Indian Economy and Basic Economics 1

Indian Economy and Basic Economics
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Indian Economy and Basic

Economics
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PREFACE
Dear Aspirants,
JagranJosh is pleased to announce the launch of its Second eBook. The content of this PDF is
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The main features of the book are
Latest data on various aspects

Exhaustive list of Government Programs and Policies
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Current Affairs related to Economy
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TABLE OF CONTENTS
Chapter 1: Basics in Economics .............................................................................................. 17
Growth and Development .................................................................................................... 17
Human Development Index (HDI) ......................................................................................... 18
Gender Inequality Index ....................................................................................................... 18
Multidimensional Poverty Index ........................................................................................... 19
Technological Achievement Index ........................................................................................ 20
Sustainable Development and Growth ................................................................................. 20
Terms and Terminology ........................................................................................................ 21
Organisation of Production ........................................................................................... 29
People as Resource ....................................................................................................... 30
Quality of Population .................................................................................................... 30
Chapter 2: Indian Economy - Over the Years .......................................................................... 32
Nature of Indian Economy .................................................................................................... 32
Current Analysis ............................................................................................................ 32
Planning over the Years: ....................................................................................................... 33
First Five-Year Plan (19511956) .................................................................................. 33
Second Five-Year Plan (19561961) ............................................................................. 33
Third Five-Year Plan (19611966) ................................................................................. 34
Fourth Five-Year Plan (19691974) .............................................................................. 34
Fifth Five-Year Plan (19741979) .................................................................................. 34
Sixth Five-Year Plan (19801985) ................................................................................. 35
Seventh Five-Year Plan (19851990) ............................................................................ 35
Eighth Five-Year Plan (19921997) ............................................................................... 35
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Ninth Five-Year Plan (19972002) ................................................................................ 36

Tenth Five-Year Plan (20022007) ................................................................................ 36
Eleventh Five-Year Plan (20072012) ........................................................................... 36
Twelfth Five-Year Plan (2012-2017).............................................................................. 37
Chapter 3: Natural Resources ................................................................................................ 39
Degrading Natural Resources and the Agrarian Crisis .......................................................... 39
Land and Soil ......................................................................................................................... 39
Ownership of the Land.................................................................................................. 40
Water .................................................................................................................................... 40
Irrigation Potential ........................................................................................................ 40
Annual requirement of fresh water (b cu m)................................................................ 41
Per Capita Availability ................................................................................................... 41
Demand Side Management of Water Resources ......................................................... 42
Biodiversity and Agricultural Genetic Resources .................................................................. 42
Forests ................................................................................................................................... 43
Demands on Forest Resources ..................................................................................... 43
Livestock................................................................................................................................ 44
Fisheries ................................................................................................................................ 44
Chapter 4: Agriculture ........................................................................................................... 46
Overview of Indias Agricultural Economy ............................................................................ 46
Crop-Specific Growth .................................................................................................... 47
Land Reforms ........................................................................................................................ 47
Policies for Agricultural and Rural Development: An Overview ................................... 49
Agriculture: Trends in Investment ................................................................................ 52
Increasing Subsidies Reduce Capital Formation ........................................................... 53
Agricultural Growth Concerns ...................................................................................... 53
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Agriculture Inputs and Green Revolution ............................................................................. 53

Irrigation........................................................................................................................ 53
Irrigation Potential and Sources of Irrigation ............................................................... 54
Some Problems Related to Irrigation............................................................................ 55
Fertilisers ............................................................................................................................... 56
Consumption, Production and Import of Fertilisers ..................................................... 56
High-Yielding Varieties of Seeds ........................................................................................... 56
Pesticides .............................................................................................................................. 57
Effects of Pesticides ...................................................................................................... 58
Green Revolution .................................................................................................................. 58
Impact of Green Revolution .......................................................................................... 58
Regional Dispersal of Green Revolution and Regional Inequalities ............................. 59
Agricultural Finance .............................................................................................................. 60
Sources of Agricultural Finance and Their Relative Importance .................................. 61
Cooperative Credit: An Evaluation................................................................................ 63
Operations of Commercial Banks: A Critical Review .................................................... 63
Problems of RRBs .......................................................................................................... 64
National Bank for Agriculture And Rural Development (Nabard) ................................ 65
Steps for Financial Inclusion ......................................................................................... 65
Agricultural Marketing in India ............................................................................................. 65
Government Measures to Improve The System of Agricultural Marketing ................. 66
Weaknesses in Agricultural Marketing ......................................................................... 66
Cooperative Marketing ................................................................................................. 67
Progress of Cooperative Marketing in India ................................................................. 68
Agricultural Price Policy in India ........................................................................................... 68
Agricultural Subsidies.................................................................................................... 69
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Subsidies on Agricultural Inputs ................................................................................... 69

Consequences of Power and Irrigation Subsidies......................................................... 70
Fertiliser Subsidy ........................................................................................................... 70
Increase in Fertiliser Prices. .......................................................................................... 71
Public Distribution System .................................................................................................... 71
Objectives and Expansion of PDS.................................................................................. 71
Flaws in Food Security System ...................................................................................... 72
Targeted Public Distribution System (TPDS) ................................................................. 73
Review of TPDS ............................................................................................................. 73
National Food Security Bill ............................................................................................ 74
ICDS ............................................................................................................................... 74
Mid-Day Meal Scheme .................................................................................................. 75
Agricultural Workers and Labourers ....................................................................................................... 75
Definition of Agricultural Labour .................................................................................. 75

Categories of Agricultural Labourers ............................................................................ 76
Growth in the Number of Agricultural Workers ........................................................... 76
Causes of Growth in the Number of Agricultural Labourers ........................................ 77
Conditions and Problems of Agricultural Labourers ..................................................... 77
Measures Adopted by the Government ....................................................................... 78
Chapter 5: Service Sector ....................................................................................................... 80
Introduction .......................................................................................................................... 80
Service sector in India ........................................................................................................... 80
Composition of Service Sector in India ................................................................................. 81
Performance of Services Sector in India ............................................................................... 81
Sectoral Composition of GDP Growth .......................................................................... 81
Employment Scenario ................................................................................................... 82
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Productivity Growth in Service Sector --Post-1980 Scenario ....................................... 82

Policy Measures for the Development of the Services Sector ............................................. 83
Problems/Challenges Ahead ................................................................................................. 83
Prospects for Growth in the Services Sector ................................................................ 84
Chapter 6: Industries ............................................................................................................. 86
Industrial Growth and Policy ................................................................................................ 86
The Industrial Scene at Independence ......................................................................... 86
Industrial Control Regime 1950s to 1970s.................................................................... 86
Performance of the Industrial Licensing System .......................................................... 86
Industrial Policy Reforms 1980 s ................................................................................... 86
The Policy Regime in the 1990s .................................................................................... 87
New Economic Policy 1991 ........................................................................................... 87
Public Sector Reforms, Privatisation and Infrastructure .............................................. 88
Industrial Policy: Recent Policy Initiatives .................................................................... 88
Recent Industrial Growth .............................................................................................. 89
Why did the Reforms Fail to deliver the Expected Results? ......................................... 90
Public Sector in the Indian Economy .................................................................................... 90
The Rationale ................................................................................................................ 90
Performance of Central Public Sector Undertakings .................................................... 91
Micro and Small Enterprises (MSEs) ..................................................................................... 92
Role of SMEs in Global Economy .................................................................................. 92
Defining MSEs-MSMED Act, 2006 ................................................................................. 92
Chapter 7: Poverty................................................................................................................. 94
How Poverty is defined? ....................................................................................................... 94
Social Exclusion ..................................................................................................................... 94
Poverty Line .......................................................................................................................... 94
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Poverty Line Estimates Controversy. .................................................................................... 95

Poverty Line Definition in India............................................................................................. 95
Inter-State Disparities ........................................................................................................... 95
Global Poverty Scenario ........................................................................................................ 96
Causes of Poverty.................................................................................................................. 96
Anti-Poverty Measures ................................................................................................. 97
National Rural Employment Guarantee Act (NREGA) 2005 ................................................. 97
Poverty Alleviation in India: Concept Note of 12th Five Year Plan........................................ 97
Terms related to Poverty .................................................................................................... 102
Chapter 8: Employment and Unemployment....................................................................... 113
Unemployment ................................................................................................................... 113
Employment ........................................................................................................................ 114
Employment Trends in India ............................................................................................... 114
Labour Force, Workforce and Unemployment (UPSS) ............................................... 116
Estimated Numbers of UPSS Workers Across Broad Industrial Categories................ 116
Employment in Organised Sector ....................................................................................... 118
Nature and Estimates of Unemployment in India .............................................................. 119
Nature of Unemployment........................................................................................... 119
Concepts of Unemployment ....................................................................................... 119
Estimates of Unemployment (1972-73 to 1993-94) ................................................... 120
Unemployment in Post Reform Period ....................................................................... 120
Causes of Unemployment ................................................................................................... 121
Chapter 9: Financial Sector .................................................................................................. 125
Financial System.................................................................................................................. 125
Financial Markets ........................................................................................................ 126
Financial Intermediation ............................................................................................. 127
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Financial Instruments.................................................................................................. 127

Monetary Policy and Fiscal Policy ............................................................................... 128
Main Objectives of Fiscal Policy In India ..................................................................... 129
Objectives of the monetary policy of India................................................................. 131
Major Monetry Operations of RBI ...................................................................................... 132
Money and Inflation............................................................................................................ 133
Money Supply ............................................................................................................. 133
How to measure inflation in India? ............................................................................ 134
Taxation in India .................................................................................................................. 135
Tax Burden in India ..................................................................................................... 135
Tax Revenue of the Central Government ................................................................... 135
Tax Revenue of the State Governments ..................................................................... 135
Taxes on Income and Wealth ..................................................................................... 136
Personal Income Tax ................................................................................................... 136
Corporation Tax .......................................................................................................... 136
Taxes on Wealth and Capital ...................................................................................... 136
Indirect Taxation ......................................................................................................... 137
Customs Duties ........................................................................................................... 137
Excise Duties ............................................................................................................... 137
States' Excise Duties.................................................................................................... 138
Service Tax .................................................................................................................. 138
Goods and Services Tax (GST) ..................................................................................... 139
Public Debt and Deficit Financing ....................................................................................... 139
Debt Obligations of the Central Government............................................................. 139
Internal Liabilities ........................................................................................................ 139
External Liabilities ....................................................................................................... 140
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Debt Obligations of The State Governments .............................................................. 140

Combined Debt of Central and State Governments ................................................... 140
Combined Liabilities of the Centre and States ........................................................... 141
Growth in public debt-GDP ratio is criticised due to following reasons .................... 141
These criticisms notwithstanding debt financing has been considered necessary for
the following purposes. .............................................................................................. 141
Banking Sector in India ....................................................................................................... 142
History of Indian Banking System ............................................................................... 142
Classification ............................................................................................................... 143
The main reasons why the banks are heavily regulated are as follows ..................... 143
Basel III norms ............................................................................................................. 143
What are the Major Changes Proposed in Basel III over earlier Accords i.e. Basel I and
Basel II? ....................................................................................................................... 144
Mirofinance ......................................................................................................................... 145
Salient features of Microfinance ................................................................................ 145
Gaps in Financial system and Need for Microfinance ................................................ 145
Channels of Micro finance .......................................................................................... 146
SHG Bank Linkage Programme................................................................................. 146
Micro Finance Institutions .......................................................................................... 146
Controversy on MFI .................................................................................................... 147
Chapter 10: Foreign Trade ................................................................................................... 149
Balance of trade .................................................................................................................. 149
The Balance of Payments Sub-division ....................................................................... 149
The Current Account ................................................................................................... 149
The Capital Account .................................................................................................... 150
The Financial Account ................................................................................................. 150
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The Balancing Act ........................................................................................................ 150

Balance of payments crisis .......................................................................................... 150
Foreign Trade and Trade Policy .......................................................................................... 151
Value of Exports and Imports in the Planning Period ................................................. 151
Composition of Foreign Trade .................................................................................... 151
India's Balance of Payments: The Pre-1991 Period .................................................... 153
Reasons for Satisfactory Balance of Payments Situation in Post-Reform Period....... 155
The Management of Balance Of Payments ........................................................................ 155
Linkages between Fiscal and External Policies ........................................................... 155
Export Policy: The Pre-Reform Period ........................................................................ 156
Export Promotion Policies: An Overall View ............................................................... 156
Foreign Trade Policy (2009-14) ................................................................................... 158
Foreign Capital .................................................................................................................... 159
Components of Foreign Capital .................................................................................. 159
Need for Foreign Capital ............................................................................................. 159
Indian Government's Policy Towards Foreign Capital ................................................ 159
Choice of Exchange Rate Regime ................................................................................ 160
Exchange Rate Management in India ......................................................................... 161
India's Foreign Exchange Reserves ............................................................................. 162
The Issue of Capital Account Convertibility ................................................................ 162
The Case For and Against Capital Account Convertibility ........................................... 162
India's Approach to Capital Account Convertibility .................................................... 163
Important Capital Account Liberalisation Measures .................................................. 163
Foreign Exchange Regulation Act (Fera), 1973 ........................................................... 163
Foreign Exchange Management Act (Fema), 1999 ..................................................... 164
Fema: A Major Departure From Fera.......................................................................... 164
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Chapter 11: International Organisations .............................................................................. 166

The International Monetary Fund ...................................................................................... 166
The World Bank................................................................................................................... 167
International Bank for Reconstruction and Development (IBRD) ...................................... 167
International Development Association ............................................................................. 168
International Finance Corporation ..................................................................................... 168
Multilateral Investment Guarantee Agency ....................................................................... 169
International Centre for Settlement of Investment Disputes ............................................ 169
World Trade Organisation and GATT .................................................................................. 169
United Nations Conference on Trade and Development ................................................... 171
Asian Development Bank .................................................................................................... 172
SAFTA .................................................................................................................................. 172
G-8 ....................................................................................................................................... 172
G-20 ..................................................................................................................................... 173
ASEAN.................................................................................................................................. 175
ASEAN Regional Forum ....................................................................................................... 175
European Union .................................................................................................................. 176
IBSA ..................................................................................................................................... 178
Asian Clearing Union ........................................................................................................... 179
Food and Agriculture Organization ..................................................................................... 179
BRICS ................................................................................................................................... 180
OECD ................................................................................................................................... 180
OPEC .................................................................................................................................... 180
Chapter 12: India and the WTO ........................................................................................... 182
Doha Round of Multilateral Trade Negotiations ................................................................ 182
I. Agriculture................................................................................................................ 183
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Tariff Reduction .......................................................................................................... 184

Subsidies Reduction .................................................................................................... 184
II. Market Access for Non-Agricultural Products (NAMA) .......................................... 186
III. Services .................................................................................................................. 187
IV. Trade Related Aspects of Intellectual Property Rights (TRIPS) ............................. 188
V. Agreement on Trade Related Investment Measures (TRIMS)................................ 189
Current Status, Indias Stand Point and Way Forward ....................................................... 190
India and the WTO ...................................................................................................... 190
Indias Participation in WTO meetings ....................................................................... 191
WTO Negotiations and India ....................................................................................... 191
Indias Stand on Various Issues ................................................................................... 191
Services ....................................................................................................................... 192
Rules ............................................................................................................................ 192
Chapter 13: Current Affairs on Economy.............................................................................. 194
Union Cabinet Approved 50 Percent Reduction in the Reserve Prices for CDMA Spectrum
............................................................................................................................................. 194
Cabinet Committee on Economic Affairs approved the Continuation of JNNURM ........... 194
CCEA approved Defreeze in the Tariff Value of Edible Oils as per International Market .. 195
Union Government Approved Open Policy and lifted ban on Export of Processed Food . 195
Union Government raised LPG Cap to Nine Subsidised Cylinders per Year ....................... 196
Union Government Imposed 2.5 Percent Import Duty on Crude Edible Oil ...................... 197
World Bank slashed the Global Growth Forecast to 2.4 Percent ....................................... 197
The Implementation of GAAR deferred by 2 Years, to Come into Force from 1 April 2016
............................................................................................................................................. 198
Sensex Crossed Crucial 20000 Mark after Two Years ......................................................... 198
Union Cabinet approved 12517 crore Rupees of Capital Infusion in 10 PSU Banks .......... 198
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RBI: Private Sector of India registered a Net Profit of 4.3 percent in First Half of 2012-13200
RBI set up Working Group to review Banking Ombudsman Scheme ................................. 200
Rollout of Direct Benefits Transfers started on 1 January 2013 ......................................... 201
FII Investment in the Indian stock market surpassed more than 24000 crore Rupees in
December 2012 ................................................................................................................... 201
Union Government Announced More Incentives to Exporters Hit By Global Meltdown .. 202
The Minimum Support Price of Wheat was Increased to 1350 Rupees per Quintal ......... 203
Indirect Tax Collection Increased at 16.8 Percent to 2.92 Lakh Crore Rupees in AprilNovember 2012 .................................................................................................................. 203
UN Slashed World Growth Forecast to 2.4 Percent for year 2013..................................... 204
Foreign Investments through P-Notes Increased to 8-Month Highest .............................. 204
Union Government of India lowered the Growth Projection for Current Fiscal to 5.7
Percent ................................................................................................................................ 205
Bombay Stock Exchange launched SME Platform Index aimed at Tracking Primary Market
Condition ............................................................................................................................. 205
Retail Inflation Increased to 9.90 Percent in November 2012 ........................................... 206
Cabinet Committee on Economic Affairs approved the Setting up of CCI ......................... 206
Indian Economy Would Dominate the Economy of the World by 2030: US Intelligence
Community Report.............................................................................................................. 207
Security and Exchange Board of India (SEBI) allowed 12 more Alternative Investment Funds
............................................................................................................................................. 208
Reserve Bank of India (RBI) signed Currency Swap Agreement with Bank of Japan .......... 209
Union Coal Ministry decided to deallocate Four Coal Blocks allotted to 15 Firms ............ 209
India signed 70 million US Dollar loan agreement with World Bank ................................. 210
Reserve Bank of India asked Banks not to Provide Loans for Purchase of Gold ................ 210
Oman Banned Import of Eggs and Chicken from India ...................................................... 211
Income Ceiling for LIG raised by Union Government of India ............................................ 211
Union Cabinet of India cleared Proposal for Spectrum Sharing ......................................... 212
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Civil Aviation Ministry approved New Traffic Rights to Indian Carriers ............................. 212
Government decided to digitize Cable TV Network in Thirty Eight Cities .......................... 213
RBI Expanded the Lending Norms on Priority Sectors ........................................................ 213
12th five-year plan focused on improvement of health, education and sanitation ........... 214
Union Government Cleared Increase of FDI in Insurance .................................................. 214
CVC instructed CBI to expand the scope of investigation on Coalgate .............................. 215
Foreign Investment cap hiked to 74 percent for Broadcasting Services ............................ 215
GAAR Report submitted by the Shome Committee to the Finance Ministry ..................... 216
Proposal for 51 percent FDI in multi-brand retail and 49 percent in Aviation passed....... 217
Report: Indian external debts are within manageable limits ............................................. 218
Cabinet gave a nod to two subsidiaries of Air India: AIESL and AITSL ................................ 219
Union Government approved 14000 Crore Rupees Fund to spur Production of Hybrid and
Electrical Vehicle ................................................................................................................. 220
SEBI allowed Partial Flexibility in IDRs for Investors ........................................................... 220
Public Accounts Committee (PAC) called for Deterrent Penal Provisions against Units in
SEZs ..................................................................................................................................... 220
India eased External Overseas Borrowing Rules to enable Easier Access to Cheap Dollar
Funds ................................................................................................................................... 221
Union Finance Ministry approved 49 Percent FDI in Insurance and Pension Sector ......... 222
RBI stipulated the Norms for Securitisation of Loans by NBFCs ......................................... 223
Regulator SEBI permitted seven Alternative Investment Funds (AIFs) to start Operation in
India .................................................................................................................................... 224
Inter-ministerial group recommended Linking Patented Drug Prices to Per-capita Income
............................................................................................................................................. 224
Indias NSE became the Worlds Largest Bourse in Equity Segment as per WFEs Global
Ranking................................................................................................................................ 225
Union Cabinet sets Base Price for Auction of 2G Spectrum at 14000 Crore Rupees ......... 226
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RBI directed NBFCs to maintain Net-owned Funds (NOF) at Rs 3 crore by 31 March 2013
............................................................................................................................................. 226
RBI signed MoU with Financial Regulators of 9 Countries to promote Sharing of
Information ......................................................................................................................... 227
Annexure A: Objective Questions ........................................................................................ 229
Answers .............................................................................................................................. 238
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CHAPTER 1: BASICS IN ECONOMICS

GROWTH AND DEVELOPMENT
Growth and Development is not the same thing. Neither is necessary for the other. To grow is
to increase in size or number. To develop is to increase ones ability and desire to satisfy ones
own needs and legitimate desires and those of others. A legitimate desire is one that, when
satisfied, does not impede the development of anyone else. Related to these two terms is
Economic Growth and Economic Development Economic Growth is a narrower concept than
economic development. It is an increase in a country's real level of national output which can
be caused by an increase in the quality of resources, increase in the quantity of resources &
improvements in technology or in another way an increase in the value of goods and services
produced by every sector of the economy. Economic Growth can be measured by an increase
in a country's GDP (gross domestic product).
Economic development is a normative concept i.e. it applies in the context of people's sense of
morality (right and wrong, good and bad). The definition of economic development given by
Michael Todaro is an increase in living standards, improvement in self-esteem needs and
freedom from oppression as well as a greater choice. The most accurate method of measuring
development is the Human Development Index which takes into account the literacy rates &
life expectancy which affects productivity and could lead to Economic Growth. It also leads to
the creation of more opportunities in the sectors of education, healthcare, employment and
the conservation of the environment. It implies to an increase in the per capita income of every
citizen.
Economic Growth does not take into account the size of the informal economy. The informal
economy is also known as the black economy which is the unrecorded economic activity.
Development alleviates people from low standards of living into proper employment with
suitable shelter. Economic Growth does not take into account the depletion of natural
resources which might lead to pollution, congestion & disease. Development however is
concerned with sustainability which means meeting the needs of the present without
compromising future needs. These environmental effects are becoming more of a problem for
Governments now that the pressure has increased on them due to Global warming.
Growth the quantitative increase in size or throughput of biophysical matter. Daly has
argued economic growth is based on the limitless transformation of natural capital
into man-made capital.
Development the qualitative improvement in economic welfare from increased
quality of goods and services as defined by their ability to increase human well-being.
This infers promoting increased economic activity only insofar as it does not exceed
the capacity of the ecosystem to sustain it.
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HUMAN DEVELOPMENT INDEX (HDI)

The Human Development Index (HDI) is a composite statistics of life expectancy, education,
and income indices to rank countries into four tiers of human development. It was created by
economist Mahbub-ul-Haq, followed by economist Amartya Sen in 1990, and published by the
United Nations Development Programme.
In its 2010 Human Development Report, the UNDP began using a new method of calculating
the HDI. The following three indices are used:
1. Life Expectancy Index
2. Education Index: It includes
o Mean Years of Schooling Index
o Expected Years of Schooling Index
3. Income Index
Finally, the HDI is the geometric mean of the above three normalized indices.
Among 187 countries ranked in the HDR, India comes in at a dismal 134 in the main
composite index.
HDR 2011 makes the important point that environmental degradation and climate
change will exacerbate inequalities, a trend already in evidence.
The report said India's Human Development Index (HDI) value for 2011 was 0.547
positioning the country in the medium human development category'
Neighbouring Pakistan was ranked at 145 (0.504) and Bangladesh at 146 (0.500).
It said between 1980 and 2011, India's HDI value increased from 0.344 to 0.547, an
increase of 59 per cent or an average annual increase of about 1.5 per cent.
Mean years of schooling: Years that a 25-year-old person or older has spent in schools
Expected years of schooling: Years that a 5-year-old child will spend with his education in his
whole life
Inequality-adjusted HDI:
The 2010 Human Development Report was the first to calculate an Inequality-adjusted Human
Development Index (IHDI). The HDI represents a national average of human development
achievements in the three basic dimensions making up the HDI: health, education and income.
Like all averages, it conceals disparities in human development across the population within the
same country. Two countries with different distributions of achievements can have the same
average HDI value. The HDI takes into account not only the average achievements of a country
on health, education and income, but also how those achievements are distributed among its
citizens by discounting each dimensions average value according to its level of inequality.
GENDER INEQUALITY INDEX

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The Gender Inequality Index (GII) is a new index for measurement of gender disparity that was
introduced in the 2010 Human Development Report 20th anniversary edition by the United
Nations Development Programme (UNDP). According to the UNDP, this index is a composite
measure which captures the loss of achievement, within a country, due to gender inequality,
and uses three dimensions to do so: reproductive health, empowerment, and labour market
participation. The new index was introduced as an experimental measure to remedy the
shortcomings of the previous, and no longer used, indicators, the Gender Development Index
(GDI) and the Gender Empowerment Measure (GEM), both of which were introduced in the
1995 Human Development Report.
The GII's dimension of reproductive health has two indicators: the Maternal Mortality
Ratio (MMR) and the Adolescent Fertility Rate (AFR).
The empowerment dimension is measured by two indicators: the share of parliamentary
seats held by each sex and higher education attainment levels
The labour market dimension is measured by women's participation in the workforce.
This dimension accounts for paid work, unpaid work, and actively looking for work.
According to the Human Development Report 2011, India ranks 129 out of 146
countries on the Gender Inequality Index, below Bangladesh and Pakistan, which are
ranked at 112 and 115, respectively.
Among BRICS (Brazil, Russia, India, China, South Africa) nations, India has the highest
inequalities in human development
MULTIDIMENSIONAL POVERTY INDEX

The Multidimensional Poverty Index (MPI) was developed in 2010 by Oxford Poverty & Human
Development Initiative and the United Nations Development Programme and uses different
factors to determine poverty beyond income-based lists. It replaced the previous Human
Poverty Index.
The MPI is an index of acute multidimensional poverty. It shows the number of people who are
multidimensionality poor (suffering deprivations in 33.33% of weighted indicators) and the
number of deprivations with which poor households typically contend. It reflects deprivations
in very rudimentary services and core human functioning for people.
The index uses the same three dimensions as the Human Development Index: health,
education, and standard of living. These are measured using ten indicators.
Dimensions
Health
Education
Living
Indicators
Child Mortality
Nutrition
Years of school
Children enrolled
Cooking fuel
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Standards
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Toilet
Water
Electricity
Floor
Assets
TECHNOLOGICAL ACHIEVEMENT INDEX

The Technology Achievement Index is used by the UNDP (United Nations Development
Programme) to measure how well a country is creating and diffusing technology and building
a human skill base, reflecting capacity to participate in the technological innovations of the
network age. The TAI focuses on four dimensions of technological capacity: creation of
technology, diffusion of recent innovations, diffusion of old innovations, human skills.
Technology creation, measured by the number of patents granted to residents per

capita and by receipts of royalties and license fees from abroad per capita.
Diffusion of recent innovations measured by the number of Internet hosts per capita
and the share of high-technology and medium-technology exports in total goods
exports.
Diffusion of old innovations, measured by telephones (mainline and cellular) per capita
and electricity consumption per capita.
Human skills, measured by the mean years of schooling in the population aged 15 and
older, and the gross tertiary science enrolment ratio.
SUSTAINABLE DEVELOPMENT AND GROWTH

Sustainable development (SD) refers to a mode of human development in which resource use
aims to meet human needs while preserving the environment so that these needs can be met
not only in the present, but also for generations to come. The term 'sustainable development'
was used by the Brundtland Commission which coined what has become the most oftenquoted definition of sustainable development: "development that meets the needs of the
present without compromising the ability of future generations to meet their own needs."
Sustainable development ties together concern for the carrying capacity of natural systems
with the social challenges faced by humanity. As early as the 1970s, "sustainability" was
employed to describe an economy "in equilibrium with basic ecological support systems."
Ecologists have pointed to The Limits to Growth, and presented the alternative of a "steady
state economy" in order to address environmental concerns.
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The concept of sustainable development has in the past most often been broken out into three
constituent parts: environmental sustainability, economic sustainability and sociopolitical
sustainability.
The United Nations 2005 World Summit Outcome Document refers to the "interdependent
and mutually reinforcing pillars" of sustainable development as economic development, social
development, and environmental protection.[8]? Based on the triple bottom line, numerous
sustainability standards and certification systems have been established in recent years.
Green development is generally differentiated from sustainable development in that Green
development prioritizes what its proponents consider to be environmental sustainability over
economic and cultural considerations. Proponents of Sustainable Development argue that it
provides a context in which to improve overall sustainability where cutting edge Green
Development is unattainable.
Inclusive green growth is the pathway to sustainable development. It is the only way to
reconcile the rapid growth required to bring developing countries to the level of prosperity to
which they aspire, meet the needs of the more than 1 billion people still living in poverty, and
fulfil the global imperative of a better environment.
TERMS AND TERMINOLOGY

The Association of South-east Asian Nations (ASEAN): It is a political, economic, and cultural
organisation of countries located in South-east AsiaThailand, Indonesia, Malaysia, Singapore,
the Philippines, Brunei Darussalam, Cambodia, Laos, Myanmar and Vietnam.
Balance of Payments (BOP): It is a statistical statement summarising all the external
transactions (receipts and payments) on current and capital account in which a country is
involved over a period of time, say, a year. As the BOP shows the total assets and obligations
over a time-period, it always balances.
Barriers to Entry: This refers to the factors which make it disadvantageous for new entrants to enter an industry as
compared with the firms already established within the industry.
Better Compliance: Obeying or complying with the Government regulation. It is referred to

usually in case of payment of taxes and dues to the Government.
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Bilateral Trade Agreements: The agreements relating to exchange of commodities or services

between two countries.
Brundtland Commission: A Commission established by United Nations Organisation in 1983 to
study the worlds environmental problems and propose agenda for addressing them. It came
out with a report. The definition provided by the Commission for the term, sustainable
development, is very popular and widely cited all over the world.
Budgetary Deficit: A situation when the governments income and tax receipts fail to cover its
expenditures.
Bureau of Energy Efficiency (BEE): It is a government organisation that aims to develop policies
and strategies with a thrust on self regulation and market principles. It promotes energy
conservation in different sectors of the economy and undertakes measures against the wasteful
uses of electricity.
Business Process Outsourcing (BPO): Outsourcing of business processes (activities constituting
a service) by companies to other companies. This term is frequently associated with
outsourcing of such activities (e.g. receiving and making calls on behalf of other companies
popularly known as call centres), by foreign companies to Indian companies in the field of ITenabled services.
Carrying Capacity: It is the measure of habitat to indefinitely sustain a population at a particular
density. A more technical definition for carrying capacity is the largest size of a densitydependent population for which the population growth rate is zero. Hence, below carrying
capacity, populations will tend to increase, while they will decrease above carrying capacity.
Population size decreases above carrying capacity due to either reduced survivorship (e.g. due
to insufficient space or food) or reproductive success (e.g. due to insufficient food, or
behavioural interactions), or both. The carrying capacity of an environment will vary for
different species in different habitats, and can change over time due to a variety factors,
including trends in food availability, environmental conditions and space.
Cascading Effect: When tax imposition leads to a disproportionate rise in prices, i.e. by an
extent more than the rise in the tax, it is known as cascading effect.
Cash Reserve Ratio (CRR): A proportion of the total deposits and reserves of the commercial
banks that is to be kept with the central bank (RBI) in liquid form. It is used as a measure of
control of RBI over the commercial banks.
Casual Wage Labourer: A person, who is casually engaged in others farm or non-farm
enterprises and, in return, receives wages according to the terms of the daily or periodic work
contract.
Colonialism: The practice of acquiring colonies by conquest or other means and making them
dependent. It also means extending power, control or rule by a country over the political and
economic life of areas outside its borders. The main feature of colonialism is exploitation.
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Commercialisation of Agriculture: It implies production of crops for the market rather than for
self-consumption i.e. family consumption. During the British rule, the commercialisation of
agriculture acquired a different meaningit became basically commercialisation of crops. The
British started offering higher price to farmers for producing cash crops rather than for food
crops. They used these cash crops as raw materials for industries in Britain.
Communes: Known as peoples communes, or renmin gongshe in China, were formerly the
highest of three administrative levels in rural areas in the period from 1958 to 1982-85, when
they were replaced by townships. Communes, the largest collective units, were divided in turn
into production brigades and production teams. The communes had governmental, political,
and economic functions.
Consumption Basket: Group of goods and services consumed by a household. In order to
estimate the consumption pattern of people, statistical agencies identify such items. For
instance NSSO has indentified 19 groups of items in the consumption basket. Some of them are
(i) cereals (ii) pulses (iii) milk and milk products (iv) edible oil (v) vegetables (vi) fuel and light
and (vii) clothing.
Default: Failure to make repayment of the principal and interest on a debt e.g. sovereign debt
(loan obtained by the government) to the lenders, say, international financial institutions, on
the scheduled date, causing loss of credibility as a debtor.
Deficit Financing: A situation where the expenditure of the government exceeds its revenue.
Demographic Transition: It is a concept developed by demographer Frank Note stein in 1945 to
describe the typical pattern of falling death and birth rates in response to better living
conditions associated with economic development. Note stein identified three phases of
demographic transition, pre-industrial, developing and modern industrialised societies. Later
another phase, post-industrial was also included.
Dereservation: Allowing an individual or group of enterprises to produce goods and services
which were hitherto produced by a particular individual or group of enterprises. In India, it
refers to allowing large-scale industries to produce goods and services which were produced
only by the small-scale industries.
Devaluation: A fall in the exchange rate which reduces the value of a currency in terms of other
currencies.
Disinvestment: A deliberate sale of a part of the capital stock of a company to raise resources
and change the equity and/or management structure of a company.
Employers: Those self-employed workers who by and large, run their enterprises by hiring
labourers.
Enterprise: An undertaking owned and operated by an individual or by group of individuals to
produce and/or distribute goods and/or services mainly for the purpose of sale, whether fully
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or partly. Equities: Shares in the paid up capital or stock of a company whose holders are
considered as owners of the company with voting rights and dividends in the profit.
Establishment: An enterprise which has got at least one hired worker for major part of the
period of operation in a year.
European Union: It is a union of twenty-five independent states founded to enhance political,
economic and social cooperation within the European continent. The member countries of
European Union are Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands,
Portugal, Spain, Sweden, United Kingdom, Malta, Poland, Slovakia and Slovenia.
Export Duties: Taxes imposed on goods exported from a country.
Export Promotion: A set of measures (including fiscal and commercial support measures and
steps aimed at removal of trade barriers) taken by a government to promote the export of
goods with a view to achieve higher economic growth and accumulation of foreign exchange
earnings.
Export-Import Policy: The economic policies of the government relating to its exports and
imports.
Family labour/Worker: A member who works without receiving wages in cash or in kind in a
farm, an industry, business or trade conducted by the members of the family.
Financial Institutions: Institutions that engage in mobilisation and allocation of savings. They
include commercial banks, cooperative banks, developmental banks and investment
institutions.
Fiscal Management: The use of taxation and government expenditure to regulate the economic
activities.
Fiscal Policy: All the planned actions of a government in mobilising financial resources for
meeting its expenditure and regulating the economic activities in a country.
Foreign Direct Investment: Investment of foreign assets into domestic structures, equipment
and organisations. It does not include foreign investment into the stock markets. Foreign direct
investment is thought to be more useful to a country than investments in the equity of its
companies because equity investments are potentially hot money which can leave at the first
sign of trouble, whereas FDI is durable and generally useful whether things go well or badly.
Foreign Exchange: Currency or bonds of another country.
Foreign Exchange Markets: A market in which currencies are bought and sold at rates of
exchange fixed now, for delivery at specified dates in the future.
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Foreign Institutional Investment: Foreign investments which come in the form of stocks,
bonds, or other financial assets. This form of investment does not entail active management or
control over the firms or investors. Foreign Institutional Investors (FIIs): Banking and nonbanking financial institutions of foreign origin e.g. commercial banks, investment banks, mutual
funds, pension funds or other such institutional investors (as distinct from the domestic
financial institutions investing) whose investment in stocks and bonds in the country through
stock markets have significant influence.
Formal Sector Establishments: All the public sector establishments and those private sector
establishments which employ 10 or more hired workers.
G-20: Group of developing countries established to focus on issues relating to trade and
agriculture in the World Trade Organisation. The group includes Argentina, Bolivia, Brazil, Chile,
China, Cuba, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay,
Philippines, South Africa, Thailand, Tanzania, Venezuela, and Zimbabwe.
G-8: The Group of Eight (G-8) consists of Canada, France, Germany, Italy, Japan, the United
Kingdom of Great Britain and Northern Ireland, the United States of America, and Russian
Federation. The hallmark of the G-8 is an annual economic and political summit meeting of the
heads of government with international officials, though there are numerous subsidiary
meetings and policy research. The Presidency of the group rotates every year. For the year
2006 it was held by Russia.
Gratuity: An amount of money given by the employer to the employee at the time of
retirement for services rendered by the employee.
Gross Domestic Product: The total value of final goods and services produced within a
countrys borders in a year, regardless of ownership. It is used as one of many indicators of the
standard of living in a country, but there are limitations with this view.
Household: A group of persons normally living together and taking food from a common
kitchen. The word normally means that temporary visitors are excluded and those who
temporarily staying away are included.
Import Licensing: Permission required from the government to import goods into a country.
Import Substitution: A policy of the state for development of economy in which import of
goods is generally substituted by domestic production (through import controls, tariffs and
other restrictions) with a view to encourage domestic industry on grounds of self-sufficiency
and domestic employment.
Infant Mortality Rate: It is the number of deaths of infants before reaching the age of one, in a
particular year, per 1,000 live births during that year.
Inflation: A sustained rise in the general price level.
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Informal Sector Enterprises: Those private sector enterprises, which employ less than 10
workers on a regular basis.
Integration of Domestic Economy: A situation where the policies of government facilitate free
trade and investment with other countries making the domestic economy work together with
other economies in an efficient and mutually interdependent way.
Invisibles: Various items enter in the current account of the balance of payments, some of
which are not visible goods. Invisibles are mainly services, like tourism, transport by shipping or
by airways, and financial services such as insurance and banking. They also include gifts sent
abroad or received from abroad and private transfer of funds, government grants and interests,
profits and dividends.
Labour Laws: All the rules and regulations framed by the government to protect the interests of
the workers.
Land/Revenue Settlement: With the British acquiring territorial rights in different parts of
India, administration of territories was formulated on the basis of survey of land. It was decided
in the interests of government in terms of revenues to be collected from each parcel of land in
possession of either a ryot (means peasant) or a mahal (revenue village) or a zamindar (a
proprietary land holder). Decision in each of these cases was meant for the rights of the latter
over land for the purposes of either ownership of land or rights to cultivation. This system is
known as land/revenue settlement. There were different land settlements formulated in India.
They are (i) system of permanent settlement, which is also known as the zamindari system (ii)
ryotwari system (a system of revenue settlement entered into by the government with
individual tenants) (iii) mahalwari system (a system of revenue settlement entered into by the
government with a mahal).
Life Expectancy at Birth (years): The number of years a newborn infant would live if prevailing
patterns of age-specific mortality rates at the time of birth were to stay the same throughout
the childs life.
Maternal Mortality Rate: It is the relationship between the number of maternal deaths due to
childbearing by the number of live births or by the sum of live births and foetal deaths in a
given year.
Merchant Bankers: Banks or financial institutions, also known as investment bankers, that
specialise in advising the companies and managing their equity and debt requirement (often
referred to as portfolio management) through floatation and sale/purchase of stocks and
bonds. Morbidity: It is the propensity to fall ill. It affects a persons work by making him or her
temporarily disabled. Prolonged morbidity may lead to mortality. In our country, acute
respiratory infections and diarrhoea are two major causes of morbidity.
Mortality Rate: The word mortality comes from mortal which originates from the Latin word
mors (meaning death). It is the annual number of deaths (from a disease or in general) per
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1,000 people. It is distinct from morbidity rate, which refers to the number of people who have
a disease compared to the total number of people in a population.
MRTP Act: An Act (Monopolies Restrictive Trade Practices Act) framed to prevent monopolistic
practices and regulate the conductor business practices of firms that are not in public interest.
Multilateral Trade Agreements: Trade agreements made by a country with more than two
nations to exchange goods and services.
National Product/Income: Total value of goods and services produced in a country plus income
from abroad.
Nationalisation: Transfer of ownership from private sector to public sector. This involves
takeover of companies owned by individuals or group of individuals by either state or central
government. In some contexts, it also involves transfer of ownership from state government to
central government.
New Economic Policy: A term used to describe the policies adopted in India since 1991.
Non-renewable Resources: Resources that cannot be renewed. They have a finite, even if large,
stock. Some examples are fossils fuels such as oil and coal and mineral resourcesiron, lead,
aluminium, uranium.
Non-tariff Barriers: All the restrictions on imports by a government in the form other than
taxes. They mainly include restrictions on quantity and quality of goods imported.
Opportunity Cost: It is defined with respect to a particular value or action and is equal to the
value of the foregone alternative choice or action. Pension: A monthly payment to a worker
who has retired from work. Per Capita Income: Total national income of a country divided by its
population in a specific period.
Permit License Raj: A term used to denote the rules and regulations framed by the government
to start, run and operate an enterprise for production of goods and services in India.
Planning Commission: An organisation set up by the Government of India. It is responsible for
making assessment of all resources of the country, augmenting deficient resources, formulating
plans for the most effective and balanced utilisation of resources and determining priorities.
Poverty Line: The per capita expenditure on certain minimum needs of a person including food
intake of a daily average of 2,400 calories in rural areas and 2,100 calories in urban areas.
Private Sector Establishments: All those establishments, which are owned and operated by
individuals or group of individuals. Productivity: Output per unit of input employed. Increase in
the efficiency on the part of capital or labour leads to increase in productivity. This term is
generally used to refer to productivity increase in labour inputs.
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Provident Fund: A savings fund in which both employer and employee contribute regularly in
the interest of the employee. It is maintained by the government and given to the employee
when he or she resigns or retires from work.
Public Sector Establishments: All those establishments which are owned and operated by the
government. They may be run either by local government, state government or by central
government independently or jointly.
Quantitative Restrictions: Restrictions in the form of total quantities or quotas imposed on
imports to reduce balance of payments (BOP) deficit and protect domestic industry.
Regular Salaried/Wage Employee: Persons, who work in others farm or non-farm enterprises
and, in return, receive salary or wages on a regular basis (i.e. not on the basis of daily or
periodic renewal of work contract). They include not only persons getting time wage but also
persons receiving piece wage or salary and paid apprentices, both full time and part-time.
Renewable Resources: Resources that can be renewed through natural processes if they are
used wisely. Forests, animals and fishes, if not overexploited, get easily renewed. Water is also
in that category.
South Asian Association for Regional Cooperation (SAARC): It is an association of eight
countries of South Asia Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka and
Afghanistan. SAARC provides a platform for the peoples of South Asia to work together in a
spirit of friendship, trust and understanding. It aims to accelerate the process of economic and
social development in member countries.
Self-Employed: Those who operate their own farm or non-farm enterprises or are engaged
independently in a profession or trade with one or a few partners. They have freedom to decide
how, where and when to produce and sell or carry out their operation. Their earning is
determined wholly or mainly by sales or profits from their enterprises.
Social Security: A government or privately established system of measures, which ensures
material security for the elderly, disabled, destitute, widows and children. It includes pension,
gratuity, provident fund, maternal benefits, health care etc.
Special Economic Zone (SEZ): It is a geographical region that has economic laws different from
a countrys typical economic laws. Usually the goal is to increase foreign investment. Special
Economic Zones have been established in several countries, including the Peoples Republic of
China, India, Jordan, Poland, Kazakhstan, the Philippines and Russia.
Stabilisation Measures: Fiscal and monetary measures adopted to control fluctuations in the
balance of payments and high rate of inflation.
State Electricity Boards (SEBs): These are part of the state administration that generate,
transmit and distribute electricity in different states.
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Statutory Liquidity Ratio (SLR): A minimum proportion of the total deposits and reserves to be
maintained by the banks in liquid form as per the regulations of the central bank (RBI).
Maintenance of SLR, in addition to the Cash Reserve Ratio (CRR), is an obligation of the banks.
Stock Exchange: A market in which the securities of governments and public companies are
traded. It provides the facilities for stock brokers to trade company stocks and other securities.
Stock Market: An institution where stocks and shares are traded.
Structural Reform Policies: Long-term measures like liberalisation deregulation and
privatisation aimed to improve the efficiency and competitiveness of the economy.
Tariff: A tax on imports, which can be levied either on physical units, e.g. per tonne (specific) or
on value. Tariffs may be imposed for a variety of reasons including: to raise government
revenue, to protect domestic industry from subsidised or low-wage imports, to boost domestic
employment, or to ease a deficit on the balance of payments. Apart from the revenue that they
raise tariffs achieve little goodthey reduce the volume of trade and increase the price of the
imported commodity to consumers.
Tariff Barriers: All the restrictions on imports by a government in the form of taxes.
Trade Union: An organisation of workers formed for the purpose of addressing its members
interests in respect of wages, benefits, and working conditions.
Unemployment: A situation in which all those who, owing to lack of work, are not working but
either seek work through employment exchanges, intermediaries, friends or relatives or by
making applications to prospective employers or express their willingness or availability for
work under the prevailing condition of work and remunerations.
Urbanisation: Expansion of a metropolitan area, namely the proportion of total population or
area in urban localities or areas (cities and towns), or the increase of this proportion over time.
It can thus represent a level of urban population relative to total population of the area, or the
rate at which the urban proportion is increasing. Both can be expressed in percentage terms,
the rate of change expressed as a percentage per year, decade or period between censuses.
Worker-Population RATIO: Total number of workers divided by the population. It is expressed
in percentage.
ORGANISATION OF PRODUCTION
The aim of production is to produce the goods and services that we want. There are four
requirements for production of goods and services.
The first requirement is land, and other natural resources such as water, forests, and minerals.
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The second requirement is labour, i.e. people who will do the work. Some production activities
require highly educated workers to perform the necessary tasks. Other activities require
workers who can do manual work.
The third requirement is physical capital, i.e. the variety of inputs required at every stage
during production. It includes
Tools, machines, buildings: Tools and machines range from very simple tools such as a farmers
plough to sophisticated machines such as generators, turbines, computers, etc. Tools,
machines, buildings can be used in production over many years, and are called fixed capital.
Raw materials and money in hand: Production requires a variety of raw materials such as the
yarn used by the weaver and the clay used by the potter. Also, some money is always required
during production to make payments and buy other necessary items. Raw materials and money
in hand are called working capital. Unlike tools, machines and buildings, these are used up in
production.
There is a fourth requirement too. You will need knowledge and enterprise to be able to put
together land, labour and physical capital and produce an output either to use yourself or to
sell in the market. This these days is called human capital.
PEOPLE AS RESOURCE
People as Resource is a way of referring to a countrys working people in terms of their
existing productive skills and abilities. Looking at the population from this productive aspect
emphasises its ability to contribute to the creation of the Gross National Product. Like other
resources population also is a resource a human resource. This is the positive side of a large
population that is often overlooked when we look only at the negative side, considering only
the problems of providing the population with food, education and access to health facilities.
When the existing human resource is further developed by becoming more educated and
healthy, we call it human capital formation that adds to the productive power of the country
just like physical capital formation. Investment in human capital (through education, training,
medical care) yields a return just like investment in physical capital. This can be seen directly in
the form of higher incomes earned because of higher productivity of the more educated or the
better trained persons, as well as the higher productivity of healthier people. Population need
not be a liability. It can be turned into a productive asset by investment in human capital (for
example, by spending resources on education and health for all, training of industrial and
agricultural workers in the use of modern technology, useful scientific researches and so on).
QUALITY OF POPULATION
The quality of population depends upon the literacy rate, health of a person indicated by life
expectancy and skill formation acquired by the people of the country. The quality of the
population ultimately decides the growth rate of the country. Illiterate and unhealthy
population are a liability for the economy. Literate and healthy population are an asset.
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CHAPTER 2: INDIAN ECONOMY - OVER THE YEARS

NATURE OF INDIAN ECONOMY
Since independence India has been a 'mixed economy'. India's large public sectors were
responsible for rendering the country a 'mixed economy' feature.
Indian economic planning is associated with capitalist framework with no element of

compulsion.
Indian economy overview was highly inspired by Soviet Union's practices postindependence. It had been recording growth rate not greater than five jumped till
1980s. This stagnant growth was termed by many economists as 'Hindu Growth Rate'.
In 1992, the country ushered into liberalization regime. Thereafter, the economy started
scaling upward. This new trend in growth was called 'New Hindu Growth Rate'.
India's diverse economy encompasses traditional village farming, modern agriculture,

handicrafts, a wide range of modern industries and a multitude of services.
Services are the major source of economic growth, accounting for more than half of
India's output with less than one third of its labour force.
CURRENT ANALYSIS
The economy of India boasts of being the fourth largest economy in the world after the
United States, China and Japan.
The country's per capita GDP (PPP) was $3,500 in 2010 and ranked at 161, making it a
lower-middle income economy.
The country recorded the highest growth rates and touched to as high as 9% GDP in
the mid-2000s. It was then considered by many financial institutions as one of the
fastest-growing economies in the world.
Notably, the robust growth rate reduced poverty by about 10 percentage points by mid2000s.
But the overview of Indian economy was hit by global slowdown in 2008. Its speed of
growth received a jerk and the country's GDP slowed down to a large extent thereafter.
Government of India has projected growth rate for 2011-12 at 8.2% of GDP compared
to 8.5% registered last year.
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As regards inflation, it has been a major concern for the government to reign in. The
inflation for over five years has crippled the economy. In 2005, the country witnessed
inflation as low as 4 %. Thereafter, the graph has been constantly rising. At many times,
inflation has reached to double digit. Several monetary measures are being taken by the
government and the Central Bank to control the menace, but in vain. However,
government expects that there will be some relief starting from November and declined
to 6.5% in March 2012.
India is the 20th largest merchandise trading nation. The country's exports were worth
$19870 million by October in 2011-12, amounting to 22% of country's GDP. Gems and
jewellery constitute the single largest export item, that is, 16 percent of total export.
However, it is feared that global economic crisis and appreciation of Rupee may hit
domestic export adversely in future.
According to Global Competitiveness Report 2011 released by World Economic Forum,

India has slipped down to its rank to 51 from 49 in 2009.
According to World Economic Outlook 2011 released by International Monetary Fund,

China is ahead of India in terms of growth. The GDP exceeded the government's target
in China and is estimated to be close to 10 percent in 2011.
PLANNING OVER THE YEARS:

FIRST FIVE-YEAR PLAN (19511956)
The first Indian Prime Minister, Jawaharlal Nehru presented the first five-year plan to the
Parliament of India on December 8, 1951.This plan was based on the Harrod-Domar model. The
plan addressed, mainly, the agrarian sector, including investments in dams and irrigation. The
agricultural sector was hit hardest by the partition of India and needed urgent attention. The
total planned budget of INR 2069 crore was allocated to seven broad areas: irrigation and
energy (27.2 percent), agriculture and community development (17.4 percent), transport and
communications (24 percent), industry (8.4 percent), social services (16.64 percent), land
rehabilitation (4.1 percent), and for other sectors and services (2.5 percent).
The target growth rate was 2.1% annual gross domestic product (GDP) growth; the achieved
growth rate was 3.6%. The net domestic product went up by 15%. The monsoon was good and
there were relatively high crop yields, boosting exchange reserves and the per capita income,
which increased by 8%. National income increased more than the per capita income due to
rapid population growth. Many irrigation projects were initiated during this period, including
the Bhakra Dam and Hirakud Dam.
SECOND FIVE-YEAR PLAN (19561961)
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The second five-year plan focused on industry, especially heavy industry. Unlike the First plan,
which focused mainly on agriculture, domestic production of industrial products was
encouraged in the Second plan, particularly in the development of the public sector. The plan
followed the Mahalanobis model, an economic development model developed by the Indian
statistician Prasanta Chandra Mahalanobis in 1953. The plan attempted to determine the
optimal allocation of investment between productive sectors in order to maximise long-run
economic growth. It used the prevalent state of art techniques of operations research and
optimization as well as the novel applications of statistical models developed at the Indian
Statistical Institute. The plan assumed a closed economy in which the main trading activity
would be centered on importing capital goods.
Hydroelectric power projects and five steel mills at Bhilai, Durgapur, and Rourkela were
established. Coal production was increased. More railway lines were added in the north east.
The Atomic Energy Commission was formed in 1958 with Homi J. Bhabha as the first chairman.
The Tata Institute of Fundamental Research was established as a research institute. In 1957 a
talent search and scholarship program was begun to find talented young students to train for
work in nuclear power. Target Growth-4.5% Growth achieved:4.0%.
THIRD FIVE-YEAR PLAN (19611966)
two wars The third plan stressed on agriculture and improvement in the production of wheat, but the
brief Sino-Indian War of 1962 exposed weaknesses in the economy and shifted the focus
towards the Defence industry or Indian army. In 19651966, India fought a [Indo-Pak] War with
Pakistan. Due to this there was a severe drought in 1965. The war led to inflation and the
priority was shifted to price stabilisation. The construction of dams continued. Many cement
and fertilizer plants were also built. Punjab began producing an abundance of wheat. Target
Growth: 5.6% Actual Growth: 2.4%.
FOURTH FIVE-YEAR PLAN (19691974)
At this time Indira Gandhi was the Prime Minister. The Indira Gandhi government nationalised
14 major Indian banks and the Green Revolution in India advanced agriculture. In addition, the
situation in East Pakistan (now Bangladesh) was becoming dire as the Indo-Pakistani War of
1971 and Bangladesh Liberation War took Funds earmarked for the industrial development had
to be diverted for the war effort. India also performed the Smiling Buddha underground nuclear
test in 1974, partially in response to the United States deployment of the Seventh Fleet in the
Bay of Bengal. The fleet had been deployed to warn India against attacking West Pakistan and
extending the war. Target Growth: 5.7% Actual Growth: 3.3%
FIFTH FIVE-YEAR PLAN (19741979)
Stress was by laid on employment, poverty alleviation, and justice. The plan also focused on
self-reliance in agricultural production and defence. In 1978 the newly elected Morarji Desai
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government rejected the plan. Electricity Supply Act was enacted in 1975, which enabled the
Central Government to enter into power generation and transmission.
Target Growth: 4.4% Actual Growth: 5.0
SIXTH FIVE-YEAR PLAN (19801985)
The sixth plan also marked the beginning of economic liberalisation. Prize controls were
eliminated and ration shops were closed. This led to an increase in food prices and an increase
in the cost of living. This was the end of Nehruvian Socialism and Indira Gandhi was prime
minister during this period.
Family planning was also expanded in order to prevent overpopulation.
Target Growth: 5.2% Actual Growth: 5.4%
SEVENTH FIVE-YEAR PLAN (19851990)
The Seventh Plan marked the comeback of the Congress Party to power. The plan laid stress on
improving the productivity level of industries by upgrading of technology.
The main objectives of the 7th five-year plans were to establish growth in areas of increasing
economic productivity, production of food grains, and generating employment.
As an outcome of the sixth five-year plan, there had been steady growth in agriculture, control
on rate of Inflation, and favourable balance of payments which had provided a strong base for
the seventh five Year plan to build on the need for further economic growth. The 7th Plan had
strived towards socialism and energy production at large.
Target Growth: 5.0% Actual Growth: 5.7%
EIGHTH FIVE-YEAR PLAN (19921997)
198991 was a period of economic instability in India and hence no five-year plan was
implemented. Between 1990 and 1992, there were only Annual Plans. In 1991, India faced a
crisis in Foreign Exchange (Forex) reserves, left with reserves of only about US$1 billion. Thus,
under pressure, the country took the risk of reforming the socialist economy. P.V. Narasimha
Rao was the twelfth Prime Minister of the Republic of India and head of Congress Party, and led
one of the most important administrations in India's modern history overseeing a major
economic transformation and several incidents affecting national security. At that time Dr.
Manmohan Singh (currently, Prime Minister of India) launched India's free market reforms that
brought the nearly bankrupt nation back from the edge. It was the beginning of privatisation
and liberalisation in India.
Modernization of industries was a major highlight of the Eighth Plan. Under this plan, the
gradual opening of the Indian economy was undertaken to correct the burgeoning deficit and
foreign debt. Meanwhile India became a member of the World Trade Organization on 1 January
1995.This plan can be termed as Rao and Manmohan model of Economic development.
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An average annual growth rate of 6.78% against the target 5.6% was achieved.
NINTH FIVE-YEAR PLAN (19972002)
Ninth Five Year Plan India runs through the period from 1997 to 2002 with the main aim of
attaining objectives like speedy industrialization, human development, full-scale employment,
poverty reduction, and self-reliance on domestic resources.
During the Ninth Plan period, the growth rate was 5.35 per cent, a percentage point lower than
the target GDP growth of 6.5 per cent.
TENTH FIVE-YEAR PLAN (20022007)
Attain 8% GDP growth per year.

Reduction of poverty ratio by 5 percentage points by 2007.
Providing gainful and high-quality employment at least to the addition to the labour
force.
Reduction in gender gaps in literacy and wage rates by at least 50% by 2007.
20 point program was introduced.
Target growth: 8% Growth achieved: 7.8%

ELEVENTH FIVE-YEAR PLAN (20072012)
The eleventh plan has the following objectives:
Income & Poverty
Accelerate GDP growth from 8% to 10% and then maintain at 10% in the 12th Plan
in order to double per capita income by 201617
Increase agricultural GDP growth rate to 4% per year to ensure a broader spread of
benefits
Create 70 million new work opportunities.
Reduce educated unemployment to below 5%.
Raise real wage rate of unskilled workers by 20 percent.
Reduce the headcount ratio of consumption poverty by 10 percentage points.
Education
Reduce dropout rates of children from elementary school from 52.2% in 200304 to
20% by 201112
Develop minimum standards of educational attainment in elementary school, and by
regular testing monitor effectiveness of education to ensure quality
Increase literacy rate for persons of age 7 years or above to 85%
Lower gender gap in literacy to 10 percentage point
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Increase the percentage of each cohort going to higher education from the present
10% to 15% by the end of the plan
Health
Reduce infant mortality rate to 28 and maternal mortality ratio to 1 per 1000 live
births
Reduce Total Fertility Rate to 2.1
Provide clean drinking water for all by 2009 and ensure that there are no slip-backs
Reduce malnutrition among children of age group 03 to half its present level
Reduce anaemia among women and girls by 50% by the end of the plan
Women and Children
Raise the sex ratio for age group 06 to 935 by 201112 and to 950 by 201617
Ensure that at least 33 percent of the direct and indirect beneficiaries of all
government schemes are women and girl children
Ensure that all children enjoy a safe childhood, without any compulsion to work
Infrastructure
Ensure electricity connection to all villages and BPL households by 2009 and roundthe-clock power.
Ensure all-weather road connection to all habitation with population 1000 and
above (500 in hilly and tribal areas) by 2009, and ensure coverage of all significant
habitation by 2015
Connect every village by telephone by November 2007 and provide broadband
connectivity to all villages by 2012
Provide homestead sites to all by 2012 and step up the pace of house construction
for rural poor to cover all the poor by 201617
Environment
Increase forest and tree cover by 5 percentage points.

Attain WHO standards of air quality in all major cities by 201112.
Treat all urban waste water by 201112 to clean river waters.
Increase energy efficiency by 20%
Target growth: 8.4% Growth achieved: 7.9%.

TWELFTH FIVE-YEAR PLAN (2012-2017)
12th five year plan (2012-17) document that seeks to achieve annual average economic growth
rate of 8.2 per cent, down from from 9 per cent envisaged earlier, in view of fragile global
recovery. 12th five-year plan is guided by the policy guidelines and principles to revive the
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following Indian economy, which registered a growth rate of meagre 5.5 percent in the first
quarter of the financial year 2012-13.
The plan aims towards the betterment of the infrastructural projects of the nation avoiding all
types of bottlenecks. The document presented by the planning commission is aimed to attract
private investments of up to US$1 trillion in the infrastructural growth in the 12th five-year
plan, which will also ensure a reduction in subsidy burden of the government to 1.5 percent
from 2 percent of the GDP (gross domestic product). The UID (Unique Identification Number)
will act as a platform for cash transfer of the subsidies in the plan.
The plan aims towards achieving a growth of 4 percent in agriculture and to reduce poverty by
10 percentage points, by 2017.
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CHAPTER 3: NATURAL RESOURCES

DEGRADING NATURAL RESOURCES AND THE AGRARIAN CRISIS
The achievements during the past ten Five Year Plans have been phenomenal. Yet, the human
development indicators such as child and adult malnutrition, poverty, illiteracy, infant and
maternal mortality rates and access to sanitation and clean drinking water are Indias major
concerns. The approach paper for the Eleventh Five Year Plan (XI Plan) mentions. Economic
growth has failed to be sufficiently inclusive, particularly after the mid-1990. Agriculture lost its
growth momentum from that point on and subsequently entered a near crisis situation,
reflected in farmer suicides in some areas.
Degradation and erosion of natural resources those parts of the natural world that are used
to produce food and other valued goods and services and which are essential for our survival
and prosperity, are one of root causes of the agrarian crisis. No current or intended use of
natural resources should condemn our children to endless toil or deprivation. Land, water, soil,
forest, livestock, fish, biodiversity (plant, animal and microbial genetic resources), along with
air and sunlight, are our natural resource upon which human life is dependent.
The natural resources are interlinked as producers and service providers to maintain
environmental health, augment agriculture production and ensure economic development. One
of the major concerns in this endeavour is to rehabilitate the degraded and vulnerable land and
water resources suffering from soil erosion, soil acidity, salinity, alkalinity, water logging,
water depletion, water pollution etc and to ensure livelihood support to the rural population
in the country. Soil and water conservation practices through engineering and vegetative
measures need to be more indigenous, innovative and eco-friendly and those which are
maintainable by farming community. The existing soil and water conservation practices to
arrest soil erosion and reclamation measures for other soil degradation processes also need to
be re-looked. Soil buffering system and land use policy are also vital components of NRM to
attain sustainability that needs to be activated
LAND AND SOIL

Land conservation, soil health and access to land for livelihood are the main challenges. Worlds
biological productivity, meeting our food, energy and other requirements, depends on soil
health, especially its water, nutrient and carbon balance. Unfortunately, it is this mother
resource which is depleting the fastest. Estimates of the cost of soil degradation during 1980s
and 1990s ranged from 11 to 26 percent of GDP. The cost of salinity and waterlogging is
estimated at Rs.120 billion to Rs.270 billion, and if the cost of environmental damage is taken
into account, Indias economic growth comes to minus 5.73 percent per annum as against plus
5.66 percent estimated otherwise.
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Out of the 328.7 million hectare (m ha) of geographical area, 142 m h is the net cultivated area
in India. Of this, about 57 m ha (40 per cent) is irrigated and the remaining 85 m ha (60 per
cent) is rain fed. Approximately, 20.00 m ha of degraded land was likely to be treated during
the Tenth Plan period and therefore, about 68.50 m ha of degraded lands will require
development after the Tenth Five Year Plan.
Soil health enhancement holds the key to raising small farm productivity. The Second or
Evergreen Revolution is not possible without overcoming the widespread macro- and micronutrient deficiencies the hidden hunger. Every farm family should be issued with a Soil
Health Passbook, which contains integrated information on the physics, chemistry and
microbiology of the soils on their farm. More laboratories to detect specific micronutrient
deficiencies in soils are urgently needed. Soil organic matter content will have to be increased
by incorporating crop residues in the soil. Proper technical advice on the reclamation of
wastelands and on improving their biological potential should be available. Pricing policies
should promote a balanced and efficient use of fertilizers.
The land use should be compatible to the land capability otherwise it will induce degradation
process that may be detrimental to the watershed development programme. The land use
policy needs to be developed as per land capability that is to be derived out of soil survey data.
In this context, it is necessary to revive the State 8
Land Use Boards (SLUBs) which should be the nodal agencies to implement land use policy as
per the capability to strengthen the mechanism to adopt optimal land use planning in the
states.
OWNERSHIP OF THE LAND

The ownership of land is highly skewed, nearly 65 per cent of the rural households owning less
than one ha. The landless population amounts to over 12 per cent of rural households.
Fragmentation of farm holdings continues unabated. Per capita land availability has also
dropped from 0.48 ha in 1951 to 0.16 ha in 1991 and is projected to drop to 0.08 ha in 2035.
Enhancing and sustaining productivity and income of small forms through crop-livestock-fish
integration and multiple opportunities through agro-processing, value addition and biomass
utilization must be a high priority. On the other hand, Land Use Planning is highly ineffective
and the Land Use Boards have been rendered nonfunctional.
WATER
IRRIGATION POTENTIAL
Irrigation expansion has been one of the three input-related driving factors (the other two
being seeds of modern HYVs and fertilizer) in the Green Revolution process. Gross irrigated
area went up by over 300 per cent, from 22.6 m ha in 1950-1951 to 57 m ha (gross irrigated
area over 75.1 m ha) in 2000-2001, rendering India as the country having the largest irrigated
area in the world. The ultimate irrigation potential for the country has been estimated at
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about 140 m ha (59 m ha through major and medium irrigation projects, 17 m ha through
minor irrigation schemes and 64 m ha through groundwater development). So far, the irrigation
potential of nearly 100 m ha has already been created, but only about 86 m ha is being utilized,
thus leaving a gap of 14 m ha between created and utilized potential.
Serious gaps also exist between the stipulated and realized productivity and income gains in
the irrigated areas. The irrigation intensity is also around 135 per cent which should be raised
to 175 per cent or more. The intended productivity increases were, however, not realized and
clearly the past policies have been inadequate and had low pay off, let alone the irrigation
associated environmental and natural resource related degradations and low water use
efficiency and inequity.
Irrigation expansion rate in recent years has been about 1.4 m ha per annum. Should the
trend scenario be maintained, by the end of the XI Plan, additional 7 m ha of irrigated land
should be available. Further, under Bharat Nirman, creation of 10 m ha additional assured
irrigation is planned during 2005-2009 through major, medium and minor irrigation projects
complemented by groundwater development
Constraints in the spread of Drip Irrigation
The main constraints encountered include (i) poor quality of the system supplied to the
farmers, (ii) unreliable and spurious spares and non-availability of standard parts, (iii) ignorance
of the users regarding the maintenance and operation of the system, and (iv)non-availability
and uncertainty of power/energy supply.
ANNUAL REQUIREMENT OF FRESH WATER (B CU M)

Under Sector
Irrigation
Domestic
Industries
Thermal Power
Other
Total
2000
541
42
8
2
41
634
2025
910
73
22
15
72
1049
2050
1072
102
63
130
80
1447
PER CAPITA AVAILABILITY

Our per capita water availability at the national level has declined rapidly, from 1986 cu m (cu
m) in 1998 to 1731 cu m in 2005, rendering India dangerously close to the threshold of 1700 cu
m and being declared as a water scarcity region of the World. Of our estimated some 350
million hectare meter (m ha m) annual renewable water resources, around 160 mhm find their
way back to the sea as river flow. On the other hand, over 29 per cent of the blocks in the
country are in the category of over exploited areas of groundwater use. Nearly 60 percent of
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the blocks in Punjab and 40 percent of the blocks in Haryana have turned dark and over
exploited - the heartland of the green revolution.
While the North Zone has already developed 87 per cent of its groundwater, the East Zone
has over 70 per cent of its groundwater unexploited for irrigation purposes. Thus, larger
investments in irrigation should be made in the East Zone. In doing so, the past mistakes and
shortcomings of irrigation development should be avoided. Such a move will be a move
towards inclusive growth, as the East Zone has higher concentration of the poor people.
DEMAND SIDE MANAGEMENT OF WATER RESOURCES

Demand management through improved irrigation practices, including sprinkler and drip
irrigation, should receive priority attention. A water literacy movement should be launched
and regulations should be developed for the sustainable use of ground water. Crop planning
and large scale adoption of proven technology can greatly mitigate the problem of excessive
use of irrigation water. For instance, one crop of irrigated rice in India consumes more than 40
per cent of all the irrigation water in the season. Believing (wrongly) that continuous
submergence/flooding of rice field throughout the crop life cycle is essential, nearly 4,500 litres
of water is required for production of one kg of rice. On the other hand, it is conclusively
established that irrigating rice only one to three days after disappearance of pond water can
save 20 to 30 per cent of irrigation water applied without any significant effect on the yield, let
alone the environmental benefits. The System of Rice Intensification (SRI) offer greater ecofriendly and economic opportunities. Development of irrigation responsive varieties,
cultivated under limited water availability and non-puddle conditions (aerobic rice) is another
highly viable complementary component of integrated on-farm water management strategy.
BIODIVERSITY AND AGRICULTURAL GENETIC RESOURCES

Biodiversity refers to the abundant wealth of flora and fauna including soil micro-flora and
micro-fauna and constitutes the genetic wealth for farmers livelihood security and welfare.
The aim should be to conserve as well as enhance these natural resources, to provide equitable
access and lead to sustainable use with equitable sharing of benefits.
But, degradations and erosions are rampant in our biodiversity, forests and agro-ecological
production systems. The loss of land races, wild species and local breeds have greatly
enhanced genetic vulnerability of our major crops, livestock and fish, besides losing
invaluable gene pools. Synergy and congruence is also missing between the two newly created
biodiversity related national bodies, namely, National Biodiversity Board and Plant Variety
Protection and Farmers Rights Authority.
The Plant Variety Protection and Farmers Rights (PVPFR) Act was enacted in 2001. The Act
recognizes the multiple roles of farmers as cultivators, conservers and breeders. Detailed
guidelines should be developed for ensuring that the rights of farmers in their various roles are
safeguarded. For example most farmers who are cultivators are entitled to Plant Back Right.
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This implies that they can keep their own seeds and also enter into limited exchange in their
vicinity. Farmers as breeders have the same rights as professional breeders and they can enter
their varieties for registration and protection.
FORESTS
Forests form the basic resource for maintaining the soil/water regimes and ecological
services, hence optimizing productivity of forest means augmenting resilience of soil, water
and agriculture, which are the pillars of rural livelihood security. Green cover is indicator of
resilience of the natural resources and a primary requirement for sustainable agriculture
production. Thus forest cover needs to be recognized as the Natural Resource Infrastructure
for agriculture / primary production / rural economic growth. Good density forest will thus
provide required ecosystem services, but also material products in plenty for communities.
Thus investment in forest estate is an investment for growth.
India is one of the 17 mega diversity countries in the world having vast variety of flora and
fauna, supporting 16 major forest types, comprising from Himalayan Alpine pasture and
temperate forest, sub-tropical forest, tropical evergreen to mangroves in the coastal areas.
India also has two biodiversity hot spots in the northeastern states and the Western Ghats.
Per capita forest area is only 0.064 ha - one-tenth of the world average. Under the heavy
pressures of human and animal populations, about 41 per cent of forest cover of the country is
degraded. Dense forests are losing their crown density and productivity continuously, the
current productivity being one-third of that of the world average. The use of forests beyond
their carrying capacity, compounded with the loss of nearly 4.5 m ha to agriculture and other
uses since 1950 and nearly 10 m ha of forest area being subjected to shifting cultivation, is the
main cause of continuous degradation of forests.
(N.B.: For More Information on Forest refer to the State of Forest Report-2011 provided in the
Annexure-A of Environment PDF)
DEMANDS ON FOREST RESOURCES

Among the many demands placed on the forest resource of India the most important, both in
terms of value and volume are timber, fuel and fodder. Of these, while timber is required by
all sections of society, demand of fuel and fodder basically comes from rural areas and that too
from the underprivileged section of the society. Thus, these two demands receive added
significance.
As regards timber, the domestic supply increased from 53 million cubic meters (m c m) in 1996
to 65 m cu m in 2006. During the same period the demand increased from 64 to 82 m cu m, the
gap being met through import, valued at Rs. 9,000 crore during the year 2003-04. While natural
forests are unable to meet the requirement, non forest areas, which include farm forests, could
play a significant role in fulfilling the demand.
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As regards fuel wood, these constitute an important basic need of about 40 per cent of the
population of India. The fact remains that India may have sufficient food to eat but not
sufficient fuel wood to cook it. Demand of fuel, which basically comes from rural areas,
depends on various factors such as availability of other fuels, climate, living standards, size of
the family, food habits, etc. It has been estimated that average annual per capita fuel wood
consumption in the country works out to about 0.35 tones. The domestic supply through
normal means generally meets hardly 50% of the demand, mostly through over exploitation of
forests beyond their productive capacities leading to degradation of growing stock.
Regarding fodder, forests meet about one-third of the requirement in India. The forests form
a major source of fodder supply and it increases during drought years when the crops fail and
therefore natural forests remain the only source of fodder. Grasslands are biomass wise among
the most productive ecosystems of the world. In an agrarian nation so dependent upon range
grazing of its moving stock, they are the most important component of countrys animal
husbandry.
LIVESTOCK
Livestock sub-sector, with its annual outputs (milk, meat, egg and wool) valued at nearly Rs.
170,000 crore - about 27 per cent of the agricultural GDP and engaging over 90 million
people, is a highly strategic and vital sub-sector for agrarian economy of the country. Unlike
the ownership of land, the ownership of livestock is positively egalitarian, especially in the
arid, semi-arid and other non-congenial rain fed settings, and is a critical component of
livelihood security.
Possessing the worlds largest livestock population, India ranks first in milk production, fifth in
egg production and seventh in meat production. Total livestock output has been growing at a
much faster rate of 3.6 percent per annum against only 1.1 percent registered for the crops
sub-sector during the past decade.
Productivity of our animals is almost one-third of that of the worlds average and far lesser
when compared with that in the developed countries. On the other hand, India has about 20
percent of the worlds animal population, but good grazing lands are practically non-existent,
thus exerting enormous pressure on the limited and shrinking land and water resources. The
major constraints relate to fodder, feed, healthcare, genetic improvement and conservation
(degeneration of the famous Tharparker cattle breed in Western Rajasthan is a sad story),
processing and value addition, remunerative pricing and marketing.
FISHERIES
Fisheries, including aquaculture, contribute significantly to food, nutrition, economic and
employment securities, and fortunately are one of the fastest growing agricultural sub-sectors
during the last three decades. Currently, fisheries contribute 4.6 percent of the agricultural
GDP, provide employment security to about 11 million people and annually earn foreign
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exchange worth Rs. 7,300 crore - about one-fifth of the value of the national agricultural
export. Of the current total production of 6.4 million tonnes (mt) of fish, marine fish
production contributed about 3.0 m t and inland fisheries contributed 3.4 m t 53 percent of
the total production. While the marine fish production has been growing at 2.2 percent per
annum, the inland production has annually been growing at 6.6 percent, resulting in an overall
annual growth rate of 4.12 percent during the nineties.
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CHAPTER 4: AGRICULTURE
OVERVIEW OF INDIAS AGRICULTURAL ECONOMY
In the early 1950s, half of Indias GDP came from the agricultural sector. By 1995, that
contribution was halved again to about 25 per cent. As would be expected of virtually all
countries in the process of development, Indias agricultural sectors share has declined
consistently over time as seen in the table below.
Year
Percentage share of GDP
1951
52.2
1965
43.6
1976
37.4
1985
32.8
1991
28.3
1999
24.4
2011
14.6
In the last five decades, the Governments objectives in agricultural policy and the instruments
used to realize the objectives have changed from time to time, depending on both internal and
external factors. Agricultural policies can be divided into supply side and demand side
policies. The former include those relating to land reform and land use, development and
diffusion of new technologies, public investment in irrigation and rural infrastructure and
agricultural price supports. The demand side policies on the other hand, include state
interventions in agricultural markets as well as operation of public distribution systems. Such
policies also have macro effects in terms of their impact on government budgets.
Macro level policies include policies to strengthen agricultural and non-agricultural sector
linkages and industrial policies that affect input supplies to agriculture and the supply of
agricultural materials. During the pre-green revolution period, from independence to 19641965, the agricultural sector grew at annual average of 2.7 per cent. This period saw a major
policy thrust towards land reform and the development of irrigation. With the green revolution
period from the mid-1960s to 1991, the agricultural sector grew at 3.2 per cent during 19651966 to 1975-1976, and at 3.1 per cent during 1976-1977 to 1991-1992. The policy package for
this period was substantial and consisted of:
a) introduction of high-yielding varieties of wheat and rice by strengthening agricultural
research and extension services,
b) measures to increase the supply of agricultural inputs such as chemical fertilizers and
pesticides,
c) expansion of major and minor irrigation facilities,
d) announcement of minimum support prices for major crops, government procurement
of cereals for building buffer stocks and to meet public distribution needs, and
e) Provision of agricultural credit on a priority basis.
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f) This period also witnessed a number of market intervention measures by the central
and state Governments. The promotional measures relate to the development and
regulation of primary markets in the nature of physical and institutional infrastructure at
the first contact point for farmers to sell their surplus products. Crops, Production,
Productivity, Inputs and Surpluses
CROP-SPECIFIC GROWTH
As per 2nd advance estimates for 2011-12, total food grains production is estimated at a
record level of 250.42 million tonnes which is 5.64 million tonnes higher than that of the last
year production. Production of rice is estimated at 102.75 million tonnes, Wheat is 88.31
million tonnes, coarse cereals 42.08 million tonnes and pulses 17.28 million tonnes. Oilseeds
production during 2011-12 is estimated at 30.53 million tonnes, sugarcane production is
estimated at 347.87 million tonnes and cotton production is estimated at 34.09 million bales
(of 170 kg. each). Jute production has been estimated at 10.95 million bales (of 180 kg each).
Despite inconsistent climatic factors in some parts of the country, there has been a record
production, surpassing the targeted production of 245 million tonnes of food grains by more
than 5 million tonnes during 2011-12. Growth in the production of agricultural crops depends
upon acreage and yield. Given the limitations in the expansion of acreage, the main source of
long-term output growth is improvement in yields. In the case of wheat, the growth in area and
yield have been marginal during 2000-01 to 2010-11 suggesting that the yield levels have
plateaued for this crop. This suggests the need for renewed research to boost production and
productivity. All the major coarse cereals display a negative growth in area during both the
periods except for maize, which recorded an annual growth rate of 2.68 per cent in the 2000-01
to 2010-11 period. The production of maize has also increased by 7.12 percent in the latter
Period. The biggest increase in the growth rates of yields in the two periods, however, is in
groundnut and cotton. Cotton has experienced significant changes with the introduction of Bt
cotton in 2002. By 2011-12, almost 90 percent of cotton area is covered under Bt. cotton,
production has more than doubled (compared to 2002-03), yields have gone up by almost 70
percent, and export potential for more than Rs 10,000 crore worth of raw cotton per year has
been created.
LAND REFORMS
Under the 1949 Indian constitution, states were granted the powers to enact (and
implement) land reforms. This autonomy ensures that there has been significant variation
across states and time in terms of the number and types of land reforms that have been
enacted. We classify land reform acts into four main categories according to their main
purpose.
1. The first category is acts related to tenancy reform. These include attempts to regulate
tenancy contracts both via registration and stipulation of contractual terms, such as
shares in share tenancy contracts, as well as attempts to abolish tenancy and transfer
ownership to tenants.
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2. The second category of land reform acts are attempts to abolish intermediaries. These
intermediaries who worked under feudal lords (Zamandari) to collect rent for the British
were reputed to allow a larger share of the surplus from the land to be extracted from
tenants. Most states had passed legislation to abolish intermediaries prior to 1958.
3. The third category of land reform acts concerned efforts to implement ceilings on land
holdings, with a view to redistributing surplus land to the landless.
4. Finally, we have acts which attempted to allow consolidation of disparate landholdings.' Though these reforms and in particular the latter were justified partly in
terms of achieving efficiency gains in agriculture it is clear from the acts themselves and
from the political manifestos supporting the acts that the main impetus driving the first
three reforms was poverty reduction.
Existing assessments of the effectiveness of these different reforms are highly mixed. Though
promoted by the centre in various Five Year Plans, the fact that land reforms were a state
subject under the 1949 Constitution meant that enactment and implementation was
dependent on the political will of state governments. The perceived oppressive character of the
Zamandari and their close alliance with the British galvanized broad political support for the
abolition intermediaries and led to widespread implementation of these reforms most of
which were complete by the early 1960s. Centre-state alignment on the issue of tenancy
reforms was much less pronounced. With many state legislatures controlled by the landlord
class, reforms which harmed this class tended to be blocked, though where tenants had
substantial political representation notable successes in implementation were recorded.
Despite the considerable publicity attached to their enactment, political failure to implement
was most complete in the case of land ceiling legislation. Here ambivalence in the formulation
of policy and numerous loopholes allowed the bulk of landowners to avoid expropriation by
distributing surplus land to relations, friends and dependents. As a result of these problems,
implementation of both tenancy reform and land ceiling legislation tended to lag well behind
the targets set in the Five Year Plans. Land consolidation legislation was enacted less than the
other reforms and, owing partly to the sparseness of land records, implementation has been
considered to be both sporadic and patchy only affecting a few states in any significant way.
Village level studies also offer a very mixed assessment of the poverty impact of different land
reforms. Similar reforms seemed to have produced different effects in different areas leaving
overall impact indeterminate. There is some consensus that the abolition of intermediaries
achieved a limited and variable success both in redistributing land towards the poor and
increasing the security of smallholders.
For tenancy reform, however, whereas successes have been recorded, in particular, where
tenants are well organized there has also been a range of documented cases of imminent
legislation prompting landlords to engage in mass evictions of tenants and of the de jure
banning of landlord-tenant relationships pushing tenancy underground and therefore,
paradoxically, reducing tenurial security. Land ceiling legislation, in a variety of village studies, is
also perceived to have had neutral or negative effects on poverty by inducing landowners from
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joint families to evict their tenants and to separate their holdings into smaller proprietary units
among family members as a means of avoiding expropriation. Land consolidation is also on the
whole judged not to have been progressive in its redistributive impact given that richer farmers
tend to use their power to obtain improved holdings. There is a considerable variation in
overall land reform activity across states with states such as Uttar Pradesh, Kerala and Tamil
Nadu having a lot of activity while Punjab and Rajasthan have very little.
POLICIES FOR AGRICULTURAL AND RURAL DEVELOPMENT: AN OVERVIEW

Important policy measures introduced in the rural sector in India during the period of
planning are as follows:
Technological measures: Initiation of measure to increase agricultural production

substantially to meet the growing needs of the population and also to provide a base for
industrial development. It included steps to increase both extensive cultivation and
intensive cultivation. For the former, irrigation facilities were provided to a large area on an
increasing basis and area hitherto unfit for cultivation was made fit for cultivation. For the
latter, new agricultural strategy was introduced in the form of a package programme in
selected regions of the country in 1966. To sustain and extend this programme to larger and
larger areas of the country, steps were initiated to increase the production of high-yielding
varieties of seeds, fertilisers and pesticides within the economy and supplement domestic
production by imports whenever necessary. Food grains production which was merely 50.8
million tonnes in 1950-51 rose to the record level of 252.6 million tonnes in 2011-12.
Land reforms: Land reform measures to abolish intermediary interests in land. Measures
taken under this head included: (i) Abolition of intermediaries; (ii) Tenancy reforms to (a)
regulate rents paid by tenants to landlords, (b) provide security of tenure to tenants, and (c)
confer ownership rights on tenants; and (iii) Imposition of ceilings on holdings in a bid to
procure land for distribution among landless labourers and marginal farmers.
Cooperation and consolidation of holdings: In a bid to reorganise agriculture and prevent

subdivision and fragmentation of holdings, the Indian agricultural policy introduced the
programmes of co-operation and consolidation of holdings. The latter programme aimed at
consolidating all plots of land owned by a particular farmer in different places of the village
by sanctioning him land at one place equal in area (or value) to his plots of land.
Institutions involving people's participation in planning: Bringing small and marginal

farmers together to cultivate jointly is only half of the story. It was precisely with this end in
view that the Programme of Community Development was initiated in 1952 in this
country. Another programme designed to encourage the participation of masses in the
planning process (and political decision- making) was the programme of democratic
decentralisation, often known as Panchayati Raj.
Institutional credit: A National Bank for Agriculture and Rural Development (NABARD) was
also set up. As a result of the expansion of institutional credit facilities to farmers, the
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importance of moneylenders has declined steeply and so has the exploitation of farmers at
the hands of moneylenders.
Procurement and support prices: To provide remunerative prices to the farmers
Input subsidies to agriculture: The government has provided massive subsidies to farmers
on agricultural inputs like irrigation, fertilisers and power.
Food security system: In a bid to provide food grains and other essential goods to
consumers at cheap and subsidised rates, the Government of India has built up an elaborate
food security system in the form of Public Distribution System (PDS) during the planning
period.
Rural employment programmes: The government introduced various poverty alleviation

programmes particularly from Fourth Plan onwards like Small Farmers Development
Agency (SFDA), Marginal Farmers and Agricultural Labour Development Agency (MFAL),
National Rural Employment Programme (NREP), Rural Landless Employment Guarantee
Programme (RLEGP), Jawahar Rojgar Yojana (JRY) , Jawahar Gram Samridhi Yojana (JGSY),
Sampoorna Grameen Rozgar Yojana (SGRY), National Food for Work Programme (NFFWP),
Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), etc.
Rashtriya Krishi Vikas Yojana (RKVY): The RKVY was launched in 2007-08 with an outlay of
Rs. 25,000 crore in the Eleventh Plan for incentivising States to enhance public investment
to achieve 4 per cent growth rate in agriculture and allied sectors during the Eleventh Five
Year Plan period. The RKVY format permits taking up national priorities as sub-schemes,
allowing the States flexibility in project selection and implementation. The sub- schemes
include: Bringing Green Revolution to Eastern India (BGREI); Integrated Development of
60,000 pulses villages in Rain fed Areas; Promotion of Oil Palm; Initiative on Vegetable
Clusters; Nutri-cereals; National Mission for Protein Supplements; Accelerated Fodder
Development Programme; and Saffron Mission.
National Food Security Mission (NFSM). The NFSM is a crop development scheme of the
Government of India that aims at restoring soil health and achieving additional production
of 10, 8 and 2 million tonnes of rice wheat and pulses, respectively by the end of 2011-12.
It was launched in August 2007 with an approved outlay of Rs. 4,883 crore for the period
2007-08 to 2011-12. The Mission has focused on the Districts with productivity of
wheat/rice below the State average.
Macro Management of Agriculture. Macro Management of Agriculture (MMA) is one of the

centrally sponsored scheme formulated in 2000-01 with the objective to ensure that
Central assistance is spent through focused and specific interventions for development of
agriculture in States. To begin with, the scheme initially consisted of 27 Centrally sponsored
schemes relating to Cooperative Crop Production Programmes (for rice, wheat, coarse
cereals, jute, sugarcane), Watershed Development Programme (National Watershed
Development Project for Rain fed Areas, River Valley Projects/Flood Prone Rivers),
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Horticulture Fertiliser, Mechanisation and Seed Production Programmes. With the

launching of National Horticulture Mission (NHM) in 2005-06, 10 schemes pertaining to
horticulture development were taken out of purview of this scheme. In the year 2008-09,
Macro Management of Agriculture Scheme was revised to improve its efficacy in
supplementing/complementing efforts of States towards enhancement of agricultural
production and productivity
In an effort to extend green revolution to the Eastern Region of the country and develop
dry land areas, the Seventh Five Year Plan introduced two specific programmes:
Special Rice Production Programme, and
National Watershed Development Programme for Rain fed Agriculture.
To increase the production of oil seeds to reduce imports and achieve self-sufficiency in
edible oils, the Technology Mission on oilseeds was launched by the Central government in
1986. Subsequently, pulses, oil palm and maize were brought within purview of the Mission
in 1990- 91, 1992 and 1995-96, respectively.
An Accelerated Irrigation Benefit Programme (AIBP) was launched during 1996-97 to give
loan assistance to the States to help them complete some of the incomplete projects. Rs.
50,381 crore had been released under AIBP as Central Loan Assistance/grant during 199697 to November 31, 2011.
To meet the demand for bringing in more crops into the purview of crop insurance,
extending its scope to cover all farmers (both loanee and non-loanee) and lowering the unit
area of insurance, the government introduced 'National Agriculture Insurance Scheme
(NAIS), in the country from Rabi 1999-2000. The scheme envisages coverage of all the food
crops (cereals and pulses), oilseeds and annual horticultural/commercial crops, in respect of
which yield data are available for adequate number of years. With the aim of further
improving crop insurance schemes, the modified NAIS (MNAIS) is under implementation
on pilot basis in 50 districts in the country from Rabi 2010-11 seasons. Some of the major
improvements made in the MNAIS are - actuarial premium with subsidy in premium at
different rates; all claims liability to be on the insurer; unit area of insurance reduced to
village panchayat level for major crops; indemnity for prevented/sowing/ planting risk and
for post harvest losses due to cyclone; on account payment of up to 25 per cent advance of
likely claims as immediate relief; more proficient basis for calculation of threshold yield; and
allowing private sector insurers with adequate infrastructure.
To facilitate access to short-term credit by farmers, a Kisan Credit Card (KCC) scheme was
introduced in 1998-99. The scheme has gained popularity and its implementation has been
taken up by 27 commercial banks, 378 District Central Cooperative Banks/State Cooperative
Banks and 196 Regional Rural Banks throughout the country.
The access to credit for the poor from conventional banking is often constrained by lack of
collaterals, information asymmetry and high transaction costs associated with small
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borrowal accounts. To bring these people within the purview of the organised financial
sector, microfinance schemes are assuming increasing importance. Based on the model of
the Grameena Bank developed originally in Bangladesh, National Bank for Agriculture and
Rural Development (NABARD) in India has been engaged in the task of linking up of selfhelp groups (SHGs) with the formal credit agencies since 1991-92
In view of the critical importance of rural infrastructure and the lacklustre growth in
agricultural investment in the past, concerns were raised about the country's ability to
increase production. Consequently, an initiative for setting up of an independent fund
called the Rural Infrastructure Development Fund (RIDF) within National Bank for
Agriculture and Rural Development (NABARD) was taken in the Union Budget of 1995-96.
The corpus of RIDF-I was kept at Rs. 2,000 crore. The successive Budgets have continued
with the RIDF scheme.
In addition to RIDF, another important initiative for building up rural infrastructure was the
announcement of the Bharat Nirman Programme in 2005. This programme covers six
components of infrastructure: irrigation, rural roads, rural housing, rural water supply,
rural electrification and rural telephony. The targets are as under: (a) irrigation - to create
10 million hectares of additional irrigation capacity; (b) rural roads - to connect all
'habitations (66,802) with population above 1,000 (500 in hilly/tribal areas) with all weather
roads; (c) rural housing - to construct 60 lakh houses for rural poor; (d) rural water supply to provide potable water to all uncovered habitations (55,067) and also address slipped
back and water quality affected habitations; (e) rural electrification - to provide electricity
to all un-electrified villages (1,25,000) and to connect 23 million households below the
poverty line; and (f) rural telephones - to connect all remaining villages (66,822) with a
public telephone.
AGRICULTURE: TRENDS IN INVESTMENT

As the economy of a backward country develops, the GDP share in primary sector declines.
Accordingly, the contribution of agriculture to GDP declines. This is borne out by Indian data
also as the share of agriculture and allied activities in GDP at factor cost has registered a fall
from 55.3 per cent in 1950-51 (at 1999-2000 prices) to only 14.4 per cent in 2010-11 (at 200405 prices). While in 1951, 69.5 per cent of the working population was engaged in agriculture,
now approximately 52 per cent of the working population is engaged in agriculture. Less
investment in agriculture would mean less growth of infra structural facilities like irrigation,
rural roads, market, power, cold storage, etc., and this would, in turn, affect agricultural growth
adversely.
1. Total investment in agriculture was Rs. 14,836 crore in 1990-91 which rose to Rs.
17,304 crore in 1999-2000 (at 1993-94 prices). At 2004-05 prices, total investment in
agriculture was Rs. 76,096 crore in 2004-05 and Rs. 1, 33, 377 crore in 2009-10.
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2. As far as public sector investment in agriculture is concerned, it was Rs. 4,395 crore in
1990-91 and Rs. 4,221 crore in 1999-2000 (at 1993-94 prices). In percentage terms, this
meant a fall in the share of public investment in total investment in agriculture from
about 30 per cent to less than 25 per cent.
3. Gross Capital Formation in Agriculture (GCFA) was 9.9 per cent of total GCF in 1990-91
and this fell drastically to only 3.5 per cent in 1999-2000 in terms of 1993-94 prices.
This poor investment in agriculture is one of the main causes of slow growth in
agriculture in recent years.
INCREASING SUBSIDIES REDUCE CAPITAL FORMATION

The most important cause for the decline in public investment in agriculture is the diversion
of resources from investment to current expenditure. A large portion of public expenditure on
agriculture in recent years went into current expenditure in the form of increased subsidies
for food and agricultural inputs. For example, food subsidy increased from Rs. 7,500 crore in
1997-98 to Rs. 67,199 crore in 2011- 12. Not only is the high level of subsidies fiscally
unsustainable, under-pricing of inputs is a major cause of indiscriminate and wasteful use of
these inputs, raising the costs of production and contributing to degradation of land, pollution
of water resources and over-exploitation of groundwater.
AGRICULTURAL GROWTH CONCERNS

Important concerns regarding agricultural growth are as follows:
1. While the rate of growth in the agriculture sector has always been less than the overall
growth rate of the economy, the gap between the growth of agriculture and nonagriculture sector began to widen since 1981-82, because of acceleration in the growth
of industry and service sectors.
2. There has been a serious set-back to agriculture during the period of Ninth and Tenth
Plans with the rate of growth in this sector decelerating to less than 2.5 per cent per
annum.
3. The increasing gap between the agriculture and non-agriculture sectors was most
prominent during the Tenth Plan. While the overall GDP increased at the rate of 7.8 per
cent per annum, the agriculture sector registered a rate of growth of only 2.3 per cent
per annum.
AGRICULTURE INPUTS AND GREEN REVOLUTION

IRRIGATION
Increase in agricultural production and productivity depends, to a large extent, on the
availability of water, hence the importance of irrigation. However, the availability of irrigation
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facilities is highly inadequate in India. For example, in 1950-51, gross irrigated area as
percentage of gross cropped area was only 17 per cent. Despite massive investments on
irrigation projects over the period of planning, gross irrigated area as percentage of gross
cropped area was only 45.3 per cent in 2009-10 (88.42 million hectares out of 195.10 million
hectares). Thus, even now almost 55 per cent of gross cropped area depends on rains. That is
why Indian agriculture is called 'a gamble in the monsoons'.
Reasons for the importance of Irrigation in the Indian context
Insufficient, uncertain and irregular rains.
Higher productivity on irrigated land.
Multiple cropping possible.
Role in new agricultural strategy: The successful implementation of the High-Yielding

Varieties Programme depends, to a large extent, on the timely availability of ample
water supply.
Bringing more land under cultivation: The total reporting area for land utilisation
statistics was 305.69 million hectares in 2008-09. Of this, 17.02 million hectares was
barren and unculturable land, 10.32 million hectares fallow land other than current
fallows, while 14.54 million hectares was current fallow lands. Cultivation on all such
lands is impossible in some cases while in others it requires substantial capital
investment to make land fit for cultivation.
Reduces instability in output levels: Irrigation helps in stabilising the output and yield
levels. A study carried out for 11 major States over the period 1971-84 revealed that the
degree of instability in agricultural output in irrigated areas was less than half of that in
unirrigated areas.
Indirect benefits of irrigation: Irrigation confers indirect benefits through increased

agricultural production. Employment potential of irrigated lands increases, increased
production helps in developing allied activities, means of water transport are improved,
income of government from agriculture increases, etc.
IRRIGATION POTENTIAL AND SOURCES OF IRRIGATION

India has vastly increased its irrigation potential after Independence. It increased from 22.6
million hectares in 1950-51 to 102.8 million hectares in 2006-07 which implies an increase of
35.5 per cent. Sources of irrigation in India can be divided into the following:
(i) Canals,
(ii) Wells,
(iii) Tanks, and
(iv) Others
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Approximately 26.3 per cent of the irrigated areas in India are watered by canals. This
includes large areas of land in Punjab, Haryana, Uttar Pradesh, Bihar and parts of southern
States. Taken together, canals and wells watered 87.3 per cent of net irrigated area in
2008-09. Tank irrigation is resorted to mostly in Tamil Nadu, Andhra Pradesh and parts of
West Bengal and Bihar.
SOME PROBLEMS RELATED TO IRRIGATION

1. Delays in completion of Projects.
2. Inter-State water disputes.
3. Regional disparities in irrigation development.
4. Water logging and salinity: Introduction of irrigation has led to the problems of water
logging and salinity in some of the States. The Working Group constituted by the Ministry of
Water Resources in 1991 estimated that about 2.46 million hectares in irrigated commands
suffered from water logging.
5. Increasing costs of irrigation: The factors contributing to increase in costs have beep 'the
following: (i) non-availability of comparatively better sites for construction in earlier plans;
(ii) inadequate preparatory survey and investigations leading to substantial modification in
scope and design during construction; (iii) the tendency to start far too many projects that
can be accommodated within the funds available for irrigation; (iv) larger provision for
measures to rehabilitate people as well as for preservation of environment and ecology;
and (v) adoption of more sophisticated but expensive criteria for irrigation project planning
in conformity with requirements of external aid agencies.
6. Losses in operating irrigation projects: The water charges have been kept too low to cover
even working expenses, not to speak of depreciation charges and contributing even a
moderate return on the investments.
7. Ageing of infrastructure and increased siltation: Almost 60 per cent of the total dams of
the country are more than two decades old. Canal networks also need annual maintenance.
8. Tail-ender deprivation: Farmers who have land at the end of the canal system are called
tail-enders. Many of them get neither enough nor timely water.
9. Decline in water table: There has been a steady decline in water table in the recent period
in several parts of the country, especially in the western dry region, on account of
overexploitation of groundwater and insufficient recharge from rainwater.
10. Wastages and inefficiencies in water use.
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FERTILISERS
Indian farmers use only one tenth the amount of manure that is necessary to maintain the
productivity of soil. Indian soil is deficient in nitrogen and phosphorus and this deficiency can
be made good by an increased use of fertilizers. Since possibilities of extensive cultivation are
extremely limited because most of the cultivable area is already being cultivated, there is no
option but to extend intensive cultivation in more and more areas by using larger quantities of
fertilizers.
CONSUMPTION, PRODUCTION AND IMPORT OF FERTILISERS

The production of fertilisers has increased by leaps and rounds in the post-Independence
period. For instance, from 98 thousand tonnes in 1960-61, production of nitrogenous
fertilisers shot up to 12,156 thousand tonnes in 2010-11. The production of phosphatic
fertilisers rose from 52 thousand tonnes in 1960-61 to 4,222 thousand tonnes in 2010-11.
Adding the production and import figures for nitrogenous, phosphatic and potassic fertilisers,
we find that the availability of fertilisers in the economy rose from 569 thousand tonnes in
1960-61 to 1,688 thousand tonnes in 1970-71 and further to 28,741 thousand tonnes in 201011. In 2010-11 the imports stood at 12,363 thousand tonnes which was 44.0 per cent of total
consumption. As far as the consumption of fertilisers is concerned, it was a meagre 66,000
tonnes in 1952-53. The advent of the HYVP in 1966 completely changed the picture and
consumption of fertilisers shot up substantially. For instance, in 1990-1991 it rose to 125.46
lakh tonnes and in 2010-11 stood at 281.22 lakh tonnes. It is generally admitted that increased
use of fertilisers can add substantially to food grains production. For instance, it has been
estimated that even an increase in fertiliser consumption of 40 to 60 kgs per hectare can yield
an additional 30 to 45 million tonnes of food grains.
HIGH-YIELDING VARIETIES OF SEEDS

Under the new agricultural strategy, special emphasis has been placed on the development and
widespread adoption of high-yielding varieties of seeds. Though the government had been
paying attention to induce qualitative improvements in seeds ever since the initiation of
planning process in the country, yet the real impetus to these efforts was given by the adoption
of the new agricultural strategy in the kharif season of 1966. In Mexico, Prof. Norman BorIaug
and his associates developed new varieties of wheat which were early-maturing, highly
productive and disease resistant during the mid-1960s and these varieties were imported and
planted in selected regions of India having adequate irrigation facilities. Within a year of their
introduction, it was conclusively demonstrated that the yields from the new varieties exceeded
25 to 100 per cent compared to the yields from traditional varieties. The Seventh Plan kept a
target of 70 million hectares for coverage in area under HYV. As against this, the actual area
under HYV by the end of Seventh Plan was only 63.1 million hectares. In 1998-99, the coverage
rose to 78.4 million hectares.
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Production of improved seeds and especially high- yielding varieties of seeds was encouraged
on the farms of the Centre and the State governments and by registered seed growers. Side by
side, Indian Council of Agricultural Research, Punjab Agricultural University at Ludhiana, G.B.
Pant Agricultural University at Pantnagar and several other research institutes were engaged
in the task of developing new hybrid varieties suitable to Indian conditions and in adopting
imported varieties to Indian requirements. While in selected regions of the country Mexican
varieties of wheat like Lerma Rojo-64-A and Sonara 64 were directly introduced in the initial
period, considerable attention was later given to hybridisation of Mexican material with Indian
varieties. Introduction of such high-yielding varieties of wheat depends crucially on the
availability of fertilisers, adequate water supply, pesticides and insecticides. Therefore they
have to be launched in the form of a 'Package Programme'. Because of their dependence on
irrigation, they could be adopted only in areas having proper irrigation facilities. Indian seed
programme includes the participation of Central and State Governments, ICAR, State
Agriculture Universities, public sector, cooperative sector and private sector institutions.
Seed sector in India consists of two national level corporations, i.e., National Seeds Corporation
(NSC) and State Farms Corporation of India (SFCI), 13 State Seed Corporations (SSCs) and
about 100 major private sector seed companies. For quality control and certification, there are
22 State Seed Certification Agencies (SSCAs) and 101 State Seed Testing Laboratories (SSTLs).
Though the private sector has started to play a significant role in the production and
distribution of seeds particularly after the introduction of the New Seed Policy of 1988, the
organised seed sector particularly for food crops and cereals continues to be dominated by the
public sector. As far as the distribution of certified/quality seeds is concerned, it increased from
25 lakh quintals in 1980-81 to 277.3 lakh quintals in 2010-11. Unfortunately, the seeds
revolution of 1960s and 1970s appears to have tapered off after encompassing only the cereal
segment. Improved seeds technology continues to elude vital segments of the farm economy
such as pulses, oilseeds, fruits and vegetables. As a result, the country has to import nearly 2
million tonnes of edible oils and about a million tonnes of pulses every year so as to meet the
domestic demand. In the above context, the National Seeds Policy 2001 provides the
framework for growth of the Seed Sector. It seeks to provide the farmers with a wide range of
superior quality seed varieties and planting materials.
PESTICIDES
Pesticide is defined as any substance or 'mixture of substances, intended for preventing,
destroying or controlling any pest including vectors of human or animal diseases, unwanted
species of plants and animals. Pesticides are classified according to their use and kinds of
applications as insecticides, fungicides, herbicides and, other pesticides. Insecticides account
for the major share of pesticides consumption in India that includes both preventive
treatments, which are applied before infestation levels are known, and intervention
treatments, which are based on monitored infestation levels and expected crop damages. The
use of pesticides in Indian agriculture was negligible in early 1950s with only 100 tonnes of
pesticides being consumed at the beginning of the First Five Year Plan. Consumption of
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pesticides (technical grade material) stood at 55.54 thousand tonnes in 2010-11. However,
there are vast inter-State differences in the level of consumption of pesticides.
EFFECTS OF PESTICIDES
In recent times (particularly during the last two decades), increasing attention has been drawn
to the health hazards and environmental problems that are caused by the unabated use of
pesticides. Health hazards are both direct and indirect.
Another problem with the use of pesticides is that the targeted pests develop resistance
towards them. As a result, higher and higher doses of more and more toxic chemicals have to
be applied. Use of fertilisers and pesticides brings about physiological changes in plants leading
to multiplication and proliferation of several pests. It is also important to note that pesticides
application needs a scientific approach and Integrated Pest Management On account of the
above reasons, what is now advocated is not just pest extermination but economical utilisation
of pesticidal chemicals with least ecological damages. The main facets of the plant protection
system currently in use are the following three - pest and disease control through Integrated
Pest Management (IPM) schemes, locust surveillance and control, and plant and seed
quarantine. Integrated Pest Management includes pest monitoring, promotion of biological
control of pests, organising demonstration, training and awareness of IPM technology. The
IPM technology encourages the use of safer pesticides including botanicals (neem based) and
bio-pesticides.
GREEN REVOLUTION
A team of experts sponsored by the Ford Foundation was invited by the Government of India in
the latter half of the Second Five Year Plan to suggest ways and means to increase agricultural
production and productivity. On the basis of the recommendations of this team, the
government introduced an intensive development programme in seven districts selected from
seven States in 1960 and this programme was named Intensive Area Development Programme
(IADP). The period of mid-1960s was very significant from the point of view of agriculture. New
high-yielding varieties of wheat were developed in Mexico by Prof. Norman Borlaug and his
associates and adopted by a number of countries. Because of the promise of increasing
agricultural production and productivity held by the new varieties of seeds, countries of South
and South-East Asia started adopting them on an extensive scale. This new 'agricultural
strategy' was put into practice for the first time in India in the kharif season of 1966 and was
termed High- Yielding Varieties Programme (HYVP). This programme was introduced in the
form of a package programme since it depended crucially on regular and adequate irrigation,
fertilizers, high-yielding varieties of seeds, pesticides and insecticides.
IMPACT OF GREEN REVOLUTION

Increase in Production and Productivity
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HYVP was restricted to only five crops - wheat, rice, jowar, bajra and maize. Therefore, nonfoodgrains were excluded from the ambit of the new strategy. That wheat has remained the
mainstay of the Green Revolution over the years.
Deceleration in Agricultural Growth Rates in the Reform Period: After registering impressive
performance during 1980s, the agricultural growth decelerated in the economic reform period
(commencing in 1991). As is clear, the rate of growth of production of foodgrains fell from 2.9
per cent per annum in 1980s to 2.0 per cent per annum in 1990s and stood at 2.1 per cent per
annum in first decade of the present century The period since 1991, therefore, emerges as a
kind of watershed in time when growth in Indian agriculture, resurgent from the middle 1960s,
was arrested. 23
Causes of Deceleration in Agricultural Growth: The main reasons for the deceleration in
agricultural growth in the post-reform period have been:
Significant deceleration in the public and overall investment in agriculture,

Shrinking farm size,
Failure to evolve new technologies,
Inadequate irrigation cover,
Inadequate use of technology,
Unbalanced use of inputs,
Decline in plan outlay, and
Weaknesses in credit delivery system.
REGIONAL DISPERSAL OF GREEN REVOLUTION AND REGIONAL INEQUALITIES

HYVP was initiated on a small area of 1.89 million hectares in 1966-67 and even in 1998-99 it
covered 78.4 million hectares which is only about 40 per cent of the gross cropped area.
Naturally, the benefits of the new technology remained concentrated in this area only.
Moreover, since green revolution remained limited to wheat for a number of years, its benefits
mostly accrued to areas growing wheat.
1. Interpersonal Inequalities: There seems to be a general consensus that in the early
period of the green revolution, large farmers benefited much more from new
technology as compared with the small and marginal farmers. This was not unexpected
as the new technology called for substantial investments which were generally beyond
the means of a majority of this country's small and marginal farmers. Larger farmers
have continued to make greater absolute gains in income because of lower costs per
acre and by reinvesting earnings in non-farm and farm assets, including purchase of land
from the smaller cultivators who could not make the transition to the new technology.
2. The Question of Labour Absorption: Although there is difference of opinion amongst
economists regarding the effects of new agricultural strategy on interpersonal
inequalities and real wages of agricultural labourers, there is a general consensus that
the adoption of new technology has reduced labour absorption in agriculture.
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In recent years, a significant development in the pattern of rural labour absorption has
been a shift away from crop production and into rural non-farm activities like agroprocessing industries and other rural industries.
3. Undesirable Social Consequences: Some micro level socio-economic studies of green
revolution areas have revealed certain undesirable social consequences of the green
revolution. Many large farmers have evicted tenants as they now find it more profitable
to cultivate land themselves. Wet lands have also attracted outsiders invest capital in
buying farms. Because of these tendencies "the polarisation process that accentuates
the rural class differences has been further intensified by the green revolution."
Health hazards of the new technology can also not be lost sight of. The agricultural work
in green revolution areas has been rendered even more injurious by the increasing use
of poisonous chemical sprays for plant protection on a large scale.
4. Change in Attitudes: A healthy contribution of green revolution is the change in the
attitudes of farmers in areas where the new agricultural strategy was practised. Increase
in productivity in these areas has enhanced the status of agriculture from a low level
subsistence activity to a money-making activity. The Indian farmer has shown his
willingness to accept technical change in the pursuit of profit thus nullifying the agelong criticism against him that he is backward, traditional and unresponsive to the price
and productivity incentives.
AGRICULTURAL FINANCE
Credit needs of the farmers can be examined from two different angles
(i) On the basis of time, and
(ii) On the basis of purpose.
On the basis of time: Agricultural credit needs of the farmers can be classified into three
categories on the basis of time
(i) Short-term,
(ii) Medium-term, and
(iii) Long-term.
Short-term loans are required for the purchase of seeds, fertilisers, pesticides, feeds and
fodder of livestock, marketing of agricultural produce, payment of wages of hired labour,
litigation, and a variety of consumption and unproductive purposes. The period of such loans is
less than 15 months. Main agencies for granting of short-term loans are the moneylenders and
cooperative societies. Medium-term loans are generally obtained for the purchase of cattle,
small agricultural implements, repair and construction of wells, etc. The period of such loans
extends from 15 months to 5 years. These loans are generally provided by moneylenders,
relatives of farmers, cooperative societies and commercial banks. Long-term loans are required
for effecting permanent improvements on land, digging tube wells, purchase of larger
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agricultural implements and machinery like tractors, harvesters, etc., and repayment of old
debts. The period of such loans extends beyond 5 years. Such loans are normally taken from
Primary Cooperative Agricultural and Rural Development Banks (PCARDBs).
On the basis of purpose: Agricultural credit needs of the farmers can be classified on the basis
of purpose into the following categories
(i) Productive,
(ii) Consumption needs, and
(iii) Unproductive.
Under Productive needs- we can include all credit requirements which directly affect
agricultural productivity. Farmers often require loans for consumption as well. Between the
moment of marketing of agricultural produce and harvesting of the next crop there is a long
interval of time and most of the farmers do not have sufficient income to sustain them through
this period. Therefore, they have to take loans for meeting their consumption needs. In the
time of droughts or floods, the crop is considerably damaged and farmers who otherwise avoidtaking loans for consumption, have also to incur such loans. Institutional credit agencies do not
provide loans for consumption purposes. Accordingly, farmers are forced to fall back upon
moneylenders and mahajans to meet such requirements. In addition to consumption, farmers
also require loans for a multiplicity of other Unproductive purposes such as litigation,
performance of marriages, social ceremonies on the birth or death of a family member,
religious functions, festivals, etc.
SOURCES OF AGRICULTURAL FINANCE AND THEIR RELATIVE IMPORTANCE

Non-institutional and Institutional Sources
Sources of agricultural finance can be divided into two categories:
Non-institutional sources, and

Institutional sources.
The non-institutional sources are the following

i.
ii.
iii.
iv.
v.
moneylenders,
relatives,
traders,
commission agents, and
landlords.
The institutional sources comprise the

i.
ii.
iii.
cooperatives,
Scheduled Commercial Banks and
Regional Rural Banks (RRBs).
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As far as cooperatives are concerned, the Primary Agricultural Credit Societies (PACSs) provide
mainly short and medium-term loans and PCARDBs long-term loans to agriculture. The
commercial banks, including RRBs, provide both short and medium-term loans for agriculture
and allied activities. The National Bank for Agriculture and Rural Development (NABARD) is
the apex institution at the national level for agricultural credit and provides refinance assistance
to the agencies mentioned above. At the time of Independence, the most important source of
agricultural credit was the moneylenders.
As far as institutional sources are concerned, the first institution established and promoted
was the institution of cooperative credit socieities. The Cooperative movement in this country
was started as far back as 1904. However, its development was very slow. Even in 1951,
cooperatives provided only 3.1 per cent of total rural credit. Hence, the dominance of
moneylenders in agricultural credit continued.
Thus, by the end of 1976, there emerged three separate institutions for providing rural credit,
which is often described as the multi-agency approach. In 1982, NABARD was set up.
As a result of the efforts undertaken by the government to develop the institutional sources of
credit, the role of non-institutional sources like moneylenders in agricultural credit declined
considerably.
More significantly, the share of moneylenders fell from 71.6 per cent in 1951 to merely 17.5
per cent in 1991 (though it rose to 26.8 per cent in 2002). The share of institutional sources in
rural credit rose correspondingly from only 7.3 per cent in 1951 to 31.7 per cent in 1971 and
further to 66.3 per cent in 1991 (in 2002, it fell to 61.1 per cent).2
To suggest measures to increase agricultural credit, the Reserve Bank constituted an "Advisory
Committee on Flow of Credit to Agriculture and Related Activities from the Banking System"
under the chairmanship of V.S. Vyas. This Committee submitted its final report in 2004. The
Committee gave 99 recommendations of which 32 were accepted and implemented by the
Reserve Bank. Some of the major recommendations were:
1. A review of mandatory lending to agriculture by commercial banks to enlarge direct
lending programmes;
2. Public and private sector banks to increase their direct agricultural lending to 12 per
cent of net bank credit in the next two years and to 13.5 per cent two years
thereafter, within the overall limit of 18 per cent of total agricultural lending;
3. Banks to increase their disbursements to small and marginal farmers under Special
Agricultural Credit Plan (SACP) by the end of the Tenth Plan Period to 40 per cent;
4. Reduction in cost of agricultural credit by enhanching the cost-effectiveness of
agricultural loans;
5.
Credit flow to small borrowers to be improved through reduction in cost of
borrowing, revolving credit packages, procedural simplification, involvement of
Panchayati Raj institutions and microfinance, etc.
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COOPERATIVE CREDIT: AN EVALUATION

The major deficiencies in the working of the cooperative societies are as follows:
1. The essence or basic features of cooperative banking system must be a larger reliance on
resources mobilised locally and a lesser and lesser dependence on higher credit institutions.
However, many PACSs are at present dependent on CCBs and have failed miserably in
mobilising rural savings. Heavy dependence on outside funds has, on the one hand, made
the members less vigilant, not treating these funds as their own and on the other led to
greater outside interference and control. Overall, this has made the cooperatives a
"mediocre, inefficient and static system".
2. The cooperative credit institutions are plagued by the problem of high level of overdues.
These overdues have clogged the process of credit recycling since they have substantially
reduced the capacity of cooperatives to grant loans.
3. The rural cooperative institutions have a high level of NPAs (non-performing assets).
4. A large number of rural cooperative credit institutions have incurred substantial losses.
5. PACS is the most important link in the short-term cooperative credit structure. However,
most of them are too small in size to be economical and viable. Besides, several of them
are also dormant while some are defunct.
6. Because of their strong socio-economic position and grip over the rural economy, large
landowners have cornered greater benefits from cooperatives. This is the opposite of what
the planners intended.
7. There are considerable regional disparities in the distribution of credit by cooperative
societies with the six States (Gujarat, Maharashtra, Karnataka, Kerala, Punjab and Tamil
Nadu) accounting for 70 per cent of the short- term loans provided by the PACSs as at endMarch 2010.
8. The powers which vest in the government under the cooperative law and rules are allpervasive. Over the years, State has come to gain almost total financial and administrative
control over the cooperatives, in the process stifling their growth. Instead of strengthening
the base, a weak base was vastly expanded as per plan targets and an immense
governmental and semi-governmental superstructure was created.
OPERATIONS OF COMMERCIAL BANKS: A CRITICAL REVIEW

1. The fast increase in bank credit to rural areas after nationalisation has created strains in
the system due to rapid expansion and diversification. One of the problems of such
rapid expansion has been the deterioration in the quality of scheme preparation,
particularly under the anti-poverty programmes.
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2. The commercial banks have found sanctioning and monitoring of a large number of
small advances in their rural branches, time-consuming and manpower intensive and
consequently a high cost proposition.
3. Opening of a large number of branches in rural areas which do not have adequate
business potential, rise in establishment expenses, and increase in non-performing
advances affected the profitability of the banks adversely.
4. The recovery position of the commercial banks is bad.
5. The commercial banks have failed to fill the geographical gap in the availability of
credit not covered by the cooperatives. They have also tended to serve those areas
which were already well served by the cooperatives.
6. The credit-deposit ratio is an important indicator of the degree of involvement of banks
in lending. The rural credit-deposit ratio declined from 1.58 per cent in 1991 to 0.73
per cent in 2001 which shows that deposits mobilised from rural India were being
utilised elsewhere.
7. Loan disbursal to small and marginal farmers decelerated sharply in the 1990s. The
option provided to the commercial banks to meet priority sector lending targets by
investing in RIDF (Rural Infrastructure Development Fund) and placing deposits with
SIDBI (Small Industries Development Bank of India) reduced the rate of growth of direct
finance to small and marginal farmers.
8. The problem of coordination not only between one commercial bank and another but
also between commercial banks and the cooperative credit structure, on the one hand,
and between banks and the Government departments, on the other, has assumed
serious dimensions.
PROBLEMS OF RRBS
1. Organisational Problems. Each RRB is sponsored by a commercial bank. The Central
Government and the concerned State government also contribute to its capital. Thus
there is a multi-agency control of RRBs. This has contributed to a lack of uniformity in
their functioning. Besides, it has resulted in lack of support from State governments and
lack of proper monitoring by sponsor banks. Second, inherent in the concept of RRB. is
the constraint of restricted area of operation and restricted clientele, i.e., specific target
groups. Third, there has been a lack of proper systems and procedures within the
institutions of RRBs, which could have avoided or minimised the scope for overdues
right from the start. Fourth, the process of recruitment and training of RRB staff has not
received adequate attention.
2. Problems of Recovery. For a number of years, the recovery position of RRBs was very
bad and their recovery varied between 51 per cent to 61 per cent.
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3. Mounting Losses Leading to Non-viability.

4. Management Problems. Since the RRBs are district level small institutions, the sponsor
banks have been deputing only middle-management staff to run them. Such staff finds it
difficult to take independent decisions in a new environment.
NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD)

Functions of NABARD
NABARD was established as a development bank to perform the following functions:
1. To serve as an apex financing agency for the institutions providing investment and
production credit for promoting various developmental activities in rural areas;
2. To take measures towards institution building for improving absorptive capacity of the
credit delivery system, including monitoring, formulation of rehabilitation schemes,
restructuring of credit institutions and training of personnel;
3. To coordinate the rural financing activities of all institutions engaged in developmental
work at the field level and liaison with the Government of India, the State Governments,
the Reserve Bank and other national level institutions concerned with policy
formulation; and
4. To undertake monitoring and evaluation of projects refinanced by it.
STEPS FOR FINANCIAL INCLUSION

1. Expansion of Public Sector Banks' Network.
2. Revitalisation of Rural Cooperative Sector.
AGRICULTURAL MARKETING IN INDIA

For a long period of time Indian agriculture was mostly in the nature of 'subsistence farming'.
The farmer sold/only a small part of his produce to pay-off rents, debts and meet his other
requirements. Such sale was usually done immediately after harvesting of crops since there
were no storing facilities. A considerable part of the total produce was sold by the farmers to
the village traders and moneylenders often at prices considerably lower than the market prices.
The farmers who took their produce to the mandies (wholesale markets) also faced a number
of problems as they were confronted with powerful and organised traders. In mandies,
business was carried out by arhatiyas with the help of brokers, who were the agents of
arhatiyas. In fact, there was a large chain of middlemen in the agricultural marketing system
like village traders, kutcha arhatiyas, pucca arhatiyas, brokers, wholesale, retailers,
moneylenders, etc. As a result, the share of farmers in the price of agricultural produce was
reduced substantially.
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In addition to the above defects in the agricultural marketing system in India - presence of a
large number of middlemen and widespread prevalence of malpractices in the mandies there were a number of other problems as well.
Transportation facilities were also highly inadequate and only a small number of villages were
joined by railways and pucca roads to mandies. Most of the roads were kutcha roads not fit for
motor vehicles and the produce was carried on slow moving transport vehicles like bullockcarts.
GOVERNMENT MEASURES TO IMPROVE THE SYSTEM OF AGRICULTURAL

MARKETING
After Independence, the Government of India adopted a number of measures to improve the
system of agricultural marketing, the important ones being establishment of regulated markets,
construction of warehouses, provision for grading and standardisation of produce,
standardisation of weights and measures, daily broadcasting of market prices of agricultural
crops on All India Radio, improvement of transport facilities, etc.
1. Organisation of Regulated Markets: Regulated markets have been organised with a
view to protect the farmers from the malpractices of sellers and brokers. The
management of such markets is done by a Market Committee which has nominees of
the State Government, local bodies, arhatiyas, brokers and farmers. Thus, all interests
are represented on the committee. These committees are appointed by the government
for a specified period of time.
Most of the States and Union Territory governments have enacted legislations
(Agriculture Produce Marketing Committee Act) to provide for regulation of agricultural
produce markets. There are 7,157 regulated markets in the country as on March 31,
2010.
2. Grading and Standardisation : Improvements in agricultural marketing system cannot
be expected unless specific attempts at grading and standardisation of the agricultural
produce are made. The government recognised this quite early and the Agricultural
Produce (Grading and Marketing) Act was passed in 1937. Initially grading was
introduced for saun, hemp and tobacco.
The government set up a Central Quality Control Laboratory at Nagpur and a number of
regional subsidiary quality control laboratories. Samples of important products are
obtained from the market and their physical and chemical properties are analysed in
these laboratories. On these bases, grades are drawn up and authorised packers are
issued AGMARK seals (AGMARK is simply an abbreviation for Agricultural Marketing).
3. Use of Standard Weights
4. Godown and Storage Facilities
5. Dissemination of Market Information
6. Government Purchases and Fixation of Support Prices
WEAKNESSES IN AGRICULTURAL MARKETING

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According to the Eleventh Five Year Plan, the regulated markets lack even basic infrastructure
at many places. When the Agriculture Produce Marketing (Regulation) Acts were first initiated,
there were significant gains in market infrastructure development. However, this infrastructure
is now out of date, especially given the needs of a diversified agriculture. At present, only onefourth of the markets have common drying yards; trader modules, viz., shop, godown and
platforms in front of shop exist in only 63 per cent of the markets. Cold storage units are
needed in the markets where perishable commodities are brought for sale. However, they
exist only in 9 per cent of the markets at present and grading facilities exist in less than onethird of the markets. The basic facilities, viz., internal roads, boundary walls, electric lights,
loading and unloading facilities, and weighing equipment are available in more than 80 per cent
of the markets. Farmers' rest houses exist in more than half of the regulated markets.
Eleventh Five Year Plan proposes to address the following issues related to agricultural
marketing - marketing system improvement and conducive policy environment;
strengthening of marketing infrastructure and investment needs; improving market
information system with the use of Information and Communication Technology (lCT); human
resource development for agricultural marketing; and promoting exports/external trade.
COOPERATIVE MARKETING
The advantages that cooperative marketing can confer on the farmer are multifarious, some of
which are listed below:
1. Increases bargaining strength of the farmers.
2. Direct dealings with final buyers.
3. Provision of credit: The marketing cooperative societies provide credit to the farmers to
save them from the necessity of selling their produce immediately after harvesting. This
ensures better returns to the farmers.
4. Easier and cheaper transport.
5. Storage facilities: The cooperative marketing societies generally have storage facilities.
Thus, the farmers can wait for better prices, also there is no danger to their crop from
rains, rodents and thefts.
6. Grading and standardization: This task can be done more easily for a cooperative
agency than for an individual farmer. For this purpose they can seek assistance from the
government or can even evolve their own grading arrangements.
7. Market intelligence: The cooperatives can arrange to obtain data on market prices,
demand and supply and other related information from the markets on a regular basis
and can plan their activities accordingly.
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8. Influencing market prices: While previously the market prices were determined by the
intermediaries and merchants and the helpless farmers were mere spectators forced to
accept whatever was offered to them, the cooperative societies have changed the
entire complexion of the game.
9. Provision of inputs and consumer goods:The Cooperative marketing societies can easily
arrange for bulk purchase of agricultural inputs like seeds, manures, fertilisers,
pesticides, etc., and consumer goods at relatively lower prices and can then distribute
them to the members.
10. Processing of agricultural produce: The Cooperative societies can undertake processing
activities like crushing oil seeds, ginning and pressing of cotton, etc.
PROGRESS OF COOPERATIVE MARKETING IN INDIA

Two types of cooperative marketing structures are found in India. Under the first type, there
is a two-tier system with primary societies at the base and the State society at the apex. Under
the second type, there is a three- tier system with primary societies at the village level, Central
marketing societies at the district level, and the State marketing society at the apex.
At present, the cooperative marketing structure comprises 2,633 general purpose primary
cooperative marketing societies at the mandi level, covering all the important mandies in the
country, 3,290 specialised primary marketing societies for oilseeds, etc., 172 district Central
Federations and the National Agricultural Cooperative Marketing Federation of India Ltd.,
(NAFED) at the national level. NAFED is the apex cooperative marketing organisation dealing in
procurement, distribution, export and import of selected agricultural commodities.
AGRICULTURAL PRICE POLICY IN INDIA

The initial price policy at the dawn of Independence was, to a large extent, based on the
plethora of controls exercised during the Second World War. It included rigid controls on
movement of crops from one State to the other, procurement of foodgrains through a
compulsory levy on producers and millers, open market purchases, and rationing in practically
all the States. Following the recommendation of the Foodgrains Policy Committee of 1947 for
progressive decontrol, restrictions were relaxed. However, a food crisis appeared in 1948 and
food prices rose substantially. Accordingly, controls were introduced.
On the recommendations of the Foodgrains Enquiry Committee, 1957, calling for 'social control
over the wholesale trade in food grains' and its subsequent endorsement by the National
Development Council in November 1958, the Government of India experimented with State
trading in foodgrains in April 1959. According to this scheme, state trading was to be confined
to two main commodities - wheat and rice. However, the scheme ran into difficulties since it
was put into practice in a haphazard way without taking cognizance of economic forces.' For
instance, procurement prices for wheat were fixed at much lower levels than those dictated by
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the forces of demand and supply. Accordingly despite large output market arrivals of foodgrains
were low. Some States imposed a very heavy compulsory levy on the wholesale traders which
discouraged the wholesalers on the one hand and on the other, prompted them to adopt unfair
and corrupt practices.
1. Organisation of food zones. To introduce an element of stability in agricultural prices,
food zones were organised in March 1964. The country was divided into eight wheat
zones. Rice zones were formed in South India. On the failure of this experiment, each
State was made a separate zone. Movement of food grains within a zone was free but
restrictions were imposed on movements from one zone to the other. The government
took upon itself the task of procuring food grains from the surplus States and
distributing them to the deficit-States through the public distribution system.
2. Fixation of minimum support prices and procurement prices by the government.
3. Rationing and sale through fair price shops.
AGRICULTURAL SUBSIDIES
The issue of agricultural subsidies is a highly politically sensitive issue and arouses strong
passions both among the supporters of such subsidies and the opponents of these subsidies.
The supporters have argued that food subsidy in India is essential to maintain and sustain the
food security system and ensure a safety net for the poor. On the other hand, subsidies on
agricultural inputs such as irrigation, power and fertilisers are necessary to enable the poor and
marginal farmers to have access to them. If agricultural inputs are not subsidised, the poor
farmers will not be able to use them and this will lead to a decline in their income and
productivity levels. On the other hand, the opponents have argued that the magnitude of
agricultural subsidies has risen to very high levels in India and is now fiscally unsustainable. Not
only this, it is argued that the benefits of subsidies on agricultural inputs are mostly cornered by
large farmers and the industry while small and marginal farmers fail to derive much gains. As far
as food subsidy is concerned, critics argue that this policy has led to the problem of burgeoning
food stocks and introduced 'imbalances' in crop structure as such subsidy is limited only to a
handful of crops. Moreover, so the critics argue, continuation of agricultural subsidies is against
the spirit of the AoA (Agreement of Agriculture) as adopted by the WTO and, in any case, such
subsidies have to be reduced in accordance with the commitments made by the member
countries to the WTO.
SUBSIDIES ON AGRICULTURAL INPUTS

Introduction of the high yielding varieties programme in the 1960s demanded a high priority to
supplying irrigation water and fertilisers to the farmers. Since these were 'critical inputs' for the
new agricultural strategy, the government tried to ensure that they were accessible and
affordable. Subsidisation of agricultural inputs thus became an important instrument of
agricultural policy. Subsidy on fertilisers is provided by the Central government while subsidy on
water is provided by the State governments. In this context, it is important to remember that
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subsidy on water is divided into two parts -power subsidy and irrigation subsidy. Power subsidy
is granted on power that is used to draw on groundwater. Accordingly, it is a subsidy to
privately owned means of irrigation. Irrigation subsidy, on the other hand, implies subsidy on
canal water (i.e., surface water) usage.
Total subsidy on agricultural inputs was Rs. 33,591 crore in 1999-2000 which rose to Rs
1,60,917 crore in 2008-09.
CONSEQUENCES OF POWER AND IRRIGATION SUBSIDIES.

The most important consequence of rapidly increasing power and irrigation subsidies is the
heavy fiscal burden. The marginal cost of power to the farmer is almost zero. This power
pricing framework provides, what Gulati and Narayanan term, 'perverse incentives' to the
farmers leading to excessive and inefficient use of power. Since cost of power is negligible,
there is no effort on the part of farmers to use power-efficient pumps. Instead, cheap pumps
are used that consume up to 30 per cent more electricity than the more efficient ones.
As far as irrigation subsidies are concerned low price of canal water induces inefficient use of
surface water and its overexploitation, It also leads to the problems of water logging and
salinity.
FERTILISER SUBSIDY
The need for fertiliser subsidy arises from the nature of the fertiliser pricing policy of the
Government of India. This policy has been governed by the following two objectives: (i)
making fertilisers available to the farmers at low and affordable prices to encourage intensive
high yielding cultivation, and (ii) ensuring fair returns on investment to attract more capital to
the fertiliser industry. To fulfill the former objective, the government has been statutorily
keeping the selling prices of fertilisers at a largely static, uniformly low level throughout the
country.
Fertiliser subsidy became necessary due to the twin objectives of fertiliser pricing policy noted
above. Under this pricing policy, the farmer gets fertilisers at a low rate which is
predetermined, called the maximum selling price. The manufacturer was paid an amount,
called the retention price which is high enough to cover his costs and yet leave a 12 per cent
post-tax return on the net worth. The difference between the retention price and the selling
price was the subsidy paid by the government. For imports, the subsidy is equal to the
difference between the cost of imported material and the selling price.
For instance, fertiliser subsidy was Rs. 505 crore in 1980. It rose to Rs. 4,562 crore in 1993-94
and, Rs. 76,603 crore in 2008-09. It fell to Rs. 52,980 crore in 2009-10.
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INCREASE IN FERTILISER PRICES.

Government of India is implementing a nutrient- based subsidy scheme (NBS) with effect from
April 1, 2010. Under the nutrient-based subsidy scheme, a fixed subsidy is announced on per kg.
basis nutrient annually. An additional subsidy is also given to micro-nutrients. With the
objective of providing a variety of subsidised fertilisers to farmers depending upon soil and crop
requirement, the government has included seven new grades of complex fertilisers under the
NBS. Under this scheme, manufacturers/ marketers are allowed to fix the maximum retail price
(MRP). Farmers pay only 50 per cent of the delivered cost of phosphate (P) and potash (K)
fertilisers, and the rest is borne by the Government of India in the form of subsidy.
Imbalance in Fertiliser Consumption. The government's price policy for fertilisers over the
years has created a lopsided nutrient price structure. This has led to distorted and lopsided
pattern of application of urea, phosphate and potash. The ideal average nitrogen (N),
Phosphate (P) and Potash (K) ratio use in India is 4: 2: 1. As against this, the ratio in India in
1991-92 was 5.9: 2.4: 1 - not very much away from the ideal ratio. The NPK ratio in 2007-08
was 5.5: 2.1: 1 which improved further to 4.7: 2.3: 1 in 2010-11.
PUBLIC DISTRIBUTION SYSTEM

OBJECTIVES AND EXPANSION OF PDS
The basic objective of the public distribution system in India is to provide essential consumer
goods at cheap and subsidised prices to the consumers so as to insulate them from the
impact of rising prices of these commodities and maintain the minimum nutritional status of
our population. To run this system, the government resorts to levy purchases of a part of the
marketable surplus with traders/millers and producers at procurement prices. The grain (mainly
wheat and rice) thus procured, is used for distribution to the consumers through a network of
ration fair price shops and/or for building up buffer stocks. In addition to food grains, PDS has
also been used in India for the distribution of edible oils, sugar, coal, kerosene and cloth. The
most important items covered under PDS in India have been rice, wheat, sugar and kerosene.
PDS in India covers the whole population as no means of direct targeting are employed. The
criterion is to issue ration cards to all those households that have proper registered residential
addresses.
PDS distributes commodities worth more than Rs. 30,000 crore annually to about 160 million
families and is perhaps the largest distribution network of its kind in the world.
The main agency providing food grains to the PDS is the Food Corporation of India (FCI) set up
in 1965. The primary duty of the Corporation is to undertake the purchase, storage,
movement, transport, distribution and sale of food grains and other foodstuffs. It ensures on
the one hand that the farmers get remunerative prices for their produce and on the other
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hand, the consumers get food grains from the central pool at uniform prices fixed by the
Government of India.
FLAWS IN FOOD SECURITY SYSTEM

The PDS in India has been criticised on various counts. The main criticisms are as follows:
1. Limited Benefit to Poor from PDS. Many empirical studies have shown that the rural
poor have not benefited much from the PDS as their dependence on the open market
has been much higher than on the PDS for most of the commodities."The costeffectiveness of reaching the poorest 20 per cent of households through PDS cereals is
very small. For every rupee spent, less than 22 paise reach the poor in all States,
excepting in Goa, Daman and Din where 28 paise reach the poor.
2. Regional Disparities in PDS Benefits. There are considerable regional disparities in the
distribution of PDS benefits. For example, in 1995, the four Southern States of Andhra
Pradesh, Karnataka, Kerala and Tamil Nadu accounted for almost one-half (48.7 per
cent) of total PDS off take of food grains in the country while their share in all India
population below the poverty line in 1993-94 was just 18.4 per cent. As against this, the
four Northern States of Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh (or
BIMARU States) having as much as 47.6 per cent of the all- India population below the
poverty line in 1993-94 accounted for just 10.4 per cent of all India off take of food
grains from PDS in 1995.
3. The Question of Urban Bias. A number of economists have pointed 'out that PDS
remained limited mostly to urban areas for a considerable period of planning while the
coverage of rural areas was very insufficient.
4. The Burden of Food Subsidy. PDS is highly subsidised in India and this has put a severe
fiscal burden on the government. From Rs. 662 crore in 1980-81, food subsidy rose to
Rs. 2,850 crore in 1991-92, Rs. 62.930 crore in 2010-11 and further to Rs. 72,823 crore in
2011-12.
5. Inefficiencies in the Operations of FeI. The Bureau of Industrial Costs and Prices (BICP)
of the Government of India and some researchers have pointed out a number of
inefficiencies in the operations of the Food Corporation of India. The economic cost of
Fel food grains operations has been rising on account of increase in procurement prices
and 'other costs' (which include procurement incidentals, distribution cost and carrying
cost).
6. PDS Results in Price Increases. Some economists have pointed out that the operations
of the PDS have, in fact, resulted in an all-round price increase. This is due to the reason
that large procurement of food grains every year by the government actually reduces
the net quantities available in the open market.
7. Leakages from PDS. Another criticism of PDS relates to the problem of leakages from
the system in the form of losses in the transport and storage and diversion to the open
market. The major part of the leakage is due to diversion of food grains to the open
market because of the widespread prevalence of corrupt practices.
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TARGETED PUBLIC DISTRIBUTION SYSTEM (TPDS)

objectives
With a view to reducing the burden of food subsidy and targeting it better to the really needy
people, the Government of India adopted the Targeted Public Distribution System (TPDS) from
June 1, 1997. TPDS aims at providing food grains to people below the poverty line at highly
subsidised
prices from the PDS and food grains to people above the poverty line at much higher
does it really conserve
the nature
prices. Thus, the TPDS adopted by the Government of India maintains the universal character of
the PDS but adds a special focus on the people below the poverty line (known as BPL).
The key features of TPDS as adopted by the Government of India are as follows:
1. Targeting. The most distinctive feature of the TPDS in relation to the previous policy is
the introduction of targeting by dividing the entire population into below poverty line
(BPL) and above poverty line (APL) categories, based on the poverty line defined by the
Planning Commission. The maximum income level for the population to be covered
under BPL was kept at Rs. 15,000 per annum.
2. Dual (multiple) prices. The second distinguishing feature is that the PDS now has dual
central issue prices: prices for BPL consumers and prices for APL consumers. A third
price, introduced in 2001, is for beneficiaries of the Antyodaya Anna Yojana (AAY).
3. Centre-State Control. A third important feature of the TPDS is that it has changed
Centre-State responsibilities with respect to entitlements and allocations to the PDS.
PDS was and is designed and managed by State governments, and State governments
differ with respect to entitlements, the commodities offered, the retail price (State issue
price) and so on. In the past, the State governments demanded a certain allocation from
the Central pool, and based on certain factors, most importantly, past utilisation and the
requirements of statutory rationing, the Central government allocated grain and other
commodities to States for their public distribution systems.
Total number of families covered under BPL and AAY is presently 6.52 crore.
REVIEW OF TPDS
TPDS has been criticised on the following grounds:
1. Targeting. The major criticism of TPDS is that it has led to the large-scale exclusion of
genuinely needy persons from the PDS. In this context, Madhura Swarninathan
discusses two types of issues - (i) conceptual issues, and (ii) operational issues." The
first concern 'the definition of the poor' and the second concern 'identification of poor
in practice.' Both these issues are very important and crucial to the working of the TPDS
as its very success hinges on the inclusion of genuinely needy persons under the
programme.
(i) Conceptual issues: (Definition of poor). The main issue here in how appropriate
is the definition of poor applied in the TPDS. The current definition of
eligibility for BPL status is based on the official poverty line as estimated by
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2.
3.
4.
5.
6.
7.
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the Planning Commission in 1993-94 (adjusted for population levels in 2000).

If we use the income poverty line, then the target group comprised 37 per
cent of the rural population and 32 per cent of the urban population in 199394. However, the official poverty line represents a very low level of absolute
expenditure.
(ii) Operational issues: (Identification in practice.) The fact of the matter is that the
whole process of identification of BPL families in many States has been
carried out in a very arbitrary manner. As a result, there have been large
errors of misclassification with genuinely deserving households excluded and
some affluent households included in the BPL category.
Leakages and diversion.
Late and irregular arrival of grains in fair price shops.
No variation in purchase across expenditure groups.
Decline in off take and the question of viability of fair price shops.
TPDS has failed in transferring cereals from surplus to deficit regions.
Burden of subsidy has increased.
NATIONAL FOOD SECURITY BILL

The National Food Security Bill was introduced in the Lok Sabha on December, 22, 2011. As per
the provisions of the Bill, it is proposed to provide 7 kg. of foodgrains per person per month
belonging to priority households at prices not exceeding Rs. 3 per kg of rice, Rs. 2 per kg of
wheat, and Rs. 1 per kg of coarse grains and to general households not less than 3 kg of
foodgrains per person per month at prices not exceeding 50 per cent of the MSP for wheat
and coarse grains and derived MSP for rice. It will benefit up to 75 per cent of rural population
(with at least 46 per cent belonging to priority households), and up to 50 per cent of urban
population (with at least 28 per cent belonging to priority households), besides providing
nutritional support to women and children and meals to special groups such as destitute and
homeless, emergency and disaster affected, and persons living in starvation. Pregnant and
lactating mothers will also be entitled to maternity benefit of Rs. 1,000 per month for six
months. In case of non-supply of food grains or meals, entitled persons will be provided food
security allowance by the concerned State/Union Territory governments. Provisions for
reforms in the TPDS such as doorstep delivery of foodgrains, application of information and
communication technology (lCT) including end to end computerisation, leveraging 'aadhar' for
unique identification of beneficiaries have also been made in the bill. Provisions have also been
made for transparency and accountability including disclosure of records relating to the PDS,
social audits, and setting up of vigilance committees besides an elaborate grievance redressal
mechanism.
ICDS
Integrated Child Development Services (ICDS) launched in 1975 is a centrally sponsored
scheme implemented by the Ministry of Human Resource Development. The Central
Government is responsible for programme planning and operating costs while State
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governments are responsible for programme implementation and providing supplementary

nutrition out of their own resources. ICDS integrates supplementary nutrition with primary
health care and informal education. It is one of the largest child intervention programmes in
the world with a holistic package of six basic services for children upto 6 years of age, and for
pregnant and nursing mothers. These services are: (1) supplementary feeding (the ICDS
provides to a child food ration for 300 days, containing 500 calories and 12-15 gms protein and
to pregnant and lactating women food ration containing 600 calories and 18-20 gms protein);
(2) immunisation; (3) health check-ups; (4) referral services; (5) health and nutrition education
to adult women; and (6) non-formal pre-school education to 3-6 years old.
ICDS is being implemented through one platform, i.e., Anganwadi Centres (or child care
centre). The staff includes CDPO (Chief Development Project Officer), supervisors, Anganwadi
workers and helpers.
MID-DAY MEAL SCHEME

The national programme of nutritional support to primary education, commonly known as
the Mid-Day Meal (MDM) scheme launched in 1995, is a nationwide Central scheme intended
to improve the enrollment and regular attendance and reduce dropout in schools. It is also
intended to improve the nutritional status of primary school children. MDM is the world's
largest school feeding programme reaching out to about 11 crore children in over 12 lakh
schools (EGS) centres across the country. The scheme is being implemented in all States and
Union Territories.
From 2008-09, i.e., with effect from April, 2008 the scheme covers all children studying in
Government, Local Body and Government-aided primary and upper primary schools and the
alternate and innovative education centres including Madersa and Maqtabs supported under
SSA (Sarva Shiksha Abhiyan) of all areas across the country. The calorific value of a mid-day
meal at upper primary stage has been fixed at a minimum of 700 calaries and 20 grams of
protein by providing 150 grams of food grains (rice/wheat) per child per school day.
The performance of mid-day meal scheme has varied across States. In Uttar Pradesh, because
of powerful food mafias and corrupt officials, there has been very poor implementation.
However, in Tamil Nadu, it has proved to be quite a success.
AGRICULTURAL WORKERS AND LABOURERS

DEFINITION OF AGRICULTURAL LABOUR
Unlike industrial labour, agricultural labour is difficult to define. The reason is that unless
capitalism develops fully in agriculture, a separate class of workers depending wholly on wages
does not come up. Since the capitalist relations are in an underdeveloped state in India, such
clear- cut class of agricultural workers has not yet evolved. Difficulties in defining agricultural
labour are compounded by the fact that many small and marginal farmers also work partly on
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the farms of others to supplement their income. To what extent should they (or their family
members) be considered agricultural labourers is not easy to answer.
The first Agricultural Labour Enquiry Committee of 1950-51 regarded those people as
agricultural workers who were engaged in raising crops on payment of wages. Since in India, a
large number of workers do not work against payment of wages all the year round, this
definition was incomplete. Accordingly, the Committee laid down that those people should be
regarded as agricultural workers who worked for 50 per cent or more days on payment of
wages.
The Second Agricultural Labour Enquiry Committee of 1956-57 took a broad view of agricultural
activities to include those workers also who were engaged in allied activities like animal
husbandry, dairy, poultry, piggery, etc. The Second Committee submitted that to know whether
a household is an agricultural labour household we must examine its main source of income. If
50 per cent or more of its income is derived as wages for work rendered in agriculture, only
then it could be classified as agricultural labour household. The changeover from 'work' to
'income' seems more scientific.
In the Census of India 1961, all those workers were included in the category of agricultural
workers who worked on the farms of others and received payment either in money or kind (or
both). The 1971 Census excluded those people from agricultural labourers for whom working
on the farms of others was a secondary occupation.
Accordingly, we must remain content with a working definition. All those persons who derive a
major part of their income as payment for work performed on the farms of others, can be
designated as agricultural workers. For a major part of the year they should work on the land of
others on wages.
CATEGORIES OF AGRICULTURAL LABOURERS

The First Agricultural Labour Enquiry Committee had classified agricultural workers into two
categories: (i) attached labourers, and (ii) casual labourers. Attached labourers are attached to
some cultivator household on the basis of a written or oral agreement. Their employment is
permanent and regular.
All workers not falling in the category of attached labourers, constitute casual workers. They
are free to work on the farm of any farmer and payment is generally made to them on a daily
basis.
GROWTH IN THE NUMBER OF AGRICULTURAL WORKERS

The class of agricultural workers did not exist in India before the advent of Britishers. Sir
Thomas Munroe had stated in 1842 that there was not a single landless laborer in India.
Undoubtedly, this was an overstatement. According to the Census of 1881, landless labourers in
that year were 7.5 million. In 1921, agricultural workers were 21 million which was 17.4 per
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cent of the total rural working population. They were 27.5 million in 1951 and 31.5 million in
1961.1 According to the Census of 1981, the number of agricultural workers was 55.4 million
which 25.1 per cent of the total labour force was. According to the Census of 1991, the number
of agricultural workers was 73.7 million which 26.5 per cent of the total labour force is. This
shows that every fourth person of the labour force is an agricultural worker in India.
CAUSES OF GROWTH IN THE NUMBER OF AGRICULTURAL LABOURERS

1. Increase in population.
2. Decline of cottage industries and village handicrafts. There was a rapid decline of
cottage industries and village handicrafts during the British period, but modem
industries were not set up to take their place. These people were forced to seek
employment as agricultural workers in the" countryside.
3. Eviction of small farmers and tenants from land.
4. Uneconomic holdings. The process of subdivision and fragmentation of holdings has
continued unabated for a long period of time. This has rendered a large number of
holdings uneconomic.
5. Increase in indebtedness. The moneylenders and mahajans often advance loans with
the purpose of grabbing the land of small farmers. They adopt various malpractices like
charging exorbitant rates of interest, manipulating accounts, etc., and once the small
and marginal farmers fall into their trap, it becomes very difficult for them to get out.
6. Spread of the use of money and exchange system. Whereas, previously land was often
given to the tenants to cultivate (from whom landlords obtained rent in the form of a
portion of the produce), the present practice is to employ agricultural workers to do the
job. These workers are paid wages.
7. Capitalist agriculture
CONDITIONS AND PROBLEMS OF AGRICULTURAL LABOURERS

The class of agricultural labourers is the most exploited and oppressed class in rural hierarchy.
1. Marginalisation of agricultural workers. The workforce in agriculture (cultivators plus
agricultural labourers) was 97.2 million in 1951 and this rose to 185.2 million in 1991. As
against this, the number of agricultural labourers rose from 27.3 million in 1951 to 74.6
million in 1991. This implies that (i) the number of agricultural labourers increased by
almost three times over the period 1951 to 1991; and (ii) as a proportion of work force
in agriculture. Agricultural labourers increased from 28 per cent in 1951 to 40 per cent
in 1991. These facts indicate the fast pace of casualisation of workforce in agriculture in
India. Moreover, the share of agriculture and allied activities in GDP at factor cost has
consistently declined over the years - from 55.3 per cent in 1950-51 to 37.9 per cent in
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1980-81 (at 1999-2000 prices) and further to 14.0 per cent in 2011-12 (at 2004-05
prices).
2. Wages and income. Agricultural wages and family incomes of agricultural workers are
very low in India. With the advent of the green revolution, money wage rates started
increasing. However, as prices also increased considerably, the real wage rates did not
increase much.
3. Employment and working conditions. The agricultural labourers have to face the
problems of unemployment and underemployment. For a substantial part of the year,
they have to remain unemployed because there is no work on the farms and alternative
sources of employment do not exist.
4. Indebtedness. Because of the low level of their incomes, agricultural workers have to
seek debts off and on. However, because of their extreme poverty, they are not in a
position to provide any security.
5. Feminisation of agricultural labour with low wages. Female agricultural workers are
generally forced to work harder and are paid less than their male counterparts.
6. High incidence of child labour. Incidence of child labour is high in India and the
estimated number varies from 17.5 million to 44 million. It is estimated that one- third
of the child workers in Asia are in India.
7. Increase in migrant labour. Green revolution significantly increased remunerative wage
employment opportunities in pockets of assured irrigation areas while employment
opportunities nearly stagnated in the vast rain fed semi-arid areas.
8. The landlord-labourer relationship. The relationship between the landlord and the
labourer is not uniform throughout the country. There are substantial differences not
only among different States but even among different villages of the same State as
regards the period of employment, mode and time-period of payment, freedom of
movement, bargaining power vis-a-vis landlords, beggar, etc.
MEASURES ADOPTED BY THE GOVERNMENT

1. Minimum wages. The Minimum Wages Act was passed as long back as in 1948 and
since then the necessity of applying it to agriculture has been constantly felt.
2. Abolition of bonded labour. After Independence, attempts have been made to abolish
the evil of bonded labour because it is exploitative, inhuman and violative of all norms
of social justice. In the chapter on Fundamental Rights in the Constitution it has been
stated that trading in humans and forcing them to do begar is prohibited and can invite
punishment under law.
3. Providing land to landless labourers.
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4. Provision of housing sites. Laws have been passed in several States for providing house
sites in villages to agricultural workers.
5. Special schemes for providing employment. Rural Employment (CSRE), National Rural
Employment Jawahar Gram Samridhi Yojana (JGSY). National Food for Work Programme
(NFFWP) MGNREGS.
6. Special agencies for development. The Special agencies - Small Farmers Development
Agency (SFDA) and Marginal Farmers and Agricultural Labourers Development Agency
(MFAL) - were created in 1970-71.
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CHAPTER 5: SERVICE SECTOR

INTRODUCTION
Every economy consists of three sectors. They are primary sector (extraction such as mining,
agriculture and fishing), secondary sector (manufacturing) and the tertiary sector (service
sector). Economies tend to follow a developmental progression that takes them from a heavy
reliance on primary, toward the development of manufacturing and finally toward a more
service based structure. Historically, manufacturing tended to be more open to international
trade and competition than services. As a result, there has been a tendency for the first
economies to industrialize to come under competitive attack by those seeking to industrialize
later. The resultant shrinkage of manufacturing in the leading economies might explain their
growing reliance on the service sector. However, currently and prospectively, with dramatic
cost reduction and speed and reliability improvements in the transportation of people and the
communication of information, the service sector is one of the most intensive international
competition. The service sector is the most common workplace in India.
The service sector consists of the soft parts of the economy such as insurance, government,
tourism, banking, retail, education, and social services. In soft-sector employment, people
use time to deploy knowledge assets, collaboration assets, and process-engagement to create
productivity, effectiveness, performance improvement potential and sustainability. Service
industry involves the provision of services to businesses as well as final consumers. Services
may involve transport, distribution and sale of goods from producer to a consumer as may
happen in wholesaling and retailing, or may involve the provision of a service, such as in pest
control or entertainment. Goods may be transformed in the process of providing a service, as
happens in the restaurant industry or in equipment repair. However, the focus is on people
interacting with people and serving the customer rather than transforming physical goods.
SERVICE SECTOR IN INDIA

Service Sector in India today accounts for more than half of India's GDP. According to data, the
share of services contributes to 55.1 per cent of the GDP, where as industry, and agriculture
in shares 26.4 per cent, and 18.5 per cent respectively. This shows the importance of service
industry to the Indian economy and as service sector now accounts for more than half the GDP
marks a watershed in the evolution of the Indian economy and takes it closer to the
fundamentals of a developed economy. There was marked acceleration in the growth of
services sector in the nineties. While the share of services in India's GDP increased by 21 per
cent points in the 50 years between 1950 and 2000, nearly 40 per cent of that increase was
concentrated in the nineties. While almost all service sectors participated in this boom, growth
was fastest in communications, banking, hotels and restaurants, community services, trade and
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business services. One of the reasons for the sudden growth in the services sector in India in
the nineties was the liberalization in the regulatory framework that gave rise to innovation
and higher exports from the services sector. In the current economic scenario it looks that the
boom in the services sector is here to stay as India is fast emerging as global services hub.
Indian service industry covers a wide gamut of activities like trading, banking & finance,
infotainment, real estate, transportation, security, management and technical consultancy
among several others.
COMPOSITION OF SERVICE SECTOR IN INDIA

In India, the national income classification given by Central Statistical Organization is followed.
In the National Income Accounting in India, service sector includes the following:
1. Trade, hotels and restaurants (THR)
a. Trade
b. Hotels and restaurants
2. Transport, storage and communication
a. Railways
b. Transport by other means
c. Storage
d. Communication
3. Financing, Insurance, Real Estate and Business Services
a. Banking and Insurance
b. Real Estate, Ownership of Dwellings and Business Services
4. Community, Social and Personal services
a. Public Administration and defense (PA & D)
b. Other services
PERFORMANCE OF SERVICES SECTOR IN INDIA

SECTORAL COMPOSITION OF GDP GROWTH
The analysis of the sectoral composition of GDP and employment for the period 1950-2000
brings out the fact that there has taken place tertiarization of the structure of production and
employment in India. During the process of growth over the years 1950-51 to 1999-2000, the
Indian economy has experienced a change in production structure with a shift away from
agriculture towards industry and tertiary sector. The share of agricultural sector in real GDP at
1993-94 prices declined from 55.53% in the 1950s to 28.66 % in 1990s.The share of industry
and services increased from 16%to 27.12% and 28.09% to 44.22% respectively during the same
period. During the 1950s it was the primary sector which was the dominant sector of the
economy and accounted for the largest share in GDP. But the whole scenario changed
subsequently, and especially in the 1980s. The service sector output increased at a rate of
6.63% per annum in the period 1980-81 to 1989-90 (i.e. pre-reform period) compared with
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7.71% per annum in the period 1990-91 to 1999-2000 (i.e. post- reform period). The tertiary
sector emerged as the major sector of the economy both in terms of growth rates as well as its
share in GDP in 1990s. It is to be noted here that while agriculture and manufacturing sectors
have experienced phases of deceleration, stagnation and growth, the tertiary sector has shown
a uniform growth trend during the period 1950-51 to 1999-2000. The share of this sector in
GDP further increased to 55.1% in 2006-07 .This sector accounted for 68.6% of the overall
average growth in GDP in the last five years between 2002-03 and 2006-07.
EMPLOYMENT SCENARIO
The sectoral distribution of workforce in India during the period 1983 to 2004-05 reveals that
the structural changes in terms of employment have been slow in India as the primary sector
continued to absorb 56.67% of the total workforce even in 2004-05, followed by tertiary and
industrial sectors (24.62% and 18.70%) respectively. There has been disproportionate growth of
tertiary sector, as its share in employment has been far less when compared to its contribution
to GDP.
It is important to point out that, within the services sector employment growth rate is highest
in finance, insurance, and business services, followed by trade, hotels and restaurants and
transport etc. The community social and personal services occupy the last rank in growth rates
of employment.
Further, there was a sharp drop in labour absorptive capacity of growth in the economy
(employment elasticity of growth) from 0.40 to 0.15 during post -reform period (1993-94 to
1999-2000) initially, reflecting the phenomenon of jobless growth. However, during 1999-2000
to 2004-05 period the employment elasticity of growth registered an increase from 0.15 to
0.51.With the exception of one sub-sector of tertiary sector i.e. transport, storage,
communication all other sub-sectors of services sector exhibited an increasing trend in
employment elasticties and thereby overall elasticity of employment increased from 0.15 to
0.51.
PRODUCTIVITY GROWTH IN SERVICE SECTOR --POST-1980 SCENARIO

Goldar and Mitra (G-M, 2008) point out in their recent paper that the process of acceleration in
growth started in 1980s rather than in 1990s Of the 2.4 percentage point increase in the rate
of economic growth that took place in the post-1980 period, about 40 percent is accounted for
by a faster growth in TFP in services. The three sectors viz. agriculture, industry and services
have witnessed acceleration in the growth rates of output, output per worker and total factor
productivity (TFP) in the post -1980 period. However, the increase is more marked in case of
services. Partially the spurt in growth rate is attributable to productivity growth in certain subsectors of services sector. The acceleration in growth rate of output per worker in PA &D and
other community, social and personal services might have resulted from the downsizing of the
public sector because of privatisation and hikes in the salaries of the central and state
government employees from time to time (i.e due to accounting reasons). Part of the
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productivity growth in the services sector might be an outcome of application of IT service.

Despite increase in growth rate of labour productivity in service sector, measurement of service
sector output and productivity are still debatable issues.
POLICY MEASURES FOR THE DEVELOPMENT OF THE SERVICES SECTOR

In post-1991 period, there were several measures undertaken by the government to develop
services sector, especially through deregulation of some sub sectors of services sector. Foreign
direct investment (FDI) varying between 26 per cent (in print media) to 100% in information
technology (IT) sector, business process outsourcing (BPOs),e-commerce activities,
infrastructure etc) has been permitted . There are several other promotional measures taken by
the government to sustain the growth of the services sector. For example, having realized that
in knowledge- intensive world driven by IT , integration with global economy cannot take place
without making quality telecom services accessible at affordable prices , a large number of
steps like launching of National Telecom Policy 1994, New Telecom Policy 1999,and National
Telecom Policy-2012, Broad Band Policy 2004 etc were undertaken. In addition to this, a
number of promotional measures have been taken up in IT and ITES (Information Technology
Enabled Services) segment, trade, tourism, banking and insurance and real estate sectors (For
details see Joshi, forthcoming).
India has emerged as a top destination for off shoring as per Global Services Location Index
2007. There is a lot of scope for future expansion as only 10 % of the potentially addressable
global IT/ ITES market has been realized. The remaining 90% (worth $300 billion) remains to be
tapped.
PROBLEMS/CHALLENGES AHEAD
The sustainability of impressive growth of Indian economy has been questioned in the wake
of some challenges in the form of lack of social infrastructure, physical infrastructure; IT
infrastructure, agricultural and industrial sector reforms, rupee appreciation and US subprime crisis, etc. Besides, challenges in the field of IT and ITES like rising labour costs, rapid
growth in demand for talented manpower/quality staff, high attrition rate, outsourcing
backlash etc are some other limiting factors. The growth of IT and ITES is having social,
economic, health, ethical and environmental implications also. Further, delay in the promotion
of conducive business environment and good governance will enable us to catch up with the
global giants in terms of world wide presence and scale. It is also important to point out here
that the measurement of output , productivity , non-availability of data or availability of data
after a time lag are other problems confronted with in case of services . The problem gets
further compounded because of the entry of new species of services (like IT, ITES etc ) and lack
of development of concepts on the one hand and non-inclusion of unpaid households on the
other. Further, quality of each unit of the same service varies from the other. Therefore, it is
too difficult to achieve the same level of output in terms of quality has been pointed out.
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Further, quality improvements stemming from the application of new technologies are
extremely hard to measure.
PROSPECTS FOR GROWTH IN THE SERVICES SECTOR

One of the major drivers of service sector growth in the post globalization era in India is the IT
and ITES sector. That is why NASSCOM (2005) says that, The IT and BPO industries can become
major growth engines for India, as oil is for Saudi Arabia and electronics and engineering are for
Taiwan. Saudi Arabias oil exports accounted for 46% of GDP in 2004; Taiwans electronics and
engineering exports accounted for 17% of GDP in the same year. . Indias IT and BPO
industries could account for 10-12% of Indias GDP by 2015 (NASSCOM, 2005, p.80). According
to NASSCOM (2005), Indias offshore IT and BPO industries hold the potential to create over 9
million jobs by 2010, 2.3 million direct jobs and 6.5 million indirect / induced jobs says
NASSCOM. The revenue generation from total software and services segment is likely to touch
$ 60-billion mark by 2010 as per NASSCOM estimates. In addition, there is a huge potential for
growth in the services sector because of increase in disposable income, increasing urbanization,
growing middle class, a population bulge in the working age groups providing demographic
window of opportunity, and emergence of a wide array of unconventional /new services like IT,
ITES, new financial services (ATMs,credit cards) and tourism services (eco-tourism, health
tourism) etc.
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CHAPTER 6: INDUSTRIES
INDUSTRIAL GROWTH AND POLICY
THE INDUSTRIAL SCENE AT INDEPENDENCE
The main features of the industrial scene in India on the eve of planning (1950) were as under:
There was the preponderance of consumer goods industries vis-a-vis producer goods
industries resulting in lopsided industrial development. In 1953, the ratio of consumer
goods to producer goods worked out to be 62:38.
The industrial sector was extremely underdeveloped with a very weak infrastructure.
The lack of government intervention in favour of the industrial sector was considered
as an important cause of under-development.
Export orientation had been against the country's interests.
The structure of ownership was highly concentrated.
what does it mean?
Technical and managerial skills were in short supply.
INDUSTRIAL CONTROL REGIME 1950S TO 1970S

The system of Indian industrial licensing, therefore, has its origins in a combination of thinking
resulting from the exigencies and requirements of a war situation, Indian nationalistic
aspirations and the socialistic leanings of some of the founding fathers of the country. The
leaders of the private sector of the time were also in favour of strong governmental assertion.
PERFORMANCE OF THE INDUSTRIAL LICENSING SYSTEM

Until the recent industrial and trade policy reforms, the establishment and operation of an
industrial enterprise in India required approvals from the Central government at almost every
step. In addition to these approvals, since the enactment of the MRTP Act in 1969, the firms
covered under this needed to obtain separate MRTP clearances from the Department of
Company Affairs. Further, resulting from the desire to promote small-scale industries, 836
items have been reserved for production in small-scale enterprises. Since 1956, there has also
been a list of industries reserved for exclusive production in the public sector.
INDUSTRIAL POLICY REFORMS 1980 S

Industrial policy changes of the 1980s represented a response to the heavily felt need for
domestic deregulation. Experiments with industrial delicensing, weakening of MRTP provisions
to provide larger scope for large industrial houses, incentives for modernization of capital stock,
policies for major industries such as textiles and sugar, gradual introduction of price decontrol
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for cement and aluminum, etc., were some of the major steps taken in the direction of
domestic deregulation.
A major exception to this thrust was the continuation of the policy of reservation of production
for the small-scale sector particularly since it constituted an important hurdle in the way of
developing export capability in sectors such as garments, leather products, sports goods, etc.,
where India has a comparative advantage.
THE POLICY REGIME IN THE 1990S

A process of reflection and debate on the need for a change in policies had been set in motion
in India in the second half of the 1970s, i.e., about the same time that China was preparing for a
major change in policy. It is worth noting that China went ahead with full force towards market
orientation and doubled its GDP between 1978 and 1991. By contrast, India used the decade of
the 1980s for hesitant experimentation in domestic deregulation, while retaining its highly
protectionist trade policy regime and keeping its loss-making public sector intact. The reform
on the industrial policy front, however, coincided with a sharp deterioration in the fiscal
accounts of the government. As the Government of India's policies became increasingly
expansionary to support growing levels of current government expenditures on sharply rising
interest payments, defence and subsidies, the gross fiscal deficit of the government increased
from 6.2 per cent of GDP in 1980-81 to 8.3 per cent by 1990-91.
The response to the crisis therefore was twofold-more domestic deregulation and foreign
competition and striving to attain macroeconomic balance. In opening up the economy to
foreign trade and foreign investment, the policies represented a more radical break with the
past.
NEW ECONOMIC POLICY 1991

The year 1991 is an important landmark in the economic history of post-Independent India.
The country went through a severe economic crisis triggered by a serious balance of payments
situation. The crisis was converted into an opportunity to introduce some fundamental changes
in the content and approach to economic policy. The response to the crisis was to put in place
a set of policies aimed at stabilisation and structural reform. While the stabilisation policies
were aimed at correcting the weaknesses that had developed on the fiscal and the balance of
payments fronts, the structural reforms sought to remove the rigidities that had entered into
the various segments of the Indian economy. The structural reforms introduced in the early
1990s broadly covered the areas of industrial licensing, foreign trade, foreign investment,
exchange rate management and the financial sector. Changes in foreign trade policy focused
on reducing the tariff rates and dismantling quantitative controls over imports. The tariff
rates have been brought down in stages. Some caution in this regard had become necessary to
enable the Indian industries set up behind high protective tariff walls to adjust to the changed
situation.
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The thrust of the New Economic Policy has been towards creating a more competitive
environment in the economy as a means to improving the productivity and efficiency of the
system. This was to be achieved by removing the barriers to entry and the restrictions on the
growth of firms. The private sector was to be given a larger space to operate in as much as
some of the areas, reserved exclusively earlier for the public sector were now to be opened to
the private sector. In these areas, the public sector would have to compete with the private
sector, even though the public sector might continue to play the dominant role in the
foreseeable future. What was sought to be achieved was the improvement in the functioning of
the various entities, whether they were in the private or in the public sector.
PUBLIC SECTOR REFORMS, PRIVATISATION AND INFRASTRUCTURE

A major gap in domestic policy reform has been in the area of public sector with maximum
adverse effect on the infrastructure sectors with its consequences for the industrial sector as a
whole. During the 1980s, while there was disillusionment with respect to the resource
generation aspects of the public sector undertakings (PSUs), the objective of the public sector
as the guiding spirit for development continued to be at the core of planning. Some effort was
made to grant greater autonomy to the PSUs from the control of their administrative ministries,
but even at the end of the 1980s there was little improvement in the situation with respect to
the operating surpluses of the PSUs.
Public sector reform remained an area of darkness in the 1990s. A significant practical
approach was adopted in which the better performing PSUs were given the freedom to access
capital markets on the strength of their own performance. They were also given more
autonomy in shaping their future. The non-performing PSUs, on the other hand, languished for
want of budgetary support or reform.
Privatisation was not pursued as an option in the early phase of reforms. Instead,
government policy concentrated on selective disinvestments of public sector equity with a
view to finance fiscal deficits rather than address the issue of improving the returns on the
capital invested. In 1997, the Government of India set up the Disinvestment Commission. The
Commission gave a series of reports analysing the 50 or so cases of PSUs, which were referred
to it and made detailed recommendations. Subsequently, the Commission was wound up and a
Department of Privatisation was created. While there have been some major privatisations,
e.g., BALCO, VSNL, Maruti and IPCL, it remains a highly contentious issue.
INDUSTRIAL POLICY: RECENT POLICY INITIATIVES

Industrial licensing had already been substantially dismantled. Drugs and pharmaceuticals
including biotechnology were de-licensed in 2005. At the end of the Tenth Five Year Plan
period, only the following manufacturing activities needed industrial license:
Distillation and brewing of alcoholic drinks;

Cigars and cigarettes of tobacco and manufactured tobacco substitutes;
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Electronic aerospace and defense equipment;

Industrial explosives;
Specified hazardous chemicals.
Apart from the licensing restrictions, there are some restrictions arising from certain industries
reserved for the public sector and for the small-scale sector. Reservation for the public sector is
now very limited, covering only manufacturing involving certain substances relevant for atomic
energy (as well as production of atomic energy and provision of railway transport). The list of
items reserved for SSIs has been reduced to 114. Larger units are allowed to manufacture items
reserved for the small-scale sector only if they undertake an export obligation of 50 per cent of
their industrial production.
The Foreign Direct Investment (FDI) policy was also successively liberalised during the Tenth
Five Year Plan. Following a comprehensive review in 2006 it was further liberalised, particularly
by allowing FDI under the automatic route for manufacture of industrial explosives and
hazardous chemicals and making it easier for new investments by foreign investors who had
entered into joint ventures with Indian partners earlier.
RECENT INDUSTRIAL GROWTH

Recent industrial growth, measured in terms of IIP, shows fluctuating trends. Growth had
reached 15.5 per cent in 2007-8 and then started decelerating. Initial deceleration in industrial
growth was largely on account of the global economic meltdown. There was, however, a
recovery in industrial growth from 2.5 per cent in 2008-9 to 5.3 per cent in 2009-10 and 8.2 per
cent in 2010-11. Fragile economic recovery in the US and European countries and subdued
business sentiments at home affected the growth of the industrial sector in the current year.
Overall growth during April-December 2011 was 3.6 per cent compared to 8.3 per cent in the
corresponding period of the previous year.
Contribution to IIP GrowthApril-December
Weight
2008
2009
2010
2011
Mining
14.16
6.4
32.1
9.4
-8.3
Manufacturing
75.53
89.4
46.8
85.6
85.6
Electricity
10.32
4.2
21.2
5.0
22.6
In terms of Use-based classification
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Basic foods
45.68
16.2
64.8
27.8
65.7
Capitals goods
8.83
52.2
-52.9
30.2
-12.0
Intermediates
15.69
3.7
24.1
13.6
-3.3
Consumer
Goods
29.81
28.0
64.0
28.4
49.4
Durables
8.46
32.7
67.3
23.0
21.3
Non Durables
21.35
-4.8
-3.3
5.5
28.1
WHY DID THE REFORMS FAIL TO DELIVER THE EXPECTED RESULTS?
Labour Market Rigidity Hypothesis: The reformists believe that India's labour laws are
the most protective of the organised labour, which makes firing of workers almost
impossible, rendering labour a quasi-fixed capital, leading to substitution of capital for
labor, yielding little employment growth. Such a reading of the labour law is perhaps
facile as it overlooks the 'fine print' of exemptions and loopholes that are build into
them.
Infrastructure Bottlenecks: That infrastructure bottlenecks are throttling industrial

progress is undisputed.
The Cost of Doing Business: Two other challenges that beset manufacturers in India
illustrate the nature of solutions required to attract more investments into
manufacturing. The 'cost of doing business' is much higher in India than in other
countries due to the plethora of forms and inspections that manufacturers have to
comply with, some of them arising out of legislations long pending review, such as the
Factories Act.
PUBLIC SECTOR IN THE INDIAN ECONOMY

THE RATIONALE
In India, the rationale for the public sector has been explicit or implicit in all plan documents as
well as policy statements, although the emphasis has changed in degrees depending upon the
constraints faced and the emerging major issues of the time.
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First, the concentration of economic power that would result from the uncontrolled
operation of the market forces can be reduced through the extension in the public
ownership of means of production.
Secondly, private investors may demand a higher risk premium for investment in
certain industries than would be socially justified. Off- shore drilling of oil is one
example in this connection.
Thirdly, the scales of investment efforts in certain heavy industries may be beyond the
capital-raising capacity of the private sector e.g., steel mills, heavy electrical machinery.
Fourthly, the public sector, through the appropriate price policy for its output will
generate investible surpluses for further investment in the economy.
Fifthly, by production as well as distribution of certain universal intermediate inputs like
coal, steel, electricity etc., the State will be able to control the composition of private
economic activity in a socially desirable direction.
Finally, the public sector would assume the role of a model employer and its
employment and wage policies would have a moderating influence on the
corresponding policies in the private sector.
PERFORMANCE OF CENTRAL PUBLIC SECTOR UNDERTAKINGS

There were altogether 248 CPSEs under the administrative control of various
ministries/departments as on 31 March 2011. Out of these, 220 were in operation and 28 were
under construction. The share of cumulative investment (paid-up capital plus long-term loans)
in all the CPSEs stood at Rs. 6,66,848 crore as on 31 March 2011 ,showing an increase of 14.8
per cent over 2009-10. The share of manufacturing in gross block, during 2010-11, was 27.8 per
cent. The share of mining, electricity, and services in total investment, in terms of gross block,
was 23.0 per cent, 25.2 per cent, and 23.2 per cent respectively. The net profit of (158) profitmaking CPSEs stood at Rs. 1,13,770 crore in 2010-11. The net loss of (62) loss-making
enterprises, on the other hand, stood at Rs. 21,693 crore during the same period. The year also
witnessed severe financial 'under-recoveries' by public-sector oil marketing companies (OMCs)
as they had to keep the prices of petroleum products low in the domestic market despite high
input prices of crude oil.
In spite of industrial deregulation and growing import competition, the public sector has
broadly maintained its share in domestic output in producing private goods and services, and
its composition has also remained roughly the same.
In contrast, however, the public investment ratio, after peaking at 12.5 per cent of GDP(factor
cost) in 1986-87 nearly halved to 6.4 per cent by 2001-02, taking the ratio back to the level
where it was in the mid-1950s. Clearly, what took the "big planners" three decades to
accomplish, the "reformers" undid in less than two decades!
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MICRO AND SMALL ENTERPRISES (MSES)

ROLE OF SMES IN GLOBAL ECONOMY
Worldwide, MSMEs have been recognised as engines of economic growth. The overall
contribution of small firms-formal and informal-to the GDP and employment remain about the
same across low, middle and high- income group countries. As income increases, the share of
the informal sector decreases and that of the formal SME sector increases. In Brazil, MSEs
represent 20 per cent of the total GDP. Of the country's 4.7 million registered businesses, 96.8
per cent are MSEs and-along with the other 9.5 million informal enterprises-they employ 59 per
cent of the economically active population. Similarly, informal and micro enterprises account
for 39 per cent of labour force and contribute to 24 per cent of the GDP in South Africa; SMEs
employ 27 per cent of the labour force and contribute 32 per cent to the GDP; while large
enterprises employ 34 per cent people and account for 44 per cent of GDP. SMEs comprise over
90 per cent of all industrial units in Bangladesh contributing between 80 per cent and 85 per
cent of the industrial employment and 23 per cent of the total civilian employment. The real
importance of the SMEs, however, can be seen in China where over 68 per cent of the exports
come from the SMEs.
DEFINING MSES-MSMED ACT, 2006
Definition of MSMEs
Manufacturing Sector
Micro enterprises
Does not exceed Rs. 25 lakh
Small enterprises
More than Rs. 25 lakh and less than Rs. 5 crore
Medium enterprises
More the Rs. 5 crore and less than Rs. 10 crore
remember
Service Sector
Micro enterprises
Does not exceed Rs. 10 lakh
Small enterprises
More than Rs. 10 lakh and less than Rs. 2 crore
Medium enterprises
More the Rs. 2 crore and less than Rs. 5 crore
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CHAPTER 7: POVERTY
This chapter deals with one of the most difficult challenges faced by independent India-poverty.
Poverty means hunger and lack of shelter. It also is a situation in which parents are not able to
send their children to school or a situation where sick people cannot afford treatment. Poverty
also means lack of clean water and sanitation facilities. It also means lack of a regular job at a
minimum decent level. Above all it means living with a sense of helplessness. Poor people are in
a situation in which they are ill-treated at almost every place, in farms, factories, government
offices, hospitals, railway stations etc.
HOW POVERTY IS DEFINED?
Since poverty has many facets, social scientists look at it through a variety of indicators.
Usually the indicators used relate to the levels of income and consumption. But now poverty is
looked through other social indicators like illiteracy level, lack of general resistance due to
malnutrition, lack of access to healthcare, lack of job opportunities, lack of access to safe
drinking water, sanitation etc. Analysis of poverty based on social exclusion and vulnerability is
now becoming very common.
SOCIAL EXCLUSION
According to this concept, poverty must be seen in terms of the poor having to live only in a
poor surrounding with other poor people, excluded from enjoying social equality of better-off
people in better surroundings. Social exclusion can be both a cause as well as a consequence of
poverty in the usual sense. Broadly, it is a process through which individuals or groups are
excluded from facilities, benefits and opportunities that others (their betters) enjoy. A typical
example is the working of the caste system in India in which people belonging to certain castes
are excluded from equal opportunities. Social exclusion thus may lead to, but can cause more
damage than, having a very low income.
POVERTY LINE
At the centre of the discussion on poverty is usually the concept of the poverty line. A
common method used to measure poverty is based on the income or consumption levels. A
person is considered poor if his or her income or consumption level falls below a given
minimum level necessary to fulfill basic needs. What is necessary to satisfy basic needs is
different at different times and in different countries. Therefore, poverty line may vary with
time and place. The present formula for estimating the poverty line is based on the desired
calorie requirement. Food items such as cereals, pulses, vegetables, milk, oil, sugar etc.
together provide these needed calories. The calorie needs vary depending on age, sex and the
type of work that a person does. The accepted average calorie requirement in India is 2400
calories per person per day in rural areas and 2100 calories per person per day in urban areas.
Since people living in rural areas engage themselves in more physical work, calorie
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requirements in rural areas are considered to be higher than urban areas. The monetary
expenditure per capita needed for buying these calorie requirements in terms of food grains
etc. is revised periodically taking into consideration the rise in prices. On the basis of these
calculations, for the year 2000, the poverty line for a person was fixed at Rs 328 per month for
the rural areas and Rs 454 for the urban areas. In this way in the year 2000, a family of five
members living in rural areas and earning less than about Rs 1,640 per month will be below the
poverty line. A similar family in the urban areas would need a minimum of Rs 2,270 per month
to meet their basic requirements. The poverty line is estimated periodically (normally every
five years) by conducting sample surveys. These surveys are carried out by the National
Sample Survey Organisation (NSSO).
POVERTY LINE ESTIMATES CONTROVERSY.
According to the latest estimates of the Commission, people with the daily consumption of
more than Rs 28.65 in cities and Rs 22.42 in rural areas are not poor. It has been criticiesd by
various Social Activist as a retrograde measure. According to it the number of poor in India
has declined to 34.47 crore in 2009-10 from 40.72 crore in 2004-05 as per the estimates based
on Tendulkar panel methodology which factors in spending on health and education, besides
the calorie intake.
POVERTY LINE DEFINITION IN INDIA

The data pegged the poverty ratio at 29.8% of the population in 2009-10, down from 37.2% in
2004-05. However, in recent times, various committees led by economists have come up with
different ways to measure the extent of poverty. The official line delivers a poverty rate of
around 32% of the population. A committee under Suresh Tendulkar estimated it at 37%, while
another led by NC Saxena said 50%, and in 2007 the Arjun Sengupta commission identified 77%
of Indians as "poor and vulnerable". The World Bank's PPP estimate of Indian poverty was
higher than 40% in 2005, while the Asian Development Bank arrived at almost 50%. The
UNDP's Multidimensional Poverty Index finds the proportion of the poor to be higher than
55%.
INTER-STATE DISPARITIES
Poverty in India also has another aspect or dimension. The proportion of poor people is not the
same in every state. Although state level poverty has witnessed a secular decline from the
levels of early seventies, the success rate of reducing poverty varies from state to state. Recent
estimates show that in 20 states and union territories, the poverty ratio is less than the national
average. On the other hand, poverty is still a serious problem in Orissa, Bihar, Assam, Tripura
and Uttar Pradesh. Orissa and Bihar continue to be the two poorest states with poverty ratios
of 47 and 43 per cent respectively. Along with rural poverty, urban poverty is also high in
Orissa, Madhya Pradesh, Bihar and Uttar Pradesh. In comparison, there has been a significant
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decline in poverty in Kerala, Jammu and Kashmir, Andhra Pradesh, Tamil Nadu, Gujarat and
West Bengal. States like Punjab and Haryana have traditionally succeeded in reducing poverty
with the help of high agricultural growth rates. Kerala has focused more on human resource
development. In West Bengal, land reform measures have helped in reducing poverty. In
Andhra Pradesh and Tamil Nadu public distribution of food grains could have been responsible
for the improvement.
GLOBAL POVERTY SCENARIO
The proportion of people in developing countries living in extreme economic poverty defined
by the World Bank as living on less than $1 per dayhas fallen from 28 per cent in 1990 to 21
per cent in 2001. Although there has been a substantial reduction in global poverty, it is
marked with great regional differences. Poverty declined substantially in China and Southeast
Asian countries as a result of rapid economic growth and massive investments in human
resource development. Number of poors in China has come down from 606 million in 1981 to
212 million in 2001. In the countries of South Asia (India, Pakistan, Sri Lanka, Nepal,
Bangladesh, Bhutan) the decline has not been as rapid. Despite decline in the percentage of
the poor, the number of poor has declined marginally from 475 million in 1981 to 428 million in
2001. Because of different poverty line definition, poverty in India is also shown higher than the
national estimates. In Sub-Saharan Africa, poverty in fact rose from 41 per cent in 1981 to 46
per cent in 2001. In Latin America, the ratio of poverty remained the same. Poverty has also
resurfaced in some of the former socialist countries like Russia, where officially it was
nonexistent earlier. The Millennium Development Goals of the United Nations calls for
reducing the proportion of people living on less than $1 a day to half the 1990 level by 2015.
CAUSES OF POVERTY
1. One historical reason is the low level of economic development under the British
colonial administration. The policies of the colonial government ruined traditional
handicrafts and discouraged development of industries like textiles.
2. High growth rate of population.
3. Unequal distribution of land and other resources.
4. Major policy initiatives like land reforms which aimed at redistribution of assets in
rural areas have not been implemented properly.
5. Many other socio-cultural and economic factors also are responsible for poverty. In
order to fulfil social obligations and observe religious ceremonies, people in India,
including the very poor, spend a lot of money.
6. High level of indebtedness is both the cause and effect of poverty.
7. Low Productivity in Agriculture
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8. Under Utilized Resources: The existence of under employment and disguised

unemployment of human resources and under utilization of resources has resulted
in low production in agricultural sector.
9. Inflation: The continuous and steep price rise has added to the miseries of poor. It
has benefited a few people in the society and the persons in lower income group
find it difficult to get their minimum needs.
ANTI-POVERTY MEASURES
Removal of poverty has been one of the major objectives of Indian developmental strategy. The
current anti-poverty strategy of the government is based broadly on two planks (1)
promotion of economic growth (2) targeted anti-poverty programmes. Over a period of thirty
years lasting up to the early eighties, there were little per capita income growth and not much
reduction in poverty. Official poverty estimates which were about 45 per cent in the early
1950s remained the same even in the early eighties. Since the eighties, Indias economic growth
has been one of the fastest in the world. The growth rate jumped from the average of about 3.5
per cent a year in the 1970s to about 6 per cent during the 1980s and 1990s. The higher growth
rates have helped significantly in the reduction of poverty. Therefore, it is becoming clear that
there is a strong link between economic growths and poverty reduction. Economic growth
widens opportunities and provides the resources needed to invest in human development.
However, the poor may not be able to take direct advantage from the opportunities created
by economic growth. Moreover, growth in the agriculture sector is much below expectations.
This has a direct bearing on poverty as a large number of poor people live in villages and are
dependent on agriculture.
NATIONAL RURAL EMPLOYMENT GUARANTEE ACT (NREGA) 2005
It was passed in September 2005. The Act provides 100 days assured employment every year
to every rural household One third of the proposed jobs would be reserved for women. The
central government will also establish National Employment Guarantee Funds. Similarly state
governments will establish State Employment Guarantee Funds for implementation of the
scheme. Under the programme if an applicant is not provided employment within fifteen days
s/he will be entitled to a daily unemployment allowance.
POVERTY ALLEVIATION IN INDIA: CONCEPT NOTE OF 12 TH FIVE YEAR PLAN
This concept note underlines the magnitude of poverty; strategies adopted and propose a
policy plan required for poverty alleviation in India.
Introduction
No society can surely be flourishing and happy, of which the far greater part of the members
are poor and miserable (Adam Smith, 1776). Recognising the problem, the Millennium
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Development Goals of the United Nations also contain a commitment to halve the proportion
of the worlds population living in extreme poverty by 2015.
Poverty is widespread in India, with the nation estimated to have a third of the world's poor.
The World Bank (2005) estimated that 41.6 percent of the total Indian population lived under
the international poverty line of US $1.25 per day (PPP), reduced from 60 percent in 1981.
Poverty eradication has been one of the major objectives of planned development in India.
According to the criterion of household consumer expenditure used by the Planning
Commission of India, 27.5 percent of the population was living below the poverty line in 2004
2005, down from 51.3 percent in 19771978, and 36% in 1993-1994 (Economic Survey 200910). The overwhelming fact about poverty in the country is its rural nature. Major
determinants of poverty are lack of income and purchasing power attributable to lack of
productive employment and considerable underemployment, inadequacy of infrastructure,
affecting the quality of life and employability, etc.
1. Poverty Alleviation Programmes: Poverty alleviation programmes have assumed
relevance as it is proved globally that the so-called 'trickle-down effect' does not
work in all the societies and India is no exception to this. In recent times, there has
been a significant shift in focus in the poverty literature away from the trickle-down
concept of growth towards the idea of pro-poor growth, which enables the poor to
actively participate in and benefit from economic activities. Hence, the strategy of
targeting the poor was adopted in India and the economic philosophy behind these
special programmes was that special preferential treatment was necessary to enable
the poor to participate in economic development (Raj Krishna, 1977). Inclusive
growth also focuses on productive employment for the excluded groups. Poverty
alleviation programmes have been designed from time to time to enlarge the
income-earning opportunities for the poor. These programmes are broadly classified
into:
2. Self-employment programmes: Creating self-employment opportunities began with
the introduction of the IRDP in 1978-79, TRYSEM (1979), DWCRA (1982-83), supply
of improved toolkits to rural artisans (1992) and the Ganga Kalyan Yoajna (19961997). To remove conceptual and operational problems in the implementation of
these programmes, a holistic programme covering all aspects of self-employment
such as organisation of the poor into SHGs, training, credit, technology,
infrastructure and marketing called Swarnjayanti Gram Swarozgar Yojana (SGSY),
was started on April 1, 1999. Based on the feedback provided and recommendations
made by various studies, National Rural Livelihood Mission (NRLM) was launched
during 2009-10 to facilitate effective implementation of the restructured SGSY
scheme in a mission mode. NRLM aims at reducing poverty in rural areas through
promotion of diversified and gainful self-employment and wage employment
opportunities.
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3. Wage employment programmes: The main purpose of the wage employment

programmes is to provide a livelihood during the lean agricultural season as well as
during drought and floods. Wage employment programmes were first started during
the Sixth and Seventh Plan in the form of National Rural Employment Programme
(NREP) and Rural Landless Employment Guarantee Programmes (RLEGP). These
programmes were merged in 1989 into Jawahar Rozgar Yojana (JRY). A special wage
employment programme in the name of Employment Assurance Scheme (EAS) was
launched in 1993 for the drought prone, desert, tribal and hill area blocks in the
country. Different wage employment programmes were merged into Sampoorna
Gramin Rozgar Yojana in 2001. NREGS, launched in 2006, aims at enhancing the
livelihood security of people in rural areas by guaranteeing hundred days of wageemployment in a financial year to a rural household whose adult members volunteer
to do unskilled manual work. During 2008-09, 4.51 crore households were provided
employment under the scheme.
4. Food security programmes: Under this, PDS is a very important poverty alleviation
programme directly acting as safety net for the poor.
5. Social security programmes include National Social Assistance Programme (NSAP),
Annapurna, etc. for the BPL.
6. Urban poverty alleviation programmes include Nehru Rozgar Yojana, Urban Basic
Services for Poor (UBSP), etc involving participation of the communities and nongovernmental organizations.
Besides, other initiatives undertaken to alleviate poverty include price supports, food subsidy,
land reforms, Area Development Programmes, improving agricultural techniques, free
electricity for farmers, water rates, PRIs, growth of rural banking system, grain banks, seed
banks, etc.
Such endeavours not only reduced poverty but also empowered the poor to find solution to
their economic problems. For instance, the wage employment programmes have resulted in
creation of community assets as well as assets for the downtrodden besides providing wage
employment to the poor. Self-employment programmes, by adopting SHG approach have led
to mainstreaming the poor to join the economic development of the country. But the focus on
the sustainable income generation still remains illusive. A review of different poverty
alleviation programmes shows that there has been erosion in the programmes in terms of
resource allocation, implementation, bureaucratic controls, non- involvement of local
communities, etc.
NABARD has also been contributing in Rural Poverty Allevaition through its various initiatives/
schemes like SHG Bank Linkage Programme, watershed development, tribal development,
CDP, REDP, ARWIND, MAHIMA, support to weavers, RIDF, R&D Fund, etc.
Policy Plan required for Poverty Alleviation in India
To promote growth in agricultural productivity and non-farm rural activities
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Public investment in rural infrastructure and agricultural research. Agricultural research

benefits the poor directly through an increase in farm production, greater employment
opportunities and growth in the rural non-farm economy.
Credit policies to promote farm investment and rural microenterprises
Policies to promote human capital to expand the capabilities of the poor
Development of rural financial markets
Self-Help Group Approach to be strengthened as it is a proven method of empowerment
of the poor
Involvement of local communities and peoples participation in NRLM and MGNREGS.
Decentralization of the programmes by strengthening the Panchayati Raj Institutions
Public Distribution System (PDS) needs to be reformed and better targeted
Provision of safety nets like targeted food subsidies, nutrition programmes and health
Targeted poverty alleviation programmes to continue as the poor of the developing
world may not have the patience to wait for the trickle-down effect.
Poverty Head Count Ratio: Major Indian States

States
Rural
Urban
Total
199394
200405
199394
20042005
199394
20042005
Andhra Pradesh
159
112
383
28
222
158
Assam
450
223
7.7
3.3
409
191
Bihar
582
430
34.5
28.7
550
11.1
Gujarat
222
19.1
279
13
242
16.8
Haryana
280
13.6
16.4
15.1
251
110
Karnataka
299
20.8
401
32.6
332
250
Kerala
258
13.2
24.6
20.2
254
150
Madhya
Pradesh
406
37.9
48.4
41.9
425
39
Maharashtra
379
29.6
352
322
369
301
Orissa
497
16.8
41.6
11.3
486
161
Punjab
120
9.1
11.4
1.1
118
81
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Rajasthan
265
18.1
30.5
32.9
274
221
Tamil Nadu
325
22.8
39.8
222
350
225
Uttar Pradesh
423
33.7
35.4
31
409
331
West Bengal
408
28.6
22.4
11.8
357
211
India
373
28.3
32.4
25.1
360
215
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Poverty By Social Groups: Rural 2004-05

States
ST
Andhra Pradesh
30.5 15.4 9.5
4.1
Assam
14.1 27.7 18.8
25.4
Bihar
53.3 64
37.8
26.6
Chhattisgarh
54.7 32.7 33.9
29.2
Delhi
0.0
10.6
Gujarat
34.7 21.8 19.1
4.8
Haryana
0.0
4.2
Himachal Pradesh
14.9 19.6 9.1
6.4
Jammu & Kashmir
8.8
3.3
Jharkhand
54.2 57.9 40.2
37.1
Karnataka
23.5 31.8 20.9
13.8
Kerala
44.3 21.6 13.7
6.6
Madhya Pradesh
58.6 42.8 29.6
13.4
Maharashtra
56.6 44.8 23.9
18.9
Orissa
75.6 50.2 36.9
23.4
Punjab
30.7 14.6 10.6
2.2
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0.0
OBC OTHERS
0.0
26.8 13.9
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Rajasthan
32.6 28.7 13.1
8.2
Tamil Nadu
32.1 31.2 19.8
19.1
Uttar Pradesh
32.4 44.8 32.9
19.7
Uttarakhand
43.2 54.2 44.8
33.5
West Bengal
42.4 29.5 18.3
27.5
All India
47.2 36.8 26.7
16.1
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TERMS RELATED TO POVERTY

Head Count Ratio (HCR): proportion of total population that falls below poverty threshold
income or expenditure. It is based on either national Poverty Line or dollar-a-day Poverty Line.
Poverty Gap Index (PGI): unlike HCR, it gives us a sense of how poor the poor are. It is
equivalent to income gap below PL per head of total population, and expressed as a percentage
of the poverty line.
Squared Poverty Gap index (SPG): Adds the dimension of inequality among the poor to the
poverty gap index. For a given value of the PGI, population with greater dispersion of income
among poor indicates a higher value for the SPG.
Lorenz curve: a curve that represents relationship between cumulative proportion of income
and cumulative proportion of population in income distribution by size, beginning with the
lowest income group. If perfect income equality, Lorenz curve will coincides with 45-degree
line.
Gini coefficient: a commonly used measure of inequality; ratio of area between Lorenz curve
and 45-degree line, expressed as a percentage of area under 45-degree line. If perfect equality,
Gini coefficient takes value 0.If perfect inequality, equals 1. Internationally, Gini coefficient
normally ranges between 0.25 & 0.7
Valmiki Ambedkar Awas Yojana (VAMBAY): The VAMBAY launched in December 2001
facilitates the construction and upgradation of dwelling units for the slum dwellers and
provides a healthy and enabling urban environment through community toilets under Nirmal
Bharat Abhiyan, a component of the scheme. The Central Government provides a subsidy of 50
per cent, the balance 50 per cent being arranged by the State Government.
Swarna Jayanti Shahari Rozgar Yojana (SJSRY): The Urban Self Employment Programme and
the Urban Wage Employment Programme are the two special components of the SJSRY, which,
in December 1997, substituted for various extant programmers implemented for urban poverty
alleviation. SJSRY is funded on a 75:25 basis between the Centre and the States.
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Antyodaya Anna Yojana (AAY): AAY launched in December 2000 provides food grains at a
highly subsidized rate of Rs.2.00 per kg for wheat and Rs.3.00 per kg for rice to the poor families
under the Targeted Public Distribution System (TPDS). The scale of issue, which was initially 25
kg per family per month, was increased to 35 kg per family per month from April 1, 2002. The
scheme initially for one crore families was expanded in June 2003 by adding another 50 lakh
BPL Families.
Pradhan Mantri Gram Sadak Yojana (PMGSY): The PMGSY, launched in December 2000 as a
100 per cent centrally Sponsored Scheme, aims at providing rural connectivity to unconnected
habitations with population of 500 persons or more in the rural areas by the end of the Tenth
Plan period. Augmenting and modernising rural roads has been included as an item of the
NCMP. The programme is funded mainly from the accruals of diesel cess in the Central Road
Fund. In addition, support of the multi-lateral funding agencies and the domestic financial
institutions are being obtained to meet the financial requirements of the programme.
Prime Ministers Rozgar Yojana (PMRY): PMRY started in 1993 with the objective of making
available self-employment opportunities to the educated unemployed youth by assisting them
in setting up any economically viable activity. While the REGP is implemented in the rural areas
and small towns (population up to 20,000) for setting up village industries without any cap on
income, educational qualification or age of the beneficiary, PMRY is meant for educated
unemployed youth with family income of up to Rs.40, 000 per annum, in both urban and rural
areas, for engaging in any economically viable activity.
Pradhan Mantri Gramodaya Yojana (PMGY): PMGY launched in 2000-01 envisages allocation
of Additional Central Assistance (ACA) to the States and UTs for selected basic services such as
primary health, primary education, rural shelter, rural drinking water, nutrition and rural
electrification.
Indira Awaas Yojana (IAY): The Indira Awaas Yojana (IAY) operationalised from 1999-2000 is
the major scheme for construction of houses for the poor, free of cost. The Ministry of Rural
Development (MORD) provides equity support to the Housing and Urban Development
Corporation (HUDCO) for this purpose.
Sampoorna Grameen Rozgar Yojana (SGRY): SGRY, launched in 2001, aims at providing
additional wage employment in all rural areas and thereby food security and improve
nutritional levels. The SGRY is open to all rural poor who are in need of wage employment and
desire to do manual and unskilled work around the village/habitat. The programme is
implemented through the Panchayati Raj Institutions (PRIs).
Swaranjayanti Gram Swarozgar Yojana (SGSY): SGSY, launched in April 1999, aims at bringing
the assisted poor families (Swarozgaris) above the poverty line by organizing them into Self
Help Groups (SHGs) through a mix of Bank credit and Government subsidy.
National Food for Work Programme: In line with the NCMP, National Food for Work
Programme was launched on November 14, 2004 in 150 most backward districts of the country
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with the objective to intensify the generation of supplementary wage employment. The
programme is open to all rural poor who are in need of wage employment and desire to do
manual unskilled work. It is implemented as a 100 per cent centrally sponsored scheme and the
food grains are provided to States free of cost. However, the transportation cost, handling
charges and taxes on food grains are the responsibility of the States.
National Social Assistance Programme: The National Social Assistance Programme (NSAP) was
introduced as a 100 per cent Centrally Sponsored Scheme on 15th August 1995. It has three
components: namely (i) National Old Age Pension Scheme (NOAPS), (ii) National Family Benefit
Scheme (NFBS) and (iii) National Maternity Benefit Scheme (NMBS). The programme represents
a significant step towards fulfillment of the Directive Principles in Articles 41 and 42 of the
Constitution. NSAP supplements efforts of State Governments with the objective of ensuring
minimum national levels of well-being and the Central assistance is not meant to displace the
States own expenditure on Social Protection Schemes.
Jawahar Rozgar Yojana (JRY): JRY was launched as Centrally Sponsored Scheme on 1st April,
1989 by merging National Rural Employment Programme (NREP) and Rural Landless
Employment Guarantee Programme (RLEGP). Its main objective was generation of additional
gainful employment for the unemployed and under-employed people in rural areas through the
creation of rural economic infrastructure, community and social assets with the aim of
improving the quality of life of the rural poor.
Integrated Rural Development Programme: The Integrated Rural Development Programme
(IRDP) was started in 1980-81 in all blocks of the country and continued as a major selfemployment scheme till April 1, 1999. Then, it was restructured as the Swarnjayanti Gram
Swarozgar Yojana. (SGSY) which aimed at self-employment of the rural poor. The objective will
be achieved through acquisition of productive assets or appropriate skills that would generate
an additional income on a sustained basis to enable them to cross poverty line.
Pradhan Mantri Gram Sadak Yojana: The primary objective of the PMGSY is to provide
Connectivity, by way of an All-weather Road (with necessary culverts and cross-drainage
structures, which is operable throughout the year), to the eligible unconnected Habitations in
the rural areas, in such a way that all Unconnected Habitations with a population of 1000
persons and above are covered in three years (2000-2003) and all Unconnected Habitations
with a population of 500 persons and above by the end of the Tenth Plan Period (2007). In
respect of the Hill States (North-East, Sikkim, Himachal Pradesh, Jammu & Kashmir,
Uttaranchal) and the Desert Areas (as identified in the Desert Development Programme) as well
as the Tribal (Schedule V) areas, the objective would be to connect Habitations with a
population of 250 persons and above.
The PMGSY will permit the Up gradation (to prescribed standards) of the existing roads in those
Districts where all the eligible Habitations of the designated population size (refer Para 2.1
above) have been provided all-weather road connectivity. However, it must be noted that Up
gradation is not central to the Programme and cannot exceed 20% of the States allocation as
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long as eligible Unconnected Habitations in the State still exist. In Up gradation works, priority
should be given to Through Routes of the Rural Core Network, which carry more traffic
Council for Advancement of Peoples Action & Rural Technology (CAPART): Recognising the
need for an organisation that would coordinate and catalyse the development work of
voluntary agencies in the country, particularly to ensure smooth flow of benefits to the
underprivileged and socio-economically weaker sections of society, Government of India, in
September, 1986 set up the Council for Advancement of Peoples Action and Rural Technology
(CAPART), a registered society under the aegis of the Department of Rural Development, by
merging two autonomous bodies, namely, Peoples Action for Development of India (PADI) and
Council for Advancement of Rural Technology (CAPART).
The main objectives of the CAPART are:To encourage, promote and assist voluntary action for the implementation of projects
intending enhancement of rural prosperity.
To Strengthen and promote voluntary efforts in rural development with focus on injecting ew
technological inputs;
To act as a catalyst for the development of technology appropriate for rural areas.
To promote, plan, undertake, develop, maintain and support projects/schemes aimed at allround development, creation of employment opportunities, promotion of self-reliance,
generation of awareness, organisation and improvement in the quality of life of the people in
rural areas through voluntary action.
PROVISION OF URBAN AMENITIES IN RURAL AREAS (PURA): Holistic and accelerated
development of compact areas around a potential growth centre in a Gram Panchayat (or a
group of Gram Panchayat) through Public Private Partnership (PPP) framework for providing
livelihood opportunities and urban amenities to improve the quality of life in rural areas.
DROUGHT PRONE AREAS PROGRAMME (DPAP): The basic objective of the programme is to
minimise the adverse effects of drought on production of crops and livestock and productivity
of land, water and human resources ultimately leading to drought proofing of the affected
areas. The programme also aims to promote overall economic development and improving the
socio-economic conditions of the resource poor and disadvantaged sections inhabiting the
programme areas.
DESERT DEVELOPMENT PROGRAMME (DDP): The basic object of the programme is to minimise
the adverse effect of drought and control desertification through rejuvenation of natural
resource base of the identified desert areas. The programme strives to achieve ecological
balance in the long run. The programme also aims at promoting overall economic development
and improving the socio-economic conditions of the resource poor and disadvantaged sections
inhabiting the programme areas.
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TECHNOLOGY DEVELOPMENT EXTENSION AND TRAINING FOR WASTELANDS DEVELOPMENT

IN NON-FOREST AREAS: Objectives of the programme
a) To operationalise appropriate, cost effective and proven technologies for development
of various categories of wastelands specially problem lands affected by soil erosion, land
degradation, salinity, alkalinity, water logging etc.
b) (b) To implement location specific pilot project as demonstration models for
development of wastelands on a sustainable basis.
c) To take up pilot projects for development of wastelands through land based activities
including pisciculture, duckery, bee-keeping, etc.
d) To disseminate research findings about new and appropriate technologies and the
application of such technologies for promoting wastelands development.
e) To undertake mapping of wastelands including preparation of thematic maps relevant
for the purpose of designing of watershed development projects/schemes using
conventional and state-of-the-art technologies, methods and materials and to prepare
watershed development project for identified areas.
f) To undertake and support preparation of watershed maps and atlas of micro-watershed
as an aid to the planning and implementation of watershed development programs.
Hariyali: The objectives of projects under HARIYALI will be: a) Harvesting every drop of rainwater for purposes of irrigation, plantations including
horticulture and floriculture, pasture development, fisheries etc. to create sustainable
sources of income for the village community as well as for drinking water supplies.
b) Ensuring overall development of rural areas through the Gram Panchayat and creating
regular sources of income for the Panchayat from rainwater harvesting and
management.
c) Employment generation, poverty alleviation, community empowerment
development of human and other economic resources of the rural areas.
and
d) Mitigating the adverse effects of extreme climatic conditions such as drought and
desertification on crops, human and livestock population for the overall improvement of
rural areas.
e) Restoring ecological balance by harnessing, conserving and developing natural resources
i.e. land, water, vegetative cover especially plantations.
f) Encouraging village community towards sustained community action for the operation
and maintenance of assets created and further development of the potential of the
natural resources in the watershed.
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g) Promoting use of simple, easy and affordable technological solutions and institutional
arrangements that make use of, and build upon, local technical knowledge and available
materials.
Computerization of Land Records: The scheme of Computerisation of Land Records (CLR) was
started in 1988-89. This is a 100 per cent grant-in-aid scheme executed by the State
Governments. The main objective of CLR scheme is that landowners should get computerized
copies of Records of Rights (RORs) at a reasonable price. The ultimate objective of the scheme
is on-line management of land records in the country.
Under the scheme, 100% financial assistance is provided to States for completion of data entry
work, setting up computer centers at the tehsil or taluk or block and sub divisional levels and
monitoring cell at the State level. Funds are also provided under the scheme for imparting
training on computer awareness and applications software to revenue officials for regular
updation of records of rights and smooth operation of computer centers.
National Skill Development Mission consists of following three institutions:
Prime Ministers National Council on Skill Development-under the chairmanship of

Honble Prime Minister, for policy direction and review of spectrum of skill development
efforts in country.
National Skill Development Coordination Board-under the chairmanship of Dy.
Chairman Planning Commission to enumerate strategies to implement the decisions of
PMs council.
National Skill Development Corporation (NSDC), a non-profit company under the
Companies Act, 1956. The corporation is being funded by trust National Skill
Development Fund to which the Government has contributed a sum of Rs.995.10
crores. The corporation is expected to mobilize about Rs.15, 000 crores from other
governments, public sector entities, private sector, bilateral and multilateral sources.
The corporation is expected to meet the skill training requirements of the labour market
including that of unorganized sector. National Policy on Skill Development (NPSD)
approved by the Government has set a target for skilling 500 million persons by the year
2022.
Rajiv Gandhi Grameen Vidutikaran Yojana: Under RGGVY, electricity distribution infrastructure
is envisaged to establish Rural Electricity Distribution Backbone (REDB) with at least a 33/11KV
sub-station in a block, Village Electrification Infrastructure (VEI) with at least a Distribution
Transformer in a village or hamlet, and standalone grids with generation where grid supply is
not feasible.
Subsidy towards capital expenditure to the tune of 90% is being provided, through Rural
Electrification Corporation Limited (REC), which is a nodal agency for implementation of the
scheme. Electrification of un-electrified Below Poverty Line (BPL) households is being financed
with 100% capital subsidy @ Rs.2200/- per connection in all rural habitations.
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Rural Electrification Corporation is the nodal agency for implementation of the scheme. The
services of Central Public Sector Undertakings (CPSU) are available to the States for assisting
them in the execution of Rural Electrification projects. The Management of Rural Distribution is
mandated through franchisees.
Under Phase-I of RGGVY, Ministry of Power has sanctioned 576 projects for 546 districts to
electrify 1, 10,886 villages and to provide free electricity connections to 2.29 Crore BPL rural
households. As on 30th Sept., 2012, works in 1, 05,851 villages have been completed and
201.18 lakh free electricity connections have been released to BPL households. 72 projects
under Phase-II covering electrification of 1909 un-electrified villages, 46606 un-electrified
habitations, 53,505 partially electrified villages, 25,947 partially electrified habitations and
release of free electricity connections to 45,59,141 BPL households have also been sanctioned
with an outlay of Rs. 7964.32 crore
The Bharat Nirman target for RGGVY was to electrify 1 lakh villages and to provide free
electricity connections to 175 lakh BPL households by March 2012 which was achieved by 31st
December, 2011.
National Rural Livelihood Mission (Aajeevika): Aajeevika - National Rural Livelihoods Mission
(NRLM) was launched by the Ministry of Rural Development (MoRD), Government of India in
June 2011. Aided in part through investment support by the World Bank, the Mission aims at
creating efficient and effective institutional platforms of the rural poor enabling them to
increase household income through sustainable livelihood enhancements and improved access
to financial services.
NRLM has set out with an agenda to cover 7 Crore BPL households, across 600 districts, 6000
blocks, 2.5 lakh Gram Panchayat and 6 lakh villages in the country through self-managed Self
Help Groups (SHGs) and federated institutions and support them for livelihoods collectives in a
period of 8-10 years. In addition, the poor would be facilitated to achieve increased access to
their rights, entitlements and public services, diversified risk and better social indicators of
empowerment. NRLM believes in harnessing the innate capabilities of the poor and
complements them with capacities (information, knowledge, skills, tools, finance and
collectivization) to participate in the growing economy of the country.
Rashtriya Mahila Kosh (RMK): The National credit Fund for Women is an innovative mechanism
for reaching credit to poor women. Through access to credit, it aims to raise the capacity of
women by enhancing through productivity and economic self- reliance. It has provided credits
to over 2.32 lakh women since its inception from 1993. It encourages formation of Self Help
Groups (SHGs) for promotion of thrift and credit leading to income generation activities.
JANANI SURAKSHA YOJANA (JSY): Janani Suraksha Yojana (JSY) is a safe motherhood
intervention under the National Rural Health Mission (NRHM) being implemented with the
objective of reducing maternal and neo-natal mortality by promoting institutional delivery
among the poor pregnant women. The Yojana, launched on 12th April 2005, by the Honble
Prime Minister, is being implemented in all states and UTs with special focus on low performing
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states. JSY is a 100 % centrally sponsored scheme and it integrates cash assistance with
delivery and post-delivery care. The success of the scheme would be determined by the
increase in institutional delivery among the poor families The Yojana has identified ASHA, the
accredited social health activist as an effective link between the Government and the poor
pregnant women in 10 low performing states, namely the 8 EAG states and Assam and J&K and
the remaining NE States. In other eligible states and UTs, wherever, AWW and TBAs or ASHA
like activist has been engaged in this purpose, she can be associated with this Yojana for
providing the services.
NATIONAL RURAL HEALTH MISSION
The National Rural Health Mission (2005-12) seeks to provide effective healthcare to
rural population throughout the country with special focus on 18 states, which have
weak public health indicators and/or weak infrastructure.
These 18 States are Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Himachal Pradesh,
Jharkhand, Jammu & Kashmir, Manipur, Mizoram, Meghalaya, Madhya Pradesh,
Nagaland, Orissa, Rajasthan, Sikkim, Tripura, Uttaranchal and Uttar Pradesh.
The Mission is an articulation of the commitment of the Government to rise public

spending on Health from 0.9% of GDP to 2-3% of GDP. It has as its key components
provision of a female health activist in each village; a village health plan prepared
through a local team headed by the Health & Sanitation Committee of the Panchayat;
strengthening of the rural hospital for effective curative care and made measurable and
accountable to the community through Indian Public Health Standards (IPHS); and
integration of vertical Health & Family Welfare Programmers and Funds for optimal
utilization of funds and infrastructure and strengthening delivery of primary healthcare.
It seeks to revitalize local health traditions and mainstream AYUSH into the public health
system.
It aims at effective integration of health concerns with determinants of health like

sanitation & hygiene, nutrition, and safe drinking water through a District Plan for
Health.
It seeks decentralization of programmer for district management of health.
PRIME MINISTERS EMPLOYMENT GENERATION PROGRAMME (PMEGP): Government of India

has approved the introduction of a new credit linked subsidy programme called Prime
Ministers Employment Generation Programme (PMEGP) by merging the two schemes that
were in operation till 31.03.2008 namely Prime Ministers Rojgar Yojana (PMRY) and Rural
Employment Generation Programme (REGP) for generation of employment opportunities
through establishment of micro enterprises in rural as well as urban areas. PMEGP will be a
central sector scheme to be administered by the Ministry of Micro, Small and Medium
Enterprises (MoMSME). The Scheme will be implemented by Khadi and Village Industries
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Commission (KVIC), a statutory organization under the administrative control of the Ministry of
MSME as the single nodal agency at the National level. At the State level, the Scheme will be
implemented through State KVIC Directorates, State Khadi and Village Industries Boards (KVIBs)
and District Industries Centres (DICs) and banks. The Government subsidy under the Scheme
will be routed by KVIC through the identified Banks for eventual distribution to the beneficiaries
/ entrepreneurs in their Bank accounts. The Implementing Agencies, namely KVIC, KVIBs and
DICs will associate reputed Non Government Organization (NGOs)/reputed autonomous
institutions/Self Help Groups (SHGs)/ National Small Industries Corporation (NSIC) / Udyami
Mitras empanelled under Rajiv Gandhi Udyami Mitra Yojana (RGUMY), Panchayati Raj
institutions and other relevant bodies in the implementation of the Scheme, especially in the
area of identification of beneficiaries, of area specific viable projects, and providing training in
entrepreneurship development.
Rajiv Gandhi Gramin LPG Vitaran Yojana (RGGLVY): Rajiv Gandhi Gramin LPG Vitaran Yojana
(RGGLVY) was launched on October 16, 2009. The Scheme aims at setting up small size LPG
distribution agencies in order to increase rural penetration and to cover remote as well as low
potential areas (locations having potential of 600 cylinders (refill sales) per month). The
agencies would penetrate deeper into the rural areas where regular distributorships become
unviable due to the scale of operation and investment. RGGLV distributors may be viable for
around 1,500 customers in the cluster of villages being served.
These agencies will be self operated: The distributorship himself will manage the agency, with
the help of his family member and one or two employees.
There will be no arrangement for home delivery.
Age limit for the distributor is being kept as between 21 and 45 years leading to new
employment opportunities for the rural youth.
Distributor under the scheme will have to be a permanent resident of the village(s) covered by
particular location.
Total Sanitation Campaign (TSC) or Nirmal Bharat Abhiyan (NBA) is a Community-led total
sanitation program initiated by Government of India in 1999. It is a demand-driven and peoplecentered sanitation program. It evolved from the limited achievements of the first structured
programme for rural sanitation in India, the Central Rural Sanitation Programme, which had
minimal community participation. The main goal of Total Sanitation Campaign is to eradicate
the practice of open defecation by 2017. Community-led total sanitation is not focused on
building infrastructure, but on preventing open defecation through peer pressure and shame.
In Maharashtra where the program started more than 2000 Gram Panchayats have achieved
"open defecation free" status. Villages that achieve this status receive monetary rewards and
high publicity under a program called Nirmal Gram Puraskar.
Rajiv Awas Yojana envisages a Slum-free India with inclusive and equitable cities in which
every citizen has access to basic civic and social services and decent shelter. It aims to achieve
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this vision by encouraging States/Union Territories to tackle the problem of slums in a definitive
manner, by a multi-pronged approach focusing on:
Bringing all existing slums, notified or non-notified within the formal system and
enabling them to avail of the same level of basic amenities as the rest of the town;
Redressing the failures of the formal system that lie behind the creation of slums; and
Tackling the shortages of urban land and housing that keep shelter out of reach of the
urban poor and force them to resort to extra-legal solutions in a bid to retain their
sources of livelihood and employment.
The duration of Rajiv Awas Yojana will be in two phases: Phase-I, for a period of two years from
the date of approval of the scheme and Phase-II which will cover the remaining period of the
Twelfth Five Year Plan 2013-17 RAY will be run in a Mission Mode.
Rashtriya Swastha Bima Yojana: RSBY has been launched by Ministry of Labour and
Employment, Government of India to provide health insurance coverage for Below Poverty Line
(BPL) families. The objective of RSBY is to provide protection to BPL households from financial
liabilities arising out of health shocks that involve hospitalization. Beneficiaries under RSBY are
entitled to hospitalization coverage up to Rs. 30,000/- for most of the diseases that require
hospitalization. Government has even fixed the package rates for the hospitals for a large
number of interventions. Pre-existing conditions are covered from day one and there is no age
limit. Coverage extends to five members of the family which includes the head of household,
spouse and up to three dependents. Beneficiaries need to pay only Rs. 30/- as registration fee
while Central and State Government pays the premium to the insurer selected by the State
Government on the basis of a competitive bidding.
Swabhimaan is a campaign of the Government of India which aims to bring banking services to
large rural areas without banking services in the country. It was launched on February 10, 2011.
This campaign is to be operated by the Ministry of Finance, Government of India and the Indian
Banks' Association (IBA) to bring banking within the reach of the masses of the Indian
population.
Urban infrastructure Development Scheme for Small & Medium Towns aims at improvement
in urban infrastructure in towns and cities in a planned manner. It shall subsume the existing
schemes of Integrated Development of Small and Medium Towns (IDSMT) and Accelerated
Urban Water Supply Programme (AUWSP).
The objectives of the scheme are to:
Improve infrastructural facilities and help create durable public assets and quality
oriented services in cities & towns
Enhance public-private-partnership in infrastructural development and
Promote planned integrated development of towns and cities.
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CHAPTER 8: EMPLOYMENT AND UNEMPLOYMENT

UNEMPLOYMENT
Unemployment is said to exist when people who are willing to work at the going wages
cannot find jobs. In case of India we have unemployment in rural and urban areas. However,
the nature of unemployment differs in rural and urban areas. In case of rural areas, there is
seasonal and disguised unemployment. Urban areas have mostly educated unemployment.
Seasonal unemployment happens when people are not able to find jobs during some months
of the year. People dependent upon agriculture usually faces such kind of problem. There are
certain busy seasons when sowing, harvesting, weeding and threshing is done. Certain months
do not provide much work to the people dependant on agriculture. In case of disguised
unemployment people appear to be employed. They have agricultural plot where they find
work. This usually happens among family members engaged in agricultural activity. The work
requires the service of five people but engages eight people. Three people are extra. These
three people also work in the same plot as the others. The contribution made by the three
extra people does not add to the contribution made by the five people. If three people are
removed the productivity of the field will not decline. The field requires the service of five
people and the three extra people are disguised unemployed. In case of urban areas educated
unemployment has become a common phenomenon. Many youth with matriculation,
graduation and post graduation degrees are not able to find job. A study showed that
unemployment of graduate and post-graduate has increased faster than among matriculates. A
paradoxical manpower situation is witnessed as surplus of manpower in certain categories
coexist with shortage of manpower in others. There is unemployment among technically
qualified person on one hand, while there is a dearth of technical skills required for economic
growth. Unemployment leads to wastage of manpower resource. People who are an asset for
the economy turn into a liability. There is a feeling of hopelessness and despair among the
youth. People do not have enough money to support their family. Inability of educated people
who are willing to work to find gainful employment implies a great social waste.
Unemployment tends to increase economic overload. The dependence of the unemployed on
the working population increases. The quality of life of an individual as well as of society is
adversely affected. When a family has to live on a bare subsistence level there is a general
decline in its health status and rising withdrawal from the school system. Hence,
unemployment has detrimental impact on the overall growth of an economy. Increase in
unemployment is an indicator of a depressed economy. It also wastes the resource, which
could have been gainfully employed. If people cannot be used as a resource they naturally
appear as a liability to the economy. In case of India, statistically, the unemployment rate is
low. A large number of people represented with low income and productivity are counted as
employed. They appear to work throughout the year but in terms of their potential and income,
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employment in the primary sector. The whole family contributes in the field even though not
everybody is really needed. So there is disguised unemployment in the agriculture sector. But
the entire family shares what has been produced. This concept of sharing of work in the field
and the produce raised reduces the hardship of unemployment in the rural sector. But this does
not reduce the poverty of the family; gradually surplus labour from every household tends to
migrate from the village in search of jobs.
EMPLOYMENT
Let us discuss about the employment scenario in the three sectors mentioned earlier.
Agriculture is the most labour absorbing sector of the economy. In recent years, there has
been a decline in the dependence of population on agriculture partly because of disguised
unemployment discussed earlier. Some of the surplus labour in agriculture has moved to either
the secondary or the tertiary sector. In the secondary sector, small scale manufacturing is the
most labour absorbing. In case of the tertiary sector, various new services are now appearing
like biotechnology, information technology and so on.
EMPLOYMENT TRENDS IN INDIA

Structure of Employment
Any assessment of the employment performance of the Indian Economy is not meaningful
without an analysis of the structural dimensions of employment. These dimensions define and
determine the substantive meaning of employment in terms of its nature and quality. Only a
small segment of the workforce is employed on a regular basis at reasonable levels of wages
and salaries. A large part is self-employed in agriculture which continues to be the major source
of employment and livelihood for majority of the Indian workers. And an overwhelming
majority works in what is called the unorganized or the informal sector. These qualitative
dimensions are, of course, interrelated and reinforce each other in the direction of keeping the
quality of employment low. We look at these aspects of employment particularly focusing on
the nature and extent of structural changes that have taken place in the recent decades, in this
section.
Sectoral Employment Shares
As is well know, majority of Indian workers are engaged in agriculture and allied activities. With
economic development, agriculture is expected to decline in importance in terms of its share in
employment and output. Proportion of agriculture in total employment has declined over the
years: from 74 per cent in 1972-73 to 68 per cent in 1983, 60 per cent in 1993-94 and to 57 per
cent in 2004- 05. It has declined further to 51 per cent in 2009-11 (Table 16). It is particularly
important to note that the decline in the employment share of agriculture has been much
slower than the share of gross domestic product (GDP) from agriculture. Thus, while share of
agriculture in GDP declined from 41 per cent in 1972-73 to 15 per cent in 2009-10 (Table 17),
that in employment declined from 74 per cent to 51 per cent. And rate of decline in GDP share
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has been faster during 1993-94 to 2009-10, from 30 to 15 per cent; while the rate of decline in
employment share has been relatively slow, from 64 per cent to 51per cent.
In the recent past, there has been deceleration in the growth of employment in India in spite of
the accelerated economic growth. This can be explained in terms of steady decline in
employment elasticity in all the major sector of economic activity except in construction.
Overall employment elasticity declined in India from 0.52 during 1983 to 1993-94 to 0.16 during
1993-94 to 1999-2000. The decline was quite fast in agriculture as it declined from 0.70 during
1983 to 1993-94 to 0.01 during 1993-94 to 1999-2000.
Details on employment trends are available from various Rounds of the NSSO Before presenting
an analysis of this information, it is necessary to understand the difference between labour
force and workforce as defind by the NSSO. The Survey The first category consists of those who
are seeking work. This is essentially the category that either finds employment or remains
unemployed. Those who find employment are designated as the 'work force' by the NSSO and
those who are unable to find employment are designated as unemployed. "Since the 'labour
force' is the total of which the 'workforce' is a part, any changes in the former are bound to
have an impact on the latter."! The second category, i.e., 'not in the labour force' consists of
persons who are not seeking work. This withdrawal from the labour force could be on account
of pursuit of education, sickness, domestic work, disability, etc.
1. While labour force increased by 25 million over the period 1993-94 to 1999-2000 and by
63 million over the period 1999-2000 to 2004-05, it declined marginally (by 0.3 million)
over the period 2004-05 to 2009-10.
2. The segment-wise disaggregation of the labour force reveals that in the period 2004-05
to 2009-10, both rural and urban males experienced deceleration in growth rates as
compared to the previous period. Nevertheless there was an addition of22 million men
into the labour force in the five year period as compared to the 36 million in the
previous periods On the other hand, 22 million women withdrew from the labour force
in the period 2004-05 to 2009-10
3. During the period 1993-94 to 1999-2000, 23 million jobs were created' and over the
next five years as many as 61 million jobs were created, only 1 million jobs could be
created over the period 2004-05 to 2009-10. This is a dismal performance on the
employment front particularly in view of the fact that the country registered a robust
economic growth during this period. The CAGR of the work force declined from 2.9 per
cent during the period 1999-2000 to 2004-05 to just 0.05 per cent during the period
2004-05 to 2009-10. Thus, one can say without hesitation that the country has
witnessed the phenomenon of jobless growth in recent times.
4. The segment-wise disaggregation of the workforce shows that in the period 2004-05 to
2009-10, there was an addition of 22 million males to the workforce while 21 million
females opted out of the workforce. While the male addition to the workforce was
evenly distributed between rural and urban areas, the decline in the female workforce
was mainly concentrated in rural areas.
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Why Did People Withdraw from the Labour Force?: The largest share of 44 per cent was that
of people who opted out of the labour force to pursue education, 31 per cent opted out for
attending to domestic duties, 15 per cent were in the 0-4 age group and the remaining
categories (disabled, pensioners, etc.), added up to a 10 per cent share. The fact that a major
part of the withdrawal of people from the labour force is due to education is an encouraging
trend as it shows that 'India is studying'.
The second largest category is of those who opted out of the labour force to attend to domestic
duties including activities like weaving, tailoring and gathering firewood for free for the
households. These withdrawals are almost completely by females - particularly rural females.
LABOUR FORCE, WORKFORCE AND UNEMPLOYMENT (UPSS)
1993-94
19992000
2004-05
2009-10
in million
Labour force
381.94
406.84
470.14
469.87
Workforce
374.47
397.88
458.99
460.17
Unemloyed
7.49
8.96
11.15
9.70
ESTIMATED NUMBERS OF UPSS WORKERS ACROSS BROAD INDUSTRIAL

CATEGORIES
Industry
Percentage
1993-94
19992000
2004-05 2007-08 2009-10
1
.
Agriculture
63.8
59.9
56.5
55.4
53.1
2
.
Mining and Quarrying
0.7
0.6
0.6
0.5
0.7
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3
.
Manufacturing
10.7
11.1
12.2
11.9
11.0
4
.
Electricity, Gas and Sater Supply
0.4
0.3
0.3
0.3
0.2
5
.
Construction
3.2
4.4
5.7
6.5
9.6
6
.
Trade, Hotels and Restaurants
7.6
10.4
10.8
10.8
10.9
7
.
Transport,
Storage
Communications
3.7
4.0
4.4
4.4
8
.
Other services
10.7
9.7
9.8
10.1
10.1
Total Employment
100.0
100.0
100.0
100.0
100.0
& 2.9
The decline in employment share of agriculture was mostly being compensated by an increase
in the share of secondary sector in the pre-reform period, but since the economic reforms the
tertiary sector has been the main gainer of the shift in employment. Yet increase in its
employment share has not been commensurate with the increase in its share of GDP during
1993-4/2009-10. The share of secondary sector in employment has increased at a relatively
faster rate while its share in GDP has remained constant at about one-fourth of the total.
Within the secondary sector construction has sharply increased its share in employment
particularly since 1999-2000, but its share in GDP has stagnated throughout the period underreference, pre- and post-reform. Manufacturing increased its share both in employment and
GDP, but rather slowly. In the tertiary sector, trade experienced a fast increase in its share in
employment, and a significant though somewhat smaller increases in its share in GDP in the
post-reform period but saw only a small increase in its employment share. Financial services
registered a fast increase both in its employment and GDP share, though its share in
employment is small (2.25) about one-seventh of its share in GDP (15.64%). Community social
and personal services which used to be the largest activity in the tertiary sector, both in terms
of employment and GDP, in the pre-reform period, saw a marginal decline in their share both in
employment and GDP and is now the smallest in regard to GDP, though it continues to be the
second largest, after trade, in terms of employment. The asymmetry in the rate of change in
employment and GDP shares of different sectors and divisions, particularly between decline inP
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and employment shares of agriculture and correspondingly between rate of increase in GDP
and employment in non-agricultural part of the economy, has serious implications in terms of
differences in earnings and income between different sectors. Let us first look at the changes in
the shares of agriculture and non-agricultural sectors in GDP and employment. In 1972-73,
agriculture employed 74 per cent workers, but it also produced 41per cent of GDP. Per worker
productivity and income in agriculture was significantly lower than in non-agricultural activities
even then; the ratio being 1:3.6. In 2004-05 the share of agriculture was much lower at 20.2 per
cent, but it was still employing 56.5 per cent of workers. The ratio between agricultural and
non-agricultural productivity in that year works out to 1:5.9. In 2009-10 the ratio has gone up to
1:6. Thus there has been a large decline in the relative earnings of agricultural workers. That is
partly because agricultural growth has been consistently much lower than that in the nonagricultural sectors, but, mainly, because a shift of workers from agricultural to non-agricultural
activities as expected in the process of economic development has not taken place. Agriculture
has grown at an average rate of 2 to 3 per cent per annum as against 5 to 6.5 per cent growth in
the nonagricultural sector during the period under consideration. It is not generally realistic to
expect a much higher growth rate in agriculture. But even if it grew at a rate of about 4 per cent
per annum, as envisaged in the Eleventh Plan, it cannot employ many more persons
productively. In fact, productivity per worker in agriculture is so low that even with a higher
growth rate, it would need to reduce its workforce so as to provide a reasonable level of
income to those engaged in it
EMPLOYMENT IN ORGANISED SECTOR

The Indian economy is divided into organised and unorganised sectors. The unorganised
sector in the economy is very large. Whole of agriculture is in unorganised sector. Besides
agriculture, most of mining, manufacturing, construction, trade, transport and
communications, social and personal services are in the unorganised sector. By and large,
organised sector is restricted to manufacturing, electricity, transport and financial services. The
relatively much larger size of the unorganised sector vis-a-vis the organised sector would be
clear from the fact that the latter provides employment to only about 6 to 8 per cent of the
workers and the remaining 92 to 94 per cent are employed in the unorganised sector.
The organised sector is divided into the public sector and the private sector. The public sector
had accounted for 67.7 per cent of the employment in the organised sector in 1981. Its share in
employment in the organised sector rose to 71.3 per cent in 1991 but fell thereafter. This was
a result of a conscious policy decision by the government to reduce employment in the public
sector. As a result, of this policy, the share of public sector in employment in the organised
sector fell to 68.9 per cent in 2001, 68.1 per cent in 2005 and further to 62.2 per cent in 2010.
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EMPLOYMENT IN THE ORGANISED SECTOR

Sectors
1981
2010
Public Sector
Private Sector
Total
154.84
73.95
228.79
178.62
108.46
287.08
Rate of growth of
employment (% per
annum)
1994 to 2008
-0.65
1.75
0.05
NATURE AND ESTIMATES OF UNEMPLOYMENT IN INDIA

Unemployment in underdeveloped countries is both open and disguised. Like all other
underdeveloped countries, India presently suffers mainly from structural unemployment which
exists in open and disguised forms.
NATURE OF UNEMPLOYMENT
Most of the unemployment in India is definitely structural. During the 1951-2011 periods,
population in this country increased at an alarming rate of around 2.1 per cent per annum and
with it the number of people coming to the labour market in search of jobs also rose rapidly,
whereas employment opportunities did not increase most of the time correspondingly due to
slow economic growth. Hence there has been "an increase in the volume of unemployment
from one plan period to another. This unemployment, on account of its very nature, can be
eliminated only by introducing certain radical reforms in the structure of the economy. Apart
from structural unemployment, there is Keynesian involuntary unemployment which can be
eliminated by increasing effective demand, as is done in developed countries. Though presently
it would be wrong to ignore the Keynesian involuntary unemployment, yet the structural
unemployment remains a greater cause of anxiety.
CONCEPTS OF UNEMPLOYMENT
Keeping in view the recommendations of the Committee of Experts on Unemployment, the
National Sample Survey Organisation (NSSO) has developed and standardised concepts and
definitions of labour force, employment and unemployment suitable to Indian conditions.
The three concepts of unemployment developed by the NSSO are: (i) Usual Status
Unemployment, (ii) Current Weekly Status Unemployment, and (iii) Current Daily Status
Unemployment.
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i.
The Usual Status concept is meant to determine the Usual Activity Status - employed, or
unemployed or outside the labour force The Usual Status unemployment rate is a
person rate and indicates chronic unemployment because all those who are found
"usually" unemployed in the reference year are counted as unemployed.
ii.
The Current Weekly Status concept A person having worked for an hour or more on
anyone or more days during the reference period gets the employed status. The Current
Weekly Status unemployment rate, like the Usual Status unemployment rate, is also a
person rate.
iii.
The Current Daily Status A person who works for one hour but less than four hours is
considered having worked for half a day. If he works for four hours or more during a
day, he is considered as employed for the whole day. The Current Daily Status
unemployment rate is a time rate.
The daily status flow rate is evidently the most inclusive, covering open as well as partial
unemployment. It is therefore the rate which is most relevant for policy-making.
ESTIMATES OF UNEMPLOYMENT (1972-73 TO 1993-94)

The unemployment rates by the three alternative concepts of the Usual Status, the Current
Weekly Status and the Current Daily Status have become available from the various Rounds of
NSSO.
The rates of unemployment do not indicate any clear trends over the 21 years period, that is,
from 1972-73 to 1993-94. However, if we compare unemployment position in 1993-94 with
that in 1983 and 1972-73, we observe that there has been marginal decline in unemployment
rates.
UNEMPLOYMENT IN POST REFORM PERIOD

Estimates of current daily status unemployment indicate a worsening of the unemployment
situation during the period of economic reform in all the four population segments, viz., rural
males, rural females, urban males and urban females.
Eleventh Five Year Plan identified the following weaknesses on the employment front during
the period of economic reforms:"18
1. The rate of unemployment has increased from 6.1 per cent in 1993-94 to 7.3 per cent in
1999-2000 and further to 8.3 per cent in 2004-05.
2. Unemployment among agricultural labour households has risen from 9.5 per cent in
1993-94 to 15.3 per cent in 2004-05.
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3. While non-agricultural employment expanded at a robust annual rate of 4.7 per cent
during the period 1999-2000 to 2004-05, this growth was largely in the unorganized
sector.
4. Despite fairly healthy GDP growth, employment in the organised sector actually
declined, leading to frustration among the educated youth who have rising
expectations.
Estimate
1. UPSS
2. CWS
3. CDS
Rual
2009-2010
1.6
3.3
6.8
Urban
2009-2010
3.4
4.2
5.8
Total
2009-2010
2.0
3.6
6.6
CAUSES OF UNEMPLOYMENT
C.B. Mamoria lists out the causes of unemployment in India in the following way:
(i) The policy of laissez-faire or free trade pursued by the British did not accelerate the
process of industrialization in India. As a result, employment opportunities could not be
generated on a large scale, during the British rule. This situation continued up to the end
of their rule in India.
(ii) The unchecked growth of population from 1921 onwards posed the problems of finding
job opportunities. For example, our population in 1921 was 251.3 million and it
increased to 361.0 millions in 1951. It has reached a record figure of 122.3 crore in 2008.
(iii) The decline of traditional skills and the decay of small scale and cottage industries led
to a great pressure on land and this in turn resulted in the greater exodus of people
from the rural to the urban areas. This added to urban unemployment.
(iv) The low level of investment and the neglect of industrial sector could not help the
process of creating job opportunities.
GR. Madan speaks of two main types of causes of unemployment: (A) individual or personal
factors , and (B) external factors or technological and economic factors .
A. Individual or Personal Factors of Unemployment
(i) Age Factor: Age factor fixes limitations on the range of choice of job opportunities. Too
young and too old people are not eligible for many of the jobs. Some young people due
to their inexperience, and some old people due to their old age, fail to get some jobs.
Young people do not get jobs soon after their studies. They will have to wait. People
who are above 50 or 60 years are less adaptable and more prone to accidents. Their
capacity to contribute to economic production is also relatively less.
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(ii) Vocational Unfitness: Many of our young people do not have a proper understanding of
their own aptitudes, abilities and interests on the one hand, and the tasks or jobs or
career they want to pursue, on the other. If willingness to do some job is not followed
by the required abilities, one cannot find a job of ones selection. Employers are always
looking forward to find persons who have the ability, experience, interest and physical
fitness to work. Sometimes, there may be more men trained in a particular profession
than required. The demand is less than the supply, and hence, unemployment.
(iii) Illness and / or Physical Disabilities or Incapabilities: Due to the inborn or acquired
disabilities or deficiencies some remain as partially employed or totally unemployed
throughout their life. Illness induced by industrial conditions and the fatal accidents that
often take place during the work may render a few other people as unemployed.
B. External Factors or Technological and Economic Factors
(i) Enormous Increase in Population: The population in India is growing at an alarming
rate. Every year India adds to her population 120 to 130 lakh people afresh. More than
this, every year about 5 million people become eligible for securing jobs. All these
people who are eligible to work are not getting the jobs. Hence, population explosion in
India is making the problem of unemployment more and more dangerous.
(ii) Trade Cycle: Business field is subject to ups and downs due to the operation of trade
cycle. Economic depression which we witness in trade cycle may induce some
problematic or sick industries to be closed down compelling their employees to become
unemployed. Fluctuations in international markets, heavy imposition of excise duties,
business strains observed in the trade cycles adversely affect the security of jobs of
some men.
(iii) Technological Advance Mechanisation Automation: Technological advancement
undoubtedly contributes to economic development. But unplanned and uncontrolled
growth of technology may have an adverse effect on job opportunities. Since
industrialists are more interested in maximizing production and profit they prefer to
introduce labour-saving machines. They always search for ways and means of reducing
the cost of production and hence go after computerization, automation, etc. The result
is technological unemployment. This state of affairs is very much in evidence in the
Indian context today.
(iv) Strikes and Lockouts: Strikes and lockouts had been an inseparable aspect of the Indian
industrial field. Due to strikes and lockouts production used to come down and
industries were incurring heavy losses. Workers used to become unemployed for a
temporary period and some were being thrown out of job. This state of affairs
continued almost up to 1990s, that is, till the launching of the [NEP] New Economic
Policy. This, prolonged period of four decades our industries received severe setbacks
due to labour strikes which affected adversely industrial growth and industrial potential
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for fetching jobs. After 1990s, things however, have been changing and labour strikes
are becoming comparatively rarer.
(v) Slow Rate of Economic Growth: Job opportunities depend very much on economic
growth. Since the rate of economic growth was very slow in the first 45 years after
independence, the economy was not able to create enough job opportunities to the
increasing number of job seekers. For example, in 1980s, the rate of growth of the
number of job-seekers increased by 2.2%, while the rate of growth of the number of job
opportunities was only 1.5%. This difference led to an enormous increase in the number of
unemployed persons.
(vi) Backwardness of Indian Agriculture: Age old mode of cultivation, too much
dependence of too many people [more than 75%] on agriculture, widespread disguised
unemployment, sentimental attachment towards land, etc., have adversely affected the
growth of Indian agriculture and its employment potential.
C. Other Causes of Unemployment: In addition to the two main types of the causes of
unemployment as mentioned by G.R. Madan, we may add a few other factors causing the
problem such as the following.
(i) Unpreparedness to Accept Socially Degrading Jobs: Some of our young men and
women are not prepared to undertake jobs which are considered to be socially
degrading or indecent. Example: Auto rickshaw and taxi-driving, working as
salesmen or sales girls in shops, doing waiters work and clerical work in hotels, etc.,
could be mentioned here as examples. Since the spirit of the dignity of labor is not
properly inculcated in them, they become the victims of false prestige and face the
risk of unemployment.
(ii) Defects in our Educational System: Our system of education which appears like a
remnant of the British colonial rule in India has its own irreparable defects and its
contribution to the problem of unemployment can hardly be exaggerated. There is no
co-ordination between our industrial growth, agricultural development and our
educational system. Our education does not prepare the minds of our young men to
become self-employed; on the contrary, it makes them to depend on government to
find for them some jobs.
(iii) Geographic Immobility of the Workers: Occupational mobility and geographic mobility
on the part of the workers lessen the gravity of the problem of unemployment. But in
the Indian context, workers are not adventurous enough to move from one physical
area to another in search of jobs, or to change their jobs to brighten their economic
prospects. They are either clinging on to their traditional profession or occupations
especially in the rural area, or concentrated in one or the other urban centre,
sometimes without any job.
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(iv) Improper Use of Human Resources: Lack of planning for the efficient utilization of
human resources for productive purposes has been one of the causes of unemployment
in India. In fact, there has been no proper co-ordination between the availability of
human resources and its utilization in the productive field. As a result, in some units,
there is the dearth of qualified man power and in some other units; we find its excess.
(v) Lack of Encouragement for Self-Employment: Ever since the time of British, Indians
have developed a tendency to give priority for salaried jobs rather than selfemployment. Our education system has also been a failure in developing the spirit of
self-employment among our youths. As a result, young people tend to wait for getting
some salaried jobs in offices, factories or business firms and private or public firms and
concerns. They often wait for such jobs for years together as unemployed or underemployed youths.
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CHAPTER 9: FINANCIAL SECTOR

FINANCIAL SYSTEM
Financial System of any country consists of financial markets, financial intermediation and
financial instruments or financial products. This chapter discusses the meaning of finance and
Indian Financial System and focus on the financial markets, financial intermediaries and
financial instruments. The brief review on various money market instruments are also covered
in this study.
India has a financial system that is regulated by independent regulators in the sectors of
banking, insurance, capital markets, competition and various services sectors. In a number of
sectors Government plays the role of regulator.
Ministry of Finance, Government of India looks after financial sector in India. Finance Ministry
every year presents annual budget on February 28 in the Parliament. The annual budget
proposes changes in taxes, changes in government policy in almost all the sectors and
budgetary and other allocations for all the Ministries of Government of India. The annual
budget is passed by the Parliament after debate and takes the shape of law.
Reserve bank of India (RBI) established in 1935 is the Central bank. RBI is regulator for financial
and banking system, formulates monetary policy and prescribes exchange control norms. The
Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 authorize the RBI to
regulate the banking sector in India.
India has commercial banks, co-operative banks and regional rural banks. The commercial
banking sector comprises of public sector banks, private banks and foreign banks. The public
sector banks comprise the State Bank of India and its seven associate banks and nineteen
other banks owned by the government and account for almost three fourth of the banking
sector. The Government of India has majority shares in these public sector banks.
India has a two-tier structure of financial institutions with thirteen all India financial
institutions and forty-six institutions at the state level. All India financial institutions comprise
term-lending institutions, specialized institutions and investment institutions, including in
insurance. State level institutions comprise of State Financial Institutions and State Industrial
Development Corporations providing project finance, equipment leasing, corporate loans,
short-term loans and bill discounting facilities to corporate. Government holds majority shares
in these financial institutions.
Non-banking Financial Institutions provide loans and hire-purchase finance, mostly for retail
assets and are regulated by RBI.
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Insurance sector in India has been traditionally dominated by state owned Life Insurance
Corporation and General Insurance Corporation and its four subsidiaries. Government of India
has now allowed FDI in insurance sector up to 26%. Since then, a number of new joint venture
private companies have entered into life and general insurance sectors and their share in the
insurance market in rising. Insurance Development and Regulatory Authority (IRDA) is the
regulatory authority in the insurance sector under the Insurance Development and Regulatory
Authority Act, 1999.
RBI also regulates foreign exchange under the Foreign Exchange Management Act (FEMA).
India has liberalized its foreign exchange controls. Rupee is freely convertible on current
account. Rupee is also almost fully convertible on capital account for non-residents. Profits
earned, dividends and proceeds out of the sale of investments are fully repatriable for FDI.
There are restrictions on capital account for resident Indians for incomes earned in India.
Securities and Exchange Board of India (SEBI) established under the Securities and Exchange
aboard of India Act, 1992 is the regulatory authority for capital markets in India. India has 23
recognized stock exchanges that operate under government approved rules, bylaws and
regulations. These exchanges constitute an organized market for securities issued by the central
and state governments, public sector companies and public limited companies. The Stock
Exchange, Mumbai and National Stock Exchange are the premier stock exchanges. Under the
process of de-mutualization, these stock exchanges have been converted into companies now,
in which brokers only hold minority share holding. In addition to the SEBI Act, the Securities
Contracts (Regulation) Act, 1956 and the Companies Act, 1956 regulates the stock markets.
Indian financial system consists of financial market, financial instruments and financial
intermediation. These are briefly discussed below;
FINANCIAL MARKETS
A Financial Market can be defined as the market in which financial assets are created or
transferred. As against a real transaction that involves exchange of money for real goods or
services, a financial transaction involves creation or transfer of a financial asset. Financial Assets
or Financial Instruments represents a claim to the payment of a sum of money sometime in the
future and /or periodic payment in the form of interest or dividend.
Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid,
short-term instrument. Funds are available in this market for periods ranging from a single day
up to a year. This market is dominated mostly by government, banks and financial institutions.
Capital Market - The capital market is designed to finance the long-term investments. The
transactions taking place in this market will be for periods over a year.
Forex Market - The Forex market deals with the multicurrency requirements, which are met by
the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of
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funds takes place in this market. This is one of the most developed and integrated market
across the globe.
Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and
long-term loans to corporate and individuals.
FINANCIAL INTERMEDIATION
Having designed the instrument, the issuer should then ensure that these financial assets reach
the ultimate investor in order to garner the requisite amount. When the borrower of funds
approaches the financial market to raise funds, mere issue of securities will not suffice.
Adequate information of the issue, issuer and the security should be passed on to take place.
There should be a proper channel within the financial system to ensure such transfer. To
serve this purpose, Financial intermediaries came into existence. Financial intermediation in
the organized sector is conducted by a wide range of institutions functioning under the overall
surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was
mostly related to ensure transfer of funds from the lender to the borrower. This service was
offered by banks, FIs, brokers, and dealers. However, as the financial system widened along
with the developments taking place in the financial markets, the scope of its operations also
widened. Some of the important intermediaries operating ink the financial markets include;
investment bankers, underwriters, stock exchanges, registrars, depositories, custodians,
portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers,
satellite dealers, self regulatory organizations, etc. Though the markets are different, there
may be a few intermediaries offering their services in move than one market e.g. underwriter.
However, the services offered by them vary from one market to another.
FINANCIAL INSTRUMENTS
Money Market Instruments: The money market can be defined as a market for short-term
money and financial assets that are near substitutes for money. The term short-term means
generally a period upto one year and near substitutes to money is used to denote any financial
asset which can be quickly converted into money with minimum transaction cost.
Some of the important money market instruments are briefly discussed below;
Call /Notice-Money Market: Call/Notice money is the money borrowed or lent on demand for
a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight)
Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money,
borrowed on a day and repaid on the next working day, (irrespective of the number of
intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and
up to 14 days, it is "Notice Money". No collateral security is required to cover these
transactions.
Inter-Bank Term Money: Inter-bank market for deposits of maturity beyond 14 days is referred
to as the term money market. The entry restrictions are the same as those for Call/Notice
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Money except that, as per existing regulations, the specified entities are not allowed to lend
beyond 14 days.
Treasury Bills: Treasury Bills are short term (up to one year) borrowing instruments of the
union government. It is an IOU of the Government. It is a promise by the Government to pay a
stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less
than one year). They are issued at a discount to the face value, and on maturity the face value is
paid to the holder. The rate of discount and the corresponding issue price are determined at
each auction.
Certificate of Deposits: Certificates of Deposit (CDs) is a negotiable money market instrument
nd issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank
or other eligible financial institution for a specified time period. Guidelines for issue of CDs are
presently governed by various directives issued by the Reserve Bank of India, as amended from
time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have
been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs
within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments
viz., term money, term deposits, commercial papers and intercorporate deposits should not
exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.
Commercial Paper: CP is a note in evidence of the debt obligation of the issuer. On issuing
commercial paper the debt obligation is transformed into an instrument. CP is thus an
unsecured promissory note privately placed with investors at a discount rate to face value
determined by market forces. CP is freely negotiable by endorsement and delivery. A company
shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the
latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based)
limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal
account of the company is classified as a Standard Asset by the financing bank/s. The minimum
maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such
equivalent rating by other agencies.
Capital Market Instruments: The capital market generally consists of the following long term
period i.e., more than one year period, financial instruments; In the equity segment Equity
shares, preference shares, convertible preference shares, non-convertible preference shares
etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc.
Hybrid Instruments: Hybrid instruments have both the features of equity and debenture. This
kind of instruments is called as hybrid instruments. Examples are convertible debentures,
warrants etc.
MONETARY POLICY AND FISCAL POLICY
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Fiscal policy deals with the taxation and expenditure decisions of the government. Monetary
policy deals with the supply of money in the economy and the rate of interest. These are the
main policy approaches used by economic managers to steer the broad aspects of the
economy. In most modern economies, the government deals with fiscal policy while the
central bank is responsible for monetary policy. Fiscal policy is composed of several parts.
These include, tax policy, expenditure policy, investment or disinvestment strategies and
debt or surplus management. Fiscal policy is an important constituent of the overall economic
framework of a country and is therefore intimately linked with its general economic policy
strategy.
Fiscal policy also feeds into economic trends and influences monetary policy. When the
government receives more than it spends, it has a surplus. If the government spends more than
it receives it runs a deficit. To meet the additional expenditures, it needs to borrow from
domestic or foreign sources, draw upon its foreign exchange reserves or print an equivalent
amount of money. This tends to influence other economic variables. On a broad generalisation,
excessive printing of money leads to inflation. If the government borrows too much from
abroad it leads to a debt crisis. If it draws down on its foreign exchange reserves, a balance of
payments crisis may arise. Excessive domestic borrowing by the government may lead to
higher real interest rates and the domestic private sector being unable to access funds resulting
in the crowding out of private investment. Sometimes a combination of these can occur. In
any case, the impact of a large deficit on long run growth and economic well-being is negative.
Therefore, there is broad agreement that it is not prudent for a government to run an unduly
large deficit. However, in case of developing countries, where the need for infrastructure and
social investments may be substantial, it sometimes argued that running surpluses at the cost
of long-term growth might also not be wise. sThe challenge then for most developing country
governments is to meet infrastructure and social needs while managing the governments
finances in a way that the deficit or the accumulating debt burden is not too great.
MAIN OBJECTIVES OF FISCAL POLICY IN INDIA

The fiscal policy is designed to achieve certain objectives as follows :1. Development by effective Mobilisation of Resources: The principal objective of fiscal
policy is to ensure rapid economic growth and development. This objective of economic
growth and development can be achieved by Mobilisation of Financial Resources. The
central and the state governments in India have used fiscal policy to mobilise resources.
The financial resources can be mobilised by:
Taxation: Through effective fiscal policies, the government aims to mobilise

resources by way of direct taxes as well as indirect taxes because most important
source of resource mobilisation in India is taxation.
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Public Savings: The resources can be mobilised through public savings by

reducing government expenditure and increasing surpluses of public sector
enterprises.
Private Savings: Through effective fiscal measures such as tax benefits, the
government can raise resources from private sector and households. Resources
can be mobilised through government borrowings by ways of treasury bills, issue
of government bonds, etc., loans from domestic and foreign parties and by
deficit financing.
2. Efficient allocation of Financial Resources: The central and state governments have
tried to make efficient allocation of financial resources. These resources are allocated
for Development Activities which includes expenditure on railways, infrastructure, etc.
While Non-development Activities includes expenditure on defence, interest payments,
subsidies, etc. But generally the fiscal policy should ensure that the resources are
allocated for generation of goods and services which are socially desirable. Therefore,
India's fiscal policy is designed in such a manner so as to encourage production of
desirable goods and discourage those goods which are socially undesirable.
3. Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving equity
or social justice by reducing income inequalities among different sections of the society.
The direct taxes such as income tax are charged more on the rich people as compared to
lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury
items, which are mostly consumed by the upper middle class and the upper class. The
government invests a significant proportion of its tax revenue in the implementation of
Poverty Alleviation Programmes to improve the conditions of poor people in society.
4. Price Stability and Control of Inflation: One of the main objective of fiscal policy is to
control inflation and stabilize price. Therefore, the government always aims to control
the inflation by Reducing fiscal deficits, introducing tax savings schemes, Productive use
of financial resources, etc.
5. Employment Generation: The government is making every possible effort to increase
employment in the country through effective fiscal measure. Investment in
infrastructure has resulted in direct and indirect employment. Lower taxes and duties
on small-scale industrial (SSI) units encourage more investment and consequently
generates more employment. Various rural employment programmes have been
undertaken by the Government of India to solve problems in rural areas. Similarly, self
employment scheme is taken to provide employment to technically qualified persons in
the urban areas.
6. Balanced Regional Development: Another main objective of the fiscal policy is to bring
about a balanced regional development. There are various incentives from the
government for setting up projects in backward areas such as Cash subsidy, Concession
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in taxes and duties in the form of tax holidays, Finance at concessional interest rates,
etc.
7. Reducing the Deficit in the Balance of Payment: Fiscal policy attempts to encourage
more exports by way of fiscal measures like Exemption of income tax on export
earnings, Exemption of central excise duties and customs, Exemption of sales tax and
octroi, etc. The foreign exchange is also conserved by providing fiscal benefits to import
substitute industries, imposing customs duties on imports, etc. The foreign exchange
earned by way of exports and saved by way of import substitutes helps to solve balance
of payments problem. In this way adverse balance of payment can be corrected either
by imposing duties on imports or by giving subsidies to export.
8. Capital Formation: The objective of fiscal policy in India is also to increase the rate of
capital formation so as to accelerate the rate of economic growth. An underdeveloped
country is trapped in vicious (danger) circle of poverty mainly on account of capital
deficiency. In order to increase the rate of capital formation, the fiscal policy must be
efficiently designed to encourage savings and discourage and reduce spending.
9. Increasing National Income: The fiscal policy aims to increase the national income of a
country. This is because fiscal policy facilitates the capital formation. This results in
economic growth, which in turn increases the GDP, per capita income and national
income of the country.
10. Development of Infrastructure: Government has placed emphasis on the infrastructure
development for the purpose of achieving economic growth. The fiscal policy measure
such as taxation generates revenue to the government. A part of the government's
revenue is invested in the infrastructure development. Due to this, all sectors of the
economy get a boost.
11. Foreign Exchange Earnings: Fiscal policy attempts to encourage more exports by way of
Fiscal Measures like, exemption of income tax on export earnings, exemption of sales
tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute
industries. The foreign exchange earned by way of exports and saved by way of import
substitutes helps to solve balance of payments problem.
OBJECTIVES OF THE MONETARY POLICY OF INDIA

1. Price Stability: Price Stability implies promoting economic development with
considerable emphasis on price stability. The centre of focus is to facilitate the
environment which is favourable to the architecture that enables the developmental
projects to run swiftly while also maintaining reasonable price stability.
2. Controlled Expansion Of Bank Credit: One of the important functions of RBI is the
controlled expansion of bank credit and money supply with special attention to seasonal
requirement for credit without affecting the output.
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3. Promotion of Fixed Investment: The aim here is to increase the productivity of

investment by restraining non essential fixed investment.
4. Restriction of Inventories: Overfilling of stocks and products becoming outdated due to
excess of stock often results is sickness of the unit. To avoid this problem the central
monetary authority carries out this essential function of restricting the inventories. The
main objective of this policy is to avoid over-stocking and idle money in the organization
5. Promotion of Exports and Food Procurement Operations: Monetary policy pays special
attention in order to boost exports and facilitate the trade. It is an independent
objective of monetary policy.
6. Desired Distribution of Credit: Monetary authority has control over the decisions
regarding the allocation of credit to priority sector and small borrowers. This policy
decides over the specified percentage of credit that is to be allocated to priority sector
and small borrowers.
7. Equitable Distribution of Credit: The policy of Reserve Bank aims equitable distribution
to all sectors of the economy and all social and economic class of people
8. To Promote Efficiency: It is another essential aspect where the central banks pay a lot of
attention. It tries to increase the efficiency in the financial system and tries to
incorporate structural changes such as deregulating interest rates, ease operational
constraints in the credit delivery system, to introduce new money market instruments
etc.
9. Reducing the Rigidity: RBI tries to bring about the flexibilities in the operations which
provide a considerable autonomy. It encourages more competitive environment and
diversification. It maintains its control over financial system whenever and wherever
necessary to maintain the discipline and prudence in operations of the financial system.
MAJOR MONETRY OPERATIONS OF RBI

Open Market Operations: An open market operation is an instrument of monetary policy which
involves buying or selling of government securities from or to the public and banks. This
mechanism influences the reserve position of the banks, yield on government securities and
cost of bank credit. The RBI sells government securities to contract the flow of credit and buys
government securities to increase credit flow. Open market operation makes bank rate policy
effective and maintains stability in government securities market.
Cash Reserve Ratio: Cash Reserve Ratio is a certain percentage of bank deposits which banks
are required to keep with RBI in the form of reserves or balances .Higher the CRR with the RBI
lower will be the liquidity in the system and vice-versa.RBI is empowered to vary CRR between
15 percent and 3 percent. But as per the suggestion by the Narshimam committee Report the
CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of November 2012, the CRR is
4.25 percent.
Statutory Liquidity Ratio: Every financial institute have to maintain a certain amount of liquid
assets from their time and demand liabilities with the RBI. These liquid assets can be cash,
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precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and
demand liabilities is termed as Statutory Liquidity Ratio.There was a reduction from 38.5% to
25% because of the suggestion by Narshimam Committee. The current SLR is 23%.
Bank Rate Policy: Bank rate is the rate of interest charged by the RBI for providing funds or
loans to the banking system. This banking system involves commercial and co-operative banks,
Industrial Development Bank of India, IFC, EXIM Bank, and other approved financial institutes.
Funds are provided either through lending directly or rediscounting or buying money market
instruments like commercial bills and treasury bills. Increase in Bank Rate increases the cost of
borrowing by commercial banks which results into the reduction in credit volume to the banks
and hence declines the supply of money. Increase in the bank rate is the symbol of tightening of
RBI monetary policy. Bank rate is also known as Discount rate. The current Bank rate is 9%.
Credit Ceiling: In this operation RBI issues prior information or direction that loans to the
commercial banks will be given up to a certain limit. In this case commercial bank will be tight in
advancing loans to the public. They will allocate loans to limited sectors. Few example of ceiling
are agriculture sector advances, priority sector lending.
Credit Authorization Scheme: Credit Authorization Scheme was introduced in November, 1965
when P C Bhattacharya was the chairman of RBI. Under this instrument of credit regulation RBI
as per the guideline authorizes the banks to advance loans to desired sectors.[7]
Moral Suasion: Moral Suasion is just as a request by the RBI to the commercial banks to take so
and so action and measures in so and so trend of the economy. RBI may request commercial
banks not to give loans for unproductive purpose which does not add to economic growth but
increases inflation.
Repo Rate and Reverse Repo Rate: Repo rate is the rate at which RBI lends to commercial
banks generally against government securities. Reduction in Repo rate helps the commercial
banks to get money at a cheaper rate and increase in Repo rate discourages the commercial
banks to get money as the rate increases and becomes expensive. Reverse Repo rate is the rate
at which RBI borrows money from the commercial banks. The increase in the Repo rate will
increase the cost of borrowing and lending of the banks which will discourage the public to
borrow money and will encourage them to deposit. As the rates are high the availability of
credit and demand decreases resulting to decrease in inflation. This increase in Repo Rate and
Reverse Repo Rate is a symbol of tightening of the policy.
MONEY AND INFLATION

MONEY SUPPLY
Need for precise definition and measure of money supply arises from delivery of monetary
services in an economy by various financial assets like currency, demand deposits, saving
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deposits, time deposits and the like. Hence it necessary to combine the potential flows of
monetary services by each of these into one or more aggregates in order to define money
The Reserve Bank of India defines the monetary aggregates as:
M0 (Reserve Money): Currency in circulation + Bankers deposits with the RBI + Other
deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial
sector + RBIs claims on banks + RBIs net foreign assets + Governments currency
liabilities to the public RBIs net non-monetary liabilities.
M1 (Narrow Money): Currency with the public + Deposit money of the public (Demand
deposits with the banking system + Other deposits with the RBI).
M2: M1 + Savings deposits with Post office savings banks.
M3 (Broad Money): M1+ Time deposits with the banking system = Net bank credit to
the Government + Bank credit to the commercial sector + Net foreign exchange assets
of the banking sector + Governments currency liabilities to the public Net nonmonetary liabilities of the banking sector (Other than Time Deposits).
M4: M3 + All deposits with post office savings banks (excluding National Savings
Certificates)
HOW TO MEASURE INFLATION IN INDIA?

Wholesale Price Index: India is one of the few countries where the WPI is considered as the
headline inflation measure by the central bank. The preference over the CPI is often
explained in terms of three criteria national coverage, timeliness of release (now only
limited to food products) and its availability in a disaggregate format. Of these criteria,
only the last one is uncontroversial the CPI numbers are not released to the public in the
detail available for the WPI. This however does not appear to be an insurmountable
problem to address, because the detailed data is collected; it is just not made public with
sufficient timeliness. The set of weights in the base 2004-05=100 proposed by the Working
Group has been adopted in the new WPI. It is interesting to note that the combined weight
of food (primary food articles and manufactured food items) in the WPI has come down to
24% from 26.9% in the old base 1993-94=100. This appears inconsistent with both the
reduction in the share of agricultural value added in gross domestic product (GDP) (by
approximately 15 percentage points during this period) and that recorded by food products
in the National Sample Survey (NSS) consumption expenditure basket, in rural and urban
areas
GDP Deflator: The GDP deflator is another indicator of inflation, which is often considered
to be broader than the CPI and the WPI. The GDP deflator in most countries is obtained by
using a variety of primary price indices. These are used to deflate individual components of
the GDP valued at current prices (either from the production or the demand side estimates)
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to obtain volume estimates. The GDP deflator is then defined implicitly as the ratio of the
estimate at current prices to the one at constant prices. When this process is followed, the
GDP deflator is legitimately recognised as a high quality measure of inflation. Nonetheless,
given the delay in publication of national accounts it is seldom used as a headline indicator
of inflation in a real-time setting.
Consumer Price Index: The overall CPI is meant to represent the cost of a representative
basket of goods and services consumed by an average household. However, in India, the
existing CPIs refer to specific segments of the population.
Types of CPI
Consumer Price Index for Agricultural Labourers (CPI-AW)

Consumer Price Index for Industrial Workers (CPI-IW)
Consumer Price Index for Urban Non-Manual Employees (CPI-UNME)
TAXATION IN INDIA
TAX BURDEN IN INDIA
The easiest way to know the tax burden is to find out tax-GDP ratio. When the process of
economic planning began in India in 1950-51, the tax-GDP ratio was as low as 6.3 per cent.
Since then it rose steadily up to 1990-91 and thereafter declined. Against 7.9 per cent in 196061, it was 10.4 per cent in 1970-71, 13.8 per cent in 1980-81, 15.4 per cent in 1990-91, 14.5 per
cent in 2000-01 and 16.1 per cent in 2010-11. Until 1970-71, the tax burden in this country was
not higher than that in other developing countries. During the 1990s the tax-GDP ratio had
declined by 1 percentage point, particularly due to reduction in tax rates.
The tax revenue has recorded a considerable increase during the planning period. However,
because of large scale poverty in the country, the base of direct taxes is very small. In
addition, an important source of income is still out of the income tax. The agricultural income
has been exempted from the Union income tax and the States are not inclined to levy it though
they have statutory powers to do so.
TAX REVENUE OF THE CENTRAL GOVERNMENT

The total tax revenue of the Central government in 1970-71 was Rs. 2,451 crore. Of this, the
share of direct taxes was Rs. 511 crore (i.e., 20.8 per cent) while the share of indirect taxes was
Rs. 1,940 crore (i.e., 79.2 per cent).
In 2010-11, direct taxes contributed Rs. 3, 14, 606 crore which was as high as 55.8 per cent of
the total tax revenue of Rs. 5, 63, 685 crore. Thus, direct taxes now account for more than half
of the total tax revenue of the Central government.
TAX REVENUE OF THE STATE GOVERNMENTS

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The principal tax revenue sources of the State governments are the share of the States in the
Central taxes and duties, commercial taxes, land revenue, stamp duties and registration fees,
and the State excise duties on alcohol and other narcotics. Of all commercial taxes, sales tax has
been the most important. However, this tax has now been replaced by Value Added Tax (VAT).
Taxes on motor spirit and vehicles, entertainment tax and duties on electricity are other
commercial taxes.
Land revenue by its nature is an inelastic tax and thus over the years revenue proceeds from
this source have not increased much. Thus its contribution to States' tax revenue declined from
9 per cent in 1967-68 to 0.8 per cent in 2006-07. In other words, sales tax and share of States in
Central taxes together accounted for 73.8 per cent (i.e., almost three-fourths) of the total tax
revenue of the States in 2009-10.
TAXES ON INCOME AND WEALTH

In India, taxes levied on income and wealth by the Central government alone are important.
Though the State governments have the power to levy a tax on agricultural incomes, yet in
practice this tax has not developed as a major source of revenue of the States. The Central
government levies a number of taxes on income and wealth of which (from the point of view of
the revenue proceeds) only personal income tax and corporation tax are important.
PERSONAL INCOME TAX

Personal income tax is levied on the incomes of individuals, Hindu families, unregistered firms
and other associations of people. For taxation purpose income from all sources is added.
Extraordinarily high tax rates in the past were highly unrealistic. They failed to reduce economic
disparities. On the contrary, they put a high premium on tax evasion and, in practice, became a
major factor in the growth of black money.
Following the thrust of the Kelkar Task Force recommendations for the simplification of direct
and indirect taxes, the income tax structure in the Budget for 2005-06 was overhauled. The
Finance Minister proposed new rates for different slabs. The marginal rate of 30 per cent was
made applicable to taxable income beyond Rs. 2.5 lakh. Surcharge of 10 per cent was levied on
taxable income level of Rs. 10 lakh or more. Moreover, the various kinds of exemptions for
savings were replaced by a single consolidated exemption of Rs. 1 lakh.
CORPORATION TAX
Corporation tax is levied on the incomes of registered companies and corporations. The
rationale for the corporation tax is that a joint stock company has a separate entity, and thus a
separate tax different from personal income tax has to be levied on its income.
TAXES ON WEALTH AND CAPITAL
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Taxes which have been levied on wealth and capital are mainly three: estate duty, annual tax
on wealth and gift tax.
Estate Duty was first introduced in India in 1953. It was levied on total property passing on the
death of a person. The whole property of the deceased constituted the estate and was
considered liable to pay estate duty. Central government decided to abolish it with effect from
April 1, 1985.
An Annual Tax on Wealth was first introduced in May 1957 on the recommendations of Kaldor.
It is levied on the excess of net wealth over exemption of individuals, joint Hindu families and
companies. Like estate duty, wealth tax has also been a minor source of revenue.
A Gift Tax was first introduced in 1958. It was treated as complementary to the estate duty and
annual tax on wealth. The gift tax was leviable on all donations except the ones given by the
charitable institutions, government companies and private companies. Gift tax has been
abolished on gifts made on or after October 1, 1998.
INDIRECT TAXATION
The principal indirect taxes levied in India are customs duties, excise duties, service tax and
sales tax or VAT. Of these until the beginning of the World War II, customs duties had remained
the most important source of revenue. Now the excise duties have emerged as the biggest
source of revenue. Under the Constitution, the Central government has exclusive power to levy
customs duties and excise duties on commodities other than alcoholic liquors and narcotics.
CUSTOMS DUTIES
While using its constitutional powers the Central government now levies duties on both
imports and exports. From revenue point of view, the importance of export duty is limited.
Import duties in India are generally levied on ad valorem basis which implies that they are
determined as a certain percentage of the price of the commodity. On some commodities
specific import duties, i.e., per unit taxes-on imports have been levied either singly or in
addition to ad valorem duties. Due to their strategic importance in the country's economic
development, imports of machinery and essential raw materials have been taxed lightly. As
compared to import duties, export duties are less important from revenue as well as foreign
trade regulation point of view.
Customs duties perform two major functions. First, like any other tax they raise revenue
needed by the government, and second they regulate foreign trade of the country, more
particularly the imports. In pursuance of these objectives during the pre-tax reform period,
India had become a country with the highest level of customs tariff in the world, with basic
duties supplemented by 'auxiliary' and additional or countervailing duties.
EXCISE DUTIES
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An excise duty IS 10 true sense a commodity tax because it is levied on production and has
absolutely no connection with its actual sale. Thus in its form, it is very much different from a
sales tax. However, from the point of view of tax shifting and the determination of incidence,
there is little difference between an excise duty and a sales tax. Excise duties on commodities
other than alcoholic liquors and narcotics are levied by the Central government.
At present, excise duties are levied by the Central government in a number of forms. This
obviously complicates the tax structure and makes it difficult to assess the final burden. In view
of this problem the government has not only converted many of the specific duties into ad
valorem rates but the number of rate categories for a Central excise duty has also been
reduced.
Taxation of inputs, such as raw materials, components and other intermediates has a number
of limitations. It very often distorts the production structure, results in 'cascading' of taxes and
does not allow correct assessment of the tax incidence. Therefore, the government removed
these defects of the central excise system by progressively relieving inputs from excise and
countervailing duties. Government introduced VAT to take care of this. However, on account of
some formidable practical difficulties in this country, the Government proposed to introduce it
in a phased manner. For instance, it initially levied a modified system of VAT (MODVAT) which
is broadly revenue neutral. The government had no intention to provide substantial reliefs on
excise. However, it is in favour of having a rationalised structure of excise duties. It has,
therefore, restructured Central excise duties in the light of the recommendations made by
the Chelliah Committee.
On theoretical grounds ad valorem rates of duties are to be preferred to specific ones. But on
practical considerations particularly the need to prevent evasion, in a number of cases
specific rates of duties have been introduced. Proliferation of specific rates of duty weakens
the built-in revenue raising capacity of the tax structure. In spite of this limitation, the
government feels that in future due to administrative exigencies it cannot do away with specific
rates of duty completely.
The standard rate of excise duty was raised from 10 per cent to 12 per cent in Union Budget
for 2012-13.
STATES' EXCISE DUTIES

The States have exclusive jurisdiction over the excise duties on alcohol and narcotics. It is an
easy source of revenue and possible revenue proceeds from this source are high.
SERVICE TAX
Service tax was introduced in 1994-95 on three services telephone services, general insurance
and share broking. Since then, every year the net has been widened by including more and
more services under the tax net. As a result, the number of assessees has increased
considerably over the years and so has been the revenue from this tax.
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The Finance Minister increased the rate of service tax from 10 per cent in 2011-12 to 12 per
cent in the Union Budget for 2012-13. From July 1, 2012, all services have been brought under
the service tax net expect a negative list of 38 services that are to be kept out of the service
tax net.
GOODS AND SERVICES TAX (GST)

It is proposed to introduce a combined national level Goods and Service Tax (GST). This is
similar in concept to State VAT for goods. It provides for input tax credit at every stage for tax
already paid till the previous transaction. This will also attempt to provide a rational system by
subsuming several State and Central level indirect taxes on goods and services.
PUBLIC DEBT AND DEFICIT FINANCING

Public debt in Indian context refers to the borrowings of the Central and State governments.
DEBT OBLIGATIONS OF THE CENTRAL GOVERNMENT

The outstanding liabilities of the Central government have increased considerably during the
period 1980-81 to 2010-11 - from Rs. 59,749 crore to Rs. 39, 31, 105 crore. During the postreform period (the period since 1991), the total liabilities increased by twelve and a half times.
INTERNAL LIABILITIES
Information on internal liabilities divided into four parts: (1) Internal debt, (2) Small savings,
Deposits and Provident Funds, (3) Other Accounts, and (4) Reserve Funds and Deposits.
1. Internal Debt. Are market loans, treasury bills, and securities issued to international
financial institutions?
(i) Market Loans. These have a maturity of 12 months or more at the time of issue
and is generally interest bearing. The government issues such loans almost every
year. These loans are raised in the open market by sale of securities or
otherwise. In addition to market loans, the government has also issued bonds
from time to time like gold bonds.
(ii) Treasury Bills. Treasury bills have been a major source of short-term funds for
the government to bridge the gap between revenue and expenditure. They have
a maturity of 91 or 182 or 364 days and are issued every Friday. Treasury bills are
issued to the Reserve Bank of India, State governments, commercial banks and
other parties.
(iii) Securities Issued to International Financial Institutions. The Government of
India contributes towards the capital of international financial institutions such
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as International Monetary Fund, International Bank for Reconstruction and

Development, and International Development Association. These contributions
are by the way of non-negotiable, non-interest bearing securities and the
Government of India is liable to pay the amount at the call of these institutions.
2. Small Savings, Deposits and Provident Funds: Small savings have consistently increased
in volume over the years due to the rising money incomes in the economy and also due
to the various innovative schemes introduced by the government. Some of these
schemes involved attractive tax concessions (like 6- Year National Savings Certificates,
VI, VII and VIII issues) and people were thus lured into channeling substantial amounts
of money through these schemes. As far as provident funds are concerned, they are
divided into two categories: (i) State Provident Fund and (ii) Public Provident Fund.
3. Other Accounts: These include mainly Postal Insurance and Life Annuity Fund, Hindu
Family Annuity Fund, Borrowing against Compulsory Deposits and Income Tax Annuity
Deposits, and Special Deposits of Non- Government Provident Fund.
4. Reserve Funds and Deposits: Reserve Funds and Deposits are divided into two
categories: (i) interest bearing and (ii) non-interest bearing. They include Depreciation
and Reserve Funds of Rail ways and Department of Posts and Department of
Telecommunications, deposits of Local Funds, departmental and judicial deposits, civil
deposits etc.
EXTERNAL LIABILITIES
Underdeveloped countries need foreign aid in the early stages of economic development to
sustain a high level of investment, purchase capital equipment and machinery from abroad and
to cover the balance of payments gap. The Government of India has raised foreign loans from a
number of countries like USA, UK, France, former USSR, Germany etc. and international
financial institutions like IMF, IBRD, IDA etc. As a result, external liabilities of the Central
government have increased considerably from Rs. 11,298 crore as at end-March 1981 to Rs.
31,525 crore as at end-March 1991 and further to Rs. 1,56,347 crore as at end-March 2011.
DEBT OBLIGATIONS OF THE STATE GOVERNMENTS

To meet their increasing requirements of expenditure, the State governments have also to
incur large debts like the Central government. Total liabilities of the State governments are
divided into the following categories: (1) Internal debt, (2) Loans and advances from the Central
government, (3) Provident funds, (4) Reserve funds, (5) Deposits and advances, and (6)
Contingency funds.
COMBINED DEBT OF CENTRAL AND STATE GOVERNMENTS

As is clear from the Table, debt-GDP ratio has increased considerably in the post-1991 period from 64.7 per cent as at end-March 1991 and 61.1 per cent as at end-March 1996 to as high as
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81.1 per cent as at end-March 2004 (it declined in later years and stood at 69.1 per cent as at
end-March 2010). This raises questions regarding 'debt sustainability'. To rein in the public
debt, serious efforts at reducing expenditures and increasing revenues are required to be
made. However, because of economic slowdown, the government was forced to adopt fiscal
stimulus packages in 2008-09. Massive government expenditures continued in 2009-10 and
2010-11 as well. Therefore, debt sustainability will remain a cause for concern.
COMBINED LIABILITIES OF THE CENTRE AND STATES
Year
1990-91
2010-11 BE
Combined Total
Liabilities
of
Centre
and
States
(Rs. Crore)
Centre
3,68.824
55.22
51,12,250
50.09
Debt-GDP Ratio
(Per cent)
States
22.50
23.11
Combined
64.75
64.91
GROWTH IN PUBLIC DEBT-GDP RATIO IS CRITICISED DUE TO FOLLOWING

REASONS
First, public debt carries burden of interest which is to be paid out of the current
revenue.
Second, public debt often does not yield direct or indirect returns and thus its
redemption becomes difficult.
Third, public debt pre-empting financial resources may reduce availability of funds to
the private sectors.
THESE CRITICISMS NOTWITHSTANDING DEBT FINANCING HAS BEEN

CONSIDERED NECESSARY FOR THE FOLLOWING PURPOSES.
Smoothening out tax rates. Non-remunerative capital expenditure is usually lumpy in

character. If such expenditure is financed through taxation, it may require considerable
increase in the tax rates. Often there are practical difficulties in resource mobilisation in
this manner. Moreover, higher rates might cause large distortions. Therefore, the
appropriate policy would be to finance such capital formation though public debt.
Macroeconomic stabillsation. In a recessionary economy, when effective demand is

lacking, the government can raise aggregate demand by pursuing a policy of deficit
budgeting.
Financing war or other emergency expenditures. War or other emergency expenditures

are often financed through borrowing.
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Current expenditure which results in human capital formation. It is generally agreed

that recurrent expenditure on defence, law and order, and general administration
should be met out of revenues. For inter-generational equity reasons the buildup of
debt due to subsidies and interest payments should be avoided. However, certain types
of current expenditures leading to creation of human capital may be met out of debt
finance because of their favorable impact on the economy.
Remunerative capital formation. The government in a developing country is expected

to playa useful role as a financial intermediary. It can use debt finance to obtain
resources to be channelized to priority areas. Only the lending to help weaker sections
may be at subsidized rates of interest.
BANKING SECTOR IN INDIA

A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental
banking services such as accepting deposits and providing loans. There are also nonbanking
institutions that provide certain banking services without meeting the legal definition of a bank.
Banks are a subset of the financial services industry. A banking system also referred as a system
provided by the bank which offers cash management services for customers, reporting the
transactions of their accounts and portfolios, throughout the day.
HISTORY OF INDIAN BANKING SYSTEM

The first bank in India, called The General Bank of India was established in the year 1786. The
East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840)
and Bank of Madras (1843). The next bank was Bank of Hindustan which was established in
1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras)
were called as Presidency Banks. Allahabad Bank which was established in 1865 was for the
first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894 with head
quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In 1921, all presidency
banks were amalgamated to form the Imperial Bank of India which was run by European
Shareholders. After that the Reserve Bank of India was established in April 1935. To streamline
the functioning and activities of commercial banks, the Government of India came up with the
Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per
amending Act of 1965. Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as a Central Banking Authority. After independence,
Government has taken most important steps in regard of Indian Banking Sector reforms. In
1955, the Imperial Bank of India was nationalized and was given the name "State Bank of
India", to act as the principal agent of RBI and to handle banking transactions all over the
country. It was established under State Bank of India Act, 1955. Seven banks forming subsidiary
of State Bank of India was nationalized in 1960. On 19th July, 1969, major process of
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nationalization was carried out. At the same time 14 major Indian commercial banks of the
country were nationalized. In 1980, another six banks were nationalized, and thus raising the
number of nationalized banks to 20. Seven more banks were nationalized with deposits over
200 Crores. Till the year 1980 approximately 80% of the banking segment in India was under
governments ownership. Later on, in the year 1993, the government merged New Bank of
India with Punjab National Bank. It was the only merger between nationalised banks and
resulted in the reduction of the number of nationalised banks from 20 to 19. On the
suggestions of Narsimhan Committee, the Banking Regulation Act was amended in 1993 and
thus the gates for the new private sector banks were opened.
CLASSIFICATION
Indian Banks are classified into commercial banks and co-operative banks. Commercial banks
comprise: 1) schedule commercial banks (SCBs) and non-scheduled commercial banks. SCBs
are further classified into private, public, foreign banks and regional rural banks (RRBs); and 2)
co-operative banks which include urban and rural co-operative banks. As on Mar 31, 2011 the
Indian banking system comprised 83 SCBs, 82 RRBs, 1,645 urban co-operative banks and 95,765
rural co-operative credit institutions.
Scheduled Banks: Scheduled Banks in India constitute those banks which have been included in
the second schedule of RBI act 1934. RBI in turn includes only those banks in this schedule
which satisfy the criteria laid down vide section 42(6a) of the Act.
Regional Rural Bank: The government of India set up Regional Rural Banks (RRBs) on October 2,
1975. The banks provide credit to the weaker sections of the rural areas, particularly the small
and marginal farmers, agricultural labourers, and small entrepreneurs.
THE MAIN REASONS WHY THE BANKS ARE HEAVILY REGULATED ARE AS
FOLLOWS
To protect the safety of the publics savings.

To control the supply of money and credit in order to achieve a nations broad economic
goal.
To ensure equal opportunity and fairness in the publics access to credit and other vital
financial services.
To promote public confidence in the financial system, so that savings are made speedily
and efficiently.
To avoid concentrations of financial power in the hands of a few individuals and
institutions.
Provide the Government with credit, tax revenues and other services.
To help sectors of the economy that they have special credit needs for eg. Housing,
small business and agricultural loans etc.
BASEL III NORMS

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Basel III (or the Third Basel Accord) is a global regulatory standard on bank capital adequacy,
stress testing and market liquidity risk agreed upon by the members of the Basel Committee on
Banking Supervision in 201011, and scheduled to be introduced from 2013 until 2018
WHAT ARE THE MAJOR CHANGES PROPOSED IN BASEL III OVER EARLIER
ACCORDS I.E. BASEL I AND BASEL II?
a. Better Capital Quality: One of the key elements of Basel 3 is the introduction of much
stricter definition of capital. Better quality capital means the higher loss-absorbing
capacity. This in turn will mean that banks will be stronger, allowing them to better
withstand periods of stress.
b. Capital Conservation Buffer: Another key feature of Basel iii is that now banks will be
required to hold a capital conservation buffer of 2.5%. The aim of asking to build
conservation buffer is to ensure that banks maintain a cushion of capital that can be
used to absorb losses during periods of financial and economic stress.
c. Countercyclical Buffer: This is also one of the key elements of Basel III.
The
countercyclical buffer has been introducted with the objective to increase capital
requirements in good times and decrease the same in bad times. The buffer will slow
banking activity when it overheats and will encourage lending when times are tough i.e.
in bad times. The buffer will range from 0% to 2.5%, consisting of common equity or
other fully loss-absorbing capital.
d. Minimum Common Equity and Tier 1 Capital Requirements: The minimum requirement
for common equity, the highest form of loss-absorbing capital, has been raised under
Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier 1 capital
requirement, consisting of not only common equity but also other qualifying financial
instruments, will also increase from the current minimum of 4% to 6%. Although the
minimum total capital requirement will remain at the current 8% level, yet the required
total capital will increase to 10.5% when combined with the conservation buffer.
e. Leverage Ratio: A review of the financial crisis of 2008 has indicted that the value of
many assets fell quicker than assumed from historical experience. Thus, now Basel III
rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative
amount of capital to total assets (not risk-weighted). This aims to put a cap on swelling
of leverage in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be
tested before a mandatory leverage ratio is introduced in January 2018.
f. Liquidity Ratios: Under Basel III, a framework for liquidity risk management will be
created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are
to be introduced in 2015 and 2018, respectively.
g. Systemically Important Financial Institutions (SIFI): As part of the macro-prudential
framework, systemically important banks will be expected to have loss-absorbing
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capability beyond the Basel III requirements. Options for implementation include capital
surcharges, contingent capital and bail-in-debt.
MIROFINANCE
Microfinance is the provision of financial services to low-income clients or solidarity lending
groups including consumers and the self-employed, who traditionally lack access to banking
and related services.
Microfinance is not just about giving micro credit to the poor rather it is an economic
development tool whose objective is to assist poor to work their way out of poverty. It covers a
wide range of services like credit, savings, insurance, remittance and also non-financial services
like training, counseling etc.
Microfinance sector has grown rapidly over the past few decades. Nobel Laureate Muhammad
Yunus is credited with laying the foundation of the modern MFIs with establishment of
Grameen Bank, Bangladesh in 1976. Today it has evolved into a vibrant industry exhibiting a
variety of business models. Microfinance Institutions (MFIs) in India exist as NGOs (registered as
societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs).
Commercial Banks, Regional Rural Banks (RRBs), cooperative societies and other large lenders
have played an important role in providing refinance facility to MFIs. Banks have also leveraged
the Self-Help Group (SHGs) channel to provide direct credit to group borrowers.
With financial inclusion emerging as a major policy objective in the country, Microfinance has
occupied centre stage as a promising conduit for extending financial services to unbanked
sections of population. At the same time, practices followed by certain lenders have subjected
the sector to greater scrutiny and need for stricter regulation.
SALIENT FEATURES OF MICROFINANCE
Borrowers are from the low income group

Loans are of small amount micro loans
Short duration loans
Loans are offered without collaterals
High frequency of repayment
Loans are generally taken for income generation purpose
GAPS IN FINANCIAL SYSTEM AND NEED FOR MICROFINANCE

According to the latest research done by the World Bank, India is home to almost one third of
the worlds poor (surviving on an equivalent of one dollar a day). Though many central
government and state government poverty alleviation programs are currently active in India,
microfinance plays a major contributor to financial inclusion. In the past few decades it has
helped out remarkably in eradicating poverty. Reports show that people who have taken
microfinance have been able to increase their income and hence the standard of living.
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About half of the Indian population still doesnt have a savings bank account and they are
deprived of all banking services. Poor also need financial services to fulfill their needs like
consumption, building of assets and protection against risk. Microfinance institutions serve as a
supplement to banks and in some sense a better one too. These institutions not only offer
micro credit but they also provide other financial services like savings, insurance, remittance
and non-financial services like individual counseling, training and support to start own business
and the most importantly in a convenient way. The borrower receives all these services at
her/his door step and in most cases with a repayment schedule of borrowers convenience. But
all this comes at a cost and the interest rates charged by these institutions are higher than
commercial banks and vary widely from 10 to 30 percent. Some claim that the interest rates
charged by some of these institutions are very high while others feel that considering the cost
of capital and the cost incurred in giving the service, the high interest rates are justified.
CHANNELS OF MICRO FINANCE

In India microfinance operates through two channels:
1. SHG Bank Linkage Programme (SBLP)
2. Micro Finance Institutions (MFIs)
SHG BANK LINKAGE PROGRAMME

This is the bank-led microfinance channel which was initiated by NABARD in 1992. Under the
SHG model the members, usually women in villages are encouraged to form groups of around
10-15. The members contribute their savings in the group periodically and from these savings
small loans are provided to the members. In the later period these SHGs are provided with bank
loans generally for income generation purpose. The groups members meet periodically when
the new savings come in, recovery of past loans are made from the members and also new
loans are disbursed. This model has been very much successful in the past and with time it is
becoming more popular. The SHGs are self-sustaining and once the group becomes stable it
starts working on its own with some support from NGOs and institutions like NABARD and
SIDBI.
MICRO FINANCE INSTITUTIONS

Those institutions which have microfinance as their main operation are known as micro finance
institutions. A number of organizations with varied size and legal forms offer microfinance
service. These institutions lend through the concept of Joint Liability Group (JLG). A JLG is an
informal group comprising of 5 to 10 individual members who come together for the purpose of
availing bank loans either individually or through the group mechanism against a mutual
guarantee. The reason for existence of separate institutions i.e. MFIs for offering microfinance
are as follows:
High transaction cost generally micro credits fall below the break-even point of
providing loans by banks
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Absence of collaterals the poor usually are not in a state to offer collaterals to secure
the credit
Loans are generally taken for very short duration periods
Higher frequency of repayment of installments and higher rate of Default
CONTROVERSY ON MFI
The Indian microfinance sector witnessed tremendous growth over the last five years, during
which institutions were subject to little regulation. Some microfinance institutions were subject
to prudential requirements; however no regulation addressed lending practices, pricing, or
operations. The combination of minimal regulation and rapid sector growth led to an
environment where customers were increasingly dissatisfied with microfinance services,
culminating in the Andhra Pradesh crisis in the fall of 2010.
Leading up to the Andhra Pradesh crisis, microfinance institutions were experiencing a large
influx of equity and debt investment. Some institutions were doubling their size each year,
aiming to reach more customers and serve more areas. As institutions scaled up quickly, hiring
and training processes were less thorough, resulting in employees who engaged in
inappropriate collection practices and lending models that led to customer over-indebtedness.
In August 2010, SKS Microfinance held the first initial public offering (IPO) for a microfinance
institution in India, raising USD 347 million1 and drawing attention to the potential profits of
the sector. Media reports took different viewpoints on the IPO, some celebrating the sector,
and others characterizing the profits as taking advantage of the poor. Further reports cited links
between Microfinance Institutions (MFIs) lending and suicides in Andhra Pradesh. The incident
culminated when Andhra Pradesh Chief Minister passed the Andhra Pradesh Microfinance
Ordinance 2010, which includes a number of measures that greatly restricts microfinance
institutions operations. As a result of the ordinance, and the general attitude towards
microfinance in Andhra Pradesh, loan repayments dropped dramatically3.
Due to low repayment rates, microfinance institutions, with exposure to Andhra Pradesh,
suffered significant losses. Banks stopped lending to microfinance institutions all over India; for
fear that a similar situation would occur elsewhere, resulting in a liquidity crunch for
microfinance institutions, which are largely dependent on bank lending as a funding source.
With the sector at a standstill, microfinance institutions, microfinance clients, banks, investors,
and local governments were calling for new regulation to address the prominent issues of the
sector. The Reserve Bank of India (RBI) responded by appointing an RBI sub-committee know as
the Malegam Committee.
This committee aimed to address the primary customer complaints that led to the crisis,
including coercive collection practices, usurious interest rates, and selling practices that
resulted in over-indebtedness. The existing regulations did not address these issues, thus, who
should respond to these issues, and how they should respond, was uncertain. This prolonged
the general regulatory uncertainty and the resulting repayment and institutional liquidity
issues.
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The Malegam Committee released their recommended regulations in January 2011. These
recommendations were 'broadly accepted' by RBI in May 2011, though specific regulation was
only released regarding which institutions qualify for priority sector lending at this time.
Additionally, an updated version of the Micro Finance Institutions (Development and
Regulations) Bill 2011 is in Parliament, which aims to provide a regulatory structure for
microfinance institutions operating as societies, trusts, and cooperatives. Although this shows
that regulators are taking steps to address the crisis issues and resolve regulatory uncertainty,
banks have not resumed lending to microfinance institutions as of July 2011.
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CHAPTER 10: FOREIGN TRADE

BALANCE OF TRADE
The balance of payments (BOP) is the method countries use to monitor all international
monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter
and every calendar year. All trades conducted by both the private and public sectors are
accounted for in the BOP in order to determine how much money is going in and out of a
country. If a country has received money, this is known as a credit, and, if a country has paid or
given money, the transaction is counted as a debit. Theoretically, the BOP should be zero,
meaning that assets (credits) and liabilities (debits) should balance. But in practice this is rarely
the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from
which part of the economy the discrepancies are stemming.
THE BALANCE OF PAYMENTS SUB-DIVISION

The BOP is divided into three main categories: the current account, the capital account and
the financial account. Within these three categories are sub-divisions, each of which accounts
for a different type of international monetary transaction.
THE CURRENT ACCOUNT

The current account is used to mark the inflow and outflow of goods and services into a
country. Earnings on investments, both public and private, are also put into the current
account.
Within the current account are credits and debits on the trade of merchandise, which
includes goods such as raw materials and manufactured goods that are bought, sold or given
away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like
the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering,
business service fees (from lawyers or management consulting, for example), and royalties
from patents and copyrights. When combined, goods and services together make up a
country's balance of trade (BOT). The BOT is typically the biggest bulk of a country's balance of
payments as it makes up total imports and exports. If a country has a balance of trade deficit, it
imports more than it exports, and if it has a balance of trade surplus, it exports more than it
imports.
Receipts from income-generating assets such as stocks (in the form of dividends) are also
recorded in the current account. The last component of the current account is unilateral
transfers. These are credits that are mostly worker's remittances, which are salaries sent back
into the home country of a national working abroad, as well as foreign aid that is directly
received.
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THE CAPITAL ACCOUNT

The capital account is where all international capital transfers are recorded. This refers to the
acquisition or disposal of non-financial assets (for example, a physical asset such as land) and
non-produced assets, which are needed for production but have not been produced, like a
mine used for the extraction of diamonds.
The capital account is broken down into the monetary flows branching from debt forgiveness,
the transfer of goods, and financial assets by migrants leaving or entering a country, the
transfer of ownership on fixed assets (assets such as equipment used in the production process
to generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift
and inheritance taxes, death levies, and, finally, uninsured damage to fixed assets.
THE FINANCIAL ACCOUNT

In the financial account, international monetary flows related to investment in business, real
estate, bonds and stocks are documented.
Also included are government-owned assets such as foreign reserves, gold, special drawing
rights (SDRs) held with the International Monetary Fund, private assets held abroad, and direct
foreign investment. Assets owned by foreigners, private and official, are also recorded in the
financial account.
THE BALANCING ACT

The current account should be balanced against the combined-capital and financial accounts.
However, as mentioned above, this rarely happens. We should also note that, with fluctuating
exchange rates, the change in the value of money can add to BOP discrepancies. When there is
a deficit in the current account, which is a balance of trade deficit, the difference can be
borrowed or funded by the capital account. If a country has a fixed asset abroad, this borrowed
amount is marked as a capital account outflow. However, the sale of that fixed asset would be
considered a current account inflow (earnings from investments). The current account deficit
would thus be funded.
When a country has a current account deficit that is financed by the capital account, the
country is actually foregoing capital assets for more goods and services. If a country is
borrowing money to fund its current account deficit, this would appear as an inflow of foreign
capital in the BOP.
BALANCE OF PAYMENTS CRISIS

A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential
imports and/or service its debt repayments. Typically, this is accompanied by a rapid decline in
the value of the affected nation's currency. Crises are generally preceded by large capital
inflows, which are associated at first with rapid economic growth. However a point is reached
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where overseas investors become concerned about the level of debt their inbound capital is
generating, and decide to pull out their funds. The resulting outbound capital flows are
associated with a rapid drop in the value of the affected nation's currency. This causes issues
for firms of the affected nation who have received the inbound investments and loans, as the
revenue of those firms is typically mostly derived domestically but their debts are often
denominated in a reserve currency. Once the nation's government has exhausted its foreign
reserves trying to support the value of the domestic currency, its policy options are very
limited. It can raise its interest rates to try to prevent further declines in the value of its
currency, but while this can help those with debts denominated in foreign currencies, it
generally further depresses the local economy.
FOREIGN TRADE AND TRADE POLICY

VALUE OF EXPORTS AND IMPORTS IN THE PLANNING PERIOD
In fact, a study of foreign trade data reveals that trade balance was positive in only two years
during the entire period 1949-50 to 2010-11. These were the years of 1972-73 and 1976-77
when the country recorded small trade surpluses of $ 134 million and $ 77 million respectively.
In all other years, deficits in balance of trade were recorded. What is a matter for concern is the
fact that the trade deficit has increased significantly over the years.
Trade deficit in 2010-11 touched the highest ever level of $ 118.63 billion recorded in pestIndependence period. However, what is encouraging is the fact that while imports increased in
volume terms by 10.1 per cent in this year, exports increased in volume terms by as much as
43.2 per cent.
COMPOSITION OF FOREIGN TRADE

Composition of Imports
In 1947-48, the main items of imports in India (in order of importance were: machinery of all
kinds; oils (vegetable, mineral and animal); grains, pulses and flour; cotton, raw and 'waste;
vehicles (excluding locomotives); cutlery, hardware, implements and instruments; chemicals,
drugs and medicines; dyes and colours; other yarns and textile fabrics; paper, paper board and
stationery; and metals other than iron and steel and manufactured. These imports together
constituted more than 70 per cent of all imports.
The Second Plan (based on the Mahalanobis Model) introduced a programme of
industrialization with heavy emphasis on the development of capital goods and basic industries.
As a result, it became necessary to import capital equipment in large quantities to be imported
in substantial quantities to keep the equipment in working order.
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For convenience, imports of the country have been divided into four broad groups: (i) Food
and live animals chiefly for food, (ii) Raw materials and intermediate manufactures, (iii)
Capital goods and (iv) Other goods.
Important facts regarding the composition of different import items are as follows:
1. There has been a substantial rise in the import expenditure on POL (petroleum, oil and
lubricants) imports.
2. Since 1999-2000, data on imports of gold and silver have become available as their
imports are now channelised through the official routes.
3. Import expenditure on 'non-electrical machinery, apparatus and appliances' rose
considerably from $ 341 million in 1970-71 to $ 26,111 million in 2010-11.
4. Due to the increasing demand of the gems and jewellery industry (which has emerged
as an important export earning industry) the imports of 'pearls, precious and semiprecious stones' have increased significantly.
5. Because of increasing domestic demand, edible oils also have had to be imported on a
considerable scale in certain years.
6. Despite increasing domestic production of iron and steel, substantial quantities continue
to be imported as domestic production has failed to keep pace with the rising demand.
7. Import expenditure on fertilisers and fertiliser materials increased considerably from $
113 million in 1970-71 to $ 1,683 million in 1995-96.
Composition of Exports
Important points that emerge from regarding different export items are as follows:
1. The most important export item in 1960-61 was jute and it contributed 21 per cent (or a
little more than one-fifth) of total export earnings. Since then its share has continuously
declined (to 12.4 per cent in 1970-71 and 0.2 per cent in 2010-11).
2. The second most important export item in 1960-61 was tea and it contributed 19.3 per
cent (i.e., almost one fifth) of total export earnings. Its share has also declined
consistently to 9.6 per cent in 1970-71 and 0.3 per cent in 2010-11.
3. Consequent upon the programmes of industrialisation initiated during the planning
period, the exports of engineering goods rose substantially. Engineering goods occupied
the first place ill India's export earnings in 2010-11.
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4. During recent years, exports of petroleum products have increased significantly. Their
exports were as high as $ 29,030 million in 2007-08 which was 17.8 per cent of total
export earnings.
5. Exports of gems and jewellery have recorded a spectacular increase. From $59 million in
1970-71 (representing 2.9 per cent of total export earnings) the exports of gems and
jewellery rose to $ 36,840 million in 2010-11 which was 14.7 per cent of total export
earnings.
6. The results of industrialisation are also expressed through increases in the exports of
chemicals and allied products.
7. Export of readymade garments has emerged as an important foreign exchange earner in
recent years.
8. Export earnings from cotton yarn, fabrics, made-ups, etc., stood at $ 5,506 million in
2010-11 which was 2.2 per cent of total export earnings.
INDIA'S BALANCE OF PAYMENTS: THE PRE-1991 PERIOD

Current Account
Period I: 1956-57 to 1975-76. This period comprising the Second, Third and Fourth plans and
first two years of the Fifth Plan saw heavy deficits in balance of payments and an extremely
tight payments position. This period witnessed three wars (in 1962 with China and in 1965 and
1971 with Pakistan), several droughts (the most severe being the droughts of 1965-66 and
1966-67), and the first oil shock in 1973. Though the government resorted to severe import
controls and foreign exchange regulations, the current account deficit stood at 1.8 per cent of
GDP. Foreign exchange reserves were at a low level, generally less than necessary to meet
three months' imports.
Period II: 1976-77 to 1979-80. This relatively short period was a golden period as far as the
balance of payments is concerned. India had a small current account surplus of 0.6 per cent of
the GDP during this period and also possessed foreign exchange reserves equivalent to about
seven months' imports. The relatively comfortable position on the balance of payments front
was due to the rapid increase in private remittances from oil exporting countries. A large
number of Indian workers temporarily migrated to the oil- rich Middle East countries to work
there as an unskilled worker, skilled technicians, office assistants, nurses etc. They kept sending
their net earnings to their families in India. As a result, transfer payments to India on private
account aggregated Rs. 3,128.7 crore over the Fifth Plan period.
Period III: 1980-81 to 1990-91. This period covering roughly the Sixth Plan (1980-81 to 1984-85)
and Seventh Plan (1985-86 to 1989-90) was marked by severe balance of payments difficulties.
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Earnings from invisibles were substantial throughout the Sixth Plan period. They touched the
highest level ever in the planning period during 1980-81. In that year they stood at Rs. 4,311
crore. In subsequent years of the plan, earnings from invisibles declined somewhat but in each
year they were Rs. 3,500 crore or more. However, during the Seventh Plan period private
remittances from middle-east countries showed tendencies of flattening out. As a result,
earnings from invisibles declined consistently and fell to Rs. 1,025 crore in 1989-90.
Capital Account: Financing the Deficit
A study of capital account of the balance of payments reveals the methods of financing the
deficit in the current account of the balance of payments. In periods I and II, the entire deficit
was financed through inflows of concessional assistance and this kept the debt servicing burden
low. In contrast, a substantial part of the deficit (indeed almost the entire incremental deficit, in
dollar terms) had to be financed through non-concessional loans obtained on market related
terms during period III.
Expecting prolonged balance of payment difficulties, the Government of India entered into an
arrangement with the International Monetary Fund (IMF) under the Extended Fund Facility
(EFF) in early 1980s. The EFF provides for assistance to member countries that need to make
structural adjustments in their economies with a view to achieving balance of payments
viability in the medium term. This facility enabled India to draw up to SDR 5 billion over a period
of four fiscal years from 1980-81 to 1984-85. The availability of EFF helped India considerably in
the financing of the current account deficit during 1980-81 to 1983-84. India terminated the EFF
before fully utilising the amount originally contemplated. Following the Gulf crisis and
deteriorating balance of payments situation, the Government of India resorted to substantial
drawals from the IMF from 1990-91 onwards under one or other facility.
The above discussion shows that the balance of payments situation turned grim in Period III.
With increasing trade deficits, flattening out of private remittances and a fall in concessional aid
to finance the ever increasing deficits, India had to depend on high cost methods of financing
the deficit, viz., external commercial borrowings, NRI deposits, short-term debt and assistance
from IMF. The conditions attached to the IMF loans are generally not known but it is a common
knowledge that such loans are packaged with high conditionality. As far as external commercial
borrowings, NRI deposits and short- term debts are concerned, these three sources are not only
more demanding and expensive in terms of debt-servicing obligations than external aid but are
also more volatile, being more vulnerable to expectations about foreign exchange risks. Also,
they represent a 'substantial future liability.
All these facts show that there was a marked 'turnaround' in the balance of payments situation
in 1993-94. The year 1996-97 witnessed a reduction in current account deficit from $ 5.9 billion
in 1995-96 to $ 4.6 billion. This was 1.2 per cent of GDP. Trade deficit rose to $ 17.8 billion in
1999-2000 but because of high earnings from invisibles, current account deficit was reduced to
about $ 4.7 billion.
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From the point of view of balance of payments, most significant have been the three years
2001-02, 2002-03 and 2003-04. In all these years, there was a surplus on current account. The
surplus on current account was 0.7 per cent of GDP in 2001-02, 1.2 per cent of GDP in 2002-03
and 2.3 per cent of GDP in 2003-04. It is the first time in post- Independence period that there
was a current account surplus for three consecutive years. This surplus was also accompanied
by strong net capital inflows.
After recording a surplus for three years in a row, the current account once again recorded a
deficit in 2004-05. The current account deficit in this year was $ 2,470 million (which was 0.4
per cent of GDP).
REASONS FOR SATISFACTORY BALANCE OF PAYMENTS SITUATION IN POSTREFORM PERIOD
High Earnings from Invisibles

Rise in External Commercial Borrowings
Non-Resident Deposits
Role of Foreign Investment. Since 1991 the government has been offering various
concessions, facilities and incentives to the foreign investors with a view to encouraging
foreign investment into the country. Foreign investment is constituted of: (1) foreign
direct investment, and (2) portfolio investment. Portfolio investment, in turn, consists of
(i) foreign institutional investment and (ii) Euro equities and others (which include
Global Depository Receipts (GDRs), American Depository Receipts (ADRs) and offshore
funds and others).
THE MANAGEMENT OF BALANCE OF PAYMENTS

In this section we propose to discuss some important issues relating to the management of
balance of payments. The issues are: (1) the linkages between fiscal and external policies, (2)
issues relating to trade strategy, (3) exchange rate management, (4) issues pertaining to the
capital account, (5) external debt, and (6) foreign currency reserves and reserve management
strategy.
LINKAGES BETWEEN FISCAL AND EXTERNAL POLICIES

As noted by C. Rangarajan, imbalances in the external sector reflect the fundamental fact that
aggregate absorption in the economy is ill excess of the domestically produced goods and
services. 15 Accordingly, measures to reduce excess demand in the economy constitute an
important policy ingredient of the adjustment towards creating a sustainable balance of
payments environment. While excess absorption can originate either from the private or the
public sector (or both), Rangarajan argues that, in reality, it is the fiscal deficit of the public
sector the is found to be associated with excess demand and the consequent deterioration of
the current account balance.
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IMPORT POLICY: THE PRE-REFORM PERIOD
The import policy of the Government of India in the pre-reform period had two important
constituents: (i) import restrictions and (ii) import substitution.
Import Liberalisation in 1980s
The year 1977-78 initiated a new era of import liberalisation in the country. This process was
carried forward ill 1980s. The annual import policies of 1980-81 to 1984-85 followed the liberal
approach of providing necessary imported inputs for the industrial sector.
1. The Import Control Regime
According to lagdish Bhagwati and Padma Desai, import policy had the following adverse
economic effects: (1) delays; (2) administrative and other expenses; (3) inflexibility; (4) lack of
co-ordination among different agencies; (5) absence of competition; (6) bias towards creation
of capacity despite underutilisation; (7) anticipatory and automatic protection afforded to
industries regardless of costs; (8) discrimination against exports; and (9) loss of revenue.
EXPORT POLICY: THE PRE-REFORM PERIOD

The Three Phases of Export Policy
Phase I was characterised by export pessimism as, following Prebisch, Singer and Nurkse, it was
believed that exports from developing countries faced a stagnant world demand and nothing
much could be done to increase them. It was also believed that the terms of trade of these
countries were destined to deteriorate over time regardless of the policies of developing
countries.
Phase II can be considered to have begun in 1973 and lasted for about a decade. "In this phase,
although this was not explicitly stated, it was recognised that import substitution policies by
themselves could not bring about a viability in India's balance of payments ..... In this second
phase exports were, therefore, accorded a high priority.
Phase III saw a more positive approach to export promotion strategy. While incentives for
export production were enhanced on the one hand, exports themselves were now being seen
as an integral part of industrial and development policies.
EXPORT PROMOTION POLICIES: AN OVERALL VIEW

Important export promotion measures undertaken by the Government of India during the prereform period were as follows:
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1. Cash Compensatory Support (CCS). This was introduced in 1966. It was designed to
provide compensation for unrebated indirect taxes paid by exporters on inputs, higher
freight rates, and market development costs.
2. Duty Drawback System. The object of the duty drawback system is to reimburse
exporters for tariff paid on the imported materials and intermediates and central excise
duties paid on domestically produced inputs which enter into export production. This is
a worldwide practice and the rationale is straightforward. Custom duties and excise
duties on inputs raise the cost of production in export industries and thereby affect the
competitiveness of exports. Therefore, exporters need to be compensated for the
escalation in their costs attributable to such customs and excise duties.
3. Replenishment Licences. In order to provide the export sector of the economy with
access to importable inputs that enter into export production, at international prices,
the import policy allowed special import facilities for registered exporters.
4. Advance Licences and Duty Exemption Scheme. Advance licences facilitated imports of
specified raw materials without payment of any customs duty. Such licences were
available only against confirmed export orders and/or letters of credit.
5. EPZs and 100 per cent EOUs. With a view to giving impetus to export drive, the
government set up Export Processing Zones (EPZs) which provide almost free trade
environment for export production so as to make Indian export products competitive in
the world market.
6. Subsidies on Domestic Raw Materials. The most important scheme in this category was
the International Price Reimbursement Scheme (IPRS) for steel, which equalised the
difference between international and domestic prices of steel obtained from domestic
sources.
7. Fiscal Concessions for Exports. Special fiscal treatment granted to exports took two
forms, that which related to the payment of indirect taxes, and that which related to the
payment of direct taxes. The first type of concession was incorporated in the duty
drawback system and the regime of cash compensatory support which sought to
reimburse indirect fares that were not refunded through the former. The second type of
concession was incorporated in income tax provisions where earnings from exports
were either partially exempted from income tax, or taxed at a lower rate.
8. Export Credit and Assistance to EPCs. Assistance was granted in the form of grants-inaid to the Export Promotion Councils and approved organisations, export houses,
consultancy organisations and individual exporters to undertake (a) market research,
commodity research, area survey etc, (b) export publicity and dissemination of
information, (c) trade delegations and teams, (d) participation in trade fairs and
exhibitions, (e) establishment of offices and branches in countries abroad, (j) research
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and development schemes etc., and (g) any other scheme that would promote the
development of market for Indian goods abroad.
9. Blanket Exchange Permit Scheme. A Blanket Exchange Permit Scheme was introduced
by the government in June 1987. The scheme aimed to give a major thrust to the
country's export promotion drive. Under the scheme, exporters were allowed, barring a
few products, to utilise 5-10 per cent of their foreign exchange earnings for undertaking
export promotion activities.
FOREIGN TRADE POLICY (2009-14)

The Policy Thrust: The Key Goals
The key objectives of FTP (2009-14) are as follows:
1. The short-term objective is to arrest and reverse the declining trend of exports and to
provide additional support to sectors hit badly by recession in the developed world.
2. The policy aims to achieve an annual export growth of 15 per cent for two years 200911; with an annual export target of $ 200 by March 2011.
3. The Commerce Ministry hopes that for the remaining three years of the FTP, the
country would return to a high export growth path of around 25 per cent per annum so
that the exports of goods and services will double by March 2014.
4. The long-term policy objective for the government is to double India's share in global
trade by 2020 (from 1.64 per cent in 2008 to 3.28 per cent 2020).
Main Features of FTP (2009-14)
1. Expansion of Focus Market Scheme. FTP (2009-14) has added 26 new markets to the
Focus Market Scheme.
2. Incentives under FMS and FPS. Incentive available under the Focus Market Scheme
(FMS) has been raised from 2.5 per cent to 3 per cent while incentive available under
Focus Product Scheme (FPS) has been raised from 1.25 per cent to 2 per cent.
3. EPCG Scheme. FTP (2009-14) has allowed zero- duty import of capital goods for
engineering and electronic products, basic chemicals and pharmaceuticals, apparels and
textiles, plastics, handicrafts, and leather.
4. DEPB Extended. The Duty Entitlement Passbook Scheme, which neutralises the
incidence of customs duty on the import content of export products, was extended by a
year to December 2010.
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5. EOUs. Export-oriented Units (EOUs) have been allowed to sell products manufactured
by them in DTA (domestic tariff area) up to a limit of 90 per cent instead of existing 75
per cent. EOUs will also be allowed to procure finished goods for consolidation, subject
to certain safeguards.
6. Thrust for Value-Added Manufacturing.
7. Simplification of Procedures, Reduction in Transaction Costs.
FOREIGN CAPITAL
COMPONENTS OF FOREIGN CAPITAL
Foreign capital can be obtained either in the form of concessional assistance or nonconcessional flows or foreign investment. Concessional assistance includes grants and loans
obtained at low rates of interest with long maturity period. Such assistance is provided
generally on bilateral basis (government to government) or through multilateral agencies like
the World Bank, International Development-Association etc.
Non-concessional assistance includes mainly external commercial borrowings, loans from other
governments/multilateral agenices on market terms and deposits obtained from non-residents.
Foreign investment is generally in the form of private foreign participation in certain sectors of
the domestic economy.
NEED FOR FOREIGN CAPITAL

1. Sustaining a high level of investment.
2. The technological gap.
3. Exploitation of natural resources.
4. Undertaking the initial risk: Many underdeveloped countries suffer from acute scarcity
of private entrepreneurs. This creates obstacles in the programmes of industrialisation.
An argument advanced in favour of the foreign capital is that it undertakes the 'risk' of
investment in the host countries and thus provides the much needed impetus to the
process of industrialisation.
5. Development of basic economic infrastructure.
6. Improvement in the balance of payments position.
INDIAN GOVERNMENT'S POLICY TOWARDS FOREIGN CAPITAL

1. No discrimination between foreign and Indian capital.
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2. Full opportunities to earn profits: The foreign interests operating in India would be
permitted to earn profits without subjecting them to undue controls.
3. Guarantee of compensation: If and when foreign enterprises are compulsorily acquired,
compensation will be paid on a fair and equitable basis as already announced in
government's statement of policy.
However, the real 'opening up' came with the announcement of the new industrial policy in July
1991. In subsequent period, several other measures for promoting foreign investment have
also been announced. The only sectors in which FDI is now prohibited are as follows:
1.
2.
3.
4.
5.
6.
7.
8.
Multi Brand Retail (Recently Cabinet has approved 49% FDI in it)
Atomic energy,
Lottery business,
Gambling and betting,
Business of chit fund,
Nidhi company,
Trading in transferable development rights, and
Activity/Sector not opened to private sector investment.
CHOICE OF EXCHANGE RATE REGIME

The two polar (or extreme) cases of exchange rate regimes are: (i) the fixed exchange rate
regime, and (ii) the fully floating (or market-determined) exchange rate regime. Between
these two extremes, one can think of a number of intermediate regimes which combine the
important features of these two regimes in different ways. The supporters of the fixed
exchange rate regime argue that it provides credibility, transparency, very low inflation and
financial stability. Countries for which pegged exchange rates seem to be appropriate are small
economies with a dominant trading partner that maintains a reasonably stable monetary
policy.' The international experience also reveals that a large number of small economies have
pegged their exchange rate regimes. For instance, small Caribbean island economies, some
small Central American countries and some Pacific island economies peg to the US dollar.
African countries like Lesotho, Namibia and Switzerland peg to the South African Rand.
Countries like Nepal and Bhutan peg their currency to the Indian rupee.
The other extreme is the fully floating exchange rate regime. In this case, there is no
government (or central bank) intervention and the currency's value is determined by the free
play of demand and supply forces. The chief merit of flexible or floating exchange rate is the
simplicity of its operative mechanism. The supporters of this exchange rate regime argue that it
is much easier to change one price, namely the exchange rate, than to alter thousands or
millions of individual prices, when an economy needs to enhance (or reduce) its international
price competitiveness in the interest of balance of payments adjustment.
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Between the two extremes of 'hard pegs' and 'full float' there is a large spectrum of exchange
rate systems that combine features of these two regimes in various degrees. Most countries in
the present-day world are following intermediate regimes with country-specific features, no
targets for the level of the exchange rate, and exchange market interventions to ensure orderly
exchange rate movements. While the increasingly accepted view is that exchange rates should
be flexible and not fixed or pegged, it is also emphasised that countries should be able to
intervene or manage exchange rates if movements are believed to be destabilising in the short
run.
Tarapore Committee on Fuller Capital Account Convertibility which submitted its Report on
July 31, 2006 envisages an exchange rate policy for India aimed at maintaining the real
effective exchange rate broadly within a +/-5 per cent band around a neutral level. This is
essentially a plea for 'managed floating.
EXCHANGE RATE MANAGEMENT IN INDIA

Over the last six decades since Independence, the exchange rate system in India has transited
from a fixed exchange rate regime where the Indian rupee was pegged to the pound sterling on
account of historic links with Britain to a basket-peg during the 1970s and 1980s and eventually
to the present form of market-determined exchange rate regime since March 1993.
Par Value System (1947-1971): After gaining Independence, India followed the par value
system of the IMF whereby the rupee's external par value was fixed at 4.15 grains of fine gold.
Pegged Regime (1971-1992): India pegged its currency to the US dollar (from August 1971 to
December 1991) and to the pound sterling (from December 1971 to September 1975).
The Period Since 1991: A two-step downward adjustment of 18-19 per cent in the exchange
rate of the Indian rupee was made on July 1 and 3, 1991.
Liberalised Exchange Rate Management System: The Finance Minister announced the
liberalised exchange rate management system (LERMS) in the Budget for 1992- 93. This system
introduced partial convertibility of rupee. Under this system, a dual exchange rate was fixed
under which 40 per cent of foreign exchange earnings were to be surrendered at the official
exchange rate while the remaining 60 per cent were to be converted at a market-determined
rate.
Market-determined Exchange Rate Regime (1993 to Present Day): The LERMS was essentially a
transitional mechanism and provided a fair degree of stability. There was also a healthy buildup of reserves. As a result, there was a smooth changeover to a regime under which the
exchange rates were unified effective March 1, 1993. Since then, the day-to-day movements in
exchange rates have been largely market-determined.
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INDIA'S FOREIGN EXCHANGE RESERVES

Over the period 1991 to 2011, India's foreign exchange reserves increased considerably - from
US $ 5.8 billion at end-March 1991 to $ 304.8 billion at end-March 2011. The traditional
measure of trade based indicator of reserve adequacy, i.e., the import cover which shrank to
three weeks of imports by the end of December 1990 also improved significantly to 14.4
months in 2007-08. It declined to 9.8 months in 2009-10 and stood at 9.6 months in 2010-11.
THE ISSUE OF CAPITAL ACCOUNT CONVERTIBILITY

Before taking up the discussion on capital account convertibility, it is important to understand
the difference between 'flotation' and 'convertibility.' "Full float" means that the exchange rate
is left to be determined by the demand and supply in the market, with no intervention by the
central bank to influence the exchange rate in any manner whatsoever. 011 the other hand,
"full (capital account) convertibility implies the unfettered right of residents and non-residents,
to convert the domestic currency into foreign currency and vice versa, for capital account
transactions involving changes in assets and liabilities in domestic and foreign currencies".
THE CASE FOR AND AGAINST CAPITAL ACCOUNT CONVERTIBILITY

The arguments put forward in favour of full capital account convertibility are as follows:
1. Liberal capital account leads to faster economic growth.
2. Developing countries need external capital to sustain an excess of investment over
domestic saving and an open capital account can attract foreign capital.
3. Since effective implementation of capital controls becomes more and more difficult in a
globalised economy, this de facto situation should be recognised de jure by lifting controls
on capital account transactions.
4. Full capital account convertibility will force governments to behave more responsibly on
fiscal balances. Unsustainable deficits would frighten investors, leading to capital flight from
the country - and this danger would force governments to act more responsibly in
controlling fiscal deficits.
While rewards are uncertain, risks are very obvious as a liberal capital account can amplify
and prolong a crisis.
China has attracted huge capital inflows without the currency being convertible even on the
current account. This shows that from the point of view of the foreign investor what matters is
the economic and industrial performance of the country and not capital account convertibility.
The experience of Mexico in 1994, East Asian countries in 1997, Russia in 1998, Brazil in 199899 and Argentina in 2001 has highlighted the risk of capital account liberalisation. For instance,
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the East Asian countries had undertaken several steps in 1980s and 1990s to open up their
capital accounts and had removed most of the restrictions on their financial markets. These
steps led to massive capital inflows in these countries. A major part of these inflows were in the
form of 'hot money'" which were extremely vulnerable to expectations and speculation.
INDIA'S APPROACH TO CAPITAL ACCOUNT CONVERTIBILITY

On account of the dangers of full capital account convertibility and the unhappy experience of
other countries who opted for such convertibility, the Reserve Bank of India opted for a
gradualist and phased capital account liberalisation programme. It started off by opting first for
current account liberalisation in stages.
IMPORTANT CAPITAL ACCOUNT LIBERALISATION MEASURES

1. All deposit schemes for NRIs have been made fully convertible.
2. NRIs will be free to repatriate in foreign currency their current earnings in India such as
rent, dividend, pension, interest and the like based on appropriate certification.
3. Indian citizens have been permitted to maintain foreign currency accounts out of foreign
exchange earned/retained from travel expenses.
4. Indian companies are allowed to access ADRs/ GDRs (American Depository Receipts/Global
Depository Receipts) markets through an automatic route without approval of the Ministry
of Finance subject to specified norms and post-issue reporting requirements.
5. FDI is allowed up to 100 per cent on the automatic route in most sectors subject to sect oral
rules/regulations applicable.
6. ECBs (external commercial borrowings) have now been allowed under an automatic route
up to US $ 500 million under certain conditions.
7. Investment in overseas financial sector is also permitted subject to certain terms and
conditions.
FOREIGN EXCHANGE REGULATION ACT (FERA), 1973

Foreign Exchange Regulation Act (FERA) was promulgated in 1973 and it came into force on
January 1, 1974. Section 29 of this Act referred directly to the operations of MNCs in India.
According to the Section, all non-banking foreign branches and subsidiaries with foreign equity
exceeding 40 per cent had to obtain permission to establish new undertakings, to purchase
shares in existing companies, or to acquire wholly or partly any other company.
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According to these guidelines, the principal rule was that all branches of foreign companies
operating in India should convert themselves into Indian companies with at least 60 per cent
local equity participation.
FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 1999

The Foreign Exchange Management Bill (FEMA) was introduced by the Government of India in
Parliament on August 4, 1998. The Bill aims "to consolidate and amend the law relating to
foreign exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in India.
FEMA: A MAJOR DEPARTURE FROM FERA

As is clear from the name of the Act itself, the emphasis under FEMA is on 'exchange
management' whereas under FERA the emphasis was on 'exchange regulation' or exchange
control. Under FERA it was necessary to obtain Reserve Bank's permission, either special or
general, in respect of most of the regulations there under. FEMA has brought about a sea
change in this regard and except for Section 3 which relates to dealing in foreign exchange, etc.,
no other provisions of FEMA stipulate obtaining Reserve Bank's permission.
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CHAPTER 11: INTERNATIONAL ORGANISATIONS

THE INTERNATIONAL MONETARY FUND
The International Monetary Fund (IMF) is an international organization that was created on
July 22, 1944 at the Bretton Woods Conference and came into existence on December 27,
1945 when 29 countries signed the Articles of Agreement. It originally had 45 members. The
IMF's stated goal was to stabilize exchange rates and assist the reconstruction of the worlds
international payment system post-World War II. Countries contribute money to a pool through
a quota system from which countries with payment imbalances can borrow funds temporarily.
Through this activity and others such as surveillance of its members' economies and policies,
the IMF works to improve the economies of its member countries. The IMF describes itself as
an organization of 188 countries, working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world. The organization's stated objectives
are to promote international economic cooperation, international trade, employment, and
exchange rate stability, including by making financial resources available to member countries
to meet balance of payments needs. Its headquarters are in Washington, D.C., United States.
Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar
period, rules for IMF membership were left relatively loose. Members needed to make periodic
membership payments towards their quota, to refrain from currency restrictions unless granted
IMF permission, to abide by the Code of Conduct in the IMF Articles of Agreement, and to
provide national economic information. However, stricter rules were imposed on governments
that applied to the IMF for funding. The countries that joined the IMF between 1945 and 1971
agreed to keep their exchange rates secured at rates that could be adjusted only to correct a
"fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement.
Voting power: Voting power in the IMF is based on a quota system. Each member has a
number of basic votes" (each member's number of basic votes equals 5.502% of the total
votes), plus one additional vote for each Special Drawing Right (SDR) of 100,000 of a member
countrys quota. Some members have a very difficult relationship with the IMF and even when
they are still members they do not allow themselves to be monitored. Argentina for example
refuses to participate in an Article IV Consultation with the IMF.
Benefits: Member countries of the IMF have access to information on the economic policies of
all member countries, the opportunity to influence other members economic policies,
technical assistance in banking, fiscal affairs, and exchange matters, financial support in times
of payment difficulties, and increased opportunities for trade and investment.
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THE WORLD BANK

The World Bank is an international financial institution that provides loans to developing
countries for capital programs. The World Bank's official goal is the reduction of poverty. The
World Bank differs from the World Bank Group, in that the World Bank comprises only two
institutions: the International Bank for Reconstruction and Development (IBRD) and the
International Development Association (IDA), whereas the latter incorporates these two in
addition to three more: International Finance Corporation (IFC), Multilateral Investment
Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes
(ICSID).
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

(IBRD)
Founded in 1944 to help Europe recover from World War II, the International Bank for
Reconstruction and Development (IBRD) is one of five institutions that make up the World
Bank Group. IBRD is the part of the World Bank (IBRD/IDA) that works with middle-income and
creditworthy poorer countries to promote sustainable, equitable and job-creating growth,
reduce poverty and address issues of regional and global importance.
Structured something like a cooperative, IBRD is owned and operated for the benefit of its
187 member countries. Delivering flexible, timely and tailored financial products, knowledge
and technical services, and strategic advice helps its members achieve results. Through the
World Bank Treasury, IBRD clients also have access to capital on favorable terms in larger
volumes, with longer maturities, and in a more sustainable manner than world financial
markets typically provide.
Specifically, the IBRD:
supports long-term human and social development needs that private creditors do not
finance;
preserves borrowers' financial strength by providing support in crisis periods, which is

when poor people are most adversely affected;
uses the leverage of financing to promote key policy and institutional reforms (such as
safety net or anticorruption reforms);
creates a favorable investment climate in order to catalyze the provision of private

capital;
Provides financial support (in the form of grants made available from the IBRD's net
income) in areas that are critical to the well-being of poor people in all countries.
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INTERNATIONAL DEVELOPMENT ASSOCIATION

The International Development Association (IDA) is the part of the World Bank that helps the
worlds poorest countries. Established in 1960, IDA aims to reduce poverty by providing loans
(called credits) and grants for programs that boost economic growth, reduce inequalities,
and improve peoples living conditions.
IDA complements the World Banks original lending armthe International Bank for
Reconstruction and Development (IBRD). IBRD was established to function as a self-sustaining
business and provides loans and advice to middle-income and credit-worthy poor countries.
IBRD and IDA share the same staff and headquarters and evaluate projects with the same
rigorous standards.
IDA is one of the largest sources of assistance for the worlds 81 poorest countries, 39 of
which are in Africa. It is the single largest source of donor funds for basic social services in these
countries. IDA-financed operations deliver positive change for 2.5 billion people, the majority of
whom survive on less than $2 a day.
IDA lends money on concessional terms. This means that IDA charges little or no interest and
repayments are stretched over 25 to 40 years, including a 5- to 10-year grace period. IDA also
provides grants to countries at risk of debt distress.
In addition to concessional loans and grants, IDA provides significant levels of debt relief
through the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief
Initiative (MDRI).
Since its inception, IDA has supported activities in 108 countries. Annual commitments have
increased steadily and averaged about $15 billion over the last three years, with about 50
percent of that going to Africa. For the fiscal year ending on June 30, 2012, IDA commitments
reached $14.8 billion spread over 160 new operations.
INTERNATIONAL FINANCE CORPORATION

The International Finance Corporation (IFC) is an international financial institution which
offers investment, advisory, and asset management services to encourage private sector
development in developing countries. The IFC is a member of the World Bank Group and is
headquartered in Washington, D.C., United States. It was established in 1956 as the private
sector arm of the World Bank Group to advance economic development by investing in
strictly for-profit and commercial projects which reduce poverty and promote development.
The IFC's stated aim is to create opportunities for people to escape poverty and achieve better
living standards by mobilizing financial resources for private enterprise, promoting accessible
and competitive markets, supporting businesses and other private sector entities, and creating
jobs and delivering necessary services to those who are poverty-stricken or otherwise
vulnerable. Since 2009, the IFC has focused on a set of development goals which its projects are
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expected to target. Its goals are to increase sustainable agriculture opportunities, improve
health and education, increase access to financing for microfinance and business clients,
advance infrastructure, help small businesses grow revenues, and invest in climate health.
MULTILATERAL INVESTMENT GUARANTEE AGENCY

Created in 1988 MIGA aims to encourage foreign direct investment by providing guarantees,
known as political risk insurance, to foreign investors against loss caused by non-commercial
risks in developing countries. MIGA, which is part of the World Bank Group, also provides
technical assistance such as capacity building and advisory services to help countries attract
foreign investment. In addition MIGA provides dispute mediation services to reduce future
obstacles to investment. Since its creation MIGA has issued nearly $14.7 billion in guarantees
for projects in 91 countries. 42 per cent of its activity is concentrated within areas considered to
be high-risk and low-income, many of which are in Africa.
INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES

The International Centre for Settlement of Investment Disputes (ICSID) is an international
arbitration institution which facilitates arbitration and conciliation of legal disputes between
international investors. The ICSID is a member of the World Bank Group and is headquartered
in Washington, D.C., United States. It was established in 1966 as a multilateral specialized
dispute resolution institution to encourage international flow of investment and mitigate noncommercial risks. Although the ICSID is a member of the World Bank Group and receives its
funding from the World Bank, it was established as an autonomous institution by a separate
treaty drafted by the International Bank for Reconstruction and Development's executive
directors and signed by member countries. The ICSID is contracted with and governed by its
member countries, but has its own Secretariat which carry out its normal operations. The ICSID
also helps administer dispute resolution proceedings under other treaties and for alternative
arbitration mechanisms. The center also performs advisory activities and maintains several
publications.
WORLD TRADE ORGANISATION AND GATT

The World Trade Organization (WTO) is an organization that intends to supervise and
liberalize international trade. The organization officially commenced on January 1, 1995
under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade
(GATT), which commenced in 1948.The organization deals with regulation of trade between
participating countries; it provides a framework for negotiating and formalizing trade
agreements, and a dispute resolution process aimed at enforcing participants' adherence to
WTO agreements, which are signed by representatives of member governments and ratified by
their parliaments. Most of the issues that the WTO focuses on derive from previous trade
negotiations, especially from the Uruguay Round (19861994).
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The organization is attempting to complete negotiations on the Doha Development Round,

which was launched in 2001 with an explicit focus on addressing the needs of developing
countries. As of June 2012, the future of the Doha Round remains uncertain: the work
programme lists 21 subjects in which the original deadline of 1 January 2005 was missed, and
the round is still incomplete. The conflict between free trade on industrial goods and services
but retention of protectionism on farm subsidies to domestic agricultural sector (requested by
developed countries) and the substantiation of the international liberalization of fair trade on
agricultural products (requested by developing countries) remain the major obstacles. These
points of contention have hindered any progress to launch new WTO negotiations beyond the
Doha Development Round. As a result of this impasse, there have been an increasing number of
bilateral free trade agreements signed. As of July 2012, there are various negotiation groups in
the WTO system for the current agricultural trade negotiation which is in the condition of
stalemate. WTO's current Director-General is Pascal Lamy
The WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was established
after World War II in the wake of other new multilateral institutions dedicated to international
economic cooperation notably the Bretton Woods institutions known as the World Bank and
the International Monetary Fund. A comparable international institution for trade, named the
International Trade Organization was successfully negotiated. The ITO was to be a United
Nations specialized agency and would address not only trade barriers but other issues indirectly
related to trade, including employment, investment, restrictive business practices, and
commodity agreements. But the ITO treaty was not approved by the U.S. and a few other
signatories and never went into effect. In the absence of an international organization for
trade, the GATT would over the years "transform itself" into a de facto international
organization.
Uruguay Round: Well before GATT's 40th anniversary, its members concluded that the GATT
system was straining to adapt to a new globalizing world economy. In response to the problems
identified in the 1982 Ministerial Declaration (structural deficiencies, spill-over impacts of
certain countries' policies on world trade GATT could not manage etc.), the eighth GATT round
known as the Uruguay Round was launched in September 1986.
It was the biggest negotiating mandate on trade ever agreed: the talks were going to extend
the trading system into several new areas, notably trade in services and intellectual property,
and to reform trade in the sensitive sectors of agriculture and textiles; all the original GATT
articles were up for review. The Final Act concluding the Uruguay Round and officially
establishing the WTO regime was signed April 15, 1994, during the ministerial meeting at
Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.
The agreements fall into a structure with six main parts:
The Agreement Establishing the WTO
Goods and investment the Multilateral Agreements on Trade in Goods including the
GATT 1994 and the Trade Related Investment Measures (TRIMS)
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Services the General Agreement on Trade in Services
Intellectual property the Agreement on Trade-Related Aspects of Intellectual

Property Rights (TRIPS)
Dispute settlement (DSU)
Reviews of governments' trade policies (TPRM)
Ministerial conferences: The topmost decision-making body of the WTO is the Ministerial
Conference, which usually meets every two years. It brings together all members of the WTO,
all of which are countries or customs unions. The Ministerial Conference can take decisions on
all matters under any of the multilateral trade agreements.
Ministerial Conference
1st Singapore ministerial conference
2nd Geneva ministerial conference
3rd Seattle ministerial conference
4th Doha ministerial conference
5th Cancun ministerial conference
6th Hong Kong ministerial conference
7th Geneva ministerial conference
8th Geneva ministerial conference
9th Bali ministerial Conference (expected)
Year
1996.
1998
1999
2001
2003
2005
2010
2011
2013
Doha Development Agenda:
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

The United Nations Conference on Trade and Development (UNCTAD) was established in
1964 as a permanent intergovernmental body. It is the principal organ of the United Nations
General Assembly dealing with trade, investment, and development issues.
The organization's goals are to "maximize the trade, investment and development
opportunities of developing countries and assist them in their efforts to into the world
economy on an equitable basis." The creation of the conference was based on concerns of
developing countries over the international market, multi-national corporations, and great
disparity between developed nations and developing nations. In the 1970s and 1980s, UNCTAD
was closely associated with the idea of a New International Economic Order (NIEO). The
primary objective of the UNCTAD is to formulate policies relating to all aspects of development
including trade, aid, transport, finance and technology. The Conference ordinarily meets once
in four years. The first conference took place in Geneva in 1964, second in New Delhi in 1968,
the third in Santiago in 1972, fourth in Nairobi in 1976, the fifth in Manila in 1979, the sixth in
Belgrade in 1983, the seventh in Geneva in 1987, the eighth in Cartagena in 1992 and the ninth
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at Johannesburg (South Africa)in 1996. The Conference has its permanent secretariat in
Geneva. One of the principal achievements of UNCTAD has been to conceive and implement
the Generalized System of Preferences (GSP).
ASIAN DEVELOPMENT BANK

The Asian Development Bank (ADB) is a regional development bank established on 22 August
1966 to facilitate economic development of countries in Asia. The bank admits the members
of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP,
formerly known as the United Nations Economic Commission for Asia and the Far East) and
non-regional developed countries. From 31 members at its establishment, ADB now has 67
members - of which 48 are from within Asia and the Pacific and 19 outside. ADB was modeled
closely on the World Bank, and has a similar weighted voting system where votes are
distributed in proportion with member's capital subscriptions.
SAFTA
What is Safta?
It is an abbreviation for the South Asian Free Trade Area. It is a proposed FTA between the
seven members of the Saarc group. These include Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka.
What is its ultimate goal?
It will replace the earlier South Asia Preferential Trade Agreement (SAFTA), which was limited in
its scope. The ultimate aim of Safta will be to put in place a full-fledged South Asia Economic
Union on the lines of the EU. Safta is scheduled for launch in January 2006 and will lead to
reduction of tariffs for intra-regional trade among Saarc countries.
What falls within the ambit of Safta?
The agreement incorporates trade in goods. Services and investment are not part of the
agreement.
What are the objectives guiding Safta?
Among its aims are: promoting and enhancing mutual trade and economic cooperation by
eliminating barriers in trade, promoting conditions of fair competition in the free trade area,
ensuring equitable benefits to all and establishing a framework.
G-8
The Group of Eight ('G8) is for the governments of eight of the world's largest economies. (It
excludes, however, two of the actual eight largest economies by nominal GDP: China, 2nd,
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and Brazil, 7th). The forum originated with a 1975 summit hosted by France that brought
together representatives of six governments: France, Germany, Italy, Japan, the United
Kingdom, and the United States, thus leading to the name Group of Six or G6. The summit
became known as the Group of Seven or G7 the following year with the addition of Canada. In
1997, Russia was added to the group which then became known as the G8. The European Union
is represented within the G8 but cannot host or chair summits. Collectively, the G8 nations
comprise 51.0% of 2011 global nominal GDP and 42.5% of global GDP (PPP). Each calendar year,
the responsibility of hosting the G8 rotates through the member states in the following order:
France, United States, United Kingdom, Russia, Germany, Japan, Italy, and Canada. The holder
of the presidency sets the agenda, hosts the summit for that year, and determines which
ministerial meetings will take place. Lately, both France and the United Kingdom have
expressed a desire to expand the group to include five developing countries, referred to as the
Outreach Five (O5) or the Plus Five: Brazil, People's Republic of China, India, Mexico, and South
Africa. These countries have participated as guests in previous meetings, which are sometimes
called G8+5.
G-20
The G-20 was formed in 1999 to give developing countries a more powerful voice in forming
the global economy. Together these countries represent two-thirds of the world's people,
and 85% of the its economy. The meetings started as an informal get-together of finance
ministers and central bankers. During the 2008 financial crisis, the first ever G-20 summit was
held on November 16-17 in Washington, DC. The leaders of the G-20 countries agreed to
regulate hedge funds and debt-rating companies such as Standard & Poor's. They also sought to
strengthen standards for accounting and derivatives. Insufficient regulations and standards
were blamed for the crisis that turned into a global recession. For more, see U.S. Resists G-20
Summit Call for Global Financial Regulation.
The G-20 finance ministers and central bank governors continue to meet twice a year, usually
in coordination with meetings of the International Monetary Fund, the World Bank, and the
G-20 summits themselves.
Significant G-20 Summit Meetings:
April 1-2, 2009 - London: G-20 leaders pledged $1 trillion to the IMF and World Bank to
help emerging market countries ward off the effects of the recession. For more see G-20
Global Plan Will Shorten Recession.
September 24-25, 2009 - Pittsburgh: Leaders established a Financial Stability Board that
would implement financial reforms. They agreed to increase banks' capital
requirements, regulate hedge funds, tax havens and executive pay. For more, see G-20
Summit Start of New World Order?
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June 26-27, 2010 - Toronto: Leaders agreed to cut their budget deficits in half by 2013,
and eliminate deficits altogether three years later. For more, see G-20 Summit Focuses
on Debt Reduction.
November 11-12, 2010 - Seoul: In advance of the G-20 meeting, finance ministers
pledged to put a stop to the currency wars which threatened to create global inflation.
For more, see G-20 Meeting Drives Stocks Up, Dollar Down.
November 2-4, 2011 - Cannes: The summit was dominated by discussions about
addressing the Greek debt crisis. They also agreed on plans to create jobs. For more, see
EU Satisfied with Achievements of G20 Summit
2012 Meeting: In June 18-19, 2012, the G-20 meeting was held in Los Cabos, Mexico. It
focused on the euro zone debt crisis. The G-20 leaders pressured German Chancellor Angela
Merkel to work with other European Union leaders to develop a more sustainable Grand Plan
to resolve the Greece debt crisis. Germany does not want to continue to bail out Greece
without continued austerity programs. That's because German taxpayers will ultimately face
higher costs to fund the bailout, and Germany itself is already highly indebted.
In return for continued bailout funds, Germany would like a fiscal union to support the EU's
monetary union. This means EU members would give up political control of their budgets to an
EU-wide approval process. This is necessary before she would support Euro-wide bonds.
(Source: Reuters, G-20 to Press Europe for Lasting Crisis Fix, June 18, 2012)
Its members include: The eight leading industrialized nations - U.S., Japan, Germany, UK,
France, Italy, Canada and Russia. This group of countries also meets on their own, and are
known as the G-8). Eleven emerging market and smaller industrialized countries: Argentina,
Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea,
Turkey, plus the EU.
Why Is the G-20 Important?
The growth of Brazil, Russia, India and China (the BRIC countries) has driven the growth of the
global economy. The G-8 countries grow slower. Therefore, the BRIC countries are critical for
ensuring continued global economic prosperity.
In the past, the leaders of the G-8 could meet and decide on global economic issues without
much interference from the BRIC countries. However, these countries have become more
important in providing the needs of the G-8 countries: Russia provides most of the natural gas
to Europe, China provides much of the manufacturing for the U.S., and India provides high tech
services.
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ASEAN
The Association of Southeast Asian Nations (ASEAN) was formed in 1967 by Indonesia,
Malaysia, the Philippines, Singapore, and Thailand to promote political and economic
cooperation and regional stability. Brunei joined in 1984, shortly after its independence from
the United Kingdom, and Vietnam joined ASEAN as its seventh member in 1995. Laos and
Burma were admitted into full membership in July 1997 as ASEAN celebrated its 30th
anniversary. Cambodia became ASEANs tenth member in 1999.
The ASEAN Declaration in 1967, considered ASEANs founding document, formalized the
principles of peace and cooperation to which ASEAN is dedicated. The ASEAN Charter entered
into force on 15 December 2008. With the entry into force of the ASEAN Charter, ASEAN
established its legal identity as an international organization and took a major step in its
community-building process.
The ASEAN Community is comprised of three pillars, the Political-Security Community,
Economic Community and Socio-Cultural Community. Each pillar has its own Blueprint
approved at the summit level, and, together with the Initiative for ASEAN Integration (IAI)
Strategic Framework and IAI Work Plan Phase II (2009-2015), they form the Roadmap for and
ASEAN Community 2009-2015.
ASEAN commands far greater influence on Asia-Pacific trade, political, and security issues
than its members could achieve individually. This has driven ASEANs community building
efforts. This work is based largely on consultation, consensus, and cooperation.
Every year following the ASEAN Ministerial Meeting, ASEAN holds its Post-Ministerial
Conference (PMC) to which the Secretary of State is invited. In 1994, ASEAN took the lead in
establishing the ASEAN Regional Forum (ARF), which now has 27 members and meets each
year at the ministerial level just after the PMC.
ASEAN REGIONAL FORUM

The Twenty-Sixth ASEAN Ministerial Meeting and Post Ministerial Conference, which were
held in Singapore on 23-25 July 1993, agreed to establish the ASEAN Regional Forum (ARF).
The inaugural meeting of the ARF was held in Bangkok on 25 July 1994.
Objectives: The objectives of the ASEAN Regional Forum are outlined in the First ARF
Chairman's Statement (1994), namely:
To foster constructive dialogue and consultation on political and security issues of

common interest and concern; and
To make significant contributions to efforts towards confidence-building and preventive

diplomacy in the Asia-Pacific region.
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The 27th ASEAN Ministerial Meeting (1994) stated that "The ARF could become an effective
consultative Asia-Pacific Forum for promoting open dialogue on political and security
cooperation in the region. In this context, ASEAN should work with its ARF partners to bring
about a more predictable and constructive pattern of relations in the Asia Pacific."
The current participants in the ARF are as follows: Australia, Bangladesh, Brunei Darussalam,
Cambodia, Canada, China, European Union, India, Indonesia, Japan, Democratic Peoples'
Republic of Korea, Republic of Korea, Laos, Malaysia, Myanmar, Mongolia, New Zealand,
Pakistan, Papua New Guinea, Philippines, Russian Federation, Singapore, Sri Lanka, Thailand,
Timor Leste, United States, and Vietnam.
ASEAN+3 comprise of 10 ASEAN nation and China, South Korean and Japan.
ASEAN+6 comprise of 10 ASEAN nation and China, Japan, South Korea, India, Australia and New
Zealand.
EUROPEAN UNION
The European Union is a geo-political entity covering a large portion of the European
continent. It is founded upon numerous treaties and has undergone expansions that have
taken it from 6 member states to 27, a majority of states in Europe.
History
The precursor to the European Union was established after World War II in the late 1940s in an
effort to unite the countries of Europe and end the period of wars between neighboring
countries. These nations began to officially unite in 1949 with the Council of Europe. In 1950
the creation of the European Coal and Steel Community expanded the cooperation. The six
nations involved in this initial treaty were Belgium, France, Germany, Italy, Luxembourg, and
the Netherlands. Today these countries are referred to as the "founding members."
During the 1950s, the Cold War, protests, and divisions between Eastern and Western Europe
showed the need for further European unification. In order to do this, the Treaty of Rome was
signed on March 25, 1957, thus creating the European Economic Community and allowing
people and products to move throughout Europe. Throughout the decades additional countries
joined the community.
In order to further unify Europe, the Single European Act was signed in 1987 with the aim of
eventually creating a "single market" for trade. Europe was further unified in 1989 with the
elimination of the boundary between Eastern and Western Europe - the Berlin Wall.
The Modern-Day EU
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Throughout the 1990s, the "single market" idea allowed easier trade, more citizen interaction
on issues such as the environment and security, and easier travel through the different
countries.
Even though the countries of Europe had various treaties in place prior to the early 1990s, this
time is generally recognized as the period when the modern day European Union arose due to
the Treaty of Maastricht on European Union which was signed on February 7, 1992 and put
into action on November 1, 1993.
The Treaty of Maastricht identified five goals designed to unify Europe in more ways than just
economically. The goals are:
1)
2)
3)
4)
5)
To strengthen the democratic governing of participating nations.

To improve the efficiency of the nations.
To establish an economic and financial unification.
To develop the "Community social dimension."
To establish a security policy for involved nations.
In order to reach these goals, the Treaty of Maastricht has various policies dealing with issues
such as industry, education, and youth. In addition, the Treaty put a single European currency,
the euro, in the works to establish fiscal unification in 1999. In 2004 and 2007, the EU
expanded, bringing the total number of member states as of 2008 to 27.
In December 2007, all of the member nations signed the Treaty of Lisbon in hopes of making
the EU more democratic and efficient to deal with climate change, national security, and
sustainable development.
How a Country Joins the EU?
For countries interested in joining the EU, there are several requirements that they must meet
in order to proceed to accession and become a member state.
The first requirement has to do with the political aspect. All countries in the EU are required to
have a government that guarantees democracy, human rights, and the rule of law, as well as
protects the rights of minorities.
In addition to these political areas, each country must have a market economy that is strong
enough to stand on its own within the competitive EU marketplace.
Finally, the candidate country must be willing to follow the objectives of the EU that deal
politics, the economy, and monetary issues. This also requires that they be prepared to be a
part of the administrative and judicial structures of the EU.
After it is believed that the candidate nation has met each of these requirements, the country is
screened, and if approved the Council of the European Union and the country draft a Treaty of
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Accession which then goes to the European Commission and European Parliament ratification
and approval. If successful after this process, the nation is able to become a member state.
How the EU Works?
With so many different nations participating, the governance of the EU is challenging, however,
it is a structure that continually changes to become the most effective for the conditions of the
time. Today, treaties and laws are created by the "institutional triangle" that is composed of
the Council representing national governments, the European Parliament representing the
people, and the European Commission that is responsible for holding up Europe's main
interests.
The Council is formally called the Council of the European Union and is the main decision
making body present. There is also a Council President here and each member state takes a six
month turn in the position. In addition, the Council has the legislative power and decisions are
made with a majority vote, a qualified majority, or a unanimous vote from member state
representatives.
The European Parliament is an elected body representing the citizens of the EU and
participates in the legislative process as well. These representative members are directly
elected every five years.
Finally, the European Commission manages the EU with members that are appointed by the
Council for five year terms- usually one Commissioner from each member state. Its main job is
to uphold the common interest of the EU.
In addition to these three main divisions, the EU also has courts, committees, and banks which
participate on certain issues and aid in successful management.
IBSA
After the failed Cancn Conference of the World Trade Organisation (WTO), developing
countries felt the need to strengthen their cooperation in trade, investment and economic
diplomacy. The leaders of three regional goliaths spearheaded a new approach for SouthSouth cooperation at the 2003 UN General Assembly Forum, resulting in a trilateral IndiaBrazil-South Africa agreement. The term, South-South cooperation signifies the cooperation
between India (South Asia), Brazil (South America) and South Africa.
The establishment of IBSA was formalized by the Brasilia Declaration, which mentions India,
Brazil and South Africa democratic credentials, their condition as developing nations and their
capacity of acting on a global scale as the main reasons for the three countries to come
together. Their status as middle powers, their common need to address social inequalities
within their borders and the existence of consolidated industrial areas in the three countries
are often mentioned as additional elements that bring convergence amongst the members of
the Forum.
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IBSA concluded its first round of Summits of Heads of State and Government Summits in 2008.
Over the years, IBSA has become an umbrella for various initiatives, both in the diplomatic field
and in Public Administration sectors. Thus, the Group has also become an instrument for
connecting India, Brazil and South Africa at all levels, aiming not only to increase these
countries projection on the international scenario but to strengthen the relations amongst
themselves.
IBSA keeps an open and flexible structure. It does not have a headquarter nor a permanent
executive secretariat. At the highest level, in counts on the Summits of Heads of State and
Government, whose last edition occurred on October 18th, and 19th, 2011, in South Africa. The
next Summit will occur in 2013, in India.
The work of monitoring and coordinating the IBSA activities is a responsibility of Senior Officials
of the Foreign Ministers, known as Focal Points.
In summary, the progress of the activities can be divided into four tracks:
(i) Political Coordination
(ii) Sectoral Cooperation, through 16 Working Groups
(iii) IBSA Fund for Alleviation of Poverty and Hunger
(iv) Involvement of other actors beyond the Executive, e.g.: parliamentarians, Constitution
courts, civil society, businessmen and opinion makers.
ASIAN CLEARING UNION

The Asian Clearing Union (ACU), with headquarters in Tehran, Iran, was established on
December 9, 1974 at the initiative of the United Nations Economic and Social Commission for
Asia and the Pacific (ESCAP). The primary objective of ACU, at the time of its establishment, was
to secure regional co-operation as regards the settlement of monetary transactions among
the members of the Union and to provide a system for clearing payments among the member
countries on a multilateral basis. Currently, the members of ACU are the central banks of
Bangladesh, Bhutan, Iran, India, Maldives, Nepal, Pakistan, Sri Lanka, and Myanmar.
FOOD AND AGRICULTURE ORGANIZATION

The Food and Agriculture Organization of the United Nations (FAO) is a specialized agency of
the United Nations that leads international efforts to defeat hunger. Serving both developed
and developing countries, FAO acts as a neutral forum where all nations meet as equals to
negotiate agreements and debate policy. FAO is also a source of knowledge and information,
and helps developing countries and countries in transition modernize and improve agriculture,
forestry and fisheries practices, ensuring good nutrition and food security for all. Its Latin
motto, fiat panis, translates into English as "let there be bread".
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The agency is directed by the Conference of Member Nations, which meets every two years to
review the work carried out by the organization and to approve a Programme of Work and
Budget for the next two-year period. The Conference elects a council of 49 member states
(serve three-year rotating terms) that acts as an interim governing body, and the DirectorGeneral, that heads the agency.
FAO is composed of eight departments: Administration and Finance, Agriculture and Consumer
Protection, Economic and Social Development, Fisheries and Aquaculture, Forestry, Knowledge
and Communication, Natural Resource Management and Technical Cooperation.
BRICS
BRICS, originally "BRIC" before the inclusion of South Africa in 2010, is the title of an
association of emerging national economies: Brazil, Russia, India, China and South Africa.
With the possible exception of Russia, the BRICS members are all developing or newly
industrialised countries, but they are distinguished by their large, fast-growing economies
and significant influence on regional and global affairs. As of 2013, the five BRICS countries
represent almost 3 billion people, with a combined nominal GDP of US$14.9 trillion, and an
estimated US$4 trillion in combined foreign reserves. Presently, India holds the chair of the
BRICS group.
Summit
1st
2nd
3rd
4th
5th
Participant
BRIC
BRIC
BRICS
BRICS
BRICS(expected)
Year
2009
2010
2011
2012
2013
Place
Russia
Brazil
China
India
South Africa
OECD
The Organisation for Economic Co-operation and Development, abbreviated as OECD and
based in Paris (FR), is an international organization of 34 countries committed to democracy
and the market economy. The forerunner to the OECD was the Organisation for European
Economic Co-operation and Development (OEEC), formed in 1947 to administer American and
Canadian aid under the auspices of the Marshall Plan following World War II. The OECD was
established on 14 December 1960. It is based in Paris.
OPEC
The Organization of the Petroleum Exporting Countries is an intergovernmental organization
of twelve oil-producing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait,
Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. OPEC has had its
headquarters in Vienna since 1965, and hosts regular meetings among the oil ministers of its
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Member Countries. Indonesia withdrew in 2008 after it became a net importer of oil, but
stated it would likely return if it became a net exporter again.
According to its statutes, one of the principal goals is the determination of the best means for
safeguarding the organization's interests, individually and collectively. It also pursues ways and
means of ensuring the stabilization of prices in international oil markets with a view to
eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests
of the producing nations and to the necessity of securing a steady income to the producing
countries; an efficient and regular supply of petroleum to consuming nations, and a fair return
on their capital to those investing in the petroleum industry.
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CHAPTER 12: INDIA AND THE WTO

DOHA ROUND OF MULTILATERAL TRADE NEGOTIATIONS
After the Uruguay Round, there was a perception among the developing countries that the
Uruguay Round has created imbalances by putting additional policy adjustment pressure on
developing countries while providing only limited rights to them. They, thus, wanted a round
that could correct those imbalances. On the other side, developed countries were of the view
that some new agenda should be there for a new round of negotiations. Also, many of the
agenda items of Uruguay Round were unfinished. So, the selection of the agenda had following
three alternatives:
a) A comprehensive and ambitious new round, including a discussion of implementation
issues (View endorsed by Developed Countries).
b) New round, but with a limited agenda, including a discussion of implementation issues
(Intermediate solution).
c) No new round, but only implementation issues and built-in-agenda to be discussed
(View endorsed by India and Low and Middle Income Countries).
Due to the differences in the views of the member countries, the draft of the ministerial text
was revised a number of times. While the Doha Ministerial Declaration (DMD) was variously
interpreted, the developing countries, in particular, had described it as a development round.
Several commitments were undertaken in connection with the integration of the LDCs into the
multilateral trading system and the global economy such as: commitment to the objective of
duty-free, quota-free market access for products originating from LDCs and facilitate and
accelerate the accession process of the LDCs to the WTO. Special and differential treatment
(SDT) was mandated as an integral element of all negotiations.
The work programme adopted in 2001 for Doha round of negotiations had issues and concerns
related to implementation, agriculture, services, market access for non-agricultural products,
trade-related aspects of intellectual property rights, relationship between trade and
investment, interaction between trade and competition policy, transparency in government
procurement, trade facilitation, WTO rules, dispute settlement understanding, trade and
environment, electronic commerce, small economies, trade, debt and finance, trade and
transfer of technology, technical cooperation and capacity building, least-developed countries
and special and differential treatment.
The main focus of the agenda was the needs of least developed and developing countries.
However, various questions were raised on the prepared agenda itself:
Text on implementation issues did not enjoy any legal standing.
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Target of completing the Doha work programme by 2004 was described as over
ambitious.
Mandate had certain interpretational complexities such as:
1) There was no fixed definition of all forms of export subsidies. The USA was of the view
that focus was on export subsidies only. The EU was of the view that it covers all forms
of export support. In developing countries view this was also applicable to subsidy
provisions in other export competition elements such as export credit, food aids, state
trading enterprises, etc.
2) There was no clarity on substantial reduction in trade-distorting domestic support. The
EU had a view that it covers only amber box, while many others, including the Cairns
Group and leading developing countries had a view that it also includes green box
because of its sheer size of US$ 78 billion a year.
I. AGRICULTURE
Agriculture has always been the most debated sector in WTO rounds. Negotiations on
agriculture sector under Doha had been carried out through Agreement on Agriculture (AoA),
which was presented in Uruguay Round and entered into force during 1995, with the
establishment of the WTO. The member countries have been protecting their domestic
agriculture sector by a host of actions such as domestic support (that is, production subsidy,
price supports, etc., affecting production level), export subsidy, imposition of tariff (most visible
form of restricting market access), tariff quota and non-tariff measures. The AoA was primarily
about reduction of barriers to trade in agricultural commodities, exercised through such
measures.
Before the Uruguay Round, trade in agricultural commodities was highly distorted on account
of excessive governmental interventions and support measures such as farm subsidy and price
supports. The AoA of the Uruguay Round was the first ever multilateral initiative that provided
framework of rules aimed at disciplining the unfair agricultural policies of the member
countries, especially members of the OECD countries. In this agreement, both developed and
developing countries had undertaken significant commitments to reduce domestic support,
export subsidy and tariff and non tariff barriers, besides accepting disciplines on areas having
trade-distorting effects. However, the Least Developed Countries (LDCs) were not required to
make any such commitment.
However, the outcome was not satisfactory. Thus, all this led to inclusion of AoA in Doha round.
The objectives of AoA under Doha Round are to achieve substantial improvements in market
access; reduction of, with a view to phasing out, all forms of export subsidies; and substantial
reduction in trade-distorting domestic support. Provision for Special and Differential Treatment
(SDT) to LDCs is also a part of the agenda. The current negotiations on AoA revolve around
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three major issues- formula for tariff reduction, subsidies reduction and special safeguard
mechanism.
TARIFF REDUCTION
The developed countries, represented by US and EU, have proposed a blended formula
involving a mix of the Uruguay Round formula, Swiss formula and duty free for a certain
percentage of tariff lines for reducing the tariff levels.
On the other hand, the developing countries, represented by G20, have not agreed to accept
blended formula and around 75 developing countries, including India, have preferred the
Uruguay Round formula because of the following structural flaws in blended formula11 :
It enables, on a self-declaratory basis, countries to opt for those tariff lines subject to
minimal cuts (i.e. apply average based Uruguay Round formula) which are of higher
commercial interest to many other member countries.
Developing countries have homogeneous tariff structure while developed countries

tariff structure is characterised by clusters of very high tariff (tariff peaks). The use of
the Swiss formula for a specific range of tariff lines in homogeneous tariff structures will
lead to higher tariff reductions by developing countries. Simulations with regard to the
Swiss formula have revealed that members entitled to special and differential
treatment will be required to make proportionally high average tariff reductions than
developed members.
At present, the draft blueprints issued for final deal on agricultural trade negotiations,
circulated on February 8, 2008, have proposed a Tiered formula for reduction in Final Bound
Tariff, t. As per the tiered formula, the tariff level has been divided into five slabs (different for
developed and developing countries). The principle at work is the higher the tariff, the greater
the required reduction for that tariff.
SUBSIDIES REDUCTION
Subsidy provision is a fiscal/monetary measure that distorts the price of an input or/and an
output. Subsidy can take several forms such as production subsidy, subsidised interest rates on
credit for production, minimum export price, etc. Subsidies have certain social and economic
domestic objectives and, therefore, reduction in subsidies involves some drastic changes in
policy at domestic level.
Regarding the reduction in subsidies, the developed countries are proposing that the member
countries should make commitment to reduce all forms of agricultural subsidies.
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On the other hand, developing countries are of the view that their limited financial resources
do not allow them to provide substantial agricultural subsidies; therefore, they are not
responsible for distortions in agriculture being created by subsidy provisions. Developed
countries should undertake reduction in subsidy provisions. Moreover, the developing
countries agriculture sector is dependent on primitive production techniques, therefore,
additional provisions should be made to enable them to pursue policies aimed at agricultural
productivity growth. For instance, input subsidies given to crops wherein productivity levels are
below the world average should be covered under the Green Box.
At present, the 2008 Draft has proposed a tiered formula for reduction in Overall TradeDistorting Domestic Support (Base OTDS) for both developed and developing countries which
has been defined as:
For Developed Countries
Base OTDS (X) = Final Bound Aggregate Measure of Support (AMS) specified in Part IV of a
members schedule + (5 per cent of average total value of production for product-specific AMS
+ 5 per cent of average total value of production for non-product-specific AMS) + average of
Blue Box payments or 5 per cent of average total value of agricultural production, whichever is
higher
For Developing Countries
Base OTDS (X) = Final Bound AMS specified in Part IV of a members schedule + (10 per cent of
average total value of production for product-specific AMS + 10 per cent of average total value
of production for non-product-specific AMS) + average of Blue Box payments or 5 per cent of
average total value of agricultural production, whichever is higher
As per the tiered subsidy reduction formula, three tiers have been defined for reducing
subsidies by developed countries. The reduction is based on the principle of the higher the
subsidy, the greater the reduction to be made. The developing countries, which have some
subsidy reduction commitment, have been given special concession, they are required to
reduce their subsidy by 2/3rd of the reduction made by developed countries at slab three and
they have been given an implementation period of 8 years whereas developed countries have
been given a period of 5 years.
Indias stand point on this particular issue is that any tariff reduction commitments can be
considered by developing countries only after substantial reduction has actually been
effected by the developed countries in all the three areas: market access, domestic support
and export subsidies.
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Special Safeguard Mechanism (SSM): SSM is a measure designed to protect poor farmers by
allowing countries to impose a special tariff on certain agricultural goods in the event of an
import surge or price fall.
The developing countries want the availability of SSM to all of them irrespective of tariff
reduction in the event of a surge in the imports or decline in prices to ensure food and
livelihood security of their people.
On the other hand, the developed countries, particularly, the United States, have argued that
while making the provision for SSM, the threshold to invoke such a measure has been set too
low which implies that it will be too easy for developing countries to invoke SSM, for even a
small size of decrease in international price of import or for a small size of increase in quantity
of import.
As per the Lamy Text, the bound rate trigger has been given a value of 140 per cent, i.e., import
volumes to rise by more than 40 per cent to enable increase of tariffs beyond the UR bound
levels. India suggested a figure of 115 per cent and the US insisted on a trigger of 140 per cent.
India has expressed its inability to accept this trigger, citing studies purportedly proving that
substantial injury can occur at level above 110 per cent.
At present, the 2008 Draft has put forth a proposal for SSM with the following features:
SSM can be invoked for all tariff lines in principle.
SSM shall not be invoked for more than [3] [8] [products] 15 in a 12- month period.
Both price and volume-based measures cant be invoked simultaneously.
The Volume based measure can be invoked if the quantity of import is more than at
least 105 per cent of the base import. In such a scenario the imposing country can apply
maximum additional duty on applied tariff with a condition on bound tariff.
The price based measure can be invoked if the c.i.f. import price is less than [70] per
cent of average monthly price (MFN Basis) of proceeding 3 years period (trigger price),
provided, the domestic currency at the time of importation has depreciated by at least
10 per cent over the preceding 12-months period.
II. MARKET ACCESS FOR NON-AGRICULTURAL PRODUCTS (NAMA )

Liberal market access for their products in the developed countries was the biggest expectation
of developing countries from the Uruguay Round. The developed countries were providing
more access to their non-agricultural market than their agricultural market as in the OECD
countries the average tariff on agricultural products was 4-5 times the average tariff on
industrial products. This multiple was 1.5-2 in developing countries.
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However, there was still continuation of tariff peaks and tariff escalation16 maintained by
developed countries with respect to products of interest to developing countries such as
textiles, clothing, footwear, leather goods, rubber, etc.
In the aftermath of Uruguay Round, major developed countries were found to be liberally using
the technical barriers (Sanitary and Phytosanitary/SPS, Certification and other Technical
Barriers to Trade/TBT) and WTO rules (that is, rules relating to anti-dumping measures,
subsidies and safeguard duties). Following them, some large developing countries have also
begun to use such practices. Thus, the non tariff barriers (NTBs) have emerged as potent
instruments for the protection of domestic industry. The brunt of this development was largely
borne by the developing countries at large.
In this scenario, negotiations for NAMA were undertaken under Doha Round. The main
elements of the Doha Mandate were to negotiate modalities aiming at:
Reduction, or as appropriate elimination, of tariffs.

Reduction or elimination of tariff peaks, high tariffs and tariff escalation.
Removal of non-tariff barriers in particular on products of export interest to developing
countries.
Providing special and differential treatment to LDCs.
The developed countries were of the view that reduction in tariff on non-agricultural
commodities should be undertaken mainly by the developing countries as the average tariff
levels in the OECD countries and some other developed countries were already low.
On the other hand, the developing countries were of the view that the mandate, through SDT
had special dispensations for them. Therefore, they were not required to make huge reductions
in tariff.
The rate of reduction is highest for high income countries (HICs) in agriculture sector. In case of
NAMA, rate of reduction is higher for HICs for applied rates but for bound rates developing
countries are required to undertake higher reduction. The greater lowering of bound rates by
developing countries implies that their future policy space will be lesser.
However, it has been pointed out that despite the lower tariff levels applied in developed
countries through Doha, the effective market access for LDCs in the EU will be negligible and
still negative in the US, as the tariff lines on which tariff cuts have not been changed comprise
the products which are of export interest for LDCs (Celine Carrere and Jaime de Melo, 2009).
III. SERVICES
From the view point of developing countries, one of the best outcomes of the Uruguay Round
was General Agreement on Trade in Services (GATS).
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The principle at work was: each according to capacity and requirements. Further, there was an
unconditional application of MFN principle. Thus, unlike other various GATT agreements, GATS
did not impose stringent binding commitments on either the developing countries or on
developed countries. With increasing importance of services exports in total world exports,
GATS continued to remain a part of negotiations and was added in the agenda of Doha round.
Conceptually, the GATS commitments are based on two lines, horizontal commitments and
sector-specific commitments. The horizontal commitments imply applicability to all sectors and
sector specific commitments are applicable only to the sub-service sector being negotiated.
Within each line there are two categories, viz., limitation on market access and limitation on
national treatment . For each of the category, commitments have been made under four modes
of supply of services which are:
Mode 1 - cross border supply, example exports and imports;

Mode 2 - consumption abroad, example tourism;
Mode 3 - commercial presence abroad, example foreign direct investment;
Mode 4- movement of natural persons, example working abroad for more than one
year.
The benefit of GATS in terms of market access for developing countries was very little as in the
schedule of commitments the developed countries had given a little concession in sectors of
interest to developing countries, particularly under Mode 4 where the developing countries had
competitive advantage. The maximum number of commitments was made in health care and
education. With respect to movement of natural persons (Mode 4), sector-specific
commitments of developed countries were mostly linked to commercial presence (Mode 3),
implying liberalisation of foreign investment.
All the developed countries, and particularly the US, the EU and Canada, had imposed a wide
range of conditions on market access and applied numerous domestic regulations to create
barriers to the entry of skilled natural persons of developing countries into their markets.
Further, under mode 4, an individual could not apply for any work in his own right on an
individual basis. He had to be an employee of a company. Thus, GATS of the Uruguay Round did
not provide much benefit to the developing countries and, therefore, it was made a part of
Doha agenda.
IV. TRADE RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (TRIPS)

The Agreement on Trade Related Aspects of Intellectual Property Rights was introduced in
Uruguay Round of multilateral trade negotiations. It included seven types of intellectual
property, namely, patents, copyrights, trade-marks, geographical indications, industrial designs,
layout-designs, integrated circuits and undisclosed information. The primary focus of the TRIPS
Agreement was on minimising the incidence of infringement of intellectual properties and,
thus, encouraging innovations.
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The implications of such an agreement for developing countries was the most controversial and
hotly-debated issue. It was argued that the agreement was aimed primarily at protecting the
interests of patent/property right holders through the provision of compulsory licensing.
Some of the items put on the agenda of the TRIPS review under Doha round are discussed
below:
Traditional Knowledge: The concept of traditional knowledge refers to genetic resources,
indigenous medicinal knowledge and other resources. The problem of protection is that the
traditional medicinal knowledge based on plants is usually not patentable - it is either obvious
or it is in the public domain. However, a pharmaceutical product derived from plants via that
traditional medicinal knowledge is patentable and the patent belongs to the pharmaceutical
company.
Public Health Issues: TRIPS Agreement has implication for public health issues also, particularly
for developing member countries. Infectious diseases kill over 10 million people each year,
more than 90 per cent of whom are in the developing world. There is a lack of access by
developing countries to several life saving drugs. The TRIPS agreement recognises that while
protecting the products of innovation, the social needs should not be ignored, for e.g., in case
of a public emergency, if a pharmaceutical manufacturer is not able to produce enough of a
needed medicine for which it has a patent, the member country can require that company to
license its medicines to another domestic manufacturer in order to supplement any anticipated
shortfall. This practice is known as compulsory licensing. However, the Article 31(f) of the TRIPS
agreement, which deals with the issue of compulsory licenses, provides that production under
compulsory licensing must be predominantly for the domestic market. The basic problem is
that many developing countries simply have no capacity to produce the necessary medicines,
even under license.
Geographical Indications: The protection of geographical indications has been made a part of
the agenda for restricting the acts of unfair competition. The geographical indications are
defined by the TRIPS agreement as indications which identify a good as originating in the
territory of a member country, or a region or a locality in that territory, where a given quality,
reputation or other characteristic of the good is essentially attributable to its geographical
origin. The protection of geographical indications through TRIPS requires more stringent
domestic policies for member countries as the simple unfair competition laws such as
misrepresentation cant be relied upon for this.
V. AGREEMENT ON TRADE RELATED INVESTMENT MEASURES (TRIMS)

Many developing countries have been using their investment policies to achieve certain
objectives of domestic growth such as technology access, employment generation, increased
exports earnings, etc. For example, during the 1980s, Indias industrial policy had favoured
conditional liberalisation of foreign (as well as domestic) investment, in the sense that only such
investors which were willing to accept conditionalities such as obligations to export, phased
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indigenisation of manufacturing, etc., were allowed to invest. In this respect, the TRIMS
agreement of the Uruguay Round was a direct attack on investment policies of developing
countries. During the negotiations, attempts were made, specifically by the US, Japan and the
EU, to widen the scope of such measures by expanding the list but it was opposed by
developing countries.
The developed countries are of the view that all types of trade-restricting investment measures
should be phased out. On the other hand, the developing countries are not in favour of
removing all investment measures even if they restrict free trade flows. India has made its
submission in the WTO regarding TRIMS as:
Developing countries are growing, therefore, they need some policy space to determine
the manner in which investments should be regulated and channeled.
Focus should be on growth enhancing investments along with ensuring that there would
not be any crowding out for small and medium enterprises.
Until recently, performance requirements were an integral part of growth strategies of

developed countries, so even developing countries should be given that much flexibility.
These along with some other issues have been hindering the conclusion of Doha Round since its
inception in 2001.
The importance of the conclusion of Doha Round has been highlighted by a study done by
Antoine Bouet and David Laborde, 2008 which has concluded that there would be a potential
loss of US$1,064 billion in world trade if world leaders failed in early conclusion of the Doha
Development Round of trade negotiations.
CURRENT STATUS, INDIAS STAND POINT AND WAY FORWARD

INDIA AND THE WTO
India was one of the 23 founding contracting parties to the General Agreement on Tariffs and
Trade (GATT) that was concluded in October 1947. India has often led groups of less developed
countries in subsequent rounds of multilateral trade negotiations (MTNs) under the auspices of
the GATT.
Despite being a founder member of GATT, India was never very active in various negotiating
rounds until late righties. Since the Indian economy followed the import substitution-led
growth strategy during sixties and seventies, gaining from the import liberalization at principal
export markets (the EU and US) was never a prime objective. In addition, a considerable
proportion of Indias trade was directed to the Soviet bloc countries, and the presence of this
assured market weakened the incentive to search for newer outlets. On the other hand,
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opening the domestic market to foreign competition through progressive tariff cuts was
perceived harmful for the local industries. Instead, the country was more willing to discuss
trade and development related issues at UNCTAD forums in collaboration with other
developing countries like Brazil (primarily through the G-77 network). Despite adoption of a
proactive approach at WTO, India still feels comfortable to discuss trade-related issues at
UNCTAD forums for coalition building among developing countries on areas pertaining to
mutual interest.
INDIAS PARTICIPATION IN WTO MEETINGS

During the Seattle-Doha period, India, for the first time, started communicating its
dissatisfaction over several issues and sharing its position with other countries at various
appropriate forums of WTO and other international bodies. Broadly speaking, a clearly
distinguishable and proactive stand emerged before the Doha ministerial, and India became
particularly concerned with: (i) non-realisation of anticipated benefits (e.g., Agreement on
Textiles and Clothing and Agreement on Agriculture), (ii) inequities and imbalances in WTO
(TRIPSs, Subsidies, Anti-dumping, etc.), and (iii) non-binding nature of special and differential
provisions (market access, DSB, etc.).
WTO NEGOTIATIONS AND INDIA

The Doha Round of trade negotiation at the WTO has been under way since 2001. The
negotiations cover several areas such as agriculture, market access for non-agricultural
products, trade related intellectual property rights, rules (covering anti-dumping and subsidies)
and trade facilitation. The conduct, conclusion and entry into force of the outcome of the
negotiations are parts of a single undertaking that is nothing is agreed until everything is
agreed.
INDIAS STAND ON VARIOUS ISSUES

Agriculture : Overall tariff reductions on bound rates for developing countries of not more than
36 per cent. Thresholds of the four band tariff formula with linear cuts to be adequately higher
for developing countries to take into account their ceilings.
Self-designation of an appropriate number of special products (SP) guided by indicators based
on the three fundamental and agreed criteria of food security, livelihood security and rural
development needs. The G-33 has proposed 20 per cent agricultural tariff lines as special
products, of which 40 per cent must be exempted from any tariff cut. India cannot accept TRQ
commitments on SPs since it would entail necessarily going below current applied rates on the
most sensitive products, viz., SPs
An operational and effective Special Safeguard Mechanism (SSM) to check against global price
dips and import surges, which is more flexible than the existing safeguard mechanism available
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mainly to developed countries. The G-33 and India remain firm that a priori exclusion of any
product, particularly SPs from the ambit of the SSM cannot be justified or accepted.
Substantial and effective cuts in overall trade-distorting domestic support by the United States
(70-75 per cent cut) and by the European Union (75-80 per cent cut), including resolving the
issue of product specific caps on Aggregate Measurement of Support (AMS) and in the new
Blue Box.
Non-agricultural Market Access: Choice of Swiss coefficients that ensures less than full
reciprocity (LTFR) in percentage reduction commitments from bound rates. The current
numbers in the chairmans draft modalities, namely coefficients of 19-23 for developing
countries and 8-9 for developed countries does not meet LTFR. A fair markup on the unbound
tariff lines. Flexibilities those are adequate and appropriate to address the sensitivities of
developing countries.
SERVICES
Commitments by the developed countries on substantial openings for Indias contractual
service suppliers (CSS) and independent professionals (IPs) in Mode 4 relating to movement of
natural persons.
Development of disciplines in Domestic Regulations in Mode 4 involving qualification and
licensing requirements and procedures
RULES
Strengthening of disciplines in anti-dumping include mandatory application of lesser duty rule,
prohibition of zeroing, stronger rules on reviews, including sunset review.
Against the enlargement of the scope of the Agreement on Subsidies and Countervailing
Measures (ASCM) and/or limit existing flexibilities for the developing countries.
Effective special and differential (S&D) treatment in any new disciplines on fisheries subsidies,
particularly in the light of employment and livelihood concerns for small, artisanal fishing
communities and for retaining sufficient policy space.
The major issues in the current negotiations in the WTO are related to Agriculture and NAMA
discussions which resumed on the basis of the draft modalities on Agriculture and NAMA issued
by the Chairs of the respective Negotiating Groups on December 6, 2008. As per the draft
agriculture modalities, developed countries would have to reduce their bound tariffs in equal
annual installments over five years with an overall minimum average cut of 54 per cent.
Developing countries would have to reduce their bound tariffs with maximum overall average
cut of 36 per cent over a larger implementation period of ten years. Both developed and
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developing members would have the flexibility to designate an appropriate number of tariff
lines as sensitive products, on which they would undertake lower tariff cuts. The revised draft
modalities propose a special product (SP) entitlement of 12 per cent of agricultural tariff lines.
The average tariff cut on SPs is proposed as 11 per cent, including 5 per cent of total tariff lines
at zero cuts. This is a special and differential treatment for developing countries. In the case of
NAMA negotiations, the tariff reductions are proposed through a non-linear Swiss formula with
a three-tiered coefficient of 20, 22 and 25 for formula reductions linked to specific flexibilities
for protecting sensitive NAMA tariff lines of developing countries, and a coefficient of 8 for
tariff reduction of developed countries.
To conclude, while India, so far, may not have been able to gain a lot from the negotiations, it
certainly came out of seclusion during the Doha Ministerial (2001) and is currently leading the
developing country coalitions at WTO.
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CHAPTER 13: CURRENT AFFAIRS ON ECONOMY

UNION CABINET APPROVED 50 PERCENT REDUCTION IN THE RESERVE
PRICES FOR CDMA SPECTRUM
The Union Government on 17 January 2013 approved a 50 per cent reduction in the reserve
price of spectrum used by CDMA mobile operators.
Spectrum auction, for both GSM and CDMA, is supposed to be completed by 31 March 2013
and thereafter the markets will decide how much revenue the government will get.
With the reduction of reserve price to 50 percent pan-India 5MHz of 800 MHz spectrum (CDMA
radio waves) will now cost 9100 crore rupees.
It was witnessed that auction of CDMA spectrum that took place in November 2012 did not
attract bidders due to high reserve price. The reserve price set was 11 times higher than what
operators paid in 2008.
Earlier CDMA spectrum price fixed by government was priced at 1.3 times more than the GSM
spectrum in 1800 MHz band.
The Cabinet has already approved a 30 per cent cut in the reserve price of 1,800 MHz band
spectrum used for offering GSM services.
The Supreme Court has recently allowed the companies whose licences were cancelled to
continue operations till 4 February 2013 when the government is supposed to inform it of the
final reserve or minimum price for the spectrum sale.
CABINET COMMITTEE ON ECONOMIC AFFAIRS APPROVED THE

CONTINUATION OF JNNURM
The Cabinet Committee on Economic Affairs on 17 January 2013 approved the continuation of
the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to sanction new projects and
capacity building activities till 31st March, 2014 under Urban Infrastructure and Governance
(UIG) and Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT)
components of JNNURM.
New Urban infrastructure projects in States / UTs would be approved till 31st March, 2014, and
taking up new capacity building activities in Urban Local Bodies (ULBs) and States has also been
approved.
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The proposal would enable provisioning of creation of urban infrastructure, particularly in small
and medium towns, in all States and UTs. These projects would be subsumed in the next phase
of the JNNURM for the 12th Five Year Plan.
CCEA APPROVED DEFREEZE IN THE TARIFF VALUE OF EDIBLE OILS AS PER

INTERNATIONAL MARKET
The Cabinet Committee of Economic Affairs on 17 January 2013 approved the de-freezing of
the tariff values of the all types of edible oils and notified that the tariffs of these oils would be
decided on the basis of the existing international prices in the market.
Oils that would suffer the effect of this decision are Soyabean Oil Crude Palm Oil - RBD
(Refined Bleached Deoderized), Palm Oil Crude, Palmolein Crude, Palm Oil others and
Palmolein others.
The decision would bring an advantage to the domestic refining industry because of the impact
that the imports of the edible oils will do on the collected duty.
Background
Under Section 14 (2) of the Customs Act 1962 the tariff value is fixed on the edible oils
mentioned would be notified fortnightly. The tariff value of the edible oils remained unchanged
since 31 July 2006 as a result of fiscal measures to control inflation. This halt in increase in the
tariff value have created a great difference between the notified tariff and the computed
landed prices following the price of edible oils in the international market. This halt had an
adverse impact on the domestic refining industry as well as the revenue collection.
UNION GOVERNMENT APPROVED OPEN POLICY AND LIFTED BAN ON

EXPORT OF PROCESSED FOOD
Union Government on 17 January 2013 lifted ban on exports of processed foods and value
added agricultural products in order to facilitate uninterrupted supply.
The uninterrupted export of such processed food products is projected to be regulated by duty.
The list of exportable goods includes processed foods from agricultural commodities, such as
wheat, rice, onion and milk.
Benefits of Lifting of Ban
The lifting of Ban is supposed to give a push to Indias weak merchandise exports and is
estimated to add 5 billion dollar to exports over the next two year with West Asia
identified as a key market for processed food from India.
It will help Indian exporters to move up the value chain as well as create additional
employment in the country.
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An always open policy of this sector will not only help reduce wastage of perishable
products but also encourage value addition.
Exports of processed or value-added products constitute a very small portion of overall

exports and hence, their continuation would not affect the availability in the domestic
market owing to very marginal processing capacity in the country.
It was seen that Exports of agricultural and processed foods have almost doubled to around
86018 crore rupees in 2012-13 from 43727 crore rupees in 2011-12.
Presently the major agricultural exports of India are that of raw or primary produce and
unprocessed or semi processed agriculture commodities, which are vulnerable to restrictions
attributing to various reasons such as bad weather conditions, deficient or delayed rainfall and
food security issue.
The Government opened up export of rice and wheat since September 2011 and has emerged a
large exporter of these commodities since then.
UNION GOVERNMENT RAISED LPG CAP TO NINE SUBSIDISED CYLINDERS

PER YEAR
The Union government on 17 January 2012 hiked the cap on subsidised LPG cylinders from 6 to
9. The move will be effective from April 2013. The Government had also allowed oil companies
to hike diesel prices by a small quantum periodically.
With the implication of raised cap the Consumers will be getting a quota of five subsidised
cylinders between September 2012 and March 2013 and from 1 April 2013, they will be entitled
to get nine cylinders per annum.
It was also decided in the meeting on Cabinet Committee on Political Affairs (CCPA) that there
will be no change in LPG and kerosene rates. With this, the Election Commission has granted no
objection to government's proposal for raising cap on LPG gas quota.
Subsidised LPG costs 410.50 rupees per 14.2-kg cylinder and any household requirement
beyond current cap of 6 cylinders is to be bought at a price of 895.50 rupees per cylinder.
The finance ministry is keen to reduce the subsidy burden. Oil companies have estimated that if
they had sold fuel at international rates they would have gained additional revenue of 1.63 lakh
crore rupees in the current fiscal year.
The oil ministry has projected a subsidy loss of 37411 crore rupees on cooking gas in 2012-13 at
520.50 rupees per cylinder.
The Government is committed to ensure smooth supply of cooking gas to consumers. To ensure
this, the government is planning to launch a system of rating gas dealers on the basis of time
taken to deliver cylinders, which will allow customers to switch dealers.
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UNION GOVERNMENT IMPOSED 2.5 PERCENT IMPORT DUTY ON CRUDE

EDIBLE OIL
Union government on 17 January 2013 imposed a 2.5 per cent import duty on crude edible oil
with keeping the duties unchanged on refined cooking oil fearing a hike in retail prices.
The decision was taken at the meeting of Cabinet Committee on Economic Affairs (CCEA) in
New Delhi with a view to protect domestic farmers. The Agriculture Ministry had proposed an
increase in the duty on crude edible oil to protect the interest of palm growers, particularly
from Andhra Pradesh.
Presently there is no import duty for crude edible oil but refined edible oil attracts an import
duty of 7.5 per cent India imports about half of the total domestic requirement of cooking oil.
In 2011-12 oil years (November-October), the total import of vegetable oils (edible and nonedible oil) was at an all-time high of 10.19 million tonnes. In the first two months of the current
oil year, imports were up 5 per cent.
The Agriculture Ministry sought for 7.5 per cent import duty on crude edible oil and 15 per cent
on refined oil. But during the inter-ministerial meeting, the finance ministry felt such a sharp
rise would lead to rise in inflation.
There is zero duty on crude edible oil and 7.5 per cent on refined edible oils. India imports over
50 per cent of its domestic demand. In 2011-12 oil years, the country imported a record 10.19
million tones of vegetable oils.
WORLD BANK SLASHED THE GLOBAL GROWTH FORECAST TO 2.4

PERCENT
The World Bank on 15 January 2013 projected that the world economy would expand 2.4
percent in 2013, little higher than the 2.3 percent achieved in 2012. In June 2012, the Bank
forecasted the growth up to 3 percent, but due to the slow growth rate, high unemployment
rate and less confidence in businesses across the developing nations it managed to revise the
forecast earlier made.
The World Bank has reduced the projected growth rate of different countries. It has slashed the
growth rate of Japan to its half from the one projected earlier and in case of US the growth rate
has been slashed by 0.5 percent points. The bank also projected narrowing in the growth rate
of the Euro Region. For emerging markets of Mexico, Brazil and India also the projection was
lowered.
The report from the lead author of the Banks Global Economic Prospects Andrew Burns
describes that the predicted recoveries of the bank in 2012 would be carried forward towards
the end of the first quarter and second quarter of 2013.
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The bank report also has claimed that the ongoing political battle in United States for raising
the borrowing limit and spending cuts by the Government would bring loss of confidence in the
rate of dollar creating an alarming situation for the world financial market and effect the
growth rate. It also pointed out the diplomatic tensions between China and Japan would also
have an impact on the growth rate.
THE IMPLEMENTATION OF GAAR DEFERRED BY 2 YEARS, TO COME INTO

FORCE FROM 1 APRIL 2016
The implementation of General Anti Avoidance Rules (GAAR) was deferred by two years by the
government of India. It will now come into force from 1 April 2016. Earlier, the provisions of
GAAR were to be implemented from 1 April 2014. GAAR will not apply to those Foreign
Institutions Investors, FIIs who are not taking any benefit under an agreement under the
Income Tax Act. Besides, it will also not apply to non-resident investors in FIIs.
The Parthasarathi Shome Committee in its final report submitted to Finance ministry on 30
September 2012 had suggested that GAAR should be deferred by three years. The report was
made public on 14 January 2013. Union Government accepted major recommendations of the
Shome Committee with some modifications.
Shome Committee was set up by Prime Minister Manmohan Singh in July 2012 to address the
issue of GAAR.
SENSEX CROSSED CRUCIAL 20000 MARK AFTER TWO YEARS

The Bombay Stock Exchange Sensex for second time in a row on 15 January 2013 touched 2years high. The shares remained supported inspite of governments delayed implementation of
the controversial rules related to tax avoidance.
However, till the time the RBI reviews the policy on 29 January 2013, analysts are expecting
that the earnings would remain crucial catalysts for the Indian shares, as the investors would
look for the signs of profit improvement in 2013. Analysts predicted that in the fiscal year 201314, the Sensex EPS would grow by 13-14 percent.
The BSE Sensex closed at 0.4 percent or 80.41 points at 19986.82 on 15 January 2013, which is
the highest since 6 January 2011. Earlier it had touched the crucial 20000 level as well.
The Nifty, on the other hand, increased to 0.54 percent or 32.55 points, ending at 6056.60,
closing more than 6000 for the second consecutive day.
Shares of the important companies such as ITC, Axis Bank, TCS and Bharti Airtel also increased.
UNION CABINET APPROVED 12517 CRORE RUPEES OF CAPITAL

INFUSION IN 10 PSU BANKS
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The Union Cabinet on10 January 2013 approved a proposal of infusing 12517 crores rupees in
public sector banks so that bank could enhance the lending activity and meet the capital
adequacy norms.
As per the Finance Minister P Chidambaram about 9-10 public sector banks are going to be
benefitted from the capital infusion programme. Also, the name of the banks, the amount for
each bank and terms of the conditions will be decided in consultation with them at the time of
infusion.
The government is supposed to Provide capital funds to PSBs during the year 2012-13 to the
tune of 12517 crore to maintain their Tier-l CRAR (capital to risk-weighted assets ratio) at
comfortable level.
The need for that is to make the PSU remain obedient with the stricter capital adequacy norms
under BASEL-III as well as to support internationally active PSBs for their national and
international banking operations undertaken through their subsidiaries and associates.
In principle approval of the Cabinet is accorded for need based additional capital infusion in
PSBs from the year 2013-14 to 2018-19 for ensuring compliance to Capital Adequacy norms
under Basel- III.
Benefits of the Capital Infusion in Banks
The capital investment will ensure fulfillment to the regulatory norms on capital
adequacy and will cater to the credit needs of productive sectors of the economy as well
as to withstand the impact of stress in the economy.
It will support national and international banking operations of PSBs and will boost the
confidence of investors and market sentiments.
The infusion of. 12517 crore rupees in the equity capital of PSBs would enable them to
expand their credit growth.
This additional availability of credit will cater to the credit needs of our economy and
will also benefit employment oriented sectors, especially agriculture, micro and small
enterprises, export, entrepreneurs etc. in promotion of their economic activities which
would, in turn, contribute substantially to the growth of the economy.
The Government is committed in making all the PSBs financially sound and healthy so as to
ensure that the growing credit needs of our economy are adequately met. To meet the credit
requirement of the economy, banks would require capital funds commensurate to the increase
in their Risk Weighted Assets (RWAs).
The government earlier had infused about 20117 crore rupees in public sector banks during
2010-11, and 12000 crore rupees in 2011-12.
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RBI: PRIVATE SECTOR OF INDIA REGISTERED A NET PROFIT OF 4.3

PERCENT IN FIRST HALF OF 2012-13
The data released from the Reserve Bank of India on 9 January 2013 reported that the Private
Corporate Sector of India registered a net profit of 91800 crore rupees in the first half of 201213 (April to September), which is 4.3 percent higher than the one reported in the first half of
the 2011-2012.
In terms of growth in Sales on the basis of the financial results of 2832 listed non-financial and
non-government companies in the first half of the current fiscal the companies grew by 12.3
percent, which is equivalent to 14.34 lakh crore. The details of the report states that the
operating profit (EBITDA) of these companies has gone up by 4.9 percent to 1.88 lakh crore
rupees.
The report states that with a net profit margin of 17 percent, the performance of the
Information Technology (IT) sector was better, when compared with the manufacturing and
non-IT service sectors. The net profit margin of the non-IT service sector and manufacturing
sector were 4.9 percent and 5.7 percent respectively. The manufacturing companies show a rise
in its net profit by 2.4 percent, which is equivalent to 61200 crore rupees and the non-IT
companies dropped down by 3.9 percent, from the one recorded previous year.
The companies involved in computer and activities related to it show a rise in net profit of 18.6
percent that is equivalent to Rs 18200 crore. The financial companies registered a net profit of
27.3 percent that was equivalent to Rs 8500 crore, when compared to previous year profit.
RBI SET UP WORKING GROUP TO REVIEW BANKING OMBUDSMAN

SCHEME
The Reserve Bank of India in the month of January 2013 had set up a working group to evaluate
and make improvements in the grievance redressal mechanism for bank customers.
The working group constituted in the Reserve Bank of India is going to review, update, and
revise the Banking Ombudsman Scheme, 2006.
As per the RBI annual report of the Banking Ombudsman Scheme 2011-12, In Financial Year
2011-12, the banking ombudsmans office of the RBI received around 72889 complaints. It
disposed off 94 per cent of the customer complaints, about one-fourth of the total customer
complaints were about banks failure to meet commitments and non-observance of fair
practices code.
Also, it was seen that the Banking Ombudsman received 14492 card-related complaints in the
reporting year. Unsolicited cards and charging of annual fee in spite of being offered free card
formed the basis of some of the complaints against the banks.
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Presently, we have 15 Banking Ombudsmen with unambiguous jurisdiction covering the 29

States and seven Union Territories in India.
ROLLOUT OF DIRECT BENEFITS TRANSFERS STARTED ON 1 JANUARY

2013
National Committee on Direct Cash Transfers in its meet with the Prime Minister of India Dr.
Manmohan Singh decided to roll-out, the Direct Cash Benefits from 1 January 2013 in 43
identified districts of the country. The decision was taken to ensure that the benefits could be
transferred electronically into the bank accounts of the individuals, without making delays and
diversions of any type.
A high level meet was conducted on 13 December 2012 with the District Collectors of thee
identified areas and fine tuned information related to steps that need to be taken in case of
Direct Benefits Transfer.
Direct Benefits Transfer and it covers:
Transfer of cash benefits like pensions, scholarships, NREGA wages and others directly
through the Government in the Bank or Post Office Accounts of identified beneficiaries
under the Direct Benefits Transfer (DBT) programme. The program would also device
necessary system so that the transfers can be done in a phased, time-bound manner for
Direct Benefits Transfer.
Direct Benefits Transfer would not act as a substitute for delivery of public services and
it would continue to be in place via normal delivery channels.
The Direct Benefits Transfer would not allow replacement of food through cash
managed under Public Distribution System. The Government will be committed towards
legislation of the National Food Security Act.
Rollout on 1.1.2013 mean in practice

The Rollout that would began on 1.1.2013 in 43 districts of 16 different states under 26
different schemes, which have been identified for first round of Direct Benefits Transfer. All
these districts were selected on the basis of its coverage of bank accounts and Aadhaar.
FII INVESTMENT IN THE INDIAN STOCK MARKET SURPASSED MORE

THAN 24000 CRORE RUPEES IN DECEMBER 2012
Foreign Institutional Investors (FIIs) in the month of December had pumped in more than Rs
24000 crore in the Indian stock market which is said to be the highest in 10 months timeline
taking total FII inflow for the year 2012 to over US$ 24 billion dollars.
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As per the SEBI Data, In December, 2012 Foreign Institutional Investors (FIIs) were gross buyers
of shares worth Rs 71595 crore while they sold equities amounting to Rs 47412 crore rupees.
This translates into a net inflow of Rs 24183 crore or around.4.42 billion dollar.
Earlier in the month of February FIIs had infused Rs 25212 crore in stocks, which is counted to
be second highest investment in Year 2012 since their entry into Indian capital markets in 1992.
If we take the latest inflows into count, FII investment in that case in the countrys equity
market reached Rs 127455 crore ($24 billion) for the year 2012 with just one more trading
session left.
Foreign investors are pouring money into the Indian stocks in hopes of cut in interest rates by
the RBI. FIIs continued their positive standpoint on the Indian equities as the lack of investment
options make the country an attractive destination.
In addition to equities, FIIs invested Rs 1178 crore rupees in the debt market the month taking
the years tally to Rs 34462 crore.
As on 28 December 2012 the number of registered FIIs in the country stood at 1759 and total
numbers of sub-accounts were 6358 during the same period.
About Foreign Institutional Investors
Foreign Institutional investors are those organizations which sum up huge amount of money
and invest that amount in securities, real property and other investment assets. Some Foreign
Institutional investors are also operating companies that decide to invest their profits to some
degree in these types of assets.
The most common types of typical investors includes banks, insurance companies, retirement
or pension funds, hedge funds, investment advisors and mutual funds. They act as highly
specialized investors on behalf of others which are considered as their economic role.
UNION GOVERNMENT ANNOUNCED MORE INCENTIVES TO EXPORTERS

HIT BY GLOBAL MELTDOWN
The union government on 26 December 2012 announced more incentives for the exporters
who were hit hard because of global meltdown. An extension of 2 percent interest subsidiary
would be provided for another year till March 2014.
Additionally, the Commerce and Industry Minister Anand Sharma decided an introduction of
pilot scheme of 2 percent interest subsidiary for those project exports that took place through
Exim Bank.
Any incremental export which would be done in the time duration of January to March 2013
would also be granted incentive. The ministry announced that the incentives would enable to
push the exports in last quarter of 2012-2013 fiscal years.
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The objective of these incentives was stabilisation of the situation as well as shift from the
negative territory to the positive one. Another objective of the incentives was keeping trade
deficit under the control.
Exports during the period of April-November 2012 shrunk by 5.95 percent to US$ 189.2 billion.
If the situation continues, it would be very difficult for India to achieve export target of US$ 360
billion dollar in 2012-2013 fiscal year.
THE MINIMUM SUPPORT PRICE OF WHEAT WAS INCREASED TO 1350

RUPEES PER QUINTAL
The Union government of India on 26 December 2012 raised the Minimum Support Price, MSP
of wheat by 65 rupees per quintal to 1350 rupees per quintal. The decision was taken in a
Cabinet meeting this morning in New Delhi Chaired by the Prime Minister, Manmohan Singh.
The government also decided to export additional 25 lakh tonnes of wheat from its go-downs.
The CCEA approved the disinvestment of 12.5 per cent paid up equity capital to the Rashtriya
Chemicals and Fertilizers. Current government holding is about 92.5 per cent. This will make the
company compliant with the SEBI norms that 10 per cent float should be there. CCEA approved
the proposal to export an additional 25 lakh tonnes of wheat. Earlier, we had approved export
of 20 lakh tonnes of wheat of that a little over 17 lakh tonnes have been contracted.
INDIRECT TAX COLLECTION INCREASED AT 16.8 PERCENT TO 2.92 LAKH

CRORE RUPEES IN APRIL-NOVEMBER 2012
The Finance Ministry announced that indirect tax collection increased at the rate of 16.8
percent to 2.92 lakh crore Rupees in the period of April-November 2012 in comparison to the
yearly growth target of 27 percent.
It was announced that in first 8 months of 2011-2012 fiscal year, accumulation of the indirect
taxes which include excise, services tax as well as customs, was 2.50 lakh crore Rupees.
Excise amounted to 108470 crore Rupees during April to November 2012, while accumulation
from service taxes and customs was 78774 crore Rupees and 104864 crore Rupees respectively.
In 2011-2012 fiscal year, the government had proposals of collecting 5.05 lakh crore Rupees in
all, from customs, service taxes and excise, which would bring an expected growth of 27
percent from last years collection.
Targeted collection through customs for 2012-2013 was determined at 1.87 lakh crore Rupees.
The targeted collection was 1.93 lakh crore Rupees through excise and 1.24 lakh crore Rupees
through service tax.
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In the third week of December 2012, the government found it difficult for achieving customs,
corporate tax as well as excise target as it was projected in Budget. This happened because
there were unresponsive corporate profits.
During November 2012, indirect tax accumulation increased by 17.2 percent to 36081 crore
Rupees in comparison to 30790 crore Rupees.
UN SLASHED WORLD GROWTH FORECAST TO 2.4 PERCENT FOR YEAR

2013
United Nations on 18 December 2012 slashed its global growth predictions to 2.4 percent for
2013 and 3.2 percent for the following year and warned of a lasting employment crisis for
western countries.
The UN's World Economic Situation and Prospects 2013 report warned that the Debt crises in
Europe and the United States and a slowdown in China could all throw the world economy into
recession.
Earlier in the t month of June 2012 UN had predicted a growth forecast 2.7 percent for 2013
and 3.9 percent for the year after.
As per the Report, With existing policies and growth trends, it is going to take at least another
five years for Europe and the United States to make up for the job losses caused by the Great
Recession of year 2008-2009.
The report also predicted growth in South Asia averaging 5 percent in 2013, up from 4.4
percent in 2012, led by a moderate recovery in India.
FOREIGN INVESTMENTS THROUGH P-NOTES INCREASED TO 8-MONTH

HIGHEST
Foreign investments in the Indian markets through P-notes or PNs (Participatory Notes)
increased to 8-month high of around 1.75 lakh crore Rupees or 32 billion dollar in October
2012. This happened because different reform measures attracted the overseas investors
towards the Indian markets.
Market regulator SEBI (Securities and Exchange Board of India) revealed in its data that the
overall value of P-Note investments in India (debt, equity or derivatives) by October 2012 end
increased to highest since February 2012, when the total value of investments like these were
1.83 lakh crore Rupees.
Apart from this, the overall value of P-notes issued with the derivatives as basics stood at 95536
crore Rupees by October 2012 end.
What are P-Notes or PNs?
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P-Notes or PNs or Participatory Notes are used by the HNIs or High Networth Individuals,
foreign institutions as well as hedge funds. P-Notes allow them to invest their money in Indian
markets via registered FIIs or Foreign Institutional Investors. This saves them cost as well as
time related to direct registrations.
So basically, PNs are the tools or instruments which are issued by the registered FIIs to the
overseas investors who are willing to invest in stock market of India without registering with
market regulator SEBI.
UNION GOVERNMENT OF INDIA LOWERED THE GROWTH PROJECTION

FOR CURRENT FISCAL TO 5.7 PERCENT
The Union Government of India on 17 December 2012 lowered down the growth projection for
the current financial year 2012-13 from 7.6 percent that was estimated earlier to 5.7-5.9
percent. It also pitched for the supportive monetary and fiscal policies for improving the
confidence of the investors. The projection was showcased in the Mid-Year Economic Analysis
tabled in Indian Parliament.
BOMBAY STOCK EXCHANGE LAUNCHED SME PLATFORM INDEX AIMED

AT TRACKING PRIMARY MARKET CONDITION
The Bombay Stock Exchange (BSE) on 14 December 2012 launched an SME index which
primarily aims at tracking the current primary market conditions in the Indian capital market
and measuring the growth in investors wealth over a period.
The index is going to be constituted by small and medium enterprises (SMEs) which are listed
on the BSE SME platform. Presently, there are 11 companies which are listed on the SME
platform and this index is going to have features similar to the BSE IPO index.
Through SME index the authorities can recognize the viability of the company and based on the
report, people can invest in these companies, which will not only help the organisations to grow
their businesses but also suppose to create employment.
Small and Medium Enterprises (SMEs) in India constitute an important segment of Indian
economy. Currently, the contribution of SMEs alone is greater than 7 per cent to GDP and 45
per cent to industrial production. Small and Medium Enterprises (SMEs) is also the second
largest provider of employment after agriculture.
SMEs also contribute to 40% of total exports directly and a significant amount of exports
indirectly through large trading houses or third parties.
With the SME platform, companies did not have to rely on loans from banks, as they can raise
funds through the market and play an important role in contributing to the economic growth of
the country.
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Out of the 11 companies listed so far, 10 are trading above their issue prices, while one is below
its IPO price.
RETAIL INFLATION INCREASED TO 9.90 PERCENT IN NOVEMBER 2012

Consumer Price Index (CPI) data released on 12 December 2012 showed that the retail inflation
increased for the second successive month to 9.90 percent in November 2012 mainly because
of the increase in price of food products like edible oil, sugar, vegetables as well as clothing. In
October 2012, the retail inflation was 9.75 percent and in September 2012, it was 9.73 percent.
Maximum increase in the price in the month of November 2012 was in oil as well as fats
segment, amounting to the annual inflation of 17.67 percent. Apart from oil, the price of sugar
also increased by 16.97 percent and pulses on the other hand because costlier by 14.19 percent
on yearly basis.
The prices of vegetables increased by 14.74 percent in November 2012, while the price of egg,
fish and meat increased by 11.33 percent. Also, there was an increase in the price of footwear
and clothing at 11.08 percent in November 2012.
In the urban areas, retail inflation increased to 9.69 percent in November 2012 in comparison
to 9.46 percent in October 2012. However, in rural areas there was a very slight decrease in
inflation to 9.97 percent in November 2012 from 9.98 percent in October 2012.
The rural, urban and combined All India provisional General (all groups) CPI numbers for the
month of November 2012 are 126.9, 123.4 and 125.4, respectively.
It is important to note that the Reserve Bank will keep an increase in retail inflation in mind
while taking review about the mid-quarter policy in the third week of December 2012. In
October 2012, raising concerns over rising inflation, Reserve Bank had kept the standard
interest rates unchanged.
CABINET COMMITTEE ON ECONOMIC AFFAIRS APPROVED THE SETTING

UP OF CCI
The Union government of India on 13 December 2012 approved the setting up of a Cabinet
Committee on Investment (CCI), to fast track investment clearances for mega projects. The
decision was taken in the Union Cabinet meeting held under the chairmanship of Prime
Minister Manmohan Singh. Prime Minister will head the CCI and he will also nominate the
members of the committee. The CCI will expedite projects offering single window clearance for
projects costing 1000 crore rupees or more by setting timelines for the concerned ministries.
The Union Cabinet also cleared the Land Acquisition Bill. Under the new bill consent of 80
percent land owners is mandatory for private acquisition of land where as for Public-PrivatePartnership 70 per cent consent is required. The award of compensation will also be as per the
new bill. The Cabinet also approved cutting the 1800-MHz band 2G spectrum auction reserve
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base price by 30 per cent for four circles that did not attract bidders in November. The circles
are Delhi, Mumbai, Karnataka and Rajasthan. The Cabinet Committee on Economic Affairs also
cleared a new urea investment policy.
INDIAN ECONOMY WOULD DOMINATE THE ECONOMY OF THE WORLD

BY 2030: US INTELLIGENCE COMMUNITY REPORT
US intelligence community in its report called Global Trends 2030: Alternative Worlds which
was released on 10 December 2012 declared that India would straddle international commerce
and will also dominate the economy of the whole world by 2030. This would happen with
decelerating Chinese economy as well as declining West.
Key points of the report:
Indias chance of powering would begin only after 2015 as Chinas fortunes would start
diminishing.
By the year 2030, Asia (mainly India) would return back to its position of being the
powerhouse of the world, like it was before 1500.
Pakistan might not exist at all.
India will rush forward after 2020 as China would begin decelerating, primarily on
certain demographic trends.
China is indeed ahead of India, but the gap between India and China would start zeroing
in by 2030. The economic growth rate of India will surge while that of China will slow
down.
In 2030, India might be rising as the economic powerhouse just like China is today. The
current economic growth rate of China, 8-10 percent would become just a memory for
the country.
Overall size of the working-age population in China would increase in 2016 and
decrease from 994 million to 961 million in 2030. Contrarily, working age population of
India would most probably rise until around 2050.
The demographic opportunities of India will rise between 2015 to 2050. Chinas
opportunities window is from 1990 to 2025. Contrarily, USs opportunity was best
between 1970 to 2015.
Median age of India which is at present 26 will increase to 32 by 2030, which would still
be the least among top 10 economies of world.
The report also mentioned that anytime after 2030, India instead of China would be
having the largest middle-class consumption, which would be even larger than US and
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Europe combined. However, India might face trapping in the status of middle-income
group in case the resources constraint, especially food, water and energy are not
resolved. More investment would be required in science and technology sector in order
to keep the pace of economy in the value chain.
It was however made clear that the journey of economic development of both India as well as
China will not be smooth. But if the difficulties were handled well, India as well as China would
be dominating the world in 2030.
About Global Trends 2030: Alternative Worlds
The latest National Intelligence Council's (NIC) Global Trends Report was released on 10
December 2012 by the Office of the Director of National Intelligence. This report is called Global
Trends 2030: Alternative Worlds. Global Trends project offers expertise beyond government on
certain factors like demography, environment, globalisation. The documents are prepared by
Global Trends to assist the makers of policies in long-term planning on major issues which hold
worldwide importance.
First Global Trends Report was released back in 1997. New global trends report is being
published after every four years after the U.S. presidential elections. For the production of
Global Trends 2030, a range of analytical tools, in-depth research as well as detailed modeling
was employed.
SECURITY AND EXCHANGE BOARD OF INDIA (SEBI) ALLOWED 12 MORE

ALTERNATIVE INVESTMENT FUNDS
Indian Market regulator Security and Exchange Board of India (SEBI) allowed 12 entities to set
up Alternative Investment Funds (AIFs), a newly created class of pooled-in investment vehicles
for real estate, private equity and hedge funds, in the last two months of October and
November 2012.
The 12 Alternative Investment Funds AIFs that were registered with SEBI since October 2010
included India Realty Fund, Dar Mentorcap Film Fund, Capaleph Indian Millennium Small &
Medium Enterprises Fund and Capaleph Indian Millennium Private Equity Fund.
SEBI in last few years had already allowed nine AIFs to set up shops in the country. As on 31
August 2012, a total of 20 applications were pending with SEBI for registration as AIFs.
As per the new SEBI guidelines, AIFs can operate broadly in three categories. The SEBI rules is
applicable to all AIFs which also includes those operating as private equity funds, real estate
funds and hedge funds.
The Category-I AIFs are those funds that get incentives from the government, SEBI or
other regulators. It includes Social Venture Funds, Infrastructure Funds, Venture Capital
Funds and SME Funds.
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The Category-II AIFs are those funds which can invest anywhere in any combination but
are prohibited from raising debt, except for meeting their day-to-day operational
requirements. These AIFs include PE funds, debt funds or fund of funds.
The Category-III AIFs are those trading with a view to make short-term returns and
include hedge funds, among others.
RESERVE BANK OF INDIA (RBI) SIGNED CURRENCY SWAP AGREEMENT

WITH BANK OF JAPAN
The Reserve Bank of India on 4 December 2012 signed a three year Bilateral Swap Arrangement
(BSA) with the Bank of Japan for swapping of the local currencies to address short-term liquidity
problems. The BSA will be effective from 5 December 2012.
The main idea behind the arrangement is to address short-term liquidity difficulties and
supplement the existing international financial arrangements, as one of the efforts in
strengthening mutual cooperation between Japan and India.
The Bilateral Swap Agreement (BSA) is going to enable both the countries to swap their local
currencies either Japanese yen or Indian rupee against US dollar for an amount up to 15 billion
dollars.
Earlier for a period of three years from June 2008 to June 2011 both the countries signed a
similar agreement for an amount of 3 billion dollar.
The enhancement of the BSA is going to strengthen economic and financial cooperation
between the two countries and accordingly to financial market stability. The BSA is activated
when an IMF-support programme already exists or is expected to be established in the near
future.
UNION COAL MINISTRY DECIDED TO DEALLOCATE FOUR COAL BLOCKS

ALLOTTED TO 15 FIRMS
The Union Coal Ministry in the fourth week of November 2012 decided to deallocate four coal
blocks allotted to 15 firms, including JSW Steel and Bhushan Steel and Strips. The four coal
blocks are as following:- Gourangdih ABC coal block in West Bengal, New Patrapara coal block
in Orissa, the Lalgarh coal block in Jharkhand and north Dhadu coal bloack. The ministry also
asked the Monnet Ispat to deposit a bank guarantee of 62 crore rupees.
The Gourangdih ABC coal block in West Bengal was allotted to Himachal EMTA Power Ltd and
JSW Steel Ltd. The Coal Ministry in its letter to the company stated that it has decided to forfeit
50 per cent of the Bank Guarantee related to the development of coal block as per the
recommendation of Inter-Ministerial Group.
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The Ministry also decided to deallocate New Patrapara coal block in Orissa and to return the full
bank guarantee amount without any deduction. The Coal Ministry in another letter to Monnet
Ispat said that the Bank Guarantee as calculated by Coal Controller is to be deposited by the
allottee company within one month from the date of letter failing which the block may be
deallocated.
In case of Domco Smokeless Fuels, the Ministry decided to deallocate the Lalgarh (North) coal
block in Jharkhand. With regard to North Dhadu coal block jointly allocated to four firms, the
Ministry has decided to deallocate the North Dhadu coal block in addition to the forfeiture of
full bank guarantee.
INDIA SIGNED 70 MILLION US DOLLAR LOAN AGREEMENT WITH WORLD

BANK
Government of India on 22 November 2012 signed a 70-million US Dollar loan agreement with
World Bank for financing the Karnataka Health Systems Development as well as Reform Project.
Primary objective of this project is improvisation of public-private collaboration, health services
delivery and financial aid for vulnerable groups and underserved in Karnataka. The agreement
was signed by the Joint Secretary, Department of Economic Affairs and India Operations
Advisor of World Bank in New Delhi.
The components of the project include:
Strengthening present health programs of the Government of India

Innovations in the health financing as well as service delivery
Project management, evaluation as well as monitoring
Additional financing of this project is scheduled to be implemented till 31 March 2016.
RESERVE BANK OF INDIA ASKED BANKS NOT TO PROVIDE LOANS FOR

PURCHASE OF GOLD
The Reserve Bank of India, in its notification released on 19 November 2012 directed banks not
to provide loans to its customers for purchase of all types of gold, which includes primary gold,
jewellery, bullion, gold coins, units of Gold Exchange Traded Funds (ETF) and units of gold
mutual funds. The order was directed for discouraging people from getting involved in
speculative activities.
The notification from the Reserve Bank of India also directed the banks not to grant advances
against gold bullion to traders or dealers, as such advances would be utilised with the purpose
of offering finance for gold purchase at auctions and speculative holding of stocks and bullion.
This notification allowed the banks to provide finances to the jewelers for their general working
capital requirements.
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The decision of RBI came up in response to the suggestion of the working Group constituted
after the announcement if the Monetary Policy Statement of April 2012. The working group
suggested that the banks are not permitted to finance purchase of any type of gold other than
the working capital.
This decision of RBI came up in response to the significant growth in the imports of the gold in
past few years that has created pressure on the current account deficit. The Gold imports of
India in 2011-12 stood up at 60 billion dollar.
OMAN BANNED IMPORT OF EGGS AND CHICKEN FROM INDIA

The Sultanate of Oman on 10 November 2012 issued an official decree banning the import of
eggs and chicken from India. Oman that is the biggest egg export market of India issued the ban
following the recommendations of the World Organisation for Animal Health about the
outbreak of bird-flu was confirmed by the Government run Turkey Farm at Hesaraghatta,
Karnataka in the month of October.
The Sultanate of Oman banned import of eggs and chicken from India for second time in 2012
and this ban is going to affect the economic conditions of the poultry farmers of India as this
ban would have an impact on a third of poultry export from India. Oman resumed the import of
Poultry Products from India after a ban that lasted for five months in the last week of
September. The previous ban was made in effect of reports of bird flu witnessed in Bihar.\
INCOME CEILING FOR LIG RAISED BY UNION GOVERNMENT OF INDIA

The Union Government of India on 15 November 2012 decided to raise cap on the annual
income which is required for qualification for the benefits under the present housing schemes
for the Low Income Groups (LIG) as well as Economically Weaker Sections (EWS). This step on
the part of the government will provide benefit to 20 lakh people.
The Ministry for Housing and Urban Poverty Alleviation (HUPA) raised the income criterion for
EWS housings from 60000 Rupees per year initially to 1 Lakh Rupees now. This clearly indicates
that people with household income below 1 Lakh Rupees will be able to avail benefits of EWS
housing scheme. Likewise, the income bar for LIG category has been raised to 2 lakh Rupees
now.
This decision will be implemented during the 12th Five Year Plan. Instructions have been given
to the state governments as well as the banks so that the decision could be implemented
effectively.
People will now be able to get benefits under the Rajiv Awas Yogna (RAY) and EWS Housing
Schemes. Additionally, the Union Minister added that they have the target of including 20 lakh
people under this plan. It is the big step because more people would qualify for the home loans
now.
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Definition of Economically Weaker Sections (EWS)

People falling within the income limit set by the Ministry of Urban Development fall under the
category of Economically Weaker Sections (EWS). Ministry of Urban Development revised this
income ceiling from Rs. 3,300 to Rs. 5,000. This income ceiling has been made applicable to
loans for Interest Subsidy for Housing the Urban Poor Scheme (ISHUP) as well as Housing and
Urban Development Corporation (HUDCO).
UNION CABINET OF INDIA CLEARED PROPOSAL FOR SPECTRUM

SHARING
The Union Cabinet of India on 8 November 2012 approved levy of about 31000 crore rupees as
one-time spectrum charge to be implemented on all incumbent telecom operators like Bharati
Airtel, Vodafone, Idea and others. The proposed charges had been implemented to create a
level ground between the old players and the new players of the telecom sector.
The Finance Minister of India P Chidambaram declared that the recommendations of the EGoM
(Empowered Group of Ministers) was cleared and the GSM operators would have to pay for the
airwaves that they hold beyond the 4.4 Mega-Hertz, the price determined at the auction and
the operators holding more than 6.2 mega hertz airwaves would have to pay a retroactive fee
from July 2008 onwards. The CDMA operators would have to pay for the airwaves that they
hold beyond 2.5 Mega-Hertz as per the validity of the permits offered to them.
CIVIL AVIATION MINISTRY APPROVED NEW TRAFFIC RIGHTS TO INDIAN

CARRIERS
The Civil Aviation Ministry in the first week of November 2012 approved new traffic rights to
Indian carriers for the next three seasons to expand international air travel out of the country.
The new cities include Rome, Madrid, Barcelona, Sydney, Melbourne, Nairobi, Al Najaf in Iraq,
Moscow, Zurich, Macau, Tashkent and Ho Chi Minh City.
Air India and its subsidiary Air India Express got their number of weekly flights enhanced. Air
India has also got the rights for the first time to fly on sectors like Delhi-RomeMadrid/Barcelona, Delhi-Moscow, Delhi-Sydney/Melbourne, Mumbai-Nairobi and Mumbai-Al
Najaf.
The allocation of flight traffic rights is expected to give a major boost to Indian carriers and spur
growth in the civil aviation sector. The move will also enhance connectivity from various Indian
cities to international destinations. It will also enhance competitiveness among airlines and is
expected to bring down fares. Opening of several new international sectors and progressive
increase in number of flights will also give a fillip to the domestic tourism sector which will
result in overall economic growth of the country.
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GOVERNMENT DECIDED TO DIGITIZE CABLE TV NETWORK IN THIRTY

EIGHT CITIES
The Union Government of India on 6 November 2012 decided to digitise Cable TV network in
thirty eight cities, spread over 15 States, by 31 March 2013 in the second phase of digitisation.
Earlier, the digitization was completed in Delhi, Mumbai and Kolkata on the 31October 2012,
while in Chennai the deadline was extended till the 9 November 2012 by the Madras High
Court.
RBI EXPANDED THE LENDING NORMS ON PRIORITY SECTORS

The Reserve Bank of India (RBI) on 18 October 2012 extended the lendings on the Priority
sectors like housing, agriculture, small and medium enterprises, and expanded the scope of
bank loans for these sectors up to 2 crore Rupees. These amendments would be in effect from
20 July 2012.
The decision came after discussions were held with the CMDs/CEOs of selected banks as well as
the heads of Priority Sectors of selected banks and based on the same the new guidelines and
amendments were made.
The banks were permitted by the central bank to offer loans up to an aggregate limit of 2 crore
Rupees, to corporate that includes farmers producer companies, co-operatives and partnership
firms of famers indulged in agricultural and allied activities including animal husbandry, beekeeping, dairy, fishery and sericulture. The Priority loan would also be made available for preharvest and post-harvest activities like weeding, spraying, grading, harvesting and sorting.
Export Credit loans for exporting ones own farm produce would also be made available. The
lending scheme fulfills the criterion mentioned under the MSMED Act-2006.
Bank loans to Micro and Small Enterprises (MSEs) those are engaged in providing services
would be eligible for the direct finance of up to 2 crore Rupees per borrower per unit under
priority sector. In case the loan amount per borrower increases the limit of 2 crore rupees, than
it can be considered as the indirect finance for agriculture.
Loans under priority sector would also include loans provided to Government agencies for
development of dwelling units or slum clearance and rehabilitation up to 10 lakh rupees. This
provision also spreads for low income group and the economically weaker sections of the
society in form of housing finance, construction and re-construction, purchase and more up to
ceiling.
The Central Bank also guided the banks to keep a check on the loans, which are offered for the
approved purposes. Thus the banks engaged in issuing loans would have to put forward a fine
and channeled internal system and control in this regard. The apex court decision came to
ensure that credit needs of people who dont have access to institutional finance.
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12 TH FIVE-YEAR PLAN FOCUSED ON IMPROVEMENT OF HEALTH,

EDUCATION AND SANITATION
The Union Cabinet on 4 October 2012 approved the 12th five-year plan with its aim to renew
Indian economy and use the funds from government in improving the facilities of education,
sanitation and health. This plan has seen a three-fold increase in the budget constraints when
compared to that of the 11th five-year plan. The plan would infuse a huge fund of 47.7 lakh
crore rupees and this will help to accomplish the economic growth to an average level of 8.2
percent.
12th five-year plan is guided by the policy guidelines and principles to revive the following
Indian economy, which registered a growth rate of meager 5.5 percent in the first quarter of
the financial year 2012-13.
The plan aims towards the betterment of the infrastructural projects of the nation avoiding all
types of bottlenecks. The document presented by the planning commission is aimed to attract
private investments of up to US$1 trillion in the infrastructural growth in the 12th five-year
plan, which will also ensure a reduction in subsidy burden of the government to 1.5 percent
from 2 percent of the GDP (gross domestic product). The UID (Unique Identification Number)
will act as a platform for cash transfer of the subsidies in the plan.
The plan aims towards achieving a growth of 4 percent in agriculture and to reduce poverty by
10 percentage points, by 2017.
The formulated draft of the plan would be presented for final approval before the National
Development Council (NDC) that is headed by the Prime Minister having the Cabinet Ministers
and Chief Ministers on board. National Development Council (NDC) is the apex decision making
body and authority to signal the five year plan in the nation.
UNION GOVERNMENT CLEARED INCREASE OF FDI IN INSURANCE

The Union Government on 4 October 2012 approved the Companies Bill, 2011 and Pension
Fund Regulatory and Development Authority (PFRDA) Bill, moving with its proposal to hike the
foreign investment in the insurance sector to 49 percent from the present 26 percent with also
opening up the pension sector for FDI. The decision was taken by Union Cabinet headed by
Prime Minister Manmohan Singh.
The benefit of this amendment will go to the private sector insurance companies which require
huge amount of capital and that capital will be facilitated with increase in FDI to 49 per cent.
With this, the state-run insurance companies will remain in the public sector. The government
also gave green signal to foreign investment in pension funds and said the FDI limit could go up
49 per cent in line with cap in the insurance sector.
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Also with opening up the pension sector, PFRDA bill gives statutory powers to the interim
regulator, constituted through an executive order in 2003.
However, it is not easy for the union government to pass this legislation in the parliament
because the Opposition Bhartiya Janta Party (BJP) opposed the hike in FDI limit in insurance
and insisted for the bill to be brought again in Parliament Standing Committee.
CVC INSTRUCTED CBI TO EXPAND THE SCOPE OF INVESTIGATION ON

COALGATE
The Central Vigilance Commission on 24 September 2012 instructed the Central Bureau of
Investigation to expand its investigation scope on Coal Block Allocation to private firms in
between 1993 to 2004. The decision was made after CVC received a letter from the Coal
Minister, Shriprakash Jaiswal seeking a probe from CBI on allocations made, since 1993.
Widening of the scope of investigation will bring into scanner the allocation done to private
companies during the reign of P.V. Narasimha Rao led congress government after 1993,
including United Front Government from 1996 to 1998 and BJP-led NDA government from
1996 to 1998. Report of Comptroller and Auditor General of India (CAG) - Vinod Rai on coal
block allocations tabled in the parliament states
Due to arbitrary allotment of the coal blocks the Indian exchequer suffered a loss of Rs
1.86 lakh crore equivalents to $ 37 billion
Up to 31 March 2011 total 194 coal blocks were allotted to different private and
government parties with an aggregate quantity of 44,440 million tonnes of coal
The beneficiary of these allotments as per CAG report were 25 major companies of India
including Essar Power, Jindal Steel and Power, Hindalco and Tata Power
To bring out transparency in the process, the CAG suggested competitive bidding as a
better solution.
FOREIGN INVESTMENT CAP HIKED TO 74 PERCENT FOR BROADCASTING

SERVICES
The Government of India on 20 September 2012 hiked the foreign investment cap for the
broadcasting service providers to 74 percent. The registered hike in foreign investment cap is
for service providers of Direct to Home (DTH), modernized cable network and mobile television.
This move of the government will allow the global players in acquiring major stakes in the
broadcasting companies. Before his decision was passed, the eligibility of DTH and multi-system
cable operators to make foreign investment was limited to 49 percent only.
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In its decision last week, the Cabinet Committee on Economic Affairs cleared its stand on the
companies of broadcast content that the TV news Channels and FM radio channels can have a
foreign investment cap of 26 percent. This decision was made to make sure that majority of
control remains back in the hands of Indian Partner.
GAAR REPORT SUBMITTED BY THE SHOME COMMITTEE TO THE FINANCE

MINISTRY
The GAAR report was submitted on 1 September 2012 to the finance minister of India by the
Shome Committee constituted by the Central Board of Direct Taxes, after the approval of Prime
Minister of India. The committee in its report has tried to create a balance in between the
investors being invited to the country and protection of the tax base from tax avoidance and
evasion, using aggressive tax planning.
The committee in its findings has stated that the GAAR guidelines should be introduced in the
country at the time of economic stability. Hence, it has recommended the postponement of its
implementation by 3 years. Committees recommendation also states about the
implementation of the findings with complete spirit and has laid emphasis on transition period
of the taxpayers and preparedness of the administrators. To provide clarity on GAARs
applicability provisions in different situations 27 illustrations were made and are mentioned
under different conditions like:
Tax Mitigation- GAAR cant be invoked

Tax Avoidance- SAAR is applicable hence GAAR is not invoked
Court Approved Amalgamations or demergers
Tax Avoidance- GAAR invoked
Tax Evasion can directly be dealt of law without invoking the GAAR
Following the Finance Act 2012, the introduction of the General Anti-Avoidance Rules (GAAR)
was done into the Income Tax Act, 1961. The committee briefly analysed the provisions of
GAAR as per the inputs available from stakeholders and following the recommendations made
the amendments in the Act were made for finalization of the guidelines for the Income Tax
Rules, 1962.
Shomes Committee
The expert committee on GAAR (General Anti-Avoidance Rules) was constituted under the
Chairmanship of Dr. Parthasarsthi Shome with members, namely Shri N. Rangachary (Former
Chairman of IRDA and CBDT), Dr. Ajay Shah (Prof. NIPFP) and Shri Sunil Gupta (Joint SecretaryTax Policy and Legislation, Department of Revenue) for undertaking the consultations of
stakeholders and finalization of guidelines for GAAR. The main objective of the committee was
to get feedbacks from the stakeholders and prepare new guidelines or to amend the previous
guidelines after examining the things finely.The committee was constituted by the Central
Board of Direct Taxes after being approved by the Prime Minister of India.
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PROPOSAL FOR 51 PERCENT FDI IN MULTI-BRAND RETAIL AND 49

PERCENT IN AVIATION PASSED
The Union Cabinet on 14 September 2012 cleared the proposal of foreign direct investment
(FDI) for 51 percent in the multi-brand retail chains and 49 percent in Aviation power exchanges
industry.
Passing of the proposal have cleared the floor for welcoming the multi-brand retail chains like
Wall mart and Tesco and Carrefour in the country for setting up of their shops and retail
outlets. Similarly, the 49 percent of FDI allowed in aviation and Power exchanges will bring in
funds for the domestic carriers on a verge of death and will help in enhancement of power
availability and distribution management, respectively.
Conditions put forward for investors in the proposal for the multi-brand retails
The proposal makes a clear stand that investors looking ahead for investments will have
to take the permission in form of approvals from the Foreign Investment Promotion
Board
Investment of minimum $100 million is a must for any foreign investor planning to
invest in India, out of which 50% of the investment should be made in creation of backend infrastructure. Back-end investment means investments that is made in quality
control, warehouse creation, cold storage, design improvement, manufacturing,
processing and packaging
The investors will have to get 30% of the production of their total products by the smallscale industries
The proposal also clears that the agricultural produce like pulses, flowers, fruits,
vegetables, poultry item, fishery, meat and others can be unbranded
Investors can invest in the 51 cities with a minimum population of 10 lakh people as per
the census presented in the year 2011
For making investment in the aviation sector, the proposals have
This will help in making equity invasion for the aviation companies seeking financial
support at the time when maximum of the domestic airlines are passing through a
phase of losses.
Investors who are not functional in airline business can own equity of 49 percent
directly or indirectly in the Indian Aviation Companies.
FDI in Power Exchanges will be guided via
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49 percent of FDI in power trading exchanges will be taken care of as per the regulation
laid down by SEBI and Central Electricity Regulatory Commission (Power Market)
Regulations) 2010
The commerce minister stated that Foreign Institutional Investors cannot exceed a limit
of 26 percent investment and the paid-up capital will be restricted to 23 percent
FII can be permitted under automatic routes whereas; the FDI will be scrutinized under
the route approved by the government
The generation of electricity, power transmission and distribution along with trading will
be done in accordance to the provisions of the Electricity Act 2003
The current policy allows FDI up to 100 percent in power sector (atomic energy is an
exception)
What does it mean for different economic sections of India?
Economy: Help in reversal of the economic slowdown, attract the investment of billions
of dollars from foreign market and spin jobs to a greater extent
Kirana Stores: Will lower down the selling price, because they will purchase the supplies
from deep down retailers
Retailers: Can sell their equity up to 51% to the global leaders
Farmers: They can sell their produce directly at higher prices and the presence of middle
man will end
States: Decision to allow the retail giants or prohibit lies in the hands of states
Common Man: A chance to gain big discount with many options to shop
UPA government: Got a chance to wash away the blames of policy paralysis
REPORT: INDIAN EXTERNAL DEBTS ARE WITHIN MANAGEABLE LIMITS

The Department of Economic Affairs (DEA) published its annual publication- Indias external
debt: a status report 2011-12. As per the published report, Indias external debt in the end of
March 2012 was $345.8 billion, which is 13% high than the previous years debt or $ 39.9 billion
from where India stood at the end of March 2011. The publication points out about the upward
movement of the stress that is put on the current account deficit (CAD) of the nation because
of the risks thrown on it, from the external sectors that comprises Fall in the reserve cover for
imports and external debt, depreciation in the exchange rate of rupee, rise in the level of
external debts and the increased share of the short term commercial borrowing in the
complete external debt quantum.
The finance ministry cleared on 10 September 2012 that there can be a rise in the global
economic risks that may rise with a weakened recovery and a slow growth scopes that may lead
into high debts and seek growth finances even in the advanced economies. This clearance was
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based on Indian Vulnerability Index indicators, which has been experiencing the euro zone debt
crisis and the global slowdown.
A detailed analysis of Indias position in external debt at the end of March, 2012 has been
presented in the status report. It is also based on the data released by the Reserve Bank of India
on 29 June 2012. The report not only presents the analysis of external debts trend and
composition on the country but it also presents a comparative picture of this debt in reference
to other developing nations of the world with respect to the fluid global economic situations.
The best part of the report produced is that instead of all the facts presented and
developments Indias debt is within manageable limits and can be indicated by the debt service
ratio to 6 percent and external debt-to-GDP ratio of 20 percent in 2011-2012. Thus India
continues to be within the less vulnerable countries when it comes to external debt indicators
compared to that of the indebted countries.
The Global Development Finance, 2012 from World Bank, India stood at the fifth position for
absolute debt stocks when compared with the 20 other developing debtor countries. But when
taken care of the ration of external debt to that of the gross national income, India was at the
fifth position from the lowest side.
CABINET GAVE A NOD TO TWO SUBSIDIARIES OF AIR INDIA: AIESL AND

AITSL
To split off the ground handling and engineering services of Air India, Union cabinet under the
chairmanship of Prime Minister Dr. Manmohan Singh approved a proposal of Rs 768 crore on 6
September 2012. Now the two units Air India Engineering Services Limited (AIESL) and Air India
Transport Services Ltd. (AITSL) will be operational as two completely owned subsidiaries and
treated as separate profit centers.
The approval came after waiting for almost two years since; Air India board agreed for the
separate operations of the two units and sent it for clearance to the Ministry Of Civil Aviation.
Ministry gave its nod to the proposal in the month of April.
AIESL will be operational in line of repair, maintenance and overhaul (MRO) business for Air
India only but also for airlines owned by different groups. Its expected that the unit can bring
back a potential turnover of about $ 1.5 billion MRO business in Asia Pacific.
Air India that has reportedly suffered a loss of about 7,853 crore in the financial year 2011-2012
is hoping to gain a total equity infusion of Rs 30,000 Crore by 2021 under the turnaround and
restructuring time devised by the government.
J.R.D. Tata founded Air India and is also known as the Father of Civil Aviation in India. Air India
took its first flight on 15 October 1932. Air India is known as the national flag carrier of India.
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UNION GOVERNMENT APPROVED 14000 CRORE RUPEES FUND TO SPUR

PRODUCTION OF HYBRID AND ELECTRICAL VEHICLE
The government of India on 29 August 2012 approved a 14000 crore rupees fund to spur the
production of hybrid and electrical vehicles in the country. According to a new policy approved,
Automobile companies and the government plan to put six million electric vehicles on road by
2020. The government under the new policy will fund research and development, infrastructure
and subsidies.
With an aim at reducing the burden on fossil fuels, the Union government in national budget
2011 had proposed a plan to develop electric and hybrid vehicles. Later, the government set up
a National Council for Electric Mobility led by heavy industries minister Praful Patel, and a
National Board for Electric Mobility to ensure uniform rules in all the states.
According to an estimate about 130000 electric vehicles were sold in India in 2011-12. Electric
scooters cost between 26000 rupees and 43000 rupees in Indian market, while countrys only
indigenously built electric car Reva starts at 3.5 lakh rupees. Japan-based Nissan Motor Co. Ltds
electric car, Leaf, is the largest-selling car in the world that runs on battery. It costs 33000 dollar
(around 18 lakh rupees) in the US and its battery cost is at least half the cars price.
The government has long been contemplating a policy to reduce its dependence on oil which
makes up a substantial part of Indias huge import basket. The hybrid and electric vehicles have
emerged as a better alternative of traditional oil-based vehicles over the years.
SEBI ALLOWED PARTIAL FLEXIBILITY IN IDRS FOR INVESTORS

Indias market regulator Security and Exchange Board of India (SEBI) on 28 August 2012 allowed
partial flexibility in the conversion of Indian Depository Receipts (IDRs) into equity shares by
investors. The SEBI move is aimed at retaining domestic liquidity besides; it is also expected to
attract foreign entities to enroll their IDRs on India stock exchanges.
In another circular released by the RBI, the central bank put an overall cap of 5 billion dollar for
raising of capital through IDRs by foreign companies in Indian markets. The RBI measure will
help Indian investors to convert their depository receipts into equity shares of the issuer
company and vice versa.
PUBLIC ACCOUNTS COMMITTEE (PAC) CALLED FOR DETERRENT PENAL

PROVISIONS AGAINST UNITS IN SEZS
Parliament's Public Accounts Committee on 23 August 2012 decided to bring the three latest
CAG reports on coal allocations, GMR-run Delhi airport and Reliance Power, onto its agenda for
the year 2012.
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The Public Accounts Committee (PAC) in its meeting on 23 August 2012 called for deterrent
penal provisions against units in Special Economic Zones which default duty payments to the
exchequer. PAC in a report adopted in the meeting recommended an oversight mechanism
which would ensure no misuse of the SEZ policy.
The PAC panel based its findings on a sample of 22 SEZ units. The panel found that out of an
overall export of Rs 7149.23 crore made by 22 SEZ units, the actual export content was only Rs
1999.27 crore (28%) and the remaining Rs 5149.96 crores (72%) related to Domestic Tariff Area
earnings.
Panel Findings & Recommendations
The report stated that low figures of actual physical export of goods were typical of most SEZ
units. The aim of SEZ Act was to boost exports and earning of foreign exchange by giving these
units certain duty waivers and incentives. PAC however observed that there is no mandatory
requirement of undertaking exports in the SEZ legislation. Since the units located in SEZs enjoy
tax benefits and are expected to fuel economic growth, PAC recommended revisiting the
scheme.
The committee recommended that all SEZs undertake physical export of at least 51% of their
product, and even import tax waivers raw material for goods falling under the Domestic Tariff
Area (DTA) is to be considered on the credit account of the SEZ firms.
It was noted that SEZ units could sell their goods, including by products, and services in DTA on
payment of applicable duty including at nil rate with no requirement to payback the duty
foregone on inputs used in the clearance of products. This policy will put SEZ units at a distinctly
advantageous position compared to similar units in the DTA.
INDIA EASED EXTERNAL OVERSEAS BORROWING RULES TO ENABLE

EASIER ACCESS TO CHEAP DOLLAR FUNDS
The high-level committee on external commercial borrowings (ECB),chaired by secretary,
department of economic affairs Arvind Mayaram on 22 August 2012 decided to further
liberalise the foreign borrowing norms.
India eased overseas borrowing rules to enable easier access to cheap dollar funds to housing
finance companies such as HDFC, small industry financier SIDBI. It was decided to permitted
non-resident entities to provide rating enhancement facility to Indian borrower. Indias
measure to ease overseas borrowing is expected to boost capital inflows by permitting lower
rated companies to raise dollar funds. Even a company with low credit rating will be able to
raise foreign funds using credit enhancement facility that states that third party is to assure the
lender that he will be compensated if the borrower defaulted.
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The government permitted foreign entities to provide credit enhancement to rupee bonds of
Indian companies which will improve their appeal to investors. The minimum maturity period of
such rupee bonds was reduced from seven years to three years.
Manufacturing sector too now will enjoy access to cheap dollar funds and they will be thus able
to revive investments plans stuck on account of high costs. Earlier, only infrastructure and
infrastructure finance companies could issue rupee-denominated bonds with guarantees from
multilateral or regional financial institutions.
The decision taken by the high-level committee on 22 August 2012 includes the following:
Foreign institutional investors were permitted to invest in these bonds up to US$5

billion within the overall corporate bond limit of US$45 billion.
The minimum maturity period for rupee bonds was reduced to three years
Credit enhancement to provide an enabling mechanism for Indian companies to raise
foreign debt
Costly credit observed to be one of the key issue impeding investments.
The panel also decided to increase the maturity of such buyers credit to maximum five
years thereby allowing companies flexibility in payment. Extending refinance facility to
SPVs will ease debt financing for infra projects.
Advantages for Lower-rated Companies

The guarantee for domestic companies from offshore entities effectively lifts the credit ratings
of the bonds thereby benefitting lower-rated borrowers. Indian companies have always been
constrained in their funding options due to high domestic interest rates and difficulties in
tapping markets overseas.
The actions targeting credit guarantees will benefit sectors such as telecoms and energy, where
foreign companies often operate via Indian units, but whose domestic borrowing get
constrained if they had lower ratings than their parent companies.
Infrastructure and manufacturing companies can re-finance a higher proportion of their rupee
borrowings via cheaper overseas debt. These infrastructure and manufacturing companies can
now tap overseas loans up to 75% of their average forex earnings over the previous three
financial years from 50% previously.
UNION FINANCE MINISTRY APPROVED 49 PERCENT FDI IN INSURANCE

AND PENSION SECTOR
In a move aimed at encouraging investment sentiment in the country, the Union Finance
Ministry on 22 August 2012 approved 49 percent foreign direct investment in insurance and
pension sector. Earlier the permitted level of FDI in the insurance and pension sector was 26
percent.
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The proposal for 49 percent FDI in insurance and pension sector was made during Pranab
Mukherjees tenure at the finance minister office. However, the decision on the same was
delayed because of resistance from the cronies.
With the approval of Union Finance Ministry, the bill will now be discussed in the cabinet and
will require to be approved by the parliament. The chances of the bill getting through in the
monsoon session of the parliament are very low as opposition parties have been consistently
stalling the house on the issue of coal scam. The monsoon session is set to end on 27 August
2012.
As per the Insurance Regulatory and Development Authority (IRDA) estimates, over the next
five years, the insurance sector requires a capital infusion of more than 12 billion dollar. The
Union Government has been trying hard to introduce the major reforms to revive the ailing
economy. The measures such as FDI in multi -brand retail and civil avaiation, implementation of
Goods and Services Tax (GST) have, however, faced fierce opposition from different political
parties.
Indian economy is rapidly moving towards the grim economic situation similar faced during the
recession. The economy needs some big ticket reforms to reverse the pessimistic economic
environment. India's GDP growth fell to 6.5 percent during 2011-12 but the fourth quarter
growth rate dropped to 5.3 percent, the slowest in past nine years. Business confidence among
the investors and business leaders has touched the historic low as industrial output and trade
figures are constantly going down.
The tight monetary policy measures adopted by the central bank to check inflation has actually
aggravated the situation as high interest rates are hugely impacting the overall growth
scenario. Indian industries have been reiterating that there is an urgent need to create
conditions for revival of private investment.
The FDI in insurance might prove to be a start of the long pending reform but the Union Finance
Minister P Chidambaram will have to work hard on political front to make it possible. Earlier the
government had to defer the decision on the bill as it faced opposition from its allies such as
Trinammol Congress.
RBI STIPULATED THE NORMS FOR SECURITISATION OF LOANS BY NBFCS

Extending the guidelines of securitisation of loan from banks to non-banking finance companies
(NBFC), Indias Central Bank Reserve Bank of India on 21 August 2012 tightened the
securitisation norms for NBFCs. The RBI instructed that a non-banking finance company will
have to retain at least 5 per cent of the loan being sold to another entity.
The RBI in its revised guidelines also stipulated that NBFC cannot sell or securitise a loan unless
three monthly installments have been paid by the borrower. The latest directives from the RBI
are aimed at checking unhealthy practices and distributing risk to a wide spectrum of investors.
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These guidelines have to implemented by NBFCs in two phases by the end of October 2012.
Earlier, the RBI had issued similar guidelines with regards to securitisation of loans by banks.
REGULATOR SEBI PERMITTED SEVEN ALTERNATIVE INVESTMENT FUNDS

(AIFS) TO START OPERATION IN INDIA
Market regulator Securities and Exchange Board of India (SEBI) in August 2012 permitted seven
Alternative Investment Funds (AIFs) to start operation in India under a newly formulated route
that enable pooling of funds for investments in areas such as real estate, private equity and
hedge funds. Six AIFs registered with the regulator in August 2012, while one was granted
registration back on 23 July 2012. SEBI had published its guidelines with regard to AIF in May
2012.
The seven AIFs that registered with SEBI include IFCI Syncamore India Infrastructure Fund,
Utthishta Yekum Fund, Indiaquotient Investment Trust, Forefront Alternate Investment Trust,
Excedo Realty Fund, Sabre Partners Trust and KKR India Alternate Credit Opportunities Fund.
Funds established or incorporated in India for the purpose of pooling in of capital from Indian
and foreign investors for investing would have to follow a pre-decided policy. SEBI decided to
allow promoters of listed companies can offload 10 per cent of equity to AIFs such as such as
SME Funds, Infrastructure Funds, PE funds and Venture Capital Funds registered with the
market regulator to attain minimum 25 per cent public holding.
AIFs, as per SEBI guidelines can operate broadly in three categories and it is mandatory for
them to get registered with the regulator. The SEBI rules apply to all AIFs, including those
operating as private equity funds, real estate funds and hedge funds, among others.
AIF Categories
The Category I AIFs are those where funds stand a chance of getting certain incentives or
concessions from the government, SEBI or other regulators in India and include Social Venture
Funds, Infrastructure Funds, Venture Capital Funds and SME Funds.
The Category II AIFs are those funds which can invest anywhere in any combination but are
prohibited from raising debt, except for meeting their day-to-day operational requirements.
These AIFs include PE funds, debt funds or fund of funds, as also all others falling outside the
ambit of Category I and Category III.
The Category III AIFs are those trading with an objective to make short term returns and include
hedge funds, among others.
INTER-MINISTERIAL GROUP RECOMMENDED LINKING PATENTED DRUG

PRICES TO PER-CAPITA INCOME
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An inter-ministerial group formed in 2007 and entrusted with the responsibility of regulating
prices of patented medicines recommended using a per capita income-linked reference pricing
mechanism. The proposal by the group is expected to reduce prices of several patented dugs by
up to one-third. However it will hit the profitability of foreign companies.
The committee suggested fixing the price of patented drugs by comparing the price at which
these drugs are procured by governments in the UK, Canada, France, Australia and New
Zealand. The committee recommended that the retail price is to be fixed by adjusting it to the
per capita income of the country. The new mechanism is to be applicable for patented drugs
that dont have any therapeutic equivalents in the market.
For patented drugs that have similar alternatives in the market, the price is to be fixed in such a
manner that it should not lead to an overall increase in the treatment cost. If the global launch
of the patented drug takes place in India, the retail price will have to be based on the cost of
developing the drugs and other factors. Prices of patented drugs are currently unregulated.
Patented drugs account for 1% of the $13-billion domestic market. This share is expected to
grow to 5% of the estimated $50-60 billion drug market by 2020.
The Indian Pharmaceutical Alliance, the representative body of big Indian drugmakers,
supported the reference-based system. The Organisation of Pharmaceutical Producers of India
(OPPI), the lobby body of multinationals however stated that the cross-country per capita
income-linked proposal is fundamentally flawed.
The Indian government is of the opinion that if patented drugs are not regulated, these would
remain unaffordable for most Indians. A WHO study stated that as many as 79% of Indian
patients pay for their healthcare expenditure from their own pockets. However it must also be
noted that if the government fixes the prices of these drugs at excessively low levels,
companies may stop selling drugs in the market.
Historical Backdrop
India had adopted a new product patent regime in 2005 after it became a signatory to TRIPS, an
international intellectual property protection agreement, providing 20 years of marketing
exclusivity to the patent holder. Global innovator companies such as GSK, Bayer AG, Novartis,
Merck & Co and Bristol Myers Squibb who started launching their drugs in India continue to
remain jittery about the governments policies aimed at reducing healthcare costs. They
complain that Indias implementation of intellectual property rights has been unsatisfactory.
INDIAS NSE BECAME THE WORLDS LARGEST BOURSE IN EQUITY

SEGMENT AS PER WFES GLOBAL RANKING
As per the latest global ranking compiled and published by the World Federation of Exchanges
(WFE) in August 2012, the National Stock Exchange of India (NSE) become the worlds largest
bourse in terms of the number of trades in equity segment for the first six months of 2012. A
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total of 735474 trades took place in the equity segment of NSE in the January-June period of
2012, making it the worlds largest exchange on this parameter. NSE was followed by NYSE
Euronext and Nasdaq OMX at the second and the third positions.
Industry experts attributed the recent position of NSE acquired by the bourse to growing
investor base, use of latest technology and new products. NSE's platform is connected to two
lakh trading terminals in more than 2000 towns and cities across the country.
NSE is the second largest exchange globally after Korea Exchange for index options. Eurex was
the third largest exchange worldwide in terms of total number of index options traded during
the first six months of 2012.
BSE recorded a total of 187824 trades during this period in its equity segment. The total
number of listed companies is much larger in case of the BSE, the exchange however lags
behind NSE significantly in terms of volume and value of trades.
The latest data published by WFE indicated that investors from tier-three cities contributed
more than 45 per cent of total cash market retail turnover in the financial year 2011- 12. The
tier-three cities account for more than half of the total retail investor base on NSE platform.
UNION CABINET SETS BASE PRICE FOR AUCTION OF 2G SPECTRUM AT

14000 CRORE RUPEES
The Union Cabinet on 4 August 2012 approved the reserve price for auction of 2G spectrum as
well as spectrum usage charges (SUC). The Cabinet set the reserve price of 14000 crore rupees
for the 5 megahertz pan-India spectrum in the 1800 megahertz band. The price is 22 percent
lower than the telecom regulator's suggestion. An auctioneer will be soon appointed to conduct
a fresh auction.
The Cabinet also endorsed the EGoM's recommendation that the reserve price for the 800
megahertz band, which is used by CDMA operators, be fixed at 1.3 times the price for 1800
megahertz band.
Telecom Regulatory Authority of India (TRAI) had recommended the base price at 18000 crore
rupees, which drew a heavy criticism from telecom companies, who argued that the base price
suggested by TRAI is irrational.
The fresh auction of 2G spectrum was necessitated after the Supreme Court scrapped 122
telecom licences on 2 February 2012 as it found the process of spectrum allocation cramped
with flaws.
RBI DIRECTED NBFCS TO MAINTAIN NET-OWNED FUNDS (NOF) AT RS 3

CRORE BY 31 MARCH 2013
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The Reserve Bank of India (RBI) in a notification issued on 3 August 2012 stated that all
registered non-banking financial companies (NBFCs) which who intend to convert themselves
into non-banking financial company-micro finance institutions (NBFC-MFIs) would have to seek
registration with immediate effect, not later than 31 October 2012.
The central bank also mentioned that the NBFCs have to maintain net-owned funds (NOF) at Rs
3 crore by 31 March 2013, and at Rs.5 crore by 31 March 31 2014. If the NBFCs fail maintain the
NOF they will have to ensure that lending to the micro finance sector, that is, individuals, SHGs
or JLGs, which qualify for loans from MFIs to be restricted to 10 per cent of the total assets.
The NBFCs operating in the north-eastern region are to maintain the minimum NOF at Rs.1
crore by 31 March 2012, and at Rs.2 crore by 31 March 2014.
Operational Flexibility
To promote operational flexibility the NBFCs are to ensure that the average interest rate on
loans during a financial year does not exceed the average borrowing cost during that financial
year plus the margin, within the prescribed cap. The RBI notification also stated that while the
rate of interest on individual loans may exceed 26 per cent, the maximum variance permitted
for individual loans between the minimum and the maximum interest rate cannot exceed 4 per
cent.
The average interest paid on borrowings and charged by the MFI will have to be calculated on
the average monthly balances of outstanding borrowings and the loan portfolio, respectively.
Cap Margin
The RBI also decided that the cap on margins as defined by the Malegam Committee are not to
exceed 10 per cent for large MFIs (loans portfolios exceeding Rs.100 crore) and 12 per cent for
others. The measure was initiated to ensure that in a low cost environment, the ultimate
borrower will benefit, while in a rising interest rate environment and that the lending NBFCMFIs will have sufficient leeway to operate on viable lines.
RBI SIGNED MOU WITH FINANCIAL REGULATORS OF 9 COUNTRIES TO

PROMOTE SHARING OF INFORMATION
The Reserve Bank of India (RBI) signed three memoranda of understanding with Jersey
Financial Services Commission (JFSC), Financial Services Authority of UK and Financial
Supervisory Authority of Norway. The Memorandum of Understanding (MoU) was signed with
regulators of other countries to promote greater co-operation and sharing of supervisory
information between the regulators. RBI signed nine MoUs thus far with financial regulators of
different countries.
The MoU with the Jersey Financial Services authority was signed on 16 July 2012. Jersey
Financial Services Commission (JFSC) is an independent statutory body. The main function of
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JFC is the regulation, licensing and supervision of financial services providers for compliance
with prudential norms and conduct of business requirements in Jersey.
The MOU with the Financial Services Authority (FSA), UK was signed on 17 July 2012 at FSA, UK
Headquarters, London. The FSA is the United Kingdoms principal national financial services and
markets regulator and administers the Financial Services and Markets Act 2000(FSMA) that
provides for the supervision of firms, financial services, financial products as well the financial
markets.
The MoU with the Financial Supervisory Authority of Norway (Finanstilsynet) was signed on 19
July 2012 at FSA, Norway headquarters. Finanstilsynet as the supervisory authority is entrusted
with supervision of banks (insurance companies and investment firms, etc.) in Norway as per
the Financial Supervision Act of 1956.
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ANNEXURE A: OBJECTIVE QUESTIONS

1. The central banking functions in India are performed by the
i. Central Bank of India
ii. Reserve Bank of India
iii. State Bank of India
iv.
Punjab National Bank
a) I, II
b) II
c) I
d) II, III
2. Development expenditure of the Central government does not include
a) defence expenditure
b) expenditure on economic services
c) expenditure on social and community services
d) grant to states
3. Gilt-edged market means
a) bullion market
b) market of government securities
c) market of guns
d) market of pure metals
4. In the last one decade, which one among the following sectors has attracted the highest
foreign direct investment inflows into India?
a) Chemicals other than fertilizers
b) Services sector
c) Food processing
d) Telecommunication
5. The most important source of capital formation in India has been?
a) Household savings
b) Public sector savings
c) Government revenue surpluses
d) Corporate savings
6. In India, the Public Sector is most dominant in?
a) transport
b) steel production
c) commercial banking
d) organised term lending financial institutions.
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7. Goas economy is mainly based on?

a) tourism
b) export of ores
c) agriculture
d) None of these
8. Indias wage policy is based on?
a) Cost Of Living
b) Standard of living
c) productivity
d) None of these
9. One of the problems in calculating the national income in India correctly is?
a) under employment
b) inflation
c) non -monetised consumption
d) low savings
10. Which of the following are the main causes of slow rate of growth of per capita income
in India?
1)
2)
3)
4)
High capital output ratio

High rate of growth of population
High rate of capital formation
High level of fiscal deficits
a)
b)
c)
d)
1,2
2,3,4
1,4
All of the Above
11. Fresh evaluation of every item of expenditure from the very beginning of each financial
year is called?
a) Fresh Budgeting
b) Deficit Budgeting
c) Performance Budgeting
d) Zero-based Budgeting
12. National Sample Survey Organisation (NSSO) was established in
a) 1947
b) 1952
c) 1951
d) 1950
13. 'Sensitive Sector' as defined by RBI includes
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a)
b)
c)
d)
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Capital Market
Real Estate
Commodities
All of the above
14. At the end-March 2012, the teledensity in the country stood at

a) 72.38%
b) 76.86%
c) 78.66%
d) 80.76%
15. Mauritius based, investment firm, got a clearance for their foreign direct investment
proposal of investing Rs 808 crore by the union government of India. What was the
name of that investment firm?
a) Cloverdell Investments Ltd
b) Conyers Dill and Pearman
c) CIEL Investment
d) Paracor Investment
16. To split off the ground handling and engineering services of Air India, Union cabinet
approved a proposal of how much amount so that the two units Air India Engineering
Services Limited (AIESL) and Air India Transport Services Ltd. (AITSL) will be operational
as two completely owned subsidiaries and treated as separate profit centers?
a) 867 crore
b) 800 crore
c) 875 crore
d) 768 crore
17. The Department of Economic Affairs (DEA) published its annual publication- Indias
external debt: a status report 2011-12. As per the published report, Indias external debt
in the end of March 2012 was?
a) $345.8 billion
b) $ 250 billion
c) $ 362.7 billion
d) $450 billion
18. As per the data released by world Economic Forum India's ranking declined by three
places to what position in the Global Competitiveness Index 2012-2013?
a) 59 positions
b) 56 positions
c) 61 positions
d) 64 positions
19. Due to the demand slowdown in the US and Europe, Indias exports in July reduced to
what per cent making it a steepest fall in three years?
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a)
b)
c)
d)
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15.2 percent
14.8 percent
12.5 percent
13.6 percent
20. In a gesture of goodwill Karnataka government in front of Supreme Court of India

agreed to release _________cusecs of water to Tamil Nadu from the Cauvery River.
a) 20000
b) 10000
c) 5000
d) 15000
21. The EGoM (Empowered Group of Ministers) on 11 September 2012 declared to slash
down the interest rate from 10 to 12 percent to how many percent in the entire 350
drought hit Talukas of the four states namely, Gujarat, Maharashtra, Rajasthan and
Karnataka?
a) 4 percent
b) 8.5 percent
c) 7 percent
d) 6 percent
22. As per the data released by the government on 14 September 2012, Indian inflation rose
from 6.87 percent recorded in July 2012 to _________percent August 2012.
a) 7.55
b) 8.0
c) 9.5
d) 7.25
23. The Union Cabinet cleared the proposal of foreign direct investment (FDI) for 51 percent
in the multi-brand retail chains and _______percent in Aviation power exchanges
industry.
a) 50
b) 49
c) 66
d) 25
24. The reserve bank of India reduced the Cash Reserve Ratio(CRR) by
a) 0.5 percent
b) 0.25 percent
c) 0.75 percent
d) 1 percent
25. The Indian Railway Catering and Tourism Corporation Limited introduced a system
for making the payment of the bookings via mobile phones. What is the name of that
system?
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a)
b)
c)
d)
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Interbank Mobile Payment System (IMPS)

Sybase mobile banking System
Railway mobile banking system
PNB mobile banking System
26. Name the Union Minister who had suggested setting up of a National Investment Board
(NIB) under Prime Minister Manmohan Singh to accord speedy clearances to mega
proposals.
a) Sharad Pawar
b) A.K. Antony
c) Kapil Sibal
d) P. Chidambaram
27. Reserve Bank of India injected a liquidity of around ___________by slashing down the
Cash Reserve Ratio (CRR) by 25 basis points to 4.50 percent from 4.75 percent.
a) 17000 crore
b) 15000 crore
c) 10000 crore
d) 12000 crore
28. Shimla Municipal Corporation introduced a Tax on Shimla entry of vehicles that are not
registered in Himachal Pradesh. What was the name of that tax?
a) Envy Tax
b) Green Tax
c) Carbon tax
d) Natural resource consumption tax
29. Name the report which was submitted to the finance minister of India by the Shome
Committee constituted by the Central Board of Direct Taxes, after the approval of Prime
Minister of India.
a) GARR Report
b) CAG Report
c) Financial Credit Report
d) Tax Mitigation Report
30. For what percent, The Government of India on 20 September 2012 hiked the foreign
investment cap for the broadcasting service providers?
a) 65 percent
b) 74 percent
c) 80 percent
d) 54 percent
31. The Cabinet Committee on Economic Affairs (CCEA) on 24 September 2012 approved a
package on debt restructuring for the state-electricity boards. What was net worth of
that package?
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a)
b)
c)
d)
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1.90 lakh Crore

3.5 lakh Crore
2.6 lakh Crore
1.25 lakh Crore
32. Which agency was instructed by the Central Vigilance Commission on 24 September
2012 to expand its investigation scope on Coal Block Allocation to private firms in
between 1993 to 2004?
a) Directorate of Revenue Intelligence
b) Central Bureau of Investigation (CBI)
c) CAG Committee
d) None of These
33. Market regulator Securities and Exchange Board of India (SEBI) has approved a proposed
hike of the government's stake in Industrial Finance Corporation of India Ltd (IFCI) to
make it a state-run company. What was hike that Percent?
a) 56.25 Percent
b) 55.57 Percent
c) 54.35 Percent
d) 58.65 Percent
34. State Bank of India, the countrys largest bank, cuts its base rate with how much point
making it to 9.75 percent?
a) 25 basis point
b) 45 basis point
c) 35 basis point
d) 50 basis point
35. The Delhi Metro Rail Corporation was awarded with the work of Management
Consulting Services in which international Metro Rail Project?
a) Jakarta Metro rail project
b) Moscow Metro rail project
c) London Metro rail project
d) Copenhagen Metro rail project
36. Name the country that has issued ban on the import of Egg and Chicken from India in
wake up of the recommendations of the World Organisation for Animal Health about
the outbreak of bird-flu in the Government run Turkey Farm at Hesaraghatta, Karnataka.
a) Oman
b) Germany
c) USA
d) Korea
37. The Union Government of India in the Month of November 2012 announced a revised
Minimum Support Price (MSP) for cotton and this would help in inducing stabilisation in
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cotton price. Cotton has witnessed a sharp decline in the past and remained operational
round about its minimum support price. The previous minimum support price of
medium staple cotton was 2800 rupees per quintal. What is the revised price for the
same?
a) 3000 rupees per quintal
b) 3600 rupees per quintal
c) 3200 rupees per quintal
d) 4300 rupees per quintal
38. The Reserve Bank of India, in its notification released in November 2012 directed banks
not to provide loans to its customers for purchase of all types of gold, which includes
primary gold, jewellery, bullion, gold coins, units of Gold Exchange Traded Funds (ETF)
and units of gold mutual funds. Which of the statements mentioned below is false in
case of the notification released?
a) The order was directed for discouraging people from getting involved in speculative
activities
b) The notification from the Reserve Bank of India also directed the banks not to grant
advances against gold bullion to traders or dealers
c) This decision of RBI came up in response to the significant growth in the imports of
the gold in past few years that has created pressure on the current account deficit.
in 2011-12 that stood up at 60 billion dollar
d) The decision of RBI came up in response to the suggestion of the working Group
constituted after the announcement if the Monetary Policy Statement of April 2011
i. Statement c is false
ii. Statement a and b are false
iii. Statements a, b and c are false
iv.
All the above mentioned statements are false
39. Which of the following statements in relation to the Cabinet Committee on Economic
Affairs decision for approval 9.5 percent Stake Disinvestment in NTPC is correct?
a) With this equity disinvestment of NTPC would bring back a sum of about 13000
crore rupees.
b) With this disinvestment the governments holding on NTPC would fall down from
present 84.5 percent to 75 percent
c) This will adhere to the minimum public shareholding norms that was stipulated by
the Securities and Exchange Board of India (SEBI), the market regulators
d) At present Government holding on the NTPC was 84. 5 percent
i. Statements a, b, c and d are false
ii. Statements a, b, c and d are true
iii. Statements a, b, and c are true
iv.
Statement b is false
40. The Reserve Bank of India asked Banks not to Provide Loans for Purchase of Gold but
allowed the banks to sanction loans as per the general working capital requirements to
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one section of the business market. Name the section that has been kept aside from the
cover of no loan policy for purchase of gold?
a) Gold Merchants
b) Normal people buying gold for household purposes and celebrations
c) Jewelers
d) Common man from buying gold for making investments in the share market
41. The Union Government of India moving ahead with its proposal to hike foreign
investment cap in the Insurance Sector 49 percent from its previous share. What was
the previous cap of FDI on Insurance sector?
a) 17 percent
b) 36 percent
c) 26 percent
d) 11 percent
42. RBI Expanded the Lending Norms on Priority Sectors like housing, agriculture, small and
medium enterprises, as well as the central bank also expanded the scope of bank loans
for these sectors up to 2 crore Rupees. To come into existence the lending scheme was
supposed to fulfil the criterions mentioned under an Act. Name the Act?
a) Micro, Small And Medium Enterprises Development Act- 2006 (MSMED Act-2006)
b) Accident Compensation Act 2001 (AC Act 2001 )
c) The Indo-American Chamber of Commerce (IACC)
d) Small, Micro and Medium Enterprise Development Act- 2012 (SMMED Act-2012)
43. Shimla Municipal Corporation introduced a TAX on Shimla entry of vehicles that are not
registered in Himachal Pradesh. What was the name of that tax?
a) Envy Tax
b) Green Tax
c) Carbon tax
d) Natural resource consumption tax
44. Name the report which was submitted to the finance minister of India by the Shome
Committee constituted by the Central Board of Direct Taxes, after the approval of Prime
Minister of India.
a) GAAR Report
b) CAG Report
c) Financial Credit Report
d) Tax Mitigation Report
45. Which committee was constituted for reforms in tax-structure?
a) Narsimham Committee
b) Chelliah Committee
c) Gadgil Committee
d) Kelkar Committee
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46. The Slogan Garibi Hatao was included in

a) First Plan
b) Fifth Plan
c) Fourth Plan
d) Second Plan
47. VAT is imposed
a) Directly on consumer
b) On final stage of production
c) On first stage of production
d) On all stages between production and final sale
48. The Keynesian theory of employment provides the solution of?
a) Frictional unemployment
b) Disguised unemployment
c) Cyclical unemployment
d) Seasonal unemployment
49. The terms NEER and REER are related with?
a) Foreign exchange rate
b) External economic resources:
c) National and regional economic equality
d) Environmental regulation
50.
a)
b)
c)
d)
The user cost of capital is?

The real rate of interest plus the rate of depreciation
The nominal rate of interest plus the rate of depreciation
The real rate of interest only
The nominal rate of interest only
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ANSWERS
1
2
3
4
5
6
7
8
9
10
b
a
b
d
a
c
b
a
c
a
11
12
13
14
15
16
17
18
19
20
d
d
a
c
a
d
a
a
b
21
22
23
24
25
26
27
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c
a
b
b
a
d
a
b
a
b
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40
a
b
b
a
a
a
b
a
b
c
41
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45
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50
c
a
b
a
b
b
d
c
a
a

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Indian Economy and Basic Economics