Chapter 3: Classic Theories of Economic Growth and Development

Development as a process of transformation

 Development as a multidimensional process of transformation involving the reorganization
and reorientation of entire economic and social systems.
 Besides improvements in output and incomes, it typically involves radical changes in
institutional, social, and administrative (governance) structures as well as in popular
attitudes and even customs and beliefs.
 But, history of development demonstrates that countries are divided in terms of
development (rapid vs gradual transformation)
 Why countries show distinct patterns of development?
What made countries develop?
 The Quest for Growth
 The financing gap (resources and capabilities)
 Investment in physical and human capital
 Structural Adjustments (closed vs open economy approaches)
 Approaches to the Theories of Development
Economic Growth and Development Theories
Classical model
Growth stage theories
Dual economy models
Dependency theories
Exogenous growth theories
Endogenous growth theories
Transactions costs/collective action
Classic Theories of Economic Development: Four Approaches
Literature on economic development is dominated by the following four strands of thought/
theories:
 Linear-stages-of-growth model: 1950s and 1960s
 Theories and patterns of structural change: 1970s
 International-dependence revolution: 1970s (indirect outgrowth of Marxist thinking)
 Neo-classical, free-market counter-revolution: 1980s and 1990s
 Post-reforms (1991 onwards) – neoliberal approach to development
I. Linear-stages theory
 Viewed the process of development as a series of successive stages of economic growth
 Mixture of saving, investment, and foreign aid was necessary for economic development
 Emphasized the role of accelerated capital accumulation in economic development
Rostow’s Stages of Growth
 W.W. Rostow (American Economic Historian) identified 5 stages of growth of an economy:
 The traditional society: no growth
 The pre-conditions for take-off
 The take-off
 The drive to maturity
 The age of high mass consumption (technology revolution, digital technology, etc)
 All advanced economies have passed the stage of take-off into self sustaining growth
 Developing countries are still in the traditional society or the pre-conditions stage. Why?
Stage 2: Preconditions for Growth
 Population growth will outpace economic growth in traditional society
  Stimulus needed to mobilize capital and resources
 Revolution and institutional restructuring
 Technological innovation
 Favorable international environment
 External Injection of capital
Stage 3: The Takeoff
 Productive investment must rise to 10 per cent of national income
 Needed: rapid accumulation of capital and productive investment
 Taxes/ Finance / Stock market/ Trade/ Foreign investment aid
4. Drive to maturity/ 5. Stage of High Mass consumption
Employment growth
Growth in national income
Rise of consumer demands
Strong domestic markets
5. Period of high mass consumption: technological advancements help overcome shortages in
demand
The Harrod-Domar Growth Model
 “The economic mechanism by which more investment leads to more growth” can be described
in terms of the Harrod-Domar growth model
 The principal strategy for development is mobilization of saving and generation of investment to
accelerate economic growth
 Importance of H-D growth model (AK model, A represents technology, K, capital): It explains the
mechanism by which investment leads to growth
 Investment comes from savings
 Rate of economic growth (GNP growth rate) is determined jointly by the ability of the economy
to save (savings ratio) and the capital-output ratio
II. Structural-Change Models
 Structural-change theory focuses on the mechanism by which underdeveloped economies
transform their domestic economic structures from traditional to an industrial economy
 Representative examples of this strand of thought are
 Arthur Lewis theory of development
 Hollis B. Chenery’s patterns of development
Lewis’ Theory of Development Also known as the two-sector surplus labor model
Features of the basic model:
 Economy consists of two sectors- traditional and modern
 Traditional sector has surplus of labor (MPL=0)
 Model focuses on the process of transfer of surplus labor and the growth of output in the
modern sector
 Growth enables shifting the surplus labour from the traditional sector (agri.) to modern
sectors (industry, services) leading to further growth and transformation of economies
 Lewis Theory of Development
 The process of self-sustaining growth and employment expansion continues in the modern
sector until all of the surplus labor is absorbed
 Structural transformation of the economy has taken place with the growth of the modern
industry
 Traditional-modern sector transformation with surplus labour movement from traditional
sector to the modern sector
  Major challenge to developing countries, including India: still facing this problem of shifting
the surplus labour to the modern sectors (discuss the reasons…)
Structural Changes & Development: Chenery’s Model
 Hollis B. Chenery (American Economist) and colleagues examined patterns of development
(1950-1970) for developing countries at different per-capita income levels
 They viewed that increased savings and investment as necessary but not sufficient for economic
development
 In Structural Change and Pattern of Development, in addition to the accumulation of capital,
both physical and human, a set of interrelated changes in the economic structure of the country
are required for the transition from a traditional economic system to a modern one
 In addition to capital accumulation, transformation of production, composition of demand, and
changes in socio-economic factors are all important
Structural Changes and Patterns of Development : Chenery’s Model (1950- 1970)
 The empirical studies identified several characteristic features of economic development:

 Shift from agriculture to industrial production

 Steady accumulation of physical and human capital
 Change in consumer demands
 Increased urbanization
 Decline in family size
 Demographic transition
Structural Changes and Patterns of Development : Chenery’s Model
 Differences in development among the countries are ascribed to:
 Domestic constraints
 International constraints
 To summarize, structural-change analysts believe that the “correct mix” of economic policies
will generate beneficial patterns of self-sustaining growth
The International Dependence Revolution (IDR)
 The IDR models reject the exclusive emphasis on GNP growth rate as the principal index of
development
 Instead they place emphasis on international power balances and on fundamental reforms
world-wide.
 IDR models view developing countries as beset by institutional, political, and economic rigidities
in both domestic and international setup
 The IDR models argue that developing countries are up in a dependence and dominance
relationship with rich countries
The International Dependence Revolution (IDR)
 Three streams of thought:
 Neoclassical dependence model
 False-paradigm model
 Dualistic-development thesis
Neoclassical Dependence Model
 “Dependence is a conditioning situation in which the economies of one group of countries are
conditioned by the development and expansion of others.”
 “Dependence, then, is based upon an international division of labor which allows industrial
development to take place in some countries, while restricting it in others, whose growth is
conditioned by and subjected to the power centers of the world.” [Theotonio Dos Santos]
 The neoclassical approach focuses on the overall policy regime (it should be neutral not
discriminatory) and, in one way or another, recommends "getting the prices right".
 This is important not just for the static gains of a more efficient allocation of resources, but
more so for fostering technical change and dynamic efficiency.
The False-Paradigm Model
 Attributes under development to the faulty and inappropriate advice provided by well-meaning
but biased and ethnocentric international “expert advisers”
 The policy prescriptions serve the vested interests of existing power groups, both domestic and
international
The Dualistic- Development Thesis
 Dualism represents the existence and persistence of increasing divergences between rich and
poor nations and rich and poor peoples at all levels.
 The concept embraces four key arguments:
 Superior and inferior conditions can coexist in a given space at given time
 The degrees of the conditions have an inherent tendency to increase
 Superior conditions serve to “develop under development”
Weaknesses of IDR Models
 Do not offer any policy prescription for how poor countries can initiate and sustain economic
development
 Actual experience of developing countries that have pursued policy of autarky/closed economy
has been negative
 But, the challenge here is that “despite opening up, a vast majority of developing countries still
continue to face the dualism in development with development and under-development co-
existing” why this? (discuss..)
The Neoclassical Counterrevolution: Market Fundamentalism
 Neoclassical counterrevolution in the 1980s called for freer markets, and the dismantling of
public ownership, and government regulations
 Four component approaches :
 Free-market analysis- markets alone are efficient
 Public-choice theory- governments can do nothing right
 Market- friendly approach- governments have a key role to play in facilitating operations of
markets through nonselective interventions
 New institutionalism- success or failure of developmental efforts depend upon the nature,
existence, and functioning of a country’s fundamental institutions
Traditional Neoclassical Growth Theory
 According to the traditional neoclassical growth theory:
 Output growth results from one or more of three factors- increases in Labor, increases in capital,
and technological changes
 Closed economies with low savings rates grow slowly in the SR and converge to lower per capita
income levels
 Open economies converge at higher levels of per capita income levels
Traditional Neoclassical Growth Theory
 Traditional neoclassical theory argues that capital flows from rich to poor countries as
capital-labour (K-L ratios) are lower and investment returns are higher in the latter
 By impeding the flow of foreign investment, poor countries choose a low growth path.
Solow's Neoclassical Model or Exogenous Growth Model
  Robert M. Solow’s model of economic growth implies that economies will conditionally
converge to the same level of income, given that they have the same rates of savings,
depreciation, labor force growth, and productivity growth
 Solow’s model differs from Harrod-Domar model in the following respects:
o Allows for substitution between labor and capital
o Assumes that there exist diminishing returns to these inputs
o Introduces technology in the growth equation
Application: Do Economies Converge?
Unconditional convergence occurs when poor countries will eventually catch up with the rich
countries (LR) resulting in similar living standards
Conditional convergence occurs when countries with similar characteristics will converge (savings rate,
investment rate, population growth)
No convergence occurs when poor countries do not catch up over time and living standards may
diverge
Who is North and Who is South?
 North = World’s Rich
 South = World’s poor, or developing nations, or emerging markets (more complicated)
 Used to be called the Third World
 We can no longer lump together the countries of the “south”
 Some are growing and “emerging” and some are not.
Dependency theories (1950’s to 1970s)
 Center – developed countries and elites within developing countries
 Periphery – poor in developing countries
 Center develops at the expense of the periphery (ethical considerations of growth and
development)
 The heightened debate on sharing the responsibilities towards climate change mitigation &
adaptation
Why dependency syndrome?
 Center has monopoly power
 Low price and income elasticities for goods produced by the periphery
 High price elasticity of demand for goods imported by the periphery from the center
 Result: periphery receives less and less for exports and pays more and more for imports
Lessons from each theory
Classical theory – savings & capital investment important
Diminishing returns to labor
Growth stage theories – structural change with development
Class struggles over distribution
Dual economy theories – food is important wage good
Surplus labor may facilitate capital formation
Technological change in agriculture important
Dependency theories – interdependent world
History important
Political and social power important
More Recent Development Thinking
 Role of Human capital
 Importance of Institutional differences
 Rule of law
  Enforceable property rights
 Need to minimize policy distortions
 Importance of freely flowing information
 Transactions costs, Collective Action, and Institutions
 Costs of transacting are key obstacles holding countries back from developing.
 Transactions costs include the costs of adjustment, information, measuring attributes, and
negotiating, monitoring, and enforcing contracts
 Because of these costs, people take advantage of others
 Transactions costs, Collective Action, and Institutions (continued)
 People often act collectively to influence public decisions in ways that help them but hurt
society at large
 Therefore with transactions costs and collective action, institutions and asset distribution matter
 Need institutions to control behavior through property rights, laws, and policies

Agricultural Transformation and Rural Development

Why rural sector important?
 Over 3.1 billion people lived in rural areas in developing countries in 2010, a quarter of them in
extreme poverty.
 People living in the countryside make up more than half of the population of such diverse Latin
American and Asian nations as Haiti, Guatemala, India, Indonesia, Myanmar, Honduras, Sri
Lanka, Pakistan, Bangladesh, the Philippines, Thailand, and China.
 In sub-Saharan Africa, the ratios are much higher, with rural dwellers constituting 65% of the
total population
 Over two-thirds of the world’s poorest people are also located in rural areas and engaged
primarily in subsistence agriculture. Their basic concern is survival.
 Many millions of people have been bypassed by whatever economic progress their nations have
attained (policy neglect).
The Imperative of Agricultural Progress and Rural Development nexus
 If development is to take place and become self-sustaining, it will have to include the rural areas
in general and the agricultural sector in particular.
 The core problems of widespread poverty, growing inequality, and rapid population growth all
originate in the stagnation and often retrogression of economic life in rural areas, particularly in
Africa
 The heavy emphasis in the past on rapid industrialization may have been misplaced
 Today, agricultural development is seen as an important part of any development strategy
 Three complementary elements of an agriculture – and employment-based strategy (integrated
rural development – inclusive growth/ development)
 Accelerated output growth
 Rising domestic demand for agricultural output
 Non-agricultural rural labor intensive rural development activities that are supported by the
farming community
Agricultural development: Critical questions
 How can total agricultural output and productivity per capita be substantially increased in a
manner that will directly benefit the average small farmer and the landless rural households
while providing a sufficient food surplus to promote food security and support a growing urban,
industrial sector?
  What is the process by which traditional low-productivity farms are transformed into high-
productivity commercial enterprises?
 What are the effects of the high risks faced by farmers in low-income countries, how do farm
families cope with these risks, and what policies are appropriate to lessen risk?
 Are economic and price incentives sufficient to help output increases among farmers, or are
institutional and structural changes in rural farming systems also required?
 Is raising agricultural productivity sufficient to improve rural life, or must there be concomitant
off-farm employment creation along with improvements in educational, medical, and other
social services?
Agricultural Growth: Past Progress and Current Challenges
 Although agriculture employs the majority of the LDC labor force, it accounts for a much lower
share of total output (15-25%)
 low-income countries tend to have the highest share of the labor force in agriculture,
sometimes as much as 80% to 90%
 In China, growth has been extremely rapid but the fall of the share of labor in agriculture has
been unusually slow due in significant part to restrictions on rural-urban migration

As Countries Develop, the Shares of GDP and Labor in Agriculture Tend to Decline, but with odd
behaviours
Agricultural Growth: Current Challenges
 Urbanization is proceeding in many countries even when per capita income is falling or not rising
much.
 Problems in the agricultural sector can suppress incomes, encouraging more migration to the
urban informal sector.
 The structure of Agrarian Systems in the Developing World. Three types of countries (World
Development Report, 2008):
 Agriculture based countries
 Transforming countries
 Urbanized countries
Three types of countries
 Agri-based countries: Agriculture is still a major source of economic growth—although mainly
because agriculture makes up such a large share of GDP.
 Transforming countries: Most of the world’s rural people—some 2.2 billion—live in what the
report categorizes as transforming countries, in which the share of the poor who are rural is
very high (almost 80% on average) but agriculture now contributes only a small share to GDP
growth (7% on average).
 Countries in agriculture-based category moved to the transforming category in recent decades,
most prominently India, China, Brazil.
 Urbanised countries: In urbanized countries, rural-urban migration has reached the point at
which nearly half, or more, of the poor are found in the cities, and agriculture tends to
contribute even less to output growth.
Agricultural Growth: Stimulated by Green Revolution
 Green revolution :The boost in grain production associated with the scientific discovery of new
hybrid seed varieties of wheat, rice, and corn that have resulted in high farm yields in many
developing countries. Agricultural productivity varies dramatically across countries. Variations in
land productivity (measured as kilograms of grain harvested per hectare of agricultural land)
 between three developed countries (United Kingdom, Japan, and United States) and nine
developing countries.
 Despite the far smaller number of farm workers per hectare in the United Kingdom, its grain
yield per hectare was 3 times that of India, 6 times that of Nigeria, and almost 12 times that of
Sudan.
 Rise in regional disparities became quite large within countries. India has regions that fall within
each of the three classifications, from modernized Punjab to semi-feudal Bihar. Even upper-
middle-income, urbanized Mexico has regions in the south with substantial poverty and high
dependence on agriculture.
 Moreover, within regions, large and small, rich and poor often exist side by side—though large
does not necessarily mean efficient.
Land Productivity in Developed and Developing Countries
 Agricultural Growth: Peasant agriculture Challenges In many developing countries, including
Latin America, Asia and Africa, various historical circumstances have led to a concentration of
large areas of land in the hands of a small class of powerful landowners.
 The average farm size in Latin America is far larger than in Asia; In majority of Asian countries,
average-operational farm size is under 4 hectares, with farm size in Indonesia just 1.1 hectares.
 In contrast, average-operation farm size ranged from 16.9 to 214.1 hectares in the Latin
American countries.
 But, a substantial number of farms in Latin America consisted of less than 5 hectares, including
36.8% of farms in Brazil and 78.0% of farms in Peru.
 This is possible because of the huge farmlands controlled by the largest farms in Latin America.
Transforming Economies: Problems of Fragmentation and Subdivision of Peasant Land in Asia
 Throughout much of the twentieth century, rural conditions in Asia deteriorated.
 Nobel laureate Gunnar Myrdal identified three major interrelated forces that moulded the
traditional pattern of land ownership into its present fragmented condition:
o Impact of colonial rule in strengthening land tenure systems of private property rights
and the consequent rise of moneylenders
o Contemporary landlordism in India and Pakistan involves absentee landlordism and
persistence of sharecroppers and tenant farmers
o Rapid population growth resulted in more fragmentation of holdings and peasant
impoverishment
Subsistence Agriculture and Low productivity
 In Africa and Asia
o Low productivity due to lack of technology
o Shifting Cultivation
o Seasonal demand for labor depending upon the rainy season
o High dependence on unimproved seeds sown on unfertilized, rain-fed fields.
 The net result of these three forces were slow growth in agricultural labor productivity
throughout much of Africa and Asia

Role of Women: Feminisation of Agriculture

 Women provide 60% to 80% of agricultural labor in Africa and Asia, and 40% in Latin America
 The most important role of women is providing food security for the household. This is
accomplished through the supplementation of household earnings, diversification of household
income sources, and raising of livestock to augment household assets.
  Women work longer hours than men. But, get less paid than men (gender disparity in rural and
urban wages)
 Government assistance programs tend to reach men, not women
Interlocking factor markets: is an important characteristic of Asian and African agriculture
 Factor markets whose supply functions are interdependent, frequently because different inputs
are provided by the same suppliers who exercise monopolistic or oligopolistic control over
resources.
 Dependence of the farmers on the seed sellers, money lenders, etc who in turn, get the produce
from the farmers as a collateral for the lending
Diversified (mixed) farming, specialised farming
 Diversified farming: The production of both staple crops and cash crops and simple animal
husbandry typical of the first stage in the transition from subsistence to specialized farming.
 Specialized farming: The final and most advanced stage of the evolution of agricultural
production in which farm output is produced wholly for the market.
Improving Small-Scale Agriculture: Technology and Innovation:
 In most developing countries, new agricultural technologies and innovations in farm practices
are preconditions for sustained improvements in levels of output and productivity.
 Two major sources of technological innovation can increase farm yields.
 The first is the introduction of mechanized agriculture to replace human labor.
 Second, biological (hybrid seeds and biotechnology), water control (irrigation), and chemical
(fertilizer, pesticides, insecticides, etc.) innovations face their own problems
Improving Small-Scale Agriculture (Contd..)
 Institutional and Pricing Policies: Providing the Necessary Economic Incentives
o Unfortunately, although the green revolution varieties of wheat, corn, and rice, together
with needed irrigation and chemicals, are scale-neutral and thus offer the potential for
continued small-farm progress, the social institutions and government economic policies
that accompany their introduction into the rural economy are often not scale-neutral
o On the contrary, they often merely serve the needs and vested interests of the wealthy
landowners.
 Improving Small-Scale Agriculture (Contd..)
o Government (state) failure: Another critical area of many past and some continued
failures in government policies relates to the pricing of agricultural commodities,
especially food grains and other staples produced for local markets.
o Many governments in developing nations, in their headlong pursuit of rapid industrial
and urban development, maintained low agricultural prices in an attempt to provide
cheap food for the urban modern sector.
o Farmers are paid prices below either globally competitive or free-market domestic
prices.
o Price realization by farmers at farm gate is a major issue in most parts of Asia (range
from below 20% to 40-50%)
Agriculture development: What is the way out?
Many development economists argue that: “if governments are to promote further increases in
agricultural production that make a larger impact on poverty reduction through green revolution
technologies, they must not only make the appropriate institutional and credit market adjustments but
also make continued progress to provide incentives for small and medium size farmers by implementing
pricing policies that truly reflect internal market conditions”
Efficiency of Markets, Institutions and Prices (MIPs), thus holds the key to achieving sustainable
agriculture, the world over
What are the Policy Options available for Agriculture Development across countries with different
growth trajectories?
 Policy diamond for agriculture-based countries
 Policy diamond for transforming countries
 Policy diamond for urbanized countries
Concepts for Review
Agrarian systems: different cropping systems/ practices
Cash crops: Commercial crops – mainly for marketing/ trade and exports
Diversified farming: agriculture/ cropping patterns are diversified – intensified farming of food and non-
food (commercial) crops
Family farms: Farming activities are entirely managed by the family members. According to the USDA,
small family farms average 231 acres; large family farms average 1,421 acres and the very
large farm average acreage is 2,086. It may be surprising to note that small family farms make up 88%
of the farms in America
Green revolution: technological diffusion launched by countries in the early 1960s for improving
agriculture production and productivity
Interlocking factor markets: land owner is often connected with the tenant for leasing land; with labour
for labour services in the farm; local seed/ fertilizer/ commodity market for purchase of seeds,
chemicals, farm implements, farm output, etc (land, labour, credit linkages)
Land reform: Land reform involves the changing of laws, regulations or customs regarding land
ownership. Land reform may consist of a government-initiated or government-backed property
redistribution, generally of agricultural land.
Farm size: Small and marginal holdings (up to 2 hectares) together constitute 86% of farm holdings (125
million) in India (2015-16). The average land holding size has more than halved from 2.28 ha (1970-71)
to 1.08 ha (2015-16).

Urbanization and Rural-Urban Migration: Theory and Policy

Urbanisation: How do we address it?
 Cities will increasingly become the main players in the global economy. —Kofi Annan, former
secretary general of the United Nations and Nobel laureate for Peace
 What are the various policy options that governments in developing countries should pursue in their
attempts to moderate the heavy flow of rural-to urban migration and to ameliorate the serious
unemployment problems that continue to plague their crowded cities?
Urbanisation: Contradiction
 Developing countries are urbanising at a faster rate than developed countries!!
 While individual countries become more urbanized as they develop, today’s poorest countries are
far more urbanized than today’s developed countries were when they were at a comparable level of
development, as measured by income per capita
Urbanisation: Rapid growth
 About half of the world’s population lives in cities; by 2025, nearly two-thirds will live in urban
areas.
 Most of the urban growth is taking place in the developing world.
 Urban population growth in the developing world is far more rapid than population growth
generally
 About half the urban growth is accounted for by migrants from rural areas.
  Unchecked urbanization of the developing world is placing a strain on infrastructure and public
health and threatens social stability.
Megacities: Cities with 10 Million or More Inhabitants
Urbanisation defined
 Demographically speaking, the level of urbanisation is measured by the percentage of
population living in urban areas.
 If a settlement satisfies demographic and economic criteria, like a population of more than
5,000, a density of 400 persons per square kilometer and 75% male workforce in the non-
agricultural sector, it can be declared urban (census towns).
 A metropolitan city is defined as, one having a population of 1 million and above.
 As of 2011 census of India, there are 46 metropolitan cities in India and the top ten are,
Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bengaluru, Ahmedabad, Pune, Surat and
Visakhapatnam.
Urbanisation: challenges
 About half of the urban labor force works in the informal sector of low-skilled, low-productivity,
often self-employed jobs in petty sales and services.
 Still, this sector may generate up to a third of urban income and features a low capital intensity,
low-cost training, waste recycling, and employment creation
 Any economic or social policy that affects rural and urban incomes will influence migration; this,
in turn, will affect sectoral and geographic economic activity, income distribution, and even
population growth.
 A central question related to the unprecedented size of the urban agglomerations is how the
cities will cope—economically, environmentally, and politically— with such acute concentrations
of people?
Urbanisation: externalities
Positive externalities: Cities offer cost-reducing advantages of agglomeration economies and economies
of scale and proximity as well as numerous economic and social externalities (e.g., skilled workers,
cheap transport, social and cultural amenities) Negative externalities: But, the social costs of a
progressive overloading of housing and social services, not to mention increased crime, pollution, and
congestion, can outweigh the historical urban advantages.
The Urban Informal Sector
 Since 1970s, the existence of an unorganized, unregulated, and mostly legal but unregistered
informal sector was recognized
 This was based on the observations in several developing countries that massive additions to
the urban labor force failed to show up in formal modern-sector unemployment statistics
 The informal sector continues to play an important role in developing countries, despite
decades of benign neglect and even outright hostility.
 In many developing countries, about half of the employed urban population works in the
informal sector
Importance of Informal Employment in Selected Cities
Who are the informal sector workers?
 The informal sector is characterized by a large number of small-scale production and service
activities that are individually or family-owned and use simple, labor-intensive technology
 The usually self-employed workers in this sector have less formal education, are generally
unskilled, and lack access to financial capital.
 As a result, worker productivity and income tend to be lower in the informal sector than in the
formal sector.
  Moreover, workers in the informal sector do not enjoy the measure of protection afforded by
the formal modern sector in terms of job security, decent working conditions, and old-age
pensions.
Who are the informal sector workers?
 Many workers entering this sector are recent migrants from rural areas unable to find
employment in the formal sector
 They generally lack minimal public services such as electricity, water, drainage, transportation,
and educational and health services.
 Others are even less fortunate, homeless, and living on the pavements.
Women and informal sector
 In some regions of the world, women predominate among rural-urban migrants and may even
comprise the majority of the urban population.
 Though historically, many of these women were simply accompanying their spouses, a growing
number of women in Latin America, Asia, and Africa migrate to seek economic opportunity.
 The increase in the number of single female migrants has also contributed to the rising
proportion of urban households headed by women, which tend to be poorer, experience tighter
resource constraints, and retain relatively high fertility rates.
 Majority of institutional credit is still channeled through formal-sector agencies, and as a result,
women generally find themselves difficult to get even small loans.
 Government programs to enhance income in poor households often neglect the neediest
households so long as governments continue to focus on formal-sector employment of men and
allocation of resources through formal-sector institutions.
Migration and development
 What drives migration? Rural Distress vs income growth preferences?
 Need to understand why people move and what factors are most important in their decision-
making process?
 What are the consequences of migration for rural and urban economic and social development?
Todaro Migration model
 A theory that explains rural-urban migration as an economically rational process despite high
urban unemployment.
 Migrants calculate (present value of) urban expected income (or its equivalent) and move if this
exceeds average rural income.
 Todaro model assumes that migration is primarily an economic phenomenon, which for the
individual migrant can be a quite rational decision despite the existence of urban
unemployment
 The model postulates that migration proceeds in response to urban-rural differences in
expected income rather than actual earnings
Components of migration
Urbanisation: Faulty planning and policies?
 Although population growth and accelerated rural-urban migration are chiefly responsible for
the explosion in urban shantytowns, part of the blame rests with governments.
 Their misguided urban-planning policies and outmoded building codes often means that 80% to
90% of new urban housing is “illegal.”
 Statistics show that rural migrants constitute anywhere from 35% to 60% of recorded urban
population growth.
 Accordingly, 90 out of 116 developing countries responding to a UN survey indicated that they
had initiated policies to slow down or reverse their accelerating trends in rural-urban migration.
Correcting the policy and planning regimes
 There is a widespread dissatisfaction with the experience of rapid urban growth in developing
countries
 The critical issue that needs to be addressed is the extent to which national governments can
formulate development policies that can have a definite impact on trends in and the character
of urban growth
 Is it possible and or even desirable now to attempt to reverse these trends by pursuing a
different set of population and development policies?

Industrial Growth in India in a comparative global perspective

Industrial Development in India
 Planning for Industrial development was one of the critical policy approach India adopted after
Independence
 Objectives of industrial policy articulated in the Industrial Policy Resolutions of 1948 and 1956
 Specific priorities and strategies spelt out in successive five year plans to be implemented by:
 A system of licensing provided for by the Industries (Development & Regulation) Act, 1951; and
 A system of import licensing and foreign trade policies meant to promote import substituting
industrialization Licensing ensured realization of physical targets for capacity set by the plan, trade
policy sought to promote domestic industrialization by physical allocation of imports by products
Industrial policies of India

The Industrial Policy Statement 1980

Formulated with respect to the Industrial Policy
Resolution of 1956 to provide for
(i) Optimum utilization of installed capacity;
(ii) Maximum production and achieving higher
productivity;
(iii) Higher employment generation;
(iv) Correction of regional imbalances;
(v) Strengthening of the agricultural base
through agro based industries and promotion of
optimum inter-sectoral relationship;
(vi) Promotion of export-oriented industries;
(vii) Promotion of economic federalism through equitable spread of investment and dispersal of returns;
(viii) Consumer protection against high prices and bad quality.
Industrial Policy 1991
Govt . recognizes the need for:
 social and economic justice, to end poverty and unemployment and to build a modern,
democratic, socialist, prosperous and forward-looking India
 India to grow as part of the world economy and not in isolation
 Greater emphasis placed on building up ability to pay for imports through our own foreign
exchange earnings development and utilization of indigenous capabilities in technology and
manufacturing as well as its up gradation to world standard
Industrial Policy 1991
Sound policy framework encompassing: encouragement of entrepreneurship,
development of indigenous technology through investment in research and development,
bringing in new technology, dismantling of the regulatory system,
development of the capital markets; and
Increasing competitiveness for the benefit of the common man.
Industrial Policy 1991
The spread of industrialization to backward areas of the country will be actively promoted through
appropriate incentives, institutions and infrastructure investments.
Government will provide enhanced support to the small-scale sector so that it flourishes in an
environment of economic efficiency and continuous technological up gradation
Foreign investment and technology collaboration will be welcomed to obtain higher technology, to
increase exports and to expand the
production base.
Government will endeavor to abolish the monopoly of any sector or any individual enterprise in any field
of manufacture, except on
strategic or military considerations and open all manufacturing activity to competition.
Need to preserve the environment and ensure the efficient use of available resources
INDUSTRIAL POLICY 1991
In pursuit of the above objectives, Government
have decided to take a series of initiatives in respect of the policies relating to the following areas:
A. Industrial Licensing.
B. Foreign Investment.
C. Foreign Technology Agreements.
D. Public Sector Policy.
E. MRTP Act.
Industrial Policy 1991
Industrial licensing:
 Modified industrial licensing policy to ease restrictions on capacity creation, respond to
emerging domestic & global opportunities by improving productivity
 Abolished industrial licensing for most industries but for 18 categories
 Small scale sector reserved
Foreign Investment:
 FDI (up to 51% foreign equity) permitted in high priority industries (high investment and
advanced technology) & export oriented companies
Industrial Policy 1991
Foreign Technology Agreements:
Towards technological dynamism, automatic approval for technological agreements related to high
priority industries; eased procedures for hiring foreign technical expertise
Public Sector Policy:
Restructuring pubic sector units, raise resources through pubic participation PSUs, refer sick units to
Board of Industrial & Financial Reconstruction
MRTP Act:
Abolished scrutiny of investment decision of MRTP companies etc.
Industrial Problems in More Developed Countries
Countries at all levels of development face a similar challenge: to make their industries competitive in an
increasingly integrated global economy. Each state faces distinctive geographical issues in ensuring that
their industries compete effectively.
Impact of Trading Blocs
 Industrial competition in the more developed world increasingly occurs not among individual
countries, but within regional trading blocs.
 The three most important trading blocs are the Western Hemisphere, Western Europe, and East
Asia.
 Within each bloc, countries cooperate in trade.
 Each bloc then competes against the other two.
Cooperation within Trading Blocs
 The North Atlantic Free Trade Agreement brought Mexico into the free trade zone with the
United States and Canada.
 The three NAFTA partners have been negotiating with other Latin American countries.
 The European Union has eliminated most barriers to trade through Western Europe.
 Cooperation among countries is less formal in East Asia, in part because Japan’s neighbors have
much lower levels of economic development and unpleasant memories of Japanese military
aggression during the 1930s and 1940s.
 The free movement of most products across the borders has led to closer integration of
industries within North America and within Western Europe.
 The three trading blocs have promoted internal cooperation, yet they have erected trade
barriers to restrict other regions from competing effectively.
Transnational Corporations
 Cooperation and competition within and among trading blocs take place primarily through the
actions of large transnational corporations, sometimes called multinational corporations.
 Initially, transnational corporations were primarily American-owned, but in recent years
especially Japan, Germany, France, and the United Kingdom have been active as well.
 Some transnational corporations locate factories in other countries to expand their markets.
 Transnational corporations also open factories in countries with lower site factors to reduce
their production cost.
 The site factor that varies most dramatically among countries is labor.
 Japanese transnational corporations have been especially active in the United States in recent
years.
 Most plants have been located in a handful of interior states, including Ohio, Indiana, Kentucky,
Michigan, Tennessee, and Illinois. German transnationals have clustered in the Carolinas.
Disparities within Trading Blocs
 One country or region within a country may have lower levels of income and amenities because
it has less industry than other countries or regions within the trading bloc.
 Disparities within Western Europe. Europe’s most important industrial areas, such as western
Germany and northern Italy, are relatively wealthy.
  Industry is concentrated in the regions most accessible to Western Europe’s core of population,
wealth, and industry.
 Germany has had a particularly difficult problem with regional disparities, a legacy of
Communist-run East Germany (German Democratic Republic).
 The European Union, through its European Regional Development Fund, assists its three least
industrialized member countries—Greece, Ireland, and Portugal—as well as regions in three
other countries that lack industrial investment—Northern Ireland (part of the United Kingdom),
southern Italy, and most of Spain.
 A number of Western European countries use incentives to lure industry into poorer regions and
discourage growth in the richer regions.
Disparities within the United States
 The problem of regional disparity is somewhat different in the United States.
 The South, historically the poorest U.S. region, has had the most rapid growth since the 1930s,
stimulated partly by government policy and partly by changing site factors.
 The Northeast, traditionally the wealthiest and most industrialized region, claims that
development in the South has been at the expense of old industrialized communities in New
England and the Great Lakes states.
 Regional development policies scored some successes as long as national economies were
expanding overall, because the lagging regions shared in the national growth.
Industrial Problems in Less Developed Countries
 Knowing that their agriculture-based economies offer limited economic growth, the leaders of
virtually every LDC encourage new industry.
 In some respects, LDCs face obstacles similar to those once experienced by today’s MDCs.
 One of the biggest issues is distance from markets.
 To minimize geographic isolation, industrializing countries invest scarce resources in
constructing and subsidizing transportation facilities.
 Another issue is inadequate infrastructure.
 The LDCs obtain support services by importing advisers and materials from other countries, or
by borrowing money to develop domestic sources.
New Problems for LDCs
 Industrializing countries now face a new obstacle.
 Few untapped foreign markets remain to be exploited.
 According to principles of economic geography, (in addition to market access), there are two
other critical locational factors: access to raw materials and site related factors.
 In fact, new African factories generally are those for which these factors are critical: (1) raw
material access, (2) site factors.
 Transnational corporations have been especially aggressive in using low-cost labor in LDCs.
 Transnational corporations can profitably transfer some work to LDCs, despite greater
transportation cost.
 Operations that require highly skilled workers remain in factories in MDCs.
 This selective transfer of some jobs to LDCs is known as the new international division of labor.
 Many African countries possess iron ore.
 But steel, perhaps the most important industry for a less developed country, has had difficulty
getting a foothold in Africa.
 Without cooperation among several small states, steel manufacturing is not likely to develop
further in Africa.
India – China comparison
  The contribution of Agriculture, industrial and service sector (2007-8) in GDP has been 21, 24
and 55%. (In China the corresponding % are 11.3, 48.6 and 40 % in GDP 2008)
 Agriculture is the predominant occupation in India, accounting for about 60% of employment (
China 43%).
 The service sector makes up a further 28% (China 32%) , and industrial sector around 12% (China
25%).
 Organized sector employs 8% of workforce (two thirds of which are in public sector), and
produces about 40% of GDP. Rest in informal sector --with predominance of ‘women.’ Urban
informal sector is a fast growing sector.
 Major problem not of open unemployment but of underemployment and disguised
unemployment.

Industrial Policy: Global agenda

 The industrial policy for industrialised countries emerge as a strategy to promote 'high-road
competitiveness‘.
 The U.S. government, the European Commission and the OECD have advocated
reindustrialization and industry-oriented 'integrated' policies, since the recent financial crisis,
1997
 High-road competitiveness is understood as the ability of an economy to achieve 'Beyond-GDP'
Goals.
  'High-road strategies' are based on advanced skills, innovation, supporting institutions,
ecological ambition and an activating social policy.
 This 'new industrial policy' is systemic, working in alignment with other policy strands and
supporting social and environmental goals; it affects the structure of the economy as the whole
not only the manufacturing sector (www.foreurope.eu).
Systemic Industrial and Innovation Policy (SIIP)
 A future-oriented industrial policy has to be systemic in the sense that it needs to be derived
from society's goals.
 If the European citizen's welfare function gives a large weighting to rising incomes, more social
inclusion (less wage dispersion), a stable financial system and sustainability, then industrial
policy has to promote these goals.
 Innovation should be shifted to social and ecological innovation (a feasible task given the scope
of government involvement in R&D).
 Industrial policy should also make use of forces that promote change and foster higher incomes,
e.g. competition, globalisation, education and training.
 Thus a 'Systemic Industrial Policy' is pulled by a vision and pushed by competition (see the Figure
next).
Systemic Industrial and Innovation Policy
 The 'new industrial policy' should be forward-looking, favour competition and support long-term
societal needs, incorporating the aspects of 'green industrial policy’
 It should be an integrated or systemic policy, not an isolated policy strand in conflict with other
policies.
 Policy measures should have a clearly communicated goal and the results of intervention should
be carefully monitored.
Towards a new growth path: Europe
 Europe must develop its existing socioeconomic model into a role model for a dynamic, inclusive
and ecological society in a globalising world.
 Social expenditures and ecological ambitions should be turned from costs into drivers of new
dynamics (e.g. through an activating labour market policy or an innovation-based sustainability
strategy).
 A new European model could be attractive for young people, as well as for countries climbing up
the income ladder, which are looking for alternatives to the Chinese catch-up model or the U.S.
frontier model based on individualism, with low priority for social goals and sustainability.
 The goals of Europe 2020 into the future and on the other targets a much deeper socio-
ecological transition
Towards a new growth path: four game changing proposals - Europe
Game changer 1: From GDP to beyond-GDP: The OECD has published a corresponding set of 'Better Life
Indicators', which many countries now start to use as measure of performance
Game changer 2: Redefining competitiveness: Competitiveness should be based on capabilities like
skills, innovation, institutions, an empowering social system and ecological ambitions (than the
conventional norms of reducing wages)
Game changer 3: Distinguishing between a low road and a high road: Objective is to lower costs
(wages, taxes, energy prices); and to raise productivity, by boosting capabilities (education, innovation),
and by becoming a leader in energy efficiency and renewable energy
Game changer 4: Industrial policy as a strategy for high-road competitiveness: Industrial policy as
economic policy to promote the competitiveness of a country or region, where competitiveness is
defined as the ability to deliver the beyond-GDP goals
Make in India Initiative
Make in India, launched by Prime Minister Modi on September 25, 2014, is a cross-cutting initiative that
seeks to realize this objective by encouraging foreign investors and domestic companies to manufacture
in India.
Make in India seeks to open up new sectors to FDI, create new “Smart Cities” and industrial clusters,
simplify regulatory approvals for opening manufacturing facilities, improve the business climate, and
provide tax relief and other incentives for manufacturing in India.
Make in India reemphasizes and expands upon the goals of the 2011 National Manufacturing Policy
(created under the previous government).
The MI initiative’s targets include creating 100 million new manufacturing jobs and growing the share of
manufacturing in India’s gross domestic product (GDP) from 16 percent to 25 percent by 2022
Assessment of State Implementation of Business Reforms
Business reforms: the context
 The Government of India has already embarked on an ambitious agenda to improve India’s
Doing Business rank to 50 by 2017
 Doing business in India is beset with several constraints on several fronts: infrastructure, capital
markets, trade facilitation and skills
 Business firms are also facing a disproportionately high regulatory burden while doing business
 This difficult regulatory burden is manifested by India’s current rank of 142 among 189 nations
in the World Bank’s Doing Business 2015 study.
 Of late, Government of India has embarked on ambitious reforms focused on improving India’s
performance in the World Bank’s Doing Business rankings.
The context of business reforms
 These efforts, among other things, focus on implementing reforms relating to starting a
business, resolving insolvency (bankruptcy), enforcing contracts, and trading across borders
 A majority of the regulatory burden imposed on business is due to the plethora of laws, rules,
regulations and procedures enforced by the States.
 This gives rise to a wide number of registrations, licenses and NOCs that businesses must obtain
and file compliance returns on.
Doing Business in India
 On 29th December 2014, Chief Secretaries of States participating in the “Make in India”
workshop finalized a 98-point Action Plan on “Ease of Doing Business”
 Subsequently it was decided that an evaluation will be done, to assess progress by June 2015
 This presentation captures the findings of the evaluation of this unique exercise, and ranking of
States in terms of their implementation of the 98-point action plan.
Data and methodology
 Data was collected through a structured questionnaire that was completed by each State and UT
Government.
 The responses were validated through a series of in-depth workshops with State Government
representatives, and collection of supporting evidence on each of the parameters.
 The evidence collected consisted of rules, notifications, circulars, website screenshots and a
variety of other documents of the State Government or found online to prove conclusively that
the State meets the requirements of the assessment.
 The data collected was evaluated in detail jointly to ensure that the same yardstick was applied
to measure progress for all States.
Doing Business in India
  The results of the assessment indicate that States have wholeheartedly embraced the challenge
placed upon them: to focus on streamlining the regulatory burden on business in India.
 The assessment has also given rise to competition among States and UTs to undertake reforms.
 Many States have already embarked on ambitious reform programs or expanded their ongoing
reform efforts since the announcement of the 98-point action plan.
Major findings of the study on Doing Business in India
Some forecasts indicate that, by 2020, India will be home to 1.35 billion people, of whom 906 million will
be of working age. These 906 million will need jobs to sustain India’s growth, and these jobs can only be
provided by the sustained growth of the manufacturing and service sectors in India. The challenge,
therefore, is to create the jobs to employ India’s rapidly growing youth base, and the only means of
doing so is to catalyze increased private investment in India. Today’s investment equals tomorrow’s
jobs, and so the Government of India has embarked on the ambitious Make in India initiative to create
jobs
How India looks as per the study
 According to the World Bank’s Enterprise Survey, businesses in India rank corruption as the number
one constraint to growth, ahead of factors like electricity, access to finance and access to land.
 Corruption arises due to lack of a transparent and effective regulatory framework
 India ranks 142 out of 189 economies in the World Bank’s Doing Business 2015 report, the second
worst performing economy in South Asia.
 The World Economic Forum’s Global Competitiveness Report ranks India as 71 out of 144
economies.
 India is ranked at 93rd on irregular payments and bribes
 59th on burden of government regulation, and
 57th on the efficiency of the legal framework in settling disputes.
Methodology & approach
Findings of the study
There is a weak negative correlation
between per capita income and
implementation status in a State (-
0.17)
This indicate that some States with
lower per capita incomes recognize
the need to attract increased
investment in order to create jobs
and generate incomes, and
Therefore, are more willing to
undertake reforms to attract
investment.
There is a strong positive correlation between implementation status and the number of investment
intentions in the State (0.61), and a
moderately positive correlation
between the implementation status
and the value of investment
intentions (0.47).
Thus, in general, States which enjoy
higher investment interest tend to
be more interested in implementing
reforms.
Critical Issues Needing policies and interventions and their impact analysis
Global Interdependence and the Growth of Developing-World Markets
Rich nation interdependence with developing countries
Three key issues
Global environment threat – climate change
Chronic poverty and economic crisis in sub-Saharan Africa
Globalization of international trade and
finance
Global warming
 Greenhouse gases: Gases that trap heat
within the earth’s atmosphere and can
thus contribute to global warming.
 absorptive capacity: The capacity of an
ecosystem to assimilate potential
pollutants
 Rain forest preservation as a public
good: who should pay?
o Improving efficiency of existing
uses
o Developing markets for
alternative rain forest products
o Debt relief: Heavily indebted
countries require debt relief measures
o Appropriate aid packages
o Purchase of timber rights by the international community
The Global Environment and Developing world
 Searching for global solutions: The 1992, 1997, and 2002 summits and follow-ups
o Earth summit
o Global commons
o Agenda 21
 Poverty reduction and environmental health programs
 Investing in environmentally sensitive agriculture
 Family planning and job opportunities
 International support for environmental protection
 Funds for biodiversity protection
 Develop non carbon energy alternatives
The Crisis in Sub-Saharan Africa
The crisis
Extreme poverty and economic decline
Drop in export revenues
Destruction of fragile ecosystems
War and internal strife
Spread of HIV and AIDS
The hope
G-8 agenda (8 major industrialized countries: USA, Russia, Japan, Germany, Italy, UK, Canada,
France)
Sustainable Development Goals agenda
Globalization and International Financial Reform
Globalization of finance
Questionable impact on development
Global factories and MNCs typify inequality (Production facilities whose various operations are
distributed across a number of countries to take advantage of existing price Differentials)
Three fold impact
Power of the nation state weakens
Increased risks of financial instability
Increase in international migration from South to North
Globalization and International Financial Reform
Often mentioned four reforms to the international system
End to debt service burdens
Creation of new LDC funding sources
Creation of “national bankruptcy” procedure for the over indebted
Reform the IMF and the World Bank
India passes national bankruptcy law
 India’s parliament has passed the country’s first national bankruptcy law (May 2016), a move
that could turn one of the slowest insolvency regimes of any major economy into one of the
fastest.
 The reform will give banks a clear path to wresting control of insolvent companies unable to
repay their debts. Its adoption is seen as a major breakthrough that will allow banks to recover
their dues in a timely manner, in contrast to the current system in which they often wage legal
battles in an attempt to recover what they are owed.
 The reform comes at a time of heightened focus on the bad debts weighing down India’s
banking system, amid the bitter battle by state banks to collect on some $1.3bn of debt left by
the collapse of industrialist Vijay Mallya’s now defunct Kingfisher Airlines.
 The new law, which has been cheered by investors, will provide a single framework for the
recovery of debts within 180 days by all creditors of insolvent companies.
Summing up
 Growing vulnerability of poor nations
 Greater cooperation or greater conflict?
 Economic futures of the rich and poor are intimately linked
 Global development is not a zero sum game
 Equitable international economic order
 India’s Economic Development and Inclusive Growth Outcomes
Policies and their impacts
Why policies?
How policies impact development?
How to measure the impacts of policies?
The criticality of ‘measurable indicators’ to understand the impacts of policies
Need for a sector-specific approach in understanding and analysing policy impacts
Why policies
 Policies as they shape up give certain guidelines to be adopted concerning the question/ issue
being targeted
 Policies could be: administrative, economic, educational, scientific, social, environment, or
anything else, and are necessarily grounded in some principles, ideology; relating to the
conception of an ideal man, or an ideal economy, an ideal education system, an ideal society, an
ideal scientific performance, an ideal environment/ ecosystem and so on
  These ideals change from time to time, region to region and from context to context, depending
on the situations/ scenarios in which the ideals are looked upon
Policy analysis: an important area
 Analysis of Economic/ business, social and environmental policies
 To understand ‘if the policies have been working as per the targeted ideals set in the concerned
issue being dealt with
 Measuring the impacts/ outcomes of policies by way of indicators that are monitorable
(monitorable indicators)
Drivers of Inclusive Growth: Global perspective
 India leap-frogged from agriculture to services with less focus on manufacturing (Rural
industrialisation)
 The share of employment in manufacturing in Malaysia is 50%, in Korea 62%, in China 31%
 On the other hand, the share of employment in manufacturing in India is only 12%
 Diversification towards rural non-form sector in China is one of the important factors
responsible for rural poverty reduction (poverty 3%)
 This was partly due to high agricultural productivity and investment in physical and human
capital achieved in China
 The rapid economic growth has lifted more than 400 millions of people out of poverty and
substantially improved the living standards of the Chinese
Inclusive Growth: EU Model
 Sustainable growth: promoting a more resource efficient, greener and more competitive
economy
 "Resource efficient Europe" (including biodiversity objectives and sustainable use of resources)
to help decouple economic growth from the use of resources, support the shift towards a low
carbon economy, increase the use of renewable energy sources, modernise our transport sector
and promote energy efficiency.
 Agro-ecological intensification of agricultural production: Production of affordable, safe and
healthy food in sufficient quantities
 Making industry Greener - replacing petrochemical inputs with renewable biological raw
materials and bioprocesses
 Closing the waste loop -reduction, recycling, creation of added value
 Enhancing Rural Development
Why think about ‘inclusive growth’?
 Notwithstanding the positive features of growth that India’s economy has been showing up,
major weaknesses exist, that:
 “Growth has not been sufficiently inclusive for the social groups, esp. SC, ST and the minorities
 Gender inequality also remains a pervasive problem and some of the structural changes taking
place have an adverse effect on women
 The lack of inclusiveness is borne out by data on several dimensions of social and economic
performance
Inclusive growth: conceptual clarity (lack of it?)
 Growth with equity- equal opportunity for all
 Could mean different things to different people – classic case of blind men describing elephant!!
 Inclusion could differ by sectors/ activities, where it should consider issues of individual choices
for being included or excluded
 Willingness to participate in the growth process depending on the sector being considered?
 Introduction of MGNREGA and its impacts on Inclusive Growth
  Would workers, who already have set a high reserve wage for them, participate in? Can we call
it exclusion if they do not participate in the MNREGA labour market?
Growth: where facts count, but not sufficient!
 India accounted for the largest number of people living below international poverty line in 2013,
with 30% of its population under the $1.90-a- day poverty measure
 Rural poverty (BPL) had come down over time: 36% (1993-94) to 28% (2004-05)
 But, still remains high and has not declined in tandem with the acceleration in GDP growth
 The incidence of poverty among certain marginalized groups (say, STs) has hardly declined at all
 As population had grown , absolute number of poor has declined only marginally, from 320
million (1993-94) to 302 million (2004-05)
Population below poverty
 The latest study by a panel headed by former chairman of the Prime Minister’s Economic
Advisory Council, C Rangarajan, estimated that 363 million, or 29.5% of India’s 1.2-billion people
lived in poverty in 2011-12.
 The Rangarajan panel considers people living on less than Rs 32 a day in rural areas and Rs 47 a
day in urban areas as poor.
Demographic dividend and inclusive growth
 The ability to generate adequate number of productive employment opportunities will be a
major factor on which the inclusiveness of growth will be judged
 India is currently at a stage of ‘demographic transition’ where population growth is slowing
down
 But the population of young people entering the labour force continues to expand without
adequate employment opportunities
 The challenge for employment along with upgrading skills (Will ‘Make in India’ help overcome
the challenge?)
 Inclusiveness: the Indian vision
 The vision of inclusiveness must go beyond the traditional objective of poverty alleviation to
encompass equality of opportunity, as well as economic and social mobility for all sections of
society, with affirmative action for SCs, STs, OBCs, minorities and women
 Equality of opportunities with freedom and dignity, and without social or political obstacles
 Improvement in opportunities for social and economic advancement
 individuals belonging to disadvantaged groups should be provided special opportunities to
develop their skills and participate in the growth
process

Inclusive growth (IG): monitorable indicators (MIs)

IG emphasis on MIs- reflect the multi-dimensional
economic and social objectives of growth
Following this approach, 27 monitorable indicators
have been identified at the national level, of which 13
can be disaggregated at the individual states level
Twenty-seven indicators at the national level fall in six
major categories:
(i) Income and Poverty; (ii) Education; (iii) Health;
(iv) Women and Children; (v) Infrastructure; and (vi)
Environment
Monitorable Indicators for IG: Major categories

Potential sources of inclusive

growth: food security
 Food price policy:
insulates domestic food prices
from the impact of rising global
food prices, through:
 High oil and fertiliser subsidies
 Duty cuts and export bans (during distress periods)
 Administrative measures on hoarding , ban on futures trading/ markets
 Procurement, buffer stock, and public distribution of food
Potential sources of inclusive growth: poverty alleviation
 Safety nets and anti-poverty programmes
 Self employment programme- women’s groups
 Wage employment programme, food subsidies, nutrition programmes for children, old age and
maternity benefits
 Public Distribution System – Subsidized food
 National Rural Employment Guarantee Scheme (NREGS) – Giving 100 days of wage employment
to the poor
NREGS: findings from state-level studies
 While implementation remains uneven and inconsistent across states and districts, evidences
suggest that the scheme has contributed to:
 increased rural wages- NREGS wages impacting market wages to rise in most states;
 reduced distress migration from traditionally migration-intensive areas;
 usage of barren lands for cultivation; and
 empowerment of the weaker sections and giving them a new sense of identity and bargaining
power.
Impact of NREGS: Implications for inclusive growth
 Wage income impact on household income
 Alternate employment options (AEO) and opportunity cost of NREGS work
 Increased monthly per capita expenditure
 Impact on food security, savings and health outcomes
 Participation of marginalized communities
 Works on private lands of the marginalized
 NREGA in areas experiencing left wing extremism (LWE)
Wage income impacts on household income
 Studies show a positive impact of the wage income transfer on household income, monthly per-
capita expenditure, food security and health of the beneficiaries
 Almost 66% of the total expenditure has been spent on wages over years. To assess the impact
of NREGS on poverty and deprivation, studies have used proxy indicators, including household
income (NREGS income as % of HH income) and monthly per-capita expenditure (MPCE)
 Estimations of the net benefits from the scheme also take into account availability of alternate
employment opportunities and opportunity cost of time (NREGS work vs others) as important
parameters
 Surveying 1500 households in three states, Jha et al., (2011) observed that the share of NREGS
in the income of the poor was the highest in Andhra (17%), followed by Rajasthan (10%) and
Maharashtra (7%).
Impact on monthly per capita consumption expenditure
 In Andhra, a study reported that NRGES has caused a significant increase in monthly per capita
consumption expenditure (MPCE) of around 10% for households. Expenditure on non-food
consumables increased significantly by around 23%. Expenditure on transportation decreased
significantly due to NREGS by around 65%. This was most likely because, the scheme stipulates
that employment be provided within 5 km of the residence of the potential job seekers (Engler
and Ravi, 2012).
 Similar trends observed from Rajasthan (Babu and Rao, 2010). The wage seekers were spending
their additional wages from NREGS mainly on food (50%), clothing (20%), education (10-15%)
and healthcare (10%).
 A longitudinal study in Andhra surveyed 2500 households in 2004 (before NREGS) and in 2006
and 2008 (after NREGS): found that NREGS participation positively impacted on consumption
expenditure, intake of energy and protein an asset accumulation (Deininger and Liu, 2010).
 Study by Banerjee and Saha (2010) in Jharkhand, Chattisgarh and Odisha reported that NREGS
enhanced the ability of households to withstand economic shocks and inflationary pressures. It
also reported that in the absence of such interventions, the households would not have had the
capacity to purchase enough foodgrains .
Impact on food security, savings & health outcomes
  NREGS help ensuring a higher intake of food and food availability. In Andhra, it was reported
that the number of meals foregone by households had reduced following NREGS
implementation.
 Health outcomes have been identified by studies (such as Engler and Ravi, 2012) in terms of a
reduction in the incidence of depression (12%) and improvements in mental health indicators. A
reduction in health expenditure has also been reported post-NREGS.
 The scheme also raised the probability of holding savings among rural households by 21% with
an increase of 19% in per-capita savings in Andhra Pradesh (Engler and Ravi, 2012).
 The impact of NREGS also has been approached by some as an instrument exerting a strong
influence on the upward movement of agricultural wages improving welfare of the HHs
 NREGS has been reportedly enabling the households earn income at times of distress caused by
adverse weather conditions, like lack of rainfall or incidence of droughts (Johnson, 2009).
 This need further research: Is if and how NREGS getting adversely or positively get affected by
changing weather conditions? (more participation during adversities)
Participation of marginalized communities
 NREGS has been successful as it has been providing employment to the SC/ST communities who
constitute almost 40-50% of the total workforce benefited under it.
 In a survey done in 2008 in six states, viz., Bihar, Chhatisgarh, Jharkhand, Madhya Pradesh,
Rajasthan and UP, it was found that a majority of the NREGS workers belong to the most
disadvantaged sections; 81% of the sample workers lived in kachcha (non-permanent) houses,
61% were illiterate, and 72% have had no electricity at home. SC, ST families accounted for 73%
of the workers in the randomly selected sample (Dreze and Khera, 2011)
 In five districts of UP, around 85% of the beneficiaries belong to BPL; 50% to SCs, 45% to OBC
(Report by IIML submitted to MORD/UNDP, 2009).
 NSSO survey (2010-11) observed that in Andhra, 42% of the beneficiaries were SCs/STs, 50%
were OBCs. In Madhya Pradesh, these proportions were 67% and 29%; in Rajasthan, 50% and
42% respectively (NSSO, 2010-11).
NREGA in areas experiencing left wing extremism (LWE)
 A study by Banerjee and Saha (2010) conducted in six LWE districts (12 blocks) of Chhatisgarh,
Jharkhand and Odisha, observed that:
 NREGS provided additional employment and has been an important source of supplementary
income. The average days of employment ranged from 7 (Malkangiri, Odisha) to 55 person days
in Bastar (Chhatisgarh). Women’s participation was above the statutory minimum of 33%.
 The increase in overall employment and wages also resulted in an increase in household income.
In Chhatisgarh, rise in household income ranged from 23- 160% post NREGS; 60-70% in
Jharkhand and 30-40% in Odisha (Banerjee and Saha, 2010).
NREGS: Gender & social empowerment
From 2006-07 to 2011-12, around Rs. 53000 crores have been spent on wages for women and around
47% of the total person days generated have been by women.
Though women have been the major benefactors across states, significant inter-state variation in
women participation exists (what explains this?)
Factors that led to increased women participation were identified as:
the low-skill knowledge intensity nature of jobs, out-migration of male members, availability of,
employment opportunity in the local vicinity, the tradition of rural women working in others’ fields, the
provision of equal, non-discriminatory wages
innovative experiments in implementation like the synergisation of NREGS with Kudumbashree in
Kerala, and in Bihar, Gender differential tasks for uniform (minimum) wages
TRADE POLICY REFORM IN INDIA SINCE 1991
Trade Reforms
 Trade policy reforms initiated in 1991, mainly focused on tariffs and quantitative restrictions
 Supplemented by recommendations of an Expert Committee, India's trade policy reform paved
the road for a major reduction of average tariffs, tariff peaks, simplification of the tariff and
quota regimes, and removal of several import restrictions
 These changes reflected a larger vision of reform to enhance the efficiency of domestic industry,
together with a number of other objectives such as promoting infant industry, exports,
technological upgradation and food security
 This paper discusses the changes, identifying both the significant progress made through
reforms and the areas needing further reform process
Trade reforms: Indian experience
 An important part of Indian experience with trade policy reform since 1991 has been that these
changes were managed without major disruptive consequences.
 The economy has been on a strong growth trend, though from time to time there are concerns
about its weaknesses
Rising trade engagements
 In the last 20 years global markets have changed in major ways, with increased competitive
pressures resulting from larger participation of several developing economies in world trade
(particularly China).
 The rise in FDI stock has meant an increasing overlap between trade and investment; and
 Rise in the significance of international value chains and lead firms managing those value
chains to specify the conditions relevant for quality and social and sustainability standards.
 The world of international trade and trade policy continues to evolve and increasing efforts to
establish trade agreements, especially bilateral and regional trade agreements by some large
economies.
Trade policy measures: external and internal
 With several rounds of trade negotiations at the General Agreement on Tariffs and Trade
(GATT)/WTO, the incidence of tariffs and import quotas has come down, though they still
remain a focus in trade negotiations
 Outside the border measures: Earlier, trade policy focused mainly on border measures
(externally imposed), such as tariffs, quotas, import licensing, and prohibitions on imports.
 Inside the border measures: Over time, many more inside-the-border policies that affect trade
began to be part of the trade policy focus, such as: IPR, trade-related investment measures, and
a recognition that trade rules also needed to apply to services (including regulatory conditions).
Competitive neutrality: Level playing field
 With increasing competition in global markets and larger economic presence of a number of
developing economies, additional trade policies considerations emerged
 This reflected an increasing focus in developed economies on conditions which they considered
as necessary to create a “level playing field” in world trade.
 These included policies which affect “competitive neutrality” (state owned and private business
compete on a level playing field to achieve growth and development) like differences in social
and sustainability (labour and environment) standards, preferential support provided to state
enterprise, competition policy, regulatory practices, and “responsible business conduct”.
Rise in value chains in services sector
 The rise of international value chains has also led to a recognition of the fact that a significant
portion of value added in goods is due to services Recent data on trade in terms of value added
 has shown that the share of services in international trade is much higher than previous
calculations because manufactured products also include value added from services
(https://www.oecd.org/sti/ind/tiva/CN_2015_India.pdf)
 Value added trade data shows that the share of services in international trade is about 40%,
much more than previous estimates.
 An important feature of services trade policy reform is that it involves both opening-up of
market entry to new service providers, and creating a “level playing field” for newcomers
through a robust regulatory regime. This consequently established the importance of regulatory
regimes as an integral part of services trade policy.

Trade Policy: Many policies, and Still Evolving

 A range of trade policies are important for understanding comprehensively the evolution of
Indian trade policy reform
 With potential new Free Trade Agreements such as the Trans Pacific Partnership (TPP), the
issues addressed in the context of trade policies is even more extensive
Import Tariff reduction
 Relatively high tariffs are kept my countries, usually on “sensitive” products, amidst generally
low tariff levels. For industrialized countries, tariffs of 15% and above are generally recognized
as “tariff peaks”.
 In the past four years, the average tariff on agriculture products rose to 36.4 per cent from 33.2
per cent, while tariff on non-agriculture items rose to 9.5 per cent from 8.9 per cent.
Tariff reduction: implications for trade in India
 With about 13% simple average applied Most Favoured Nation (MFN) tariffs, India today is close
to the upper part of the range of tariffs in ASEAN economies (Thailand: 11.6%; Cambodia:
11.2%; Laos: 10%; Vietnam: 9.5%)
 If we consider only the MFN tariffs, then it would appear that considerable further tariff
reduction would be required if India aims to reach the middle part of the ASEAN tariff structure,
with average applied MFN tariffs of Indonesia, Malaysia, Myanmar and the Philippines ranging
between 5.6% and 6.9%.
Different Tariff Patterns for Agriculture and Non-Agriculture Products in India
 The profile of tariff distribution across agriculture and non-agriculture products show that
greater tariff protection provided by India to its agriculture products.
 This is not unusual, as can be seen for several developed economies as well, including the
United States and very much the EU
  A closer look at India’s tariff structure shows that India’s overall average tariffs are low, primarily
because of the low tariffs for non-agricultural products and their large share in total imports

Conclusions and observations

 India has travelled a long way from the days when tariff reform was initiated in 1991.
 Today, its level of average MFN tariffs for non-agriculture are comparable to several economies
which are conventionally considered to have carried out significant tariff reform and opening-up
of their markets.
 Lower tariffs due to free trade agreements (FTAs): the early 1990s, India had few Free Trade
Agreements (FTAs) or Preferential Trade Agreements (PTAs).
 Over time, these have increased and the proliferation of FTAs (with 54 countries) has been
supplemented by larger agreements in the form of Comprehensive Economic Partnership
Agreement (CEPA) or Comprehensive Economic Cooperation Agreement (CECA) which cover
many more areas than conventional market opening under FTAs (18 groups/ countries).
Conclusions and observations
 Since 1991, trade policy reform has opened up India’s trade. It has increasingly provided Indian
consumers and producers access respectively to world-class consumer goods and the relevant
capital and intermediate goods.
 The major trade policy reform, together with other policy changes have led to a greater
integration of India with the world economy, and improved capacities as well as potential for
growth.
 There was a high degree of success in trade. High trade growth was achieved until recently, with
ratio of exports and imports to GDP reaching about 49% in 2014 from about 24% in 2000.
 Future trade policy reform should include establishing systems to enable quick information
coming to the policy makers about the diverse areas.
 Policy makers need to participate to the extent possible, in both formal and informal initiatives
dealing with the expanded trade policy agenda.
Liberalisation and its Impact on Agricultural Growth in India
The context
 It was argued that economic liberalisation would make a favourable shift in the terms of trade
for agriculture in India, enabling producers to reinvest surplus from farming operations to make
long-term improvements on land, and raise agricultural productivity and output growth.
  But, contrary to expectations, there was no visible improvement in the terms of trade for
agriculture following the reforms.
 Instead, there was a decline in capital formation in agriculture, inadequate expenditure on
irrigation and extension services in rural areas, and a dearth of cheap institutional credit
 Which resulted in a slowdown of agricultural growth and heightened livelihood insecurity for a
major segment of population dependent on agriculture.
Agriculture the backbone of Indian economy
 Importance of agriculture is heightened with a substantial section of the population dependent
on agriculture for employment.
 As per the National Sample Survey Office (NSSO), about 59% of male workers and 75% of
women workers were dependent on agriculture in 2011–12 (NSSO 2014: 14).
 High agricultural growth is important to reduce rural poverty.
 It was argued that doubling of the rate of agricultural growth from 2% to 4% along with 9% rate
of growth of the economy will reduce income disparities between the agricultural and non-
agricultural sectors (Planning Commission 2006).
 Hence, it will be worthwhile to analyse growth rates of the agricultural sector, and evaluate its
performance in the context of the overall economy, following the enunciation of economic
reforms since 1991

Agriculture losing its economic base

 Results indicates that agricultural sector
is losing its importance as an income generating
activity at a faster pace with the onset of
reforms in India.
 Expectations about the performance of
agriculture sector as highlighted in the
approach paper of 11th Five Year Plan (Planning
Commission, 2006) have not been realised.
 Trends in area, production and
productivity of important crops showed varied
trends
 Growth in area under many crops has
been stagnant or negative. Increase in area under rice and wheat took place at the cost of other
food crops
 Production and productivity of commercial crops, such as oilseeds and cotton were observed,
mainly contributed by Bt (GM) technology in case of cotton and the technological modernisation
under the Technological Mission on Oilseeds (TMO)
Capital formation in Indian Agriculture
 “Crowding in and crowding out” of investments
 Theoretically, it is expected that public investments for capital formation in agriculture would
induce private investments
 Gross capital formation in agriculture had increased since mid-1960s through late 1970s
 The share of agriculture and allied activities in gross capital formation in the economy was
increasing in the mid-1960s, and this trend continued till the late 1970s
  This resulted in higher growth rates of agriculture in the 1980s, due to lagged impact of
increases in gross capital formation in agriculture during the late 1960s and 1970s

Declining investments vs increasing subsidies

 The declining trend since the 1990s implies that there has been lesser investment in agriculture
as compared to the non-agriculture sector.
 Chand and Kumar (2004) argued that public capital formation has a long-term beneficial impact
on agriculture as compared to subsidies whose impact is short-term.
 They estimated that a rupee spent on public sector capital formation contributes to GDP growth
in agriculture by Rs. 35.21 over a period of 58 years.
 Diverting 1% of resources from subsidies to public investment raises output by more than 2%,
and is highly desirable in ensuring growth of agriculture GDP (Chand and Kumar, 2004: 5611–
16).
Institutional credit support to agriculture
 The policy of social and development banking, initiated with the nationalisation of commercial
banks in the late 1960s, was rolled back on account of financial liberalisation.
 Reduced emphasis on priority sector lending with financial liberalisation had led to reduction in
the availability of credit to small and marginal farmers and made cultivation more expensive.
 Reduction in bank branches in rural areas and declining credit–deposit ratios led to increased
dependence of smaller farmers on private moneylenders at exploitative conditions.
Research and extension services
 Extension and research are public goods that are prone to market failures, and hence the
government has to take a leading role in investing in these activities.
 Agricultural research and establishment of Agri. Universities and Agri. Departments and allied
institutions were primarily responsible for the success of green revolution in India.
 Public spending on agricultural research and extension services did not increase after reforms.
Price Factors Affecting Agricultural Growth
 It was expected that with agricultural trade liberalisation, India will emerge as a major exporter
of agricultural commodities, leading to increased inflows of foreign exchange reserves in the
economy due to elimination of bias against agriculture after reforms.
 Terms of trade (ToT) were in favour of agriculture in the 1980s, and this continued till 1994–95.
 ToT was stagnant till 1998–99, and worsened till 2008–09, falling further after 2010–11.
  There were improvements in the ToT between 2009–10 and 2011–12 after which there was
again a decline till 2013–14.
 In all, there was no marked improvement in the terms of trade for agriculture as was expected
with the onset of reforms. In certain phases in the post-reform period, the terms of trade for
agricultural producers worsened.
Decline in prices of agri. commodities
 Decline in agri. Commodities in international markets also adversely affected prices of
commodities domestically.
 In India, where almost 91% of households are marginal, small and medium farmers, who
cultivate on less than 2 hectares (5 acres) of land, exposure to fluctuations in international
prices will endanger livelihood security of substantial sections of the farming population
 As a result, farmers incurred huge losses or lost entire agri. business activities
 Thus, the income generating capacity of agriculture faces serious challenge in India in the face of
declining public investments, declining terms of trade, weakening of institutional credit support,
volatility and decline in farm prices, etc
Conclusions
 Indian agriculture is at a serious crisis of loosing its economic vibrancy
 Strengthening public investments as well as revamping the rural credit institutions would be
required to boost infrastructure investments in irrigation as well as marketing, processing and
storage related activities should receive adequate attention in the emerging scenario
India’s Fiscal Policy and Monetary Policy:
Monetary Policy
 The Monetary Policy aims to maintain price stability, full employment and economic growth.
 The Monetary Policy is different from Fiscal Policy as the former brings about a change in the
economy by changing money supply and interest rate, whereas fiscal policy is a broader tool
with the government.

Fiscal Policy
Fiscal policy means the use of taxation and
public expenditure by the government for
stabilization or growth of the economy.
According to Culbarston, “By fiscal policy
we refer to government actions affecting
its receipts and expenditures which
ordinarily as measured by the
government’s receipts, its surplus or
deficit.” The government may change
undesirable variations in private
consumption and investment by
compensatory variations of public expenditures and taxes.
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 generalization, excessive printing of money leads to inflation. If the government borrows too
much from abroad it leads to a debt crisis. 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. So it can be said that the fiscal deficit can be like a double edge
sword, which need to be tackled very carefully.
Main Objectives of Fiscal Policy
 Maintain and achieve full employment.
 Stabilize the price level.
 Stabilize the growth rate of the economy.
 Maintain equilibrium in the Balance of Payments.
 Promote the economic development of underdeveloped countries.
 Fiscal policy of India always has two objectives, namely, improving the growth performance of
the economy and ensuring social justice to the people.
Objectives of India’s Fiscal Policy
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 state governments in India have used fiscal policy to mobilise resources through:
a. 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.
b. Public Savings: The resources can be mobilised through public savings by reducing government
expenditure and increasing surpluses of public sector enterprises.
c. 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, issuance of government bonds, etc., loans from domestic and
foreign parties and by deficit financing.
Objectives of India’s Fiscal Policy (contd..)
2. 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.
3. Price Stability and Control of Inflation: One of the main objectives 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.
4. Employment Generation: The government is making every possible effort to increase employment in
the country through effective fiscal measures. 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 generate 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.
Objectives of India’s Fiscal Policy (contd..)
5. Balanced Regional Development: there are various projects like building up dams on rivers,
electricity, schools, roads, industrial projects etc run by the government to mitigate the regional
imbalances in the country. This is done with the help of public expenditure.
6. Reducing the Deficit in the Balance of Payment: some time government gives export incentives to
the exporters to boost up the export from the country. In the same way import curbing measures are
also adopted to check import. Hence the combine impact of these measures is improvement in the
balance of payment of the country.
7. Increases National Income: it’s the strength of the fiscal policy that is brings out the desired results in
the economy. When the government want to increase the income of the country then it increases the
direct and indirect taxes rates in the country. There are some other measures like: reduction in tax rate
so that more peoples get motivated to deposit actual tax.
8. Development of Infrastructure: when the government of the concerned country spends money on
the projects like railways, schools, dams, electricity, roads etc to increase the welfare of the citizens, it
improves the infrastructure of the country. A improved infrastructure is the key to further speed up the
economic growth of the country.
9. Foreign Exchange Earnings: when the central government of the country gives incentives like,
exemption in custom duty, concession in excise duty while producing things in the domestic markets, it
motivates the foreign investors to increase the investment in the domestic country.
Instruments of Monetary Policy
 Bank Rate is the rate at which RBI allows finance to commercial banks.
 Any upward revision in Bank Rate by central bank is an indication that commercial banks should
also increase deposit rates as well as Prime Lending Rates.
 This any revision in the Bank rate influence interest on your deposits and also an increase or
decrease in your EMI.
 At present Bank Rate: 6.50% (Q1/2019)
 Policy Repo Rate: Repo Rate is the rate at which RBI lends money to commercial banks. At
present Repo Rate: 6.25% (Q1/2019)
 Reverse Repo Rate: Reverse Repo Rate is the rate at which RBI borrows money from the
commercial banks. At present Reverse Repo Rate: 6.0% (Q1/2019)
 Cash Reserve Ratio: Cash Reserve Ratio is the amount of funds that the banks have to keep with
the RBI.
 The CRR is basically to secure solvency of the banks. The present CRR is 4% (Q1/ 2019)
 Statutory Liquidity Ratio: Statutory Liquidity Ratio (SLR) is the Indian government term for
reserve requirement that the commercial banks in India require to maintain in the form of gold,
cash or government approved securities before providing credit to the customers.
 SLR is maintained in order to control the expansion of bank credit. The present SLR: 19.25%
(Q1/2019)
Implementation of GST
 The Goods and Services Tax (GST) is a
value added tax levied across goods and
services and is actually a tax on final
consumption expenditure.
 Value added = Final Consumption (C) +
Investment (I) + Government Expenditure (G)
+ Exports (X) – Imports (M)
 Since, exports are not taxed and
imports are, tax credit is provided for
investment purchases, and government
expenditures are mostly exempt, only ‘C’ is
taxed
 In India, it is a “dual” tax which will be levied by both the center and the states and will replace
all current domestic indirect taxes levied by the center (excise and service tax) and states (VAT)
  Currently, excise and the CST are origin-based taxes which benefit producing states. GST is a
destination based tax which will benefit net consuming states
Seven Key Benefits of GST
1. Reducing corruption and leakage
2. Simplifying complex tax structure and bringing uniformity in tax rates across the country
3. Creating a common market by eliminating taxes on inter-state trade
4. Furthering Make in India by eliminating bias in favour of imports (“negative protection”)
5. Eliminating cascading which will also benefit manufacturing
6. Boosting revenues, investment, and medium-term economic growth
7. Furthering cooperative federalism: All tax decisions to be taken jointly by center and states
Reflections on the current policy scenario
 India is one of the few emerging market economies characterised with a robust macroeconomic
policy framework, flexible exchange rate, and manageable exposures to foreign-currency-
denominated debt.
 Recent structural reforms are helping to further support domestic demand, strengthen
investment, and thereby, improve income growth.
Economic, Social and Environmental Policies: conflict vs coherence
Economic policies
Monetary (Central Government & RBI)
and fiscal policies (Finance Ministry) of the
national government from time to time
Awards of Finance Commission
concerning generation of tax revenues
and distribution of the same based on
characteristics, such as population, tax
efforts, development status, etc
Demonetisation came as a radical
governance-cum-social engineering
measure was enacted on November 8,
2016.
The aim of the action was fourfold: to curb corruption, counterfeiting, the use of high denomination
notes for terrorist activities, and especially the accumulation of “black money”, generated by income
that has not been declared to the tax authorities.
Demonetisation policy
 Demonetisation has the potential to generate:
 long-term benefits in terms of reduced corruption,
 greater digitalization of the economy, increased flows of financial savings,
 and greater formalization of the economy,
 all of which could eventually lead to higher GDP growth, better tax compliance and greater tax
revenues
 The initial responses to demonetisation policy seem to be mixed with varied pros and cons
across economic activities and sectors
Trade policy
 The environment for global trade policy has probably undergone a paradigm shift in the
aftermath of Brexit and the US elections.
  These are likely to be exacerbated by macro-economic developments in the United States, and
in particular the, sharp rise in the dollar that is already under way: since November 8, 2016 the
dollar has appreciated by 5.3 percent by end December before recovering to 3.1 percent in
January 2017 in nominal terms against an index of partner countries.
 In the context of India’s need for open markets abroad to underpin rapid economic growth
domestically, it is increasingly clear that India and other emerging market economies must play
a more proactive role in ensuring open global markets.
Trade policy and impacts
 In an urge to promote labor-intensive exports, India could more proactively seek to negotiate
free trade agreements with the UK and Europe.
 The projected potential gains for export and employment growth are substantial, particularly in
the apparels, leather goods and footwear sectors.
 But, there are several other trade agreements that India has been engaged into within the
Asian/ South-east Asian regional context
 The impacts of these FTAs/RTAs are going to have mixed implications for the production sectors
in the domestic economy
Job creation: the real challenge for India
 Generating rapid economic growth is one critical element of the policy response;
 Nurturing an enabling environment for investment is another challenge; and
 Targeted actions for the same is yet another challenge.
 The apparel and leather and footwear sectors meet many or all of the criteria of social
transformation, while generating exports and growth
 Hence, these sectors are eminently suitable candidates for targeting in the short run.
 Apparels and Leather sectors offer tremendous opportunities for creation of jobs, especially for
women.
Comparative advantage vs challenges
 Clearly, India still has potential comparative advantage in terms of cheaper and more abundant
labour.
 But these are nullified by other factors that render them less competitive than their peers in
competitor countries.
 The Apparel and Leather sectors face a set of common challenges: logistics, labor regulations,
and tax & tariff policy, and disadvantages emanating from the international trading environment
compared to competitor countries.
 The leather and footwear sector faces the specific challenge relating to policies that prevent
converting its comparative advantage— abundance of cattle—into export opportunities.
India’s green actions & policies
 India ratified the Paris Agreement on 2nd October 2016.
 India’s comprehensive nationally determined compliance (NDC) targets are:
 To lower the emissions intensity of GDP by 33 to 35 per cent by 2030 from 2005 levels,
 To increase the share of non-fossil fuels based power generation capacity to 40 per cent of
installed electric power capacity by 2030, and
 To create an additional (cumulative) carbon sink of 2.5–3 GtCO2e through additional forest and
tree cover by 2030.
Renewable energy targets
 Currently, India’s renewable energy sector is undergoing transformation with a target of 175
GW of renewable energy capacity to be reached by 2022.
  To achieve the target, the major programmes/ schemes on implementation of Solar Park, Solar
Defence Scheme, Solar scheme for Central Public Sector Undertakings, Solar photovoltaic (SPV)
power plants on Canal Bank and Canal Tops, Solar Pump, Solar Rooftop, etc. have been launched
in recent years
 A capacity addition of 14.30 GW of renewable energy has been reported during the last two and
half years under Grid Connected Renewable Power, which include 5.8 GW from Solar Power,
7.04 GW from Wind Power, 0.53 GW from Small Hydro Power and 0.93 GW from Bio-power
National tariff policy for electricity
 In January 2016, Government has amended the National Tariff Policy for electricity. The Tariff
Policy amendment has a focus on the environmental aspect with provisions such as:
 Renewable Purchase Obligation in which 8% of electricity consumption excluding hydro power
shall come from solar energy by March 2022;
 Renewable Generation Obligation in which new coal/lignite based thermal plants after
specified date to also establish/procure/ purchase renewable capacity;
 bundling of renewable power with power from plants whose Power Purchase Agreements have
expired or completed their useful life;
 no inter-state transmission charges for solar and wind power;
 procurement of 100 per cent power produced from waste-to energy plants;
 ancillary services to support grid operation for expansion of renewable energy, etc
National adaption fund for climate change
 Government of India has established the National Adaptation Fund for Climate Change to assist
States and Union Territories to undertake projects and actions for adaptation to climate change.
 Rs. 182.3 crore has been released for 18 projects for sectors including agriculture and animal
husbandry, water resources, coastal areas, biodiversity and ecosystem services.
 India is also one of the few nations to impose a tax on coal. This coal cess which has been
renamed as “Clean Environment Cess” in the Union Budget 2016-17 funds the National Clean
Environment Fund (NCEF).
National Clean Environment Fund (NCEF)
 The Clean Environment Cess has been doubled in the 2016-17 budget from Rs. 200 per tonne to
Rs. 400 per tonne.
 The proceeds of the NCEF are being used to finance projects under:
 Green Energy Corridor for boosting up the transmission sector,
 Namami Gange,
 Green India Mission,
 Jawaharlal Nehru National Solar Mission,
 installation of SPV lights and small capacity lights,
 installation of SPV water pumping systems,
 SPV Power Plants and Grid Connected Rooftop SPV Power Plants.
Increasing rural-urban migrations
 Migration is accelerating. In the period 2001-11, according to Census estimates, the annual rate
of growth of labour migrants nearly doubled relative to the previous decade, rising to 4.5 per
cent per annum in 2001-11 from 2.4 per cent in 1991- 2001.
 This acceleration has been accompanied by the surge of the economy.
 As growth increased in the 2000s relative to the 1990s, the returns to migration might have
increased sufficiently to offset the costs of moving, resulting in much greater levels of migration.
 Workforce and Migration for Economic reasons, Census 1991-2011 (% growth)
Changing profile of migrants
 A breakdown by gender reveals that the acceleration of migration was particularly pronounced
for females.
 In the 1990s female migration was extremely limited, and migrants were shrinking as a share of
the female workforce.
 But in the 2000s the picture turned around completely: female migration for work not only grew
far more rapidly than the female workforce, but increased at nearly twice the rate of male
migration.