Corp. 6,150 Indian Oil 2,720 Rashtriya Ispat Nigam 4,907 SBI 1,604 Bharat Coking Coal 4,066 MTNL 1,557 Indian Bank 3,883 Nabard 1,310 Eastern Coalfields 3,846 GAIL 1,126 National Jute Mfg 2,763 HPCL 1,088 Indian Drugs & Pharma 1,675 Nuclear Power Corp. 825 Hindustan Photo Films 1,475 BPCL 820 National textile Corporation

(Mah.North) 1,430

Power Grid Corp. 742 Cement Corp. of India 1,422 Neyveli Lignite 726 United Bank of India 1,359 Northern Coalfields 703 Heavy Engineering Corp. 1,342 IDBI 691 Konkan railway Corp 1,302 Nalco 656 Mining & Allied Machinery

Corporation 1,285

Power Finance Corp. 604 National Textile Corp.(South Maharashtra)

1,271

SIDBI 477 National Textile Corp.(WB,Assam,Orissa)

1,166

Oil India 467 National Textile Corp.(UP) 1,158 PNB 464 Hindustan Shipyard 1,090 ICICI 455 National Textile

Corp.(Gujarat) 1,021

DISINVESTMENT OF PUBLIC SECTOR SHAREHOLDING

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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

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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

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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. Extent of restructuring required and the potential for improving share value

2. The permissible extent of disinvestments with reference to the classification of industry as core and non-core

3. The size of the company and the phasing of disinvestments 4. Equity Fund Mobilisation of the concerned unit

5. 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.

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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. Coal and Lignite 2. Mineral Oils 3. Arms, ammunition and defence equipment 4. Atomic energy 5. Radio-active minerals 6. Railway transport The central government also drew up a Common Minimum

Programme in 1996. The highlights of the programme were as follows: 1. To carefully examine the public sector non-core strategic

areas 2. To set up a Disinvestments Commission for advising on

disinvestments related matters 3. To take and implement decision to disinvest in a

transparent manner 4. 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

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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

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b) Atomic Energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes in agriculture, medicine and non-strategic industries)

c) 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;

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� 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

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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 No of PSEs in which equity sold

Target Receipt for the year (Rs. In Crores)

Actual Receipts (Rs. In Crores)

1991-92 47 2500 3,038 1992-93 35 2500 1,913 1993-94 3500 -48 1994-95 13 4000 5,607 1995-96 05 7000 1,397 1996-97 01 5000 455 1997-98 01 4800 912 1998-99 05 9006 5,376 1999-2000 03 10000 2,600 2000-01 03 10000 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.

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TABLE – V

PSUs APPROVED FOR DISINVESTMENT

Serial No

Name of Public Sector Enterprise

1. Air India Ltd. (AI) 2. Bharat Brakes & Valves Limited (BBVL) 3 Bharat Heavy Plates & Vessels Ltd (BHPV) 4. Bharat Pumps and Compressors Ltd (BPCL) 5. Engineering Projects (India) Ltd. (BPCL) 6 Hindustan Cables Ltd (HCL) 7 Hindustan Copper Ltd (HCL) 8 Hindustan Insecticides Ltd. (HIL) 9 Hindustan Organic Chemicals Ltd. (HOCL) 10 Hindustan Salts Ltd. (HSL) 11 Hindustan Zinc Ltd (HZL) 12 Indian Airlines (IA) 13 Indian Petrochemicals Corporation Ltd (IPCL) 14. Indian Tourism Development Corporation

(ITDC) 15 Instrumentation Ltd. (IL) 16 Jessup & Company Ltd (Jessup) 17 Madras Fertilizers Ltd (MFL) 18 Maruti Udyog Ltd (MUL) 19 Minerals and Metal Trading Corporation of

India Ltd. (MMTC) 20 MSTC Ltd 21 National Fertilizers Ltd (NFL) 22 NEPA Ltd 23 Praga Tools Ltd 24 Scooters India Ltd 25 Sponge Iron India Ltd (SIIL) 26 State Trade Corporation (STC) 27 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

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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 TABLE TABLE TABLE ---- VI VI VI VI

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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. 148.8 CMC Sept2001 Tata Sons 51 152.00 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 2.51 Temple Bay Ashok Beach Resort

Nov.2001 GR Thanga Maligai 6.8

Hotel Ashok, Agra Nov.2001 Mohan Singh 3.9 Juhu Centaur Hotel Nov.2001 Tuli Hospitality Services 153.0 Hotel Madurai Ashok Jan.2002 Sangu Chakra Hotels 100 5.48 Hotel Laxmi Vilas Jan.2002 Bharat Hotels 7.5 Hotal Centaur Feb.2002 Al Batra Group 83.0 VSNL Feb.2002 Tata Group 25 3,689.00 IBP Feb.2002 IOC 33.58 1,153.68 Paradeep Phosphates Ltd.

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 Ashok 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

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 Airport Ashok,Kolkata

June 2002 Bright Enterprises 100 20.01

Hotel Auragabad Ashok June 2002 Loksangam Hotels 100 17.40 Hotel Manali Ashok June 2002 Auto Impex Ltd 100 4.00 Hotel Khajuraho Ashok July,2002 Bharat Hotels 2.2 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 45.0

Chandigarh Project July 2002 Taj GVK Hotels & Resort 17.3

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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

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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.

P O W E R

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 inter-state 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

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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.

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• 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 market-determined, 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

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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.

R O A D 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 high-powered 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

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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 high-rise buildings, replace all existing mechanical exchanges with digital

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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

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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.

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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.

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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

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major airports, and the development of a landlord-coordinator role for the various airport authorities similar to that envisioned for the seaports.

P O R T

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.

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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

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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 city-

level 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.

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Urban infrastructure projects are eminently suitable for public-private 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 cross-subsidisation 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 loss-making 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

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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.

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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.

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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

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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

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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

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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, re-insurance, 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

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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 1999-2000 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.

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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

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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 Population of 60 & above

Assets of Pension Funds ( $ bn.)

Pension Fund per an old individual($000)

USA 42.08 2915 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

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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.

R E F E R E N C E

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

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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 market- both 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

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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

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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

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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

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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

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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

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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

R E F E R E N C E S

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

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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 BANKING INSTITUTIONS NON-BANKING FINANCIAL

COOPERATIVE BANKS COMMERCIAL BANKS REGIONAL RURAL BANKS NATINALIZED BANKS PRIVATE 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.

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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 Deposits

( In Lakhs) Deposits ( In Lakhs )

1905 1910 1905 1910 Presidency Banks 3 3 2538 3658 Indian Joint Stock Banks

9 16 1199 2566

The Exchange Banks

10 11 1704 2479

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.

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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.

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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

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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

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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 Non-Performing 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%

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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.

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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.

.

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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.

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IMPACT OF ECONOMIC REFORMS ON INDIAN ECONOMYIMPACT OF ECONOMIC REFORMS ON INDIAN ECONOMYIMPACT OF ECONOMIC REFORMS ON INDIAN ECONOMYIMPACT 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

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sustainability of average growth rates recorded in future has to be evaluated in terms of the trends with respect to revival of industrial growth.

T A B L E – I

ANNUAL GROWTH RATE OF GNP AT FACTOR COST

Year Old Series at 80-81 prices New Series at 1993-94 prices 1989-90 6.9 1990-91 5.2 1991-92 0.5 1992-93 5.2 1993-94 6.2 1994-95 7.8 7.2 1995-96 7.4 7.5 1996-97 7.7 8.2 1997-98 4.8 1998-99 6.4 1999-2000 6.2 2000-20001

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 0.66 1996-97 5.56 1992-93 2.39 1997-98 6.58 1993-94 5.93 1998-99 1994-95 8.4 1999-2000 1995-96 12.82 2000-2001

However since 1996 growth rates of the secondary sector have decelerated during the subsequent years to 6.0 percent and to 6.2 percent

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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.

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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 Foodgrain Production

Year Foodgrain Production

1989-90 171.04 1995-96 180.42 1990-91 176.39 1996-97 199.44 1991-92 168.39 1997-98 192.43 1992-93 179.48 1998-99 202.5 1993-94 164.26 1999-2000 1994-95 191.5 2000-2001

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.

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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

1992-93 559 315 56.351 1993-94 4153 586 14.11 1994-95 5138 1314 25.57 1995-96 4892 2144 43.83 1996-97 6133 2821 46.00 1997-98 5285 3557 66.05 1998 2401 2462 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

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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

T A B L E – V

MAJOR INDICATORS OF INDIA’s FOREIGN TRADE

YEAR EXPORTS IMPORTS BALANCE OF TRADE

GROWTH OF EXPORTS

1990-91 18145 24073 -5927 9.2 1991-92 17865 19411 -1545 -1.5 1992-93 18537 21882 -3344 3.8 1993-94 22238 23306 -1068 20.0 1994-95 26331 28654 -2324 18.4 1995-96 31795 36675 -4880 20.8 1996-97 33470 39132 -5663 5.3 1997-98 35006 41485 -6478 4.6 1998-99 33659 41858 -8199 -3.9 1999-2000

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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 1998-99 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.

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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

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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.

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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.

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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 short-term 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.

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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 1992-93 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)

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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

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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.

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IMPACT ON AGRICULTUREIMPACT ON AGRICULTUREIMPACT ON AGRICULTUREIMPACT 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

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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

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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

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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

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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 cost-of-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 top-heavy 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

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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

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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

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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

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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

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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.

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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

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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, Sub-assemblies, 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 socio-economic 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.

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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 Non-Governmental 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.

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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.

T A B L E - I

YEAR CAPITAL 1950 Capital Assets not exceeding Rs 5 Lakhs 1958 Capital Investment of less than Rs.5 Lakhs 1959 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 Original Value of Plant & Machinery Original Value of Plant & Machinery Original Value of Plant & Machinery OnlyOnlyOnlyOnly 1966 Upto 7.5 Lakhs 1975 Upto 10 Lakhs 1980 Upto 20 Lakhs 1985 Upto 35 Lakhs 1991 Upto 60 Lakhs 1997 Upto 3 Crores 1998 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 small-scale sector has grown phenomenally during the last three decades and the

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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

Production (Rs. in Crores) No. of Units (in Lakhs)

At Current Price

At 1990-91 price

Employment (Lakhs nos.)

Export (Rs. in Crores)

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99(P)

20.82

22.46

23.88

25.71

27.24

28.57

30.14

31.21

178699

209300

241648

293990

356213

412636

465171

527515

160156

169125

181133

199427

222162

247311

268159

288807

129.80

134.06

139.38

146.56

152.61

160.00

167.20

171.58

13883

17784

25307

29068

36470

39249

44437

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.

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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

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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.

T A B L E – V

PRODUCTION (RS. CRORES)

YEAR NO OF LAKH UNITS Current

Price At 1990-91 Price

EMPLOYMENT (Lakh Nos.)

EXPORT (RS.CRORE)

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 161.00 39249 1997-98 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

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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

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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

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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

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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 merchant-exporters 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.

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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 import-export 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)

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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 187.71 75.82 263.53 1991 190.57 76.76 267.33 1992 192.10 78.46 270.56 1993 193.26 78.50 271.76 1994 194.45 79.30 273.75 1995 194.66 80.59 275.25

(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

1991 1992 1993 1992 1995 1996 1997 Public Sector 1.52 0.80 0.60 0.62 0.11 0.19 0.67 Private Sector 1.24 2.21 0.06 1.01 1.63 5.62 2.04 Total Organized Sector 1.44 1.21 0.44 0.73 0.54 1.51 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

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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

RATE OF GROWTH OF EMPLOYMENT

PERIOD

Usual Status Current Daily Status

1972 –73 to 1977-78 2.73 0.92 1977-78 to 1983 2.17 2.08 1983 to 1987-88 1.54 2.89 1987-88 to 1993-94 2.43 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

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T A B L E - IV

1977-78 1983 1987-88 1993-94 EDUCATED

Rural Male 14.2 10.9 11.5 8.9 Rural female 45.7 35.0 34.9 25.0 Urban Male 9.8 8.5 8.3 6.9 Urban Female 40.0 22.2 21.9 21.1 GRADUATES AND ABOVE Rural male 19.7 12.8 15.0 13.4 Rural Female 44.8 41.5 37.3 32.3 Urban Male 9.3 7.3 7.4 6.4 Urban Female 35.9 21.1 21.0 20.5

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.

T A B L E – V

Percentage Among Employed Y E A R R U R A L U R B A N

1977-78 51.81 37.99 1983 45.25 39.69 1987-88 38.02 36.94 1993-94 35.25 30.61

QUALITY OF EMPLOYMENT: Security of employment can be

used as a proxy for quality of employment. NSS data provides

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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.

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TABLE - VI

SECTORAL SHARES OF GDP (Percentage) Year Primary Secondary Services 1950-51 55.80 15.20 29.00 1960-61 45.80 20.70 33.50 1970-71 44.50 23.60 31.90 1980-81 38.10 25.90 36.00 1989-90 32.40 28.10 38.50 1990-91 30.90 30.00 39.10 1997-98 26.74 27.75 45.50 1998-99 26.82 27.01 46.17 1999-00 25.50 27.40 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 Community Services

Total

1980-81 12.02 4.67 8.81 10.48 35.98 1981-82 12.07 4.77 8.81 10.48 35.98 1982-83 12.36 4.96 9.13 10.70 37.15 1983-84 12.04 4.91 8.82 10.24 36.00 1984-85 12.05 5.08 9.01 10.56 36.00 1985-86 12.26 5.32 9.12 10.79 37.49 1986-87 12.29 5.46 9.41 11.15 38.31 1987-88 12.80 5.42 9.91 11.49 39.62 1988-89 12.41 5.21 9.76 11.03 38.40 1989-90 12.52 5.30 10.13 11.17 39.12 1990-91 12.52 5.26 10.23 11.05 39.06 1991-92 12.50 5.51 11.12 11.40 40.53 1992-93 12.75 5.57 10.98 11.40 40.53 1993-94 12.77 5.66 11.42 11.46 41.31 1994-95 13.44 5.47 11.73 10.68 41.32

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1995-96 14.47 5.53 12.01 10.56 42.57 1996-97 14.59 5.61 12.14 10.45 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 AGRICULTURAL & ALLIED

INDUSTRIAL SECTOR

SERVICE SECTOR

1987-88 31.40 27.18 39.62 1988-89 33.03 26.66 38.40 1989-90 31.40 27.18 39.62 1990-91 30.93 28.02 39.06 1991-92 29.97 27.45 40.53 1992-93 30.18 27.12 40.70 1993-94 29.80 26.97 41.31 1994-95 26.77 28.07 41.32 1995-96 26.04 29.53 42.57 1996-97 26.13 29.34 42.79 1997-98 24.40 31.40 44.20 1998-99 28.90 24.40 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

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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 employment-unemployment 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

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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 Estimates S. P. Gupta’s Estimates Year Rural Urban Rural Urban Total 1977-78 50.60 47.96 - - - 1983 45.31 35.65 45.65 40.79 44.48 1986-87 38.81 32.29 - - - 1987-88 39.23 36.20 39.09 38.20 38.86 1988-89 39.06 36.60 - - - 1989-90 34.30 33.40 33.70 36.00 34.28 1990-91 36.43 32.76 35.04 35.29 35.11 1991-92 37.42 33.23 - - - 1992-93 43.47 33.73 41.70 37.60 40.70 1993-94 36.66 30.51 37.27 32.30 35.07 1994-95 41.02 33.50 38.03 34.24 36.98 1995-96 37.15 28.04 38.29 30.05 36.08 1997 35.78 29.99 38.46 33.97 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.

T A B L E – X CHANGES IN POVERTY, EMPLOYMENT AND GDP

Y E A R S CHANGES IN POVERTY RATIO

EMPLOYMENT GDP GROWTH

1983 TO 1990-91 -3.1 1.6 5.6 1990-98 +2.7 1.1 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.

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TABLE – XI PERCENTAGE OF POPULATION BELOW THE POVERTY LINE

R U R A L U R B A N T O T A L Year Poverty

Ratio Annual Decline

Poverty Ratio

Annual Decline

Poverty Ratio

Annual Decline

1977-78 53.0 - 45.2 - 51.3 - 1983 45.7 -3.24 40.8 -2.25 44.5 -3.11 1987-88 39.1 -3.41 38.2 -1.45 38.9 -2.95 1993-94 37.3 -0.78 32.4 -2.71 36.0 -1.29

(SOURCE: ECONOMIC SURVEY, 1997-98)

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

RATE OF GROWTH OF EMPLOYMENT

PERIOD Usual Status Current Daily

Status 1972 –73 to 1977-78 2.73 0.92 1977-78 to 1983 2.17 2.08 1983 to 1987-88 1.54 2.89 1987-88 to 1993-94 2.43 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

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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,

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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 Total Plan Outlay (In Crores)

Expenditure on Education (Crores)

% Of Plan Outlay

1992-93 72852.4 2619.4 3.6 1993-94 88080.7 3147.3 3.6 1994-95 98167.3 3940.0 4.0 1995-96 107380.4 5355.7 4.9 1996-97 129188.6 7346.1 5.7 1997-98 139625.9 8208.2 5.8

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.

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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 two-third 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 1990-91 1980-81 1970-71 Primary GIRLS

110.4 (89.0) 47.9 (76.2)

97.4 (101.0) 40.4 (85.6)

73.8 (80.5) 28.5 (64.1)

57.0 (76.4) 21.3 (59.1)

Middle GIRLS

41.1 (54.9) 16.4 (44.3)

34.0 (60.1) 12.5 (46.1)

20.7 (41.9) 6.3 (28.6)

13.3 (34.2) 3.9 (20.9)

High/Higher Secondary

27.0 19.1 11.0 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] Coming to the expenditure, the current expenditure on education

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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. Even 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

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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.

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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

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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

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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 watered-down programme of maternal and child health (MCH) suffers a major obstacle. With regard to quality of service, even the record of the favoured

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'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

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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.

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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 long-term 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.

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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 1981-1991. 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 low-income 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 per-capita incomes in India has not been what one would have desired,

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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 1991-92. 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

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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 Inter-Ministerial 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

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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.

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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.

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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) Wheat Rice Sugar APL 6.82 9.05 12.00 BPL 2.50 3.50 12.00 New Rates (2000) APL 8.40 11.78 -- BPL 4.20 5.89 13.00 Revised Rates (2002) APL 6.10 8.30

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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) By eliminating Subsidy on APL, The Government hopes to save Rs 4360.

II) By doubling grain allocation for BPL Families FCL us expected to save Rs 1078 crores by way of reduction of buffer stock.

III) 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

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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

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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 1988-90. 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.

R E F E R E N C E S

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: Har-Anand, 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,

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5. Ratnakar: Economic Reforms in India: Experiences and Lessons., Delhi: Deep & Deep, 1996, pp.292

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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 ___________________.

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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

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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

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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

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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. 1967 B. 1970 C. 1973 D. 1976

10. ICICI is the name of

A. Financial institution

B. Chemical industry

C. Cotton industry

D. Chamber of commerce & industry

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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 C. Rs.75 crore D. Rs.100 crore

13. The Tenth Finance Commission was appointed in

A. April 1993 B. June 1992 C. June 1991 D. April 1990

14. Ad Valorem means, according to

A. Valid rule B. existing rules C. Value D. excise rules

15. . 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. 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

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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 B. 1951 C. 1965 D. 1974

21. 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

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23. Contribution of agriculture in the total exports of India is

A. 18% B.19% C. 17% D. 20%

24. The new CRR announced by the RBI is

A. 10% B. 9.5% C. 10.5% D. 9%

25. 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

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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

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43. The first bank in India introduced by the British was known as

A. Imperial Bank of India B. East India Company bank C. Impress of India Bank D. 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

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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

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ANSWERS TO REINFORCEMENY QUIZ ANSWERS TO REINFORCEMENY QUIZ ANSWERS TO REINFORCEMENY QUIZ ANSWERS TO REINFORCEMENY QUIZ –––– II II II 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

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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

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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

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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

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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

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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.

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CONCEPT OF SECOND GENERATION REFORMS 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.

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BACK-GROUND

The “First Generation Reforms” initiated in 1991 were crisis-

driven. 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.

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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 1999-2000, 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 crisis-driven 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

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–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 second-generation 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

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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,

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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

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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

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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. Report of the Eleventh Finance Commission 2. Ruddar Dutt, “Economic Reforms in India”, 2000 3. The Hindu, “Survey of Indian Industry”, 2001 4. Govt of India, “Speech of the Fin.Minister on Budget 2000-01” 5. World Bank, “World Development Report”, 2000-01 6. UNDP, “Human Development Report”. 7. Panchmukhi P.R., “Social Impact of Economic Reforms in India: A

Critical Appraisal”, Economic & Political Weekly, March 4-10,2000

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IMPACT OF ECONOMIC REFORMS ON STATES

India embarked on a process of economic policy reforms in mid- 1991 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

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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

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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 all-India 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

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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.

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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.

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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

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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 non-working 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 Sub-Committee 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

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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.

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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.

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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 non-working 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

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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 1990-91 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

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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 non-productive 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 two-thirds 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.

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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 non-lending 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

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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, re-organization, 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:

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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 re-organization, 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 Sub-committee (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.

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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,

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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)

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TABLE – I

STATE-WISE FOREIGN INVESTMENT APPROVED

(AUGUST 1991 TO NOVEMBER 2001)

State No. of Approvals Total Tech Fin

Amt. of FDI Approved

ANDHRA PRADESH 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

HIMACHAL PRADESH 93 55 38 3630.90

JAMMU AND KASHMIR 5 3 2 84.10

JHARKHAND 72 48 24 1438.15

KARNATAKA 1768 432 1336 210928.25

KERALA 241 61 180 14695.45

MADHYA PRADESH 219 70 149 91606.36

MAHARASHTRA 3630 1111 2519 473667.42

MANIPUR 1 - 1 31.85

MEGHALAYA 4 - 4 529.60

NAGALAND 2 1 1 36.80

ORISSA 136 49 87 82290.03

PUNJAB 174 54 120 19584.62

RAJASTHAN 311 99 212 26469.91

TAMIL NADU 1983 517 1466 225816.15

TRIPURA 2 1 1 6.80

UTTARANCHAL 48 22 26 1256.49

UTTAR PRADESH 717 260 457 42902.99

WEST BENGAL 568 190 378 84652.06

ANDAMAN & NICOBAR 8 - 8 137.87

ARUNACHAL PRADESH 2 - 2 110.60

CHANDIGARH 43 9 34 1469.60

DADRA & NAGAR HAVELI 70 46 24 1239.80

DELHI 1715 195 1520 331821.50

GOA 165 56 109 8795.88

LAKSHADWEEP 1 - 1 5.00

MIZORAM 1 - 1 15.22

PONDICHERRY 107 39 68 12387.94

DAMAN & DIU 39 14 25 552.20

OTHERS (STATE NOT INDICATED) 5745 2501 3244 730636.86

GRAND TOTAL 20645 6905 13740 2712186.02

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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

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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

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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

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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.

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CONCEPT OF ECONOMIC REFORMSCONCEPT OF ECONOMIC REFORMSCONCEPT OF ECONOMIC REFORMSCONCEPT OF ECONOMIC REFORMS 1.1.1.1. MEANING OF ECONOMIC REFORMSMEANING OF ECONOMIC REFORMSMEANING OF ECONOMIC REFORMSMEANING 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 CHANGES IN ECONOMY

1.B1.B1.B1.B DIMINISHING ROLE OF BUREAUCRACY

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1.C1.C1.C1.C---- INCREASING ROLE OF INCREASING ROLE OF INCREASING ROLE OF INCREASING ROLE OF MARKETMARKETMARKETMARKET

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

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5.REDUCTION OF PUBLIC EXPENDITURE 3. 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

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4. BRETTON WOODS

ADVOCATED PROCESS OF ECONOMIC REFORMS . DEVALUATION: Currency to promote exports DEREGULATION: of controls & restrictions DEFLATION: to control inflationary

conditions of The economy

5.5.5.5. TARGET OF ECONOMIC TARGET OF ECONOMIC TARGET OF ECONOMIC TARGET OF ECONOMIC REFORMSREFORMSREFORMSREFORMS

( 5 I s )

� INTERNATIONAL ECONOMIC STABILITY

� INVESTMENT � INEQUALITY - Eradication

� INSTITUTIONS-PSU & Control

Elimination

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� IDEOLOGY - Neo-Liberalism

6. 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 tax 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

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• 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

I. Principal Actors

• 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 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 insulated technocratic elites

• Institutional development highly dependent on midlevel public sector management

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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.

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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.

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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.

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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.

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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 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. 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.

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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 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. 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. 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

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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.

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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.

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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 REFORMSINTERNATIONAL EXPERIENCES OF REFORMSINTERNATIONAL EXPERIENCES OF REFORMSINTERNATIONAL EXPERIENCES OF REFORMS

ARGENTINAARGENTINAARGENTINAARGENTINA I GROWTH OF GDP ROSE FROM 0.9 (82-86) TO 7.6 IN 1991-92

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II INFLATION 315.5% IN 1982-86

BUT DECREASED TO 24. 9 % IN 1991-92.

III DECONTROL OF ALL EXISTING

CONTROLS NIGERIANIGERIANIGERIANIGERIA - I ABOLITION OF IMPORT LICENCES

- II ABOLITION OF SUBSIDIES - III DECONTROL

BOLIVIABOLIVIABOLIVIABOLIVIA - 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 CHILECHILECHILECHILE - I) GDP ROSE FROM 2.0 IN 1982-86 TO 8.7 IN 1991-92

- II) INFLATION DECREASED FROM 21.2 IN 1982-86 TO 15.4 IN 1991-92

MEXICOMEXICOMEXICOMEXICO - 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

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KOREAKOREAKOREAKOREA - 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.

CHINACHINACHINACHINA - FOLLOWING REFORM WERE MADE –

A) COVERAGE OF VAT BROADENED

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

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11.6% OF TOTAL GVT EXPENDITURE IN 1978 TO 23.5 % IN 1995.

F) DECLINE OF INFLATION

U.K.U.K.U.K.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) OTHER PRIVATISATION - BRITISH LEY LAND , CABLE WIRELESS. BRITISH RAILWAYS

HOTEL, SEA PORTS, NATIONAL FREIGHT COMPANY, NEWZEALANDNEWZEALANDNEWZEALANDNEWZEALAND - I) SINGLE RATE VAT.

-II) REDUCTION OF RULES & REGULATIONS

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-III) PRIVATISATION OF TRADING ACTIVITIES

IV) REDUCTION TARIFFS

RESULTS -I) FISCAL SIMPLES -II) REDUCTION IN INFORMATION. POLANDPOLANDPOLANDPOLAND I.) REFORMS STARTED IN 1989

II) TRADE & PRICE LIBERALIZATION III) REFORMS IN TAXES

IV) FISCAL DECENTRALIZATION

RESULTS I) FISCAL DEFICIT DECLINED TO 2.62%

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

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ROMANIAROMANIAROMANIAROMANIA 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

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FIVE YEAR PLANSFIVE YEAR PLANSFIVE YEAR PLANSFIVE 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

PROGRESPROGRESPROGRESPROGRESSSSS

I. PRIVATE AIRLINES NATIONALISED IN 1953

II. PRODUCTION OF COMMERCIAL VEHICLES STARTED IN 1954.

III. GOVT TAKES OVER IMPERIAL BANK OF INDIA

& RENAMED IT SBI IN DEC. 1954

IV. ICICI SET UP IN 1955.

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V. LIFE INSURANCE NATIONALISED.

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2)2)2)2) SECOND FIVE YEAR PLAN (1956 SECOND FIVE YEAR PLAN (1956 SECOND FIVE YEAR PLAN (1956 SECOND FIVE YEAR PLAN (1956 –––– 65) 65) 65) 65)

I. SPECIAL STRESS ON HEAVY INDUSTRIES

II. 1957- PACT WITH USSR FOR SETTING UP HEAVY INDUSTRIES

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 TO HANDLE CONSUMER INDUSTRIES

RESULTS : VII. PRICE LEVEL INCREASES BY 30 %

VIII. BALANCE OF PAYMENT CRISIS STARTED

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3)3)3)3) THIRD FIVE YEARS PLAN THIRD FIVE YEARS PLAN THIRD FIVE YEARS PLAN THIRD FIVE YEARS PLAN (1961(1961(1961(1961---- 66) 66) 66) 66)

AIMS- 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 MINIMUM FOUR PERCENT BONUS INTRODUCED

1966 START OF GREEN REVOLUTION.

RESULTS AGRICULTURE PRODUCTION STAGNANT.

DEPENDENCE ON FOREIGN AID

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GROWING TRADE DEFICIT. BALANCE OF PAYMENT MORE ADVERSE

4)4)4)4) ANNUAL PLANS (1966ANNUAL PLANS (1966ANNUAL PLANS (1966ANNUAL PLANS (1966----69)69)69)69)

1969 FOURTEEN BANKS NATIONALISED

-MONOPOLIES & RESTRICTIVE TRADE

PRACTICES ACT PASSED. RESULTSRESULTSRESULTSRESULTS DEFICIT FINANCING REACHED A LEVEL OF RS

676 CRORE

- DECLINE IN GROWTH OF INDUSTRIAL PRODUCTION

5)5)5)5) FOURTH PLAN (1969FOURTH PLAN (1969FOURTH PLAN (1969FOURTH PLAN (1969----74)74)74)74)

AIMSAIMSAIMSAIMS 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

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-FOREIGN EXCHANGE REGULATION ACT PASSED RESULTRESULTRESULTRESULTSSSS - 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%.

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1976 DEMONETISATIONS OF RS 1000, RS 5,000, RS 10,000 NOTES.

RESULTS I) FOOD GRAINS TARGET ACHIEVED

II) REDUCTION OF FOREIGN ASSISTANCE III) PLAN TERMINATED IN FOURTH YEAR IN

MARCH 1978

7) SIXTH PLAN (1980-85) OBJECTIVESOBJECTIVESOBJECTIVESOBJECTIVES REMOVAL OF POVERTY

STRENGTHENING INFRASTRUCTURE LIKE AGRICULTURE & INDUSTRY.

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

RESULTSRESULTSRESULTSRESULTS 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

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8) SEVENTH PLAN (1985 – 90) AIMS -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%

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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

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X TELECOM OPENED TO PRIVATE SECTOR XI RBI DEREGULATES LENDING RATES

1995 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 PLANNINTH FIVE YEAR PLANNINTH FIVE YEAR PLANNINTH FIVE YEAR PLAN (1997 (1997 (1997 (1997----2002)2002)2002)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

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EARLY INITIATIVES OEARLY INITIATIVES OEARLY INITIATIVES OEARLY INITIATIVES OF ECONOMIC REFORMS F ECONOMIC REFORMS F ECONOMIC REFORMS F ECONOMIC REFORMS

1)1)1)1) BACKGROUND BACKGROUND BACKGROUND 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

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1984 ASSASSINATION OF INDIRA GANDHI

2 SITUATION BEFORE 198SITUATION BEFORE 198SITUATION BEFORE 198SITUATION BEFORE 1980000

i. MOUNTING GOVT EXPENDITURE

1. INFLATION

- 20% in 197920% in 197920% in 197920% in 1979----80808080

III. ADVERSE BOP

IN 1980 THERIN 1980 THERIN 1980 THERIN 1980 THERE WAS 130% INCREASE E WAS 130% INCREASE E WAS 130% INCREASE E WAS 130% INCREASE OF OIL PRICE.OF OIL PRICE.OF OIL PRICE.OF OIL PRICE.

IV. FISCAL DEFICIT

5.4% IN 19815.4% IN 19815.4% IN 19815.4% IN 1981----82828282

0 10000 20000 30000

1950

1960

1970

1980

RISING GOVT. EXPENDITURE

RISING GOVT.EXPENDITURE

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3)3)3)3) BEGINNINGBEGINNINGBEGINNINGBEGINNING BY MRS BY MRS BY MRS BY MRS GANDHIGANDHIGANDHIGANDHI

A 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 IN THE IMPORT OF RAW MATERIALS

4)4)4)4) ER UNDER RAJIV GAER UNDER RAJIV GAER UNDER RAJIV GAER UNDER RAJIV GANDHI NDHI NDHI NDHI

REGIME REGIME REGIME REGIME

I. DECONTROL OF CEMENT

II. SANCTION OF ADDITIONAL LICENSED CAPACITY IN PVT. SECTOR

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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)5)5)5) RESULTS:RESULTS:RESULTS:RESULTS:

I. NO DESIRED OUTCOME

II. BALANCE O TRADE DEFICIT JUMPED FROM RS 5,930 CRORES DURING (1980-85) TO RS. 15,890 CRORES DURING 1985-90 PERIOD.

III. DECLINE IN RECEIPT IN INVISIBLE ACCOUNT FROM, RS 19,070 CRORES (1980-85) TO RS 15,890 CRORES DURING (1985-90)

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IV. LOAN TAKEN FROM IMF TO THE

TUNE OF $ 7 BILLION.

FISCAL STABILISATIONFISCAL STABILISATIONFISCAL STABILISATIONFISCAL 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

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FISCAL POLICY

Budgetary Policy Taxation Public Debt Public Expenditure

3. 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

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(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 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

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D. PROMOTION AND MAINTENANCE OF ECONOMIC STABILITY.

E. REDISTRIBUTION OF NATIONAL INCOME. F. PROMOTION AND MAINTENANCE OF PRICE STABILITY.

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.

II) EXPENDITURE GROWTH

FISCAL IMBALANCE

02468

10

1983-84

1984-84

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

Budget DeficitRev.DeficitGross Def

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1981-82

1986-871990-91

0%

10%

20%

30%

40%

EXPENDITURE GDP RATIO

1981-821986-871990-91

III) INTEREST PAYMENT

Year Percent of GDP Percent of Expenditure 1980-81 1990-91

2 4

10 20

6. 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 1991-92. 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 No of loss making enterprises.

74

100

109

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Losses of loss making PSUs (RS. Billion).

7.6

17

30.6

III 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.

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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

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1980

-81

1982

-83

1984

-85

1986

-87

1989

-90

Whole Sale PriceMoney Supply

2 CAUSES OF INFLATION

(A) DEMAND PULL FACTORS:

I. MOUNTING GOVT. EXPENDITURE

1. 1950-51: Rs.740 crores 2. 1980-81: Rs.37, 000 crores 3. 1999-00: Rs.5, 69,400 crores

II. DEFICIT FINANCING

1. 1983-84 - 6.3 2. 1985-86 - 8.3 3. 1986-87 - 9.0 4. 1988-89 - 7.8 5. 1990-91 - 8.3

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0.2

5.43.3

6.6

2.54.2

02468

%

1981-82 1990-91 1995-96

DEFICIT FINANCING (1981-1995)

Revenue DeficitFiscal Deficit

(III) MOUNTING GOVT. EXPENDITURE:

Expenditure-GDP Ratio

0%

10%

20%

30%

40%

1981-82 1986-87 1990-91

Expenditure-GDP Ratio

IV. 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) COST-PUSH FACTORS: (I) FLUCTUATIONS IN FOODGRAINS OUTPUT:

YEAR PRODUCTION (M.T.) 1978-79 132 1979-80 110 1983-84 152 1987-88 140

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(II) UPWARD REVISION OF ADMINISTRATED PRICES

(A) INCREASE OF PETROL PRICE IN 1988, 1990 (B) RISE IN PRICES OF COAL, FERTILIZERS,

CEMENT IRON & STEEL, POWER ETC.

(III) 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

(IV) INADEQUATE RISE IN INDUSTRIAL PRODUCTION

1965 – 1985 4.7 per annum

3. CONSEQUENCES OF INFLATION

(A) INCREASE IN ECONOMIC INEQUALITY (B) ADVERSE EFFECT ON BALANCE OF PAYMENT (C) CHANGES IN RELATIVE PRICES (D) OBSTACLE TO DEVELOPMENT

4. CONTROL OF INFLATION (A) FISCAL MEASURES

(I) REDUCTION IN WORK FORCE (II) RESTRAINT IN RECRUITMENT

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(III) DOWNSIZING OF MINISTRIES/DEPTTS (IV) REDUCTION OF CAPITAL ASSISTANCE TO NON-

VIABLE 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

8.40%

6.20%4.90%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00%

1990-91

1991-92

1992-93

Fiscal Deficit of GDP

(B) MONETARY MEASURES (I) REDUCTION IN CRR WHICH RELEASED FUNDS LOCKED UP WITH RBI FOR LENDING TO INDUSTRIES & OTHER SECTORS

(II) DECREASE OF SLR FROM 38.5% TO 27% IN MARCH 1997 AND 25% IN OCTOBER 1997 WHICH INCREASED THE

1991

1993

1997

2001

0% 5% 10% 15%

1991

1993

1997

2001

CRR

CRR

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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

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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

INFLATION DURING REFORM PERIOD

0

5

10

15

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

2000

-01

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CURRENT ACCOUNT CAPITAL ACCOUNT.

3 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 (1951-90)

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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.

BALANCE OF TRADE & BALANCE OF PAYMENT

-60000

-40000

-20000

0

20000

51-55

56-60

61-65

66-68

69-73

74-78

80-84

85-89

BOTBOP

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E. EXTERNAL DEBTS – $ 98 BILLION THAT MAKES BOP UNFAVOURABLE.

F. INFLATIONARY PRESSURES

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

10.65.7

9.112.1

13.7

0 5 10 15

1987-88

1989-90

1991-92

inflation

inflation

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I. LARGE SCALE TRADE DEFICITS

II. 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. GULF CRISIS INCREASED TRADE DEFICIT TO RS 16,934

CRORES.

7. 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.

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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. CONTROL OF FISCAL DEFICIT – DURING VTH

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)

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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 LIBERALISED FOR TECHNOLOGICAL UP GRADATION.

III. IN PLACE OF DEBT- CREATING FLOWS OF CAPITAL, NON – DEBT

CREATING INFLOWS SUCH AS FID AND PORTFOLIO INVESTMENT WERE ENCOURAGED.

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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.

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� 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

3) 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

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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 Foreign

currency assets

TOTAL (2+3+4)

1 2 3 4 5 1970-71 243 148 584 975 1980-81 370 603 5850 6823 1990-91 3496 102 2,236 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

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foreign exchange for all business transactions including travel education medical expenses etc.

9. COMMITTEE ON CAPITAL ACCOUNT CONVERTIBILITY (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 $ 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.

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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

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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 2) The Enforcement Directorate had power of arrest for forex violations

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 circumstance under which imprisonment can be made is for non-payment of such penalty.

12) RESULTS OF NEW FOREIGN EXCHANGE POLICY (Million of US Dollar)

Year GOLD SDR FOREIGN CURRENCY

TOTAL

1 2 3 4 2+3+4

1990-91 3,496 102 2,236 5,834

2000-1 2,725` 2 39,554 42,281

05,000

10,00015,00020,00025,00030,00035,00040,00045,000

GO

LD

SDR

s

Fore

ign

Cur

renc

yAs

sets

TOTA

L

1990-912000-01

REMOVING CONTROL ON PRIVATE INVESTMENT

1. RESTRICTIONS ON PRIVATE INVESTMENT

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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

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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. Restriction started in 1956 –57

ii. Classified into 4 items

a. BANNED ITEMS b. CANALISED ITEMS c. RESTRICTED ITEMS d. 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) IN 1970S EXPORTS GOT HIGH PRIORITY

E. EXCHANGE CONTROL

I. FERA. 1973 REQUIRED THAT EXPORTERS

EARNING FE HAD TO SURRENDER EARNINGS TO AD AND GET RUPEE IN EXCHANGE.

II. PURCHASE & SALE OF FOREIGN

SECURITIES BY INDIANS WAS STRICTLY CONTROLLED.

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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 BE

TRANSFERRED TO CONSUMER COURTS.

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

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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

(Rs. billion) Actual inflow of FDI 1991 1992 1993 1994 1995 1996 1997 1998 1999

2000 (JAN)

Government's Approval 1.9 4.8 9.9 15 38.7 57.6 101.3 82.4 61.9 2.6 RBI Automatic Approval - 0.5 2.4 3.6 5.3 6.2 8.7 6.1 7.6 1.9 NRI Schemes 1.6 1.5 5.6 11.1 19.7 20.6 10.4 3.6 3.5 0.2 Total 3.5 6.8 17.9 29.7 63.7 84.4 120.4 92.1 73 4.7

OPENING OF ECONOMY FOR TRADE

1. PHASES OF INDIA’S TRADE POLICY: -

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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)

3. RESTRICTION ON TRADE

(I) CONTROL OVER IMPORTS

YEAR EXPORTS IMPORTS TRADE BALANCE 1950-51 1269 1273 -4 1960-61 1346 2353 -1007 1970-71 2031 2162 -131 1979-80 7947 11321 -3374 1980-81 8486 15869 -7383 1985-86 8904 16067 -7162 1990-91 18143 24075 -5932 1991-92 17865 19411 -1546

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FOREIGN EXCHANGE DIFFICULTIES LED TO IMPOSITION OF RESTRICTION SUCH AS –

I. BANNED ITEMS

II. CANALISED ITEMS

III. RESTRICTED ITEMS

IV. OGL ITEMS

A) 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

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I)I)I)I) IMPORTSIMPORTSIMPORTSIMPORTS

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) (i) (i) (i) ARMSARMSARMSARMS

R U S S I A SWEDEN UNITED KINGDOM (ii) (ii) (ii) (ii) FOOD ARTICLESFOOD ARTICLESFOOD ARTICLESFOOD ARTICLES

U.S.A. (iii)(iii)(iii)(iii)PETROLEUMPETROLEUMPETROLEUMPETROLEUM MIDDLE EAST (iv)CIVILIAN AIRCRAFT(iv)CIVILIAN AIRCRAFT(iv)CIVILIAN AIRCRAFT(iv)CIVILIAN AIRCRAFT

U.S.A. FRANCE

II)II)II)II) EXPORTSEXPORTSEXPORTSEXPORTS

A) LARGE OUTLETS FOR EXORTS

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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 BASKET OF FIVE

CURRENCIES IN JULY 1991. 3) SIMPLIFICATION OF IMPORT PROCEDURE

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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.

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8) EXPORT PROMOTION CAPITAL GOODS SCHEME

THE EPCG SCHEME WAS REVAMPED BY HAVING ONLY ONE WINDOW WITH A CONCESSIONAL DUTY OF 15 % & 25 %.

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

6. EXIM POLICY (1999 –2000)

Trade Tariff

110% 85% 65% 50% 40%0%

20%40%60%80%

100%120%

Pre1993

1993 1994 1995 1997

Trade Tariff

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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.

7. 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.

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• 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.

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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

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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

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81. D

82. D

83. k. MONEY LENDING l. RESERVOIR. m. INTERNAL n. CASH o. OVERDRAFT p. DISCOUNTING q. AGENCY r. LOW s. CASH RESERVE RATIO t. 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

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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 REINFORCEMENT QUIZ REINFORCEMENT QUIZ REINFORCEMENT QUIZ ––––IIII 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

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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 c) 1962 d) 1966

91. Annual Plan 1966-69 was caused by

a) 1965 War b) severe drought 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

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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 d) 1992

102. Capital Account is concerned with a) services b) merchandise c) economic transaction

103. Reserve Bank of India Act was passed in a) 1932 b) 1933 c) 1934 d) 1935

104. FERA was passed in a) 1971 b) 1972 c) 1973 d) 1975

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

108. Inflation is caused by a) increase in money supply b) increase in production c) decrease in production d) both a & c

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

111. Socialist Pattern comes through a) Free Economy b) Mixed economy c) Public Sector d) None of these

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

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a) developed economy b) developing economy c) backward economy d) none of these

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

117. The Plan Holiday refers to a) 1965-68 b) 1966-69 c) 1967-70 d) 1978-80

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 c) inappropriate educational system d) none of these

125. 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.

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w. A commercial bank finances _____________ trade of a country.

x. ______________ credit is an arrangement by which the banks agree to lend money up to a specified limit.

y. Under an ________________ arrangement, a depositor can draw by cheque, more than the deposited amount to his credit.

z. Banks also give financial help to customers by ________________ their bills of exchange.

aa. _______________ functions are those services which are rendered by the banks as the agents of their customers.

bb. If liquidity preference is high, the capacity of the banks to create credit is _____________.

cc. 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 _________________.

dd. The apex bank of a country is known as its ________________.

126. 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

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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:

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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. 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

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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 .

GOVERNMENTGOVERNMENTGOVERNMENTGOVERNMENT PRIVATEPRIVATEPRIVATEPRIVATE

GOVT. REPRESEBTED BY MIN. BOARD OUTLINE BOARD OF DIRECTORS

MANAGERS OF UNDERTAKING ACTUAL PRICE MANAGING DIRECTOR

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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

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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.

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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 –

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.

5) 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.

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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 – 58% PSUS

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50 – 75% - 13% BELOW 50% - 29%

7. DISADVANTAGES OF PRICE CONTROL

1. MOUNTING LOSSES 2. HARM TO CONSUMERS

3. FAILURE TO COMPETE IN

INTERNATIONAL MARKETS

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

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A. CENTRAL ELECTRICITY REGULATORY COMMISSION ACT TO DEPOLITICISE POWER TARIFF.

B. THE ACT ALSO PROVIDES FOR SEPARATE STATE

ELECTRICITY REGULATORY COMMISSION.

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,

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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. FEATURES: -

(A) EQUITY /DIRECT INVESTMENT

(B) BORROWING AS PART OF ORIGINAL

INVESTMENT.

3. DIFFERENCE BETWEEN FDI & FOREIGN CAPITAL: -

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FOREIGN CAPITAL FOREIGN CAPITAL FOREIGN CAPITAL FOREIGN CAPITAL

FOREIGN DIRECT INVESFOREIGN DIRECT INVESFOREIGN DIRECT INVESFOREIGN DIRECT INVESTMENTTMENTTMENTTMENT

a. Foreign Aid a. Borrowing as part of original Investment

b. Commercial b. Commercial b. Commercial b. Commercial BorrowingBorrowingBorrowingBorrowing

c. Equity / Direct Investment

B .Equity / Direct 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 & REGULATION ACT (IRDA, 1951)

B. THE MONOPOLIES & RESTRICTIVE TRADE

PRACTICES ACT, 1969

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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 AGAINST THE

CONCENTRATION OF ECONOMIC POWER AND 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.

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

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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. 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

b. THREE TIER SYSTEM OF APPROVAL

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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. INVESTMENT IN MUTUAL FUNDS SUCH AS UTI

V. DEPOSIT IN BANKS

VI. LOAN FORM

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10. SOURCES OF INVESTMENT

• OVERSEAS CORPORATE BODIES LIKE MNCS

• FOREIGN INSTITUTIONAL INVESTORS

• NON RESIDENT INDIANS 11 BENEFICIAL RESULTS

SEVERAL PARTICIPATING COUNTRIES - USA, FRANCE, UK, GERMANY, JAPAN, CANADA, NEATHERLANDS, SWEDEN, SWITZERLAND, ETC

Increase of foreign companies

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1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

01000

20003000

NUMBER OF FOREIGN COMPANIES

No. of Cos.

1990 469 1991 666 1992 1520 1993 1476 1994 1854 1995 2373

Rise in foreign investment

YEAR TOTAL INVESTMENT

DIRECT INVESTMENT

1992-93 $559 Million 315 1993-94 4153 586 1994-95 5138 1314 1995-96 4892 2144 1996-97 6133 2821

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1997-98 5285 3557 1998-99 2401 2462

SectOral Break up of FD

PSU REFORMS & DISINVESTMENTPSU REFORMS & DISINVESTMENTPSU REFORMS & DISINVESTMENTPSU REFORMS & DISINVESTMENT

1. BIRTH OF PSU

THE INDUSTRIAL POLICY RESOLUTION 1956 GAVE A STRATEGIC ROLE TO THE PSUS.

2. GROWTH OF CENTRAL

GOVERNMENT ENTERPRISES

SECTORAL BREAK UP OF F.D.I.

FUELTELECOMTRANSPORTSERVICESMETALLURGY

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YEAR NO OF

UNITS INVESTMENT IN CRORES

1951 5 29

1961 47 950 1980 179 18150 1990 244 99,330 1998 236 2,23,047 1999 240 2,52,554

RISING INVESTMENT IN PSEs

020000400006000080000

100000120000

1951 1961 1980 1990 1998 1999

cror

e (R

s.) Investment in

CroresNo of Units

3. SHORTCOMINGS -

A. MOUNTING LOSSES –

1992 1996 1998

4560 19,230 13,431

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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 OF MINIMUM

RESERVE PRICE

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D. CHOOSING APPROPRIATE

DISINVESTMENTS

E. FINALISING MODALITIES OF TRANSFER

DIFFERENCE BETWEEN PRIVATISATION & DISINVESTMENT PRIVATISATION DISINVESTMENT I) OPENING OF CERTAIN SECTOR FOR PRIVATE SECTOR PARTICIPATION.

I) SALE OF GOVERNMENT EQUITY IN THE EXISTING PUBLIC ENTERPRISES

II) ALL INDUSTRIES EXCEPT SIX – ARMS/MINERAL OIL AND RAIL ARE OPEN FOR PRIVATISATION.

II) ALL INDUSTRIES ARE NOT OPEN FOR DISINVESTMENTS. THE GOVERNMENT ANNOUNCES A LIST OF SUCH UNITS FROM TIME TO TIME.

6. PRIMARY OBJECTIVES

I. TO REDUCE THE FINANCIAL BURDEN & TO FILL THE FISCAL DEFICIT OF THE STATE.

II. TO REDUCE LARGE AMOUNT OF PUBLIC RESOURCES LOCKED UP IN NON-

STRATEGIC 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

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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 AS HIGH,

MEDIUM, OR LOW POTENTIAL

8. 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.

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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 ASSUMED THE RESPONSIBILITY OF DISINVESTMENT COMMISSION

11. PROGRESS OF DISINVESTMENT

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YEAR NO OF PSEs IN WHICH

EQUITY SOLD TARGET RECEIPT FOR THE YEAR (CRORES)

ACTUAL RECEIPTS (CRORES)

1991-92

47 2500 3038

1992-93

35 2500 1913

1993-94

3500 Nill

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

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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 TOURISM DEVELOPMENT

CORPORATION

XV. INSTRUMENTATION LTD

XVI. JESSOP AND COMPANY LTD

XVII. MADRAS FERTILISERS LTD

XVIII. MARUTI UDHYOG LTD

XIX. NATIONAL FERTILISERS LTD

XX. SCOOTERS INDIA & OTHERS. 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.

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ALL SUCH FACILITIES AND SERVICES CONSTITUTE COLLECTIVELY THE INFRASTRUCTURE OF THE ECONOMY. THEY FACILITATE WORKING OF AN ECONOMY.

3. INFRASTRUCTURE FACILITIES

(A) ENERGY – COAL, ELECTRICITY, OIL, AND NON –CONVENTIONAL SOURCES.

(B) TRANSPORT -RAILWAYS, ROADS, SHIPPING & CIVIL AVIATION

(C) COMMUNICATION -POST & TELEGRAPHS, TELEPHONES, TELECOMMUNICATION . (D) BANKING, FINANCE, INSURANCE.

(E) SCIENCE & TECHNOLOGY. (F) SOCIAL OVERHEADS: - HEALTH AND HYGIENE AND

EDUCATION. 4. ROLE OF INFRASTRUCTURE

A) FACILITATES FUNCTIONING OF ECONOMY. B) PROMOTES DEVELOPMENT C) FACILITATES INVESTMENT d) REDUCES POVERTY.

5. 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.

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(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.

6. REMEDIES: -

(A) INCREASED INVESTMENT (B) EXPANSION OF INFRASTRUCTURE FACIELITIES

(C) BETTER MAINTENANCE.

(D) IMPROVED PERFORMANCE (TAILORED TO PEOPLE’S

DEMANDS) 7. CHANGES IN POWER: -

New power Policy in 1992: - AMENDMENT OF INDIAN ELECTRICITY ACT, 1910 & THE

INDIAN ELECTRICITY (SUPPLY) ACT, 1948.

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New Package of Incentives: -

I. HIGHER DEBT EQUITY RATIO AT 4:1 FOR FINANCING NEW SCHEMES.

II. 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. 79 PROPOSALS (37,930 MW) ACCORDED CLEARANCE IN PRINCIPAL.

IV. 5 PROPOSALS UNDER EXAMINATION.

V. 14 POWER PROJECTS UNDER CONSTRUCTION

FOR A TOTAL CAPACITY OF ABOUT 3500 MW.

VI. 22 PROJECT PROPOSALS (5,375 MW) HAVE BEEN APPROVED BY INDIAN FINANCIAL INSTITUTIONS.

8. CHANGES IN ROAD

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(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.

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9. CHANGES IN TELECOMMUNICATION i) MEASURES - NATIONAL TELECOM POLICY, 1994

- NATIONAL TELECOM POLICY, 1997 II) NTP, 1994 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 SHOULD BE AVAILABLE ON DEMAND BY 1997. D) 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 –

A. INTERCONNECTIVITY OF NETWORK FOR DATA TRANSMISSION HAS BEEN PERMITTED.

B. LICENCES TO 187 INTERNET SERVICE

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.

iv) RESULTS -

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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: -

I) MEASURES -

(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) AIRPORT AUTHORITY ACT, 1995: - IT HAS TWO DIVISION VIZ.,

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

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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.

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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

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INFRASTRUCTURE COMPANIES THROUGH LONG TERM DEBT INSTRUMENTS –VIZ., BONDS, DEBENTURES.

INSURANCE SECTOR REFORMSINSURANCE SECTOR REFORMSINSURANCE SECTOR REFORMSINSURANCE 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 NON-

LIFE SECTOR INSURANCE COMPANIES.

(III) 1973- TO ALL NATIONALIZATION 3. CLASSIFICATION OF INSURANCE BUSINESS: INSURANCE BUSINESS

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Business Generation Maintenance Business Payment of Clams

4. 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.

5. SUBSIDIARIES OF LIC/GIC

INSURANCE SECTOR

Life Insurance Company General Insurance Company

LIC International LIC Nepal LIC Housing Finance LIC Mutual Fund

Oriental Insurance New India Assurance Co National Insurance United India Assurance

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6. DEFICIENCIES OF INSURANCE SECTOR:

(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.

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7. RECOMMENDATIONS OF MALHOTRA COMMITTEE:

(a) 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

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(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. 12.02.2001 TATA AIG LIFE INSURANCE CO. 7. 30.03.2001 SBI LIFE INSURANCE CO.

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8. 02.08.2001 IGN VESYA LIFE INSURANCE CO. PVT. LTD. 9. 03.08.2001 ALLIANCE BAJAJ INSURANCE CO. LTD. 10. 06.08.2001 MET LIFE INDIA INSURANCE CO.PVT. LTD. 11. 23.10.2000 ROYAL SUNDARAM ALLIANCE INSURANCE. 12. 23.10.2000 RELIANCE GENERAL INSURANCE CO. LTD. 13. 04.12.2000 IFFCO TOKYO GEN.INS.COM. LTD. 14. 22.01.2001 TATA AIG. GEN. INS. CO. LTD. 15. 02.05.2001 BAJAJ ALLIANCE GEN. INS. CO. LTD. 16. 03.08.2001 ICICI LOMBARD GEN. INS. CO. LTD.

10. BENEFIT OF INSURANCE SECTOR REFORMS (A) 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.

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(F) BEST GLOBAL MANAGEMENT PRACTICES

(G) LONG TERM INVESTMENT CAPITAL

CAPITAL MARKETING RCAPITAL MARKETING RCAPITAL MARKETING RCAPITAL MARKETING REFORMSEFORMSEFORMSEFORMS 1. COMPOSITION

CAPITAL MAKET Gill Edged Industrial Development Financial Market Securities Financial Intermediaries

Market Institution (DFIS)

New Issue Market Old Issue Market (Stock Exchange)

IFCI ICICI SFCS IDBI IIBI UTI Merchant Mutual Leasing Venture Others Banks Funds Companies Capital Companies

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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.

5. SALE AT HIGHER PRICE: RETAIL INVESTORS, 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.

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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.

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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.

1975-76 1985-86 1994-95 1995-96 1997-98

No of Stock Exchange

8 14 21 22 22

Listed Companies

1852 4344 7811 9100 9833

6. FACTORS CONTRIBUTING TO GROWTH OF CAPITAL MARKET

A. ESTABLISHMENT OF DEVELOPMENT BANKS AND

INDUSTRIAL FINANCING INSTITUTIONS.

Legislative Measures

I. COMPANIES ACT, 1956.

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II. CAPITAL ISSUES (CONTROL) ACT 1947. III. REPEAL OF ACT (1947) IN 1992.

B. GROWTH OF UNDERWRITING BUSINESS.

Growing public confidence

C. INCREASING AWARENESS OF INVESTMENT

OPPORTUNITIES.

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 THE CAPITAL ISSUES

(CONTROL) ACT, 1947

B. RECOMMENDATION OF REFORM – THE NARSIMHAM COMMITTEE.

C. REPEALED ACT THE CAPITAL ISSUES

(CONTROL) ACT

D. NEW BODY SEBI WAS ESTABLISHED IN 1988 BUT GIVEN STATUTORY RECOGNITION IN 1992

FUNCTIONS–

II. REGULATING THE BUSINESS IN STOCK EXCHANGE AND ANY OTHER SECURITIES MARKET.

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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. THE PHYSICAL FLOOR WAS REPLACED BY ANONYMOUS, COMPUTERISED ORDER MATCHING WITH STRICT PRICE TIME PRIORITY.

B. 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.

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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, 14-DAY 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.

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VI. LIQUIDITY SUPPORT - THE RBI STARTED PROVIDING LIQUIDITY SUPPORT TO MUTUAL FUNDS DEDICATED EXCLUSIVELY TO INVESTMENT IN GOVERNMENT SECURITIES.

VII. ENTRY OF FIT - FOREIGN INSTITUTIONAL

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 SUB- BROKERS.

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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 INSTITUTION NON-BANKING BANKING FINANCIAL

COOPERATIVE BANKS. COMMERCIAL BANKS. REGIONAL RURAL BANKS

NATIONALISED BANKS PRIVATE BANKS FOREIGN BANKS

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State Cooperative Banks Central Cooperative Banks Primary Credit Societies 2) BRANCH EXPANSION OF BANKS

AS ON June 30

TOTAL NO OF BRANCHES

RURAL BRANCHES

RURAL BRANCHES AS PERCENTAGE OF TOTAL

POPULATION PER BANK

1969 8,260 1,860 22 63,800 1991 60,650 32,750 54 14,150 2000 65,450 32,710 50 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 BEHIND

LOSSES

I. DECADES OF NON COMMERCIAL ORIENTATION

II. SECURITIES SCAM.

III. DECLINING INTEREST INCOME FOR BANKS (ACC. TO NARASIMHAM COMMITTEE)

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IV. INCREASING COST OF

OPERATION (NARASIMHAM COMMITTEE)

V. HIGH PROPORTION OF TOTAL DEPOSIT BEING IMPOUNDED IN CRR AND SLR.

VI. HIGH PROPORTION OF

DEPOSIT BEING ALLOCATED TO SOCIAL SECTORS

VII. 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

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I) REDUCTION OF STATUTORY

LIQUIDITY REQUIREMENTS FROM THE PRESENT 38.5 % TO 25 % IN NEXT FIVE YEARS FROM 1991.

II) SIMPLIFICATION OF STRUCTURE OF INTEREST RATES.

C) 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. REDUCTION OF SLR: SLR HAS BEEN REDUCED FROM 38.5

% TO 25 % .

II. 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.

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III. CHANGES IN INTEREST RATES: -

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.

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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 % .

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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 DEPOLITICISATION OF BOARD’S APPOINTMENTS

8) RECOMMENDATIONS ON THE BANKS IN 1991 AND 1998

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1991 RECOMMENDATIONS 1998 RECOMMENDATIONS

I. MERGE BANKS TO REDUCE

NUMBERS

A) MERGE STRONG BANKS

II. FREE BANK BOARDS FROM GOVT.

INTERFERENCE

B) FREE THE BOARD FROM GOVT.

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;

WIND UP BANKING DIVISION OF

MINISTRY OF FINANCE

E) CONSIDER WHETHER AUTONOMY

IS CONSISTENT WITH PUBLIC

OWNERSHIP.

8) 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.

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B) GREATER RELIANCE ON NON- FUND

BUSINESS SUCH AS ADVISORY AND CONSULTANCY

SERVICES.

C) GREATER OVERLAP IN PRODUCT

COVERAGE BETWEEN COMMERCIAL BANKS AND NON-

BANK FINANCIAL INTERMEDIARIES.

D) GREATER FINANCIAL

DISINTERMEDIATION WITH LARGE COMPANIES

ACCESSING SECURITISED DEBT DOMESTICALLY AND

FROM FINANCIAL MARKETS ABROAD.

IMPACT ON INDIAN ECONOMY

1. GDP GROWTH

01234

5678

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

=00

GDP GrowthRateGDP GrowthRate

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Year GDP Growth Rate 1990 –91 5.2 1991 –92 1.5 1992 –93 4.5 1993 –94 6.0 1994 –95 7.0 1995 –96 7.3 1996 –97 7.5 1997 –98 5.9 1998 –99 6.8 1999 –2000 6.4

2. INDUSTRIAL GROWTH

Industrial Growth %

0.662.39

5.938.4

12.82

5.566.58

0 5 10 15

1991-921992-931993-941994-951995-961996-971997-98

Industrial Growth %

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Year Growth Percent 1991-92 0.66 1992-93 2.39 1993-94 5.93 1994-95 8.4 1995-96 12.82 1996-97 5.56 1997-98 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 No of units Investment in crores 1951 5 29 1961 47 950 1980 179 18,150 1990 244 99,330 1998 236 2,23,047 1999 240 2,52,554

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4) DISINVESTMENT

YEAR No of PSES in which equity sold

Target Receipt (crores)

Actual Receipts (crores)

91-92 47 2500 3038 92-93 35 2500 1913 93-94 - 3500 Nil 94-95 13 4000 4843 95-96 5 7000 362 96-97 1 5000 380 97-98 1 4800 902 98-99 5 5000 5371 99-00 3 10,000 1584

5 FOREIGN DIRECT INVESTMENT

FOREIGN DIRECT INVESTMENT

-1000

0

1000

2000

3000

4000

5000

6000

7000

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

Mill

ion

Dol

lars

DI

PI

TotalFDI

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Year Direct Investments ( $

Million) Portfolio Investment($-Million)

Total Investment

1991 129 4 133 1992 315 244 559 1993 586 3567 4153 1994 1314 3824 5138 1995 2144 2748 4892 1996 2821 3212 6133 1997 3557 1828 5385 1998 2462 -61 2401 1999 2155 3026 5181 2000 2339 2760 5099 6 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.

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7. FOREIGN EXCHANGE MANAGEMENT

05000

1000015000200002500030000350004000045000

90-91

92-93

94-95

96-97

98-99

2000-01

SDRGOLDFC AssetsTOTAL

8. AGRICULTURE

GROWTH OF EXPORTS

05,000

10,00015,00020,00025,00030,00035,00040,000

1990 1998U

S $

Mill

ion

0.48%0.50%0.52%0.54%0.56%0.58%0.60%0.62%0.64%0.66%

Growth of Exports AS % of World Exports

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9. EMPLOYMENT IN ORGANISED SECTOR ( IN LAKHS)

Year Food Grain Production MT. 1989-90 171.04 1990-91 176.39 1991-92 168.39 1992-93 179.48 1993-94 164.26 1994-95 191.5 1995-96 180.42 1996-97 199.44 1997-98 192.26 1998-99 203.612 1999-00 208.87

Foodgrains Production

168.39179.48

164.26191.5

180.42199.44192.26203.612208.87

1991-921992-931993-941994-951995-961996-971997-981998-991999-00

million tonnes

FoodgrainsProduction

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Year Private Public 89-90 75.8 187.7 90-91 76.8 190.6 91-92 78.5 192.1 92-93 78.5 193.3 93-94 79.3 194.5 94-95 80.6 194.7 95-96 85.1 194.3 96-97 86.9 195.6 97-98 87.5 194.2 98-99 87.0 194.1 99-00 87.8 192.8

GROWTH OF EMPLOYMENT IN PVT. & PUBLIC SECTORS

72747678808284868890

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

( IN

LA

KH

S)

190191192193194195196

(IN L

AK

HS)

PrivatesectorOublicS t

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10. PERCENTAGE OF POPULATION BELOW POVERTY LINE

Year Rural Urban Combined 1989 -90 20.3 13.3 18.5 1990-91 19.7 10.8 17.4 1991-92 20.5 12.9 18.5 1992-93 22.9 13.0 20.3 1993-94 19.9 13.2 18.1 1994-95 19.3 9.5 16.6

PERCENTAGE OF POPULATION BELOW POVERTY LINE

0

5

10

15

20

25

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

Rural PovertyUrban Poverty

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11. INFLATION DURING PRE REFORM PERIOD

INFLATION DURING POST-REFORM PERIOD

IMPACT ON FOREIGN TRADE IMPACT ON FOREIGN TRADE IMPACT ON FOREIGN TRADE IMPACT ON FOREIGN TRADE

INFLATION DURING REFORM PERIOD

02468

10121416

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

2000

-01

INFLATION

10.3

13.7

0

5

10

15

1990-91 1991-92

Inflation

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(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.

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.

GROWTH OF EXPORTS

050,000

100,000150,000200,000250,000

1990

-91

1199

3-94

1995

-96

1997

-98

1999

-00

In C

rore

Rup

ees

GrowthofExports

GROWTH OF IMPORTS DURING REFORM PERIOD

010,00020,00030,00040,00050,00060,000

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

US

$ M

illio

n

IMPORTS

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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 )

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.

GROWTH OF EXPORTS

05,000

10,00015,00020,00025,00030,00035,00040,000

1990 1998

US

$ M

illio

n

0.48%0.50%0.52%0.54%0.56%0.58%0.60%0.62%0.64%0.66%

Growth of Exports AS % of World Exports

TRADE-GDP RATIO

0%2%4%6%8%

10%

1980s 1990s

Export-GDP %Import-GDP %

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(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%.

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.

RISE OF MANUFACTURED EXPORTS

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%

87-88 to90-91

92-93 to98-99

ManufacturedGoodsPrimary Goods

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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’.

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.

EXPORTS OF COFFEE, RICE & PROCESSED JUICE/FRUIT

1990-911998-99

DECLINE IN ORES & MINERALS

0.00%1.00%2.00%3.00%4.00%5.00%6.00%

!980-90 1990-00

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(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 RATE OF PETROLEUM PRODUCTS LOW-

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.

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(D) CHANGES IN DIRECTION OF TRADE

I) EXPORTS

II) IMPORTS

COUNTRIES 1987 -91 1992 – 99

Developing OPEC OECD Eastern European

18.0 14.5 59.4 8.1

23.0 21.9 52.1 2.9

IMPACT ON AGRICULTUREIMPACT ON AGRICULTUREIMPACT ON AGRICULTUREIMPACT ON AGRICULTURE

DIRECTION OF EXPORTS DURING REFORM PERIOD

19.30%26.70%

9.90%

27.80%

6.50%

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%

U.S

.A.

Eurp

ean

Uno

n

OPE

C

Dev

elop

ing

Cou

ntrie

s

Japa

n

00.20.40.60.811.2

1987-911992-99

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2. INCREASE IN AGRICULTURE PRODUCTION

3. DECREASE IN GROWTH RATE: -

Names Pre Reform Period 1990 –91 over 1980 –81

Post Reform Period 1998 –99 over 1990 –91

Food grains

3.1 1.7

Oil Seeds

7.1 4.1

Sugarcane

4.6 2.4

Cotton

3.4 3.4

Jute

1.2 0.7

4. 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

AGRICULTURAL PRODUCTION

050

100150200250

1980-81 1990-91 1998-99

Mill

ion

Tonn

es

AgriculturalProduction

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SHARP DECLINE AND AVERAGED ONLY RS 1,138 CRORES DURING 6 YEAR REFORM PERIOD (1991 –97).

5. IMPORT OF FOOD GRAINS (IN CRORES): -

THIS RISE IN IMPORT OF FOOD GRAIN IS THE INDICATOR OF LIBERAL IMPORT DUTY RATES INTRODUCED BY GOI DURING REFORM PERIOD.

6. IMPROVEMENT IN EXPORTS (IN CRORES): - 7. RISE IN FERILISER IMPORTS ( 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

IMPORT OF FOODGRAINS

374

516

582

80 to 84 85 to 89 90 to 98

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The rise on Fertiliser import is also a consequence of liberalisation. 8. FOOD GRAIN PRODUCTION IN INDIA

Fertiliser Import

698

1,114

4,537

80 to 84

85 to 89

90 to 98

Fertiliser Import

FOODGRAIN PRODUCTION

150160170180190200210220

1990-91

1996-97

1998-99

1999-00

Mill

ion

Tonn

es

FoodgrainProduction

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9. BETTER AVAILABILITY OF FOOD GRAINS (GRAM PER CAPITA PER DAY)

10. STOCK OF CEREALS (IN MILLION TONNES): -

Date Rice Wheat 1.7.1990 07.48 13.15 1.7.1991 09.72 11.04 1.7.1992 08.31 06.74 1.7.1993 10.44 15.22 1.7.1994 14.92 17.78 1.7.1995 16.44 19.22 1.7.1996 12.88 14.13 1.7.1997 10.95 11.42 1.7.1998 12.04 16.48

11. GROSS CAPITAL FORMATION IN AGRICULTURE (1993 –94 PRICE):

AVAILABILTY OF FOODGRAINS

0100200300400500600

1990

1991

1992

1993

1994

1995

1996

1997G

RA

M P

ER D

AY

PER

CA

PITA

RiceWheatGramPulsesFoodgrain

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YEAR TOTAL PUBLIC PRIVATE PUBLIC PRIVATE ( In Rupees Crores) Percent Share 1993-94 13523 44677 9056 33.0 67.0

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

11. PRODUCTION OF RICE AND WHEAT

IMPACT ON SMALL SCALE SECTORIMPACT ON SMALL SCALE SECTORIMPACT ON SMALL SCALE SECTORIMPACT ON SMALL SCALE SECTOR

1. DEFINITION

PRODUCTION OF RICE & WHEAT

5474

86 91

3655

70 76

020406080

100

1980-81 1990-91-

1998-99 1999-00

Mill

ion

Tonn

es

RICE

WHEAT

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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 1997 : LIMIT RAISED TO RS. 3 CRORES FOR SSI/ANCILLIARIES

2. SMALL INDUSTRY

SMALL INDUSTRY

TRADITIONAL INDUSTRY BASED MODERN SMALL SCALE INDUSTRY BASED ON TRADITIONAL SKILL WITH MODERN TECHNOLOGY AND TECHNIQUE

HANDICRAFT WITH HIGH SKILL VILLAGE & HOUSEHOLD INDUSTRIES WORKMANSHIP PRODUCING COMMON CONSUMER GOODS

3. MEASURES TAKEN FOR DEVELOPMENT OF SSI (A)(A)(A)(A) ITEMS FOR SSIITEMS FOR SSIITEMS FOR SSIITEMS FOR SSI : THE NUMBER OF ITEMS EXCLUSIVELY RESERVED FOR SSI IS NOW 800. IN 1997, SOME ITEMS HAVE BEEN DERESERVED

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(B)(B)(B)(B) LILILILIBERALISATION OF FINANCIAL ASSISTANCEBERALISATION OF FINANCIAL ASSISTANCEBERALISATION OF FINANCIAL ASSISTANCEBERALISATION 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)(C)(C)(C) EXCISE CONCESSIONSEXCISE CONCESSIONSEXCISE CONCESSIONSEXCISE CONCESSIONS : THESE CONCESSIONS ARE GRANTED TO BOTH REGISTERED AND UNREGISTERED UNITS ON A GRADED SCALE DEPENDING ON TURNOVER UPTO RS. 300 LAKHS (D)D)D)D) FULL EXCEPTIONFULL EXCEPTIONFULL EXCEPTIONFULL 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)(E)(E)(E) PURCHASE PREFERENCEPURCHASE PREFERENCEPURCHASE PREFERENCEPURCHASE PREFERENCE : PRICE AND PURCHASE PREFERENCE IS GRANTED TO PRODUCTS MANUFACTURED IN THE SMALL SECTOR (F)(F)(F)(F) CONSULTANCY SERVICESCONSULTANCY SERVICESCONSULTANCY SERVICESCONSULTANCY SERVICES :::: A COMPREHENSIVE RANGE OF CONSULTANCY SERVICES ARE PROVIDED TO SSI BY SIDO (SMALL INDUSTRIES DEVELOPMENT ORGANISATION) (G)(G)(G)(G) STRENGTHENING OF FINANCIAL ASSISTANCESTRENGTHENING OF FINANCIAL ASSISTANCESTRENGTHENING OF FINANCIAL ASSISTANCESTRENGTHENING OF FINANCIAL ASSISTANCE

-SMALL INDUSTRIES DEVELOPMENT FUND (SIDF) -NATIONAL EQUITY FUND (NEF) -SINGLE WINDOW SYSTEM

4.4.4.4. NEW POLICY PACKAGESNEW POLICY PACKAGESNEW POLICY PACKAGESNEW POLICY PACKAGES

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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

5.5.5.5. RESULTS:RESULTS:RESULTS:RESULTS:

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(A)(A)(A)(A) RISE IN NUMBER OF UNITSRISE IN NUMBER OF UNITSRISE IN NUMBER OF UNITSRISE IN NUMBER OF UNITS

(B)(B)(B)(B) RISE IN PRODUCTIONRISE IN PRODUCTIONRISE IN PRODUCTIONRISE IN PRODUCTION

(C) GROWTH IN EMPLOYMENT

19.520.8220.46

23.8125.7127.2428.5730.1431.2132.25

1990-911991-921992-931993-941994-951995-961996-971997-981998-991999-00

Series1

RISE IN PRODUCTION OF SSI UNITS

0100,000200,000300,000400,000500,000600,000700,000

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

RS

CR

OR

ES

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(D) IMPROVEMENT IN EXPORTS

(E)(E)(E)(E) HIGHER CONCENTRATION IN RESERVED ITEMSHIGHER CONCENTRATION IN RESERVED ITEMSHIGHER CONCENTRATION IN RESERVED ITEMSHIGHER CONCENTRATION IN RESERVED ITEMS

RISE IN SSI EMPLOYMENT

125.3129.8

134.1139.4

146.6152.6

160.6167.2

171.6178.5

0 50 100 150 200

1990-911991-921992-931993-941994-951995-961996-971997-981998-991999-00

Lakhs

010,00020,00030,00040,00050,00060,000

Rs. Crores

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

GROWTH OF SSI EXPORTS

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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)(F)(F)(F) ADVERSE EFFECT OF DERESERVATIONADVERSE EFFECT OF DERESERVATIONADVERSE EFFECT OF DERESERVATIONADVERSE EFFECT OF DERESERVATION

1997-98 : ICE-CREAM, BISCUITS, SYNTHETIC SYRUPS, AUTOMOBILE PARTS, CORRUGATED PAPER AND BOARD, VINEGAR, POULTRY FEED, RICE MILLING, ETC.

1998-99 - AGRICULTURAL IMPLEMENTS THESE DECISIONS HAVE ADVERSELY AFFECTED THE SSI

(G)(G)(G)(G) FACTORS AFFECTING PERFORMANCE OF A FIRMFACTORS AFFECTING PERFORMANCE OF A FIRMFACTORS AFFECTING PERFORMANCE OF A FIRMFACTORS AFFECTING PERFORMANCE OF A FIRM

IMPACT ON SOCIAL SECTOR

I) POVERTY

SKILLED MANPOWER AVAILABILITY

ENTREPRENERIAL VISION AND COMPETENCIES

REGULATORY AND F I S C A L ENVIRONMENT

AVAILABLE INFRASTRUCTURE

SUPLLIERS AND SERVICE PROVIDERS

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RURAL POVERTY DECLINED IN 1980S BUT NOT IN 1990S URBAN POVERTY DECLINED IN 1980S AND IN 1990S.

EMPLOYMENT IN ORGANISED SECTOREMPLOYMENT IN ORGANISED SECTOREMPLOYMENT IN ORGANISED SECTOREMPLOYMENT IN ORGANISED SECTOR

Year Year Year Year Public SectorPublic SectorPublic SectorPublic Sector Private SectorPrivate SectorPrivate SectorPrivate Sector TotalTotalTotalTotal 1990199019901990 197.71 lakhs 75.82 lakhs 263.63 1991199119911991 190.57 76.76 267.33 1992199219921992 192.10 78.46 270.56 1993199319931993 193.26 78.50 271.76 1994199419941994 194.45 79.30 273.75 1995199519951995 194.66 80.59 275.25

EMPLOYMENT HAS BEEN INCREASING BUT THE GROWTH IN ORGANIZED SECTOR HAS BEEN VERY SLOW.

EMPLOYMENT GROWTH RATE

YearYearYearYear RuralRuralRuralRural UrbanUrbanUrbanUrban YearYearYearYear RuralRuralRuralRural UrbanUrbanUrbanUrban 1983198319831983 45.31 35’65 1991-92 37.42 33.23 1986198619861986----87878787 38.81 32.29 1992-3 43.47 33.73 1987198719871987----88888888 39.23 36.20 1993-94 36.66 30.51 1988198819881988----89898989 39.06 36.60 1994-95 41.02 33.50 1989198919891989----90909090 34.30 33-40 1995-96 37.15 28.04 1990199019901990----91919191 36.43 32.76 1997-98 35.78 29.99

0204060

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1997-98

RURAL URBAN POVERTY

RuralUrban

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1991 1992 1993 1994 1995 1996 1997 Public Sector 1.52 0.80 0.60 0.62 0.11 0.19 0.67

Private Sector 1.24 2.21 0.06 1.01 1.63 5.62 2.04

MOVEMENT OF EMPLOYMENT ( Percentage)

V) EFFECT ON SERVICES

Year Primary Laundry Services 1960-61 45.80 20.70 33.50 1970-71 44.50 23.60 31.90 1980-81 38.10 25.90 36.00 1989-90 32.40 28.10 38.50 1990-91 30.90 30.00 39.10 1997-98 26.74 27.75 45.50 1998-99 26.82 27.01 46.17 1999-00 25.50 27.40 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 ��PPrriimmaarryy SSeeccttoorr iinncclluuddeess aaggrriiccuullttuurree,, ffoorreessttrryy aanndd ffiisshheerriieess...

�SSeeccoonnddaarryy sseeccttoorr iinncclluuddeess mmiinniinngg,, mmaannuuffaaccttuurriinngg aanndd eelleeccttrriicc ssuuppppllyy aanndd ccoonnssttrruuccttiioonn.. ��SSeerrvviicceess ccoovveerr ttrraaddee,, ttrraannssppoorrtt,, ccoommmmuunniiccaattiioonn,, ffiinnaannccee,, rreeaall eessttaattee aanndd ccoommmmuunniittyy,, ssoocciiaall aanndd ppeerrssoonnaall sseerrvviiccee

Organised Sector Unorganised Sector 1983to1990-91 1.73 2.41

1990-91 to 1997-98 0.6 1.1

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VII). SERVICES CONTRIBUTION TO GDP

VIII. RURAL-URBAN POVERTY COMPARISON

IX) EDUCATION

01020304050

89-90 90-91 97-98 98-99 99-00

IMPROVEMENT IN SERVICES

PrimarySecondaryServices

CONTRIBUTION OF SERVICES SECTOR TO GDP

05

101520

90-91

91-92

92-93

93-94

94-95

95-96

96-97

PER

CEN

T

Trade

Transport

Finance

Community Services

0

20

40

%

87-88 93-94

DECLINE OF POVERTY

Rural Urban

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DurinReform period expenditure has increased’

X) 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-

Year - Total Plan outlay (crores) Expenditure on Education ( crores)

% of plan

1992-93 72852.4 2619.4 3.6 1993-94 88080.7 3147.3 3.6 1994-95 98167.3 3940.0 4.0 1995-96 107380.4 5355.7 4.9 1996-97 129188.6 7346.1 5.7 1997-98 139625.9 8208.2 5.8

02000400060008000

10000

92-93

93-94

94-95

95-96

96-97

97-98

0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%

Expenditure

Percentage

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XII) IMPROVEMENT IN DRINKING WATER AND SANTIATION

Item/Area 1985 1990 1995 Drinking water Rural 56.3 73.9 82.8

Urban 72.9 83.8 84.3 Sanitation Facility Rural 0.7 2.4 3.6 Urban 28.4 45.9 49.98

XIII) IMPACT ON FEMALES

A) Decline in unemployment of urban females (per 1000)

Year RURAL URBAN Males Females Males Females1993-94

56 56 67 104

1999-2000

72 70 73 94

(Source: NSS 55 Round 1999 –2000)

B) Decline in Rural Unemployment

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Sector& Year Secondary & Above Graduate& Above RURAL Males Females Males Females1993-94 89 243 134 323 1999-2000 69 204 197 351 URBAN 1993-94 69 207 64 205 1999-2000 66 163 66 163

(Source : NSS 55th Round, 1999-2000.)

XIV) EXPANSION IN HEALTH SERVICES

CHC COMMUNITY HEALTH CENTRE PHC PRIMARY HEALTH CENTRE

IMPACT ON FOOD SECURITY

(A) DEFINITION DEFINITION DEFINITION DEFINITION

WORLD DEVELOPMENT REPORT DEFINED FOOD SECURITY AS ACCESS BY ALL PEOPLE AT ALL TIMES TO ENOUGH FOOD FOR AN ACTIVE HEALTHY LIFE.

0500

10001500200025003000

1981 1992 19970500010000150002000025000

M.CollegesC.H.CP.H.C.

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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 COMPONENTMAIN COMPONENTMAIN COMPONENTMAIN 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.

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VIII) MAINTAINING BUFFER STOCKS SO AS TO TAKE CARE OF NATURAL CALAMITES.

(C)(C)(C)(C)

(D) (D) (D) (D) COMPARATIVE ISSUE PRICE OF PDS (2000COMPARATIVE ISSUE PRICE OF PDS (2000COMPARATIVE ISSUE PRICE OF PDS (2000COMPARATIVE ISSUE PRICE OF PDS (2000))))

Old Rates (1998) Wheat Rice Sugar APL 6.82 9.05 12.00 BPL 2.50 3.50 12.00 New Rates (2000) APL 8.40 11.78 -- BPL 4.20 5.89 13.00 Revised Rates (2002) APL 6.10 8.30 BPL 4.15 5.65 13.50

PUBLIC DISTRIBUTION SYSTEM

Block supplyGo down

States Agencies

Procurement of Food

Food Corporation

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(E) FEATURES OF REVISED PDS

I) INCREASED ALLOCATIONINCREASED ALLOCATIONINCREASED ALLOCATIONINCREASED ALLOCATION FOR BPL FAMILIES FOR BPL FAMILIES FOR BPL FAMILIES FOR BPL FAMILIES:

ALLOCATION OF WHEAT & RICE BPL FAMILIES HAS BEEN RAISED FROM 10KG TO 20 KG.

II) HIKE OF APL FOODGRAIHIKE OF APL FOODGRAIHIKE OF APL FOODGRAIHIKE OF APL FOODGRAINSNSNSNS: 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 SUGARCHANGES IN DESTRIBUTION OF SUGARCHANGES IN DESTRIBUTION OF SUGARCHANGES 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.

(F) RESULTS I) INCOME TRANSFER TO POOR:I) INCOME TRANSFER TO POOR:I) INCOME TRANSFER TO POOR: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,

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ii) EFFECT ON SUBSIDY:ii) EFFECT ON SUBSIDY:ii) EFFECT ON SUBSIDY:ii) EFFECT ON SUBSIDY:

Wheat Rice Sugar 1998 PRICE of APL - 6.82 9.05 12.100 2000 PRICE of APL - 8.40 11.78 ----

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.

((((iviviviv)))) LOW COVERAGE OF POPULATIONLOW COVERAGE OF POPULATIONLOW COVERAGE OF POPULATIONLOW 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 APL POPULATION NOT GETTING BENEFIT APL POPULATION NOT GETTING BENEFIT 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

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THEY GET BETTER QUALITY AT THE SAME PRICE. SUGAR/ KEROSENE IS NOW DENIED TO THEM

. (vi)(vi)(vi)(vi) NO IMPROVEMENT IN HEALTHNO IMPROVEMENT IN HEALTHNO IMPROVEMENT IN HEALTHNO 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)(vii)(vii)(vii) HELP IN RELIEF WORKHELP IN RELIEF WORKHELP IN RELIEF WORKHELP 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)(viii)(viii)(viii) MEEMEEMEEMEETING FOOD SCARCITIES TING FOOD SCARCITIES TING FOOD SCARCITIES TING FOOD SCARCITIES

INDIA WAS ABLE TO OVERCOME FAMINES AND OTHER ACUTE FOOD SCARCITIES BECAUSE OF FOOD SECURITY SYSTEM

(ix)(ix)(ix)(ix) BETTER PRICE TO PRODUCERS BETTER PRICE TO PRODUCERS BETTER PRICE TO PRODUCERS BETTER PRICE TO PRODUCERS THE CENTRAL GOVERNMENT FIXES BETTER PROCUREMENT PRICES FOR WHEAT /RICE SO THAT FARMERS GET GOOD PRICES FOR THEIR PRODUCE. (x)(x)(x)(x) PRICE CHECKPRICE CHECKPRICE CHECKPRICE CHECK A) BY KEEPING A LOWER PRICE. B) BY RELEASING GRAIN FOR OPEN MARKET.

ANSWERS TO REINFORCEMENY QUIZ – II

40.

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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

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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

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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

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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

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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

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97. 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

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 ___________________.

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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 NMLMOPEYET

e. EUBLOD ITNOOCNG

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f. MIES EHSINIFD DOOG

g. RSNATERF TNMYAPE

h. DESIUGSID TYOLPMENUMEN

i. NOICIRPEDATI

j. LDOHEUOHS ROTESC

101. 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

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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

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(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 D. 1976

106. ICICI is the name of

E. Financial institution

F. Chemical industry

G. Cotton industry

H. Chamber of commerce & industry

107. IDBI is a

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B. Bank B. Board C. Bureau D. Corporation

108. Prior to July 24, 1991 the MRTP Act applied to an undertaking owing assets worth more than

B. Rs.25 crore B. Rs.50 crore C. Rs.75 crore D. Rs.100 crore

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

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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. 1947 B. 1951 C. 1965 D. 1974

117. 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%

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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

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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

132. The reform committee on insurance reform is known as B. Manmohan Committee B. Rangarajan Committee C. Malhotra

Committee D. Goyal Committee

133. The Insurance Regulatory Bill was passed in B. 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

140. The Reserve Bank of India started to function in B. 1930 B. 1935 C. 1940 D. 1945

141. The number of banks nationalized in first phase was

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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

143. The second phase of nationalization of banks was done in B. 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

145. The interest rate of the Banks were deregulated since B. 1990 B. 1991 C. 1992 D. 1993

146. The Indian Electricity Act was passed in B. 1905 B. 1910 C. 1915 D. 1920

147. The Electricity Supply Act was passed in B. 1940 B. 1942 C. 1948 D. 1952

148. The National Highways Act was passed in B. 1955 B. 1956 C. 1957 D. 1958

149. The Privatization in Telecommunication started in the area of E. Basic Telephone services F. Cellular Telephone services G. Radio Paging services H. 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

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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

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• 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.

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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.

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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.

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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 OF SERVICES

PROVIDED BY THE STATE,

(IV) (IV) UNDERTAKE DISINVESTMENTS OF LOSS-MAKING ENTERPRISES,

(V) IMPROVE WORKING OF SEBS AND SRTUS, (V) REDUCE PUBLIC DEBT TO SCALE DOWN

INTEREST BURDEN, (VI) WIDEN TAX BASE THROUGH AGRICULTURAL

TAXATION OF SERVICES AND

(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

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INTERMEDIATE REFORMERS: HARYANA, ORISSA AND WEST BENGAL

LAGGING REFORMERS: ASSAM, BIHAR, KERALA, MADHYA PRADESH, PUNJAB, RAJASTHAN AND UTTAR PRADESH

GUJRATGUJRATGUJRATGUJRAT 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

MAHARASHTRAMAHARASHTRAMAHARASHTRAMAHARASHTRA 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

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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 NADUTAMIL NADUTAMIL NADUTAMIL 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

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Investment (as on 31.3.2001) Rs.6192.20 crores

Identified for disinvestment 13

UTTAR PRADESHUTTAR PRADESHUTTAR PRADESHUTTAR PRADESH THE GOVERNMENT OF UTTAR PRADESH HAS

DECIDED TO TAKE THE FOLLOWING STEPS:

(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.

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

KARNATAKA

THE STATE GOVERNMENT'S KARNATAKA ECONOMIC RESTRUCTURING PROGRAM, WHICH THIS BANK OPERATION SUPPORTS, HAS FOUR MAIN COMPONENTS:

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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 HIGH-PRIORITY 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 PRADESHANDHRA PRADESHANDHRA PRADESHANDHRA PRADESH

THE STATE GOVERNMENT'S ANDHRA PRADESH ECONOMIC REFORM PROGRAM, WHICH THIS OPERATION SUPPORTS, HAS THREE MAJOR COMPONENTS:

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1. FISCAL REFORMSFISCAL REFORMSFISCAL REFORMSFISCAL REFORMS AIM TO RESTRUCTURE EXPENDITURES TO MEET DEVELOPMENT PRIORITIES, ACHIEVE SUSTAINABLE FISCAL BALANCES, AND REDUCE THE BURDEN OF PUBLIC DEBT.

2. PUBLIC EXPENDITUREPUBLIC EXPENDITUREPUBLIC EXPENDITUREPUBLIC 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 THE STATE'S THE STATE'S THE STATE'S GOVERNANCEGOVERNANCEGOVERNANCEGOVERNANCE 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 DECISION DECISION DECISION ON SLPESON SLPESON SLPESON 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 / closure

21

HARYANAHARYANAHARYANAHARYANA

No. of SLPEs 27

Investment (as on 31.3.2000) Rs. 4746 crore

Net accumulated loss (as on 31.3.2000) Rs. 169 crore

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Identified for disinvestment 8

Process initiated for liquidations / closure 2 (Haryana State Electricity Board, Haryana Breweries Ltd.)

ORISSAORISSAORISSAORISSA

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

PUNJABPUNJABPUNJABPUNJAB

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 PRADESHMADHYA PRADESHMADHYA PRADESHMADHYA PRADESH

No. of SLPEs 26

Investment (as on 31.3.2000) Rs. 7922.87 crore

Identified for Disinvestment 14 (including ADB assisted programme)

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Process Initiated 14

KERKERKERKERALAALAALAALA

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 BENGALWEST BENGALWEST BENGALWEST 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

ASSAMASSAMASSAMASSAM

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 - Oht –a1 Some Basic Economic Terms - Oht –a2 International Experiences of Economic Reforms - Oht –a3 Five Year Plans - Oht –a4 Early Initiative of Economic Reforms - Oht –a5

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DAY-2 Fiscal Stabilization - Oht –b1 Inflation Control - Oht –b2 Balance of Payment Management - Oht –b3 Foreign Exchange management - Oht –b4 Removing control on Private Investment - Oht –b5 Opening of Economy for Trade - Oht –b6 Reinforcement Quiz I - Oht –b7 Answers to RQ I - Oht-b7(a)

DAY-3 Ending Price Control Regime - Oht-c1 Foreign Direct Investment - Oht-c2 PSU Reforms and Disinvestments - Oht-c3 Infrastructure Development in Reforms - Oht-c4 Insurance Sector reforms - Oht-c5 Capital Market reforms - Oht-c6 Banking Sector Reforms - Oht-c7

DAY-4 Impact on Economic Growth - Oht-d1

Impact on Trade - Oht-d2 Impact on Agriculture - Oht-d3 Impact on Small Scale Sector - Oht-d4 Impact on Social Sectors - Oht-d5 Impact on Food Security - Oht-d6 Reinforcement Quiz II - Oht-d7 Answers to RQ II - Oht-d7(a)

DAY-5 Second Generation Reforms - Oht-e1

Initiative Taken in States - Oht-e2 Group Presentation