Economics - III

NATIONAL LAW UNIVERSITY,
ASSAM
B.A.LL.B. (Hons.) Five Years
III Year - V Semester

5.1 Economics - III
Course Compiled By:

Mr. Nayan Jyoti Pathak
Course Instructor:
Mr. Nayan Jyoti Pathak
Academic Session
(2015-16)
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ECONOMICS - III
Semester July – Nov ember

Course code 5.1
Course credit 5
Maximum marks 100
Teaching Hours Required 64
Tutorial/Presentation hours 12 – 15
Medium of instruction English
64 credit hours & 4 credit course Regular
Course Objectives
The course of Economics III basically includes some basic issues of

Indian economy, global economy and the fundamentals of public
finance. The study of Indian economy would help in comprehending
the working of the economic system in India and would also assist
the students in understanding some of the basic problems engulfing
the economy. The study of some important global economic
institutions is v ery much necessary to understand the functioning of
the global economy. The course of Economics III is so designed to
instil the much required knowledge and information in these fields of
study. In addition to this, the course is also concerned with the study
of public finance i.e. the revenue, expenditure and borrowing part
of the government. It also discusses the various forms of taxation
along with the concept of budget. To conclude the basic objectiv es
are as follows:
1. To assist the understanding of the process of Indian economic
system;
2. To get acquainted with the basic issues in the Indian
economy;
3. To get introduced to some of the basic global economic
institutions;
4. To understand the concept and issues therein in the study of
public finance;
5. To identify emerging issues in the subject;
The students shall be introduced to the fundamentals of some of the

basic theories incorporated therein. The course, besides prov iding
the conceptual fodders, intends to ignite the curiosity of the students
regarding the current problems in the field of Indian and world
economy.
Teaching Methodology
The teaching methodology shall be participatory teaching with

discussions on the topics included and connected. The
students are informed in advance the topic for discussion and
the topic of project / assignment they have to prepare. The
students prepare their topics from the sources suggested to
them. The students are also encouraged to do independent
research on their respectiv e assignments. In the classroom
ev ery student is required to present his/her topic and to have
his/her doubt cleared through discussion. The teacher will be
helping and guiding the students in their pursuits of legal
learning. The teacher summarizes after the students have
completed their discussion, and he clarifies the doubts, if any,
and answer their queries.
Course Text Books
There are several books on developmental and env ironmental

economics which may assist students study and research. The
preferred books are: P.K. Dhar, “Indian Economy and Its
Growing Dimensions”; H.L. Bhatia, “Public Economics”, S.B.
Gupta, “Monetary Economics”; R. Jha, “Modern Public
Economics”, R.A. Musgrave, “Theory of Public Finance”; R.K.
Choudhury, “Public Finance and Fiscal Policy”; S.S. Mishra,
“Money, Inflation and Economic Growth”; Economic Survey,
Annual Budget etc. There is a long list of suggested references
being attached separately at the end of course outlines.
Students are adv ised to use references from the said list for their
in-depth knowledge, project research and/or an independent
research for publications.
Course Evaluation Method
The Course is assessed for 100 Marks in total by a close book

examination system. There shall be a Mid-Semester Exam for 20
Marks and End Semester Exam for 50 Marks. 25 Marks are
allotted for the Project work and 5 Marks for attendance. The
question papers shall be designed on application based
questions.
Expected Outcomes of the Course
On completion of the Course the students are expected to

understand the nuances of each module and thereafter they shall
be in a position to understand and relate emerging topics in their
field of study. They are also expected to develop keen interest in the
topics as they are quite relevant in their practical aspects as well.
The proper understanding of the modules shall help the students
comprehend the some of the basic issues in Indian as well as the
global economy.
COURSE CONTENTS
MODULE 1 [20 Teaching Hours]
Indian Economic issues
Agriculture industry of India: cropping seasons, land reforms, green

revolution, minimum support prices, subsidies, marketing, credit,
gov ernment schemes, WTO and Indian agriculture
Industrial Sector: industrial policy statements, disinv estment, special

economic zones, National Manufacturing Policy, infrastructure
Basic issues: pov erty, absolute and relative, causes and

consequences, unemployment, inflation, demand pull and cost push
inflation, wholesale price index and consumer price index, parallel
economy
Compulsory Readings:
1. P.K. Dhar, Indian Economy and Its Growing Dimensions, Kalyani

Publishers, Fifteenth Edition, 2007
2. A.N. Agarwal, Industrial Economy: Problems of Dev elopment and

Planning, New Age International Publishers, Twenty Third Edition, 2007
3. R. Dutt and K. P. M. Sundaram, Indian economy, Sultan Chand

and Sons Educational Publishers, New Delhi, 2012
4. Gov ernment of india, economic Survey(annual), New Delhi
5. Ramesh Singh, Indian Economy, McGraw Hill Education, Fifth

Edition, 2013
6. Uma Kapila, Indian Economy: Performances and Policies, 2013-

2014
India and Global Economy
Indian Financial Market: money market, capital market, financial

intermediaries, financial instruments
Balance of Payment: Concept, current account, capital account,

current account deficit, impact
Exchange rate: concept, determination, purchasing power parity
Global Institutions: The World Bank, International Monetary Fund, The

World Trade Organisation
Compulsory Readings

2. K.C. Rana and K.N. Verma, International Economics, Paperback &

Hardbound 5th (Reprint), 2014 Edition
3. M L Jhingan, Macro Economic Theory, Vrinda Publications (P) Ltd,

2010, 210-280
4. Bharati V. Pathak, The Indian Financial System: Markets, Institutions

and serv ices, Third Edition, Pearson Publication, 2007
5. D.M. Mithani, Modern Public Finance, Himalaya Publishing House,

1998
Public Finance
Public Finance: subject matter, private finance vs. public finance,

role
Public Rev enue: tax rev enue and non – tax rev enue
Taxation: concept, cannons of taxation, types of taxes, rates of

taxation – progressiv e, proportional, regressiv e, concept of impact
and incidence of taxation, effects of taxation, taxable capacity
Benefit principle and Ability to Pay Theory of taxation
Compulsory Readings:
1. R.K. Choudhury, Public Finance and Fiscal Policy, Kalyani

Publishers, New Delhi, 2005
2. R.R Paul, Money Banking and Public Finance, Kalyani Publishers,

2007
3 R.A. Musgrave, Theory of Public Finance, Tata McGraw Hill, 2010
4. R.K. Lekhi, Public Finance, Kalyani Publishers, thirteen Edition, 2006
5. R.A Musgrav e and P.B Musgrave, Public Finance in Theory and

Practice, McGraw Hill, 1976

Public Expenditure
Public Expenditure: concept, cannons of public expenditure, effects
Public Debt: sources, burden of public debt, effect,
Budget: concept, types of budget, system of budgeting, deficits –

budget deficit, rev enue deficit, fiscal deficit
Fiscal Policy: concept, role and significance
Compulsory Readings


2007
5. R.A Musgrav e and P.B Musgrave, Public Finance in Theory and

List of Readings:

2. A.N. Agarwal, Industrial Economy: Problems of Dev elopment and

Planning, New Age International Publishers, Twenty Third Edition, 2007

4. Gov ernment of india, Economic Survey(Annual), New Delhi
5. Ramesh Singh, Indian Economy, McGraw Hill Education, Fifth

Edition, 2013
6. Uma Kapila, Indian Economy: Performances and Policies, 2013-

2014
7. K.C. Rana and K.N. Verma, International Economics, Paperback &

Hardbound 5th (Reprint), 2014 Edition
8. M L Jhingan, Macro Economic Theory, Vrinda Publications (P) Ltd,

2010, 210-280
9. Bharati V. Pathak, The Indian Financial System: Markets, Institutions

and serv ices, Third Edition, Pearson Publication, 2007
10. D.M. Mithani, Modern Public Finance, Himalaya Publishing House,

1998

2007
14. R.A Musgrave and P.B Musgrave, Public Finance in Theory and

17. J.I. Laliwala, The Theory Of Inflation, Vani Educational Book, New
Delhi, 1984
18. R.K. Lekhi, The Economics of Dev elopment and Planning, Kalyani
Publishers, Tenth Rev ised edition, 2005
The list of the articles included in the study material along with the authors is
outlined below:
Sl. Authors/Institutions Titles

No
1 Tripathi and Prasad Agricultural Development in India since
Independence
2 Indian Council of Chapter XXVI

Agricultural Research Pursuit and Promotion of Science
3 R Nagaraj Industrial Policy and performance since
1980: which way now?
4 The WTO Agreement The Agreement Establishing WTO
Series
5 Andrew R. Donaldson Aspects of the New Public Finance
6 Martin A. Weiss International Monetary Fund:
Background and Issues for Congress
7 Barry W. Ickes Lecture Note on the Balance of Payments
8 PILDAT Budget and Budgetary Process in the
Parliament of India
Tripathi and Prasad: Agricultural Development in India since Independence
INDIA, CHINA AND AMERICA INSTITUTE

1549 CLAIRMONT ROAD, SUITE 202 ● DECATUR, GA 30033 USA
WWW .ICAINSTITUTE.ORG
Agricultural Development in India

since Independence: A Study on
Progress, Performance, and
Determinants
Amarnath Tripathi & A.R. Prasad
Journal of Emerging Knowledge on Emerging Markets

Volume 1 Issue 1
November 2009
Published by DigitalCommons@Kennesaw State University, 2009 1

Journal of Emerging Knowledge on Emerging Markets, Vol. 1 [2009], Art. 8
Agricultural Development in
India since Independence: A
Study on Progress,
Performance, and
Determinants
Amarnath Tripathi
Agriculture Economic Research Unit
Institute of Economic Growth
A.R. Prasad
Department of Economics
Banaras Hindu University
Journal of Emerging Knowledge on Emerging Markets

Volume 1 Issue 1
November 2009
Introduction
A
griculture plays an essential role in the process of economic development of less
developed countries like India. Besides providing food to nation, agriculture
releases labour, provides saving, contributes to market of industrial goods and
earns foreign exchange. Agricultural development is an integral part of overall economic
development. In India, agriculture was the main source of national income and occupation
at the time of Independence. Agriculture and allied activities contributed nearly 50 percent
to India’s national income. Around 72 percent of total working population was engaged in
2009 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG PAGE 63

http://digitalcommons.kennesaw.edu/jekem/vol1/iss1/8 2
DOI: 10.7885/1946-651X.1007
AGRICULTURAL DEVELOPMENT IN INDIA SINCE INDEPENDENCE: A STUDY ON PROGRESS,

PERFORMANCE, AND DETERMINANTS
agriculture. These confirm that Indian economy was a backward and agricultural based
economy at the time of Independence. After 61 year of Independence, the share of
agriculture in total national income declined from 50 percent in 1950 to 18 percent in 2007-
08. But even today more than 60 percent of workforce is engaged in agriculture. In spite of
this, it is also an important feature of agriculture that is to be noted that growth of other
sectors and overall economy depends on the performance of agriculture to a considerable
extent. Because of these reasons agriculture continues to be the dominant sector in Indian
Economy.
Since independence India has made much progress in agriculture. Indian agriculture, which
grew at the rate of about 1 percent per annum during the fifty years before Independence,
has grown at the rate of about 2.6 percent per annum in the post-Independence era.
Expansion of area was the main source of growth in the period of fifties and sixties after
that the contribution of increased land area under agricultural production has declined over
time and increase in productivity became the main source of growth in agricultural
production. Another important facet of progress in agriculture is its success in eradicating of
its dependence on imported foodgrains. Indian agriculture has progressed not only in output
and yield terms but the structural changes have also contributed. All these developments in
Indian agriculture are contributed by a series of steps initiated by Indian Government. Land
reforms, inauguration of Agricultural Price Commission with objective to ensure
remunerative prices to producers, new agricultural strategy1, investment in research and
extension services, provision of credit facilities, and improving rural infrastructure are some
of these steps.
Notwithstanding these progresses, the situation of agriculture turned adverse during post-
WTO period and this covered all the sub sectors of agriculture. The growth rates in output
of all crops decelerated from 2.93 percent to 1.57 percent. The livestock declined from 4.21
percent to 3.40 percent. The fisheries declined from 7.48 percent to 3.25 percent. Only,
forestry witnessed a sharp increase from 0.09 percent to 1.82 percent.
1
In order to achieve the goal of self sufficiency in agriculture, new agricultural
strategy has been initiated in 1966-67. The fundamental of this strategy is the
application of science and technology for increasing yield per hectare. This strategy,
known as New Agricultural Strategy or Green Revolution, is based on the extension of
high yielding varieties responsive to heavy doses of fertilizers and the package of
improved practices in selected areas with assured rainfall or irrigation facilities. The
programmes included under the new strategy are: (1) the high yielding varieties
programme, (2) multiple cropping programme, (3) integrated development of dry areas,
(4) plant protection measures, (5) increased use of fertilizers, and (6) new irrigation
concept.
PAGE 64 2009 JOURNAL OF EMERGING KNOWLEDGE ON EMERGING MARKETS ● WWW .ICAINSTITUTE.ORG


The crop sector, which forms largest segment of agriculture, showed poorest growth during
post-WTO period in comparison to all other periods. Further, within crop sector, all crops
except sugar showed declining trend between initial years of reforms and post-WTO period.
This deceleration is very high in Cereals, Corse Cereals, Pulses, Oilseeds, and Drugs &
Narcotics. The growth rate turned negative in the case of pulses.
Both dominant nature of agriculture and decelerating growth trend in agriculture attracts
attention of policymakers, researchers and economists. The main cause of failure of all
development policy for agriculture is that there is no availability of any separate
development strategy2 for Indian agriculture. This is due to the fact that we had not
available necessary data to study the characteristics of Indian agriculture. But presently we
have come a long way from Independence and now we have long-terms data pertaining to
Indian agriculture. So, the present study makes attempt to fill this gap.
In this context, the present paper extensively evaluates performance and progress of Indian
agriculture since Independence. Besides comparing facts and figures, we also examined
sources of agricultural growth and instability of Indian agriculture for evaluating
performance and progress of Indian agriculture. The paper also finds out determinates of
agricultural production by using production function approach and verifies the results of
decomposition of agricultural growth. This paper covered period from 1950-51 to 2005-06.
We have chosen 1950-51 as starting period because all required data is not available (some
data are available but sources are not authentic) for period before 1950-51 and 2006-07 as
end period because the most recent data pertained to 2006-07 at the time of finalising the
paper.
The rest of the paper is organized as follows. Section (ii) reviews previous agricultural
policies. Section (iii) evaluates changes and performance of Indian agriculture since
Independence. In this section, we discussed change in whole scenario of Indian agriculture
over period of time. Section (iv) guesstimate sources of agricultural growth by
decomposition analysis. Section (v) calculates instability in production, area, and yield of
principal crops. Section (vi) estimates determinants of agricultural production by production
function approach. Concluding remarks are presented in the final section.
Agricultural Policy: A Review

In this section, we try to trace out the principle government policies for promoting
agricultural development. For the overall development of Indian agriculture, many
institutional and infrastructural changes have been introduced since Independence. Broadly,
agricultural policy followed during this period can be distinguished in four phases: first
phase considered from 1947 to mid sixties, second phase considered period from mid-
2Agriculture production is a biological process, agriculture is diminishing returns activity because land is
ultimately a fixed factor of production and the demand for agricultural commodities is income inelastic.
These characteristics make different to agriculture from other sector. Therefore, a separate policy for
agricultural development is must.

DOI: 10.7885/1946-651X.1007

sixties to 1980, third phase included period from 1980 to 1991, and forth phase includes
period from 1991/92 onwards.
The first phase of agricultural policy witnessed tremendous agrarian reforms, institutional
changes, development of major irrigation project and strengthens of cooperative credit
institution. The most important contribution of land reforms was abolition of intermediaries
and giving land titles to the actual cultivators. This released productive forces and the
owner cultivators put in their best to augment production on their holdings. Land reforms
were important in increasing agricultural production during this phase. The Community
Development Programme, decentralised planning and the Intensive Area Development
Programmes were also initiated for regenerating Indian agriculture that had stagnated
during the British period. In order to encourage the farmers to adopt better technology,
incentive price policy was adopted in 1964 and the Agricultural Price Commission was set
up to advice the Government on the fixation of support prices of agricultural crops. Despite
the institutional changes and development programmes introduced by the Government
during this phase, India remained dependent upon foreign countries for food to feed the
rising population.
The second phase in Indian agriculture started in mid 1960s with adoption of new
agricultural strategy3. The new agricultural strategy relies on high-yielding varieties of
crops, multiple cropping, the package approach, modern farm practices and spread of
irrigation facilities. The biggest achievement of this strategy has been attainment of self
sufficiency in foodgrains. Agrarian reforms during this period took back seat while
research, extension, input supply, credit, marketing, price support and spread of technology
were the prime concern of policy makers (Rao, 1996).
The next phase in Indian agriculture began in early 1980s. This period started witnessing
process of diversification which resulted into fast growth in non-foodgrains output like
milk, fishery, poultry, vegetables, fruits etc which accelerated growth in agricultural GDP
during the 1980s (Chand, 2003). There has been a considerable increase in subsidies and
support to agriculture sector during this period while public sector spending in agriculture
for infrastructure development started showing decline in real term but investment by
farmers kept on moving on a rising trend (Mishra and Chand, 1995; Chand, 2001).
The fourth phase of agricultural policy started after initiation of economic reform process in
1991. Economic reforms process involved deregulation, reduced government participation
in economic activities, and liberalization. Although there is no any direct reforms for
agriculture but the sector was affected indirectly by devaluation of exchange rate,
liberalization of external trade and disprotection to industry. During this period opening up
of domestic market due to new international trade accord and WTO was another change that
affected agriculture. This raised new challenges among policymakers. Because of this, a
New Agricultural Policy was launched by Indian Government in July 2000. This aims to
3 This is also known as Green Revolution strategy.


attain output growth rate of 4 percent per annum in agriculture sector based on efficient use
of resources. It seeks to achieve this objective in a sustainable manner and with equity. This
was first time when government released a national agriculture policy. The policy document
discusses what ought to be done in agriculture but the subsequent step, how and when
policy goals and objective would be achieved is not discussed (Chand, 2003). Therefore, it
is highly desirable to prepare action plans at both centre and state level in quantity terms to
implement the new policy agenda in a time bound framework.
Changing Agrarian Economy since Independence

In this section we focused on how agrarian economy has changed since Independence.
Keeping this view in mind this section follows land use pattern, population and agricultural
workers, distribution of operational holding, and cropping pattern.
Land Use Pattern

The basic factor in agriculture is land. A knowledge about land use pattern is vital to
understand whether the utilisation of land in India is at its full potential or far from its full
potential. In India the classification of land has had its roots in agricultural statistics. Till
1950, the land in India was broadly classified into five categories: (i) Area under forests; (ii)
Area not available for cultivation; (iii) Uncultivated lands including current fallows; (iv)
Area under current fallows; and (v) Net area sown. But then it was realised that such a
classification did not give a clear picture of the actual area under different categories of land
use required for agricultural planning. Hence, a reclassification was adopted from March
1950. Under it, land in India now classified under nine different categories. These are as: (i)
forests; (ii) barren and uncultivable lands; (iii) land put to non-agricultural uses; (iv)
cultivable wastes; (v) permanent pastures and other grazing lands; (vi) miscellaneous tree
crops and groves not included in the net area sown; (vii) current fallows; (viii) other
fallows; and (ix) net sown area.
Table 1 shows changes in land use pattern in India since 1950/51.The total geographical
area of the country is 328726 thousand hectares in which 93 percent area is reporting area
which means that the area for which record is available. It was 88 percent in 1950/51. The
net sown area has risen by 18.44 percent from 1950/51 to 2000/01. The net sown area is
only 46 percent of total reporting area that was 41 percent of total reporting area in 1950/51.
The area under non agricultural use has increased from 12690 thousand hectares to 24070
thousand hectares since 1950/51. But barren and uncultivable land has fallen from 37484
thousand hectares to 17709 thousand hectares. Both the cultivable waste land and fallow
land have also decreased during this period. But even today 4.4 percent of total reporting
area is available as a cultivable waste land and 4.8 percent of total reporting area is fallow
land. This indicates that there is scope to increase the net sown area by at least 5 to 10
percent by improving both cultivable waste land and fallow. Gross sown area was 131893
thousand hectares in 1950/51 and it has increased to 185704 thousand hectares in 2001/02.

DOI: 10.7885/1946-651X.1007

This shows that only 11 percent of net sown area was used for more than one crop in
1950/51 and this figure increased to 31 percent in 2001/02. This point out that gross sown
area can be increased by 70 percent of net sown area through intensive cropping.
Table 1: Changes in Land Use Pattern in India from 1950-51 to 2001-02

(In Thousand Hectares)
Category 1951-52 1961-62 1971-72 1981-82 1991-92 2001-02
Geographical Area 328726 328726 328726 328726 328726 328726
Reporting Area for 287827 299151 304141 304272 304900 305014
land use (87.56) (91) (92.52) (92.56) (92.75) (92.79)
Area under non 12690 14795 16972 19686 21465 24070
agricultural use (4.41) (4.95) (5.58) (6.47) (7.04) (7.89)
Barren and 37484 35921 27996 20010 19270 17709
uncultivable land (13.02) (12.01) (9.20) (6.58) (6.32) (5.81)
Net sown area 119400 135399 139721 141928 141632 141416
(41.48) (45.26) (45.94) (46.64) (46.45) (46.36)
Gross sown area 131893 152772 165791 172630 185742 185704
Cropping Intensity 111 115 118 123 130 131
Forest land under 48889 54189 63771 67422 67866 69511
good tree cover (16.98) (18.11) (20.97) (22.15) (22.25) (22.79)
Misc. tree crops 7881 4500 4284 3715 3761 3370
and groves (2.73) (1.50) (1.41) (1.22) (1.23) (1.10)
Cultivable 23929 18632 17456 16475 14994 13405
wastelands (8.31) (6.23) (5.74) (5.41) (4.92) (4.39)
Current fallows 13808 11155 12669 13173 14672 14643
(4.80) (3.73) (4.16) (4.33) (4.81) (4.80)
Old fallows 15154 10478 8312 9862 9941 10304
(5.26) (3.50) (2.73) (3.24) (3.26) (3.38)
Permanent 8592 14082 12960 12007 11299 10586
pastures and (2.98) (4.70) (4.26) (3.95) (3.71) (3.47)
grazing lands
Note: figure in parentheses indicate percentage to Reported Area

Source: Agricultural Statistics at a Glance (2008)
Changing Agricultural Structure

We look at changing structure of Indian agriculture in terms of employment and land
holding. The share of agriculture in employment declined from about 82 percent in 1950/51
to about 72 percent by 2001. During the same duration, the share of agriculture in total GDP
also declined from 54.66 percent in 1950/51 to 24 percent by 2001.Among agricultural
workforce about 45.6 percent are registered as agricultural labour and the rest, i.e., 54.4
percent as cultivators while 28.1 percent was registered as agriculture labour and the rest as


cultivators in 1950/51. This indicates that agricultural workforce shifted from cultivators to
agricultural labours (see Table 2).
Table 2: Population and Agricultural Workers in India since 1950-5

(In Millions)
Average
Annual Share of
Total Rural Agricultural
Year Exponential Cultivators Total Agriculture
Population Population Labourers
Growth Rate to GDP (%)
(%)
27.3 140.0
1951 361.1 1.25 298.6 (82.7) 69.9 (71.9) 54.66
(28.1) (100.0)
188.7
1961 439.2 1.96 360.3 (82.0) 99.6 (76.0) 31.5 (24.0) 49.14
(100.0)
180.4
1971 548.2 2.22 439.0 (80.1) 78.2 (62.2) 47.5 (37.8) 43
(100.0)
244.6
1981 683.3 2.20 523.9 (76.7) 92.5 (62.5) 55.5 (37.5) 37.5
(100.0)
185.3
1991 846.4 2.14 628.9 (74.3) 110.7 (59.7) 74.6 (40.3) 30.32
(100.0)
234.1
2001 1028.7 1.95 742.6 (72.2) 127.3 (54.4) 106.8 (45.6) 24
100.0)
Note: figure in parentheses indicate percentage to Reported Area
There were 48900 million operational holding in 1960/61 and covered area of 131400
million hectares. These operational holding increased to 115580 million in 2000/01and
covered area of 163357 million hectares. It shows that the number of operational holding
has increased by about 66680 million units but the area covered by then has not
significantly increased. It implies that size of operational holding has been reducing.
Table 3 shows that the number of marginal and small holdings and the area under such
holdings has increased while the number of semi-medium, medium, and large holdings and
the area under such holdings has reduced. It reveals that the inequalities in the distribution
of land among the cultivators has reducing trend but the number of uneconomic holdings
has an increasing trend, i.e., small and marginal holdings are increasing in both number and
percentage.

DOI: 10.7885/1946-651X.1007

Table 3: The Percentage Distribution of Operational Holding by Size Class,

1960-61 to 2000-01
(i) Share in Number of Holding (In Percentage)

Category of holdings 1960-61 1970-71 1980-81 1990-91 2000-01
Marginal 40.69 50.6 56.4 59.4 63.0
Small 22.29 19.1 18.1 18.8 18.80
Semi-Medium 18.8 15.2 14.0 13.1 11.7
Medium 13.4 11.3 9.1 7.1 5.4
Large 4.9 3.9 2.4 1.6 1.02
(ii) Share in Operated Area (In Percentage)
Marginal 6.6 9.0 12.0 15.1 18.82
Small 12.17 11.9 14.1 17.4 20.18
Semi-Medium 19.93 18.4 21.2 23.2 23.96
Medium 30.51 29.8 19.6 27.0 23.84
Large 30.74 30.9 23.0 17.3 13.21
(iii) Average Size (In Hectares)
Marginal 0.41 0.39 0.39 0.40
Small 1.44 1.44 1.43 1.41
Semi-Medium 2.81 2.78 2.76 2.72
Medium 6.08 6.02 5.9 5.80
Large 18.1 17.41 17.33 17.18
Note: 1. Marginal – 0 to 1 hectare; Small – 1 to 2 hectare; Semi-medium – 2 to 4
hectare; Medium – 4 to 10 hectare; and Large – 10 and above hectare.
Source: Agricultural Census Division, Ministry of Agriculture, New Delhi.
Changes in Cropping Pattern

Cropping pattern means the proportion of area under different crops at a particular period of
time. A change in cropping pattern means a change in the proportion under different crops.
Table 4 indicates that the area under non-food crops as a proportion of the total cropped
area is increasing but still there is dominance of food crops. At the beginning of the
economic planning in India, 76.7 percent land was put under food crops and about 23.3
percent on non-food crops. By 2001, area under food crops had come down to 65.83 percent
and under non-food crops has increased to 34.17 percent. This shift in the allocation of area
from food crops to non-food crops reflect a change from subsistence cropping to
commercial cropping. This shifting of land from food crops to non-food crops was mainly
influenced by the prevailing price in market and profitability per hectare.
Similarly, here it can also be concluded that, there is preponderance of cereals, about 54.43
percent of the area is devoted to the production of cereals, while only 11.4 percent is
devoted to pulses. Though, the area under both cereals and pulses is increasing but the rate
of increase in area under cereals is greater than that of pulses. It means whatever cropped
area increased as a result of irrigation facilities, chemical fertiliser, and high yielding
varieties of seeds, a greater part of it is devoted to foodgrains. Within cereals, area under


coarse cereals is gradually declining since 1950/51. This is due to fact that coarse cereals
are inferior goods.
Table 4: Changes in Cropping Pattern in India since 1950-51

(In Percent)
Crops 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01
Rice 23.5 22.3 22.6 23.3 23 24.03
Wheat 7.6 8.5 11 12.8 12.9 13.84
Corse Cereals 29.9 29.4 27.8 24.6 19.6 16.55
Total Cereals 61.1 60.2 61.4 60.8 55.5 54.43
Total Pulses 15.6 15.5 14 13.2 13.5 11.4
Total Foodgrains 76.7 75.7 75.4 73.9 68.9 65.83
Sugarcane 1.3 1.6 1.6 1.7 2.1 2.49
Condiments & 0.9 1 1.1 1.2 1.3 1.5
Spices
Fruits & Vegetable 1.7 1.9 2 1.7 3.6 4.39
Total Oilseeds 8.3 8.3 8.9 9.1 13.5 13.56
Total Fibres 5.1 5.7 5.5 5.3 4.7 5.22
Tobacco 0.3 0.3 0.2 0.3 0.2 0.16
Furthermore, Table 4 also shows that area under fruits and vegetables and oilseeds is
gradually increasing since 1950/51. This is because the consumption pattern is shifting from
cereals to non-cereals. This phenomenon can be seen in Tables 5 and 6.
Table 5: Trends in Food Consumption Pattern from 1972-73 to 2004-05, All

India (Rural)
% share of major food groups in total expenditure

Sector Year All Cereals Pulses
Milk & Edible Egg, Fish Vegeta Fruits & Sugar Beverages
food milk oil & meat bles nuts & etc
products
Rural 72-73 72.9 40.6 4.3 7.3 3.5 2.5 3.6 1.1 3.8 2.4
87-88 64.0 26.3 4.0 8.6 5.0 3.3 5.2 1.6 2.9 3.9
93-94 63.2 24.2 3.8 9.5 4.4 3.3 6.0 1.7 3.1 4.2
99-00 59.4 22.2 3.8 8.8 3.7 3.3 6.2 1.7 2.4 4.2
04-05 55.0 18.0 3.1 8.5 4.6 3.3 6.1 1.9 2.4 4.5
st
Source: 61 Round Report of NSS, Ministry of Statistics and Programme implementation, New
Delhi.

DOI: 10.7885/1946-651X.1007

Table 6: Trends in Food Consumption Pattern from 1972-73 to 2004-05, All

India (Urban)
% share of major food groups in total expenditure

Sector Year All Cereals
Pulses Milk & Edible Egg, Fish Vegeta Fruits & Sugar Beverages
food milk oil & meat bles nuts & etc
products
Urban 72-73 64.5 23.3 3.4 9.3 4.9 3.3 4.4 2.0 3.6 7.6
87-88 56.4 15.0 3.4 9.5 5.3 3.6 5.3 2.5 2.4 6.8
93-94 54.7 14.0 3.0 9.8 4.4 3.4 5.5 2.7 2.4 7.2
99-00 48.1 12.4 2.8 8.7 3.1 3.1 5.1 2.4 1.6 6.4
04-05 42.5 10.1 2.1 7.9 3.5 2.7 4.5 2.2 1.5 6.2
st
Source: 61 Round Report of NSS, Ministry of Statistics and Programme implementation, New
Delhi.
Following inferences can be drawn in these two tables.

1. The share of food in the total budget expenditure of a household has been showing a
decline over the years in both rural and urban sector. In rural all India, the share of
food declined from 72.9 percent in 1972-73 to 55 percent in 2004-05 and in urban
all India it declined from 64.5 percent in 1972-73 to 42.5 percent in 2004-05.
2. Although cereal continues to be the important constituent of a household’s food
bosket, its share in total budget is declining.
3. The share of pulses is also showing declining trend.
4. The consumption of vegetables and fruits, milk, meat, egg, and fish, and edible oil
has shown an increase.
The structural shift in consumption pattern is on account of the consumption diversification
effect because of easy access to supply, changed tastes and preferences, and change in
relative prices (Radhakrishna and Ravi 1992; Kumar 1998; Murthy 2000). Increasing
urbanization and economic growth reduces per capita demand for cereals and increases the
demand for non-cereals food items. Modernisation of agricultural also bears a similar
negative relationship with the per capita consumption of cereals. Mechanization of
agricultural activities and improvement in infrastructure also contribute to reduction in
energy requirement and thus less cereal consumption (Rao 2000).
Performance of Indian Agriculture
Output Growth
Agricultural growth is one of the main facets of India’s economic development and national
food sufficiency policies. Tables 7-8 show the growth rate of agriculture by sector and


different crop wise. The aggregate agricultural output increased annually at 2.6 percent
during period from 1950/51-2006/07. Disaggregating of aggregate agricultural output
growth into sub periods shows that annual growth rate of agriculture was the highest during
the period 1981/82-1990/91 and the lowest during period 1950/51-1965/66. Further
disaggregating of agriculture into sub sectors; crop, livestock, forestry, and fishing, shows
that fisheries and livestock were the main sources of the acceleration in growth rate of
agricultural output in 1980s. The growth rate of aggregate agricultural output turned up
3.29 percent during the initial years of reforms, which was 0.43 percentage point higher
than the previous period. However, the situation of agriculture turned adverse during post-
WTO period and this covered all the sub sectors of agriculture. The growth rates in output
of all crops decelerated from 2.93 percent to 1.57 percent. The livestock declined from 4.21
percent to 3.40 percent. The fisheries declined from 7.48 percent to 3.25 percent. Only,
forestry witnessed a sharp increase from 0.09 percent to 1.82 percent.
Table 7: Average Annual Compound Growth in Value of Output

(Group Wise)
(In Percent)
Group 1950/51 - 1966/67 - 1981/82- 1991/92- 1950/51 -
1965/66 1980/81 1990-91 2006/07 2006/07
Crop 2.4 2.6 2.4 2.2 2.5
Livestock 1.3 3.2 4.4 3.4 3.1
Forestry 1.3 00 00 1.5 0.6
Fishing 4.5 3.1 5.8 4.0 4.2
Aggregate 2.1 2.5 2.8 2.6 2.6
Note: Annual compound growth rates have been calculated by using log linear model
Table 8: Average Annual Compound Growth in Value of Output

(Crop Wise)
(In Percent)
Crop 1950/51 - 1966/67 - 1981/82- 1991/92- 1950/51 -
1965/66 1980/81 1990-91 2006/07 2006/07
Rice 3.6 2.6 4.0 0.9 2.5
Wheat 3.4 6.4 3.2 1.4 4.7
Coarse Cereals 1.6 0.9 0.7 0.5 0.9
Pulses 1.1 0.5 1.6 0.4 0.6
Oil seeds 2.5 1.4 5.4 0.7 2.6
Sugar 4.4 2.5 2.6 4.1 2.9
Fibres 3.1 2.1 2.6 1.6 2.2
Drugs & Narcotise 2.1 3.2 2.2 2.6 2.7
Condiments & 2.5 3.2 4.5 4.9 3.3
Spices
Fruits & Vegetables 1.8 4.3 2.1 4.3 3.8
Others 00 0.4 00 4.6 0.6
Note: Annual compound growth rates have been calculated by using log linear model

DOI: 10.7885/1946-651X.1007

The crop sector, which forms the largest segment of agriculture, grew annually at 2.5
percent since 1950/51. The acceleration rate of crop sectors fluctuated around 2.5 percent
during all sub periods. It grew at the lowest rate during post-WTO period in comparison to
all other periods. Further, within crop sector, all crops except sugar, condiment, spices,
fruits and vegetables showed declining trend between 1950/51-1965/66 and 1991/92-
2006/07. This deceleration is very high in Cereals, Corse Cereals, Pulses, Oilseeds, and
Drugs & Narcotics. Similar declining trend in growth rate of all crops is also confirmed by
Table 9 that shows average annual compound growth rate of output in physical term for all
major crops.
Table 9: Average Annual Compound Growth in real term

(Crop Wise)
(In Percent)
Crop 1950/51 - 1950/51 - 1966/67 - 1981/82- 1991/92- 1950/51 -
2006/07 1965/66 1980/81 1990-91 2006/07 2006/07
Rice 2.5 3.6 2.6 4.1 1.0 2.5
Wheat 4.7 3.7 6.3 3.3 1.4 4.7
Coarse Cereals 0.9 2.2 0.9 0.7 0.7 0.9
Pulses 0.5 1.6 0.2 1.4 0.2 0.5
Oil seeds 2.9 2.8 2.1 5.6 0.9 2.9
Cotton 2.4 3.6 2.5 3.2 2.7 2.4
Jute & Mesta 1.5 4.4 2.1 0.7 1.5 1.5
Sugarcane 3.1 6.2 3.0 2.9 0.8 3.1
Tobacco 1.5 2.4 2.1 0.0 -0.1 1.5
Potato 5.4 5.4 7.2 4.9 3.1 5.4
Note: Annual compound growth rates have calculated by using log linear model
These growth rates are lower than the growth rate of rural population. Thus, the clear
implication of this growth trends is that the per capita output in agriculture is declining.
This seems to be one of the causes for rising disparity between rural and urban areas in
India.
Net Availability of Foodgrains
Table 10 shows net availability of foodgrains for per capita per day. An average availability
of foodgrains per capita per day was 429.8 gram in 1950s and increased to 475.5 gram
during 1990s. Further, it decreased to 446.6 gram in the first decade of 21st century. Within
foodgrains, all food crops reveals similar trend except coarse cereals. The availability of
coarse cereals is continuously declining.


Table 10: Net availability of foodgrains (per day) India

(In Grams Per Capita per day)
Decades Rice Wheat Other Cereals Gram Pulses Foodgrains
Cereals
1951-60 178.1 65.9 119.4 363.4 27.5 66.4 429.8

1961-70 188.3 91.1 113.5 392.9 22.6 54.7 447.5
1971-80 183.0 114.8 100.9 398.7 17.0 43.5 442.2
1981-90 198.1 143.3 83.2 424.6 13.2 39.6 464.2
1991-2000 209.3 162.7 67.7 439.7 12.3 35.8 475.5
2001-2005 194.7 159.9 59.0 414.2 9.8 32.4 446.6
Input Use Pattern
Agricultural production and efficiency largely depend upon the inputs applied and the
methods adopted. In India, “while population grows, the land surface is fixed and of this
only a certain proportion is available for cultivation” (Planning commission, 1961). Further
scope for bringing extra land under the plough is limited. If more production is to be got out
of this existing area, the problem has to be tackled on a wide front. This can be done by
applying inputs in a more intensive way and by adopting modern methods of production
through use of improved technology, besides making an adequate provision for institutional
financing, better methods of marketing, etc.
Technical factors, i.e., technology have received increasing emphasis and the recent
breakthrough in agriculture is the outcome of these factors. These technological factors
comprise (i) irrigation; (ii) Consumption of fertilisers and manure; (iii) Improved seed, and
(iv) agricultural implements.
Water is another basic factor in agriculture next only to land. Only rainfall is the natural
source of water in agriculture. But rainfall is the most unreliable and is marked by wide
variations in different parts and also variation from year to year in its quantity, incidence,
and duration. Therefore, only artificial supply of water through irrigation is the way to
overcome the problem of deficiency of water. Irrigation water comes from two sources:
surface water and ground water. Surface water is provided by the flowing water of rivers or
the still water of tanks, ponds, lakes, and artificial reservoirs. The surface water is carried to
the filed by canals, distributaries, and channels. Ground water is tapped by sinking wells
where drought animals, diesel or electric power is utilized to take out water. In india canals,
tanks, wells including tubewells are the principal sources of irrigation. Since 1950-51,
considerable importance had been attached to the provision of canal irrigation and well
irrigation. Even though 40 percent of irrigation is supplied by canals, now well irrigation
has caught up rapidly irrigation by tubwells has been expanded considerably. In the
meantime, tanks and other source of irrigation are declining in importance (see Table 11).

DOI: 10.7885/1946-651X.1007

Table 11: Sources of Irrigation

Sources 1950/51 1970-71 2000/01
Area (Million % Area (Million % Area (Million %
ha) ha) ha)
Canals 8.29 44.0 12.80 40.5 17.1 31.3
Wells 5.98 31.7 12.10 38.3 30.9 56.6
including
tubewells
Tanks 3.61 19.1 4.10 13.0 3.1 5.7
Others 0.97 5.2 2.60 8.2 3.5 6.4
Total 18.85 100 31.60 100 54.6 100
st
Source: Indian Agriculture in brief, 21 Edn, 1986 CMIE, Statistical Abstract, India, 2004
Table 12 shows that the net irrigated area has risen by 163 percent from 1950/51 to
2000/01. This increment in irrigated area is very nominal and only 39 percent of net sown
area is irrigated area. This figure is very unsatisfactory and it is matter of concern that why
only 39 percent of net sown area is irrigated area. It is also concerning matter that growth in
gross irrigated area is also very nominal. Thus, there is scope to increase agricultural
production by increasing both net and gross irrigated area.
Table 12: Changes in Irrigated Area in India from 1950-51 to 2000-01

(In Thousand Hectares)
Category 1950-51 1960-61 1970-71 1980-81 1990-91 2000-01
Net irrigated area 20853 24661 31103 38720 48023 54836
Gross irrigated area 22563 27980 38195 49775 63204 75821
Irrigation intensity 108 113 123 128 132 138
(In percent)
Note: Irrigation intensity is calculated by author.
Source: Agricultural Statistics at a Glance (2008
In any scheme for boosting agricultural output, the use of chemical fertiliser has an
important role. India’s soil though varied and rich in deficient in nitrogen and phosphorus-
two plants nutrients which together with organic manure influence crop return, which
population rising at a first rate, the use of larger and larger doses of chemical fertiliser is the
only way to augment our foodgrains production. The new agricultural strategy was based on
increased use of fertiliser.
Since adoption of the new agricultural strategy in the sixties, the consumption of chemical
fertiliser has been growing rapidly. The Government is also encouraging the use of fertiliser
through heavy subsidies. That is why the consumption has gone up abnormally high from
70000 tonnes in 1950-51 to 2,177,000 tonnes in 1970-71, 12,546,000 tonnes in 1990-91 and


19,145,000 tonnes in 1999-2000 (see Table 13). The fertiliser consumption per hectare of
gross cropped area has also gone up steadily, from 0.50 kg in 1950-51 to 74 kg in 1995-96.
The corresponding figures for developed countries are much higher than the Indian
Agriculture (see Table 14).
The low consumption may be due to the poor economic condition of farmers, lack of
assured irrigation (58.5 % of the cropped area lack irrigation facilities), inadequate
demonstration and promotion for the use of fertilisers, insufficient supply at the proper
time, high price of fertiliser, absence of soil testing facilities so as to recommended the
precise deficiencies in the soil and recommended proper dose of fertiliser, and wrong notion
among some conservative farmers regarding the use of chemical fertilisers.
Improved seeds have played vital role in augmenting agricultural production in developing
countries like India. These seeds not only help in increasing in agricultural production by 10
to 20 percent but introducing new characteristics in the biological structure of the plant. For,
example researches have made it possible to develop such seeds which are quick maturing,
provide higher agricultural yield and are resistant to insects, diseases and droughts. In India
the success of Green Revolution is partly associated with the use of high yield variety
(HYV) seeds. The HYV programme was started in 1966. Between 1967-68 and 1996-97
the area under HYVP has witnessed 12.6 times increase (from 6.07 million ha to 76 million
ha). The success of the programme remains most marked in the case of wheat and rice. The
HYV programme has led to 4.84 times increase in the output of wheat from 1966-67 (11.39
million tonnes) to 1990-91 (51.1 million tonnes) and 1.78 times increase in the production
of rice from 1967-68 (37.6 million tonnes) to 1990-91 (74.3 million tonnes).
The implements and tools used by the Indian farmers are primitive, crude, and obsolete
which impede the development of modern agriculture. New farm machineries not only save
time, reduce cost of production but also increase agricultural production. These machineries
replace the animal and human power and perform various works of agriculture ranging
from ploughing, showing, and harvesting to the marketing of the produce. There is
difference of opinion amongst scholar regarding the mechanisation of agriculture. In fact
small and scatter land holding, cheap and abundant human labour and poverty amongst
farmers go against total mechanisation of Indian agriculture but the possibility of limited
mechanisation is not ruled out. In many cases where the use of animal and human power
has become costlier, mechanization is proving to be boon for agriculture. Even small
farmers prefer to use these machineries to save the time and money.

DOI: 10.7885/1946-651X.1007

Table 13: Production, Import, and Consumption of Fertiliser

(In thousand tonnes)
1950/51 1960/61 1970/71 1980/81 1990/91 2000/01
A. Nitrogen
Production 09 98 830 2164 6993 10961
Imports 399 477 1510 414 154
Consumption 210 1487 3678 7997 10920
B. Phosphatic
Production 09 52 229 841 2052 3743
Imports 32 452 1016 396
Consumption 53 462 1214 3221 4215
C. Postassic
Production
Imports 20 120 797 1328 1541
Consumption 29 228 624 1328 1567
D. All fertilisers
Production 39 150 1059 3005 9045 14704
Imports 52 419 629 2759 2758 2090
Consumption 70 292 2177 5516 12546 16702
Source: Indian Economic Survey, 2002-03
Table 14: Fertiliser Consumption per Hectare of Agricultural Land in

Selected Countries in 2004-05
(In KG per Hectare)
Countries N P K Total
Egypt 476.2 67.6 11.3 555.1
Bangladesh 128.6 37.4 18.5 184.5
India 65.0 25.7 11.4 102.1
Japan 116.0 137.4 109.5 362.9
Korea Rep. 208.3 82.9 103.5 394.7
Pakistan 92.6 26.6 NA 119.2
Sri Lanka 69.3 14.8 25.8 109.9
Belarus 47.7 12.1 55.6 115.4
Denmark 80.3 13.0 36.7 130.0
France 80.1 26.0 33.1 139.2
Germany 104.5 21.1 28.1 153.7
Netherlands 142.4 29.6 77.4 249.4
Norway 101.4 12.4 44.7 158.5
Poland 53.4 24.8 37.9 116.1
United Kingdom 66.8 16.0 22.3 105.1


Studies show that sufficient progress has been made in respect of farm mechanisation in
India. For example, the number of tractors which was less than 10000 in 1950-51 increased
to 1 lakh in 1970-71 and 14.5 lakhs in 1990-91. Similarly, the number of diesel pump sets
increased from 80,000 in 1950-51 to 48.5 lakhs in 1990-91 and electric irrigation pump sets
from 26,000 in 1950-51 to 91 lakhs in 1990-91. But most of the mechanisation has largely
been confirmed to the rich farmers belonging to the developed areas of the country.
Sources of Growth in Indian Agriculture

Any change in the output of a crop in physical term4 depends fundamentally on the changes
in the area under the crop and its average yield. To measure the effect of area, productivity
and their interaction in increasing the crop output, differential equation given by Sharma
(1977) was used:
∆ P = A ∆Y + Y ∆A + ∆A ∆Y … (1)
The first term on the right hand side is considered as yield effect, second term as the area
effect and the third as the interaction effect. Thus, total change in output can be
decomposed into three effects; yield effect, area effect, and the interaction effect due to
change in yield and area.
During 1950/51-1965/66, area and yield both almost equally contributed in growth of rice,
wheat, and coarse cereals. But for non-food crops, expansion area was dominant source of
output growth (see Table 15).
During 1965/66-1980/81, increase in yield was comparatively more contributed in output

growth of all major crops except Wheat and Jute and Mesta. For Wheat, 40.49 percent of
output growth was contributed by expansion in area and 34.46 percent was contributed by
increase in yield. Remaining part (25 percent) of output growth of Wheat was contributed
by interaction of area and yield (see Table 16).
During 1981/82-1990/91, an increase in yield was more contributed in output growth of all
major crops except oilseeds and sugarcane (see Table 17).
4 Agricultural output may be measured either in nominal or physical terms. The output measured in
physical term obviates the need for incorporation of price effect in decomposition of the changes in
output.

DOI: 10.7885/1946-651X.1007

Table 15: Sources of Agricultural Growth in Period: (1950/51-

1965/66)
Crop Change in Area Effect Yield Effect Interaction
Output Effect
Rice 10010 3112.7 (31.1) 5991.1 (59.85) 906.16 (9.05)
Wheat 3940 1868.43 (47.42) 1606.83 (40.78) 464.74 (11.79)
Coarse 6040 2723.24 (45.1) 2817.82 (46.65) 498.93 (8.26)
Cereals
Pulses 1530 1600.83 (104.63) -57.27 (-3.74) -10.89 (-0.7)
Oil seeds 1240 2174.12 (175.33) -665.26 (-53.65) -280.24(-22.6)
Cotton 307.7 183.04(59.49) 94.08(30.57) 33.28(10.82)
Jute & Mesta 444.6 563.22(126.68) -60.99(-13.72) -57.78(-13)
Sugarcane 66940 37767(56.42) 17604(26.30) 11633(17.38)
Tobaco 30 14.62(48.73) 16.92(56.4) 0.94(3.13)
Potato 2420 1660.1(68.60) 383.04(15.83) 383.04(15.83)
Table 16: Sources of Agricultural Growth in Period: (1966/67 -

1980/81)
Output Effect
Rice 11890 3598.7 (30.3) 7431.4 (62.5) 879.12 (7.4)
Wheat 20440 8276.38 (40.49) 7044.7 (34.46) 5118.93(25.04)
Coarse 4970 -1765.48 (-35.52) 7269.1(146.26) -533.61(10.74)
Cereals
Pulses 2280 128.18 (5.62) 2123.52(93.14) 32.64 (1.43)
Oil seeds 2940 1112.8 (37.85) 1560 (53.06) 270.4 (9.2)
Cotton 295.8 -2.28(-0.77) 297.92(100.72) -0.76(-0.26)
Jute & Mesta 284.4 190.44(66.96) 80.64(28.35) 12.96(4.56)
Sugarcane 61420 14924(24.3) 40268(65.56) 6478(10.55)
Tobaco 130 25.02(19.25) 97.02(74.63) 6.93(5.33)
Potato 6150 1934.4(31.45) 2734.5(44.46) 1512.7(24.60)

1990/91)
Output Effect
Rice 20660 3392.8 (16.4) 16240 (78.6) 1027.4 (5)
Wheat 17690 3432.73 (19.40) 13070.14 (73.9) 1198.4 (6.8)
Coarse 1610 -4493.29 (-279.1) 7103.175(441.12) -1025.74(63.7)
Cereals
Pulses 2750 396.06 (14.40) 2264.8 (82.36) 77.9 (2.83)
Oil seeds 6530 3348.36 (51.28) 2496.12 (38.22) 691.68 (10.59)
Cotton 333.2 -102.9(-30.89) 475.54(142.72) -36.58(-10.98)
Jute & Mesta 154.8 -170.4(-110.1) 371.45(239.95) -41.99(-27.13)
Sugarcane 54690 29180(53.35) 22445(41.04) 3518(6.43)
Tobaco 40 -35.16(-87.9) 79.64(199.1) -5.43(-13.58)
Potato 5300 2339.28(44.14) 2476.1(46.72) 586.44(11.06)


During 1991/92-2005/06, again yield’s contribution in output growth of all major crops
except Wheat, Sugarcane, and Potato was greater than expansion in area. It is a matter of
great concern as to why the productivity of wheat and sugarcane remains stagnant (see
Table 18).

2006/07)
Crop Change in Area Effect Yield Effect Interaction Effect
Output
Rice 16370 1838.5 (11.23) 14203 (86.8) 349.65 (2.01)
Wheat 18010 11755 (65.27) 5181.42(28.77) 1093.76 (6.07)
Coarse 6930 -3872.84 (- 12710.36(183.41) -1894 (-27.33)
Cereals 55.88)
Pulses 2090 650.26 (31.11) 1374.94 (65.79) 74.42 (3.56)
Oil seeds 4660 71.9 (1.54) 4556.64 (97.78) 17.6 (0.38)
Cotton 1926.1 317.52(16.48) 1348.2(70) 258.72(13.43)
Jute & Mesta 189 -265.9(-140.7) 546.12(288.95) -78.72(-41.65)
Sugarcane 68940 65408(94.88) 2933.8(4.25) 756.36(1.1)
Tobaco -30 -2.34(7.8) 48.256(-160.9) -6.73 (22.44)
Potato 7520 5884.48(78.25) 1188.8(15.81) 427.04(5.68)
Instability in Indian Agriculture

Instability is one of the important decision parameters in development dynamics and more
so in the context of agricultural production. An analysis of fluctuations in crop output, apart
from growth, is of importance for understanding the nature of food security and income
stability. Wide fluctuations in crop output not only affect prices and bring about sharp
fluctuation in them but also results in wide variations in disposable income of the farmers.
The magnitude of fluctuations depends on the nature of crop production technology, its
sensitivity to weather, economic environment, availability of material inputs and many
other factors. High growth in production accompanied by low level of instability for any
crop is desired for sustainable development of agriculture.
In this section we examined extent of production, area, and yield instability for major crops.
The instability in area, production and yield of major crops is measured in relative terms by
the Cuddy-Della Valle index which is used in recent years by a number of researchers as a
measure of variability in time series data. The simple coefficient of variation overestimates
the level of instability in time-series data characterized by long term trends whereas the
Cuddy-Della Valle index corrects the coefficient of variation.

DOI: 10.7885/1946-651X.1007

The instability index IX, is given by the expression:
…(2)
Where,
CV = Coefficient of variation (in percent)
= Coefficient of determination from a time-trend regression adjusted by the number of

degrees of freedom
The CV is calculated by using this formula: where, standard deviation5 and

mean6.
It may be mentioned here that some researchers have estimated the CV around trend as the
standard error of regression divided by mean. After estimating in both ways from the same
set of data, Sindh and Byerlee (1990) found that the results are almost identical whichever
method is used. Since both methods provide the same results, we decided to estimate the
instability index using the Cuddy-Della Valle index. Thus, instability index are calculated
for the pre-green revolution, post-green revolution period, and post-reform period. These
results are shown in Tables 20, 21, and 22. For wheat, rice, pulses, oilseeds, cotton, jute,
and potato, these measures show decrease in production instability during post-reform
period. This indicates that post-reform period helps in reducing production instability for
these crops. Yet, despite this decrease in production instability, corse cereals, sugarcane,
and tobacco realized an increment in production instability during post-reform period. Area
instability for wheat, jute, sugarcane, and potato decreased by 49.43 percent, 41.36 percent,
5.5 percent, 13 percent, respectively and for rice, corse cereals, pulses, oilseeds, cotton, and
tobacco increased by 22 percent, 33 percent, 11 percent, 35 percent, 65 percent, and 60
percent, respectively in post-reform period. Further, the results indicates that the yield
instability for rice, wheat, corse cereals, pulses, jute and sugarcane declined by 36 percent,
37 percent, 6 percent, 32 percent, 64 percent, and 0.4 percent, respectively during post-
reform period. But Yield instability for oilseeds, cotton, potato, and tobacco increased by 3
percent, 93 percent, 11 percent, 19 percent, respectively. Production instability was the
highest for tobacco (15.03), oilseeds (14.93), jute (14.65), cotton (10.86), and coarse cereals
(10.42). Yield instability was the largest for cotton (20.54), and oilseeds (10.38).
5 The Standard deviation is equal to
6 The arithmetic mean is equal to


Table 20: Instability in Production
Crop Pre-green revolution Post-green revolution Post-reform

CV Instability CV Instability Index CV Instability Index
Index
Wheat 19.315 9.71 36.429 10.46 8.845 6.21
Rice 18.881 8.95 23.310 9.03 8.017 6.77
Corse
Cereals 13.267 9.20 10.562 9.17 10.544 10.42
Pulses 13.428 11.59 12.777 10.94 8.835 9.15
Oil Seeds 16.003 8.83 30.317 14.89 14.918 14.93
Cotton 20.008 11.86 21.063 11.83 20.730 10.86
Jute 25.922 16.58 23.160 19.86 26.836 14.65
Sugar cane 32.166 12.74 23.873 9.51 9.600 9.64
Potato 30.655 13.56 44.046 9.97 16.205 9.64
Tobacco 14.935 9.90 16.504 11.43 15.107 15.03
Table 21: Instability in Area

Index
Wheat 12.299 6.86 15.455 7.00 4.338 3.54
Rice 6.692 1.69 5.053 2.38 2.836 2.91
Corse
Cereals 4.954 3.91 7.480 2.78 6.382 3.70
Pulses 8.459 5.40 4.326 3.90 4.235 4.33
Oil Seeds 12.232 3.29 13.277 5.53 7.424 7.52
Cotton 9.666 6.40 5.165 4.92 8.315 8.14
Jute 22.878 13.78 13.426 13.71 7.764 8.04
Sugar cane 18.313 9.62 13.565 7.46 7.781 7.05
Potato 22.312 3.26 23.526 5.70 10.268 4.95
Tobacco 9.609 7.47 9.277 8.90 15.006 14.29

DOI: 10.7885/1946-651X.1007

Table 22: Instability in Yield

Index
Wheat 10.144 7.71 24.136 6.17 5.450 3.92
Rice 13.220 8.38 18.587 7.49 6.243 4.74
Corse
Cereals 8.707 6.43 15.135 8.13 11.060 7.64
Pulses 7.896 8.15 10.349 9.29 6.222 6.33
Oil Seeds 8.394 8.48 16.585 10.10 11.538 10.38
Cotton 13.166 9.37 22.018 10.64 20.579 20.54
Jute 5.934 6.04 15.824 8.10 8.360 2.94
Sugar cane 15.363 7.02 12.367 5.02 4.997 5.00
Potato 10.849 10.56 23.076 7.12 8.932 7.89
Tobacco 7.904 5.90 16.135 5.22 6.205 6.20
Overall analysis indicates that production and yield instability for almost crops declined in
post-reform period. But further it also indicates that area instability increased in the same
period. Therefore, it can be concludes that reduction in production instability is mainly due
to reduction in instability of yield and present instability in production is mainly because of
increasing instability in area.
Determinates of Agricultural Production

This section aims at analyzing the impact of production variables (inputs) on agricultural
output growth. For this purpose we used Cobb-Douglus Production Function specified as:
loge (GVAO) = β0 + β1loge (L) + β2 loge (M) + β3 loge (K) + εt …(3)
where GVAO is gross value of agricultural output; L is agricultural land force; K is capital
input; M is agricultural labour; Coefficients βi ( i =1, 2, 3) are the elasticities of the
respective variables with respect to agricultural production, with the assumption that βi >0.
The data used in the estimation of production function were country level agricultural
output and inputs for estimating the Cobb-Douglas production function of Indian
agriculture from 1950/51 to 2005/06. Most previous studies on Indian agriculture used
gross value of agricultural output (GVAO) as the total value of agricultural production.
GVAO is defined as the sum of the total value of production from farming, forestry,
livestock, and fishery. The sum of output of all products of farming, livestock, forestry, and
fishery equals to GVAO and is expressed at constant (1999/2000) prices. The data on


GVAO were taken from the National Account Statistics (Back series 1950 to 2000, and
2008) published from Central Statistical Organization, Government of India.
Labour, land, and capital are considered the three main inputs in agricultural production.
Labour input is measured as workforce involved in agriculture. The data of workforce in
agriculture is given in Agricultural Statistics at a Glance (2008) published from Directorate
of Economics and Statistics, Ministry of Agriculture, Government of India only for census
year. This series was interpolated for making time series data. Land input refers to the net
cultivated area and is measured by net sown area. The data were taken from Agricultural
Statistics at a Glance (2008). Capital stock of a country is broadly referred to as that part of
national wealth which is reproducible; it consists of all resources which contribute to the
production of goods and services. Capital is measured in terms of net fixed capital stock in
agriculture and data related to net fixed capital stock are taken from Nation Account
Statistics. This capital stock measure includes agricultural machinery, farm equipment and
tools, transport equipment in farm business, land improvements, investments in private and
public irrigation, and farm houses.
Results for the Cobb-Douglas estimates are reported in Tables 23.1, 23.2, & 23.3. The
estimated agricultural production function for Indian agriculture based on data during
1950/51 to 2005/06 can be expressed in the following mathematical form:
Loge (GVOA) = -0.44 + 0.32 Loge (L) + 0.88 Loge (M) + 0.36 Loge (K)
(3.12) (0.32) (0.17) (0.15)
From the above equation, we can see that in Indian agriculture during 1950/51 to 2005/06,
the output elasticities of land, labour, and capital were 0.32, 0.88, and 0.36 respectively. If
α = 0.32, and the land input increases to about 1 percent, then the gross value of agricultural
output increases 0.32 percent. Similarly, β = 0.88, and γ = 0.36 can be interpreted in the
same way. The sum (α, γ, and β) gives information about the returns to scale, that is,
response of output to a proportionate change in the input, in our case adding the three
output elasticities we obtain 1.56 , which gives the value of the returns to scale parameter.
As we can see the sum is greater than 1, thus there are increasing returns to scale. As is
evident, over the period of the study, the Indian agriculture is characterized by increasing
returns to scale doubling the inputs will more than double the output.

DOI: 10.7885/1946-651X.1007

Table 23.1: Model (without dummy variables) Summary

2
Model Adjusted R Std. error of the
estimate
1 0.986 0.05048
Table 23.2: Analysis of Variance (ANOVA)

Model Sum of Df Mean Square F Sig.
Squares
1 Regression 10.384 3 3.461 1358.32 0.000
Residual 0.130 51 0.002
Total 10.514 54
Table 23.3: Coefficients

2
Variables Coeff. Std. Err. t- Value Adj- R DW- Stat.
Cons. -0.44 3.123 -0.14
Nsa 0.32 0.318 1.02 .986 1.120
Labr 0.88* 0.059 14.81
Cptl 0. 36* 0.063 5.75
* Significant at 1 percent level
From a purely statistical viewpoint, the estimated regression line fits the data quite well.
The R2 value of 0.99 means that 99 percent of the variation in the (logarithmic of) gross
value of agricultural output is explained by the (logarithmic of) land, labour, and capital.
For adjusted R2 the relation is 99 percent. This shows the statistical dependence of the
(logarithmic of) gross value of agricultural output on the (logarithmic of) labour, land and
capital, and γ and β are statistically significant at the 1 percent level and α is not significant.
The dw-statistic is equal to 1.121. From the Durbin-Watson tables, we found that for 55
observation and three explanatory variables, dL = 1.414 and dU = 1.724 at the 5 percent
level. Since the computed dw-statistics lies below dL, cannot reject the hypothesis that there
is positive autocorrelation.
Despite the problem of autocorrelation, intercept and output elastities estimated by equation
2 are constant over period of time. But in real it is not true, i.e., intercept and output
elasitcties are variable over period of time. This is because of structural changes that
occurred in economy during a period of time. The structural changes also occurred in Indian
Agriculture. Pulapre, Balakrishnan, and Parameswaran (2007) identified agricultural growth
shows trend break in 1964/65 when growth accelerates. It means that there are two growth
regimes in Indian Agriculture since 1950. One is from 1950/51 to 1964/65 and second is
beyond 1964/65. Expansion of area was the main source of growth in the first regime of
agricultural growth after that the contribution of increased land area under agricultural
production has declined over time and increase in productivity became the main source of


growth in agricultural production in second regime of agricultural growth. This estimation

have confirmed that intercept and output elasticites are not constant over the period of time.
To solve this problem, we have used dummy variables, i.e., 0 for observations in 1950/51-
1964/65 and 1 for observations in 1965/66-2005/06, in equation 2.
First, we hypothesized that only level of agricultural output (intercept) has changed between
these two regimes of agricultural growth. So, to capture this difference, we have
incorporated intercept dummy in equation 3:
loge (GVAO) = β0 + β1loge (L) + β2 loge (M) + β3 loge (K) +β4Dt + εt …(4)
Next we hypothesized that both level of agricultural output (intercept) and output
elasticities have changed between these two regimes of agricultural growth. To capture
these differences, we have incorporated both intercept dummy and slop dummy in equation
3. The equation 3 becomes:
loge (GVAO) = β0 + β1loge (L) + β2 loge (M) + β3 loge (K) +β4Dt + β5 [Dt loge (L)]
+ β6 [Dt loge (M)] + β7 [Dt loge (K)] + εt ... (5)
Results for the Cobb-Douglas Production function with only intercept dummy (equation 4)
estimates are reported in Tables 24.1, 24.2, & 24.3. The estimated agricultural production
function with only intercept dummy for Indian agriculture based on data from 1950/51
through 2005/06 can be expressed in the following mathematical form:
loge (GVAO) = -0.48 + 0.38 loge (L) + 0.98 loge (M) + 0.27 loge (K) + 0.06 Dt
(3.079) (0.316) (0.085) (0.086) (0.04)
From the above equation, we can see that in Indian agriculture during the period 1950-51 to
2005-06, the output elasticities of land, labour, and capital were 0.38, 0.98, and 0.27,
respectively. The coefficient of intercept dummy is 0.06. This indicates that intercept
increased by 0.06 from period first to second. It means that intercept was -0.48 in period
1950/65 and becomes -0.42 (-0.48 + 0.06) in period 1965/2006.
From a purely statistical viewpoint, the estimated regression line fits the data quite well in
comparison to equation 2. In this equation also γ and β are statistically significant at the 1
percent level and α is not significant. The coefficient of intercept dummy is also not
statistically significant. This reveals that there is no difference in intercept or level of
agricultural output between two periods; 1950-65 and 1965-2006. The dw-statistic is equal
to 1.202. In this case also the computed dw-statistics lies below dL; cannot reject the
hypothesis that there is positive autocorrelation.

DOI: 10.7885/1946-651X.1007

Table 24.1: Model (with intercept dummy) Summary

2
estimate
2 0.987 0.04976
Predictors (Constant), LNL, LNM, LNK, Dependent Variable LNGVAO

Squares
2 Regression 10.390 4 2.598 1049.00 0.000
Residual 0.124 50 .002
Total 10.514 54
Predictors (Constant), LNL, LNM, LNK, Dependent Variable LNGVAO

2
Cons. -0.48 3.079 -0.16
dummy 0.063 0.039 1.58
Nsa 0.38 0.316 1.21 .987 1.202
Labr 0.98* 0.085 11.44
Cptl 0. 27* 0.086 3.13
Results for the Cobb-Douglas Production function with both intercept and slop dummy
(equation 5) estimates are reported in Tables 25.1, 25.2, & 25.3. The estimated agricultural
production function with both intercept and slop dummy for Indian agriculture based on
data during the period 1950-51 to 2005-06, can be expressed in the following mathematical
form:
loge (GVAO) = -14.10 + 2.34 loge (L) - 0.26 loge (M) - 0.04 loge (K) +4.24 Dt - 1.09 [Dt
loge (L)] + 1.13 [Dt loge (M)] + 0.27 [Dt loge (K)] + εt
From the above equation, we can be seen that in Indian agriculture during 1950/5-1964/65,
the output elasticities of land, labour, and capital were 2.34, - 0.26, and - 0.04, respectively,
and during 1965/66-2005/06, the output elasticities of land, labour, and capital were 1.25,
0.87, and 0.23. The sum of output elasticities (returns to scale) was 2.04 during 1950/51-
1964/65 and increased to 2.35 during 1965/66-2005/06.


Table 25.1: Model (with intercept dummy) Summary

2
estimate
3 0.995 0.02945

Squares
2 Regression 10.474 7 1.496 1725.34 0.000
Residual 0.041 47 .001
Total 10.514 54

2
Cons. -14.10 5.411 -2.61
Dummy 4.20 5.881 0.71
Nsa 2.34* 0.623 3.75 .987 1.202
Dnsa -1.09 0.664 -1.64
Labr -0.26 0.181 -1.42
Dlabr 1.13* 0.196 5.80
Cptl -0.04 0.128 -0.31
Dcptl 0.27** 0.143 1.88
From a purely statistical viewpoint, the estimated regression line fits the data quite well in
comparison to other two regression lines (3 and 4). Only the coefficient of land is
statistically significant at 1 percent level and the coefficient of labour and capital are not
statistically significant during the period 1950-51 to 1964-65. While in the period 1965-66
to 2005-06 the coefficient of labour and capital are statistically significant at 1 percent and
5 percent level, respectively and the coefficient of land is not statistically significant. This
shows that land significantly affected the agricultural output growth during 1950/51-
1964/65 and after that land became less significant and now labour and capital are
significantly affecting the agricultural output growth. The dw-statistic is equal to 1.718.
From the Durbin-Watson tables, for 55 observation and seven explanatory variables, dL =
1.253 and dU = 1.909 at the 5 percent level. Since the computed dw-statistics lies between
dL and dU, autocorrelation is inconclusive.

DOI: 10.7885/1946-651X.1007

Concluding Remarks
This paper evaluates performance and progress of Indian Agriculture since Independence.
In addition, this paper also analyzes sources of agricultural growth and determinants of
agricultural production. We use the decomposition test to analyze sources of agricultural
growth and the production function approach to analyze determinants of agricultural
production over the period 1950/51 through 2005/06. The study indicates that there is scope
to increase both net sown area and gross sown area. The study also highlights that only 39
percent of net sown area is irrigated area. After evaluating the changes in agrarian structure,
input use pattern and growth trend of agriculture, this paper point outs some points. These
are: agricultural workforce shifted from cultivators to agricultural labours, the number of
uneconomic holdings has an increasing trend, area under food crops shifted towards non
food crops, and within food crops area under cereals has been shifting towards non cereals,
growth trend of aggregate agriculture as well as all sub sector of agriculture except forestry
is showing declining trend during post-WTO period. It is also observed in this study that
production and yield instability declined for almost crop during post reform period while,
area instability increased in the same period. This further indicates that instability in area
became major responsible factor for production instability.
The decomposition analysis indicates that rising output per hectare is the predominant
source of agricultural growth for most of the crops and crop groups. Disaggregating of
reference period in four sub periods shows that expansion of agricultural land was the main
source of agricultural growth during the period before 1965/66 after that the contribution of
increased land area under agricultural production has declined over time and increase in
productivity became the main source of growth in agricultural production.
The estimation of aggregate agricultural production function with both intercept and slope
dummy indicates that land significantly affected the agricultural output growth during
1950/51-1964/65 and after that land became less significant and now labour and capital are
significantly affecting the agricultural output growth. Thus, the result of the aggregate
agricultural production function verifies the results of decomposition analysis.


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University Press.

CHAPTER XXVI
INDIAN COUNCIL OF
AGRICULTURAL RESEARCH
A
griculture sector occupies the centre mental safety. Towards this goal, it is operating two
stage of IndiaÕs social security and prestigious and mega projects, viz. National
overall economic welfare. Since Agricultural Technology Project with emphasis on
Independence, India has witnessed production system research, organization and
significant increase in foodgrain production (green management reforms and innovations in
revolution), oilseeds (yellow revolution), milk technology dissemination and Agricultural Human
(white revolution), fish (blue revolution), and fruits Resource Development Project with emphasis on
and vegetables (golden revolution). All these improving the quality of agricultural education.
became possible owing to the application of cutting The ICAR began as the Imperial Council of
edge of science coupled with the positive policy Agricultural Research, an autonomous body (a
support, and hard work of Indian farmers. The registered society) in 1929. Presently the Union
Indian Council of Agricultural Research (ICAR), an Minister of Agriculture is the President of the ICAR
apex organization for Society. The Director-General
conducting and co-ordinating (DG) is the Principal Exe-
agricultural research, has
been at the forefront to lead
S INCE INDEPENDENCE, cutive Officer and is also the
Secretary to the Department
INDIA HAS WITNESSED
these agricultural revolutions of Agricultural Research and
in the country, making India SIGNIFICANT INCREASE IN Education (DARE). DARE is
not only self-sufficient in food FOODGRAIN PRODUCTION the nodal department for all
but also with surplus. As a related scientific and
(GREEN REVOLUTION),
forward looking development activities and
organization, fully realizing OILSEEDS (YELLOW bilateral scientific collab-
the emerging complex REVOLUTION), MILK orations with other countries.
challenges, ICAR has set a The Council has its
(WHITE REVOLUTION),
vision to attain ÔRainbow Headquarters at New Delhi,
RevolutionÕ covering the FISH (BLUE REVOLUTION), and a vast network of
entire spectrum of activities AND FRUITS AND institutes all over the country,
in agriculture which will consisting of 45 Institutes,
VEGETABLES (GOLDEN
make India a developed four National Bureau, 30
nation free of poverty, hunger, REVOLUTION). National Research Centres,
malnutrition, and environ- ten Project Directorates and
258 PURSUIT AND PROMOTION OF SCIENCE

80 All India Coordinated Research Projects. The
functions of ICAR are similar to those of University
Grants Commission (UGC) in respect of agricultural
education. The technical functions of the Head-
quarters are grouped into eight subject-matter
divisions, each headed by an eminent scientist as
Deputy Director-General.
Under the aegis of the ICAR there are 28 state
agricultural universities, four deemed-to-be-
universities and one central agricultural university,
261 Krishi Vigyan Kendras (KVKs: farm clinics) in the
rural districts of the country for transfer of
technology, and eight trainers training centres. For
staff training and addressing research management
issues, it has established an institute for human
Photo: H.Y. Mohan Ram
resource development called the National Academy
of Agricultural Research Management (NAARM).
ICAR is one of the leading agricultural research
and development systems in the world, having
30,000 personnel, with more than 7000 engaged in
active research and management. Bajra Ð Pennisetum typhoides.
THE MANDATE ● To do other things considered necessary to attain

The mandate of ICAR is: the objectives of ICAR.
● To plan, undertake, aid, promote and coordinate
education, research and its application in CROP SCIENCE DIVISION
agriculture, agroforestry, animal husbandry,
fisheries, home science and allied sciences.
● To act as clearing house of research and general
T he Crop Science Division has played a key role in
ushering in the era of Green and Yellow
Revolutions in the country. It is the largest Division
information through publications and of the Council with focus on the development of
information system, and instituting and improved crop cultivars and appropriate crop pro-
promoting transfer of technology programmes. duction-protection technologies, and basic and
● To provide, undertake and promote consultancy strategic researches in crop science. The Division has
services in the fields of education, research, ten institutes, one bureau, five project directorates,
training and dissemination of information. seven national research centres and 30 all India co-
● To look into problems relating to broader areas ordinated research projects. In addition, a large num-
of rural development concerning agriculture, ber of ad-hoc research projects and revolving
including post-harvest technology, by schemes are also in operation.
developing cooperative programmes with other
organizations such as the Indian Council of ACHIEVEMENTS
Social Sciences Research, Council of Scientific ● Over 2,300 high-yielding varities and hybrids of
and Industrial Research, Bhabha Atomic field crops have been developed, released and
Research Centre and universities. notified for their commercial cultivation.
PURSUIT AND PROMOTION OF SCIENCE 259

● First in the world to develop hybrid cultivars of ● Developed experimental transgenics in cotton
cotton, grain pearl millet, pigeonpea, castor and and rice by incorporating genes for insect
safflower, and second to develop hybrid resistance. Also developed protocols for
cultivars of rice and sorghum. Hybrid cotton is micropropagation.
a landmark achievement in hybrid research. ● The etiology, epidemology and the management
● The varieties of foodgrains, particularly that of of major diseases/insects pests have been
wheat and rice, have been instrumental in worked out, facilitating the forecasting system
ushering in the area of Green Revolution in mid- and in developing location-specific integrated
60s and sustaining the momentum of pest management (IPM) modules for sustainable
productivity enhancement in post-green crop production. Protocols have been developed
revolution period. for mass multiplication and release of biocontrol
● The improved varieties played a catalytic role in agents.
the adoption of other components of improved ● Adoption of IMP modules has helped in
technology package, such as fertilizers, lowering the quantum of pesticide requirements
pesticides, irrigation water and transforming the and promoting non-chemical eco-friendly
mindset of farmers from conservative to approaches.
technology-responsive ones. ● Established the National Gene Bank at the
● Incorporation of resistance to diseases and National Bureau of Plant Genetic Resources,
tolerance to abiotic stresses in high yielding New Delhi, one of the WorldÕs leading gene
background have enabled insulation of crop banks, for long-term storage of seed and other
plants against these stresses and thus provided planting materials. About 0.20 million accessions
stability in food production and food security. have been conserved.
● Development of short duration varieties of rice, ● Steady increase in breeder seed production
sorghum, cotton, pigeonpea, chickpea, resulting in enhanced supply of quality seeds to the
greengram, blackgram etc. has opened up farmers. About 26,000 q. of breeder seed is being
awareness for multiple cropping systems and produced annually and supplied for production of
helped in enhancing cropping intensity. foundation seed and in turn certified seed.
● Developed/deployed the concept of new plant ● Seed production technologies for various crops
type in various crop plants particularly wheat, refined, particularly with reference to hybrid
rice, maize, sorghum etc. to upgrade genetic seed production.
ceiling of yield potential. ● Developed a unique concept of multi-
● Spectacular success has been achieved in disciplinary, multi-locational approach in crop
introduction and improvement of new crops, improvement in the form of All India
such as soybean and sunflower. India is now the Coordinated Research projects which led to
fifth largest producer of soybean in the world. synergistic cooperation for the development of
● Improved varieties of sugarcane, wheat, rice, widely adapted/location-specific cultivars and
maize, sorghum, groundnut, mustard etc. production technologies.
developed in India have been used for ● Between 1950-51 and 1998-99, the production of
commercial cultivation in many other countries. foodgrains increased from 50.8 to 202.5 mt,
● Developed new breeding methods, mating oilseeds from 5.2 to 25.7 mt, cotton from 3.0 to
designs and analyses, and germplasm screening 12.8 mt and sugarcane from 5.2 to 290.7 mt. The
techniques for evaluation of resistance/tolerance productivity of wheat increased four times and
to biotic and abiotic stresses. that of rice, maize and cotton three times.

● Development and adoption of new
varieties of oilseeds and comple-
mentary technologies doubled oilseeds
production in a decade (12.6 mt during
1987-88 to 24.4 mt during 1996-97),
generally known as the Yellow
Revolution.
● Increased food production has
transformed the ship to mouth nation
of early 1960s into a food secure one
with exportable surplus of certain
commodities.
● India has become the second largest
producer of wheat and rice and is also
amongst the top exporters of rice.
HORTICULTURE DIVISION
T he Horticulture Division has nine

research institutes, 11 national research
centres and 15 coordinated research projects.
ACHIEVEMENTS
● India has emerged as the second largest
producer of fresh fruits and vegetables
in the world.
● India is presently the largest exporter
of spices and cashew.
Photos: H.Y. Mohan Ram
● A total of 460 high-yielding varieties

and hybrids of horticultural crops have
been developed. As a result, produc-
tivity of banana and potato has gone
up three-times each, and cassava two-
times. Top: Breeding work in mustard is receiving top
● Regular bearing mango hybrid, export quality priority
grapes, multi-disease resistant vegetable Bottom: India is the second largest producer of fresh
hybrids, high value spices and tuber crops of vegetables in the world. Vegetables are an important
industrial use have been developed. source of vitamins, minerals, fibre and anti-oxidants
● Substantial increase in production of banana in human diet
plantlets through tissue culture, use of drip
irrigation, chemical regulation of mango standardized.
flowering and high-density orcharding in fruit ● Low cost environment-friendly cool chambers
crops have been obtained. for on-farm storage of fruits and vegetables have
● True potato seed (TPS) technology is been developed.

NATIONAL BUREAU OF PLANT GENETIC RESOURCES
N ational Bureau of Plant Genetic Resources (NBPGR) was established in 1976 by ICAR, at Pusa
Campus, New Delhi. The institute has been vested with the responsibility to plan, undertake and
coordinate activities and services related to plant genetic resources including collection, exchange,
quarantine, evaluation, documentation, conservation and utilization of crops plants and horticultural
plants, their land races and wild relatives. Besides its Headquarters at the Pusa Campus and
Experimental Farm at the Issapur village near Delhi, the institute has 12 regional stations/exploration
base centers/quarantine stations/satellite stations located in diverse agro-climatic zones of the country.
NBPGR is the nodal organization for developing, operating and coordinating the Indian Plant Genetic
Resource System. The system comprises base collections of germplasm of different crops kept under
long term storage at NBPGR headquarters and a network of over 30 National Active Germplasm Sites
located throughout the country. These sites are responsible for evaluation, multiplication and storage of
germplasm. NBPGR has been able to build up 2,02,228 accessions from 183 species in its base collec-
tions in the National Gene bank (at -20¡ C) as of June 2001.
ANIMAL SCIENCES DIVISION livestock and poultry diseases developed for
T he Division has seven research institutes, one

bureau, two project directorates, six national
research centres, and 11 coordinated research projects.
precise and rapid diagnosis. Effective disease
monitoring and surveillance have resulted in
reduced morbidity and mortality.
● Process, techniques and equipment for the
ACHIEVEMENTS manufacture of quality milk and dairy products
● A number of new genotypes in cattle Ð Karan with reliable quality testing methods developed.
Swiss, Karan-Fries and Frieswal developed for ● Methods of preparation of different recipes and
increased milk production. Murrah, Nili, Ravi preservation of meat and eggs developed, and
and Surti buffaloes improved for milk quality testing protocols for egg, meat and meat
production products standardized.
● Three new high producing strains of sheep for ● Blending of camel hair and Angora rabbit wool
fine wool, carpet wool and mutton evolved; and with other fibres and converting those into yarn
a strain of Mohair goat developed. suitable for making finished goods achieved.
● Two hybrids of fast-growing poultry broilers and ● Nutrient requirements of various categories of
four high producing layer strains developed and livestock for different production functions
released. studied and standards set up.
● Various immuno-biologicals, vaccines, immuno- ● Technologies for utilization of cereal straws,
diagnostics, indigenous drugs and medicines agro-byproducts, conventional and non-conven-
against various infectious and non-infectious tional feeds developed area-wise and region-
diseases of livestock and poultry, developed. wise.
● Monoclonals have been developed for the ● Artificial insemination and embryo transfer
diagnosis of various diseases and reproductive technology used for improvement of native
disorders. germplasm, and production and multiplication
● ELISA-based diagnostic tests for various of elite germplasm.

Photo: H.Y. Mohan Ram
FISHERIES DIVISION Goats and sheep grazing in a field in Andhra
T his Division has six institutes, one bureau and

one research centre. In addition a good number
of ad-hoc research projects and revolving fund
Pradesh
export market.
schemes are also in operation. ● Technology development of Retortable Pouch
Process as a substitute for canning fish.
ACHIEVEMENTS ● Commercial production of chitin and chitosan
● Blue Revolution has been attained by enhancing from shrimp head and shell.
fish production from 0.75 million mt in 1951 to ● Hatchery technology for shrimp.
5.4 million mt in 1997. ● Semi-intensive shrimp farming.
● India has emerged as the second largest ● Fattening of lobsters and crabs.
producing country in the world in freshwater ● Artificial feed for shrimp farming.
aquaculture. ● Technology package for broodstock management,
● Phenomenal growth of marine products export. production of fingerlings and grow-out systems
● Indigenous design of fishing craft and gears. for major finfish, shellfish and molluscs.
● Developed national standards for fish inspection ● Culture and utilization of sea weeds.
and quality control. ● Technology package for mass culture of 11
● Nutritional evaluation of major fish species and species of micro-algae.
fishery products. ● Production of ornamental fish under hatchery
● Created national collection centre for conditions.
characterization and storage of important ● Breeding of seabass under controlled conditions.
marine microorganisms. ● Commercial production of cultured pearls from
● Developed value-added fishery products for pearl oysters.

● Induced breeding of major carps, catfishes and puffing machine; crop residue fired and solar
other finfishes. drier; cleaners, sifters and graders; low cost
● Production of freshwater pearls. improved storage structures for foodgrains,
● Development of vaccines and formulation of evaporative cooled structures for fruits and
drugs for fish diseases. vegetables.
● Genetically improved, rohu, CIFA IR-I. ● Machinery for soybean processing and solid,
● Commercialization of fish feeds for inland granular and liquid jaggery developed.
aquaculture. ● Technologies for cotton and jute products
● Production of mahseer and snow-trout in developed.
hatcheries. ● Process for the preparation of shellac, lac dye
● Conservation of endangered species. and wax from lac factory effluents; insulating
● Cryopreservation of milts of consumable varnishes, melfolac, primer and paint
important fish species. compositions, shellac bond powder, aleuritic and
● Enhanced fish productivity of reservoirs. jalaric acids, perfumery compounds developed.
● Energy efficient equipment and packages;
AGRICULTURAL ENGINEERING DIVISION enhanced system efficiency in use of animate
T he Division provides engineering inputs for

mechanization of conventional and protected
agriculture, conservation of produce and by-prod-
power; tractors and power tillers; low cost biogas
plants; pyrolysed briquetted fuels; low cost solar
cookers and water heaters, solar tracking device;
ucts from quantitative and qualitative losses, and high efficiency cooking stoves; gasifiers for
value addition and agro-processing enterprises for process heat and mechanical power; charcoal
additional income and employment, energy manage- briquetting machine; portable charring kiln
ment in agriculture and rural living for increasing developed.
production and productivity, and reducing ● System improvement and safety in centrifugal
drudgery. pumps; solution to corrosion and incrustation in
ACHIEVEMENTS tube-wells; construction of wells in hard rock
● Manual, animal and power-operated seeds areas; surface, sub-surface and vertical drainage.
drills, and planters, weeders; animal drawn ● Establishment of Agricultural Research
multi-purpose tool frame; zero-till/strip-till- Information System (ARIS), a WAN connecting
drills, till-planters; puddlers; manual and self- 28 State agricultural universities and their 120
propelled rice transplanters; tall tree, orchard, zonal agricultural stations, 49 ICAR institutes,
and high clearance sprayers; self-propelled, 10 project directorates, 25 NRCs and its
walking/riding and tractor/ power tiller headquarters in Krishi Bhavan.
mounted vertical conveyor reaper; and multi-
crop threshers. NATURAL RESOURCES
● 126 types of agricultural machines developed, MANAGEMENT DIVISION
of which more than 60 have been
commercialized and 23 released for front-line
demonstrations.
T he Division has nine research institutes, one
bureau, two project directorates and two nation-
al research institutes.
● Hand-operated groundnut-cum-castor decorticator,
low-cost grains, pulse, oilseed mills; power ACHIEVEMENTS
operated straw baler, vegetable dehydrator; ● Soil map of the country on 1:7 million scale, state
manually and power operated dough mixer; rice map on 1:250,000 scale and district soil maps on

1:50,000 scale have been prepared. Soil developed for excess groundwater utilization by
degradation map of the country on 1:4.4 million the use of cavity wells, irrigation-cum-recharge
scale has also been prepared. well and by percolation tank in hard rock areas.
● Twenty agro-ecological zones and sixty agro- ● Relay, parallel, multiple and multi-storey
ecological sub-regions of the country based on cropping systems resulted in improved cropping
physiography, soils, climate, length of growing intensity and productivity.
period and available soil moisture are mapped ● Agri-silviculture, agri-silvi-horticulture, agro-
on 1:4.4 million scale. horticulture, silvi-pasture systems have been
● Modification of land configuration on Alfisols, developed and evaluated for different agro-
Vertisols and Inceptisols for on-farm rainwater ecological regions.
management in rainfed areas. ● Agriculture production strategies developed
● An integrated strategy of managing rainfed based on weather forecast.
areas through watershed development projects
in several parts of the country. AGRICULTURAL EDUCATION DIVISION
●
●
Soil and water conservation treatments in
mountainous watersheds to runoff and soil loss.
Off-season tillage to improve moisture
T he Education Division provides administrative
support to the Central Agricultural University
(CAU) and the National Academy of Agricultural
conservation and weed control on Alfisols. Research Management and development grants to
● Techniques of sand dune stabilization and State Agricultural Universities, CAU, and Deemed-
shelter belt plantation were developed for to-be Universities in ICAR.
arresting the movement of sand dunes in the
arid zone. ACHIEVEMENTS
● Cropping sequences and intercrop combinations ● Establishment of Accreditation Board for quality
developed for irrigated and rainfed areas. assurance to clientele.
● Water-use efficient irrigation schedules for major ● Grants of over Rs.760 millions sanctioned to
crops were evolved resulting in saving of SAUs, Central University and DUs to strengthen
irrigation water. and update infrastructure and faculty
● Water-use efficient, micro-irrigation methods improvement during VIII Plan.
and technologies for utilization of available ● Revision and updating of course curricula of all
water in scarce areas were developed for 11 undergraduate (UG) courses completed and
irrigation, resulting in considerable saving of adopted by all SAUs.
water and significant increase in crop yields. ● Qualifying National Eligibility Test (NET) made
● Technology for reclamation of alkali soils has compulsory for recruitment at Assistant
been adopted in 1.0 M ha in Haryana, Punjab Professor/Lecturer level.
and Uttar Pradesh. ● To reduce inbreeding and promote cultural
● Sub-surface drainage technology developed for exchange, 300 National Talent Scholarships in
waterlogged saline soils in Punjab, Haryana, UG, 437 Junior Research Fellowships (JRF) and
Rajasthan, Gujarat, Karnataka, and Andhra 200 Senior Research Fellowships (SRF) are
Pradesh. awarded to meritorious students in every
● Critical growth stages of various crops and academic session.
cropping systems with respect to water stress ● 200 foreign students from Iran, Ethiopia, Nepal,
and water requirement have been identified. Bhutan, Bangladesh, Eritrea, Mauritius, Uganda
● Methodology of artificial groundwater recharge and Yemen were admitted in UG and PG courses

in 1998-99 academic session. ● In-service training programme to upgrade the
● Organized summer/winter schools in different knowledge and skills in transfer of technologies
disciplines to train scientists and faculty in agriculture and allied areas for 2,200 extension
members. functionaries in KVKs and TrainersÕ Training
● Arranged training programmes under Centres Centres (TTCs).
of Advance Studies to train scientists/teachers ● Front-line Demonstration (FLD) on oilseed and
in current advancement in several areas. pulse crops benefitting 11,000 farmers.
● A workshop was held for writing university ● Training of trainers in frontier areas such as
level books and 35 titles were finalized. dryland agriculture, animal production,
● National Information System on Agricultural horticulture, freshwater, aquaculture, marine
Education (NISAGE) developed. fisheries, hill agriculture, agricultural
● Nine National Professors and 25 National engineering and women in agriculture in TTCs.
Fellows are in position. ● Multi-locational advance varietal trials of 17
selected crops in 60 centres under irrigated and
AGRICULTURAL EXTENSION DIVISION rainfed conditions under separate cropping
T his is the backbone of the ICAR System for

technology assessment, refinement and trans-
fer to the farmers.
sequences in a joint collaborative Technology
Evaluation and Impact Assessment Project with
Crop Science Division.
● Identification, assessment and development of
ACHIEVEMENTS gender-specific technologies at the National
● 25,000 farmers and farm women are trained Research Centre for Women in Agriculture,
every year in agriculture and allied fields such Bhubaneshwar (Orissa). Training of farm women
as crop production, plant protection, livestock in farm implements and tools at the sub-centre of
production and management, soil and water NRCWA at the Central Institute of Agricultural
management, farm machinery and tools, and Engineering, Bhopal (Madhya Pradesh).
home science. ● Establishment of 40 Agricultural Technology
● Vocational training is imparted to 46,000 rural Information Centres in ICAR Institutes and
youth in poultry, dairying, piggery, beekeeping, SAUs. These centres will provide a ÔSingle
fisheries, fruit and vegetable preservation, WindowÕ delivery system for technology
maintenance and repairing of farm machinery products, services and information available in
and tools, and hybrid seed production. the institutions to the farmers.
◆◆

Special articles
Industrial Policy and Performance

since 1980: Which Way Now?
Since 1980-81, manufacturingsector output has grown at 7 per cent per year, with economic
reforms making little difference to the trend in the 1990s. But growth has decelerated over the
last seven years, after peaking in 1995-96. Why is this so? The reforms have narrowlyfocused
on policy-induced restrictions on supply, ignoring the demand constraint due to the cut in
public infrastructureinvestmentsince the late 1980s and indifferentagricultural performance
in the 1990s. These issues have to be squarely addressed to revive industrial growth, and to
reap the benefits of the investmentboom in organised manufacturingin the last decade.
R NAGARAJ
India's manufacturingsector currentlyaccounts for about However, from 1980 onwards, after the domestic political
17 per cent of real (measured)GDP, 12 per cent of total uncertainty had ended, industrial policy witnessed greater prag-
workforce,andclose to 80 percent of merchandiseexports. matism with a gradual loosening of controls, and a greater
Overthe pasthalf century,this sectorhas grownat nearly6 per willingness to import technology and foreign private capital
cent per year;at over one-and-a-halftimes the growthrate of to modernise the manufacturing sector. Greater realism in
domesticoutput- representinga majorbreakfromthe colonial policy-making also included stepping up of public investment
past. in infrastructureand energy production (to insulate the economy
Theannualtrendgrowthrateof totalmanufacturing grossvalue from external shocks), rural development for diffusion of green
added(output,for short,hereafter)duringthe last two decades revolution technology, and for a 'direct' attack on poverty. As
(1980-2000) is close to 7 per cent. While this representsa the second oil shock was successfully met by increasing domestic
turnaroundcomparedwith the preceding period of 'relative oil productionand import substitution in fertilisers in a short time,
stagnation'(1965-1980), the record is modest in contrastto the second half of the 1980s witnessed considerable de-licensing
China's(official)double-digitgrowthduringthisperiod,as also and relaxation of import controls to upgrade the industrial tech-
most other industrialisingAsian economies (Table 1). nology - as reflected in Rajiv Gandhi's political slogan of taking
the country to the 21st century! To achieve these, there was a
greater reliance on the private corporate sector with fiscal in-
centives provided for stock market-based financing of industrial
Evolutionof Policysince 1980 investment, as government faced a growing resource constraint
Industrial upturn in the 1980s: Around 1980, the initial year of to meet the ambitious planned investment target.
our studyperiod,therewas considerablegloom aboutthe im- In the 1980s, many branches of manufacturinglike automotive
mediate prospects for industrial growth, despite having a industry,cement, cotton spinning, food processing, and polyester
surplusof food and foreignexchangestocks for a few yearsin filament yarn, witnessed modernisation and expansion of scales
the late 1970s - widely regardedas long-termconstraintson of production. Industrial export growth also improved in the
India'seconomicgrowth.For a varietyof reasons,lack of in- second half of the 1980s as importrestrictions moved from quotas
dustrialdemand,especially for investmentgoods, was widely to tariffs (as a first phase of trade reforms) although at very high
acceptedto be the principalreasonfor the relativestagnation levels, and a steady depreciation of the currency in nominal terms.
sincethe mid-1960s.However,therewas also an argumentthat The turnaroundin industrial output growth in this decade has
the controlson output,investmentand trade- popularlycalled been variedly attributedto liberalisation, improvement in public
the 'permitlicence raj' - were stifling private initiativeand investment and public sector performance [Ahluwalia 1992;
wastingmeagrepublicresources.Reportedlythe controlsled to Nagaraj 1990].
widespreadinefficiencyin resourceuse, as reflectedin poortotal Speeding up of reforms in the1990s: As part of the orthodox
factorproductivitygrowth,or in the economywiderise in incre- initiatives since 1991, industry and trade policy reforms were
mentalcapital output ratios in the 1970s [Ahluwalia 1985; accelerated, while public investment contracted sharply to reign
Rangarajan 1982]. The gloom was perhapsaccentuatedby the in the fiscal imbalance. Financing of industrial development
oilpriceandagriculturalsupplyshocksin thelate 1970s,together changed considerably as part of the financial sector reform that
withpoliticaluncertaintyas the Indiandemocracyenteredthe cut directed lending, and abolished subsidised credit for the
coalitionera at the nationallevel for the first time in 1977. identified sectors since development banks' access to long-term
Economicand PoliticalWeekly August 30, 2003 3707
Economic and Political Weekly, Vol. 38, No. 35 (Aug. 30 - Sep. 5, 2003), pp. 3707-3715
Figure 1: Share of Employment, Output and Investment in risen from around the mid-1980s for over a decade, without a
Total Manufacturing
trace of the effect of the 1991 reforms in the trend (Figure 2).
50 Thus, in the aggregate, the worst fears did not come true (more
40
about this later).3
Trendanalysis: Table 3 provides the trend growth rates of output
30 for the total and registered manufacturingfor varying time periods
. 20 Table 1: Industrial Growth in Asian Perspective, 1980-2000
(Per cent per year)
Country GrowthRate
0 A
India 6.8
1983 1987-88 1993-94 1999-00 China 12.8
Year Indonesia 10.2
a Employment ? GDP 0 FixedInvestment Korea 9.4
Malaysia 11.2
Singapore 7.7
Figure 2: Employment in Registered Manufacturing Thailand 9.8
6.86 Note: Data are in constant (1996) dollarterms.
6.84 Source: WorldDevelopmentIndicators,2002.
6.82
o 6.8/ Table 2: Share of Manufacturing in GDP, 1980 to 2000
6.78
6.76 Country 1980 1990 2000
6.74-
' 6.72 - 29.5 26.8 17.6
Argentina
6.7 Brazil 33.5 24.0
6.68- Chile 21.5 19.6 15.9
6.66 -, .
Mexico 22.3 20.8 20.7
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 Memo:India 13.8 16.6 17.2
Yearendng
Source: WorldDevelopmentIndicators,2002;,NAS,variousissues.
E- hrploymert
credit from the Reserve Bank and SLR funds were terminated. Table 3: Manufacturing Sector Growth, 1980-81 to 2001-02
Although formal changes in industrial labour laws were avoided (Per cent per year)
due to lack of political consensus, there were adequate signals Period Total Registered DummyVariableTest
to employers that the government would not come in the way (YearEnding) ManufacturingManufacturing Sign Statistical
of restructuringindustrial relations, layoffs and retrenchments Significance
of organised workers - giving up the implicit compact that had 1981-02 6.7 + Not significant
bound capital and labour together in the previous four decades. 1981-91 7.4 8.2
While reforms appeared like a 'big bang' by Indian standards, 1992-02 6.3
1981-01 7.4 + Notsignificant
the pace was gradualcompared with, say, China, let alone Russia 1993-01 6.6
and the east European economies. 1981-00 6.9
Proponentsexpected the reforms to accelerate domestic output Source: NAS,variousissues.
and industrial growth, taking it close to those achieved by the
successful Asian economies. 'Uncaging the tiger', the metaphor Table 4: Growth by 2-digit Industry Groups,
1980-81 to 1999-2000
that TheEconomist's Clive Crook coined, caught the imagination
of the policy-makers and public alike -just as the new govern- Industry TotalManufacturing RegisteredManufacturing
ment was about to be formed in 1991 amidst an external payment Group(NIC)1981-91 1992-00 1981-00 1981-91 1992-00 1981-00
crisis.2 Expectedly, the policy initiatives drew considerable 20-21 7.0 4.9 6.1 9.5 5.2 7.3
criticism, apprehendingdeep retrenchmentof output and employ- 22 2.9 10.8 5.2 8.5 8.4 7.8
23-26 5.5 3.7 4.9
ment as had happened in Latin America, and towards 'dependent 23 5.6 6.3 3.2
development'. 24 5.8 13.8 7.6
How did the industrialsector really perform in the 1990s? How 25 1.9 4.4 0.9
does it compare it with the previous decade? 26 12.8 1.6 14.8
27 (-) 2.7 2.0 (-) 0.8 7.3 4.7 0.9
28 9.1 4.3 6.2 9.2 0.6 5.3
29 3.8 5.1
II 30 9.3 10.4
6.0
10.0
9.7
9.4
3.7
10.6
10.4
10.3
Industrial 1980-81to 2001-02
Performance, 31 14.7 5.5 9.9 17.6 5.5 11.4
32 9 9.9 7.4 11.8 7.7 7.9
Quite unlike Latin America, where the manufacturing sector's 33 5.7 8.1 7.4 5.4 8.4 7.2
share in GDP declined sharply over the last two decades, in India 34 6.0 6.9 4.3 6.5 7.9 6.2
the share in the 1990s has remained broadly the same, with a 35 6.0 8.7 6.1 6.0 8.5 6.0
36 12.5 12.3 10.0 10.7 13.0 9.6
marginal rise (Table 2). As Figure 1 shows, the manufacturing 37 5.5 6.3 5.3 5.4 5.5 6.5
sector's share in workforce has remained roughly constant at 38 11.1 7.6 7.1 7.7 7.0 7.3
around 12 per cent. Registered manufacturing employment - in 39+97 7.1 8.3 5.4 15.3 6.8 13.2
factories regularly employing J0 or more workers constituting Total 7.7 7.5 7.2 8.5 7.4 8.0
about one-fifth of total manufacturingemployment- has steadily Source: NAS,variousissues.
3708 Economicand Political Weekly August 30, 2003

Figure 3: MachinerySector's Share in ManufacturingOutput incremental demand was met by imports, as the import-to-
30 l consumption ratio nearly doubled from 29 in the 1990s, to 56
20 - per cent in1995.5
Due to the differing growth rates over nearly two decades, the
15
relative weights of use-based industrial groups have changed
considerably. To discern their long-term changes in registered
O . .....
... - .
......... manufacturing, we have looked at their shares in every decade
lip <^ <lb since 1960-61 (Table 6). During nearly three decades since
~'.,' t'O O' <<?
t,,' q; tlb Ao'
<'
' t ,'
<,'
<'^~
c' 4 ' ' .
1970-71, the share of consumer goods has gone up by 7 per-
Year
centage points from 35 per cent to 42 per cent - mainly on account
- Registered - Total
of consumer durable goods. Shares of basic and intermediate
goods have gone down, while that of capital goods increased
between 1980-81 and 2001-02. Evidently, the growth rates are, marginally by about one percentage point.
in general, lower in the 1990s compared with those in the previous Though informative, the above findings are incomplete, as they
decade. However, a dummy variable to test for a break in the exclude the unregistered sector, which constitute one-third of the
series in 1991-92 does not show any statistically significant total manufacturing value added. Moreover, with the diffusion
change in the growth rates. Thus, industrial growth during the of technology and skills, spread of electricity, and in response
last two decades have remained roughly the same, both for total to a variety of policies to encourage small enterprises, many
and registered manufacturing. industries have got diffused in the unorgainsed sector in this
Results of a similar exercise for disaggregated (2-digit) industry period. While such a process is more likely in consumer goods
groups are reported in Table 4. During the two-decade periods, industries, it is probably true to a lesser extent in machinery
in total manufacturing,chemicals (NIC 30), rubberand petroleum manufacturing, since technology in these industries is amenable
(NIC 31), and electrical machinery (NIC 36) have grown at above to division of labour and specialisation. But we cannot satisfac-
average growth rates by a reasonable margin. The same is true torily capture these changes, as use-based classification of
separatelyfor each of the two decades. Similarly, textile products unorganised sector output is not available.
(NIC 26), leather,chemicals, rubberand petroleum, (NIC 29-31), However, as a proxy for capital goods, we take the share of
and repair services (NIC 39+97) grew faster than the average NIC 35 to NIC 37 in total manufacturing output (Figure 3).
in registered manufacturing. Expectedly, the capital goods' share in total manufacturing is
Growthby use-based industrial groups: Many believe, the sharp smaller than that in registered manufacturing. The two shares
reduction in tariffs for capital goods in the 1990s has severely move in parallel, though there seems to be some narrowing of
affected their domestic output - 'massacre of machine building', the gap between the two, suggesting a notable diffusion of capital
to use Ashok Desai's (2001) graphic description. Initial assess- goods production in the unorganised sector.
ments, based on the index of industrial production (IIP) with But strikingly, capital goods' share in total manufacturing,after
different base years gave conflicting evidence in this regard. We peaking at about 18 per cent in 1984-85 has stagnated in the
now have a better basis to assess this proposition using the ASI following decade-and-a-half. Thus, reforms have severely
data for the period 1980-81 to 1997-98 (Table 5).4 The capital affected the sector - at least in the aggregate. Arguably, the steep
goods sector has grown at 6.7 per cent per year during 1981-98,
and at 5.7 per cent per year during 1992-98; but there is no Table 5: Growth in Registered Manufacturingaccording
to Use-Based Classification of Output,
statisticallysignificant break in the trend growth rate in 1991-92. 1980-81 to 1997-98
The same is true for all the use-based industrial groups. Thus, (Per cent per year)
the trend in output growth in the decades of the 1980s and the
Use-Based Group 1980-81/ 1980-81/ Dummy
1990s are broadly similar - in the aggregate, by 2-digit industry 1997-98 1990-91 VariableTest
groups as well as by use-based classification of output.
1 Basic goods 8.3 8.0 (-) Not Sig
However, these trends seem to hide significant variations
2 Intermediategoods 10.7 11.2 (-) Not Sig
across specific products and industries. Within capital goods, 3 6.7 5.3 (+) Not Sig
Capitalgoods
production (in numbers) of passenger car - a widely accepted 4 Consumergoods 9.1 8.9 (-) Not Sig
indicator of conspicuous consumption in a poor country -went 4.1 Consumerdurablegoods 12.5 12.0 (+) Not Sig
up from about 31,000 in 1980-81 to about 5.8 lakhs in 2000, 4.2 Consumernon-durablegoods 8.5 8.3 (-) Not Sig
representingan annual growth rate of 15 per cent during the two Source:EPWResearch Foundation(2002).
decades.
Its contrast with machine tool industry - the heart of domestic Table 6: Changes in the Use-Based Classification of Registered
machine building capability - is telling. Gross value added ManufacturingOutput, 1960-61 to 1997-98
in this industry grew at a mere 1.7 per cent per year during Use-Based Groups 1960-61 1970-71 1980-81 1990-91 1997-98
1981-97, witnessing a negative growth thereafter. Indian
1 Basic goods 27.5 30.7 21.3 23.7 23.0
Machine Tool Manufactures' Association says, "Output by
2 Intermediategoods 21.0 19.0 16.3 16.8 17.0
domesti metalworking machine tool manufacturers in 2001 3 Capitalgoods 10.7 15.2 21.2 17.5 16.3
calendar year declined by 14 per cent to Rs 5,137 million marking 4 Consumergoods 40.8 35.1 41.1 42.0 43.6
fourth year of decline, since 1997, for the Indian machine tool 4.1 Consumerdurablegoods 2.5 2.8 4.8 6.8 8.8
4.2 Consumernon-durable
industry" (http://imtma.org/aimti.htm). Domestic machine 38.3 32.6 36.4 35.2 34.8
tool production stagnated at a time when industrial investment goods
really boomed (discussed later). Evidently, much of the Note: Dataforthe years 1960-61 and 1970-71 are fromAhluwalia(1985:9).
Economicand PoliticalWeekly August 30, 2003 3709

Figure 4: Real Price of GFCFby Type of Assets since 1982 leading to substantial capacity creation, entry of new
140 - firms and technological upgradation (moving from wet to dry
120
process, thus lowering of the energy intensity of output). As the
100 - -_ _ C -
real price of fixed investment has gone down, and the share of
machinery in gross fixed capital formation (GFCF) has risen
40- ..._._ steadily, the additions to the capital stock are much more pro-
20 ---_------
ductive. This, in principle, would have economywide effects on
potential output and productivity growth.
Growth of construction sector: With the relaxation of supply
,'0f ,w ;\ ' o
^b'6 <S lb', Zoy 3O@O' 9' 9 o?99 99?'
constraints on cement and steel, and a fall in their real prices,
there seems to have been a steady growth in the construction
Machinery-a-Construction Year
sector. Though not evident from domestic output estimates,
Figure 5: Workforce Distribution, 1983-2000 employment figures seem to show a clearer picture.6 The
80 - employment (usual status) share in construction for all India has
70 F __ nearly doubled from 2.3 per cent of the total workforce in 1983,
to 4.4 per cent in 1999-2000 [Chadda and Sahu 2002]. Therefore,
60
50 quite contrary to the popularly held view, the employment share
of the industrial sector (mining, manufacturing,construction and
40
_30 utilities) shows a moderate increase in the last two decades,
20 despite stagnation in manufacturing's share (Figure 5).
10 Betterfunctioning of industrial market: Undoubtedly, economic
0- reforms have increased domestic and external competition,
1983 1987-88 1993-94 1999-00 providing greater consumer choice. A relative cheapening of
Y-far capital goods under pressure from import competition has made
[ Agriculture
* Industry0 Services fixed investment more productive, the gains of which are increas-
ingly passed on to consumers by price reduction, or quality
Figure 6: ManufacturingOutput Growth, 1991-2002 improvement. Firms can no longer implicitly operate on a 'cost
201 plus' pricing principle. The shift in market conditions is perhaps
best reflected in manufacturers'growing use of consumer credit
co
15At,, ,.. to induce sales of durable goods.
)10 Moreover, the widely commented corruption in the industrial
licensing system at the level of the central government has got
largely eliminated, as entrepreneursnow have to merely register
o5- -- -- ----1995 16 17 18 19 20 21 their proposed project with the concerned ministry, while state
-5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 governments compete with each other for private investment with
Yearending incentives. These are certainly significant gains of the gradual
reforms over the last two decades.
---IIP manufacturing-- Totalmanufacturing
GDP
On a close look, however, there are many causes for concern.
Figure 7: Fixed Investment Growth in Total Manufacturing
70 l Ill
60 -- A Closer Lookat the 1990s
50 -/ \ __
While the trend growth rate in the 1990s is the same as in the
I 30--- previous decade, the yearly growth rates show an interesting
pattern (Figure 6). After an expected contraction in response to
,- 20 the external payment crisis in 1991-92, industrial output re-
bounded rapidly in the following four years, peaking in 1995-
-10
-10 9 94 95 97 96. In fact, the annual growth rate of output of over 14 per cent
-20
Yearending
in that year is perhaps the highest ever recorded in India. The
--- Fixedinvestment sharp upturn is widely credited to policy reforms, with the
expectation of further acceleration with more reforms.
iise in imports reflects poor capability of the domestic industry But the growth rate steadily decelerated in the following seven
and its high prices. While there may be some merit in such an years, except for a minor improvement in 1999-2000. Though
argument, it is hard to believe that such an outcome was in- it is not yet evident as a statistically significant break in the trend
evitable, with policy reforms. growth rate, the perceptible slowdown for so many years is surely
Capital goods prices: But the flip side of this is that, the real a matter of concern. The deceleration is even sharper in fixed
price of capital goods - the ratio of prices of capital goods to investment, which has turned negative in recent years (Figure 7).
the GDP deflator - has steadily come down during the last two As there was an investment boom in manufacturing without a
decades with the decline in tariffs, especially since 1993-94 corresponding rise in output growth, there is now a huge excess
(Figure 4). The same holds true for the real price of construction capacity, especially in consumer durable goods, the automotive
- a positive effect of gradual decontrol of the cement industry industry -and more generally in capital goods.
3710 Economic and Political Weekly August 30, 2003

Figure 8: Unregistered Sector's Share in Manufacturing to the small-scale sector in unregistered manufacturing - as
Fixed Investment
proportions of (i) total non-food credit, and (ii) net bank credit
601 - has declined from over 16 per cent in the late 1980s to less
50 than 12 per cent a decade later (Figure 9). In other words, in
the liberalised regime and without a change in the legal environ-
40
ment, commercial banks had little incentive to lend to small
30 enterprises.
Thus, after over two decades of 'creeping' liberalisation - to
borrow Pranab Bardhan's (1998) phrase - there is now wide-
spread gloom, with decelerating growth for nearly seven years
0'. since the mid-1990s with a huge excess capacity in many in-
dustries. This is in sharp contrast to the euphoria that marked
O
I *,V, , . , , , , , i ,jqr ,, ,,
Q-
, \
*-^
, I ,.\
Y ^
the initiation of the orthodox economic reforms a little over a
_ ____ __- *
decade ago.
Year Evidently, there is an uncanny resemblance of the current
- Unregisteredsector's share industrial outlook with that around 1980, which we described
at the beginning. Why did reforms not lead to an acceleration
Figure 9: Bank Creditto SSI, 1980-81 to 2000-01 of output growth with a greater share of labour-intensive manu-
18 factures and exports? More pertinently perhaps, why has growth
14 tapered off after the mid-1990s, although there were no signi-
12
ficant policy reversals'? If anything, regardless of the political
_
'? 1
a 10 - -- - -- .-- - -- -. -- -_ _ -- dispensation in power, successive governments have sought to
iron out the wrinkles in the reform process. Is it a question of
the reforms being too little, too late? Or is it a mere failure of
81-------- --------- _----- --- .- _
6 . __ ...___ ___ _
_._._
... _ . implementation of a sound design (political and bureaucratic
inertia)?
These are serious questions that have a bearing not just on in-
4. 0 _ Co'00_00 D00 0 C0 . 0_ _ CTO 1 0 ) 0 ._
L) _. ^0000
__10-
00 .0 . 0O CJ
0
dustrialperformance,but also perhapson the validity of the analy-
oo a00()
0oo
Co
0) 0
o
(0(0(0(0
0o0
e)
00o
05
o0 O0 o 00O
O oo
o(0 o (0)
O (0
03 O0)
0 o )0(0 0 ((0
0
au
OT
) 0))_
a)OlO0
0
o0
0)
0( OT
OT
o 0
a)
0
0) O
o
(0
9~ 9
00
90
0
tical model that underpins much of the current policy discourse.
_ _ _ It - cM c
Year
-- As per cent of non-food credit --As per cent of net bank credit IV
Towardsan Explanation
Divergence in performance: By doing away with the reported The policy initiatives of the 1990s were based on considerable
import substitution bias in industrial policy, reforms were ex- supportfrom the mainstreameconomics. They were, in principle,
pected to boost output and exports of labour intensive manu- expected to set right what was widely believed to have been wrong
factures.If we accept the distinction of registered and unregistered with India's industrialisation effort. As T N Srinivasan argued,
sectors as proxies for import competing and export-oriented "They (the reforms) were solidly based on an understanding of
manufacturingrespectively (as is widely done in the literature), what went wrong with Indian development strategy since 1950
then the experience of the 1990s seems to be at variance with thatdelivered neitherrapidgrowth nor appreciablygreaterequity"
the priori expectation. [Srinivasan 1993:258]. In Jagdish Bhagwati's view, the three
While there was an investment boom in the registered sector, main elements of India's policy framework that stifled growth
the unregistered sector has suffered. The unregistered sector's and efficiency were: "extensive bureaucraticcontrols over pro-
sharein total manufacturingGFCF has nearly halved, from around duction, investment and trade: inward looking trade and foreign
45 per cent in the mid-1980s to less than 20 per cent by the end investment policies, and a substantial public sector, going well
of the 1990s (Figure 8). What explains this? Investments seem to beyond the conventional confines of public utilities and infra-
havebeen driven by the potential size of the domestic market,and structure" [Bhagwati 1993:48]. Joshi and Little (1994:3) con-
the expectation of its growth in the liberalised regime.7 This is tended, that "India's control system was not only micro-
particularlytrue of consumer durable goods and the automotive economically inefficient but macroeconomically perverse", im-
industry,largely driven by a surge in foreign direct investment plying that the industrial policy was responsible for persistent
[Nagaraj2003]. Many incumbentdomestic firms responded to the fiscal deficits and periodic balance of payment crises.
threatof new entry by modernisation, expansion and strength- Broadly, none of these features of the policy framework remain
ening the distribution network, thus contributing to the invest- any more after 1991. Why, then, has manufacturingsector growth
mentboom. However, this did not translateinto output growth as slowed down so precipitously since the mid-1990s? Why haven't
the size of the marketwas found to be much smaller thanprojected. the budgetary imbalances disappeared with the doing away of
Investment in unregistered manufacturing was probably hurt the allegedly worst features of the policy framework?
by high interest rates in the initial years of reforms.8 While Desai (2001), among others, has argued that the credit squeeze
interest rates came down in the second half of the 1990s, in 1996 and rise in interest rates throttled the boom of 1993-96.
commercial banks have resisted lending for productive sector While it might have been true in the short run, why has industry
as they found it profitable to invest in risk-free government not revived despite the steady loosening of credit constraint and
securities. As a proxy for access to fund investment, bank credit the fall in interest rates over the past seven years?
Economic and Political Weekly August 30, 2003 3711

Figure 10: Trends in AgriculturalProduction, 1980-81 output and income in this sector are rising rapidly, consumer
to 1999-2000 demand for both agriculturaland non-agriculturalproductscan
4- also be expected to increase rapidly, the latterbeing even more
than the former since higher proportionsare generally spent on
non-agriculturalproducts as levels of income rise. Output and
incomes in the agriculturalsector need not of course always rise
together since the effect of sharp increases in output could well
AllCrops Frs Nn- Crs Re Wat be to lower the prices of agriculturalproductsmore than propor-
AllCrops Foodgrains Non- Cereals Rice Wheat tionately;this is in fact an importantfactorgoverningagricultural
foodgrains income in some regions of the country characterisedby serious
Crops year-to-yearvariationin climaticconditionsandwatersupply [Raj
01981-90 a 1991-2000 1986:225i]
Without denying that long-term constraint in a developing
Many attributethe slowdown (lack of sustained improvement economy is one of supply of savings and investment, Sukhamoy
in the 1990s) to the stalled reforms. They believe a quick and Chakravartyargued that under specific circumstances that India
sharp reduction in tariffs to the average levels of many Asian faced, lack of aggregate demand could become a binding con-
economies, pulling down the remaining restrictions on foreign straint [Chakravarty 1979 and 1984].
direct investment, and removal of policy-induced rigidities in the From a variety of analytical perspectives, it is widely accepted
industrial labour market would deliver the desired fruits of that autonomous public investment in a developing economy
reforms. These arguments merit closer examination. helps create large demand for industrial goods as well as relieve
If such an argument is valid, then the hastening of the reforms infrastructuresupply constraint [Narayana and Srinivasan 1978;
in the 1990s, compared with the previous decade, ought to have Patnaik and Rao 1978]. Pandit's (1995) survey of macro-
improved industrialgrowth rate, which evidently did not happen. econometric evidence seems to unambiguously support the view
Moreover, in comparative experience, there is little evidence to that public investment 'crowds-in' private investment. Inter-
suggest an unambiguous positive association between the scope national evidence also suggests that public investment in infra-
(and speed) of reforms and economic outcomes. If one can cite structure does not displace private investment, but crowds it in
cases from Asian economies as successful examples of following [Serven 1996].
the orthodoxy, there are equally compelling cases from Latin Combining the above arguments, one can perhaps contend that
America with adverse outcomes. industrial growth in India is largely run on the twin engines of
Thus, there are no clear signals as to how to reverse the trend agricultureproductivityandpublic investment. Apparently,neither
of decelerating industrial growth, except for the fond hope that of these was functioning well in the 1990s.
furtherrelaxation of rules governing the use of capital (domestic Agricultural performance: In the aggregate, there are no signs
andforeign) and labourwould somehow do the trick.9 Moreover, of a statistically significant slowdown in the growth of GDP
the view that 'reforms have not gone far enough' resembles the in agriculture in the 1990s [Nagaraj 2001]. However, there are
argumentsin earlier times when repeated failure of the five-year other pieces of evidence, mainly based on physical output
plans to meet targets was attributed to 'not enough planning' growth, at the disaggregated level, that seem to suggest a dif-
or 'lack of political will', despite the growing evidence of the ferent tendency.
economy's structuralweaknesses, or the heavy hand of bureau- A comparison of land productivity of all major crops (and
cracy. Therefore, such arguments in favour of more reforms do crop groups) between the 1980s and the 1990s shows a
not seem to be based on an application of economic reasoning distinctly lower trend growth rate in the latter decade, except
and examination of the evidence. Thus, there is a reason for us for wheat (Figure 10).10 If this evidence has any merit, then
to look for an alternative explanation. poorer agricultural performance could have adversely affected
It is perhaps useful to start with the classical economic view. the demand for industrial goods.
As Arthur Lewis once asked, "What limits the size of the The indifferent agricultureperformance in the 1990s is perhaps
manufacturing sector?" His preliminary answer was, "produc- associated with the much-commented slowdown in public in-
tivity of farmers whose marketable surplus will exchange for Table 7: ManufacturingValue Added Per Capita in Selected
manufactures" [Lewis 1984:121]. As India is still a large and Industrialising Economies
poor agrarianeconomy with 3/5th of workforce still dependent Countries Value Added Per Sapitain
on agriculture(in Bihar it is close to 3/4th), with land productivity Manufacturingin US$ in 1998
being one-third of China's, per capita value added in manufac-
1253
turing is the lowest among the newly industrialising economies; Argentina
Brazil 1078
and one-fourth of China's (Table 7). Mexico 821
If we accept, following Chenery's stylised fact, that large HongKong 1738
countries in general have low trade ratios, and that India does Korea 2142
not have abundant natural resources for exports, then industrial Singapore 6064
India 70
growth largely boils down to the size (and growth) of the domestic China 286
market.This, in turn,yet largely depends on how agriculture per- Malaysia 946
forms. The rich discourse on India's industrialisation experience Indonesia 115
has shown that in a poor agrarianeconomy lack of demand could Thailand 582
be a binding constraint on industrial growth. To quote K N Raj: Turkey 501
Memo:Highincomeeconomies 5344
Privateconsumerdemand in a country such as India depends to
a large extent, ... on how things go in the agriculturalsector. If Source:Weiss (2001): 15.

Figure 11: Share of Manufacturing and Infrastructure from 8-10 per cent per year in the 1980s to 4-6 per cent in the
in GFCF
1990s (Figure 12). The fall in public investment has been so
50 drastic that it is now - to rephrase Bhagwati's earlier quote -
451 -:= ^- = 7
4o5 ------
40 --_ -_--- --- well behind the conventional confines of public utilities and
35 infrastructure.
_ 0>
S3 b. A ?
25 _+ ?_
While some may applaud this 'achievement' at dismantling
the public sector's role in the provision of social overhead
capital, this has not led to a surge in investment and employment
in labour-intensive manufactures. But the fall in infrastructure
investment seems to have constrained industrialoutput and export
growth, and also perhaps the inflow of foreign direct investment.
s' s <s sZ as
N ,# $ ,o @ 9 9N9 9N 9N N o Economic theory seems fairly clear that when markets fail, as
__________1981-2001 often happens in the industrial sector which has considerable
Year
-. --Manufacturing
-_-Manufacturing ; ..- Infrastructure
Infrastructure externalities, economies of scale, scope and network, state inter-
102
vention, in principle, improves social welfare. Such a view is
increasingly countered by arguing that in developing economies,
12: Annual Growth in Electricity Generating Capacity,
Figure8/---, the costs of 'state failures' due to inefficiency, waste and cor-
~5
ruption could outweigh the costs of market failure.
14 i As such disputes cannot be resolved analytically, we have to
O A
-, . , , , I , ,
15 .------------------------
look at evidence on marketfailure versus state failure in the course
of industrialisation.The experience of successful industrialisation
Year
ending in the 20th century does not seem to support the state failure
hypothesis in the aggregate: if anything, the sustained ability at
L 6
Figure12:- Annual Growth in Electricity
Generating apacity acquisition of technical capability in late industrialising econo-
mies has gone hand in hand with substantial, yet responsive, state
action [Amsden 2001]. On the other hand, leaving more and more
economic decisions to markets uncritically during the past two
Bath~l198a
-2001] decades seems to have led to deindustrialisation, as measured
by workforce distribution [Weiss 2002]. Chile is probably the
prime example of Latin America's most industrialised nation
getting transformed into a primary producer of exotic (counter
seasonal) agricultural produce.
vestmentin this sector. Althoughan improvementin private v

investment seems to have partiallyndin
dema
~~~Yelabour compensated for the
ahu (2002) decline
show that
inbetween and 2000, there
investment,
public1993 u is an undeniable
nerat have
es decline
whilepacity in total Policy Options andConstraints
gone up,
agricultural
agricultural investment growth [Roy and Pal
investmentgrowth [Roy and Pal 2002; Gulati
2002; Gulatiandand If the foregoing discussion has any merit, then what should
meant
it had
Bathla in this sector. Althpreviough
2001]. an improvement.
This found tobe be done for industrialrevival? There is widespread support from
true stment
Poor seems to
byagricultural have partially
performance compensated
seems for thein
to be alsoevident decline
lower diverse analytical perspectives for stepping up public infra-
public investment,theraoe a evideniable
Thus in
decline tosuggest structure investment, but the endorsement weass thin as to how
to finance it. Financing by increasing user charges and cutting
adeterioration
of performance
agricultural seemsto be 1990also
evidentin lower down delays and waste in public sector (reducing X- inefficiency)
true have
by all
p erhaps measures ofaffected
adversely industriSahu
unemployment. (2002) showth. are obviously the first-best solution, but it is a gradual and
public investemployment
reformstween, haverates
one-half
of which
is in in- politically difficult - but perhaps not an insurmountable- process
in a democratic set-up. Probably the best practical option in the
it hadcomeinfrastructure
down decade.This is found to be
aousutilities
prev(mining, medium-term is to use the available food and foreign exchange
Public investment: It is widely accepted that1970-71.seems
as partofto
economic reserves for stepping public infrastructureinvestment - perhaps
manufactures,
piecingin GFCF
foetherthe periodsince suggest
on the lines that Shetty (2001) suggested. Given the overflowing
the
declinterioration
- infrastructure'sshare in
started the hat
1990secondcould
frastructure
frastructure waswas deliberately
deliberately reduced.1i
reduced.1I Figure
Figure 11 shows
shows the food stocks and considerable excess capacity in industry, the
perhapshave adverselyaffected in themanufacturingsector's inflationary potential of such a stance is likely to be modest. But
PublicinvesItharein GFCF.wIf ee takeal longer time-period what if such a policy accentuates the existing fiscal imbalance?
reforms,public investment- over one-halfre of publicisinvest- But it need not necessarily happen, as is often believed. As Mihir
of thein1980s andbecame Rakshit argued:
men the late
its mirror image1990s,
abo in
atsharp 30the
can be found in per
ut mid-1990s. Interestingly,
cent of total GFCF, has
the manufacturing sector's Even in mainstream economics it is recognised that the fiscal
manufacturing in GFCFfor the period sinthe
early 1950swh1.
Evidently,
India
increasing share in GFCF. If we take a longer time-period deficit cannot be a primarypolicy parameter,but is the outcome
the
(notdecline in investment
shown public
here), iure's that
we discover be
the
perhaps shareinofthe
stcaptured second
public half
invest- of the workingof theentiresystem... [in] Indiaalmostall industrial
ment in1980s
precipitouhe late in
the fall 1990s, at sharp
thbecame aboutin
30thelectricity
per centgenterestingl
of total GFCF, has
capacity units producing heavy machinery, equipment and basic metals
fallen close to the level it was in the early 1950s when India belong to the public sector;and the wage bill in the large majority
initiated plannedeconomic
initiatedplanned development.In
economicdevelopment. physical terms,
In physical terms,the
the of these enterprisesconstitutesa fixed ratherthan a variablecost
decline in public investment is perhaps best captured in the in the short and medium run. This implies that (i) an increase in
precipitous fall in the growth of electricity generation capacity the demand for fixed capital goods met from domestic sources

raises public sector savings by an almost identical amount;and The much expected restructuring of production away from
(ii) the value of the investment multiplieris close to unity. Thus domestic market orientation, and towards labour intensive
even the short-runeffects of public consumptionand investment manufactures and their exports has not happened - at least not
on aggregatedemandarequitedifferent[Rakshit1994:269-70].12 as yet. If anything, import competing organised manufacturing
Within mainstream economics there are many who argue that has been strengthenedby the investment boom, while unregistered
after reforms the markets may be less imperfect, but may not manufacturing suffered in the 1990s. Much of the boom went
'naturally' lead to improved growth performance. Dornbusch into production for the home market. Quite contrary to Joshi and
famously argued. "Stabilisation may be inevitable, but it is not Little's (1994) contention, elimination of the import substitution
a ticket for prosperity...One should not presume that the market bias and the decline in the public sector's role in manufacturing
automatically solves the coordination problems..." [Dornsbusch have not resulted in a decline in macroeconomic perversity, as
1990:42-43]. A large and credible public investment programme evident from persistent fiscal imbalances even after a decade of
- besides creating the well known economywide supply and economic reforms.
demand linkages - could go a long way in stabilising the private Why did industrial and export growth not accelerate in the
sector's business expectations, and provide powerful signals on 1990s with the speeding up of the orthodox reforms? More
the broad direction of the economic policy, and the commitment precisely, why did the growth momentum of the 1980s taper off
of policy-makers to it. Further,it would perhaps not be incorrect so sharply after a mere four-year boom in the early 1990s? The
to argue that in a poor and inequitous, agrarian economy like experience seems to suggest that the much argued positive
ours public infrastructureinvestment contributes towards effi- association between reforms and growth seems suspect, or
ciency as well equity.13 overdone. What, then, should we do to revive industry?
Agriculture has received less policy attention in recent years 'Stalled' reforms since the mid-1990s are widely believed to
as food stocks have risen well beyond the needs of safe levels be responsible for the industrial deceleration. Such a view pre-
for food security. But such a policy overlooks the fact that what sumes a positive association between speed (anddepth) of reforms
is procured and distributed by the public distribution system and output growth - a view sustainable neither in principle nor
forms a small part of total food production and consumption; in comparative experience. Successive governments in the 1990s
and a sizeable (though declining) share of food output is not have, by and large, sought to operationalise the reforms and
marketed at all. Therefore, what share of rural income is left for remove various bottlenecks rather than go back on them - but
non-food consumption depends on food production (and its with little effect.
prices), as poor and marginal farmers are net buyers of food. Therefore, it needs to be recognised that the industrial sector
currentlysuffers from a lack of demand especially of investment,
and not of supply - constrained by policy. In a poor, agrarian
VI economy there are many structural features that can constrain
SummaryandConclusions industrialdemand, although low capital stock per head continues
To sum up, industrialoutput growth during the last two decades to be the long-term constraint. Lack of demand seems to be on
has improved compared with the previous period of 'relative account of poor to indifferent agricultural performance in the
stagnation'. But contrary to both the euphoria and apprehension, 1990s and a deep cut in public infrastructureinvestment since
with the acceleration of reforms there has been little change in the late 1980s.
the trend growth rate of output in the 1990s compared with the Following the classical economic precepts, there is an urgent
previous decade. Moreover, since the mid- 1990s, therearedistinct need to refocus policy on stimulating agricultural productivity
signs of a slowdown in growth for seven years now. that creates ruraldemand. With growing capital intensity of crop
Gradualism in industry and trade policy reform during the last production, such a move will not only augment demand for
two decades has some notable achievements to its credit. Indus- consumer goods but also for capital and basic goods. Stepping
trial marketshave become more competitive, and product quality up public infrastructure investment would not only generate
and variety have improved substantially. A relative cheapening investment demand but also ease the constraints on infrastructure
of machinery and construction have made fixed investment more supply that could bring in domestic investment, and probably
productive. An improved supply of cement and steel, and a fall the much sought after foreign investment as well. Given the
in their real prices, has spurred the construction sector whose structural features of the Indian economy, a carefully crafted
sharein total workforce has nearly doubled - increasing industrial strategyof financingsuch investmentmay not worsenthe budgetary
sector's share in the total workforce. imbalance as widely apprehended - on the contrary it may
Contrary to many apprehensions, the trend growth rate of improve it, if the utilisation of excess capacity stimulates internal
capital goods in the registered manufacturing has not declined savings of enterprises. i3
during 1992-98 from that in 1981-91.While the capital goods Address
sector's share in registered manufacturing has increased by for correspondence:
nagaraj @igidr.ac.in
about one percentage point in the 1990s, the share in total manu-
facturing has virtually stagnated since the mid-1980s, clearly
suggesting the negative effect of reforms on this sector. More-
Notes
over, the aggregate performance seems to hide more than it [I am grateful to K V Ramaswamy, C Rammanohar Reddy and
reveals. To illustrate, the number of passenger cars produced has M H Suryanarayana for their comments and suggestions on an earlier
draft of this study. None of them are responsible for the errors that
increased at 15 per cent per year for two decades now. But the remain.]
machine tool industry- making the mother machines - has barely I Unless mentionedotherwise, the growth rates in this paperrefer to log-
grown with imports to consumption ratio nearly doubling in linear trendgrowth rates, and all economicaggregates are measuredat
the 1990s. constant prices.

2 Clive Crook wrote, "India is a caged tiger. The tiger, set free, can be Bhagwati,Jagdish(1993): India's Economy:TheShackledGiant,Clarendon
as healthy and vigorous as any in Asia. ... What needs to be done is Press, 1993
clear.... The governmentmust dismantle an unbelievablycomplicated Chadda, G K and P P Sahu (2002): 'Post-Reform Setbacks in Rural
system of restraintsand rewards that, over the past four decades, has Employment',Economicand Political Weekly,Vol 37, No 22, May 25.
securely enclosed every aspect of Indian life. The first and necessary Chakravarty,Sukhamoy(1984): 'Aspects of India's Development Strategy
step is to see these restraintsand rewardsas the cage that they are"(The for the 1980s' in reprintedin Chakravarty's,Selected Economic Writings,
Economiist:India Survey, May 4, 1991:5). Oxford University Press, Delhi, 1993.
3 Reportedly,therehave been large-scaleretrenchmentsin older industries - (1979): 'On the Question of Home Market and Prospects for Indian
and locations like Mumbai, though the official estimates do not seem Growth', Economic and Political Weekly,Vol 14. Nos 30-32, August,
to reflect the reality as the system of reportingof labour statistics has Annual Number.
deteriorated.Howell and Kambhampati(1999) give a grim picture of Desai, Ashok (2001): 'A Decade of Reforms', Economic and Political
textile workers in Ahmedabad. Weekly,Vol 36, No 50, December 15.
4 The latest ASI data are available up to 1999-2000. We are unable to Dornsbusch,Rudiger(1990): 'Policies to Move fromStabilisationto Growth',
use the informationfor the last two years of the 1990s as there is, once Proceedings of the World Bank Annual Conference on Development
again,a change in the industrialclassificatiol, and the census and sample Economics, World Bank, Washington, DC.
sectors within the factory sector have also been redefined. We believe Economic Advisory Council (1987): Public Enterprises in India: Some
the broadtrendsreportedin this study are unlikely to change by adding Current Issues, Economic Advisory Council, New Delhi.
the datafor the latesttwo years. In this study we have used the consistentEPW Research Foundation(2002): Annual Survey of Industries, 1973-74
time series compiled by EPW Research Foundation (2002). to 1997-98 - A Data Base on the Industrial Sector in India, EPW
5 High level of import-to-consumptionratio in machine tools would not Research Foundation, Mumbai.
have matteredif theirexports were also growing rapidly.Machinetools
Gulati, Ashok and Seema Bathla (2001): 'Capital Formation in Indian
are a highly tradedgoods, even among countries like the US, Germany
and Japan, with considerable economies in specialisation. Agriculture Re-visiting the Debate', Economic and Political Weekly.
Vol 36, No 20, May 19.
6 While outputhas boomed since cement decontrol in 1982, neitherfixed
Howell, Jude and Uma Kambhampati(1999): 'Liberalisationand Labour:
capital formation in construction nor domestic output in construction The Fate of RetrenchedWorkersin the CottonTextile Industryin India',
shows a correspondingincrease, suggesting a growing underestimation
of value addition in this sector [Nagaraj 2001]. Oxford Development Studies, Vol 27, No 1, February.
7 Much of this investment was predicated on the estimated size of the Joshi, Vijay and I M D Little (1994): India: Macroeconomicsand Political
domestic marketfor consumer durablegoods to be around200 million Economy, 1961-1991, Oxford University Press, Delhi.
- based on private market research and consumption surveys. Lewis, W Arthur(1984): 'Development Economics in the 1950s', Gerald
8 Many believe the reservationpolicy for small scale industries(SSIs) is MeierandDudleySeers(eds), PioneersinDevelopment,OxfordUniversity
responsiblefor the lack of investment in the unregisteredsector. While Press, New York.
de-reservationsurely meritsattention,the policy cannot perhapsexplain Nagaraj, R (2003): 'Foreign Direct Investment in India in the 1990s:
the fall in investment,as the reservationis restrictedto a small number Trends and Issues', Economic and Political Weekly, Vol 38, No 17,
of industries,with a modest share in SSIs' output. April 26.
9 This view is well reflected in the official Economic Survey since the - (2001): 'National Income and Balance of Payments Statistics: A
early 1990s. Review' in C P Chandrasekhar and Jandhyala B G Tilak (eds),
10 I owe an earlier version of this graph to G S Bhalla. India 's Socio-Economic Database: Slurveysof Selected Areas, Tulika,
11 Usually infrastructureincludes mining, utilities, transport and com- New Delhi.
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were also included,keeping in view the agrariannatureof the economy, and Issues', Economicand Political Weekly,Vol 15, No 41, October 13.
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International Monetary Fund:
Background and Issues for Congress
Martin A. Weiss
Specialist in International Trade and Finance
July 17, 2014
Congressional Research Service

7-5700
www.crs.gov
R42019
International Monetary Fund: Background and Issues for Congress
Summary
The International Monetary Fund (IMF), conceived at the Bretton Woods conference in July
1944, is the multilateral organization focused on the international monetary system. Created in
1946 with 46 members, it has grown to include 188 countries. The IMF has six purposes that are
outlined in Article I of the IMF Articles of Agreement: promoting international monetary
cooperation; expanding the balanced growth of international trade; facilitating exchange rate
stability; eliminating restrictions on the international flow of capital; ensuring confidence by
making the general resources of the Fund temporarily available to members; and adjusting
balance-of-payments imbalances in an orderly manner.
Congressional interest in IMF activities has increased since the onset of the financial crisis in
2008. IMF lending has surged in recent years, particularly in light of large recent loans to Greece,
Ireland, and Portugal. In 2009, major economies agreed to substantially increase the IMF’s
resources and to move forward on several major reforms at the institution. These include
increasing the voting share of emerging economies; revamping the IMF’s lending toolkit to
introduce greater flexibility and create new facilities for low-income countries; and creating a
road map for resolving the fast-growing economic imbalances in the global economy between
surplus and deficit countries. In late 2010, IMF members agreed to a doubling of IMF quotas,
which would require congressional authorization and appropriations.
The United States was instrumental in creating the IMF and is its largest financial contributor.
Since voting shares are based on financial contributions, the large U.S. voting share provides the
United States veto power over major decisions at the IMF. Both the IMF and its sister
organization, the World Bank, are headquartered in Washington, DC.
At the Bretton Woods conference, the IMF was tasked with coordinating the system of fixed
exchange rates to help the international economy recover from two world wars and the instability
in the interwar period caused by competitive devaluations and protectionist trade policies. From
1946 until 1973, the IMF managed the “par value adjustable peg” system. The U.S. dollar was
fixed to gold at $35 per ounce, and all other member countries’ currencies were fixed to the dollar
at different rates. This system of fixed rates ended in 1973 when the United States removed itself
from the gold standard.
The IMF has evolved significantly as an institution since it was created. Floating exchange rates
and more open capital markets in the 1990s created a new role for the IMF—the resolution of
frequent and volatile international financial crises. The Asian financial crisis of 1997-1998 and
subsequent crises in Russia and Latin America revealed many weaknesses of the world monetary
system, which have only become more apparent in the wake of the 2008-2009 global financial
crisis and the more recent sovereign debt crises in Europe.
This report evaluates the purpose, membership, financing, and focus of the IMF’s activities. It
also discusses the role of Congress in shaping U.S. policy at the IMF and concludes by addressing
key issues, both legislative and oversight-related, that Congress may wish to consider.

Contents
Introduction...................................................................................................................................... 1
Background ...................................................................................................................................... 1
Origins ....................................................................................................................................... 1
The Bretton Woods Monetary System ....................................................................................... 2
From 1973 to the Present ........................................................................................................... 3
Institutional Aspects......................................................................................................................... 4
Organizational Structure ............................................................................................................ 4
Quotas ........................................................................................................................................ 6
Supplemental Facilities ............................................................................................................. 6
Voting and Influence at the IMF ................................................................................................ 7
Functions of the IMF ....................................................................................................................... 9
Surveillance ............................................................................................................................... 9
Financial Assistance ................................................................................................................ 10
IMF Loan Programs .......................................................................................................... 11
Trends in IMF Lending ..................................................................................................... 12
Technical Assistance ................................................................................................................ 13
U.S. Engagement with the IMF ..................................................................................................... 14
U.S. Policy-Making Process .................................................................................................... 14
Authorizing and Appropriating U.S. Contributions to the IMF............................................... 16
Policy Issues for Congress ............................................................................................................. 18
Adequacy of IMF Resources ................................................................................................... 21
Figures
Figure 1. IMF Governance............................................................................................................... 4
Figure 2. Concentration of IMF Voting Shares ................................................................................ 8
Figure 3. Outstanding IMF Credit, 1970-2010 .............................................................................. 13
Figure 4. Increasing Global Linkages and Risks ........................................................................... 19
Tables
Table 1. IMF Members with Largest Quota and Voting Shares ....................................................... 8
Table 2. Budgetary Treatment of U.S. Contributions to the IMF .................................................. 17
Appendixes
Appendix. U.S. Contributions to the IMF and the Federal Budget ............................................... 23

Contacts
Author Contact Information........................................................................................................... 24
Acknowledgments ......................................................................................................................... 24

Introduction
This report provides background information and potential policy issues for Congress concerning
the International Monetary Fund (IMF, the Fund), which is the central multilateral organization
for international monetary cooperation. The United States is the largest financial contributor to
the IMF. Congressional interest in IMF activities has increased since the onset of the financial
crisis in 2008. IMF lending has surged in recent years, including large loans to Greece, Ireland,
and Portugal. Potential policy issues for Congress include the role of the IMF as a lender of last
resort, the adequacy of IMF resources, and the effectiveness of IMF surveillance of financial and
monetary conditions in its member countries and of the world economy.
Background
Origins
Prior to World War II, there was no negotiated international regime governing international
monetary and trade relations. It was the shared view among the allied powers that many
characteristics of the international financial system during the period between the first and second
world wars, including competitive devaluations, unstable exchange rates, and protectionist trade
policies, worsened the 1930s depression and accelerated the onset of the war. To address these
concerns, representatives of the 44 allied nations gathered in Bretton Woods, NH, in July 1944 for
the United Nations Monetary and Financial Conference. Their goal was ambitious and largely
successful—to create a cooperative and institutional framework for the global economy that
would facilitate international trade and balanced global economic stability and growth.
At the Bretton Woods conference, Articles of Agreement for the IMF and the International Bank
for Reconstruction and Development (IBRD), later known as the World Bank, were drafted and
adopted. They entered into force, formally creating the institutions, on December 27, 1945,
following the adoption of implementing or authorizing legislation within member countries.1 The
Articles of Agreement of both institutions constitute an international treaty, imposing obligations
on member states, which have changed over time.
In the eyes of its founders, the IMF’s purpose and contribution to postwar macroeconomic
stability were threefold: (1) facilitate trade by restricting certain foreign exchange controls; (2)
create monetary stability by managing a fixed (but flexible) exchange rate system; and (3)
provide short-term financing to member countries to correct temporary balance-of-payments
problems.
The U.S. Senate agreed to the ratification (by the President) of the Fund and Bank Agreements in
July 1945. U.S. participation in both organizations is authorized by the United States Bretton
Woods Agreement Act, as amended (Bretton Woods Act).2 Unique among the founding members,
1
The third pillar of the postwar economic agenda, negotiation on multilateral rules to liberalize and govern
international trade, was not completed until the 1947 General Agreement on Tariffs and Trade (GATT). In 1995, the
GATT was succeeded by the World Trade Organization (WTO).
2
P.L. 79-171, 22 U.S.C. 286 et. seq.
Congressional Research Service 1

the United States, in the Bretton Woods Act, requires specific congressional authorization to
change the U.S. quota or “shares” in the Fund or for the United States to vote to amend the
Articles of Agreement of the IMF or the World Bank. The U.S. Congress, thus, has veto power
over major decisions at both institutions.
The Bretton Woods Monetary System

From 1946 to 1971, the main purpose of the IMF was regulatory, ensuring IMF members’
compliance with a par value exchange rate system. This was a two-tiered currency regime using
gold and the U.S. dollar. Each IMF member government could choose to define the value of its
currency in terms of gold or the U.S. dollar, which the U.S. government agreed to support at a
fixed gold value of one ounce of gold being equal to $35. Unlike in the classic gold standard
period (1880-1914), monetary policy was not strictly restricted by a country’s holdings of gold.
Member countries were allowed to intervene in the currency market but were obligated to keep
their exchange rates within a 1% band around their declared par value.
When currencies (other than the U.S. dollar) came under pressure from short-term “balance of
payments” imbalances that normally arose through international trade and finance exchanges,
countries would receive short-term financial support from the IMF. In cases where the currency
“peg” was considered fundamentally misaligned, a country could devalue (or revalue) its
currency. By providing monetary independence limited by the peg, the Bretton Woods monetary
system combined exchange rate stability, the key benefit of the 19th century gold standard, with
some of the virtues of floating exchange rates, principally independence to pursue domestic
economic policies geared toward full employment.3
Balance-of-Payments Basics
The balance of payments is an accounting of a country’s international transactions with individuals, businesses, and
government agencies in that country and those in the rest of the world. It represents the sum of purely financial
transactions (capital account) and those arising from the export and import of goods and services (current account),
and other unilateral transfers (such as gifts or remittances).
A country’s current account should be equal to the sum of the capital account and any unilateral transfers. If a
country spends more abroad on goods and services than it receives, it incurs a current account deficit. The shortfall,
or deficit, can be financed by selling assets or borrowing, which involves a private capital inflow into the deficit
country (a capital account surplus). If, however, private sources do not cover the current account deficit, then it must
be financed by the government through the sale of foreign exchange (official reserves), which is referred to as a
balance-of-payments deficit.
With flexible exchange rates, the deficit (or surplus) is corrected by a market-driven adjustment to the exchange
rate—that is, it depreciates or appreciates based on demand. No purchase or sale of official reserves by the
government is necessary to operate a floating exchange regime. Under a pegged exchange rate system, however,
countries cannot alter exchange rate values and so use their foreign exchange reserves to finance the balance-of-
payments deficit, leaving the currency value intact. When a country does not have adequate foreign exchange
reserves to finance its balance-of-payments deficit, it can petition the IMF for financial assistance.
The first major challenge to the postwar international monetary system came in the early 1960s.
The postwar expansion in international trade and economic growth required an increase in
international liquidity, that is, an increase in central bank holdings of the two major international
3
Ibid.

reserve assets, gold and the U.S. dollar. With the economic recovery of Europe well advanced, the
slow growth in gold supplies was hampering the growth of international reserve assets. As early
as 1960, global foreign dollar holdings exceeded the value of U.S. gold holdings (at $35 an
ounce). The system could continue to function as long as countries were willing to settle their
balance of payments in U.S. dollars instead of gold.
The international community’s response was to create a new international reserve currency, the
Special Drawing Right (SDR). The SDR also serves as the IMF’s unit of account. Initially
defined as equivalent to 0.888671 grams of fine gold, the value of the SDR was switched to a
basket of international currencies following the collapse of the Bretton Woods system of fixed
parity exchange rates in 1973. The current basket includes the euro, the Japanese yen, the British
pound sterling, and the U.S. dollar.
By 1970, a large and prolonged U.S. balance-of-payments deficit was mirrored by its counterpart,
large balance-of-payments surpluses in the other major industrial countries. As a result, much of
the 1960s was characterized by substantial currency instability, as liberalized capital flows
brought about repeated currency crises in the supposedly “fixed” exchange rate Bretton Woods
system. Amid declining confidence in the U.S. dollar, foreign central banks increasingly became
reluctant holders of U.S. dollars and began exchanging their dollar reserves for U.S. gold
holdings. After several years of instability, the Bretton Woods system of fixed exchange rates
finally collapsed in March 1973 when the United States severed the link between the dollar and
gold, allowing the value of its currency to be determined by market forces.
From 1973 to the Present

A major purpose of the IMF as originally conceived at Bretton Woods—to maintain fixed
exchange rates—was, thus, at an end. Although the IMF had lost its motivating purpose, it
adapted to the end of fixed exchange rates. In 1973, IMF members enacted a comprehensive
rewrite of the IMF Articles. IMF members condoned the floating-rate exchange rate system that
was already in place; officially ended the international monetary role of gold (although gold
remains an international monetary asset); and, nominally, but unsuccessfully, made the SDR the
world’s “principal reserve asset.” Henceforth, member countries were allowed to freely determine
their currency’s exchange rate, and use private capital flows to finance trade imbalances.
The IMF was also given two new mandates, which became the foundation of its role in the post-
Bretton Woods international monetary system. The first was for the IMF to oversee the
international monetary system to ensure its effective operation. The second was to oversee the
compliance by member states with their new obligations to “collaborate with the Fund and other
members to assure orderly exchange arrangements and to promote a stable system of exchange
rates.” Consequently, the IMF transformed itself from being an international monetary institution
focused almost exclusively on issues of foreign exchange convertibility and stability to being a
much broader international financial institution, assuming a broader array of responsibilities and
engaging on a wide range of issues including financial and capital markets, financial regulation
and reform, and sovereign debt resolution.
The IMF also increasingly relied on its lending powers, as floating exchange rates and the growth
of international capital flows led to more frequent, and increasingly severe, financial crises. Over
the past several decades, the IMF has been involved in the oil crisis of the 1970s; the Latin
American debt crisis of the 1980s; the transition to market-oriented economies following the
collapse of communism; currency crises in East Asia, South America, and Russia; and, most

recently, the global response to the 2008-2009 global financial crisis and the 2010-2011 European
sovereign debt crisis.
Institutional Aspects
Organizational Structure
The IMF Articles provide for a three-tiered governance structure with a Board of Governors, an
Executive Board, and a Managing Director (Figure 1).
Figure 1. IMF Governance
Source: International Monetary Fund, adapted by CRS.
The Board of Governors is the highest policy-making authority of the IMF. All countries are
represented on the Board of Governors, usually at the finance minister or central bank governor
level. IMF Governors usually meet annually at the fall IMF meetings. A committee of the
Governors, the International Monetary and Financial Committee (IMFC), meets twice annually to
consider major policy issues affecting the international monetary system and makes
recommendations to the full Board of Governors. The Development Committee, a joint
committee of the Boards of Governors of the IMF and World Bank, also meets at the same time to
consider development policy issues and other matters affecting developing countries. The two
committees generally issue communiqués at the close of their meetings, summarizing their
findings and recommendations. These often serve as policy guidance to the IMF and the World

Bank and as a means for airing views and for coordinating or harmonizing country policies on
issues of international concern.
Day-to-day authority over operational policy, lending, and other matters is vested in the Board of
Executive Directors, a 24-member body that meets three or more times a week to oversee and
supervise the activities of the IMF. The five largest shareholders are entitled to appoint their own
Executive Director.4 The remaining members are elected by groups of countries, generally on the
basis of geographical or historical affinity. A few countries—Saudi Arabia, China, and Russia—
have enough votes to elect their own Executive Directors. In reforms approved by the Governors
in December 2010, the IMF Articles of Agreement will eventually be amended so that the
Executive Board will consist solely of elected Directors, doing away with the practice of some
member countries appointing their representatives.
The IMF Executive Board selects the Managing Director of the IMF, who serves as its chairman
and chief executive officer. The Managing Director is elected for a five-year renewable term of
office. The Executive Board also approves the selection of the Managing Director’s principal
assistants, the First Deputy Managing Director and three Deputy Managing Directors. The
Managing Director manages the ongoing operations of the Fund (under the policy direction of the
Executive Board); supervises some 2,800 staff members; and oversees the preparation of policy
papers, loan proposals, and other documents that go before the Executive Board for its approval.
By tradition, the European countries nominate the IMF Managing Director.5 The United States
has a similar prerogative at the World Bank. The First Deputy Managing Director of the IMF is
typically a U.S. citizen. Leadership selection has been a long-standing issue of concern. Emerging
economic powers argue that any agreement that grants the leadership position based on
nationality limits the pool of potential candidates. During the most recent transition from
Dominique Strauss-Kahn to Christine Lagarde, however, non-European countries were unable to
coalesce on a candidate, securing the position for a European.
Some analysts argue that calls for a non-European director from the emerging economies mask
divides that make it difficult for emerging economies to unite behind one credible candidate.
These calls, the argument goes, are part of the larger issue of the influence of emerging
economies in the international financial institutions, and could ultimately lead to additional shifts
toward emerging economies, despite Europe’s hold on the top position. Evidence suggests that
some shifts are underway. In July 2011, new Managing Director Lagarde elevated Zhu Min, a
Chinese national serving as an advisor to the Managing Director, to Deputy Managing Director.
In addition to the official representation of the Board of Governors and the Executive Board,
several other cross-cutting groups of countries are actively involved with the IMF. These include
forums such as the Group of Seven (G-7) meeting of the finance ministers,6 the Group of 20
major economies (G-20),7 which in 2009 was declared by its members as the premier forum for
4
The five largest shareholders of the IMF are the United States, Japan, Germany, France, and the United Kingdom.
5
For more information, see CRS Report R41828, International Monetary Fund: Selecting a Managing Director, by
Martin A. Weiss.
6
The members of the G-7 are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
7
The members of the G-20 are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy,
Japan, Mexico, Russia, Saudi Arabia, South Africa, Korea, Turkey, the United Kingdom, the United States, and the
European Union, which is represented at the leaders’ level by the presidents of the European Union and the European
Commission and at the finance level by the rotating presidency of the European Council and the European Central
(continued...)

international economic cooperation,8 and the Intergovernmental Group of Twenty-Four on

International Monetary Affairs and Development (G-24),9 which coordinates the position of
developing countries on monetary and development issues.
Quotas
Quotas are the primary national contribution to the IMF and are the foundation of country
representation at the IMF. When a country joins the Fund, it is assigned a quota based on its
relative weight in the global economy. Economic considerations include a member’s GDP,
openness to trade, volume of current account transactions, and level of official reserves.
A country’s quota determines:
• Subscriptions: the amount of financial resources each member is required to

contribute to the Fund;
• Access to Financing: the amount of financing a member may receive from the
Fund; and
• Voting Power: the ability to formally influence the IMF’s decisions.
The total of all member countries’ quota subscriptions is 238 billion IMF Special Drawing Rights
(SDRs), approximately $368 billion.10 Upon joining the Fund, a country normally pays up to one-
quarter of its quota, the so-called “reserve tranche,” in the form of reserve assets, widely accepted
foreign currencies (such as the U.S. dollar, euro, yen, pound sterling), or special drawing rights
(SDRs). The remaining three-quarters are paid in the country’s own currency.
Supplemental Facilities
In addition to its regular quota resources, the IMF maintains two standing multilateral borrowing
arrangements—the New Arrangements to Borrow (NAB) and the General Arrangements to
Borrow (GAB). These are backstop resources intended to temporarily supplement available quota
resources and borrowing. If activated, participating creditor countries make loans to the IMF, and
the IMF uses those funds to provide loans to eligible countries.
The NAB is a set of credit arrangements between the IMF and a group of member countries and
institutions, including advanced economies and a number of emerging market countries. The
NAB is the facility of first and principal recourse in circumstances in which the IMF needs to
supplement its quota resources. Once activated, it can provide supplementary resources of up to
SDR 367.5 billion (about $568 billion) to the IMF. The U.S. commitment to the NAB is $100
(...continued)
Bank.
8
CRS Report R40977, The G-20 and International Economic Cooperation: Background and Implications for
Congress, by Rebecca M. Nelson.
9
The members of the G-24 are Algeria, Argentina, Brazil, Colombia, Côte d'Ivoire, the Democratic Republic of Congo,
Egypt, Ethiopia, Gabon, Ghana, Guatemala, India, Iran, Lebanon, Mexico, Nigeria, Pakistan, Peru, Philippines, South
Africa, Sri Lanka, Syria, Trinidad and Tobago, and Venezuela.
10
International Monetary Fund, “IMF Members’ Quotas and Voting Power,” and “IMF Board of Governors,” available
at http://www.imf.org/external/np/sec/memdir/members.aspx.

billion.11 The IMF does not hold the NAB funds; rather, the IMF will call on NAB members to
provide a percentage of funds that these members have committed if and when the Fund needs to
use them. U.S. commitments to NAB are in the possession of the United States until the IMF
requests that funds be released. If NAB members choose not to activate the NAB, the GAB,
which was established in 1962, allows the IMF to borrow up to $26 billion from 11 industrial
countries.
Voting and Influence at the IMF

The Executive Board or Board of Governors of the IMF can approve loans, policy decisions, and
many other matters by a simple majority vote. However, a supermajority vote is required to
approve major IMF decisions. The supermajority may require a 70% or 85% vote, depending on
the issue. A 70% majority is required to resolve financial and operational issues such as the
interest rate on IMF loans or the interest rate on SDR holdings. An 85% majority is required for
the most important decisions, such as the admission of new members, increases in quotas,
allocations of SDRs, and amendments to the IMF’s Articles of Agreement.
As Figure 2 shows, voting at the IMF is highly concentrated, with 10 countries controlling over
50% of the voting shares (Table 1). With a voting share of 16.75%, the United States is the only
country able to unilaterally veto major IMF decisions (i.e., those requiring an 85% majority). The
United States also exercises a substantial amount of informal power at the IMF, given its large
quota share and the location of the Fund in Washington, DC.12 According to one analyst, “the
IMF is an instrument of the G-7 countries. There is no example that comes easily to mind of a
position taken by the IMF on any systematic issue without the tacit, if not explicit, support of the
United States and the other G-7 countries.”13
11
To meet the U.S. $100 billion commitment to the expanded NAB, as well as an $8 billion increase in the U.S. quota
at the IMF, Congress appropriated $5 billion in the FY2009 Spring Supplemental Appropriations for Overseas
Contingency Operations (P.L. 111-32).
12
Randall W. Stone, Controlling Institutions: International Organizations and the Global Economy (New York:
Cambridge University Press, 2011).
13
Lex Rieffel, Restructuring Sovereign Debt: The Case for Ad-Hoc Machinery (Brookings Institution Press,
Washington, DC, 2003).

Figure 2. Concentration of IMF Voting Shares
Source: International Monetary Fund.
Table 1. IMF Members with Largest Quota and Voting Shares

(as of July 10, 2014)
Member Quota share (percentage) Voting share (percentage)
United States 17.69 16.75

Japan 6.56 6.23
Germany 6.12 5.81
France 4.51 4.29
United Kingdom 4.51 4.29
China 4.00 3.81
Italy 3.31 3.16
Saudi Arabia 2.93 2.80
Canada 2.67 2.56
Russia 2.50 2.39
The IMF states that its programs are based on purely economic factors, in order to seek an
acceptable balance between protecting the interests of individual members and those of the
membership as a whole. In practice, however, many analysts contend that the IMF is a highly
politicized institution, reflecting the wide power differential between a few advanced economies
and the remaining membership. For example, some analysts argue that recent IMF lending to
European countries has been greater, and on more lenient terms, than lending provided to
developing countries. “History suggests that if this were happening to a poor country or
developing country, the rich countries would have voted against [the loan],” argues Arvind

Virmani, the Indian Executive Director at the IMF, commenting about the possibility of fresh IMF
support for Greece.14
On account of the heavily skewed nature of IMF voting, some analysts also argue that the
developing countries with strong political ties to the IMF’s largest shareholders get more
favorable treatment by the IMF than other developing countries. For example, researchers have
found evidence that countries are more likely to receive IMF loans if their voting at the United
Nations General Assembly is similar to that of the United States and other advanced economies.15
At the same time, countries may not seek loans for the IMF, because they are politically unwilling
to meet the IMF’s economic conditions.
Functions of the IMF

In practice, the IMF’s mandate of promoting international monetary stability translates into three
main functions: (1) surveillance of financial and monetary conditions in its member countries and
in the world economy; (2) financial assistance to help countries overcome major balance-of-
payments problems; and (3) technical assistance and advisory services to member countries.
Surveillance
The IMF provides surveillance of the international monetary system “in order to ensure its
effective operation” and to “oversee the compliance of each member with its obligations” to the
Fund.16 In particular, “the Fund shall exercise firm surveillance over the exchange rate policies of
member countries and shall adopt specific principles for the guidance of all members with respect
to those policies.”17 The IMF’s general surveillance recommendations are not binding or
enforceable. The effectiveness of IMF surveillance is dependent on the peer pressure exercised by
other IMF member countries, and increasingly the global financial sector, as most IMF analysis
of global economic risks is made now public.
The IMF engages in both bilateral and multilateral surveillance. IMF members agree, as a
condition of membership, that they will “collaborate with the Fund and other members to assure
orderly exchange arrangements and to promote a stable system of exchange rates.”18 In particular,
they agree to pursue economic and financial policies that will produce orderly economic growth
with reasonable price stability, to avoid erratic disruptions in the international monetary system,
not to manipulate their exchange rates in order to attain unfair competitive advantage or shift
economic burdens to other countries, and to follow exchange rate policies compatible with these
commitments.19
14
Alan Beattie, “IMF Warned over fresh Greek Loan,” Financial Times, July 8, 2011.
15
Strom Thacker, “The High Politics of IMF Lending,” World Politics, vol. 52 (1999), pp. 38-75. See also Axel
Drehar, Jan-Egbert Sturm, and James Raymond Vreeland, “Global Horse Trading: IMF Loans for Votes in the United
Nations Security Council,” European Economic Review, vol. 53 (2009), pp. 742-757.
16
Article IV, Section 3.
17
Ibid.
18
Article IV, Section 1.
19
Ibid.

Countries are required to provide the IMF with information and to consult with the IMF upon its
request. The IMF staff generally meets annually with each member country for “Article IV
consultations” regarding the country’s current fiscal and monetary policies, the state of its
economy, its exchange rate situation, and other relevant concerns. The IMF’s reports on its Article
IV consultations with each country are presented to the IMF Executive Board, along with the
staff’s observations and recommendations about possible improvements in the country’s
economic policies and practices.
In pursuit of its multilateral surveillance function, the IMF publishes numerous reports each year
on economic conditions and trends in the world economy. These include three semiannual
publications: (1) the World Economic Outlook, which provides analysis of the state of the global
economy; (2) the Global Financial Stability Report, which assesses global financial markets; and
(3) the Fiscal Monitor, which surveys and analyzes the state of public finances in member
countries.
Financial Assistance
Notwithstanding its macroeconomic surveillance, the IMF is perceived as an institution that
primarily provides temporary financing to troubled economies. The IMF’s financial structure can
best be characterized as that of a credit union (see box). IMF member countries deposit hard
currency and some of their own currency, from which they can draw the currencies of other
countries if they face significant problems in managing their balance of payments. As noted
above, supplemental resources are available from the NAB or GAB if quota resources are
insufficient.
Mechanics of IMF Financing

The IMF’s financing mechanism is rooted in the credit facilities that existed between central banks prior to the IMF’s
creation. Central banks would borrow from each other with the borrower purchasing the currency of the lender, and
paying for it by crediting the lender's account with the borrower in the borrower's currency. Thus, when borrowing
from the IMF, a member purchases from the IMF the hard currency of another member in exchange for its own
currency. Repayment is effected through a reversal of the original transaction. The member repays the loan by paying
the IMF hard currency and repurchasing its own currency that the IMF had acquired.
For the IMF to be able to lend, it has available, through members’ quota subscriptions and NAB commitments, a pool
of hard currency and SDRs. A quarter of a member’s quota payment is normally paid in usable assets (SDRs or
currencies of other members acceptable to the IMF), and the balance is paid in the member’s own currency. When
members borrow from the IMF, the pool contains more of debtor members’ currencies and less of SDRs or
currencies of creditor members. The reverse takes place as members repay their borrowings from the IMF.
Operationally, the IMF decides quarterly, based on the expected pipeline of member borrowings and repayments,
which currencies are to be used (and up to what amounts) to finance and repay its lending. The amounts transferred
and received by these members are managed to ensure that their creditor positions in the IMF remain broadly even in
relation to their quota, which are reported by the IMF on a quarterly basis. The most recent report, covering
transactions between August 1, 2010, and October 31, 2010, reported that the U.S. creditor position was 22.5% of
total quota available to finance transactions.
The IMF is required by its Articles to ensure that countries' use of its resources will be temporary
and that loans will be repaid. Failure of a borrowing country to repay the IMF reduces the
availability of financing for all other IMF members. In order to ensure that it gets repaid, the IMF
imposes conditionality on its loans. Conditionality is also intended to correct the borrower's
current account deficit by bringing about macroeconomic stabilization and economic adjustment.

In the past, there have been debates about whether the austerity conditions that are often the core
of IMF conditionality are productive in increasing economic growth. In 2000, one heavily cited
paper found that participating in IMF programs lowers growth rates during the program, as would
be expected. In addition, however, the study found that once countries leave the program, they
grow faster than if they had remained, but not faster than they would have without participating in
the IMF program in the first place.20
After heavy criticism of the conditions attached to IMF loans to East Asia in the late 1990s, the
IMF revamped its conditionality guidelines in 2002. Additional reforms, including new IMF
lending instruments based on economic prequalification (ex-ante conditionality) rather than
traditional structural adjustment (ex-post conditionality) also address these concerns.21
IMF Loan Programs

The IMF has several loan programs. The Stand-By Arrangement (SBA), which provides the bulk
of IMF assistance to middle-income countries, addresses short-term balance-of-payments
problems and typically lasts one to two years. The Extended Fund Facility (EFF) addresses
longer-term balance-of-payments problems requiring fundamental economic reforms and
generally runs for three years or longer.
In 2009, following the financial crisis, the IMF created the Flexible Credit Line (FCL). The FCL
provides a credit line to countries that have strong economic fundamentals and policies, and that
the credit line can be drawn on without new conditionalities being imposed. Unlike the SBA and
the EFF, the FCL relies on ex-ante conditionality. As of July 2011, Colombia, Mexico, and Poland
have accessed the FCL. In 2010, the IMF introduced the Precautionary Credit Line, now known
as the Precautionary and Liquidity Line (PLL), for countries whose financial situations would
make them ineligible for the FCL. A country can request a PLL for six months with a limit of five
times its quota. The only PLL program approved to date was for Macedonia in January 2011,
although many expected some Eurozone countries to request access to credit.
The IMF provides loans to its poorest member countries on concessional repayment terms. These
aim to help countries overcome balance-of-payments problems, but their conditionality puts less
emphasis on cutting spending and more on economic growth-enhancing reforms. There are three
lending facilities for low-income countries:
• The Extended Credit Facility (ECF), which provides flexible medium-term

support to low-income members that have protracted balance of payments
problems.
• The Standby Credit Facility (SCF), which addresses short-term and precautionary
balance of payments needs, similar to the Stand-By Arrangements in regular
Fund lending.
• The Rapid Credit Facility (RCF), which provides rapid access at low levels with
limited conditionality to meet urgent balance-of-payments needs.
20
Adam Przeworski and James Vreeland, “The effect of IMF programs on economic growth,” Journal of Development
Economics, vol. 62 (2000).
21
Olivier Jeanne, Dealing with Volatile Capital Flows, Peterson Institute for International Economics, Working Paper
PB10-180, Washington, DC, July 2010.

In 2010, the Fund created the Post-Catastrophe Debt Relief (PCDR) Trust Fund to provide debt
relief to low-income countries hit by catastrophic natural disasters. The first recipient of the trust
was Haiti.
Finally, the Policy Support Instrument (PSI) supports low-income countries that do not want, or
need, IMF lending, but seek IMF macroeconomic advice, and a “seal of approval” of their
economic policies as a signal to international donors and financial markets. To date, seven
countries have received support from the PSI: Cape Verde, Mozambique, Nigeria, Senegal,
Uganda, Tanzania, and Rwanda.
Trends in IMF Lending

Prior to the onset of the 2008 economic crisis, many analysts argued that the IMF was on the
brink of irrelevance, as booming capital flows and commodity prices allowed the remaining IMF
creditors to repay their loans. With developing countries no longer needing IMF lending, and the
advanced economies largely ignoring the IMF’s surveillance, the Fund’s future looked bleak. At
the same time, IMF resources, especially when compared to global capital flows, had declined
over the past few decades. Prior to the crisis, this raised little concern because demand for IMF
resources was low. This view changed quickly in 2008, as the economic crisis worsened, and the
IMF’s loan portfolio expanded from below SDR 10 billion in 2007 to over to SDR 96.4 billion
($144.6 billion) in February 2013.22
Figure 3 illustrates the significant change in the composition of IMF lending since 1970.
Advanced economies accounted for over 75% of the IMF credit in 1970, during the waning days
of the fixed exchange rate regime. By 1990, their share of IMF credit had dropped to zero, before
increasing in the late 1990s (loans to Korea and Russia), and then after the recent financial crisis.
In 2010, due to several large European programs, IMF lending to advanced economies accounted
for 17% of total lending. Loans to Latin America began rising in the 1970s, but did not increase
sharply until the 1980s debt crises, peaking in 1990. Loans increased after 2000 because of three
large programs (Argentina, Brazil, and Uruguay), but have since declined, and are now at
historically low levels, along with Asian economies.
22
For more information, see CRS Report RS22976, The Global Financial Crisis: The Role of the International
Monetary Fund (IMF), by Martin A. Weiss.

Figure 3. Outstanding IMF Credit, 1970-2010

(percentage of total outstanding credit)
80
70
60
50
40
30
20
10
0
1970 1975 1980 1985 1990 1995 2000 2005 2010
Sub-Saharan Africa Developing Asia Mid.East & N. Africa

Western Hemisphere Emerging Europe Advanced Economies
Another key trend is the increasing size of IMF loans compared to a country’s quota. Officially,
the amount a country is able to borrow from the IMF is related to the country’s quota, its
ownership and contribution share in the IMF. In most instances, countries may borrow several
multiples of their quota in response to particular circumstances. The conditionality and
performance standards attached to a loan become more rigorous and demanding as its size
(relative to the borrower’s quota) increases. In many cases, deemed exceptional by the IMF
executive board at the time, countries have received much larger loans from the IMF than are
allowed under normal guidelines. The 2010 loan to Greece, for example, was 3,212% of Greece’s
quota at the IMF. The 2011 loan to Ireland was 2,322% of its quota.
Technical Assistance
Access to technical assistance is one benefit of IMF membership, accounting for about 20% of
the IMF’s annual operating budget. The IMF provides technical assistance in its core areas of
expertise: macroeconomic policy; tax and revenue policies; expenditure management; exchange
rates; financial sector sustainability; and economic statistics. IMF technical assistance supports
the development of the productive resources of member countries by helping them to effectively
manage their economic policy and financial affairs. The IMF helps these countries to strengthen
their capacity in both human and institutional resources, and to design appropriate
macroeconomic, financial, and structural policies. About 90% of IMF technical assistance goes to
low and lower-middle income countries.23
23
International Monetary Fund, Fact Sheet: IMF Lending, March 30, 2011.

U.S. Engagement with the IMF
U.S. Policy-Making Process

As the largest single shareholder of IMF quota (approximately $67.35 billion), and contributor to
the NAB ($100 billion), the United States has a leading role in shaping the IMF’s lending,
surveillance, and advisory operations. While the statutory framework for U.S. participation in the
IMF provides the President the authority to appoint the U.S. Governor, Alternate Governor,
Executive Director, and Alternate Executive Director, the Department of the Treasury has been
delegated responsibility to direct U.S. representatives at the IMF and to take a range of actions
with respect to the IMF, including making contributions to capital increases and implementing
congressional mandates. Congress is responsible for authorizing and appropriating all U.S.
financial commitments to the IMF. The Senate has advise and consent authority over all persons
nominated to represent the United States at the IMF.
U.S. participation in the IMF is authorized by the Bretton Woods Agreements Act of 1945.24 U.S.
representatives at the Board of Governors and the Board of Executive Directors are appointed by
the President, by and with the advice and consent of the Senate, to terms of five years and two
years, respectively. They have the right to remain in office until a successor has been appointed.25
The Secretary of the Treasury, as a matter of practice, is nominated to serve as the U.S. Governor
at the IMF. The Chairman of the Federal Reserve customarily is nominated to serve as the U.S.
Alternate Governor. As discussed above, the Board of Governors has delegated substantial
authority to the IMF’s Executive Board, which carries out the IMF’s day-to-day operations. The
U.S. Executive Director and Alternate U.S. Executive Director serve as representatives of the
United States to the IMF and present the U.S. government’s positions. Executive Directors at the
IMF, including those of those of the United States, are employees of the IMF.26
When the United States joined the IMF, Congress made an interagency group of executive branch
agencies, the National Advisory Council on International Monetary and Financial Problems
(NAC), responsible for instructing the U.S. IMF representative, under the general direction of the
President. Unless the President overrode their recommendations, policy was determined by a
majority vote of agencies involved. The initial interagency procedure did not work well, and in
1965, Congress approved a reorganization act that abolished the NAC as a statutory committee
and transferred all of its responsibilities and authority to the President, including the
responsibility for instructing U.S. representatives at the IMF. In 1966, President Lyndon Johnson
delegated the responsibility to direct U.S. representatives at the IMF to the Treasury Department,
where it continues to reside today.27 The President reconstituted the NAC by executive order, but
24
22 U.S.C. 286 et seq.
25
22 U.S.C. 286a (a), (b).
26
Federal law limits the salaries that IMF may pay the U.S. representatives, capping them at the rate of level IV of the
Executive Schedule for the U.S. Executive Director and level V for the Alternate U.S. Executive Director.
27
Executive Order 11269 of February 14, 1966, as amended, specifically delegates to the Secretary of the Treasury the
President’s authority to instruct representatives of the United States to the international financial organizations and to
provide the U.S. government’s consent with respect to IMF decisions. In addition, 22 U.S.C. 6593 specifically provides
the Department of the Treasury with the primary responsibility to continue to coordinate “activities relating to United
States participation in international financial institutions and relating to organization of multilateral efforts aimed at
currency stabilization, currency convertibility, debt reduction, and comprehensive economic reform programs.”

it became solely a forum where other agencies could advise the Treasury Department about policy
concerns regarding U.S. participation in the international financial institutions.28
Unlike in a U.S. government department or agency, changes in the IMF’s operations cannot be
brought about simply by changing U.S. law. As a result, congressional proposals for policy
changes in the IMF are formulated as directives to the Secretary of the Treasury to instruct the
representative of the U.S. government in the IMF, the U.S. Executive Director, to promote the
desired change. These have often been formulated as an instruction to use the “voice and vote” of
the United States to achieve the desired goal. Consequently, the term “voice and vote” has
become something of a generic or descriptive term for those amendments to U.S. law that seek to
bring about specific changes within the IMF. Over the years, “voice and vote” amendments have
increased. In the context of the current debate over IMF funding for advanced European
economies, questions have arisen over the extent to which congressional policy, as embodied in
the “voice and vote” amendments, has been carried out.
Voice and vote amendments can be organized in three broad categories: “policy,” “directed vote,”
and “reporting.” Policy mandates seek to foster or advocate certain policies at the IMF by
directing the Treasury Department to instruct the U.S. Executive Director to use his or her
“voice” and/or “vote” on behalf of the United States at the IMF Executive Board. For example,
the U.S. Executive Director is directed to (1) encourage the IMF to adopt internationally
recognized worker rights for borrowing countries; (2) encourage and promote the integration of
women into the national economies of IMF member countries and into professional positions
within the IMF organization; and (3) urge the IMF to encourage member countries to pursue
macroeconomic stability while promoting environmental protection.
The second category, directed voting mandates, require that the U.S. Executive Director oppose
an IMF loan when a country meets or does not meet certain criteria. In practice, U.S. opposition
can take the form of abstaining from voting on, or voting against, the IMF loan under
consideration. Examples include when a country has been determined by the President to violate
religious freedom, provide support for acts of international terrorism, or engage in the
proliferation of nuclear weapons.
Reporting requirements, the third category, require Treasury to report to Congress on various
issues related to U.S. participation in the IMF. Congress enacted legislation in 2010, for example,
that requires the Treasury Department to report regularly to Congress about economic conditions
in heavily indebted advanced economies receiving IMF assistance.29 These reports are to discuss
the debt status of the borrower country, economic conditions affecting its vulnerability and its
ability to repay, and its debt management status.
28
Since 1999, Congress has required that Treasury, as Chairman of the NAC, annually report to Congress on several
topics related to U.S. participation in the international financial institutions, including an assessment of the
effectiveness of the major policies and operations of the international financial institutions; the major issues affecting
United States participation; progress made and steps taken to achieve U.S. policy goals (including major policy goals
embodied in current law).
29
For more information, see CRS Report R41239, Frequently Asked Questions about IMF Involvement in the Eurozone
Debt Crisis, coordinated by Rebecca M. Nelson, p. 22.

Authorizing and Appropriating U.S. Contributions to the IMF

As discussed above, quota increases are paid to the IMF by transferring 25% of the increase in
hard currency and the remainder in national currency, typically through a letter of credit. Both
hard currency payments and payments to the IMF under the quota letter of credit result in a
budget expenditure only if cash is actually transferred to the IMF. When a transfer is made,
however, the United States gets an equal and offsetting receipt—an interest-bearing, liquid
international monetary asset, specifically the increase in the U.S. reserve position in the Fund.
Under current budgetary conventions, these offsetting transactions are treated as an exchange of
assets. As a consequence, they do not result in net budget outlays, and they do not affect the net
budgetary position (deficit or surplus) of the federal government. Looked at another way, any
debt (liability) incurred through the sale of securities to make this expenditure is balanced by an
asset—the U.S. reserve position in the Fund.
Nonetheless, Members of Congress have often provided authorization and appropriations to

increase the U.S. quota, reflecting congressional concern about increasing U.S. foreign liabilities,
and their impact on the federal budget.
Budgetary treatment for the NAB is identical to that of IMF quota increases: an exchange of
assets, having no net effect on the U.S. fiscal position. A drawing by the IMF under the NAB
would not constitute a contribution to the IMF’s capital and would not, therefore, increase the
U.S. reserve position in the IMF. Rather, it would constitute an interest-bearing loan to the IMF.
Table 2 provides U.S. contributions since the IMF’s creation, and their budgetary treatment. An
Appendix provides additional information on the budgetary treatment of U.S. contributions to the
IMF.

Table 2. Budgetary Treatment of U.S. Contributions to the IMF

U.S.
contribution
(approximate
Date billions of Appropriation
Event Effective U.S. dollars) Budgetary Treatment (Yes/No)
Founding 1945 $2.75 Outlay No

Subscription
Quota increase 1959 $1.375 Outlay No
Establish General 1962 $2.00 None Yes
Agreements to
Borrow (GAB)
Quota increase 1966 $1.035 25% outlay, remainder issued as line of Yes
credit, outlay on call only
Quota increase 1970 $1.54 No outlay, exchange of monetary assets Yes
Quota increase 1978 $2.10 No outlay, exchange of monetary assets No
Participate in 1978 $1.87 No outlay, exchange of monetary assets No
Supplemental
Finance Facility
GAB increase 1983 $2.45 No outlay, exchange of monetary assets Yes
Establish New 1998 $3.4 No outlay, exchange of monetary assets Yes
Arrangements to
Borrow (NAB)
Ad hoc quota 2009 $8.00 Outlay, credit reform scoring adjusted for Yes
increase market risk
NAB increase 2009 $100.00 Outlay, credit reform scoring adjusted for Yes
market risk
Source: C. Randall Henning, U.S. Interests and the International Monetary Fund, Peterson Institute for International
Economics, Policy Brief no. 09-12, Washington, DC, June 2009.

Policy Issues for Congress

Increased attention to the IMF since the financial crisis has revived long-standing debates about
the institution’s role in the global economy and the future of U.S. support for the institution.
Some analysts argue that with the end of the pegged-exchange rate system, the IMF is no longer
needed and it should be abolished.30 Others say the IMF is still vital, but needs to be restructured
and refocused.31 Still others suggest that new functions should be added to the IMF and its role in
the international monetary system should be expanded.32
Events since 2008 have shown that substantial risks remain in the global economy. Global
imbalances, exchange rate misalignment, volatile capital flows and exchange rate movements,
and the accumulation of large stockpiles of foreign exchange reserves have led many analysts to
question the functioning of the international monetary system, and by extension, the future of the
IMF.
Two issues that Congress may wish to consider are (1) should the IMF act as an international
lender of last resort; and (2) are the resources of the IMF adequate to complete this function?
A central challenge for the global economy, according to some analysts, is the lack of an
international lender of last resort that has access to sufficient finance to prevent a systemic global
financial crisis.33 Cross-border financial integration has brought many benefits, through trade and
increased access to financing, but has also increased the risk of contagion, whereby a crisis may
spread beyond its borders to other, seemingly stable economies. This is especially evident among
advanced economies, where many analysts argue that the proliferation of credit in the financial
system—among advanced economies, gross assets and liabilities are 500% of GDP—reflects
significant economic distortions in the underlying economies. As the recent 2008 financial crisis
illustrated, a single event, the bankruptcy of Lehman Brothers, can trigger a sharp contraction of
global capital flows in such a highly connected global economy (Figure 4).
30
Amar Bhide and Edmund Phelps, “More Harm Than Good: How the IMF’s Business Model Sabotages Properly
Functioning Capitalism,” Newsweek, July 11, 2011.
31
Edwin Truman, On What Terms is the IMF Worth Funding?, Peterson Institute for International Economics, WP 08-
11, Washington, DC, December 2008.
32
Barry Eichengreen, Out-of-the-Box Thoughts on the International Financial System, International Monetary Fund,
Working Paper no. 09-116, Washington, DC, May 2009.
33
In a national economy, this function is typically provided by the central bank. See CRS Report RS21986, Federal
Reserve: Lender of Last Resort Functions, by Marc Labonte.

Figure 4. Increasing Global Linkages and Risks

(percent of GDP, unless otherwise indicated)

Notes: (1) Trade openness is the sum of exports and imports as a share of GDP. Financial openness is the sum
of external assets and liabilities as a share of GDP. (2) As classified in the IMF World Economic Outlook.
The challenge facing the international monetary system, and thus the IMF, is described by
economist Maurice Obstfeld:
In a world of integrated financial centers and multiple currencies, the boundaries within
which a central bank can function as a last-resort lender no longer correspond to the
boundaries within which a liquidity shortage in its currency can arise. Furthermore, the
globally interdependent nature of modern financial relationships ensures that market turmoil
outside the central bank’s jurisdiction may well migrate inside. This is the basic problem.34
While many emerging and some advanced economies drew on IMF resources during the recent
financial crisis, the majority resorted to an ad hoc network of central bank swap arrangements. At
the height of the crisis, in the face of a massive global shortage of dollars, the U.S. Federal
Reserve deployed over $600 billion in global liquidity to many other advanced and emerging
economies, double the available resources of the IMF. The European Central Bank (ECB) set up
€250 ($360) billion in swap lines, of which about €200 ($288) billion was with the U.S. Fed. In
34
Maurice Obstfeld, Expanding Gross Asset Positions in the International Monetary System, remarks at the Federal
Reserve Bank of Kansas City symposium on “Macroeconomic Challenges: The Decade Ahead,” Jackson Hole,
Wyoming, August 26-28, 2010.

October 2008, the Fed also authorized swap lines of $30 billion each to four emerging economies
with large exposure to U.S. financial institutions, Brazil, South Korea, Mexico, and Singapore.
Thus, the Fed, and not the IMF, was the de facto lender of last resort for major economies. At the
same time, several other countries, primarily in Asia, relied on their accumulation of foreign
exchange reserves built up during the 2000s to prevent their economies from collapsing due to the
liquidity crisis.
While central bank swap lines and self-insurance through reserve accumulation were effective in
mitigating the effects of the crisis, and restoring liquidity in the global economy, the costs
associated with these mechanisms are substantial, both for individual countries and for the system
as a whole.35 By their very nature, the Fed and ECB swap lines were selective, and subject to
domestic monetary policy, as well as political pressure. It is uncertain whether the United States
will be willing to play this role again in the future. Large accumulation of foreign exchange
reserves is expensive, since they typically earn little interest and are susceptible to exchange rate
risk. They also contribute to systemic instability, by creating excessive demand for reserve
currencies, thus putting downward pressure on interest rates in the economies of reserve
currencies, such as the U.S. dollar. Large swings in official portfolios of foreign exchange
reserves can also have significant impact on exchange rates and the price of sovereign bonds.
Some analysts have proposed improving the Fund’s lender of last resort function. For example,
one recent study proposed three main elements of what such reform could look like: (1) an
automatic trigger to access the facility; (2) unilateral country prequalification to the facility
during Article IV consultations; and (3) liquidity funded by the world’s “issuers of last resort.”36
When considering expanding the role of the IMF, however, the concept of moral hazard has often
been considered. As IMF lending increased after the financial crisis, especially after the large
loans to Greece, Ireland, and Portugal, many observers, including some Members of Congress,
raised concerns that financing by the IMF, particularly emergency financing provided during
financial crises, encouraged the very behavior that it sought to prevent. Simply put, IMF lending
may send the wrong signals to government officials. According to this view, in the best-case
scenario, countries are spared the worst consequences of their poor economic decisions. In other
cases, the IMF program may not stabilize the crisis, further indebting the crisis-afflicted country.
Other analysts argue that, as the 1994-1995 Mexican crisis, the 1997-1999 Asian crisis, and the
recent 2008 crisis have demonstrated, residents of IMF-recipient countries suffer painful
consequences of a forced economic adjustment. The policy question is whether economic pain is
mitigated by external financial support tied to a conditional economic adjustment program. A
different type of “moral hazard” also arises with regard to investors. Does the existence of an
emergency financial mechanism encourage private investors to take on risks that they might
otherwise shun in an attempt to reap greater financial returns? In this context, some are troubled
that, as a by-product of a “bailout,” professional investors, who took on higher risks and were
probably rewarded with higher returns, are made whole.
35
Maurice Obstfeld, Jay C. Shambaugh, and Alan M. Taylor, Financial Instability, Reserves, and Central Bank Swap
Lines in the Panic of 2008, National Bureau of Economic Research, NBER Working Paper No. 14826, March 2009.
36
Eduardo Fernandez-Arias and Eduardo Levy Yeyati, Global Financial Safety Nets: Where Do We Go from Here?,
Inter-American Development Bank, IDB Working Paper 231, November 2010.

IMF conditionality and pre-qualification of IMF loans might reduce concerns about moral hazard.
Edwin Truman at the Peterson Institute for International Economics argues that the IMF’s role
can be improved, addressing moral hazard at the same time, through a “comprehensive
prequalification” process where the Fund presents “policy terms for lending” to every member
country potentially eligible to borrow from the IMF, based on the IMF’s bilateral and multilateral
economic surveillance.37
Adequacy of IMF Resources

To address the increased demand for IMF resources, world leaders at the spring 2009 G-20
meeting in London agreed to substantially boost the IMF’s lending capacity, primarily by a $500
billion increase in the size of the NAB. The Obama Administration proposed that the United
States contribute up to $100 billion.38 The requisite authorizations and appropriations were
included in the FY2009 Spring Supplemental Appropriations for Overseas Contingency
Operations (P.L. 111-32).
One of the reasons that world leaders increased IMF resources in 2009 via the NAB, and not
through an increase in quotas, was long-standing frustration among emerging market economies
that, after years of sustained economic growth, their representation at the IMF did not reflect their
current economic position in the world economy.39 Simply put, many emerging economies were
unwilling to increase the IMF’s quota resources, unless there was also a shift in their share of IMF
quota relative to the advanced economies that had traditionally dominated the institution. At the
same time, a broad consensus has emerged that some European countries are over-represented at
the IMF compared to their share of global GDP, especially in light of their representation on the
Executive Board. European countries have three full seats on the IMF Executive Board, and
currently chair or co-chair seven of the group constituencies.
At the April 2010 G-20 meetings, leaders pledged a shift of at least 5% of the IMF quota share to
under-represented countries. On November 11-12, 2010, IMF member states agreed on a package
of reforms, the core of which is a doubling of overall IMF quota to about $755 billion. In
addition, there would be a significant shift of voting power to dynamic emerging market
economies. If the reforms are implemented, the 10 largest members of the IMF will consist of the
United States; Japan; the four largest European economies (France, Germany, Italy, and the
United Kingdom); and Brazil, China, India, and Russia.
The quota increase is expected to come via a repositioning of the NAB resources that were
pledged in 2009. As part of the new quota increase to be completed by September 2012, member
countries’ commitments to the NAB are expected to be proportionally reduced to fund the
increase in their quota.
Action by Congress will likely be required for the United States to participate in this plan.40
According to one analyst, for the United States to participate in the quota increase, Congress
37
Edwin Truman, The IMF as International Lender of Last Resort, Peterson Institute for International Economics, Real
Time Economic Issues Watch, October 12, 2010.
38
CRS Report R40578, The Global Financial Crisis: Increasing IMF Resources and the Role of Congress, by Jonathan
E. Sanford and Martin A. Weiss.
39
CRS Report RL33626, International Monetary Fund: Reforming Country Representation, by Martin A. Weiss.
40
For more information, see CRS Report R42844, IMF Reforms: Issues for Congress, by Rebecca M. Nelson and
(continued...)

would need to authorize a shift of about $65 billion from the funds appropriated for increased
U.S. IMF participation in the FY2009 Supplemental Appropriations Act.41 In addition to
increasing the size and composition of IMF quota, there was also agreement on some governance
reform of the IMF Executive Board, which would also need congressional approval since the
IMF’s Articles must be amended for them to take effect. These include
• the transfer of two European chairs to emerging market countries;

• the move to an all-elected Executive Board, eliminating the practice of
appointing Executive Directors and allowing all countries to participate in
Executive Director elections;42 and
• establishment of a second alternate Executive Director position for multi-country
constituencies with at least seven countries.43
The quota and governance reforms are interlinked, and cannot be implemented separately. A
double majority of the IMF membership (voting power and number of total members) is required
to adopt the reforms. For the quota increase, IMF members representing at least 70% of IMF
contributions must consent to the increase. The governance reforms must be agreed by three-
fifths of the IMF’s 188 members (113 members) having 85% of the IMF’s total voting power. In
many cases (including the United States) this involves parliamentary approval. Since the United
States has voting power of 16.75%, the reforms cannot become effective without ratification by
the United States.
(...continued)
Martin A. Weiss.
41
Edwin Truman, IMF Governance Reform: A “Pretty Good” Step in the Right Direction, Peterson Institute for
International Economics, November 8, 2010.
42
Currently, members holding the five largest voting positions at the Fund appoint an Executive Director and are
unable to participate in the elections that decide nominated Executive Directors.
43
International Monetary Fund, “Factsheet: IMF Quotas,” March 3, 2011.

Appendix. U.S. Contributions to the IMF and the

Federal Budget
When the United States joined the IMF, and for the first two quota increases, U.S. contributions
were appropriated and recorded as an outlay on the federal budget. In 1967, the President’s
Commission on Budget Concepts recommended that U.S. transfers to the IMF be reflected on the
federal budget as an exchange of monetary assets of equivalent value to the United States from
the IMF, and therefore that they not be recorded in the federal budget as an outlay.
At the time of the next IMF quota increase, which became effective on October 30, 1970, the new
budgetary concepts applicable to U.S. transactions with the IMF were not fully implemented. As
a result, the transaction was treated as an exchange of assets rather than as an outlay in the official
budget, as recommended by the President’s Commission on Budget Concepts. For the next quota
increase, which became effective in 1978, the U.S. share was subject to the budgetary treatment
recommended by the commission: the quota increase was an exchange of monetary assets
involving no budgetary outlay and requiring no appropriation.
At the time of congressional debate on the 1980 quota increase, Congress and the Administration
agreed to incorporate appropriations legislation to reflect the fact that U.S. commitment to the
IMF represented a line of credit. As such, Congress wanted control over the amount of contingent
liability the United States undertook through its participation in the IMF. Since the United States
received an equal asset at the IMF, and nobody could predict whether there would be any eventual
outlays, a compromise was reached whereby U.S. contributions to the IMF (either quota or NAB)
would score as budget authority (an act of appropriations would be required), but the
contributions would continue to be scored as zero (i.e., no cost) on the federal budget, thus
incurring no budget outlays (no effect on deficits/surplus).
In spring 2009, President Obama requested an increase in U.S. contributions to the IMF. When
the request was transmitted to Congress, President Obama argued that treatment for U.S.
contributions to the IMF should revert to the pre-1980 standard, and thus neither require budget
authority nor incur any outlays. While many agreed with the Administration that it was unusual to
record budget authority and not outlays, some Members of Congress raised concerns about not
scoring any outlays for additional U.S. contributions to the IMF. They argued that such a method
did not correctly reflect the degree of risk of the IMF defaulting on the U.S. contribution, given
the current economic turmoil.
After several months of negotiation, on May 12, 2009, the White House and Congress reached an
agreement to treat the U.S. subscription to the IMF as a line of credit for budgetary purposes. The
Federal Credit Reform Act of 1990 provides that when the U.S. government makes a loan, it does
not need to include the full face value of the loan in the federal budget. Rather, Congress must
appropriate the estimated subsidy cost, an amount equal to the amount the U.S. government might
lose from these loans as a consequence of defaults.44 This procedure is used throughout the
federal budgeting process. Unlike IMF quota increases since 1967, the U.S. contribution would
be scored as a loan for budgetary purposes under the existing credit reform legislation with a
44
See out-of-print CRS Report RL30346, Federal Credit Reform: Implementation of the Changed Budgetary
Treatment of Direct Loans and Loan Guarantees, by James M. Bickley (available upon request).

commensurate budgetary impact. In the law authorizing U.S. participation in the new IMF
funding plans, the FY2009 Spring Supplemental Appropriations for Overseas Contingency
Operations, Congress subsequently appropriated $5 billion as a loan loss reserve to cover the risk
associated with the new U.S. payments to the IMF.45
Author Contact Information
Martin A. Weiss
Specialist in International Trade and Finance
mweiss@crs.loc.gov, 7-5407
Acknowledgments
Amber Wilhelm provided graphics support on this report.
45
CRS Report R40531, FY2009 Spring Supplemental Appropriations for Overseas Contingency Operations,
coordinated by Stephen Daggett and Susan B. Epstein.

1
T H E W T O
AGREEMENTS
S E R I E S
AGREEMENT
ESTABLISHING
THE WTO
THE WTO AGREEMENTS SERIES
This series offers a set of handy reference booklets on selected WTO agreements, the legal foundation for
the international trading system used by the bulk of the world’s trading nations. Each volume in the series
contains the text of one agreement, an explanation designed to help the user understand the text, and in
some cases supplementary material.
The agreements were the outcome of the 1986-1994 Uruguay Round of world trade negotiations held
under the auspices of what was then the GATT (the General Agreement on Tariffs and Trade). The full set
is available in The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts. It
includes about 60 agreements, annexes, decisions and understandings, but not the commitments individual
countries made on tariffs and services. A full package of agreements that includes the over-20,000 pages of
commitments is available from WTO Publications in a 34-volume set, and also a CD-ROM, The Results of
the Uruguay Round.
This series of smaller volumes includes introductions explaining the accompanying legal texts. They are
intended to be an authoritative aid for understanding the agreements, but because of the legal complexity
and the fact that a number of issues have not been tested — for example in the WTO’s dispute settlement
procedures — the introductions cannot be taken as legal interpretations of the agreements.
Another WTO publication, Guide to the Uruguay Round Agreements (shortly to be published jointly by the
WTO and Kluwer Law International), is a comprehensive explanation of all the agreements. A simpler
guide to the agreements is in Trading into the Future, a booklet and electronic guide introducing all
aspects of the WTO’s work that can also be found on the WTO website: http://www.wto.org.
The volumes in this series

(the sequence follows their order of appearance in the WTO Agreement):
1. Agreement Establishing the WTO 11. Rules of Origin
2. GATT 1994 and 1947 12. Import Licensing Procedures
3. Agriculture 13. Subsidies and Countervailing Measures
4. Sanitary and Phytosanitary Measures 14. Safeguards
5. Textiles and Clothing 15. Services
6. Technical Barriers to Trade 16. Trade-Related Intellectual Property Rights
7. Trade-Related Investment Measures 17. Dispute Settlement
8. Anti-dumping 18. Trade Policy Reviews
9. Customs Valuation 19. Trade in Civil Aircraft
10. Preshipment Inspection 20. Government Procurement
Contacting the WTO:
For publications, write to:

WTO Publications, World Trade Organization, Centre William Rappard, rue de Lausanne 154,
CH–1211 Genève 21, Switzerland
Tel: (41 22) 739 52 08 / 739 53 08 Fax: (41 22) 739 57 92 e-mail: publications@wto.org
On-line bookshop: http://www.wto.org/wto/publicat/publicat.htm
For general information, write to:

Information and Media Relations Division, World Trade Organization, Centre William Rappard, rue de Lausanne 154,
CH–1211 Genève 21, Switzerland
Tel: (41 22) 739 50 07 Fax: (41 22) 739 54 58 e-mail: enquiries@wto.org
Website: http://www.wto.org
CONTENTS
ABBREVIATIONS iii
PREFACE iv
THE BASIC STRUCTURE OF WTO AGREEMENTS v
INTRODUCTION The Agreement Establishing the World Trade Organization 1

Overview 1
Functions of the WTO 1
Objectives 1
Implementing agreements 2
Negotiations 2
Disputes and policy reviews 2
Developing countries 2
Coherence 3
The structure of the WTO 3
Ministerial Conference and General Council 3
Goods, services and TRIPS councils 3
Committees reporting to General Council 4
Figure I.1 The WTO’s structure 5
Other bodies 6
Bureaucracy and finance 6
Membership 7
Decision-making 8
Coherence in global economic policymaking 9
Note: the WTO Agreement and the Uruguay Round Final Act 11
TEXT: MARRAKESH AGREEMENT ESTABLISHING THE WORLD TRADE ORGANIZATION 13

Article I Establishment of the Organization 13
Article II Scope of the WTO 13
Article III Functions of the WTO 14
Article IV Structure of the WTO 14
Article V Relations with Other Organizations 15
Article VI The Secretariat 15
Article VII Budget and Contributions 16
Article VIII Status of the WTO 16
Article IX Decision-Making 17
Article X Amendments 18
Article XI Original Membership 19
Article XII Accession 20
Article XIII Non-Application of Multilateral Trade Agreements between Particular Members 20
i
Article XIV Acceptance, Entry into Force and Deposit 20
Article XV Withdrawal 21
Article XVI Miscellaneous Provisions 21
Explanatory Notes: 22
LIST OF ANNEXES 23
ANNEX 1 23
ANNEX 2 UNDERSTANDING ON RULES AND PROCEDURES GOVERNING THE SETTLEMENT OF
DISPUTES 23
ANNEX 3 TRADE POLICY REVIEW MECHANISM 23
ANNEX 4 PLURILATERAL TRADE AGREEMENTS 23
ANNEX 1A MULTILATERAL AGREEMENTS ON TRADE IN GOODS 24

General interpretative note to Annex 1A: 24
TEXT: FINAL ACT EMBODYING THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL
TRADE NEGOTIATIONS 25
TEXT: Decision on Measures in Favour of Least-Developed Countries 26
TEXT: Declaration on the Contribution of the World Trade Organization to Achieving

Greater Coherence in Global Economic Policymaking 28
TEXT: Decision on Trade and Environment 30
Decision on the Acceptance of and Accession to the Agreement Establishing the World
Trade Organization 33
ii
ABBREVIATIONS
DSU Dispute Settlement Understanding

GATS General Agreement on Trade in Services
GATT The General Agreement on Tariffs and Trade, established in 1947. The abbreviation is
used for both the legal text and the institution
G A T T 1 9 4 7 The text of GATT as used until amended by the WTO Agreements which came into force
in 1995
G A T T 1 9 9 4 The General Agreement on Tariffs and Trade, as revised in 1994, which is part of the
WTO Agreements. GATT 1994 includes GATT 1947 together with amendments.
ICITO Interim Commission for the International Trade Organization, the provisional agency
handling financing and staffing of GATT.
ITO International Trade Organization, the proposed third Bretton Woods agency (with
International Monetary Fund and World Bank) that was never set up.
TPRM Trade Policy Review Mechanism
TRIPS Trade-Related Aspects of Intellectual Property Rights
WTO The World Trade Organization, established as the successor to the GATT on
1 January 1995
iii
PREFACE
THE AGREEMENT ESTABLISHING THE WTO
The World Trade Organization (WTO) provides the institutional and legal foundation for the new
multilateral trading system that came into being on 1 January 1995. The Agreement Establishing the WTO
is a comparatively short agreement that sets out its role, structure and powers. It is also the first text of
permanent importance in the package of agreements signed in Marrakesh on 15 April 1994 at the end of
the Uruguay Round negotiations. Named after the country where it was launched in 1986, the Uruguay
Round came under the auspices of the General Agreement on Tariffs and Trade (GATT). It lasted seven
and a half years and it was the last of eight rounds of GATT negotiations.
GATT was the WTO’s predecessor. It had a far weaker institutional basis, but it provided a system of
rights and obligations for trade in goods. These were was set out in a number of legal texts: the General
Agreement itself, negotiated in 1947 and little changed thereafter, and a large number of related agreements
or decisions reached over the years.
Although the General Agreement’s provisions applied to all its signatory countries (or “Contracting
Parties”), some of the most important among the other agreements had been signed by comparatively few
countries. The business of the GATT was carried on by institutions that had been developed somewhat
haphazardly in response to evolving needs, and the necessary financing and staff were formally provided
through a moribund provisional agency, the Interim Commission for the International Trade Organization
(ICITO), which for more than 40 years had served no other purpose. Dispute settlement arrangements had
also evolved on a largely ad hoc basis, with separate arrangements to resolve disputes arising under the
General Agreement and under most of the limited-membership agreements. All this has now changed.
This agreement (called here for short the WTO Agreement) and others contained in the Final Act of the
Uruguay Round are part of the treaty which established the WTO. The WTO superseded the GATT as the
umbrella organization for international trade, but the text of the General Agreement remains in force as one
of the WTO’s agreements. Amended once again, it is now called GATT 1994 and it includes the original
version (“GATT 1947”). It and the supplementary agreements on trade in goods form a package that has
the official title of the “Multilateral Agreement on Trade in Goods”. This in turn is Annex 1A of the
“Marrakesh Agreement Establishing the World Trade Organization.
The WTO Secretariat has prepared this booklet to assist public understanding of the WTO Agreement.
The first section is an introduction to the agreement. The second section contains the legal text of the
agreement. It also includes related legal documents — the text of the Final Act (see explanation on page 11)
and ministerial decisions cited in the introduction. The booklet is not intended to provide legal
interpretation of the agreement.
May 1998
iv
THE BASIC STRUCTURE
OF WTO AGREEMENTS
The conceptual framework

Broadly speaking, the WTO agreements for the two largest areas of trade — goods and services — share a
common three-part outline, even though the detail is sometimes quite different.
In a nutshell
The basic structure of the WTO agreements
Goods Services Intellectual Disputes Trade policy

property reviews
Basic principles GATT GATS TRIPS Dispute TPRM
settlement
Additional details Other goods Services annexes

agreements and
annexes
Market access Countries’ Countries’

commitments schedules of schedules of
commitments commitments
(and MFN
exemptions)
♦ They start with broad principles: the General Agreement on Tariffs and Trade (GATT) (for goods),
and the General Agreement on Trade in Services (GATS). (The agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS) also falls into this category although at present it has no additional
parts.)
♦ Then come additional agreements and annexes dealing with the special requirements of specific
sectors or issues. These deal with the following specific sectors or issues:
For goods (under GATT) For services

Agriculture Customs valuation methods (the GATS annexes)
Health regulations for farm and Preshipment inspection Movement of natural persons
food products (SPS) Rules of origin Air transport
Textiles and clothing Import licensing Financial services
Product standards (TBT) Subsidies and counter- Shipping
Investment measures measures Telecommunications
Anti-dumping measures Safeguards
♦ Finally, there are the detailed and lengthy schedules (or lists) of commitments made by individual
countries allowing specific foreign products or service-providers access to their markets. For GATT,
these take the form of binding commitments on tariffs for goods in general, and combinations of tariffs
and quotas for some agricultural goods. For GATS, the commitments state how much access foreign
service providers are allowed for specific sectors, and they include lists of types of services where
individual countries say they are not applying the “most-favoured-nation” principle of non-
discrimination.
v
Much of the Uruguay Round dealt with the first two parts: general principles and principles for specific
sectors. At the same time, market access negotiations were possible for industrial goods. Once the
principles had been worked out, negotiations could proceed on the commitments for sectors such as
agriculture and services. Negotiations after the Uruguay Round have focused largely on market access
commitments: financial services, basic telecommunications, and maritime transportation (under GATS),
and information technology equipment (under GATT).
The agreement in the third area of trade covered by the WTO — on intellectual property — is at the level
of basic principles although some details on specific areas (for example on copyright, patents, trademarks,
geographical indications) are handled in the agreement. Other details come from conventions and
agreements outside the WTO.
The agreements on dispute settlement and trade policy reviews are also essentially at the level of basic
principles.
Also important
One other set of agreements not included in the diagram above is also important: the two “plurilatera
agreements not signed by all members: civil aircraft, government procurement. (Originally there were four:
the agreements on dairy products and bovine meat were terminated at the end of 1997.)
The legal framework

The conceptual structure is reflected in the way the legal texts are organized. A short Marrakesh
Agreement Establishing the World Trade Organization sets up the legal and institutional foundations.
Attached to it is a much lengthier set of four annexes.
♦ Annex 1 contains most of the detailed rules, and is divided into three sections:
• 1A, containing the revised General Agreement on Tariffs and Trade, the other agreements
governing trade in goods, and a protocol which ties in individual countries’ specific
commitments on goods;
• 1B, the General Agreement of Trade in Services, texts on specific services sectors, and
individual countries’ specific commitments and exemptions; and
• 1C, the Agreement on Trade-Related Aspects of Intellectual Property Rights.
Collectively, the agreements included in Annex 1 are referred to as the Multilateral Trade
Agreements, since they comprise the substantive trade policy obligations which all the members
of the WTO have accepted.
♦ Annex 2 sets the rules and procedures for dispute settlement.
♦ Annex 3 provides for regular reviews of developments and trends in national and international
trade policy.
♦ Annex 4 covers four “plurilateral” agreements (later reduced to two) which are within the
WTO framework but which have limited membership.
Finally, the Marrakesh texts include a number of decisions and declarations on a wide variety of matters
that were adopted at the same time as the WTO Agreement itself.
vi
INTRODUCTION
The Agreement Establishing
the World Trade Organization
The World Trade Organization (WTO) provides the institutional and legal foundation for the
new multilateral trading system that came into being on 1 January 1995.
The comparatively short agreement that sets out its role, structure and powers is also the
first text in the package of Uruguay Round agreements signed in Marrakesh on 15 April
1994 that is of permanent importance.
Overview
The WTO Agreement1 creates an entirely new international organization to administer “an integrated,
more viable and durable multilateral trading system encompassing the General Agreement on Tariffs and
Trade, the results of past liberalization efforts, and all of the results of the Uruguay Round of Multilateral
Trade Negotiations” (Preamble, para.4). The agreement defines the functions of the organization, its
structure, the qualifications for membership, and decision-making procedures and requirements. It also
calls for efforts to improve the coherence of global economic policy-making. However, the WTO
Agreement itself contains no substantive trade policy obligations: these are to be found only in the annexes.
Functions of the WTO
Objectives
The Preamble to the WTO Agreement essentially sets out, in the broadest terms, the objectives of the
whole body of agreements reached at the end of the Uruguay Round. Much of the language of the
Preamble is taken over from the GATT, with several modifications. Thus, principal objectives of the WTO,
as of the GATT, are raising standards of living, ensuring full employment, expanding production and trade,
and allowing optimal use of the world’s resources. The WTO Preamble adds three elements. It refers to
production of and trade in goods and services (the GATT spoke only of goods); it states the objective of
sustainable development, “seeking both to protect and preserve the environment”; and it recognizes the
need for positive efforts to ensure that developing countries, and especially the least-developed countries,
“secure a share in international trade commensurate with the needs of their economic development” (
Preamble, paras. 1 and 2). The declared means of achieving these objectives is exactly the same as that laid
down 47 years earlier in the GATT: “reciprocal and mutually advantageous arrangements directed to the
substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment
1 Confusingly, this short text of sixteen articles has no official name of its own. The title which heads it — Marrakesh
Agreement Establishing the World Trade Organization — in fact covers not only the WTO itself, but also all the
other Uruguay Round agreements attached to it in its Annexes. For this introduction, the sixteen-article text will be
referred to as the WTO Agreement, to distinguish it from the broader Marrakesh Agreement. (See also the note at
the end of this introduction that relates the WTO Agreement to the Uruguay Round Final Act.)
1
2 THE WORLD TRADE ORGANIZATION AGREEMENTS
in international trade relations” (Preamble, para.3).

The stated objectives are clearly those of the Marrakesh package of agreements as a whole. The role of the
World Trade Organization itself is defined by Article III of the WTO Agreement, which defines five
functions for it.
Implementing agreements
The first, and broadest, function is to “facilitate the implementation, administration and operation, and
further the objectives, of this Agreement and of the Multilateral Trade Agreements”, and also to “provide
the framework for the implementation, administration and operation of the Plurilateral Trade Agreements”
(Article III:1). The wording reflects the difference between the multilateral agreements, to which all member
governments are committed, and the plurilateral agreements which are under the WTO umbrella but
cannot expect the same degree of support.
Negotiations
The WTO’s second function is to be a negotiating forum. Again, a distinction is made between
negotiations for which the WTO shall provide the forum, and those for which it may provide a forum
(Article III:2). The first category, specifically reserved to the WTO, consists of multilateral negotiations on
matters dealt with in the annexes to the agreement  that is, on the subjects already covered by the GATT
and the Uruguay Round. The second category is defined only as “further” negotiations concerning
multilateral trade relations, as may be decided by the WTO’s Ministerial Conference: should such
negotiations take place, the WTO can also provide the framework for putting their results into effect.
Disputes and policy reviews

The third and fourth functions of the WTO are to administer the arrangements in Annexes 2 and 3 for the
settlement of disputes that may arise between members and for the review of trade policies (Article III:3 and
III:4). Finally, the WTO is to cooperate, as appropriate, with the International Monetary Fund and the
World Bank “with a view to achieving greater coherence in global economic policymaking” (Article III:5).
Developing countries
The WTO Agreement’s Preamble and Article III are buttressed by two separate texts that were adopted by
Ministers on the same day that they signed the Marrakesh agreements.
One text, of particular importance because it has a bearing on virtually every other agreement in the
Uruguay Round package, is a decision on measures in favour of least-developed countries. Its central point
is that these countries, as long as they remain in the least-developed category, 2 will only be required to
undertake commitments and concessions under the Uruguay Round agreements “to the extent consistent
with their individual development, financial and trade needs, or their administrative and institutional
capabilities”3, and that the rules and transitional arrangements in the agreements “should be applied to
Para. 2 (iii)). The decision gave least-developed countries an
additional year to submit their schedules of commitments on goods and services (Para. 1). 4 Other
provisions require regular reviews to ensure that special and differential measures in their favour are put
promptly into effect; encourage early action to reduce trade barriers facing products of interest to them;
and call on developed countries to be careful of the effects any import relief measures they take may have on
2 The categorization referred to is that established, and periodically reviewed, by the United Nations.
3 Decision on Measures in Favour of Least-Developed Countries, para. 1.
4 The requirement to have schedules of commitments for goods and services, a condition of membership in the
WTO, is discussed below under “Membership”.
INTRODUCTION TO THE AGREEMENT ESTABLISHING THE WTO 3
exports of the least-developed countries. Finally, the decision promises the least-developed countries
substantially increased technical assistance in the development, strengthening and diversification of their
production and exports, as well as continuing review of their specific needs (Para. 2). There is no
comparable general text covering developing countries other than those in the least-developed category.
Special and differential treatment for developing countries is instead included in most of the separate
agreements and arrangements reached in the Uruguay Round, where it usually takes the form of less
stringent obligations (e.g. longer transition periods) than are imposed on developed countries.
Coherence
The second ministerial text bearing on the functions of the WTO is a declaration on its role in achieving
“greater coherence in global economic policymaking”.5 As the title of the declaration suggests, it is directly
linked with the fifth function of the WTO, already referred to. Its content and significance are discussed
below.
The structure of the WTO

The WTO Agreement provides the new organization with a clear structure, political guidance, a proper
staff, and appropriate financial arrangements.
Ministerial Conference and General Council

The structure is headed by a Ministerial Conference, composed of all members of the WTO, which is to
meet at least once every two years. The conference has full powers under the agreement: it is to “carry out
the functions of the WTO and take actions necessary to this effect”, and has “the authority to take decisions
on all matters under any of the Multilateral Trade Agreements” (WTO Agreement, Article IV:1). The GATT
had no equivalent body, although its sessions of the GATT Contracting Parties were occasionally held at
Ministerial level, and its work in consequence lacked continuity in political leadership.
Between sessions of the Ministerial Conference, its functions are exercised by the General Council, also
made up of the full membership of the WTO (Article IV:2). The General Council is in effect responsible for
the continuing management of the organization. It supervises all aspects of the WTO’s work, and at the
same time is able to handle even the most important matters that may need urgent attention. For these
purposes, it meets regularly but — at least on the basis of experience so far — not particularly frequently:
the emerging pattern appears to be about half a dozen meetings a year. Most of the national representatives
at these meetings are the permanent heads of their countries’ delegations in Geneva.
The General Council has also been given two additional specific tasks. The WTO Agreement requires it to
convene as the Dispute Settlement Body and as the Trade Policy Review Body. These are responsible
respectively for the operation of the dispute settlement and trade policy review arrangements of the WTO.6
Meetings for these purposes take place much more frequently: experience so far is that the Dispute
Settlement Body meets about once a month, and the Trade Policy Review Body still more often.
Goods, services and TRIPS councils

The WTO Agreement provides for three separate sets of subsidiary bodies reporting to the General
Council. The most important group, responsible for the main operational aspects of the WTO, consists of
the three Councils which supervise work arising from the obligations which all member countries have
5 Declaration on the Contribution of the World Trade Organization to Achieving Greater Coherence in Global
Economic Policymaking adopted by Ministers in Marrakesh on 15 April 1994.
6 These arrangements are discussed in separate booklets in this series.
assumed under the agreements on trade in goods, trade in services, and trade-related aspects of intellectual
property matters. A second set of subsidiary bodies is responsible for broad functions that cut across
sectoral responsibilities. The third group consists of the bodies established under the Plurilateral Trade
Agreements, which by definition contain the obligations that bind only those WTO members that have
accepted them.
The three subsidiary Councils are the Council for Trade in Goods, the Council for Trade in Services, and
the Council for Trade-Related Aspects of Intellectual Property Rights (known for short as the Council for
TRIPS). Each operates under the general guidance of the General Council, and is to carry out the functions
assigned to it by the goods, services or TRIPS agreements, and by the General Council. The Council for
Trade in Goods covers the agreements in Annex 1A to the WTO Agreement: that is, the GATT itself, and
all the multilateral understandings, agreements and decisions reached on trade in goods either as a result of
the Uruguay Round, or carried over from earlier years. The Council for Trade in Services oversees the
General Agreement on Trade in Services (GATS). The Council for TRIPS oversees the Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). Each of the Councils is open to
all WTO members who may wish to attend (Article IV:5). The Councils are to meet as necessary, and can
set up subsidiary bodies (Article IV:6).
Committees reporting to General Council

The second group of permanent bodies reporting to the General Council and specified in the WTO
Agreement consists of the Committee on Trade and Development, the Committee on Balance-of-Payments
Restrictions, and the Committee on Budget, Finance and Administration. To these has been added the
Committee on Regional Trade Agreements, set up in 1996 (Article IV:7). 7 All the first three committees
had direct counterparts under the old GATT: the difference is that they now have to cover the wider
responsibilities of the WTO. Many, or even most, of their tasks are specifically laid down elsewhere in the
WTO Agreement, or in its annexes.8 However, the Committee on Trade and Development is also required
to review periodically the application of the special provisions of the Multilateral Trade Agreements in
favour of least-developed countries, and has set up a sub-committee for this purpose (Article IV:7). These
permanent committees are open to all WTO members, although it is only the Committee on Trade and
Development whose membership approaches in numbers that of the WTO itself. One important body, the
Committee on Trade and Environment, was created under the terms of a Ministerial decision in
Marrakesh. 9 Initially established to report to the first meeting of the Ministerial Conference, held in
December 1996, its work programme has been further extended.
7 The Committee on Regional Trade Agreements, set up in February 1996 by decision of the General Council
(Decision of 6 February 1996, WT/L/127), has the responsibility of examining all bilateral, regional and plurilateral
trade agreements that are preferential in nature, and also considers the systemic implications of such agreements and
regional initiatives for the multilateral trading system.
8 The GATT Committee on Trade and Development was set up to supervise application of Part IV (Articles XXXVI,
XXXVII and XXXVIII) of the GATT, and its WTO successor, with its sub-committee on least-developed countries,
is similarly concerned with trade issues affecting developing countries. The Committee on Balance-of Payments
Restrictions carries out functions under GATT Articles XII and XVIII:B and related provisions, as well as under
GATS Article XII. Article VII of the WTO Agreement itself defines the tasks of the Committee on Budget, Finance
and Administration.
9 Decision on Trade and Environment, adopted by Ministers in Marrakesh on 15 April 1994. See also Annex II of
the present study.
Figure I.1
The WTO’s structure
All WTO members may participate in all councils, committees, etc, except Appellate Body, Dispute
Settlement panels, Textiles Monitoring Body, and plurilateral committees.
Ministerial Conference
General Council meeting as General Council meeting as

Trade Policy Review General Council Dispute Settlement
Body Body
Appellate Body
Dispute Settlement panels
Committees on Council for

Council for Council for
Trade and Environment Trade-Related Aspects
Trade in Goods Trade in Services
of Intellectual
Trade and Development Property Rights
Subcommittee on Least-
Developed Countries
Regional Trade Committees on Committees on
Agreements
Market Access Trade in Financial
Balance of Payments Services
Agriculture
Restrictions
Sanitary and Phytosanitary Specific Commitments
Budget, Finance and
Measures Working parties on
Administration
Technical Barriers to Trade Professional Services
Working parties on
Subsidies and Countervailing GATS Rules
Accession
Measures
Working groups on
Anti-Dumping Practices
Plurilaterals
the Relationship between
Customs Valuation
Trade and Investment Committee on Trade in Civil
Rules of Origin Aircraft
the Interaction between
Trade and Competition Import Licensing Committee on Government
Policy Trade-Related Investment Procurement
Transparency in Measures
Government Procurement Safeguards
Textiles Monitoring Body
Working parties on
State-Trading Enterprises
Preshipment Inspection
Key
Reporting to General Council (or a subsidiary)
Reporting to Dispute Settlement Body
Plurilateral committees inform the General Council of their
activities although these agreements are not signed by all WTO
members
The General Council also meets as the Trade Policy Review Body and Dispute
Settlement Body
The third group consists of the bodies set up under the limited-membership Plurilateral Trade Agreements,
which are in fact successors to earlier agreements, negotiated during the Tokyo Round of the 1970’s, that
were not made applicable to all WTO members. These are the committees on civil aircraft and government
procurement, which are not strictly subsidiaries of the General Council, but “operate within the
institutional framework of the WTO” and are required to keep the General Council regularly informed of
their activities (Article IV:8). 10
Other bodies
The list of WTO bodies prescribed in Article IV is not exclusive. As already noted, the Councils for Goods,
Services and TRIPS are specifically authorized to set up subsidiary bodies. The Council for Goods
necessarily has a large number of such bodies. Many are established under the terms of specific Uruguay
Round agreements, such as those on agriculture or subsidies, and to a great extent are successors to groups
which existed under the GATT. A new standing committee, the Committee on Market Access, has been set
up to handle work on both tariff and non-tariff matters. Temporary groups, usually known as “working
parties”, are established to study and report on matters that arise and will eventually require decision by the
Council. The Council for Trade in Services has also set up a number of subsidiary bodies. Most have the
task of carrying forward one or other aspect of the heavy programme of negotiations on services issues
called for by the GATS or by related Ministerial decisions taken at Marrakesh. Because the main
substantive provisions of the TRIPS Agreement came into effect only in 1996, the Council for TRIPS
initially set up no subsidiary bodies, but remains free to do so. Finally, nothing in the WTO Agreement
prevents further plurilateral agreements beyond the two now in existence from being negotiated, and from
operating in the same way within the WTO framework, provided the Ministerial Conference agrees to this
by consensus (Article X:9).
Bureaucracy and finance

Article VI of the WTO Agreement provides the organization with its permanent staff. As with the old
GATT, this consists of a Secretariat, headed by a Director-General. Unlike the GATT, however, the WTO
provides directly and clearly for their appointment and role. The Director-General is appointed by the
Ministerial Conference (Article VI:2); he in turn is to appoint the staff and set their duties and conditions of
service in accordance with regulations adopted by the Conference (Article VI:3). Both the Director-General
and the staff of the Secretariat are to function in the classic role of international civil servants, taking no
orders “from any government or any other authority external to the WTO” (Article VI:4). The WTO
Secretariat has essentially been staffed by the members of the former GATT Secretariat, with additional
staff recruited as necessary to meet the wider tasks required under the WTO. This transfer of staff was
envisaged in the WTO Agreement itself (Article XVI:2).
The other main elements in the provisions governing the WTO’s structure and status are provided by
Articles VII and VIII. Article VII lays down that annual budget proposals for the WTO shall be presented
by the Director-General to the Committee on Budget, Finance and Administration, which shall make
recommendations for approval by the General Council (Article VII:1). The Committee is also responsible for
drawing up financial regulations which “shall be based, as far as practicable, on the regulations and
Article VII:2). The most important element in the financial regulations is the
scale of contributions which determines the share of the WTO’s budget to be paid by each member
government. The basic principle is that contributions are proportionate to the share of each country’s
exports and imports in the total trade among members. Under the GATT, this was measured in terms only
of goods; under the WTO it is the share of goods and services. There is a minimum 0.03% contribution
10 Two other bodies, the International Dairy Council and International Meat Council, fell into the same category, but
were wound up at the end of 1997, along with the plurilateral agreements which they administered. See also Annex
I of the present volume.
applicable to countries with a share of less than that amount in total trade among WTO members.11 Article
VIII gives the WTO legal personality, and provides it and its staff with the privileges and immunities
needed to exercise its functions on a basis similar to that of specialized agencies of the United Nations.
Membership
The WTO Agreement provides for two ways of becoming a member of the organization. The first,
“original membership”, essentially covers the situation of governments which were Contracting Parties to
the old GATT (“GATT 1947”), and is governed by rules which mean that the possibility of joining the
WTO by this route was available only for a limited period. The second approach to membership is by
“accession”, which effectively means by negotiating the terms of membership with the governments that
are already members. Once membership has been achieved, the approach used ceases to be of significance:
original members and members by accession are all on the same footing, subject to any special terms of
accession. 12
Original members were required to be Contracting Parties to the GATT at the date of entry into force of
the WTO (1 January 1995), to have accepted the WTO Agreement, and also to have made concessions and
commitments for both goods and services, embodied in schedules that had been duly accepted and annexed,
respectively, to the GATT 1994 and the GATS (WTO Agreement, Article XI:1). It is these requirements,
and in particular the fact that all original members had to accept the WTO Agreement without reservations
(Article XVI:5), that establishes the all-embracing nature of the new organization and of the rights and
obligations for which it provides. Least-developed countries who became original members of the WTO
are subject to the same basic conditions, but “will only be required to undertake commitments and
concessions to the extent consistent with their individual development, financial or trade needs or their
administrative and institutional capabilities” (Article XI:2). Although elaborate provisions were made in a
Ministerial Decision13 to give adequate time for all qualifying countries to accede to the WTO as original
members, a final cut-off date was also provided. “Unless the Ministers decide otherwise”, new original
members were to be able to join only during the two years following entry into force of the WTO (WTO
Agreement, Article XIV:1). Almost all GATT contracting parties managed to ratify their accessions before
the end of 1996, and a short extension of the time-limit permitted the last of them to join in March 1997. 14
The accession route into the WTO remains open indefinitely to any state, and also any separate customs
territory which is free to conduct its own external trade policy and other policies governed by the WTO
agreements. (One prominent such territory — Hong Kong, China — is an original WTO member, as is
Macao.) The conditions for membership are not specified: accession is simply to be “on terms to be agreed
Article XII:1). It may however be assumed that, although they will be tailored to
the particular circumstances of the country concerned, they will be intended to put that country on a
footing similar to that of the existing members.
The WTO Agreement itself imposes few substantive obligations on members. Two exceptions, for all
countries, are the requirement to pay their shares in the expenses of the WTO (Article VII:4) and to ensure
the conformity of their laws, regulations and administrative procedures with their obligations under the
agreements in the WTO package (Article XVI:4).
11 WTO document WT/BF/A/13, 3 November 1995.

12 Decision on the Acceptance of and Accession to the Agreement Establishing the World Trade Organization,
Preamble.
13 Decision on the Acceptance of and Accession to the Agreement Establishing the World Trade Organization.
14 With accession to the WTO by the Republic of Congo, on 27 March 1997, as the organization’s 131st member, all
former contracting parties to the GATT (except the former Yugoslavia) had become WTO members.
The counterpart to the provisions on joining the WTO is of course the set of provisions on leaving it. Any
WTO member can withdraw, but the withdrawal will apply to all the multilateral agreements as well as the
WTO itself, and will take effect only six months after written notice has been given (Article XV:1.).
For political or other reasons, certain countries may not wish to have WTO rules apply between them. This
is possible, provided either of the members concerned makes its position clear at the time that it or the
other country becomes a member (Article XIII:1.). However, no country that was a GATT contracting party
may invoke this right to “non-application” against another former GATT contracting party unless it was
already invoking the equivalent GATT provision (Article XXXV of the General Agreement) (Article XIII:2).
This rule ensured that the changeover from the GATT to the WTO could not be used as an opportunity to
introduce new trade restrictions.
Decision-making
An important provision of the WTO Agreement states that, except as otherwise provided, the WTO is to
be “guided by the decisions, procedures and customary practices” followed under the old GATT (Article
XVI:1). The implications of this principle for decision-making are spelled out further: “the WTO shall
continue the practice of decision-making by consensus followed under GATT 1947” (Article IX:l).
Votes were seldom taken in GATT. The tradition was that decisions were normally taken only after an
issue had been discussed to the point at which an agreement had been developed which all countries were
ready to support, or at least not to oppose. Voting, when it took place, was normally a mere formality, and
usually concerned the approval of the pre-negotiated terms on which a country either acceded to the GATT
or was permitted (by a “waiver” of its normal obligations) to deviate from the requirements of a particular
rule. The rules on decision-making under the WTO seem likely to lean in practice even more heavily
towards the use of consensus rather than formal voting.
As far as formal voting is concerned, each WTO member has one vote. The general rule is that decisions of
the Ministerial Council or the General Council shall be by a majority of the votes cast (Article IX:1). Matters
become more complicated, however, if the vote concerns interpretations of the WTO Agreement or the
Multilateral Trade Agreements, amendment of these agreements, the grant of waivers, or the accession of
new members.
Interpretations can be adopted only if supported by a three-fourths majority of the membership (Article
IX:2). Even the submission of proposals for amendments normally requires consensus support (although if
consensus cannot be achieved, support by a two-thirds majority of the membership suffices), and approval
of proposals in most cases would require favourable votes by two-thirds of the membership (Article X:1).
Moreover, certain key articles that guarantee centrally-important rights have an entrenched status, and
cannot be changed unless all members so agree. These are Article IX of the WTO (the waiver rules),
Articles I and II of the GATT (respectively, the most-favoured-national rule and the schedules of
concessions on goods), and Articles II:1 of the GATS and 4 of the TRIPS agreement (in each case, the
most-favoured-nation rule of that agreement) (Article X:). If an amendment to the WTO, GATT or TRIPS
agreements would alter the rights and obligations of members, it will take effect for members which accept
it when two-thirds of the membership has voted in favour. The Ministerial Conference may decide by a
three-fourths majority of the membership that any such amendment is of such a nature that any member
which does not accept it “shall be free to withdraw from the WTO or to remain a member with the
consent of the Ministerial Conference” (Article X:3). Similar but separate provisions govern amendments to
the GATS rules on general obligations or specific commitments (Article X:).
Requests for waivers from obligations under the WTO Agreement or any of the Multilateral Trade
Agreements require approval by three-quarters of the membership, and must spell out the reasons for
granting the waiver, and the conditions on which it is granted, including its termination date (Article IX:3
and 4). 15 Decisions on the accession of new members require approval by two-thirds of the membership
(Article XII:2).
These voting requirements, tougher than those set by the old GATT, were introduced because of fears that
a number of countries might otherwise be tempted to join forces to vote through waivers or other decisions
that would deprive the outvoted minority of rights under the WTO. In the last resort, the requirements
would provide a strong defence if such a threat should ever materialize. It was soon realized, however, that
their practical effect could be to make it very hard to take important decisions, even when no member is
actually opposed to the decision. The total membership of the WTO is already over 130, and may reach
150 in the fairly near future. A requirement that three-quarters of the membership approve a proposed
waiver, or that two-thirds of the membership vote in favour of a country’s accession to the WTO, could
therefore demand the affirmative votes of more than 100 countries. This condition could be difficult to
fulfil, since the failure of quite a small number of countries to vote (and many countries do not have
permanent representation in Geneva) could be sufficient to block action. In consequence, the General
Council agreed in November 1995 on an important clarification of the decision-making rules in Articles IX
and XII of the WTO Agreement. It underlines that in considering requests for waivers or accessions, the
General Council shall seek to reach agreement by consensus. Votes will be taken only if consensus cannot
be reached. While any WTO member may request a vote, it should, in order to do so, be present at the
meeting at which the matter is considered: “the absence of a member will be assumed to imply that it has
no comments on or objections to the proposed decision on the matter”.16 It seems apparent already that,
following this agreement, formal votes will be even less frequent in the WTO than they were under the
GATT.
One further clarification of the decision-making procedures of the WTO has been reached since the
Uruguay Round agreements were signed. As part of the process of drawing up rules of procedure for the
various WTO bodies, the member governments agreed that voting should take place only in the General
Council and Ministerial Conference. When an agreement cannot be reached by consensus in a subsidiary
body such as the Council for Goods, the matter will be passed up to the General Council for further
consideration.
Coherence in global economic policymaking

The WTO Agreement makes provision in its Article V for the organization to establish cooperative
arrangements with other intergovernmental organizations, as well as non-governmental organizations,
whose responsibilities and interests are related to those of the WTO (Article V:1 and 2). In November
1995, for instance, the WTO General Council noted17 an exchange of letters under the terms of this
provision between the Director-General of the WTO and the Secretary-General of the United Nations
which ensures close cooperation in future between the two organizations, even though WTO members had
earlier decided18 that it would not be appropriate for the WTO to seek a more formal “specialized agency”
relationship with the UN. Provisions of this kind are normal in the basic rules of any organization.
However, the WTO Agreement is unusual in specifically calling on the new organization to cooperate with
two other agencies, the International Monetary Fund (IMF) and the International Bank for Reconstruction
15 For waivers of obligations under the GATT, a separate Understanding establishes further provisions (GATT 1994:
Understanding in Respect of Waivers of Obligations under the General Agreement on Tariffs and Trade 1994). See
separate booklet on GATT.
16 Decision-making procedures under Articles IX and XII of the WTO Agreement: statement by the Chairman, agreed
by the General Council on 15 November 1995. WT/L/93.
17 WTO document WT/GC/W/10, 3 November 1995.
18 Report of the Preparatory Committee for the World Trade Organization, document PC/R, 31 December 1994.
and Development (World Bank), and in including this requirement among the basic functions of the WTO
(Article III:5). The reason is that, whereas cooperation with other organizations is seen as necessary because
of specific overlaps between their tasks and those of the WTO, in the case of the IMF and World Bank
there is a concern, shared with the WTO, to ensure that international economic policies as a whole work in
harmony.
The IMF and World Bank, established as a result of the 1944 Bretton Woods conference, have for the past
half-century been the world’s main instruments of monetary and financial cooperation. Plans for a
counterpart third economic agency, the International Trade Organization, were stillborn, leaving only the
weaker provisional agreement, the GATT, as basis for international cooperation on trade policy matters.
During the Uruguay Round, the participants discussed how a strengthened GATT might cooperate more
closely with the Bretton Woods agencies. All countries agreed that such cooperation was desirable in order
to ensure that the operations of the three agencies were consistent and mutually reinforcing. Many, but not
all, governments also felt that cooperation could serve a wider purpose: they believed that it could help to
overcome what they saw as a tendency for international monetary, financial and trade policies to work on
occasion at cross-purposes. The outcome of these discussions was the negotiation of a Ministerial
declaration, approved in Marrakesh as part of the Uruguay Round package, that calls on the WTO to
contribute “to achieving greater coherence in global economic policymaking”.19 The requirement in Article
III of the WTO Agreement that the new organization cooperate with the IMF and World Bank includes
the same language on policy “coherence”, and was in fact included in the agreement, after the draft
declaration had already been negotiated, as a means of carrying the declaration into operation.
The declaration states that globalization of the world economy has led to ever-growing interactions between
the economic policies pursued by individual countries. Successful cooperation in each area of economic
policy contributes to progress in other areas. The declaration cites links between exchange rate stability and
the expansion of trade, sustainable growth and development, as well as the role of aid and investment flows
and debt relief. Trade liberalization, it recalls, is an increasingly important component in the success of
adjustment programmes undertaken by many countries, and has been supported by the IMF and World
Bank. The results of the Uruguay Round — including improved market access, strengthened trade rules, a
better forum for further liberalization and more effective surveillance — “mean that trade policy can in the
future play a more substantial role in ensuring the coherence of global economic policymaking”. However,
trade policy measures alone cannot redress difficulties whose origins lie outside the trade field. This, the
declaration concludes, “underscores the importance of efforts to improve other elements” of policymaking
“to complement the effective implementation of the results achieved in the Uruguay Round”.
The declaration does not seek to prescribe in detail how the WTO should cooperate with the Bretton
Woods agencies. It calls only for the international economic institutions to follow “consistent and mutually
supportive policies”, and for whatever cooperation is developed to respect “the mandate, the confidentiality
requirements and the necessary autonomy in decision-making procedures of each institution”. A further call
to avoid “the imposition on governments of cross-conditionality or additional conditions” reflects the worry
of some countries that a closer alliance between powerful international agencies might otherwise have this
undesired result. Finally, the declaration sets in motion the process of developing closer links between the
WTO and the Bretton Woods agencies by inviting the WTO’s Director-General to review possibilities for
future cooperation with his counterparts at the IMF and World Bank. Discussions to this end were
launched in 1995, soon after the WTO came into existence, and separate agreements concluded between
the WTO and the IMF and WTO and the World Bank were signed, respectively, in December 1996 and
April 1997.
19 Declaration on the Contribution of the World Trade Organization to Achieving Greater Coherence in Global
Economic Policymaking.
Note: the WTO Agreement and the Uruguay Round Final Act
The WTO Agreement is preceded by two other texts, neither of which involves obligations that are still
relevant. One (the Marrakesh Declaration of 15 April 1994) is an essentially political declaration by
Ministers, celebrating conclusion of the Uruguay Round. The other (the Final Act Embodying the Results
of the Uruguay Round of Multilateral Trade Negotiations) is the formal agreement by which each country’s
representative recognized the attached substantive texts as representing the results of the Round.
The Final Act distinguishes between three groups of texts.
♦ The first group consists of what is now known as the Marrakesh Agreement: that is, the WTO
agreement itself, plus all the agreements annexed to it. By signing the Final Act, each government
undertook to submit the Marrakesh Agreement for ratification by the national legislature or other
appropriate authority.
♦ The second group, consisting of Ministerial Decisions and Declarations related to the Uruguay Round
results, did not need ratification, and therefore were actually adopted through signature of the Final Act.
♦ The third group contains just one text, the Understanding on Commitments in Financial Services,
which did not require adoption.
Two points in the Final Act are worth noting: the target date of 1 January 1995 which was set (and met)
for entry into force of the WTO; and the conditions for acceptance, which reflect the requirements for
original membership set out in Article XI:1 of the WTO Agreement.
(See also “ The Basic Structure of WTO Agreements”, page v–vi.)
TEXT:
MARRAKESH AGREEMENT
ESTABLISHING THE WORLD TRADE ORGANIZATION
The Parties to this Agreement,
Recognizing that their relations in the field of trade and economic endeavour should be conducted
with a view to raising standards of living, ensuring full employment and a large and steadily growing
volume of real income and effective demand, and expanding the production of and trade in goods and
services, while allowing for the optimal use of the world’s resources in accordance with the objective of
sustainable development, seeking both to protect and preserve the environment and to enhance the means
for doing so in a manner consistent with their respective needs and concerns at different levels of economic
development,
Recognizing further that there is need for positive efforts designed to ensure that developing
countries, and especially the least developed among them, secure a share in the growth in international
trade commensurate with the needs of their economic development,
Being desirous of contributing to these objectives by entering into reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to
the elimination of discriminatory treatment in international trade relations,
Resolved, therefore, to develop an integrated, more viable and durable multilateral trading system
encompassing the General Agreement on Tariffs and Trade, the results of past trade liberalization efforts,
and all of the results of the Uruguay Round of Multilateral Trade Negotiations,
Determined to preserve the basic principles and to further the objectives underlying this
multilateral trading system,
Agree as follows:
Article I
Establishment of the Organization
The World Trade Organization (hereinafter referred to as “the WTO”) is hereby established.
Article II
Scope of the WTO
1. The WTO shall provide the common institutional framework for the conduct of trade relations
among its Members in matters related to the agreements and associated legal instruments included in the
Annexes to this Agreement.
2. The agreements and associated legal instruments included in Annexes 1, 2 and 3 (hereinafter
referred to as “Multilateral Trade Agreements”) are integral parts of this Agreement, binding on all
Members.
3. The agreements and associated legal instruments included in Annex 4 (hereinafter referred to as
13
“Plurilateral Trade Agreements”) are also part of this Agreement for those Members that have accepted
them, and are binding on those Members. The Plurilateral Trade Agreements do not create either
obligations or rights for Members that have not accepted them.
4. The General Agreement on Tariffs and Trade 1994 as specified in Annex 1A (hereinafter referred
to as “GATT 1994”) is legally distinct from the General Agreement on Tariffs and Trade, dated
30 October 1947, annexed to the Final Act Adopted at the Conclusion of the Second Session of the
Preparatory Committee of the United Nations Conference on Trade and Employment, as subsequently
rectified, amended or modified (hereinafter referred to as “GATT 1947”).
Article III
Functions of the WTO
1. The WTO shall facilitate the implementation, administration and operation, and further the
objectives, of this Agreement and of the Multilateral Trade Agreements, and shall also provide the
framework for the implementation, administration and operation of the Plurilateral Trade Agreements.
2. The WTO shall provide the forum for negotiations among its Members concerning their
multilateral trade relations in matters dealt with under the agreements in the Annexes to this Agreement.
The WTO may also provide a forum for further negotiations among its Members concerning their
multilateral trade relations, and a framework for the implementation of the results of such negotiations, as
may be decided by the Ministerial Conference.
3. The WTO shall administer the Understanding on Rules and Procedures Governing the Settlement
of Disputes (hereinafter referred to as the “Dispute Settlement Understanding” or “DSU”) in Annex 2 to
this Agreement.
4. The WTO shall administer the Trade Policy Review Mechanism (hereinafter referred to as the
“TPRM”) provided for in Annex 3 to this Agreement.
5. With a view to achieving greater coherence in global economic policy-making, the WTO shall
cooperate, as appropriate, with the International Monetary Fund and with the International Bank for
Reconstruction and Development and its affiliated agencies.
Article IV
Structure of the WTO
1. There shall be a Ministerial Conference composed of representatives of all the Members, which
shall meet at least once every two years. The Ministerial Conference shall carry out the functions of the
WTO and take actions necessary to this effect. The Ministerial Conference shall have the authority to take
decisions on all matters under any of the Multilateral Trade Agreements, if so requested by a Member, in
accordance with the specific requirements for decision-making in this Agreement and in the relevant
Multilateral Trade Agreement.
2. There shall be a General Council composed of representatives of all the Members, which shall meet
as appropriate. In the intervals between meetings of the Ministerial Conference, its functions shall be
conducted by the General Council. The General Council shall also carry out the functions assigned to it by
this Agreement. The General Council shall establish its rules of procedure and approve the rules of
procedure for the Committees provided for in paragraph 7.
3. The General Council shall convene as appropriate to discharge the responsibilities of the Dispute
Settlement Body provided for in the Dispute Settlement Understanding. The Dispute Settlement Body may
AGREEMENT ESTABLISHING THE WTO 15
have its own chairman and shall establish such rules of procedure as it deems necessary for the fulfilment of
those responsibilities.
4. The General Council shall convene as appropriate to discharge the responsibilities of the Trade
Policy Review Body provided for in the TPRM. The Trade Policy Review Body may have its own
chairman and shall establish such rules of procedure as it deems necessary for the fulfilment of those
responsibilities.
5. There shall be a Council for Trade in Goods, a Council for Trade in Services and a Council for
Trade-Related Aspects of Intellectual Property Rights (hereinafter referred to as the “Council for TRIPS”),
which shall operate under the general guidance of the General Council. The Council for Trade in Goods
shall oversee the functioning of the Multilateral Trade Agreements in Annex 1A. The Council for Trade in
Services shall oversee the functioning of the General Agreement on Trade in Services (hereinafter referred
to as “GATS”). The Council for TRIPS shall oversee the functioning of the Agreement on Trade-Related
Aspects of Intellectual Property Rights (hereinafter referred to as the “Agreement on TRIPS”). These
Councils shall carry out the functions assigned to them by their respective agreements and by the General
Council. They shall establish their respective rules of procedure subject to the approval of the General
Council. Membership in these Councils shall be open to representatives of all Members. These Councils
shall meet as necessary to carry out their functions.
6. The Council for Trade in Goods, the Council for Trade in Services and the Council for TRIPS
shall establish subsidiary bodies as required. These subsidiary bodies shall establish their respective rules of
procedure subject to the approval of their respective Councils.
7. The Ministerial Conference shall establish a Committee on Trade and Development, a Committee
on Balance-of-Payments Restrictions and a Committee on Budget, Finance and Administration, which shall
carry out the functions assigned to them by this Agreement and by the Multilateral Trade Agreements, and
any additional functions assigned to them by the General Council, and may establish such additional
Committees with such functions as it may deem appropriate. As part of its functions, the Committee on
Trade and Development shall periodically review the special provisions in the Multilateral Trade
Agreements in favour of the least-developed country Members and report to the General Council for
appropriate action. Membership in these Committees shall be open to representatives of all Members.
8. The bodies provided for under the Plurilateral Trade Agreements shall carry out the functions as-
signed to them under those Agreements and shall operate within the institutional framework of the WTO.
These bodies shall keep the General Council informed of their activities on a regular basis.
Article V
Relations with Other Organizations
1. The General Council shall make appropriate arrangements for effective cooperation with other
intergovernmental organizations that have responsibilities related to those of the WTO.
2. The General Council may make appropriate arrangements for consultation and cooperation with
non-governmental organizations concerned with matters related to those of the WTO.
Article VI
The Secretariat
1. There shall be a Secretariat of the WTO (hereinafter referred to as “the Secretariat”) headed by a
Director-General.
2. The Ministerial Conference shall appoint the Director-General and adopt regulations setting out
the powers, duties, conditions of service and term of office of the Director-General.
3. The Director-General shall appoint the members of the staff of the Secretariat and determine their
duties and conditions of service in accordance with regulations adopted by the Ministerial Conference.
4. The responsibilities of the Director-General and of the staff of the Secretariat shall be exclusively
international in character. In the discharge of their duties, the Director-General and the staff of the
Secretariat shall not seek or accept instructions from any government or any other authority external to the
WTO. They shall refrain from any action which might adversely reflect on their position as international
officials. The Members of the WTO shall respect the international character of the responsibilities of the
Director-General and of the staff of the Secretariat and shall not seek to influence them in the discharge of
their duties.
Article VII
Budget and Contributions
1. The Director-General shall present to the Committee on Budget, Finance and Administration the
annual budget estimate and financial statement of the WTO. The Committee on Budget, Finance and
Administration shall review the annual budget estimate and the financial statement presented by the
Director-General and make recommendations thereon to the General Council. The annual budget estimate
shall be subject to approval by the General Council.
2. The Committee on Budget, Finance and Administration shall propose to the General Council
financial regulations which shall include provisions setting out:
(a) the scale of contributions apportioning the expenses of the WTO among its Members; and
(b) the measures to be taken in respect of Members in arrears.
The financial regulations shall be based, as far as practicable, on the regulations and practices of
GATT 1947.
3. The General Council shall adopt the financial regulations and the annual budget estimate by a two-
thirds majority comprising more than half of the Members of the WTO.
4. Each Member shall promptly contribute to the WTO its share in the expenses of the WTO in
accordance with the financial regulations adopted by the General Council.
Article VIII
Status of the WTO
1. The WTO shall have legal personality, and shall be accorded by each of its Members such legal
capacity as may be necessary for the exercise of its functions.
2. The WTO shall be accorded by each of its Members such privileges and immunities as are
necessary for the exercise of its functions.
3. The officials of the WTO and the representatives of the Members shall similarly be accorded by
each of its Members such privileges and immunities as are necessary for the independent exercise of their
functions in connection with the WTO.
4. The privileges and immunities to be accorded by a Member to the WTO, its officials, and the
representatives of its Members shall be similar to the privileges and immunities stipulated in the Convention
on the Privileges and Immunities of the Specialized Agencies, approved by the General Assembly of the
United Nations on 21 November 1947.
5. The WTO may conclude a headquarters agreement.
Article IX
Decision-Making
1. The WTO shall continue the practice of decision-making by consensus followed under
GATT 1947. 1 Except as otherwise provided, where a decision cannot be arrived at by consensus, the
matter at issue shall be decided by voting. At meetings of the Ministerial Conference and the General
Council, each Member of the WTO shall have one vote. Where the European Communities exercise their
right to vote, they shall have a number of votes equal to the number of their member States2 which are
Members of the WTO. Decisions of the Ministerial Conference and the General Council shall be taken by a
majority of the votes cast, unless otherwise provided in this Agreement or in the relevant Multilateral Trade
Agreement. 3
2. The Ministerial Conference and the General Council shall have the exclusive authority to adopt
interpretations of this Agreement and of the Multilateral Trade Agreements. In the case of an interpretation
of a Multilateral Trade Agreement in Annex 1, they shall exercise their authority on the basis of a
recommendation by the Council overseeing the functioning of that Agreement. The decision to adopt an
interpretation shall be taken by a three-fourths majority of the Members. This paragraph shall not be used
in a manner that would undermine the amendment provisions in Article X.
3. In exceptional circumstances, the Ministerial Conference may decide to waive an obligation

imposed on a Member by this Agreement or any of the Multilateral Trade Agreements, provided that any
such decision shall be taken by three fourths4 of the Members unless otherwise provided for in this
paragraph.
(a) A request for a waiver concerning this Agreement shall be submitted to the Ministerial
Conference for consideration pursuant to the practice of decision-making by consensus. The
Ministerial Conference shall establish a time-period, which shall not exceed 90 days, to
consider the request. If consensus is not reached during the time-period, any decision to
grant a waiver shall be taken by three fourths4 of the Members.
(b) A request for a waiver concerning the Multilateral Trade Agreements in Annexes 1A or 1B
or 1C and their annexes shall be submitted initially to the Council for Trade in Goods, the
1 The body concerned shall be deemed to have decided by consensus on a matter submitted for its consideration, if
no Member, present at the meeting when the decision is taken, formally objects to the proposed decision.
2 The number of votes of the European Communities and their member States shall in no case exceed the number of
the member States of the European Communities.
3 Decisions by the General Council when convened as the Dispute Settlement Body shall be taken only in accordance
with the provisions of paragraph 4 of Article 2 of the Dispute Settlement Understanding.
4 A decision to grant a waiver in respect of any obligation subject to a transition period or a period for staged
implementation that the requesting Member has not performed by the end of the relevant period shall be taken only
by consensus.
Council for Trade in Services or the Council for TRIPS, respectively, for consideration
during a time-period which shall not exceed 90 days. At the end of the time-period, the
relevant Council shall submit a report to the Ministerial Conference.
4. A decision by the Ministerial Conference granting a waiver shall state the exceptional
circumstances justifying the decision, the terms and conditions governing the application of the waiver, and
the date on which the waiver shall terminate. Any waiver granted for a period of more than one year shall
be reviewed by the Ministerial Conference not later than one year after it is granted, and thereafter annually
until the waiver terminates. In each review, the Ministerial Conference shall examine whether the
exceptional circumstances justifying the waiver still exist and whether the terms and conditions attached to
the waiver have been met. The Ministerial Conference, on the basis of the annual review, may extend,
modify or terminate the waiver.
5. Decisions under a Plurilateral Trade Agreement, including any decisions on interpretations and
waivers, shall be governed by the provisions of that Agreement.
Article X
Amendments
1. Any Member of the WTO may initiate a proposal to amend the provisions of this Agreement or
the Multilateral Trade Agreements in Annex 1 by submitting such proposal to the Ministerial Conference.
The Councils listed in paragraph 5 of Article IV may also submit to the Ministerial Conference proposals to
amend the provisions of the corresponding Multilateral Trade Agreements in Annex 1 the functioning of
which they oversee. Unless the Ministerial Conference decides on a longer period, for a period of 90 days
after the proposal has been tabled formally at the Ministerial Conference any decision by the Ministerial
Conference to submit the proposed amendment to the Members for acceptance shall be taken by consensus.
Unless the provisions of paragraphs 2, 5 or 6 apply, that decision shall specify whether the provisions of
paragraphs 3 or 4 shall apply. If consensus is reached, the Ministerial Conference shall forthwith submit the
proposed amendment to the Members for acceptance. If consensus is not reached at a meeting of the
Ministerial Conference within the established period, the Ministerial Conference shall decide by a two-
thirds majority of the Members whether to submit the proposed amendment to the Members for
acceptance. Except as provided in paragraphs 2, 5 and 6, the provisions of paragraph 3 shall apply to the
proposed amendment, unless the Ministerial Conference decides by a three-fourths majority of the Members
that the provisions of paragraph 4 shall apply.
2. Amendments to the provisions of this Article and to the provisions of the following Articles shall
take effect only upon acceptance by all Members:
Article IX of this Agreement;
Articles I and II of GATT 1994;
Article II:1 of GATS;
Article 4 of the Agreement on TRIPS.
3. Amendments to provisions of this Agreement, or of the Multilateral Trade Agreements in

Annexes 1A and 1C, other than those listed in paragraphs 2 and 6, of a nature that would alter the rights
and obligations of the Members, shall take effect for the Members that have accepted them upon acceptance
by two thirds of the Members and thereafter for each other Member upon acceptance by it. The Ministerial
Conference may decide by a three-fourths majority of the Members that any amendment made effective
under this paragraph is of such a nature that any Member which has not accepted it within a period
specified by the Ministerial Conference in each case shall be free to withdraw from the WTO or to remain
a Member with the consent of the Ministerial Conference.
4. Amendments to provisions of this Agreement or of the Multilateral Trade Agreements in

Annexes 1A and 1C, other than those listed in paragraphs 2 and 6, of a nature that would not alter the
rights and obligations of the Members, shall take effect for all Members upon acceptance by two thirds of
the Members.
5. Except as provided in paragraph 2 above, amendments to Parts I, II and III of GATS and the
respective annexes shall take effect for the Members that have accepted them upon acceptance by two thirds
of the Members and thereafter for each Member upon acceptance by it. The Ministerial Conference may
decide by a three-fourths majority of the Members that any amendment made effective under the preceding
provision is of such a nature that any Member which has not accepted it within a period specified by the
Ministerial Conference in each case shall be free to withdraw from the WTO or to remain a Member with
the consent of the Ministerial Conference. Amendments to Parts IV, V and VI of GATS and the respective
annexes shall take effect for all Members upon acceptance by two thirds of the Members.
6. Notwithstanding the other provisions of this Article, amendments to the Agreement on TRIPS
meeting the requirements of paragraph 2 of Article 71 thereof may be adopted by the Ministerial
Conference without further formal acceptance process.
7. Any Member accepting an amendment to this Agreement or to a Multilateral Trade Agreement in

Annex 1 shall deposit an instrument of acceptance with the Director-General of the WTO within the period
of acceptance specified by the Ministerial Conference.
8. Any Member of the WTO may initiate a proposal to amend the provisions of the Multilateral
Trade Agreements in Annexes 2 and 3 by submitting such proposal to the Ministerial Conference. The
decision to approve amendments to the Multilateral Trade Agreement in Annex 2 shall be made by
consensus and these amendments shall take effect for all Members upon approval by the Ministerial
Conference. Decisions to approve amendments to the Multilateral Trade Agreement in Annex 3 shall take
effect for all Members upon approval by the Ministerial Conference.
9. The Ministerial Conference, upon the request of the Members parties to a trade agreement, may
decide exclusively by consensus to add that agreement to Annex 4. The Ministerial Conference, upon the
request of the Members parties to a Plurilateral Trade Agreement, may decide to delete that Agreement
from Annex 4.
10. Amendments to a Plurilateral Trade Agreement shall be governed by the provisions of that
Agreement.
Article XI
Original Membership
1. The contracting parties to GATT 1947 as of the date of entry into force of this Agreement, and the
European Communities, which accept this Agreement and the Multilateral Trade Agreements and for
which Schedules of Concessions and Commitments are annexed to GATT 1994 and for which Schedules of
Specific Commitments are annexed to GATS shall become original Members of the WTO.
2. The least-developed countries recognized as such by the United Nations will only be required to
undertake commitments and concessions to the extent consistent with their individual development,
financial and trade needs or their administrative and institutional capabilities.
Article XII
Accession
1. Any State or separate customs territory possessing full autonomy in the conduct of its external
commercial relations and of the other matters provided for in this Agreement and the Multilateral Trade
Agreements may accede to this Agreement, on terms to be agreed between it and the WTO. Such acces-
sion shall apply to this Agreement and the Multilateral Trade Agreements annexed thereto.
2. Decisions on accession shall be taken by the Ministerial Conference. The Ministerial Conference
shall approve the agreement on the terms of accession by a two-thirds majority of the Members of the
WTO.
3. Accession to a Plurilateral Trade Agreement shall be governed by the provisions of that Agreement.
Article XIII
Non-Application of Multilateral Trade Agreements between Particular Members
1. This Agreement and the Multilateral Trade Agreements in Annexes 1 and 2 shall not apply as
between any Member and any other Member if either of the Members, at the time either becomes a
Member, does not consent to such application.
2. Paragraph 1 may be invoked between original Members of the WTO which were contracting
parties to GATT 1947 only where Article XXXV of that Agreement had been invoked earlier and was
effective as between those contracting parties at the time of entry into force for them of this Agreement.
3. Paragraph 1 shall apply between a Member and another Member which has acceded under
Article XII only if the Member not consenting to the application has so notified the Ministerial Conference
before the approval of the agreement on the terms of accession by the Ministerial Conference.
4. The Ministerial Conference may review the operation of this Article in particular cases at the
request of any Member and make appropriate recommendations.
5. Non-application of a Plurilateral Trade Agreement between parties to that Agreement shall be

governed by the provisions of that Agreement.
Article XIV
Acceptance, Entry into Force and Deposit
1. This Agreement shall be open for acceptance, by signature or otherwise, by contracting parties to
GATT 1947, and the European Communities, which are eligible to become original Members of the WTO
in accordance with Article XI of this Agreement. Such acceptance shall apply to this Agreement and the
Multilateral Trade Agreements annexed hereto. This Agreement and the Multilateral Trade Agreements
annexed hereto shall enter into force on the date determined by Ministers in accordance with paragraph 3
of the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations and shall
remain open for acceptance for a period of two years following that date unless the Ministers decide other-
wise. An acceptance following the entry into force of this Agreement shall enter into force on the 30th day
following the date of such acceptance.
2. A Member which accepts this Agreement after its entry into force shall implement those con-
cessions and obligations in the Multilateral Trade Agreements that are to be implemented over a period of
time starting with the entry into force of this Agreement as if it had accepted this Agreement on the date of
its entry into force.
3. Until the entry into force of this Agreement, the text of this Agreement and the Multilateral Trade
Agreements shall be deposited with the Director-General to the CONTRACTING PARTIES to GATT
1947. The Director-General shall promptly furnish a certified true copy of this Agreement and the
Multilateral Trade Agreements, and a notification of each acceptance thereof, to each government and the
European Communities having accepted this Agreement. This Agreement and the Multilateral Trade
Agreements, and any amendments thereto, shall, upon the entry into force of this Agreement, be deposited
with the Director-General of the WTO.
4. The acceptance and entry into force of a Plurilateral Trade Agreement shall be governed by the
provisions of that Agreement. Such Agreements shall be deposited with the Director-General to the
CONTRACTING PARTIES to GATT 1947. Upon the entry into force of this Agreement, such
Agreements shall be deposited with the Director-General of the WTO.
Article XV
Withdrawal
1. Any Member may withdraw from this Agreement. Such withdrawal shall apply both to this Ag-
reement and the Multilateral Trade Agreements and shall take effect upon the expiration of six months from
the date on which written notice of withdrawal is received by the Director-General of the WTO.
2. Withdrawal from a Plurilateral Trade Agreement shall be governed by the provisions of that
Agreement.
Article XVI
Miscellaneous Provisions
1. Except as otherwise provided under this Agreement or the Multilateral Trade Agreements, the
WTO shall be guided by the decisions, procedures and customary practices followed by the
CONTRACTING PARTIES to GATT 1947 and the bodies established in the framework of GATT 1947.
2. To the extent practicable, the Secretariat of GATT 1947 shall become the Secretariat of the WTO,
and the Director-General to the CONTRACTING PARTIES to GATT 1947, until such time as the
Ministerial Conference has appointed a Director-General in accordance with paragraph 2 of Article VI of
this Agreement, shall serve as Director-General of the WTO.
3. In the event of a conflict between a provision of this Agreement and a provision of any of the Mul-
tilateral Trade Agreements, the provision of this Agreement shall prevail to the extent of the conflict.
4. Each Member shall ensure the conformity of its laws, regulations and administrative procedures
with its obligations as provided in the annexed Agreements.
5. No reservations may be made in respect of any provision of this Agreement. Reservations in

respect of any of the provisions of the Multilateral Trade Agreements may only be made to the extent
provided for in those Agreements. Reservations in respect of a provision of a Plurilateral Trade Agreement
shall be governed by the provisions of that Agreement.
6. This Agreement shall be registered in accordance with the provisions of Article 102 of the Charter
of the United Nations.
DONE at Marrakesh this fifteenth day of April one thousand nine hundred and ninety-four, in a
single copy, in the English, French and Spanish languages, each text being authentic.
Explanatory Notes:
The terms “country” or “countries” as used in this Agreement and the Multilateral Trade
Agreements are to be understood to include any separate customs territory Member of the WTO.
In the case of a separate customs territory Member of the WTO, where an expression in this
Agreement and the Multilateral Trade Agreements is qualified by the term “national”, such expression shall
be read as pertaining to that customs territory, unless otherwise specified.
LIST OF ANNEXES
ANNEX 1
A N N E X 1 A : Multilateral Agreements on Trade in Goods

General Agreement on Tariffs and Trade 1994
Agreement on Agriculture
Agreement on the Application of Sanitary and Phytosanitary Measures
Agreement on Textiles and Clothing
Agreement on Technical Barriers to Trade
Agreement on Trade-Related Investment Measures
Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994
Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994
Agreement on Preshipment Inspection
Agreement on Rules of Origin
Agreement on Import Licensing Procedures
Agreement on Subsidies and Countervailing Measures
Agreement on Safeguards
A N N E X 1 B : General Agreement on Trade in Services and Annexes
A N N E X 1 C : Agreement on Trade-Related Aspects of Intellectual Property Rights
ANNEX 2
UNDERSTANDING ON RULES AND PROCEDURES GOVERNING
THE SETTLEMENT OF DISPUTES
ANNEX 3
TRADE POLICY REVIEW MECHANISM
ANNEX 4
PLURILATERAL TRADE AGREEMENTS
Agreement on Trade in Civil Aircraft

Agreement on Government Procurement
International Dairy Agreement
International Bovine Meat Agreement
ANNEX 1A
MULTILATERAL AGREEMENTS ON TRADE IN GOODS
General interpretative note to Annex 1A:
In the event of conflict between a provision of the General Agreement on Tariffs and Trade 1994
and a provision of another agreement in Annex 1A to the Agreement Establishing the World Trade
Organization (referred to in the agreements in Annex 1A as the “WTO Agreement”), the provision of the
other agreement shall prevail to the extent of the conflict.
TEXT:
FINAL ACT
EMBODYING THE RESULTS OF THE
URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS
1. Having met in order to conclude the Uruguay Round of Multilateral Trade Negotiations,
representatives of the governments and of the European Communities, members of the Trade Negotiations
Committee, agree that the Agreement Establishing the World Trade Organization (referred to in this Final
Act as the “WTO Agreement”), the Ministerial Declarations and Decisions, and the Understanding on
Commitments in Financial Services, as annexed hereto, embody the results of their negotiations and form
an integral part of this Final Act.
2. By signing the present Final Act, the representatives agree
(a) to submit, as appropriate, the WTO Agreement for the consideration of their respective
competent authorities with a view to seeking approval of the Agreement in accordance with
their procedures; and
(b) to adopt the Ministerial Declarations and Decisions.
3. The representatives agree on the desirability of acceptance of the WTO Agreement by all
participants in the Uruguay Round of Multilateral Trade Negotiations (hereinafter referred to as
“participants”) with a view to its entry into force by 1 January 1995, or as early as possible thereafter. Not
later than late 1994, Ministers will meet, in accordance with the final paragraph of the Punta del Este
Ministerial Declaration, to decide on the international implementation of the results, including the timing
of their entry into force.
4. The representatives agree that the WTO Agreement shall be open for acceptance as a whole, by
signature or otherwise, by all participants pursuant to Article XIV thereof. The acceptance and entry into
force of a Plurilateral Trade Agreement included in Annex 4 of the WTO Agreement shall be governed by
the provisions of that Plurilateral Trade Agreement.
5. Before accepting the WTO Agreement, participants which are not contracting parties to the
General Agreement on Tariffs and Trade must first have concluded negotiations for their accession to the
General Agreement and become contracting parties thereto. For participants which are not contracting
parties to the General Agreement as of the date of the Final Act, the Schedules are not definitive and shall
be subsequently completed for the purpose of their accession to the General Agreement and acceptance of
the WTO Agreement.
6. This Final Act and the texts annexed hereto shall be deposited with the Director-General to the
CONTRACTING PARTIES to the General Agreement on Tariffs and Trade who shall promptly furnish to
each participant a certified copy thereof.
DONE at Marrakesh this fifteenth day of April one thousand nine hundred and ninety-four, in a
single copy, in the English, French and Spanish languages, each text being authentic.
[List of signatures to be included in the treaty copy of the Final Act for signature]
25
TEXT:
Decision on Measures in Favour of
Least-Developed Countries
Ministers,
Recognizing the plight of the least-developed countries and the need to ensure their effective
participation in the world trading system, and to take further measures to improve their trading
opportunities;
Recognizing the specific needs of the least-developed countries in the area of market access where
continued preferential access remains an essential means for improving their trading opportunities;
Reaffirming their commitment to implement fully the provisions concerning the least-developed
countries contained in paragraphs 2(d), 6 and 8 of the Decision of 28 November 1979 on Differential and
More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries;
Having regard to the commitment of the participants as set out in Section B (vii) of Part I of the
Punta del Este Ministerial Declaration;
1. Decide that, if not already provided for in the instruments negotiated in the course of the Uruguay
Round, notwithstanding their acceptance of these instruments, the least-developed countries, and for so
long as they remain in that category, while complying with the general rules set out in the aforesaid
instruments, will only be required to undertake commitments and concessions to the extent consistent with
their individual development, financial and trade needs, or their administrative and institutional capabilities.
The least-developed countries shall be given additional time of one year from 15 April 1994 to submit their
schedules as required in Article XI of the Agreement Establishing the World Trade Organization.
2. Agree that:
(i) Expeditious implementation of all special and differential measures taken in favour of least-
developed countries including those taken within the context of the Uruguay Round shall be
ensured through, inter alia, regular reviews.
(ii) To the extent possible, MFN concessions on tariff and non-tariff measures agreed in the
Uruguay Round on products of export interest to the least-developed countries may be
implemented autonomously, in advance and without staging. Consideration shall be given to
further improve GSP and other schemes for products of particular export interest to least-
developed countries.
(iii) The rules set out in the various agreements and instruments and the transitional provisions
in the Uruguay Round should be applied in a flexible and supportive manner for the least-
developed countries. To this effect, sympathetic consideration shall be given to specific and
motivated concerns raised by the least-developed countries in the appropriate Councils and
Committees.
(iv) In the application of import relief measures and other measures referred to in
paragraph 3(c) of Article XXXVII of GATT 1947 and the corresponding provision of
GATT 1994, special consideration shall be given to the export interests of least-developed
countries.
26
DECISION: LEAST DEVELOPED COUNTRIES 27
(v) Least-developed countries shall be accorded substantially increased technical assistance in

the development, strengthening and diversification of their production and export bases
including those of services, as well as in trade promotion, to enable them to maximize the
benefits from liberalized access to markets.
3. Agree to keep under review the specific needs of the least-developed countries and to continue to
seek the adoption of positive measures which facilitate the expansion of trading opportunities in favour of
these countries.
TEXT:
Declaration on the Contribution of
the World Trade Organization to Achieving
Greater Coherence in Global Economic Policymaking
1. Ministers recognize that the globalization of the world economy has led to ever-growing
interactions between the economic policies pursued by individual countries, including interactions between
the structural, macroeconomic, trade, financial and development aspects of economic policymaking. The
task of achieving harmony between these policies falls primarily on governments at the national level, but
their coherence internationally is an important and valuable element in increasing the effectiveness of these
policies at national level. The Agreements reached in the Uruguay Round show that all the participating
governments recognize the contribution that liberal trading policies can make to the healthy growth and
development of their own economies and of the world economy as a whole.
2. Successful cooperation in each area of economic policy contributes to progress in other areas.
Greater exchange rate stability, based on more orderly underlying economic and financial conditions,
should contribute towards the expansion of trade, sustainable growth and development, and the correction
of external imbalances. There is also a need for an adequate and timely flow of concessional and non-
concessional financial and real investment resources to developing countries and for further efforts to
address debt problems, to help ensure economic growth and development. Trade liberalization forms an
increasingly important component in the success of the adjustment programmes that many countries are
undertaking, often involving significant transitional social costs. In this connection, Ministers note the role
of the World Bank and the IMF in supporting adjustment to trade liberalization, including support to net
food-importing developing countries facing short-term costs arising from agricultural trade reforms.
3. The positive outcome of the Uruguay Round is a major contribution towards more coherent and
complementary international economic policies. The results of the Uruguay Round ensure an expansion of
market access to the benefit of all countries, as well as a framework of strengthened multilateral disciplines
for trade. They also guarantee that trade policy will be conducted in a more transparent manner and with
greater awareness of the benefits for domestic competitiveness of an open trading environment. The
strengthened multilateral trading system emerging from the Uruguay Round has the capacity to provide an
improved forum for liberalization, to contribute to more effective surveillance, and to ensure strict
observance of multilaterally agreed rules and disciplines. These improvements mean that trade policy can in
the future play a more substantial role in ensuring the coherence of global economic policymaking.
4. Ministers recognize, however, that difficulties the origins of which lie outside the trade field
cannot be redressed through measures taken in the trade field alone. This underscores the importance of
efforts to improve other elements of global economic policymaking to complement the effective
implementation of the results achieved in the Uruguay Round.
5. The interlinkages between the different aspects of economic policy require that the international
institutions with responsibilities in each of these areas follow consistent and mutually supportive policies.
The World Trade Organization should therefore pursue and develop cooperation with the international
organizations responsible for monetary and financial matters, while respecting the mandate, the
confidentiality requirements and the necessary autonomy in decision-making procedures of each institution,
and avoiding the imposition on governments of cross-conditionality or additional conditions. Ministers
further invite the Director-General of the WTO to review with the Managing Director of the International
Monetary Fund and the President of the World Bank, the implications of the WTO’s responsibilities for its
28
DECLARATION: COHERENCE IN GLOBAL POLICY 29
cooperation with the Bretton Woods institutions, as well as the forms such cooperation might take, with a
view to achieving greater coherence in global economic policymaking.
TEXT:
Decision on Trade and Environment
Ministers,
Meeting on the occasion of signing the Final Act Embodying the Results of the Uruguay Round of
Multilateral Trade Negotiations at Marrakesh on 15 April 1994,
Recalling the preamble of the Agreement establishing the World Trade Organization (WTO),
which states that members’ “relations in the field of trade and economic endeavour should be conducted
with a view to raising standards of living, ensuring full employment and a large and steadily growing
volume of real income and effective demand, and expanding the production of and trade in goods and
services, while allowing for the optimal use of the world’s resources in accordance with the objective of
sustainable development, seeking both to protect and preserve the environment and to enhance the means
for doing so in a manner consistent with their respective needs and concerns at different levels of economic
development,”
Noting:
♦ the Rio Declaration on Environment and Development, Agenda 21, and its follow-up in
GATT, as reflected in the statement of the Chairman of the Council of Representatives to the
CONTRACTING PARTIES at their 48th Session in December 1992, as well as the work of
the Group on Environmental Measures and International Trade, the Committee on Trade and
Development, and the Council of Representatives;
♦ the work programme envisaged in the Decision on Trade in Services and the Environment;
and
♦ the relevant provisions of the Agreement on Trade-Related Aspects of Intellectual Property

Rights,
Considering that there should not be, nor need be, any policy contradiction between upholding and
safeguarding an open, non-discriminatory and equitable multilateral trading system on the one hand, and
acting for the protection of the environment, and the promotion of sustainable development on the other,
Desiring to coordinate the policies in the field of trade and environment, and this without
exceeding the competence of the multilateral trading system, which is limited to trade policies and those
trade-related aspects of environmental policies which may result in significant trade effects for its members,
Decide:
♦ to direct the first meeting of the General Council of the WTO to establish a Committee on Trade and
Environment open to all members of the WTO to report to the first biennial meeting of the Ministerial
Conference after the entry into force of the WTO when the work and terms of reference of the Com-
mittee will be reviewed, in the light of recommendations of the Committee,
♦ that the TNC Decision of 15 December 1993 which reads, in part, as follows:
“(a) to identify the relationship between trade measures and environmental measures, in order to
promote sustainable development;
30
DECISION: TRADE AND ENVIRONMENT 31
(b) to make appropriate recommendations on whether any modifications of the provisions of the
multilateral trading system are required, compatible with the open, equitable and non-discrimina-
tory nature of the system, as regards, in particular:
• the need for rules to enhance positive interaction between trade and environmental measures,
for the promotion of sustainable development, with special consideration to the needs of
developing countries, in particular those of the least developed among them; and
• the avoidance of protectionist trade measures, and the adherence to effective multilateral
disciplines to ensure responsiveness of the multilateral trading system to environmental
objectives set forth in Agenda 21 and the Rio Declaration, in particular Principle 12; and
• surveillance of trade measures used for environmental purposes, of trade-related aspects of

environmental measures which have significant trade affects, and of effective implementation of
the multilateral disciplines governing those measures;”
constitutes, along with the preambular language above, the terms of reference of the Committee on
Trade and Environment,
♦ that, within these terms of reference, and with the aim of making international trade and environmental
policies mutually supportive, the Committee will initially address the following matters, in relation to
which any relevant issue may be raised:
• the relationship between the provisions of the multilateral trading system and trade measures
for environmental purposes, including those pursuant to multilateral environmental agreements;
• the relationship between environmental policies relevant to trade and environmental measures
with significant trade effects and the provisions of the multilateral trading system;
• the relationship between the provisions of the multilateral trading system and:
(a) charges and taxes for environmental purposes;
(b) requirements for environmental purposes relating to products, including standards and
technical regulations, packaging, labelling and recycling;
• the provisions of the multilateral trading system with respect to the transparency of trade
measures used for environmental purposes and environmental measures and requirements
which have significant trade effects;
• the relationship between the dispute settlement mechanisms in the multilateral trading system
and those found in multilateral environmental agreements;
• the effect of environmental measures on market access, especially in relation to developing

countries, in particular to the least developed among them, and environmental benefits of
removing trade restrictions and distortions;
• the issue of exports of domestically prohibited goods,
♦ that the Committee on Trade and Environment will consider the work programme envisaged in the
Decision on Trade in Services and the Environment and the relevant provisions of the Agreement on
Trade-Related Aspects of Intellectual Property Rights as an integral part of its work, within the above
terms of reference,
♦ that, pending the first meeting of the General Council of the WTO, the work of the Committee on
Trade and Environment should be carried out by a Sub-Committee of the Preparatory Committee of the
World Trade Organization (PCWTO), open to all members of the PCWTO,
♦ to invite the Sub-Committee of the Preparatory Committee, and the Committee on Trade and
Environment when it is established, to provide input to the relevant bodies in respect of appropriate
arrangements for relations with inter-governmental and non-governmental organizations referred to in
Article V of the WTO.
Decision on the Acceptance of and Accession to
the Agreement Establishing the World Trade Organization
Ministers,
Noting that Articles XI and XIV of the Agreement Establishing the World Trade Organization
(hereinafter referred to as “WTO Agreement”) provide that only contracting parties to the GATT 1947 as
of the entry into force of the WTO Agreement for which schedules of concessions and commitments are
annexed to GATT 1994 and for which schedules of specific commitments are annexed to the General
Agreement on Trade in Services (hereinafter referred to as “GATS”) may accept the WTO Agreement;
Noting further that paragraph 5 of the Final Act Embodying the Results of the Uruguay Round of
Multilateral Trade Negotiations (hereinafter referred to as “Final Act” and “Uruguay Round” respectively)
provides that the schedules of participants which are not contracting parties to GATT 1947 as of the date
of the Final Act are not definitive and shall be subsequently completed for the purpose of their accession to
GATT 1947 and their acceptance of the WTO Agreement;
Having regard to paragraph 1 of the Decision on Measures in Favour of Least-Developed

Countries which provides that the least-developed countries shall be given an additional time of one year
from 15 April 1994 to submit their schedules as required in Article XI of the WTO Agreement;
Recognizing that certain participants in the Uruguay Round which had applied GATT 1947 on a
de facto basis and became contracting parties under Article XXVI:5(c) of the GATT 1947 were not in a
position to submit schedules to GATT 1994 and the GATS;
Recognizing further that some States or separate customs territories which were not participants in
the Uruguay Round may become contracting parties to GATT 1947 before the entry into force of the
WTO Agreement and that States or customs territories should be given the opportunity to negotiate
schedules to GATT 1994 and the GATS so as to enable them to accept the WTO Agreement;
Taking into account that some States or separate customs territories which cannot complete the
process of accession to GATT 1947 before the entry into force of the WTO Agreement or which do not
intend to become contracting parties to GATT 1947 may wish to initiate the process of their accession to
the WTO before the entry into force of the WTO Agreement;
Recognizing that the WTO Agreement does not distinguish in any way between WTO Members
which accepted that Agreement in accordance with its Articles XI and XIV and WTO Members which
acceded to it in accordance with its Article XII and wishing to ensure that the procedures for accession of
the States and separate customs territories which have not become contracting parties to the GATT 1947 as
of the date of entry into force of the WTO Agreement are such as to avoid any unnecessary disadvantage or
delay for these States and separate customs territories;
Decide that:
1. (a) Any Signatory of the Final Act
♦ to which paragraph 5 of the Final Act applies, or
♦ to which paragraph 1 of the Decision on Measures in Favour of Least-Developed

Countries applies, or
33
♦ which became a contracting party under Article XXVI:5(c) of the GATT 1947
before 15 April 1994 and was not in a position to establish a schedule to GATT
1994 and the GATS for inclusion in the Final Act, and
any State or separate customs territory
♦ which becomes a contracting party to the GATT 1947 between 15 April 1994
and the date of entry into force of the WTO Agreement
may submit to the Preparatory Committee for its examination and approval a schedule of
concessions and commitments to GATT 1994 and a schedule of specific commitments to the
GATS.
(b) The WTO Agreement shall be open for acceptance in accordance with Article XIV of that
Agreement by contracting parties to GATT 1947 the schedules of which have been so submitted
and approved before the entry into force of the WTO Agreement.
(c) The provisions of subparagraphs (a) and (b) of this paragraph shall be without prejudice
to the right of the least-developed countries to submit their schedules within one year from 15
April 1994.
2. (a) Any State or separate customs territory may request the Preparatory Committee to
propose for approval by the Ministerial Conference of the WTO the terms of its accession to the
WTO Agreement in accordance with Article XII of that Agreement. If such a request is made by a
State or separate customs territory which is in the process of acceding to GATT 1947, the
Preparatory Committee shall, to the extent practicable, examine the request jointly with the
Working Party established by the CONTRACTING PARTIES to GATT 1947 to examine the
accession of that State or separate customs territory.
(b) The Preparatory Committee shall submit to the Ministerial Conference a report on its
examination of the request. The report may include a protocol of accession, including a schedule of
concessions and commitments to GATT 1994 and a schedule of specific commitments for the
GATS, for approval by the Ministerial Conference. The report of the Preparatory Committee shall
be taken into account by the Ministerial Conference in its consideration of any application by the
State or separate customs territory concerned to accede to the WTO Agreement.
ISSN 1608-7143
OECD JOURNAL ON BUDGETING
Volume 6 – No. 2
© OECD 2006
Aspects of the New Public Finance
by
Andrew R. Donaldson*
This article considers the context of the emerging developing country

public finance and identifies two particular driving forces behind its
increased complexity: the policy space between public and private
within countries, and the policy space between countries and
institutions in the international arena. The article highlights that
international co-operation happens not as much across national
borders as at a national level influenced by international agreements.
Hence the building of common approaches to partnerships,
prioritisation and budgeting is important for the efficient mobilisation
of resources. The article also stresses the need for more direct
co-operation between countries, particularly in a regional developing
context; the role of ministries of finance and budget offices in ensuring
the growth of such co-operation; and the need to streamline budget
institutions to ensure their effectiveness.
* Andrew R. Donaldson is Deputy Director-General of the Public Finance Division,

Budget Office, South African National Treasury.
1
ASPECTS OF THE NEW PUBLIC FINANCE
1. Introduction
Public finance, as an analytical discipline and as the practical arena of
public policy design and implementation, has undergone two far-reaching
reforms over the past two decades. The first is the exploration of the
“policy space” between markets and government action: the evolution of
public-private partnerships and the pursuit of public policy purposes through
the regulation and mobilisation of private sector activity and co-operation
with civil society organisations. The second is the growing role of
international co-operation in public affairs: action to address global public
goods and increasing attention to the dynamics and effectiveness of
international collaboration in both policy and public service delivery.
These dimensions of public policy add considerable complexity to the
discipline of public finance and to the practice of public policy making and
implementation. The tidy division of the world into public and private sectors,
and domestic and foreign affairs, has given way to much more complex
institutional arrangements and hence a more elaborate intellectual apparatus.
At the same time, the “new public economics” is beginning to give some order
to what formerly appeared to be fragmented and disorderly: the diversity of
divisions between public and private activity, and the great clutter of
overlapping international agreements and institutions.
There is no sharp divide between the old and the new; globalisation
and increasing interconnectedness of countries has been a long historical
trajectory, and the interface between the public and private sectors has been a
kaleidoscope in motion for as long as public affairs have been the subject of
literate comment. However, the last few decades have seen great seismic
shifts in both the discourse and the practice of public finance, and some
commentators have seen fit to identify a “new public economics 1” and a
“new public economics 2” in recent times: the first concerned with the
public-private interface, the second with the international dimensions.*
The complexity of these shifts raises difficulties for public policy, because
both public-private partnerships and international co-operation carry high
transaction costs. For developing countries, and particularly for small
low-income countries, managing the complexity is a huge challenge. The great
* See I. Kaul and P. Conceição (eds.) (2005), The New Public Finance, Oxford University
Press, Oxford. This article draws strongly on the overview chapter in this volume.
2 OECD JOURNAL ON BUDGETING – VOLUME 6 – No. 2 – ISSN 1608-7143 – © OECD 2006

benefit of traditional government arrangements is that they are simple, lines of

authority are clear, rules and procedures are documented and familiar, and the
annual budget process provides a transparent and unambiguous assignment of
resources to public purposes. Resources are raised through taxes, which have
the great advantage to the fiscal authorities of being mandatory.
Co-operative or contractual arrangements with the private sector, and
international collaboration in pursuit of common purposes, are fraught with
negotiation difficulties, problems of trust, possible conflicts of interest, risk,
uncertainty, asymmetric power and interminable frustration. It is easy enough to
formulate rhetorical praise for the partnership idea; getting the agreements past
the legal advisors, the financial analysts and the project steering committees is
entirely another matter. Nevertheless, the complexity is with us, and we have to
find a way through the barriers of misunderstanding and the legal and financial
technicalities.
This situation creates rather a daunting agenda for the Collaborative Africa
Budget Reform Initiative (CABRI) for the next year or two. But it is also a
wonderfully exciting opportunity, because there is so much to gain from getting
these things right; there are immense benefits from improvements in the public-
private sector interface and in the quality and focus of international partnerships.
Constructing the right agenda for research and co-operation over the
next few years means thinking hard about what the most pressing and most
promising areas of collaboration might be. CABRI’s resources are limited, so it
is important to make careful choices.
2. The new public finance

2.1. An intermediary state
Let me share a few ideas from the “new public finance” literature that
might be useful. The first is the idea of an intermediary state. This is a concept
developed in some detail by Inge Kaul of the UNDP Office of Development
Studies as a way of thinking about how governments in a globalised world
have to reach compromises and negotiate an appropriate balance between the
demands of the outside world and their own domestic political and policy
objectives. States that fail to negotiate workable compromises risk being
marginalised in the global development race, and in extreme cases end up as
“rogue” or “failed” states. Thus, it is one of the tasks of modern governments
to intermediate between national and global interests, but it is not efficient to
think of every small country finding its own particular set of compromises
with the rest of the world. Consequently, there are multilateral institutions
that perform the intermediary role on a global or regional scale, in effect
providing a forum for achieving collective solutions and developing
OECD JOURNAL ON BUDGETING – VOLUME 6 – No. 2 – ISSN 1608-7143 – © OECD 2006

3
“templates” for international partnership: in trade matters, in managing

global environmental issues, in dealing with international crime and money
laundering, and in regulating financial affairs.
CABRI has an intermediary role to play, and it may be worth spending
some time exploring what this means. First, there is no need to reinvent
standards of good practice in budget design and implementation, but there is
a clear need to adapt from international practice simplified and standardised
approaches that are suitable for countries with very limited resources, various
degrees of aid dependence and, perhaps, the particular kinds of relationships
between the national fiscal authorities and local or community development
programmes that are characteristic of African economies. In all of this work, it
is important to respect national sovereignty – country circumstances vary and
sovereign governments will make their own choices – but there is a great deal
of useful work that can be done collaboratively to assist governments in
exploring options and finding a shared understanding, especially in those
areas of public policy and financial management in which the external world
has particular interests.
These interests of the rest of the world are very wide-ranging, and often
uncomfortably intrusive. This is not just a First World-Third World thing:
national sovereignty is subject to constraints, even in the richest and most
powerful countries. Sovereignty is qualified by the rest of the world’s interest
in how property rights are protected, in how one country’s tax laws impact on
investments or trade relations, in how crime and fraud are combated, in how
the environment is protected, and in how human rights are protected. Take
the currently topical example of the concern, worldwide, about the prevalence
and possible mutation of the bird flu virus. Because birds migrate across
boundaries, a country’s interests cannot simply be secured by strict border
controls and municipal health inspections; every country has an interest in
what every other country does to control the internal transmission of bird flu.
The “new public economics” reminds us that many public goods are in fact
“global” public goods that require global co-operation and partnerships.
What has this got to do with budget reform? Shared interests need to be
addressed through shared resource arrangements. Of course, the rest of the
world can negotiate individual aid or budget assistance or joint financing
arrangements with every individual country, but progress is likely to be faster
and more efficient if collective vehicles are found. So it may be helpful to give
further thought to the intermediary role that CABRI can play, helping shape
more streamlined arrangements for dealing with the external world’s interest
in financial management and resourcing both of development and of the
global or regional public goods that need to be collectively addressed.

2.2. Subsidiarity
There is a second concept in the “new public finance” literature that is
helpful in managing the complexity of things: the idea of subsidiarity. This is
rather a ponderous word, but it captures the simple idea that globalisation is
more about co-operation behind, rather than beyond, national borders. This
gives recognition to the fact that international institutions do not have
sovereign powers and international collective action is difficult and costly.
Thus, many kinds of international co-operation happen, in effect, behind
national boundaries – that is, they do not rely on multilateral institutions and
global action, but take place within the context of national programmes and
partnerships. This is a simple but very powerful insight.
It is not necessary – in fact, it is often impractical – to create an international
pool of funds and directly spend or control programmes through multilateral
institutions, in order to deal with global public goods or shared interests. In recent
years, there have been new international funds and programmes created for
particular purposes, but comparatively few permanent multilateral institutions
have been created. Most action happens at the national level, influenced but not
dictated by international agreements. It is precisely because this is where most of
the action is that it is so very important for initiatives like CABRI to make progress
in building a common understanding and consistent approaches to budgeting,
planning, prioritisation and partnerships, so that resources can be efficiently
mobilised although neither pooled nor collectively managed.
Although there is a preference for national-level interventions, because
institutions and decision processes are largely defined by national boundaries,
we need to explore options for more direct collaboration as well. Many African
countries are very small, so there are economies of scale in joint initiatives.
Major infrastructure projects (transport, water supply, power generation) have
natural network properties that cut across national boundaries. In areas such
as higher education, production and supply of school books, tertiary referral
hospitals, customs and trade administration, specialist agricultural support
and industrial standards and certification, even tourism promotion, there are
substantial economies of scale and benefits of concentration of resources.
CABRI might usefully give further consideration to how the planning,
budgeting and management of joint infrastructure projects, and collaboration
in improving the quality of public services, could be taken forward; these are
perhaps matters for dedicated task teams to consider.
An interesting sub-component of this topic is the scope for contractual
service delivery agreements between governments, or “trade” in public services.
Many American states have cross-border agreements on access to and charges
for higher education opportunities, for example. There are many areas of public
service delivery where the normal principles of specialisation, comparative

5
advantage and potential economies of scale argue for co-operative government-

to-government agreements, and these can also involve private sector service
providers. It does not make sense for every country to have its own mint, or to
try to achieve a comprehensive portfolio of higher education and research
programmes. However, unless work is done on the terms and conditions of
agreements between countries, and the appropriate financing or pricing
arrangements, these kinds of co-operation will not happen.
Economic regulation is another area of considerable complexity, in which
there is much to gain from cross-border co-operation. The last 20 years have seen
phenomenal growth internationally in the number and variety of arm’s-length
regulatory agencies, through which governments seek to provide expert and
independent oversight of financial markets, industrial competition, public
utilities, telecom suppliers, environmental protection, consumer protection, food
safety and public health. It is not just that there would be economies of scale and
technical advantages from collaboration in building regulatory capacity; there is
also the huge benefit for the development of the market economy that comes
with standardisation and greater certainty in the regulatory environment.
This is a useful reminder that the central economic challenge facing
African economies is to achieve more rapid economic growth, investment,
broader participation and employment creation. Complex and elaborate
public services that carry high investment requirements or requirements for
significant increases in revenue are unlikely to be affordable. Budget offices
have a huge responsibility to concentrate resources on those programmes and
initiatives that have the greatest impact on both economic development and
poverty reduction. Of course, it does not help if the plans and analyses and
programme designs for development and poverty reduction are so complex
that nobody in the spending agencies actually knows what they are supposed
to be doing. We need to build sound and simple monitoring and evaluation
systems and continuously look for ways of achieving greater impact with the
limited resources at our disposal, in association with spending departments
and service delivery agencies.
International partnerships can help, and there is a great deal of work to
do in simplifying and streamlining the allocation of international donor funds
and ensuring that foreign technical assistance is more efficiently used.
Partnerships with the private sector can help: both contractual arrangements
for private sector service delivery and partnerships with local and
international non-governmental organisations. Again, there is a great deal of
work to be done in getting the design of these arrangements right and in
building relationships of trust and effective co-operation.

In managing these and other kinds of partnership, and more generally in

modernising our budget systems and financial management, it is important
that we continuously guard against unnecessary complexity. Complex loan
structures and guarantees can be designed for infrastructure investments, but
then you need to make sure that you have lawyers and financial analysts on
your side who are just as good as those hired by the banks. Multiple
performance targets and objectives and outputs can be written up for a
multitude of programmes and agencies, but you are much more likely to keep
track of progress if you are monitoring a handful of reliable performance
indicators. Modern accounting systems can be purchased as off-the-shelf
computer packages, but traditional cash management systems are more likely
to give you effective expenditure control.
3. Conclusion
The modern world offers many opportunities for public finance
innovation and for new kinds of partnership with the private sector and across
national boundaries. There are enormous benefits from getting these reforms
right. However, getting them right means keeping them simple, so that as
reforms proceed we have more control, we know more about what is going on,
and we have a better understanding of how the national budget complements
international initiatives and contributes to growth of the market economy.

7
Lecture Note on the Balance of Payments
Barry W. Ickes
Fall 2003
1. Introduction to the Balance of Payments

The balance of payments is the record of a country’s transactions with the rest
of the world. It consists of three main parts: the current account, the capital
account, and official reserves settlement balance.1 The sum of the three main
parts sum to zero. All transactions must be recorded somewhere. The key is
where.
Letting CAt be the current account, KOt the capital account, and ORTt the
official reserves settlement balance, the Balance of Payments can simply be written
as:
CAt + KOt + ORTt = 0. (1.1)
If the sum of the three accounts is equal to zero it is hard to speak of a bal-
ance of payments deficit. When people speak of a Balance of Payments deÞcit
they are referring to the sum of the current and capital account. If these are in
deÞcit, a surplus is required in official settlements.2 From (1.1) we can see that
−ORTt = CAt + KOt . The difference is made up by the loss of foreign reserves,
often gold. This may not be sustainable. So while technically the Balance of
Payments is always in balance, when we speak of a Balance of Payments deÞcit
we automatically react to this by thinking of the sum of the current and capital
account.
1
Notice that the capital account balance and the balance on official reserves settlement both
refer to assets. One may wonder why they are distinguished. The reason is that the official
reserves settlement balance refers to transactions between central banks, while all other asset
transactions are recorded in the capital account.
2
Or, as in China today, if the current acccount and capital account are in surplus, then the
country must be increasing its foreign reserves.
The basic idea behind Balance of Payments accounting is straightforward: any
transaction that gives rise to a receipt from the rest of the world is recorded as a
credit, while any transaction that gives rise to a payment is a debit in the Balance
of Payments. One simple way to think about the Balance of Payments is that
if you need dollars to pay for the transaction it is a credit. If you need foreign
currency it is a debit item. The question is where are they allocated.
1.1. A Simple Three-Item Model of the Balance of Payments

It is useful to start with a simple three-item model. The key point to remember
in this example is that when people buy goods across countries they have to pay
for it somehow. Suppose that our economy has net exports of goods and services
to ROW equal to 100, and assume that these are paid for in the following way:
80 comes from imports of Þnancial assets in excess of exports, and 20 comes from
gold. That is, the surplus in trade is paid for in part by accumulating foreign
assets, and in part by accumulating gold. Our simple Balance of Payments looks
like:
Category Net Exports
Goods and Services 100
Financial Claims -80
Gold -20
Total 0
What does it mean to have negative net exports of Þnancial claims? Suppose
that domestic residents issue an IOU to foreigners. Foreigners would be crediting
us now in exchange for payments in the future. With these credits we could buy
goods and services in the foreign country. In our example, foreigners are issuing
more credits to us then we are to them; hence, there are negative net exports of
Þnancial assets. Notice further, that if foreigners were not able to borrow from
us, and if their sales of goods and services (i.e., our imports from them) were less
than our sales to them, they would have to pay the difference somehow. All is left
in our simple model is to transfer some other asset; gold.
The key point of our simple example is that the sum of the three components
equal zero. It does not matter exactly how they balance out, but it is critical that
the sums do. Notice that in this example, we are selling more goods and services
to the rest of the world than we are purchasing. This excess must be paid for
somehow.
The three categories of our simple example correspond to the three main parts
2
of the Balance of Payments. The CAB refers to the balance on net exports of
goods and services, including net interest income on foreign assets and unilateral
transfers. The second category corresponds to the balance on the capital account,
and the third category corresponds to net imports of international reserves.
We have engaged in one simpliÞcation, however. In practice, the Balance of
Payments involves double-entry bookkeeping.. Transactions are recorded twice.
When I purchase a Lexus, this is recorded as an import. My check to the dealer
eventually results in an export of a Þnancial claim to Japan. The dealer needs yen
to buy new cars from the manufacturer, not dollars. Think of the dealer putting
the funds in his Tokyo bank account. This involves purchasing this deposit with
dollars. Hence, it is a debit in the Balance of Payments. SpeciÞcally, it is a
purchase of foreign assets, an import in the capital account.
Our simple example abstracts from the double entry aspects of the Balance of
Payments, focussing only on the net ßows. But it is enough to capture the general
principles.
1.2. A Schematic Representation of the Balance of Payments

It is useful to break the Balance of Payments down further in a schematic repre-
sentation. This gives the ßavor of the Balance of Payments..
3
Table 2: Schematic Representation of the Balance of Payments
Accounts and Sub-accounts Cumulative Balance
Current Account
Merchandise merchandise balance
Services
-tourism
-transportation
-professional and other services resource transfer
-interest and other investment income balance on goods and services
Unilateral transfers
-government grants
-private remittances current account balance
(Private) Capital Account

Direct investment Securities
Banking ßows
-short term
-long term basic balance
Other portfolio capital overall balance of payments
Official Reserve Transactions

Changes in foreign CB holding of domestic assets
Changes in domestic CB holdings of foreign assets
-gold
-IMF credits and SDR’s
-foreign exchange reserves
A schematic breakdown is useful here.
Current Account The current account is the measure of the economy’s

trade in goods and services with the rest of the world, including unilateral trans-
fers. A good way to think of it is precisely as current items. Hence, it included
investment income, tourism, payments to military personnel, as well as exports
and imports. What is excluded from the current account is trade in assets. This
is what makes up the capital account balance.
In the current account visibles and invisibles are typically distinguished. The
4
former refers to merchandise which can be seen and touched; the latter to tourism
and other ßows of professional services which create remissions, but no tangible
good.
Interest and investment income is an especially important item. It is important
to note that the payments for the services of capital, investment income, appears
in the current account. The purchase of the good itself appears in the capital
account. For example, the proÞts from a factory in Canada would be in the
current account, while the investment to build the factory shows up in the capital
account.
The current account balance also corresponds, as we have already seen, the net
acquisition of assets by the economy. If the CA > 0 it means that the economy
has received more in receipts than we have made payments. Hence, the difference
must have been acquired by the economy. This can happen in two ways. Either
through a surplus in the capital account or in official reserves.
Capital Account Balance The capital account balance refers to all inter-
national asset transactions, excluding the ones made by the monetary authorities.
When US residents purchase German bonds that represents an outßow in the
capital accounts. A German resident’s purchase of US assets would represent a
capital inßow. If the capital account balance is in surplus it means that there is
a net inßow of resources.
The capital account contains three main types of ßows. First, there is direct
foreign investment; for example, the factory built in Canada. Second, there is
long-term portfolio investment, which would include purchases of securities and
long-term bank loans. Of course, purchases of securities is somewhat arbitrary;
one can speculate on 10 year bonds just as easily as on 3-month T bills. Short-
term capital ßows are the third item, and refer to purchases of securities with
maturities less than one year.
Because of the ambiguity over ßows, the US now breaks down portfolio invest-
ment into bank-related and securities rather than short-term and long-term. But
other countries still stick to the maturity distinction.
Official Reserve Transactions Official Reserve Transactions (ORT) are

conducted in the form of international reserve assets, such as gold and major
currencies. The key here is that they are conducted by central banks. Notice that
peculiar duality of reserve holdings: Changes in foreign Central Bank holding of
domestic assets and Changes in domestic Central Bank holdings of foreign assets.
5
For most countries we would simply include the Central Bank’s holdings of foreign
assets. But the dollar is a reserve currency. Hence, to measure the change in
US holding of international reserves, IR, we have to subtract changes in foreign
holdings of dollars from domestic changes. Hence,
∆IR = ∆IRUS − ∆IRF,US
where ∆IRF,U S refers to purchases by foreign Central Banks of dollars.
To see the importance of ∆IRF,U S suppose that the sum of the current account
and the capital account is −$25 billion. Then our international reserves must fall
by this same amount. But suppose that foreign central banks desired to increase
their reserves, and this meant that ∆IRF,U S = $10 billion (−25 = −15 − 10).
Then international reserves held by the Fed would need to fall by only −$15
billion. The willingness of foreign central banks to hold dollars helps to Þnance
our excess of spending over income.
1.3. The Current Account, the Capital Account, and Causality

It is evident that a surplus in the capital account, a capital inßow, can offset a
deÞcit in the current account. During the late 1980’s large US current account
deÞcits were offset by an inßow of capital. This took many forms, including the
purchase of US Treasury Bills by foreigners. More attention, however, was drawn
to the purchase of Rockefeller Center and other prime assets by the Japanese.
The US used to be the largest creditor nation in the world.3 Current account
surpluses led to a large acquisition of foreign assets by Americans. The income
from these assets meant that the current account remained in surplus for many
years after the trade balance went into deÞcit. Large current account deÞcits
beginning in the early 1980’s, however, has resulted in the US becoming the
world’s largest debtor nation.
The typical form of Balance of Payments accounting — with the capital and
current account summing above the line to form the balance of payments — sug-
gests an implicit causality. The idea is that the official reserves transactions are
the result of the other balances; i.e.,
CAt + KOt = −ORT
with the right-hand side caused by the left. This made some sense under Þxed
exchange rates; in the 1960’s, US current account deÞcits led to increased reserve
3
The US still is the largest creditor in gross terms. But in net terms the US is now a debtor.
6
holdings by foreign central banks, to some extent involuntary.4 But it makes much
less sense now to follow such reasoning.
First, under a system of pure ßexible exchange rates, the value of a cur-
rency is determined the supply and demand for it, with no official transactions.
Hence, pure ßoating implies ORT = 0. In practice we do not have pure ßoating;
rather we have managed ßoating. But even here the direction of causality is not
pre-determined. Intervention in the currency markets are made often to induce
changes in the other balances, not simply a response to them. When the Ger-
man Central Bank purchases dollars because it feels the mark has appreciated too
rapidly, it is at least as correct to say that these purchases allowed the US to run
current account deÞcits as is the reverse.5
Note that we could make a similar point with respect to the other balances.
If the demand for US capital assets increases, so that the balance on the capital
account increases, this allows us to run a larger current account deÞcit. It is no
less correct to say that the increased capital inßow ”caused” the current account
deÞcit as it is to say the reverse. The important point is that there is no neces-
sary direction of causality. The balances must add up, but they are determined
jointly. Whereas at one time it may have made sense to speak of autonomous and
accommodating transactions, such terminology seems no longer of much use.
4
This is the ”Triffin Problem” and was the ultimate downfall of the Bretton Woods system.
5
This point also applies to private holdings of dollars. Clearly, the large dollar holdings by
Russian citizens allows us to Þnance a larger current account deÞcit than would otherwise be
the case.
7
BACKGROUND PAPER
Budget and Budgetary Process

in the Parliament of India
BACKGROUND PAPER
Budget and Budgetary Process

in the Parliament of India
PILDAT is an independent, non-partisan and not-for-profit indigenous research and training institution with the mission
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PILDAT is a registered non-profit entity under the Societies Registration Act XXI of 1860, Pakistan.
Copyright ©Pakistan Institute of Legislative Development And Transparency - PILDAT
All Rights Reserved
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Published: May 2010
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E-mail: info@pildat.org Web: www.pildat.org
BACKGROUND PAPER
Budget and Budgetary Processes in the Parliament of India
CONTENTS
Abbreviations & Acronyms
Foreword
An Overview 09
Constitutional Mandates 09
Business Processes and Procedures in the Parliament 11
The Role of Parliamentary Committees 13
Power Asymmetry: Lower House's Budget 17
Budgeting for Defence: Role of Parliament 16
Public Consultation in the Budget Process 17
Concluding Remarks 18
References 23
APPENDIX A: Budget Documents in the Parliament of India 21
Charts, Graphs and Tables
Chart1: Business Process of Union Budget in Lok Sabha 11

Chart2: Who Does the FM meets? 17
Graph1: Time Taken for 'General Discussion' and 'Discussion on Demands for
Grants' of Union Budget in Lok Sabha (1952-2008) 12
Table1: Statistics of Budgets Session during UPA Government (2004 to till-
date) 13
Table2: A Bird's Eye View on State of Important Committees of Parliament 15
BACKGROUND PAPER
Abbreviations and Acronyms
AFS Annual Financial Statement

ASSOCHAM Associated Chambers of Commerce and Industry of India
ATR Action Taken Report
CAG Comptroller and Auditor General
CFI Consolidated Fund of India
CII Confederation of Indian Industry
CPU Committees on Public Undertakings
DRSCs Departmentally Related Standing Committees
EC Estimates Committee
FCs Financial Committees
FICCI Federation of Indian Commerce and Industry
FM Finance Minister
IT Information Technology
MP Members of Parliament
NCRWC National Commission to Review on the Working of the
Constitution
PAC Public Accounts Committee
RBI Reserve Bank of India
BACKGROUND PAPER
FOREWORD
FOREWORD
I ndian Parliamentary procedures and practices remain the most-relevant examples in the case of Pakistan due
to the similarity of the processes applied in both Pakistan and India. Continuity of democracy and a
Westminster form of an uninterrupted parliamentary tradition spanning over several decades offers many
examples that are useful for a comparative analysis in Pakistan.
Pakistan's current budgetary process has, for various historical reasons, attracted little input from parliamentarians,
political parties or wider civil society. The budget process has, in consequence, become solely the domain of the
government, leaving little scope for analysis or accountability. PILDAT has been striving for reforms in the
Parliamentary Budget Process and believes that each standing committee should hold pre-Budget public
consultations and compile and share recommendations for priority consideration by the Ministry of Finance ahead of
finalisation of budget. The duration of the Parliamentary Budget Process should be extended to minimum 60 days.
Demands for Grants for each Ministry / Division should be referred to the concerned Standing Committees after the
presentation of the budget in the House and Committees should be given approximately 2 to 3 weeks to complete their
consideration and prepare their reports for the House. Details of the Defence Budget be made a part of the Budget
Documents and an independent Budget Unit be established within the Parliament staffed with experts who can provide
unbiased information relating to the budget and an independent analysis of the budget for the benefit of the
parliamentarians.
What is the Budget and Budgetary Process in the Parliament of India? This Background Paper, part of the PILDAT
Series on Parliamentary Budget Process, has been especially commissioned by PILDAT to examine the Indian case in
this regard. While several PILDAT publications earlier share overview of the Indian budget process, this background
paper, authored by Mr. Gyana Ranjan Panda, Programme Officer, Centre for Budget and Governance Accountability,
Delhi, describes in detail various stages of the Indian budget process in detail. The paper has been especially
developed for the purpose of comparative analysis with the budgetary process in Pakistan and placed together with a
PILDAT Baseline Report on Parliamentary Budget Process in Pakistan and Canada offers an insightful comparative
perspective.
Acknowledgments
This Background Paper is published by PILDAT under the Parliamentary and Political Party Strengthening Project
which is funded through Canada's Department of Foreign Affairs and International Trade (DFAIT) and implemented
jointly by the Parliamentary Centre, Canada and PILDAT.
Disclaimer
The views expressed in this paper are those of the author do not necessarily reflect the views of PILDAT, Parliamentary
Centre, Canada or Canada's Department of Foreign Affairs and International Trade (DFAIT).
Islamabad
May 2010
BACKGROUND PAPER
An Overview near absolute and free run in the crucial phase of budget
enactment process in the Parliament of India.
The 'power of the purse' is an incontestable democratic
fundamental (Ian Lienert 2005). This denotes that there is Constitutional Mandates
an obligation on the part of the legislature to ensure that all
revenue and spending measures it authorizes, legally and The Constitution of India unmistakably mandates that, “no
constitutionally, are fiscally sound, match the needs and tax shall be levied or collected except by authority of the
aspirations of the population with equity, and that they are Parliament” and that the “President shall cause to be laid
being implemented appropriately and efficiently. It further before the House, the Annual Financial Statement (AFS) in
symbolizes that it is “we the people” who make and respect of every financial year.” 1 These two provisions
implement the budget for themselves. ensure that the Government cannot dispense any proposal
of expenditure without the sanction of the Parliament for a
In the case of India, where parliamentary democracy is period of not more than one year (Kashyap 2008).
ingrained in the practices of constitutionalism, the drafting
process of the budget belongs to the executive and remains It further underscores for a Consolidated Fund of India
behind the extreme “confidentiality” of bureaucratic (CFI) under Article 266 in which all revenues received by
homework. It is when the budget is tabled in the legislature way of taxes, loans, ways and means, advances, etc. are
that in-depth public debate becomes feasible and so the credited and debited. No money can be withdrawn from the
budget becomes matter of public inquiry. Open discussion CFI except under an Appropriation Act passed by the
on the contents of the budget in the legislature legitimizes Parliament. The estimates of expenditure embodied in the
transparency and facilitates accountability. “Budget in AFS show separately: (a) the charged expenditure and (b)
legislature can help to ensure a balance of views and inputs “other/voted expenditure” from the CFI.
into budget decisions and thus provides a platform for
establishing broadly based consensus with regard to Expenditure under 'charged' 2 category can be discussed in
difficult budgetary tradeoffs” (Ian Lienert 2005). Budget in both the Houses of Parliament but are not submitted to vote
the Parliament of India, on the last working day in the month in either House. They constitute the non-votable part of the
of February, commence as an entry point to the interface Budget. The expenditures charged on the CFI include, inter
between people and the executive and hence the role and alia, the emoluments and allowances of the President, the
interventions of independent think tanks, academics, civil salaries and allowances of the Chairman, Deputy Chairman
society groups, and concerned citizen becomes extremely of the Rajya Sabha and the Speaker and the Deputy Speaker
instrumental in opening up important perspectives on the of the Lok Sabha. It also includes the salary and other
budget and its outcomes for its effective beneficiary. allowances payable to the judges of the Supreme Court and
any other expenditure declared by the Constitution or by the
In India, the sovereign power of purse is in the hand of Parliament by law to be so charged(Kashyap 2008; Bakshi
Parliament and executive is accountable to the Parliament 2009). The expenditure for the above mentioned heads are
for all acts of its commissions and omissions. The financial by its very nature declared as 'charged' by the Constitution
procedures relating to Budget are organically laid down in and hence declared as absolute necessities to protect the
the Constitution. It ensures categorically the supremacy of independence and autonomy of these organisation. Though
the Lok Sabha in most of the financial matters for the Union the 'Charged' expenditures are non-votable, nothing can
of India with exclusive legislative jurisdiction over Union prevent the discussion in either House of Parliament on any
Budget. However, the practices suggest that party politics of those estimates.
of the day dominate over the constitutional obligations of
the Parliament in carrying out effective oversights and Expenditures failing in the second category are referred to
control over public expenditure. This allows the as 'voted' expenditure and are presented in the form of
Government, due to its numbers over Opposition, to enjoy Demands for Grants to the Lok Sabha. The Lok Sabha has
1. The term 'Budget' is nowhere referred in the text of the Constitution of India. The term 'Annual Financial Statement (AFS)' is used instead.
2. As per Article 112(3) the following expenditure shall be expenditure charged on the Consolidated Fund of India:- (a) the emoluments and allowances of the President and other expenditure relating to his office; (b) the salaries and allowances
of the Chairman and the Deputy Chairman of the Council of States and the Speaker and the Deputy Speaker of the House of the People; (c) debt charges for which the Government of India is liable including interest, shrinking fund charges and
redemption charges, and other expenditure relating to the raising of loans and services and redemption of debt; (d) (i) the salaries, allowances and pensions payable to or in respect of judges of the Supreme Cour t, (ii) the pensions payable to
or in respect of Judges of the Federal Court, (iii) the pensions payable to or in respect of Judges of any High Court which exercises jurisdiction in relation to any area included in the territory of India; (e) the salary, allowances and pension
payable to or in respect of the Comptroller and Auditor- General of India; (f) any sums required to satisfy any judgement, decree or award of any cour t or arbitral tribunal; (g) any other expenditure declared by this Constitution or by Parliament
by law to be so charged
09
BACKGROUND PAPER
the right to assent or reduce the demand specified therein, for grants is taken up.
but can not increase any demands made in the Demands for
Grants. Since these demands are meant to fulfil the If an amount spent for a particular service for a financial
programmes and policies of the government, if any such year is found to be insufficient for the purpose or a need has
demand as a whole is voted down, conventionally it is arisen for some new services to be inducted in the Budget
considered as lack of confidence (No Confidence) 3 on Documents of that year, the Government is authorised by
government budgetary proposals and hence considered as Article (115a) to seek Supplementary Grants 5 during any
'collective' defeat of the government. 4 So far no government session from the Lok Sabha. Similarly, there is also a
has fallen out of power in India in the context of voting Constitutional Provision (Article 115b) to seek approval of
against specific Demands for Grants of a particular ministry. the Parliament for any Excess Grants 6 for any amount that
have been spent on any service during a financial year in
The Indian Parliament's approval to the withdrawal from the excess of the amount granted for that service and for that
CFI for the voted and charged expenditure is sought via year.
Appropriation Bill. Under Article 114(3) of the Constitution,
no amount can be withdrawn from the Consolidated Fund Furthermore the Constitution is also conscious of the fact
without the enactment of such a law by the Parliament. about providing approval to the Vote of Credit (Article
116b) to the Government to meet an unexpected demand
All the financial proposals of the Government for the for money without going into the details of expenditure. An
financial year are incorporated in a Bill known as the Exceptional Grant (Article 116c) can be made for a
Finance Bill (Article 117) which is generally introduced in particular and special purpose which does not form part of
the Lok Sabha every year immediately after the Budget is the ordinary expenditure of the financial year.
presented. It gives effect to the financial proposals of the
Government. While general criticism of the policy of the The Budget is referred to as the Money Bill under Article
government is permitted, discussion on the details of 110 as it contains provisions dealing with all or any of the
particular estimates is not. This Bill has to be considered following matters, namely:
and passed by the Parliament and assented to by the
President within 75 days (Kashyap 2008) of its introduction. a) the imposition, abolition, remission, alteration or
regulation of any tax;
In India, the passage of the Budget beginning with its b) the regulation of the borrowing of money or the giving
presentation to its final approval generally goes beyond 1st of any guarantee by the Government of India, or the
April. In India, the Financial Year begins with 1st of April and amendment of the law with respect to any financial
ends with 31st March. Hence, it is inevitable for the obligations undertaken or to be undertaken by the
Government to keep enough finance to run the Government of India;
administration of the country until the demands are voted c) the custody of the Consolidated Fund or the
on by the Parliament. A special constitutional provision, Contingency Fund of India, the payment of moneys into
Vote on Account (Article 116a) therefore authorises the or the withdrawal of moneys from any such Fund;
Parliament to make any grant in advance (a sum equivalent d) the appropriation of moneys out of the Consolidated
to 1/6th of the estimated expenditure) for the period of two Fund of India;
months (normal year) to three to four months (election e) the declaring of any expenditure to be expenditure
year) pending the completion of the budgetary process. charged on the Consolidated Fund of India or the
Vote of account is generally passed after the general increasing of the amount of any such expenditure;
discussion is over and before the discussion on demands f) the receipt of money on account of the Consolidated
3. The rule 198 of Lok Sabha explains the procedure of No Confidence Motion. No Confidence Motion is used against collective responsibility of the government not against individual responsibility of a particular minister.
4. Article 74 (3) reads “the Council of Ministers shall be collectively responsible to the House of the People” and budget in particular reflects the collective will of the government and hence comes under the sacred parliamentary principles of
“Collective Responsibility” under Article 75.
5. The Supplementary Demands for Grants are presented to and passed by the House before and the end of the financial year. (Sury 1997: 71)
6. All such cases are brought to the notice of the Parliament by the CAG through his report on Appropriation Accounts. The excess grants are then examined by the PAC which makes recommendations regarding their regularisation in its report
to the Lok Sabha. The demands for excess are made after the expenditure has actually been incurred and after the financial year to which it relates has ended (Sury 1997: 71). For instance- Discussion and Voting for Excess (General Budget)
for 2006-07 FY took place on 8.7.2009. Source: Resume of Work, Fifteen Lok Sabha-Second Session (2 July, 2009 to 7 August, 2009), http://164.100.24.207/resumeofwork/II/1502.pdf
10
BACKGROUND PAPER
Fund of India or the public account of India or the Finance Bill containing the taxation proposals made by the
custody or issue of such money or the audit of the government. No discussion on the Budget takes place on
accounts of the Union or of a State (Bakshi 2009:117). the day it is presented.
However defining a particular bill as the Money bill needs The discussion on the Budget commences after a few days
the certification of the Speaker, which is final and then it is of its presentation. 8 It gives Members of Parliament the
sent to the Council of States (Rajya Sabha) for its necessary time and space to go in details of the Budget
consideration and final assents. Thereafter the Budget is Documents and to discuss the financial proposals among
presented to the President under Article 111for his formal themselves. Budget discussion in the Lok Sabha occurs in
assent to the Bill. two stages-the 'General Discussion' followed by a detailed
'Discussion and Voting on the Demands for Grants'.
Business Processes and Procedures in the Besides, it also covers supplementary discussion on
financial proposals and passing of the Appropriation Bill
Parliament and the Financial Bill.
The business procedures in the Parliament for the Union Under the stage of 'General Discussion', Members deal with
Budget run through following stages. General Budget is the general aspects of the fiscal and economic policy of the
presented by the Finance Minister (FM) on the last working Government and do not go into details of taxation and
day of February 7with a 'Budget Speech'. This speech is expenditure proposals as made by the Government in the
delivered in two parts: Part A: 'general economic survey' of Annual Budget. Interestingly, the Rajya Sabha has no
the country and Part B:'the taxation proposals' for the business with the budget beyond the General Discussion.
financial year. A copy of the Budget is laid on the Table of the Detailed discussion and voting on the Demands for Grants
Rajya Sabha at the conclusion of the budget speech in the of various ministries and departments is the exclusive
Lok Sabha. Almost immediately, the FM introduces the prerogative of the Lok Sabha.
Chart 1: Business Process of Union Budget in Lok Sabha

Demands of the Ministry
The President of On last working day of
voted; Guillotine applied;
India February,
All Expenditure under Ministry of
Budget is introduced
Appropriation Bill puts for Finance
only in Lok Sabha along
final voting
with Finance Bill. No
discussion takes place
(3) Final Voting and Approval FM Introduces the

of the Budget Budget
(2) Detailed Discussion & (1) General Discussion

Voting on Demands for Grants
General debate spreads over 3-

Discussion on Expenditure part of
4 days; deals with general
the Budget; DRSCs minutely
aspects of budget and does not
examine Ministry/Dept. grants;
go into details of budget
Cuts Motions take place
7. There are instances that budget in India has been presented on Saturday and holiday. The year in which budget has been presented on Saturday are 1954,1955,1981,1982, 1983, 1987, 1992, 1992; the year in which the budget is presented
on holiday is 29th February 1984 (Holiday for Parliament)
8. As per Statistical handbook (Government of India 2009:71-75) the time lag between the dates of Budget presented and 'General Discussion' are approximately 15 days. For instances in the General Budget 2010-11 has been presented on
26th February 2010 (27th and 28th February being Saturday and Sunday) and the General Discussion started on 12-15th of March 2010; the Parliament convention in India also suggests that the detailed 'Discussion and Voting on Demands
for Grants' of various ministries takes place after the 'recess' period. The recess period is an interval period between first part of the budget session where the General Discussion' takes place and last part where the detailed discussion and
voting on the demands for grants and final voting on the budget take place. In general, the recess period is taken approximately for one month. In the current budget session 2010-11, the budget session got adjourned for a recess period of
30 days (adjourned on16/03/2010 and reconvened on 15/04/2010).
11
BACKGROUND PAPER
The next stage in the procedure is detailed discussion and c) Token Cut “that the amount of the demand be reduced
voting on Demands for Grants. Generally, separate by Rs. 100”. The purpose behind moving Cut Motions
demands are made for the grants proposed for each by the opposition parties is to voice a particular
ministry. These 'demands' are in the nature of request made grievance for which the Government is responsible.
to the Lok Sabha for the grant of authority to spend the
amount asked for. Cut Motions have only symbolic value as they have no
chance of getting passed unless the Government loses
During the stage relating to Demands for Grants, it is open to majority in the Lok Sabha. The Business Advisory
all members to disapprove a policy pursued by a Ministry or Committee fixes a time limit for voting on a particular
to suggest measures for economy in the administration or demand and for all the demands for grants included in the
to focus attention of the ministry to specific local Budget. As soon as the time limit for a demand is over,
grievances. The members can do so by moving a “Closure” is applied and the demand is put to vote. This
subsidiary motion to the main motion for demands for process is known as “Guillotine” which concludes the
grants (Kashyap 2008). These subsidiary motions are discussion on demands for grants.
called in parliamentary parlance as “Cut Motions.” Three
types of Cut Motions are in practice in India (Sury 1997: Practice shows that the time as consumed by the process
68): of “General Discussions” and “Detailed Discussion on
Demands for Grants” has started shrinking since early
a) Policy Cut “that the amount of demand be reduced to 1990s (Chart 1). The politics of coalition government
Rs.1”, implies that the mover disapproves of the policy manifestly reflect such downwards trend in time taken for
underlying the demand; both general discussion and discussions on demands for
b) Economic Cut “that the amount of the demand be grants. The BJP-led NDA Government and recently INC-led
reduced to Rs....(a specified sum)”- seeks to reduce UPA government have not appropriated significance to the
the demand by a specific sum with a view to effect Budget Sessions in India. Similar trend can be seen with
economy in the expenditure; and lastly regards to number of Demands for Grants of ministries
Graph 1: Time Taken for 'General Discussion' and 'Discussion on Demands for Grants' of Union
Budget in Lok Sabha (1952-2008)
160.00
140.00
Demands for Grants
120.00
General Discussion
100.00
hrs/min.
80.00
60.00
40.00
20.00
0.00
1952 1960 1970 1980 1990 2000 2008
Year
12
BACKGROUND PAPER
being discussed on the floor of the House before the taxation and estimates of expenditure made by the
Guillotine was applied. As Table 3 hints at there are only government. Nearly two months of the Budget Session are
three Demands for Grants (on an average) being discussed devoted for this purpose; discussions are neither very
in detail and voted and passed by the UPA government in extensive nor intensive. As the time available is short, often
the last 14th and ongoing15th Lok Sabha. The outcome of demands relating to a number of ministries/ departments
almost 90% of the demands of ministries has been are not discussed at all and the 'guillotine' is applied. It is
determined only in just few seconds (Table 3). This not only here that Departmentally Related Standing Committees
shows political ineptitude of members for persistently (DRSCs) and Financial Committees (FCs) of Parliament
overlooking serious matters concerning public expenditure endeavour to undertake the task of detailed scrutiny of the
but also dents the Parliament's commitments as custodian governmental spending and performance, thereby the
of public purse and the spirit of democratic and accountability of the administration to the Parliament in
constitutional mandate in India. financial matters.
The Role of Parliamentary Committees in the Since 1993-94, a good deal of the Parliamentary business
is transacted in the Parliamentary Committees (Standing
Budget Process 9 Committees and Ad hoc Committees). Till the 13th Lok
Sabha, there were 17 Departmentally Related Standing
As Parliament's oversight/control over the Union Budget is
Committees (DRSC) in all. However, in July, 2004, the
limited and subject to political dynamics among political
numbers of Committees were increased from 17 to 24 with
parties, it cannot confer close consideration to all the
each DRSC consisting of 31 Members - 21 from Lok Sabha
legislative and other matters before it. It is the responsibility
and 10 from Rajya Sabha. There is no generic budget
of the Parliament to examine and approve the proposals for
Table 1. Statistics of Budget Sessions during UPA Government (2004 to till date)
No. of Budget Time SpentTime spent Discussion Guillotine Time Spent

Budgets Session on Generalon and Voting Applied for
During UPA (Period) DiscussionDiscussion on (No. of Min/ Guillotine
Govt. (H/m) and Voting Demands Depts.)
on for Grants
Demands (No. of Min/
for Grants Depts.)
(H/m)
First 5 July-26 17h/35m** NA* 0 52 7 Sec.
Aug 2004
Second 25 Feb-13 1h/49m 14h/32m 4 48 5 Sec.
May 2005
Third 16 Feb-23 1h/36m 18h/93m 3 50 5 Sec.
May 2006
Fourth 23 Feb-17 17h/27m 15h/45m 3 51 5 Sec.
May 2007
Fifth 25 Feb-5 1h/50m 24h/58m 4 49 6 Sec.
May 2008
Sixth 2th July-7th 17h/12m 30h/01m 5 48 5 Sec.
August
2009
So urce: 14th & 15th Lo k Sabha B usiness, Resume o f Wo rk, P arliament o f India.
9. There has been an exponential growth in the number of committees in Parliament in India. To read more- Jha, Rajesh (2009), Evaluation of Parliamentary Committees and Committee System: Changing Contours of Governance and Policy,
Social Watch Perspective Series, Vol: 2. Http://socialwatchindia.net/new1/images/Perspective%20paper%20Vol%202.pdf
13
BACKGROUND PAPER
committee in the Parliament to deal with matter related to Parliamentarian engage in other related issues.
Union Budget; instead, DRSCs as sectoral committees
scrutinise the Detailed Demands for Grants of There are three Financial Committees in the Parliament of
Ministries/Departments and report to the Parliament. 10 The India: the Public Accounts Committee (PAC), the Estimates
Financial Committees, DRSCs and some other Committees Committee (EC) & the Committee on Public Undertakings
come under the category of Standing Committees. Ad hoc (CPU). The PAC examines the statement of accounts
Committees are appointed for a specific purpose and they showing the appropriation of sums granted by the
cease to exist when they finish the task assigned to them Parliament for the expenditure of the Government of India;
and submit a report. the annual finance accounts of the Government and such
other accounts laid before the House as the Committee may
The general procedure of working of the Committees is think fit. It also scrutinizes the Appropriation Accounts of
governed by the General Rules No. 253 to 286 of the Rules the Government of India and the Report of the Comptroller &
of Procedure and Conduct of Business in the Lok Sabha, the Auditor General of India (CAG). While scrutinising the above
General Directions No. 48 to 73A of the Directions by the reports, the Committee has to satisfy that:
Speaker relating to Parliamentary Committees, internal
rules specific to the Committees and other relevant a) the moneys shown in the accounts as having been
Parliamentary Conventions and Practices. disbursed were legally available for, and applicable to,
the service or purpose to which they have been applied
Standing Committees are permanent and regular or charged;
committees which are constituted every year with the b) the expenditure conforms to the authority which
functions of: governs it;
c) every re-appropriation has been made in accordance
a) consideration of Demands for Grants; with the provisions made in this behalf under rules
b) examination of Bills as referred to by the Chairman, framed by competent authority.
Rajya Sabha or the Speaker, Lok Sabha as the case
may be; The Estimates Committee, on the other hand, acts as the
c) consideration of Annual Reports of the ministries; and 'continuous economy committee' and its criticisms and
d) consideration of national basic long term policy suggestions act as a deterrent on extravagance in public
documents presented to the House and referred to the expenditure. It makes a detailed examination of the annual
Committee by the Chairman, Rajya Sabha or the budget estimates in order to:
Speaker, Lok Sabha, as the case may be.
a. Repor t what economies, improvements in
However, these Committees do not consider matters of organisation, efficiency or administrative reform,
day-to-day administration of the concer ned consistent with the policy underlying the estimates
Ministries/Departments. may be effected;
b. suggest alternative policies in order to bring about
Besides DRSCs and Financial committees, there are 30 efficiency and economy in administration;
Consultative Committees attached to different ministries. c. examine whether the money is well laid out within the
Furthermore, there has been a tendency to form client- limits of the policy implied in the estimates; and
centric committees also (e.g., Committee on d. suggest the form in which the estimates shall be
Empowerment of Women). The 14th Lok Sabha has presented to Parliament.
initiated a novel experiment in this area. The Parliamentary
Forums on (i) Water Conservation and Management, (ii) The financial committees are said to play a very important
Children, (iii) Youth, (iv) Population and Public Health, and role as the watch dogs of the Parliament. They are unique as
(v) Global Warming and Climate Change. These were the oversight and control exercised by these committees is
constituted in 2005-06 for the first time to include those continuous, thorough and direct, employing all means of
members who have knowledge and expertise regarding scrutiny by way of issuance of questionnaires, calling of
development in these sectors and also to help the memoranda from representative non-official organisations
10. DRSCs constituted under Lok Sabha jurisdiction submit their reports to Lok Sabha and DRSCs under Rajya Sabha submit their reports to Rajya Sabha only
14
BACKGROUND PAPER
and knowledgeable individuals, on the spot study of to light various inefficiencies, waste and indiscretion in the
organisations and informal discussions and oral evidence implementation of policies and programmes approved by
of non-officials and officials (Kashyap 2008). the Parliament. Their recommendations are intended to
tone up the administration for economic, efficient and
The three financial committees ideally constituted to bring speedy execution of these policies and programmes.
15
BACKGROUND PAPER
However, as per Table 2, the average member's attendant continue to serve on a particular committee. This
and number of sittings and durations of such sitting do not adhocism tells on the quality of work done by the
reflect such commitments and their parliamentary activities committees whose reports suffer from absence of
are far from satisfactory. Nevertheless, such parliamentary critical analysis of the work of the ministries under their
mechanisms to control over executive Budget keep the supervision. Parliamentary oversight, essential for
administration on its toes. It is very much observed that enforcing accountability of the executive, is worse than
various measures as suggested by the FCs are in general useless if it degenerates into a meaningless routine”.
accepted by the government. The Financial Committees
have adequate procedures to ensure that their Budgeting for Defence: The Role of Parliament
recommendations are given due considerations by the
government and where they are not accepted, the In the perspective of Union Budget, though the sectors of
committees are apprised of the reasons for not being expenditure (General, Economic and Social) 12 pattern vary;
accepted in the 'Action Taken Report' as submitted by the but through the lens of legislators in India, the dichotomy
Government on the floor of the Parliament (Kashyap 2008). with regards to parliamentary business and conducts
among sectors is rarely visible. Various Demands for
There are difficulties in the functioning of the committees Grants 13 relating to defence budgeting pass through the
system. First, they normally do not go into questions of same process of General Discussion, Detailed Discussion
policy as policy formulation is the exclusive privilege of the on Demands for Grants and scrutiny of the DRSC on
executive and a committee is not supposed to sit in Defence, and final approval of the Lok Sabha as other
judgement on a policy already approved by the executive. Demands for Grants for Social Budgeting. However
Second, furthermore, they examine the administration ex statistics reveal otherwise. It is observed that though the
post facto. The Committee examine only those acts which Demands for Grants for Ministry of Defence have been
have already been done or not done which otherwise ought listed for detailed discussion during Budget Session since
to have been done. Third, the recommendations of the 1993, it actually took place only in the year 1993,1995, and
committees do not contain any binding force as they are 2008. From 1996 to 2009 Budget sessions, the Demands
merely advisory in nature. Fourth, there is large scale for Grants for the Ministry of Defence have been finally
absenteeism; combined average attendance was reported approved under few seconds of Guillotine.
to have been less than 50 per cent in Committees. As Table
2 suggests the frequency of sitting, hours of sitting and In the 2009-10 budget session, the Demands for Grants of
percentage of attendance are matters of concern for the Ministry of Defense were laid in Lok Sabha on 7 July,
effective functioning of Committees in handling 2009. This year being the election year, the Demands for
significance legislations and scrutinising crucial aspect of Grants of the Ministry of Defence were referred belatedly to
public expenditure in the Parliament. the Standing Committee on Defence for examination and
report. In the aforesaid background, the Committee
As observed by the National Commission to Review on the considered the Demands for Grants and took evidence of
Working of the Constitution (NCRWC, Final Report 2002) 11 the representatives of the Ministry of Defense on 27, 28 and
29 October 2009. The final Report of the DRSC on the study
“Most committees oversee more than one ministry, thus of the Demands for Grants for Defence for the Financial Year
preventing more focused work. Most political parties do 2009-10 was submitted to the Lok Sabha on 16-12-2009
not follow any norms while nominating members to after five months. There have been many instances where
these committees. They are also handicapped by lack of Standing Committees scrutinized demands of the ministry
specialist advisers. Every committee has tenure of one after long interval of passing of the Union Budget. However,
year. This means members have no opportunity of as per Parliamentary convention the Government needs to
specializing in a particular subject or group of subjects submit an Action Taken Report (ATR) on the observations
unless they can persuade their whips to let them so made by the report on the floor of the Lok Sabha. 14
11. Http://lawmin.nic.in/ncrwc/finalreport/v1ch5.htm
12. In India, the sectors of expenditure in the Union Budget are divided into 'General', 'Economic' and 'Social' sectors. The expenditure relating to National Defence, Espionage, Ordinance factor y and Research and Development are covered under
the General Sector of the Union Budget.
13. Demands Nos. of various Demands are follows: Ministry of Defence (20), Defence Pensions (21), Defence Services Army (22), Defence Services Navy (23), Defence Services Air force (24), Defence Ordinance Factories (25), Defence
Services Research and Development (26), and Capital Outlay on Defence Services (27)
14. The reports of the DRSC on Defence and the ATR are available on the Lok Sabha website http://164.100.47.134/committee/Comm_Details.aspx?comcode=7
16
BACKGROUND PAPER
Furthermore, the performances of various programmes Speaker that it is a money bill. The Rajya Sabha has very
and efficiency in the Defence budget are also scrutinized by limited financial power as it can not reject a money bill nor
a constitutional and independent regulatory and can it amend it. It must, within a period of 14 days from the
compliance body, the Comptroller and Auditor General date of receipts of the Bill, return the bill to the Lok Sabha
(CAG) of India. Its performance and regulatory/compliance with its recommendations. The Lok Sabha may thereupon
audits reports 15 get scrutinized further by the Financial either accept or reject all or any of the recommendations of
Committees (PAC & CPU). The Financial Committees the Rajya Sabha. There is no chance of any disagreement
present their Report to the Parliament/ State Legislature between the two Houses with regards to Money Bills as in
with their observations and recommendations. The various the case of ordinary Bill, where Rajya Sabha enjoys an
Ministries/ Department of the Government are required to equal power with the Lok Sabha. There is no provision of
inform the Committees of the action taken by them on the Joint Sitting in the case of Money Bill. The consent and
recommendations of the Committees (which are generally approval of the Rajya Sabha on money bill is a mere
accepted by the Government) and the Committees present formality.
Action Taken Reports to Parliament / Legislature. This
ensures that the audit Reports are not taken lightly by the Public Consultation in the budget process
Government, even if the entire report is not deliberated
upon by the Committee. Public consultation in the Budget process can be
distinguished as pre-budget consultation and consultation
Power Asymmetry: Lower House's Budget in the post-budget phase. The pre-budget consultation
generally takes place every year, when the Finance Minister
There is a considerable power asymmetry between the Lok (FM) initiates the process of meeting various stakeholders
Sabha (Lower House/popular house) and the Rajya Sabha from the first week of December till the end of January.
(Upper House/Council of States) with regards to power of During this period, the FM generally meets the industry and
purse. A Money Bill (AFS is covered under the mandate of commerce lobby groups FICCI, ASSOCHAM and CII. Some
Money Bill) as defined by the Article. 110 can not be other stakeholders who meet the FM include the RBI
introduced in the Rajya Sabha. It can be introduced in the Governor, representatives of the trade unions, Congress
Lok Sabha only on the recommendation of the President. Party office bearers, farmers and the agriculturalists. The
After it is passed in the Lok Sabha, it is sent to the Rajya FM's customary list is also extended to the State Finance
Sabha for its recommendations with a certificate by the Ministers, exporters and also experts from electronics, IT
Chart 2: Who Does the FM Meet? 16
15. In India, the Audit of the CAG is bifurcated into two streams namely Performance Audit and Regularity (Compliance) Audit. For details kindly visit- http://www.cag.gov.in/; http://www.cag.gov.in/html/reports/2009.htm
16. Note: * this chart represents the pre-budget consultation as initiated by the Finance Ministry for the preparation of the first Union Budget of the current UPA Government after general election.
Source: “Response to the Union Budget 2009-10, Is the New Government Committed or Complacent”, Centre for Budget and Governance Accountability, New Delhi, 2009
17
BACKGROUND PAPER
and financial sectors. But in the run-up to Union Budget 2. Parliamentary Control over Borrowing: While the
2010-11, the FM has started meeting CSOs leaders for the budgetary demands for grants of various ministries is
first time. It is a symbolic but a positive and significant step, examined by the concerned standing committees, still
but the need of the hour is to institutionalise the process of there is no provision for a parliamentary scrutiny or
public input into budget-making, so that the budget control of public borrowing. In India, the Constitution
represents the concerns of the millions of poor. and the laws place no limits on the borrowing powers
of the Executive. Parliamentary approval for any
Public consultation in the post-budget phase, on the other amount of internal or external borrowings as such is
hand, is wide open particularly in the Budget enactment not required except that it is a part of the budget. This is
stage. It is so as the budget as prepared by the executive a significant lacuna and must be plugged. Public
only gets public once it is tabled in the Parliament. The borrowing is a charge on the future generations and
legislators from both the Houses of Parliament get to debate must be duly controlled. Beyond certain prescribed
and discuss, scrutinise and question all aspect of receipts limits, borrowing proposals should also be subjected
and s of the budget in camera. CSOs step up their to scrutiny by the parliamentary committee on
parliamentary advocacy, lobby, and interventions during National Economy or the Standing Committee for the
this phase of Budget process and ventilate their unheard Ministry of Finance.
expectations, concerns and grievances about the Budget.
Members of Parliament from across political parties, 3. The Subject/Ministry based Standing Committees
regions, interests come together under political need to embrace the entire spectrum of administration
commonality and compulsions (sensing politics of the day) for an in-depth and continuous study to provide:
question the vision and principles underlying a particular
budget. Interestingly, CSOs during this phase circulate a) close pre-budget scrutiny of the estimates and
policy briefs, prepare questions for parliamentarians, complex expenditure plans (Demands for Grants)
submit memorandum to Department Related Standing before they are voted on the floor of the House;
Committees (DRSCs) on a particular subject to influence b) concurrent and contemporaneous examination of
Budget in the enactment phase. the activities of Government departments and
matters of national concern in cool, non-partisan
Concluding Remarks atmosphere;
(c) monitoring and evaluation of performance,
The functioning of the Parliament in India in general and relating to financial input to the policy objectives
ensuring parliamentary accountability on budget in and actual results to measure effectiveness, and
particular is plagued by many problems and shortcomings. detailed examination of supplementar y
The National Commission to Review on the Working of the estimates;
Constitution (2002) has given some workable (d) feed-back of valuable insight and information to
recommendations: Parliament and to the Government to reappraise
economic proposals;
1. Absenteeism of Members: Absenteeism of Members (e) closer and more competent scrutiny of all
threatens to become a serious malady. Quorum is met legislative proposals all Bills introduced in the
in each House when 1/10th of the members are House may automatically stand referred to the
present on the floor of the House. Many instances, the appropriate Committee for detailed consideration
House gets adjourned due to the lack of quorum. The and discussion.
citizens have certain claims on their representatives
and perhaps expectation of some minimum hours of 4. The Committees system could strengthen the
presence in the house and some minimum hours of Government by providing valuable insights into its own
parliamentary work each day would be quite legitimate. working, provide to Parliament sharper and more
Those Members who are not so present in the House effective surveillance tools and restore the balance
may, therefore, under their own self-regulatory between Parliament's legislative and deliberative
procedures, lose their salary and allowances for the functions and its role as a representational body, and,
day. above all, save valuable parliamentary time to the
advantage both of Parliament and the Government.
18
BACKGROUND PAPER
Working away from the glare of publicity, in a truly

corporate sense, free from the normal partisan spirit
that often characterizes the debates in the House, the
new parliamentary committees could play an
important, substantial and useful role. These
Committees could provide a potent mechanism for a
meaningful multilateral dialogue between the
Government and the Members of Parliament enabling
a proper appreciation of each other's views,
reasonable accommodation of varying viewpoints and
harmonization of conflicting interests.
5. Nodal Standing Committee on Economy: The existing

standing committee does not cover the subject
relating to conditions of national economy. It may be
advisable to have a nodal Standing Committee on
national economy with specific subject-oriented study
groups aided by experts and concerned with
economic policy formulation and implementation. The
study groups would make internal study reports to the
main Committee based on operational research in
performance evaluation against physical targets. The
Committee would in its turn make annual reports to
Parliament. These reports would prove valuable to
various Ministries and Depar tments of the
Government. Also, they would serve the purpose of
constant vigilance and constructive appraisal directed
to preventing erosion of credibility, plugging loopholes
and strengthening the system as a whole. The
Committee recommendations would help to evolve
and adopt better means of monitoring, analyzing and
evaluating performance in implementing policies and
prescribing correctives to ensure the best use of
available resources. The reports would provide
valuable feedback to Parliament and should be
discussed by the two Houses each year.
19
BACKGROUND PAPER
APPENDIX A
Budget Documents in the Parliament of India

No. Document Nature of the Document Contents of the Document
1. Annual Financial Constitutional Requirement The core budget document, shows estimated receipts and disbursements under the three
Statement (AFS) parts, in which Government Accounts are kept viz.,(i) Consolidated Fund, (ii) Contingency
Fund and (iii) Public Account
2. Demand for Grants Constitutional Requirement Estimates of expenditure from the Consolidated Fund of India included in the Annual Financial
(DG) Statement and required to be voted by the Lok Sabha are submitted in the form of Demands
for Grants.
3. Appropriation Bill Constitutional Requirement The Bill that empowers the Parliament's to authorise the Government to withdraw money from
the Consolidated Fund for the 'charged' and 'voted' expenditure
4. Finance Bill Constitutional Requirement Finance Bill when approved empowers the Government to impose, abolish, remit, alter and
regulate taxes as proposed in the Budget.
5. Memorandum Requirement under Fiscal The document facilitates an understanding of the taxation proposals contained in the Finance
Explaining the Responsibility and Budget Bill.
Provisions in the Management Act 2003
Finance Bill, 2009 (FRBM Act)
6. Macro-economic Requirement under Fiscal The Macro-economic Framework Statement contains an assessment of the growth prospects
framework for the Responsibility and Budget of the economy with specific underlying assumptions. It contains assessment regarding the
relevant financial year Management Act 2003 GDP growth rate, fiscal balance of the Central Government and the external sector balance of
(FRBM Act) the economy.
7. Fiscal Policy Strategy Requirement under Fiscal The Fiscal Policy Strategy Statement outlines the strategic priorities of Government in the
Statement for the Responsibility and Budget fiscal area for the ensuing financial year relating to taxation, expenditure, lending and
financial year Management Act 2003 investments, administered pricing, borrowings and guarantees.
(FRBM Act)
8. Medium Term Fiscal Requirement under Fiscal The Medium-term Fiscal Policy Statement sets out three-year rolling targets for four specific
Policy Statement Responsibility and Budget fiscal indicators in relation to GDP at market prices namely (i) Revenue Deficit, (ii) Fiscal
Management Act 2003 Deficit, (iii)Tax to GDP ratio and (iv) Total out-standing Debt at the end of the year. The
(FRBM Act) Statement also includes the underlying assumptions for an assessment of sustainability
relating to balance between revenue receipts and revenue expenditure and the use of capital
receipts including market borrowings for generation of productive assets.
9. Expenditure Budget Policy Requirement This document deals with revenue and capital disbursements of various
Volume -1&2 Ministries/Departments and gives the estimates in respect of each under 'Plan' and 'Non-Plan'
expenditure.
10. Receipts Budget Policy Requirement Estimates of receipts included in the Annual Financial Statement are further analysed in the
document "Receipts Budget". The document provides details of tax and non-tax revenue
receipts and capital receipts and explains the estimates.
11. Budget at a glance Policy Requirement This document shows in brief, receipts and disbursements along with broad details of tax
revenues and other receipts.
12. Highlights of Budget Policy Requirement The document explains the key features of the Budget inter alia, indicating the prominent
achievements in various sectors of the economy. It also explains, in brief, the budget
proposals for allocation of funds to be made in important areas. The summary of tax
proposals is also reflected in the document.
21
BACKGROUND PAPER
No. Document Nature of the Document Contents of the Document
13. Detailed Demands for Policy Requirement Detailed Demands for Grants elaborate the provisions included in the Demands for Grants as
Grants also actual expenditure during the previous year. A break-up of the estimates relating to each
programme/organisation, wherever the amount involved is not less than Rs.10 lakhs, is given
under a number of object heads which indicate the categories and nature of expenditure
incurred on that programme, like salaries, wages, travel expenses, machinery and equipment,
grants-in-aid, etc.
14. Annual Report Policy Requirement The document provides a descriptive account of the activities of each Ministry/Department
and brought out separately by each Ministry/Department and circulated to Members of
Parliament at the time of discussion on the Demands for Grants.
15. Outcome Budget Policy Requirement The document contains a brief introductory note on the organization and function of the
Ministry/Department, list of major programmes/schemes implemented by the
Ministry/Department, its mandate, goal and policy framework, budget estimates, scheme-
wise analysis of physical performance and linkage between financial outlays and outcome,
review covering overall trends in expenditure vis-a-vis budget estimates in recent years,
review of performance of statutory and autonomous bodies under the administrative control
of the Ministry/Department, reform measures, targets and achievements and plan for future
refinements
16. Economic Survey Policy Requirement The document brings out the economic trends in the country, which facilitates a better
appreciation of the mobilisation of resources and their allocation in the Budget. The Survey
analyses the trends in agricultural and industrial production, infrastructure, employment,
money supply, prices, imports, exports, foreign exchange reserves and other relevant
economic factors which have a bearing on the Budget, and is presented to the Parliament
ahead of the Budget for the ensuing year.
22
BACKGROUND PAPER
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24
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NATIONAL LAW UNIVERSITY,

B.A.LL.B. (Hons.) Five Years

III Year - V Semester

Course Compiled By:

Semester July – Nov ember

The course of Economics III basically includes some basic issues of

The students shall be introduced to the fundamentals of some of the

The teaching methodology shall be participatory teaching with

There are several books on developmental and env ironmental

Course Evaluation Method

The Course is assessed for 100 Marks in total by a close book

On completion of the Course the students are expected to

MODULE 1 [20 Teaching Hours]

Indian Economic issues

Agriculture industry of India: cropping seasons, land reforms, green

Industrial Sector: industrial policy statements, disinv estment, special

Basic issues: pov erty, absolute and relative, causes and

1. P.K. Dhar, Indian Economy and Its Growing Dimensions, Kalyani

2. A.N. Agarwal, Industrial Economy: Problems of Dev elopment and

3. R. Dutt and K. P. M. Sundaram, Indian economy, Sultan Chand

4. Gov ernment of india, economic Survey(annual), New Delhi

5. Ramesh Singh, Indian Economy, McGraw Hill Education, Fifth

6. Uma Kapila, Indian Economy: Performances and Policies, 2013-

India and Global Economy

Indian Financial Market: money market, capital market, financial

Balance of Payment: Concept, current account, capital account,

Exchange rate: concept, determination, purchasing power parity

Global Institutions: The World Bank, International Monetary Fund, The

1. P.K. Dhar, Indian Economy and Its Growing Dimensions, Kalyani

2. K.C. Rana and K.N. Verma, International Economics, Paperback &

3. M L Jhingan, Macro Economic Theory, Vrinda Publications (P) Ltd,

4. Bharati V. Pathak, The Indian Financial System: Markets, Institutions

5. D.M. Mithani, Modern Public Finance, Himalaya Publishing House,

Public Finance: subject matter, private finance vs. public finance,

Taxation: concept, cannons of taxation, types of taxes, rates of

Benefit principle and Ability to Pay Theory of taxation

1. R.K. Choudhury, Public Finance and Fiscal Policy, Kalyani

2. R.R Paul, Money Banking and Public Finance, Kalyani Publishers,

3 R.A. Musgrave, Theory of Public Finance, Tata McGraw Hill, 2010

4. R.K. Lekhi, Public Finance, Kalyani Publishers, thirteen Edition, 2006

5. R.A Musgrav e and P.B Musgrave, Public Finance in Theory and

6. R. Dutt and K. P. M. Sundaram, Indian economy, Sultan Chand

Public Expenditure: concept, cannons of public expenditure, effects

Public Debt: sources, burden of public debt, effect,

Budget: concept, types of budget, system of budgeting, deficits –

Fiscal Policy: concept, role and significance

1. R.K. Choudhury, Public Finance and Fiscal Policy, Kalyani

2. R.R Paul, Money Banking and Public Finance, Kalyani Publishers,

3 R.A. Musgrave, Theory of Public Finance, Tata McGraw Hill, 2010

4. R.K. Lekhi, Public Finance, Kalyani Publishers, thirteen Edition, 2006

5. R.A Musgrav e and P.B Musgrave, Public Finance in Theory and

1. P.K. Dhar, Indian Economy and Its Growing Dimensions, Kalyani

2. A.N. Agarwal, Industrial Economy: Problems of Dev elopment and

3. R. Dutt and K. P. M. Sundaram, Indian economy, Sultan Chand

4. Gov ernment of india, Economic Survey(Annual), New Delhi

5. Ramesh Singh, Indian Economy, McGraw Hill Education, Fifth

6. Uma Kapila, Indian Economy: Performances and Policies, 2013-

7. K.C. Rana and K.N. Verma, International Economics, Paperback &

8. M L Jhingan, Macro Economic Theory, Vrinda Publications (P) Ltd,

9. Bharati V. Pathak, The Indian Financial System: Markets, Institutions

10. D.M. Mithani, Modern Public Finance, Himalaya Publishing House,

11. R.K. Choudhury, Public Finance and Fiscal Policy, Kalyani

15. R. Dutt and K. P. M. Sundaram, Indian economy, Sultan Chand

Sl. Authors/Institutions Titles