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    Indian business environment book @ bec doms Indian business environment book @ bec doms Document Transcript

    • BUSINESS ENVIRONMENTCHAPTER IBusiness environment- Dynamic factors of environment- Importance ofscanning the environment-Fundamental issues-Economics environmentof business - Sock) - cultural environment- Political/ Legal environment-Cultural environment.CHAPTER IIPolitical economy - Government and business -.Public control, ofbusiness -Trends and structure of Indian economy - Socio - economicproblems of IndiaCHAPTER IIIGovernment controls and regulations -, Regulating economic andindustrial activities - Industrial Licensing policy - Control of monopolies -,Capital issues control - Government control over FDI and collaboration -Distribution and price control - New EXIM policy - Foreign exchange flowregulation -Technology transfer.CHAPTER IVMonetary and fiscal system - Banking and credit structure in India –Financial institution - Fiscal system - theory and practice.CHAPTER VEconomic planning and development - Government and planning -Indias eight five year plan and structural reforms - Industrial policies andpromotion schemes - Government policy and SSI - Interface betweenGovernment and public sector.CHAPTER VINew Economic Policy Environment in India - Privatization - Liberalizationand Globalization - Experiences and issues - Environmental assessmentand evaluation. BSPATIL
    • Business environment1 Environment - Introduction Business Environment & Economy2 Control of Business Environment3 Monetary & Fiscal System4 Planning & Development56 Liberalization & Globalization CHAPTER IBusiness environment - Dynamic factors of environment - Importance ofscanning the environment - Fundamental issues - Economic environmentof business - Socio - cultural environment - Political / Legal environment-Cultural environmentThis chapter focuses on the following aspects of Business environment:Definition of business, meaning of business environment, the BSPATIL
    • classification of business environment, need to study environment inbusiness decisions, the methods of scanning the business environment,issues that are to be addressed while scanning the environment, varioustypes of factors that influence business environment, non-economicenvironment and its impact on business decisions.To highlight the importance of the Business environment, three casestudies have been appended at the end of this lesson.Definition of businessThe term business is understood and explained in different ways bydifferent people. For some, business is an activity, for some it is amethod of transacting, for sonic others, it is a method of money makingand some people argue that business is an organized activity to achievecertain pre-determined goals or objectives. Dictionary meaning ofbusiness is: the act of buying and selling of goods and services,commerce and trade. Based on all these meanings of justness, we maydefine business as: gainful activity through which various elements ofsociety conduct exchanges of the desirable things.In the olden days, the people engaged in different activities in a societywere classified into four groups : Brahmnas, Shatriyas, Vysyas and Sudras,Of these our fold classification of social activities, the activities of vysyasincluded basically, facilitating exchange. Hence, business as an exchangeactivity remained since the days of exchange started. It could also berecalled that business as a social activity became popular only when thewants of different people in a society were to be met with the availableresources. In other words, whenever there was a scope for producingsomething, which is wanted, then business activity automatically emerged. BSPATIL
    • But now a days, business is viewed more as a profession or occupation.From the days of family owned business, we have reached a stage ofprofessionals and experts starting and running business. It could also benoted that business administration and business management haveemerged as the most prospective field of study and occupation. Personswith educational background in business, enter business or join businessorganizations to make them successfully function. Unlike the olden days,a number of interests are involved in business today, viz. owners,investors in business, suppliers, customers, employees, government,stake holders, administrators, managers, strategists, executives, and somany others. Hence, every business activity has to meet the goals or aimsor objectives of these various groups of people. That in fact, has madebusiness a most complicated activity.Modern business has a number of features. Understanding of these wouldhelp to appreciate and organize business activities in a highlyprofessional way.1. Business is an economic activity :Business involves organizing activities to satisfy human plants. Theseactivities may result in the manufacture or production of a commodity orextension of a service. When a good or service is produced, resources areinvolved. Resources like human resources, physical resources andfinancial resources are all required to realize output to meet human BSPATIL
    • needs. These resources are limited in supply, and so business involvesidentification of resources, evaluation of resource qualities, buying theseresources and utilizing these resources. These resources being scarce inrelation to their demand, the resources carry some value [i.e., price]. Theycannot be procured at any cost to produce anything to meet humanwants. So automatically selection among various resources come upwhich is made on the basis of requirement and cost. Once they areprocured, then they are used in a very judicious manner so that there isno waste. That is optimal utilization-of resources is to be achieved. Inthis context, several decisions like resource selection, resourceprocurement, resource mix, resource utilization, etc. are all involved. Asin all these stages, choice among alternatives is involved, every businessactivity is to be treated as economic in nature. Depending upon thebusiness activity, the approach to selection among alternatives woulddiffer. For example, in a manufacturing business, the choice is aboutinput selection to supply quality output, in a service organization thechoice is about-inputs and delivery process, in a governmentorganization it is about production and equitable distribution of output,in an institution like bank, provision of various investment opportunitiesof short term and long term to the public, etc.2. A business organization is an economic unitEvery business organization is engaged in transforming inputs intooutput to meet the requirements of the people. The selection of inputand size of procurement will depend upon, the size of the organization.This would also depend upon the nature or product or serviceextended/by the business unit. All these are attended with the objectiveof making profit or surplus. Only when there is surplus achieved, can the BSPATIL
    • business units grow. Hence creation of surplus in a business becomes thefocal point and this is best achieved through optimal utilization ofresources. That way, all business units have to achieve the maximumoutput with minimum inputs which in other words is the effort to achieveeconomic efficiency. Only economic efficiency can enable firms to beefficient in every other sense. Therefore, business organizations are onlyeconomic units in nature.3. Business decisions making is essentially an economic processAll business decisions involve selection from alternatives. In other words,the rational choice of inputs is implied in every business decision. Hence,to be rational, a business unit goes through the process of : determiningobjectives, identifying opportunities, generating alternatives, classifyingthese alternatives as feasible and infeasible alternatives, then rank thefeasible alternatives on some criteria and then select those alternativesfulfilling the constraints. For example, if the objective of a business unitis to maximize profits, then this would call for minimizing cost andmaximizing revenue. On the cost side, the business unit have to identify,procure and utilize resources in the optimal way and on the revenue side,the business unit should determine the price which would facilitatemaximization of revenue. Price determination again would depend onvarious factors like demand, supply, competitive scenario, governmentinterference, statutory compulsions, conflicting interests of the stakeholders of the business, etc. Therefore, every decision made in a businesswould automatically depend on the economic process.Changing concept of businessIt has been stated already that the concept of business has undergone avast change. From a producer driven stage business has becomeconsumer centered and driven stage. While the earliest concept was * sell BSPATIL
    • what is produced the modern concept is produce what is wanted Soevery business depends on consumers and their ever changing needs.Any business unit which has successfully understood its customers andoffer the product or service meeting their requirements alone issuccessful. But in this process, business units have to manage pressuresfrom its owners and other stake holders. It should take into account therequirements of the workers and the trade unions. It should abide by therules and regulations of a number of government agencies andinstitutions. It should meet the challenges and threats from competitors.Most important, it has to fulfill its social obligations. To survive everybusiness unit has to also consider: the revolutionary changes intechnology, market expansion, information explosion, competitorstrategies. These are days when the consumers are better informed andso no business unit can afford to ignore consumer awareness andpreferences. Technological development has brought with it thecompulsion to use modern methods and techniques. Social obligationshave made business units to meet pollution norms, etc. Trade unionpressures have made them to design satisfactory service conditions forthe work force. Then there is compulsion to provide for development ofhuman resources in the organization to achieve organizationaldevelopment. All these have made modern business ‘tight rope walking.’BUSINESS ENVIRONMENTBusiness involves activities, which links an organization with outsideworld. Within an organization, a business is governed by the behaviour ofits employees, management or decision makers. But externally a businessis influenced by a score of factors, which range from customers tocompetitors and government. Therefore, a business cannot beindependent of (he influence of these external factors. It should also benoted that a business has absolute control over all the internal factors, ithas no control over the external factors. So often it becomes necessary BSPATIL
    • for business houses to modify their internal decisions and policies, on thebasis of the pressure from external factors This highlights the need to beever- cognizant of changes and influences of external factors so as toconduct business on healthy lines. It is in this context that businessenvironment assumes all significance. Business environment thereforerefers to the influences and pressures exerted by external factors on thebusiness. The following Figure would help to understand the variousfactors which constitute the business environment.From the Figure: 1, it would be clear that business organizations functionin an environment subject to the influence of various constituents. Earhone of the constituents have in turn a number of factors influencing them.For example, economic environment has micro and macro environmentalfactors affecting it. To develop a right perspective about businessenvironment, let us discuss briefly about each one of the externalenvironment constituents. 1. Demographic environment : This refers to the size and behaviour of population in a country. Suppose a country has a huge size of population, then, the country would provide extensive business or marketing opportunities for all types of business organizations. On the other hand, a country with low size of population would force the business organizations to seek external market for their BSPATIL
    • products or services. Similarly, if the population in a country is well - tuned to use and throw concept’ [like most of the Western countries] then there would be limited scope for repair shops and employment scope in that segment would be almost nil. But alternatively this would give wide marketing opportunities for manufacturing organizations. On the other hand, if the population is averse to use and throw concept, then the business opportunities would be limited for manufacturing organizations but the repair shops, self-employed technical persons and spares manufacturers, would have roaring business. Hence, the size and quality of population emerges as a vital factor influencing business environment.2. Economic environment: Economic environment refers to the overall economic factors like economic philosophy of the country, economic structure, planning, economic policies, controls and regulations, etc. All these have a serious impact on the functioning of business organizations in a country. For example, in a Capitalistic economic system, business organizations would be subjected to limited government regulations and controls. They would be more governed by market forces [demand and supply] rather than by other factors. On the other hand, in a Socialist system, the government would determine everything on behalf of the country. In a Communist set up, the government has absolute control over every aspect over production that private enterprises may not exist at all. In a Mixed economic system, government would be selective in allowing die presence of private enterprises in certain activities, reserving some spheres completely for governmental operations. Hence, the economic philosophy of the country directly determines the scope and functions of business organizations in that country. BSPATIL
    • 3. Geographical and ecological environment: Geographical environment refers to climatic conditions and natural resources, which determines flu manufacturing scope and the nature of the products that could be marketed. For example, a country like Kenya has to manufacture more of products based on forest resources, while the Gulf countries can produce only crude, Japan can have business in fish, fruits, etc., Countries in the tropical region would have organizations specializing in products from geographical resources available in abundant in that region, while organizations in Mediterranean countries have a Different business scope, Scandinavian countries have scope for dairy product manufacturing, etc. Similarly ecological imbalance is taking place at an alarming rate in the world today, that deforestation and hunting of rare species of animals for food are all prohibited now. Hence, while identifying the business opportunities, business organizations have to be conscious of the limitations posed by the geographical and ecological considerations.4. Legal environment: It is well known that every country has a number of legal regulations to ensure that the interests of business organizations do not run counter to national interests. Right from the stage of incorporation of organizations, their listing in stock exchange, reprisal of customer complaints, payment of tax to government, manufacturing practices, human resources development to pricing of products and services, a number of legal regulations have to be fulfilled. For example, in USA and several western countries, consumer protection is very active, that even a medical practitioner is subjected to huge liabilities in limes of deficiency in services. In India and other countries, very rigorous legal provisions arc in place to prevent hunting of rare species, that BSPATIL
    • any organization, which manufactures products based on such species, have lo get legal sanctions. In case of failure to honor cheques issued, organizations are now a days made to pay hefty compensations. Hence, the deterrence in terms of legal provisions has become the order of the day. All organizations have to first of all address these provisions become coming in to steam.5. Technological environment: This is a very significant external factor determining the destiny of business organizations. Supported by computerize operations, modem business organizations have succeeded in analyzing customers, minimizing the defects in products, ensuring service at the right time and place, etc. While communications use to take unduly long time in those days, business communications are instantaneous these days, thanks to modem satellite technology. Modern organizations have recognized that research and development alone can ensure organizational growth and stability. They have become more and more pro-active and remain as change agents of the economy. Governments have also become more technology conscious that right from police controls to registration of title deeds, computerizations has been adopted. Customer servicing through call centers is the latest necessity of organizations. Manufacturing activities have become more and more technically sophisticated. Therefore business environment has become highly dynamic.6. Social environment: Social environment today has brought compulsions on business organizations to adhere to certain business ethics and morals. Social responsibility of business is an important force that modern business organizations cannot wriggle out of their duties and responsibilities towards the society. For example, every leather manufacturing or process unit is made BSPATIL
    • to install pollution prevention system. Similarly, the expectations of various interests in the society have undergone a sea of change. The shareholders, promoters and owners expect a reasonable return on their investments. The workers expect security of service, terminal benefits, accident relief and various other compensations from the organizations. Government expects the business units to pay tax regularly and participate in social improvement. The distributors and agents expect the organizations to ensure smooth delivery process and demand more commission and compensation. Suppliers expect the organizations to give them continuous business and prompt payment of bills. Therefore each social group has a specific interest, the combination of all these, exerts enormous pressure on the business unit. A business unit which succeeds in meeting the interests of all these groups remains successful and grows.7. Educational and cultural environment: Educational environment in a country determines the quality of population. A country with very high illiterate population would always experience political and economic instability. Similarly, lack of education may also give scope for the existence of superstitious beliefs, fatalistic attitude, etc. Peoples choice of goods and services would be more governed, by their religious faiths and beliefs. For instance, in the colonial days, the Indian population was a victim of the Britishers divide and rule tactics. The economic development of a country completely depends on the literacy level which alone can pave the way for improvement in science and technology, modernization, industrialization, etc. In such a country, the business opportunities are plenty. BSPATIL
    • Cultural environment refers to the values, norms, customs, ethics, goals and other accepted behaviour pattern of people in a country. In olden days, religion was the basis of all activities in a society. The religious leaders and institutions determined what business should do and what people must consume. In India, the existence of caste system has done more damage than any good. Caste based politics has become the order of the day. Under the pretext of working for backward and downtrodden people, several persons have amassed fortune. This is worsened by political support and policies. A modern organization does not have the liberty to recruit people on merit but it has to follow strictly die reservation policy of the government. Another serious aspect of the cultural environment is the attitude and behaviour of the people in urban and rural areas. The urban - rural divide has created enormous problems for administrators and specifically business organizations prefer urban educated person to persons from rural areas.8. Political environment: Political stability is one important factor winch determines the business growth or downfall. A country with relative political stability would witness inflow of foreign capital and collaboration. By political stability we mean that the policies of government remaining consistent. As the business decisions arc based on government policies, frequent changes in these policies would force business organizations to change their policies too which, makes functioning very difficult. Sometimes, when the policies determined by a party in power are reversed by the succeeding party forming the government, there would be far reaching changes in business environment For example, India was following a policy of protectionism till late" 1908s. Hence, the industrial development and economic development could not take place at a rapid rate. In the absence of competition, the business BSPATIL
    • organizations, made people to accept inferior quality goods and services. Once, the liberalization policy is adopted, the scene has completely changed. Today, no business can survive unless it provides quality goods or services on par with the multinational corporations. Another aspect of political environment is the political ideology with which a party is wedded to, would make the government tow the lines of countries with similar ideologies. Until the disintegration of USSR, India was simply following USSRs lines, but after the disintegration, India has to literally fend for itself. With the pressures mounted by the Western countries, India had to accept various trade and monetary policies. This has brought about a complete change in business environment.NEED TO SCAN ENVIRONMENTHaving discussed very briefly the features of each one of the constituentsof business environment, let us discuss why the environment should beanalyzed by the business organizations.It is well known that business enterprises cannot remain independent ofthe society and the institutions. So whatever decision they take as to be intune with the requirements of society and the dictums of the institutions.A business organization has to continuously monitor the environment soas to identify the business opportunities and threats. By exploring itsstrengths and minimizing its weaknesses, if the organizations cancapitalize these opportunities and effectively thwart the threats, then itwould be able to grow. Let us elaborate this with an example.Suppose an organization wants to introduce a new consumer durableproduct in the market. Then it would study whether there would bedemand for this product and the product would be accepted by the BSPATIL
    • society. At the outset, the organization would examine whether theproduct would suit the culture in the society. Suppose the product is useand throw type. Then people would certainly be influenced by thisfeature of the product while evaluating the price of the product. In India,such a product would never be accepted as the culture here is to lengthenthe life of every product by repairing it. Similarly suppose the productrequires some critical component from abroad. Then unless thegovernment policy is favourable the component has to be imported at avery high cost, which in turn would drive the price up. .Suppose theproduct is only one of its types, the organization would then emerge as amonopoly supplying the product. This may not be tolerated by thegovernment. Suppose the manufacturing of the product involvesadvanced technology, then the type of human resources required wouldbe well educated and trained. Obviously this will rule out the jobopportunities for persons educated in rural areas. Further, if themanufacturing process involves scope for pollution, then the organizationhas to address it in relation to the provisions of the pollution controlnorms. Hence, in every decision of the organization, the externalenvironment has an important role to play. Any future plans of expansionand forecasting of demand will depend upon the changes in the businessenvironment. These changes may include both the current and expectedchanges. Unless these changes are also foreseen, decisions taken wouldturn out to be suicidal. In the case of organizations which have beenpro-active, the changes in the environment do not affect them much. Butthose which fail to understand from their own experience or that of theother changes would remain challenges for ever.Among the various constituents of business environment discussedabove briefly, we will focus on the following constituents and discussthem in greater detail. The constituents now elaborated are: Economicenvironment, political environment and cultural environment. BSPATIL
    • 1. Economic environmentThe economic environment is composed of various set of economicpolicies, economic system, strategy of economic growth and development,resource endowment, size of market and status of infrastructural facilitiesin a country. All these affect the business environment one way or theother. To understand the impact of these on business environment, let usdiscuss each one of these components in detail.Economic policies: Economic policies include fiscal policy, monetarypolicy, foreign trade policy, licensing policy, technology policy, pricepolicy, etc. These policies lay the framework within which everyorganization has to function.A] By fiscal policy we mean, the governments tax efforts, publicexpenditure and public borrowing. Through these the government caneffectively encourage consumption, investment and savings habits andalso restrict them. For example, suppose there is inflation in a country.Inflation implies that the people have high purchasing power and so theydemand goods. To curb this, the government may raise the personal taxand also the corporate tax. Consequently, individuals will be left withlesser disposable income and to minimize tax, they may start savingthrough various tax -saving schemes. As far as the corporate areconcerned, they have to part with more by way of tax to the governmentand this would bring down the rate of profit and dividend declared. As aresult the corporate would resort to upward price revision, which mightlead to further fall in demand for their products and services. Duringdeflationary period, the government would reduce the tax so as toencourage more spending and investment. Even in tax policy, thegovernment can be selective in taxing more of rich and exempting the BSPATIL
    • poor completely. This would facilitate income re-distribution and improvethe conditions of poor.Similarly, by altering its expenditure on various public projects, thegovernment would be able to influence the prevailing economic condition.Government expenditures are incurred on infrastructural development,public utility services like hospitals, new industrial units of very huge size,etc. For instance, suppose there is inflation in a country. The governmentwould reduce its level of expenditure, thereby reducing the income of thepeople. With lesser income, the demand would, go down and so the price.At the time of deflation, the government would expand its publicexpenditure by investing in a number of public projects, so that there willbe income generation find demand generation which will revive theeconomy. BSPATIL
    • Public borrowing is one more instrument in the hands of the governmentto influence the economic condition in a country. This involvesgovernment issuing bonds and encouraging common public and otherinstitutions to buy them. By this, the government would be able to bringdown the level of purchasing power in the economy and control theinflation. During deflation, the government would redeem the bonds andso with more purchasing power, the economy would be able to revive.B] Monetary policy refers to the set of policies determined andimplemented by the central bank of a country to control the economiccondition. The central bank of a country has the basic responsibility tomaintain the price level and money supply in a country. This is possibleonly when the central bank has certain instruments. These instrumentsavailable with the central bank to control the money supply and pricelevel are called monetary policy instruments. They are called Creditcontrol policy. Credit controls can be of two types: Quantitative creditcontrols and Qualitative credit controls. The former aims at limiting themoney supply, while the latter is used to channelize the available credit inthe country.Quantitative credit control policy includes three tools: bank rate, openmarket operations and variable reserve ratio. Bank rate refers to the rateat which the central bank would re-discount the eligible bills alreadydiscounted by the commercial- banks. By revising the bank rateupwards, the central bank would be able to make the discounting bybusiness organizations with commercial banks costly. This woulddiscourage discounting and thereby money supply in the economy, wouldcome down. Alternatively, by lowering the bank rate, the central bankmakes credit available at a cheaper rate, and so the businessorganizations would go for a larger discounting of eligible bills with BSPATIL
    • commercial banks. This liberal credit policy would have expansionaryeffects on the economy. Similarly, using open market operations, thecentral bank would buy or sell the securities in the open market andthrough that increase or contract money supply in the economy. Forexample, suppose there is inflation in an economy. To bring down themoney supply, the central bank would sell the securities it has which willbe bought by the commercial banks and other institutions. In thisprocess the excess money with these institutions would be siphoned off,there by they have to restrict credit. Alternatively when there is deflation,the central bank would buy the securities and the money equivalenttransferred to the banking system would facilitate adoption of liberalcredit. Variable reserve ratio refers to the increase or decrease in thequantum of Statutory liquidity ratio and the Cash reserve ratio which thecommercial banks have to maintain as a proportion of their total deposits.By increasing the ratios, the commercial banks would be left with lesservolume of funds and so they can lend less. By reducing the ratio, thecommercial banks would be left with more funds with which they canmake lending liberal. All these policies would have a direct impact on thebusiness organizations and their operations.Through qualitative credit controls, the central bank can : regulateconsumer credit, alter the margin requirements, resort to persuasiveefforts, take direct action on erring commercial banks, etc. Through thesepolicies, the central bank would be able to regulate and direct theavailable credit to the priority sector and discourage credit for lesspriority or no priority sector. Hence, business organizations, which fallunder priority sector, would be able to expand their business with cheapfunds and assistanceC] Foreign trade policy: The foreign trade policy determines the scopefor trade between countries. It would directly affect the business BSPATIL
    • prospects of the business organizations. A liberal policy would extendthe scope for exports and imports, while a restrictive policy would narrowthe scope. Similarly, if protectionism is favored, then the businessorganizations will have lesser market threats from multinationalcorporations. Alternatively if liberalization is the policy, then everydomestic business organization has to tune itself to every type ofchallenge posed by the business giants from abroad. Foreign trade policyalso includes the exchange rate policy and exchange controls andcustoms duties. All these are fundamental to the growth of a businessorganization. For example, suppose there is full" convertibility, then thebusiness organizations would be able to export and import and makepayments with lesser restrictions. On the other hand, if there is onlypartial convertibility, the scope for trade is correspondingly less and thebusiness organizations have to go through a sickening process of gettinglicenses for export or import and route all their payments through properchannel. Customs duties also play a vital role in determining the volumeof external trade. A rise in customs duties would discourage domesticdemand because the price of imported goods and services would go upfind remain at a high level compared to the domestically produced goodsand services, A reduction in customs duties would encourage imports andbe favourable to the domestic manufacturers.Government frequently changes the foreign trade policy, keeping in viewthe requirements of the country and the economic condition. To tide overthe Glance of payments difficulties, government may resort to variouspolicy measures like devaluation, exchange clearing agreements, tariffsand duties, exchange control regulations, etc. These tools would besuitably modified to achieve the desired goals. For example, to encourageexports and discourage imports, the government may devalue thecurrency, by which the imports of Indian goods abroad become cheaperand the imports of foreign goods in India become costlier. Hence the BSPATIL
    • business organizations have to continuously monitor the changes in thetrade policies so as to position themselves accordingly.D] Licensing policy: In the pre-liberalization days, India adoptedlicensing policy in regulate the growth of industries in India. Since thedays of independence, India adopted licensing policy, which in effectmade the government control the growth of independence in accordancewith the national priorities. For example, in India, till 1985, the industriesin India were classified into four categories: industries completely ownedby public sector, industries where both public and private sectorparticipation was permitted, small scale industries and collage industries.Except the first category in all the other categories, private sectorpresence was permitted through licensing. This was resulted in severaladverse effects, which were all explained in detail by the Dutt committeereport. But till 1985, liberalization was never accepted as a part of growthstrategy. But after 1985, the situation slowly changed that by 1991 Indiaadopted a policy of liberalization. Consequently, the business scope andprospects of the Indian business organization changed since 1991. Ashas been already pointed out they were exposed to market competitionand threats after liberalization. Performance has become a necessity forsurvival. By about the end of 20th century, the government also proceededto disinvest several public sector units thereby opening up the challengesall the more for Indian industries. Therefore, the licensing policy and itsdirection have a lot of impact on the business organizations.E] Technology policy: One of the most important economic policies isthe technology policy. Improvement in technology is a condition forgrowth and survival in any organization. From a stage of man-dependentenvironment, the business organizations are all fast becomingmachine-dependent [computer dependent]. Right from the stage ofenquiries down up to planning the logistics, computers are widely used.Only from the mid -1990s the government started adopting a favourable BSPATIL
    • technology policy. Apart from permitting free imports of computers andcomponents as well as telecommunication equipments, the governmenthas devised a number of schemes like Software Technology Park, to givea Phillip to the technology in India. Computerization has come to stay intelecommunication, railways, roadways, postal services, educationalservices, medical services, engineering, financial services, etc. This liberaltechnology policy has resulted in the growth of new industrial segment,viz., and information technology. Millions of youngsters get trained andare gainfully employed. Indian software engineers are considered as thebest in the world and several of the multinational corporations depend onIndian supply of trained software and hardware professionals. Thebusiness environment has completely transformed over the past five tosix years that unless organizations also accordingly change themselves,their survival will become a serious question.F] Price policy: This refers to the controls that government has on theprice in a country. This is necessary, because, unless price is controlled,there is bound to be inflation and then economic instability. Further inIndian context, nearly 35% of the population is living below the povertyline. They do not have any permanent employment. Especially the ruralpoverty is very serious. To overcome this situation, the governmentresorts to price control policy. All the essential and basic necessary goodsare subjected to price control. While the poor and downtrodden areprovided the essential goods at a controlled and subsidized rate throughpublic distribution, the others are expected to meet their requirementsthrough open market. Through demand and supply management, thegovernment makes all the efforts to keep the prices under--control. Forinstance, by building up buffer stocks, the government overcomes theshortage of food commodities during adverse period. Similarly, specificconcessions are given to industrial units located in backward regions andrural areas. This helps them to run on sound basis. As regards the BSPATIL
    • manufactured products, the government adopts the administered pricemechanism to control the prices. For example, the cooking gas issupplied to the public at one price, to the commercial establishments at adifferent price. This helps to minimize the strain of the population usingLPG as cooking media. Similarly till April, 2002, petrol and diesel weresubjected to administered price controls. Sugar, cement, etc., are alsosubjected to administered price. Hence, through price policy thegovernment protects the interests of the people and this policy has adirect impact on the functioning of the business organization in ourcountry.2. Political environmentIt is well known that the business environment in a country is very muchinterlinked with the political environment. The political environmentsimply means the political ideology which is adopted by the government.In a democratic country like India, this political ideology changes as andwhen there is a change in the party ruling the country at the Centre andthe State level. A number of examples could be cited to prove how thepolitical ideology has influenced the business environment of the country.Before independence, under the guidance of Mahatma Gandhi, India waswedded to the policy of ‘Swadeshi’. That is, Gandhi advocated the use ofonly Indian made goods and to completely abstain from imported goods,specifically British goods. As a result immediately after independence,Indian government followed a restrictive, trade policy imposing veryheavy customs duty on imported goods. This was thought that such apolicy would help to achieve both the political commitment as well asprotection of domestic producers from the invasion offoreign-manufacture-s and traders. A deeper look into such a policywould reveal that India never wanted to entertain a policy of allowingforeign trading activities on Indian soil as this would lead to colonization. BSPATIL
    • After all the British East India Company entered the Indian shores underthe pretext of trading with India in 1600 AD and the country had to pay aheavy price for the next 350 years being a colony. Hence, a restrictivetrade policy was very much favored by every one and in such anenvironment the business environment was such the domestic producerscould operate under the umbrella protection of the government.This is also evident from the Industrial policy of the government in 1948,which clearly posed a threat to foreign interests in India. At the sametime, the Indian government was very much influenced by the Russiantype of planning. Being a declared democratic socialist country, Indiaadopted planning as the strategy of economic development. The First FiveYear plan was formulated and implemented without relying much onindustrial development, when at the end of the I Plan it was realized thatgrowth is impossible without industrial development, a shift focus wasnecessitated that the government gave emphasis on industrialdevelopment. But here again, the government approached the issue withcaution. It felt that a controlled and guided industrial developmentwould yield better results than a free unrestricted industrial development.The consequence was the Licensing policy. Though imports werepermitted, industrial development through collaborative efforts withentrepreneurs abroad was subjected to a very critical scrutiny. When theLicensing policy led only to concentration of economic power in thehands of a few private sector units like TATA, Birla, and others, thegovernment brought in the Monopolies Restrictive Trade PracticesAct, in 1970. This has on the one hand put a check on growth ofmonopolies in India, on the other hand the industrial development wasnot taking place at a desired pace. The seeds for liberalization weresown in 1985, when the government felt that India could achievemiraculous growth through this liberalization course, it proceeded in thatdirection. This culminated in the introduction of Liberalization policy in BSPATIL
    • l99l. This resulted in a peculiar scenario in –which ‘democratic socialismwith capitalistic ideologies’ existed. Throughout the four decades afterindependence, Indias policies were more governed by the political factorsrather than economic necessities or compulsions. Hence, at the beginningIndian government adopted a purely socialistic pattern of developmentstrategy while by 1990’s development by subscribing to capitalisticpattern has become the reality. This shift has a great impact on thebusiness environment that domestic business today has to realign itselfto survive and grow, in a competitive atmosphere.Having discussed the effect of political environment on businessenvironment let us examine how far the economic system is an importantfactor influencing business environment. Economic system refers to theorganizations and institutions created for the purpose of satisfying thewants of human beings. In a country, available resources have to beutilized to manufacture and distribute goods and services, which wouldmeet the needs of the people so that they are satisfied. Theseinstitutions and organizations function with their own rules andregulations. The economic system has certain broad characteristic.1. The economic system always functions with scarcity of resources. How the system effectively and efficiently uses the resources will determine the extent to which the needs of the people are met.2. An economic system comprises people. That is, a society of human beings alone can constitute economic system.3. A set of institutions are created and used for the purpose of smooth functioning of an economic system. For example, banks, money, technology, government, price mechanism, planning etc., are all institutions through which the systems operate. BSPATIL
    • 4. The basic objective with which an economic system functions is to satisfy the wants of the people. Unless there is want for a commodity or service, nothing can be produced. Hence, the economic system allocates the resources in such a way that the wants of the people are satisfied.5. On the basis of the above characteristics of an economic system, it should be clear that the economic system is very dynamic in nature. That is, the economic system undergoes changes with every change in the institutions, though the rate of change would differ from institution to institution.The economic system functions to answer three vital questions:a] what to produceb]how to produce andc] for whom to produce.Answering these questions assumes enormous significance as that woulddetermine every activity within a country.The first question What to produce depends on what is wanted. Theeconomic system would throw signals through which the requirements ofthe people could be understood. But not all wants could be satisfied. Thisis because; a country may not be gifted with all the necessary resourcesto produce all the goods. Hence, depending upon the resourceendowment a country would decide what it could produce. Then there is aproblem of prioritizing the available resources among the goods to beproduced. Resources should not be used for the production ofunwarranted goods. The production of goods, which are harmful tohuman beings, like narcotic drugs, should be prevented. Hence, BSPATIL
    • considering the availability of resources, the economic system should optto produce only goods that would satisfy the wants of human beings. Inthis context it is also necessary to weigh the individual requirements andthe national requirements for goods. The latter should be givenpreference over the former.The second question ‘How to produce’ addresses basically, issuesrelating to selection of right strategy, technology and investment. Forexample, a country like India, with very huge population should notprefer capital -intensive technology, as that would lead to moreunemployment of human resources. Similarly, while selecting thetechnology, a country should weigh a number of considerations likerelevance of technology, cost of technology, support in case of failures,consequences of the technology used, etc. Another vital aspect is theinvestment that a country has to make while selecting the strategy andthe technology. A very important question is whether the available fundsshould be invested in sophisticated research and development or meetingthe basic needs of the people. Hence, the second question wouldultimately determine the efficiency with the available resources areutilized.‘For whom to produce’ implies that based on the resource utilization, thecountry as a whole should benefit and not a few segments. Hence, havingproduced the goods and services, how they could be equitably distributedis an important aspect. The distribution of national product would differfrom country to country depending upon the economic system in vogue.It has been already pointed out that the way in which the above threequestions are answered depends on the economic system which functionsin a country. To understand how these answers differ among theeconomic systems, we should understand the different types of economic BSPATIL
    • systems. In the next section, the details of different types of economicsystems are discussed.Types of Economic systemEconomic systems may broadly be classified into three categories:Capitalism, Socialism and Mixed economy. A number of other types alsoemerged but all of them came close to any one of the above three typesof systems. Such systems include: communism and Marxism Let us nowdiscuss the features, strengths and weaknesses of each one of thesesystems.1. CapitalismCapitalism is an economic system based on the principle of freeenterprise. Individual ownership of resources is an important feature.With control and command over resources, individuals can conduct anytype of business. The object in such a system is to maximize privategains. Any type of enterprise or production of any commodity or serviceis permitted, so long it is wanted by the society. In such a system themarket forces determine the resource allocation and price. That is, thedemand and supply forces together determine what to produce, how toproduce and for whom to produce. Price mechanism is the nucleus of thecapitalistic society. The price mechanism clearly reflects the wants of thepeople. Once this is known, the producers would allocate the resourcesto manufacture and sell the products in great demand. While doing so,there is no control or regulation over production. In other words,oligopoly environment prevails. But each producer differentiates hisproduct that he would be able to stay in the market. Technology andinnovation ensure the stability and growth of organizations. As a resultonly efficient organization would survive. The resources would be fullyutilized. The system is so flexible that it can adjust itself for anyeconomic condition. The workers get equal opportunities and those with BSPATIL
    • skills would be able to command better wages and salaries. On the wholecapitalism offers scope for growth of efficient individuals andorganizations.But capitalism has a number of weaknesses. The important ones arediscussed below.1. Economic inequality is invariably found in capitalistic societies. Individuals and organizations with ownership of resources and hold over the market for (heir product or service, would be able to maximize their gains. Those who have no such property would remain poor and become poorer. So it is said that under capitalism, rich becomes richer and poor becomes poorer. The inequality in wealth and income widens over a period under capitalism.2. The scope for the emergence of monopolies in capitalistic societies is very high. Organizations by virtue of their economic power would be able to easily eliminate rivals and competitors in the market. There is also possibility of such monopolies influencing the government in policy making and intervention.3. Though it is said that capitalism would always lead to ideal allocation of resources and fuller utilization of resources, in reality the experience is that resources are held by individuals and organizations and under utilization is the result. Sometimes, products which are not really national priority are produced and forced on the public, through advertisements and sales promotion techniques.4. Though it is expected that in capitalistic societies the output would increase to optimal level, in. practice this is never found. Producers BSPATIL
    • always restrict output to maintain a high price and also maximize profit. So excess capacity would exist in many industries.5. In a capitalistic society the divide between the haves and have-nots widen that over a period. Existence of poverty among the sophisticated sections of people is also seen. This results in built up of frustration in the society. Over a period this might lead to revolution and social upheaval.2. Socialism Socialism refers to an economic system ir which the following features predominant: The resources are owned by the State or state owned institutions. Production takes place in the interest of the society and not for maximizing profits of individuals or organizations. Government decides the type of productive efforts to be permitted. In other words, in a socialist country, government can adopt licensing system and other types of regulations to prevent the emergence of monopolist and exploitative tendencies. Maximization of Community welfare is the objective than profit maximization. Another very important feature is the government ensures equitable distribution of national product. Public distribution system assumes enormous significance in such an economic system. On the whole, the socialistic society differs from capitalist society in every sense. In the broad spectrum of economic systems, socialism and capitalism occupy two extremes. In the world today, pure capitalistic society is not seen in any country. Even in USA, government interference in various economic activities is found. For example, in the field of national defense, atomic energy, space technology, social security, etc., the presence of government is BSPATIL
    • almost complete. Government also retains the right to interfere inthe market system, whenever there is deliberate and intentionalattempt to monopolize the resource ownership or the market.Similarly, in the erstwhile Soviet Union, socialistic principles werefollowed. But even here, there were instances of private ownershipof property, enterprises, etc., were reported. • That is why it is verydifficult to come across pure capitalistic or socialistic societies.The merits of socialism includes: 1. Collective ownership eliminateemergence and existence of monopolies. 2, Resources utilization isplanned and achieved in the interest of the society. 3. Governmentwith its control over the resources is able to use resources fullyutilized and avoid wastage and production of unnecessary goods. 4.As equality in distribution is the fundamental feature of socialism,there is no scope for widening inequalities rind the governmenttakes steps to narrow the gap between the rich and the poorthrough various measures.However, socialistic states suffer from the following limitations: 1.Excessive dependence on government decisions often result indelay in offering any public service. 2. Bureaucratic controlbecomes an integral part of the socialistic principles. As a resultthe benefits and its direction of flow is determined by thebureaucrats. 3. Government by undertaking excessive responsibilityon its shoulders, abets inefficiency and corruption in the society. 4.No incentive and motivation for individual excellence orachievements is possible in such a society and so innovations andinventions do not really lake place in large scale in such a society. 5.With governmental presence in every walk of life, efficiency andproductivity suffer. 6. Lack of support for individual liberty killsinitiative. BSPATIL
    • 3. Mixed economyEvolution of the concept of Mixed economy:There was no reference to the mixed economic system in Economicliterature in the past. Economists were mainly familiar and advocated theLaissez faire or free enterprise system, as several countries could developfast following the free enterprise system, in which there was no or littlegovernment intervention. The entire economic system operated with theprice mechanism at its center point. The producers produced what theconsumers wanted and this provided very little scope for the governmentto intervene in the system. The Classical economists and their ardentsupporters believed that the invisible hand will direct the economy andwith private initiative and enterprise, every country should be able torecord a faster growth as proved in the case of UK, USA, Europe, Australia,and other countries.But over a period under the leadership of Karl Marx, a new economicsystem was developed called socialism, in which there is no scope for anyprivate enterprise as everything owned and controlled by the government.The government decided the type of developmental activities and merequirements of the society and used the available resources in theprovision of these requirements. Several countries like USSR, CommunistChina, Vietnam, Cuba and others preferred this socialist system in whichgovernment is made the custodian of the society. The main reason forDie emergence of this new economic system was the failure of capitalismduring the 1929 depression to revive every economy from depression.Keynes himself thought that capitalism without some of its evils couldcertainly help economic recovery. Hence, a time came when economistsfelt that cent per cent free enterprise or cent per cent governmentgoverned economic development cannot work satisfactorily. A BSPATIL
    • compromise between these extremes was thought of as an idealeconomic system. The new system called mixed economic systemcontained the merits of both the capitalism and socialism and appearedto be full of promise. This mixed economic system is adopted by India asindicated by the First Industrial Policy Resolution 1948.Characteristics of mixed economy:i. Co-existence of public and private sectors:In a mixed economy, one will find the existence of both the private andpublic sectors. In such a system, the government will undertake theresponsibility to build and develop certain sector activities and leave theother activities for the private initiative. In India, the governmentannounced the adoption of the mixed economy system through its 1948Industrial Policy Resolution. The government clearly earmarked theindustries to be completely under the state control, the industries whichare to owned and controlled by the state as well as the private sector andindustries which are completely left for the private sector. In this way theResolution provided for the simultaneous existence of both private andpublic sectors.ii. State participation in economic development:This is the second feature of mixed economy, according, to which thestate reserves its right to design and decide the type of development tobe achieved. In such a set up, the government strives to promote thewelfare of the country by ensuring social order, social justice andestablishing all the necessary institutions which are required to achievethe desired pattern of growth and development.iii. Distribution of ownership and control of resources: BSPATIL
    • This is the next feature of mixed economy. In this system, thegovernment itself enters the field of production so that the availableresources are fully utilized. This will also help to avoid concentration ofwealth in the hands of a few and enable distribution of ownership andcontrol of productive activities. As a result there is no scope forexploitation of any group, say labor, by any other group. In this way theweaker section of the community is well protected and taken care of.Only the mixed economy will enable the government to attain theobjectives of the Directive Principles of the Indian Constitution.iv. Directing the investment in socially desirable projects and channels:Mixed economy facilitates the flow of investment into channels whichconfers the society with several benefits. For example, the Indiangovernment has invested huge amount in several projects to develop theinfrastructural facilities. This forms the basis for the development ofother sectors. The investment in these infrastructural areas will not comeforth from the private sector as the return is nil. Hence, the governmentin a mixed economic set up provides the thrust by developing thenecessary background and strength which will encourage the privatesector to invest in profitable opportunities. In this way the governmentplays a key role in a mixed economic system.v. Scope for achieving balanced economic development:I Left to itself, the private sector would establish its enterprises only inurban or sub-urban areas and that too in already well developed states.This will mean other areas will have no scope for development. But in amixed economy, the government will itself undertake the initiative to set BSPATIL
    • up industries in backward areas and encourage the private initiative to setup industries in such areas by offering several concessions andexemptions. In the absence of nixed economy, several states in Indiawould have remained industrially Ultimate control and regulation in the hands of government:This feature of mixed economy clearly spells out that in every activityaffecting the economy, the government will be the ultimate authority.Though the private sector is assigned its role to perform, the governmentwill still monitor and control the way in which the private initiative isperforming its role. Infact, according to the 1948 Industrial PolicyResolution, the government made it clear that the industries alreadyestablished by the private sector belonging to that category in which newindustries will be established by the government alone, the governmentwould undertake the review of the working of these industries in privatesector after a period of ten years and if found not satisfactory, they wouldbe taken over by the government. Though this was criticized as a threatof nationalization, yet through such a provision the governmentunderlines its authority. Similarly in the banking and insurance sectors,the government nationalized banks emphasizing its powers to controland regulate any sector.vii. Co-operation in the field of economic development:According to this feature of mixed economy, the government formulatesthe design for development and invites the private sector to participate inthe development. It clearly spells out the guidelines which would governsuch co¬operative efforts and the limits of freedom granted to theprivate sector. In Indian case, the government prepares the plans fordevelopment and spells out the areas left for the private initiative and the BSPATIL
    • areas that will be under state control. Hence, there is scope for thedevelopment of private sector, though only according to the designdeveloped by the government.Planning process under mixed economy:As has been already stated, in a mixed economy there is a need toachieve a compromise between self-interest and social interest This is avery difficult task as the government has to carefully foresee the type ofdevelopment it wants to achieve and closely monitor the activities of theprivate sector to ensure that the social interest is never at stake.Obviously, planning is a very difficult exercise in a mixed economy set up.The success of planning will depend upon; i) the extent to which thepublic sector is able to rise to achieve the social gains aimed for, ii) thesuccess of the state in guiding and regulating the private sector activitiestowards social goals and iii) the extent lo which (lie state is able (o checkthe distortions taking place in investment by private sector affecting (heinterest of the public sector. Hence in the planning process the state hastaken up the following steps to ensure the accomplishment of theobjectives of the mixed economy,a. By holding complete ownership of defense and heavy industries, the government has provided an industrial base with which the private sector is expected to plan its investment activities.b. The state also has made huge investments in economic infrastructures so as to help the extension of market for goods, raising the productivity in agricultural and industrial sectors, encouragement of further productive investmentc. The government has complete control of the financial institutions including banks so that it can ensure that the banks and other institutions play a key role in the development activities of the BSPATIL
    • state. The government could also realize the expected gains by encouraging the priority activities in every sector. The economic institutions are made to support the weaker sections of the community.d. Through powerful legislations like MRTP Act, FERA, etc., the government could ensure that there is no scope for exploitation of the common people by the private enterprise. Such a legal framework lays down the rules of the game and ensures fair play in a mixed economic set up.e. As a method of protecting the weaker and downtrodden people, the government has policies like rationing, price controls, etc. Such regulations are built in the planning mechanism itself, so that the private sector cannot exploit the community.f. Towards the improvement of welfare in the economy, the state has undertaken several specific programs aimed at specific target groups. For example schemes aimed at the backward and schedule tribe providing them reservation in educational, employment and other opportunities, rural oriented schemes for the rural folks, health for all schemes, provision of free educational and medical facilities up to a certain level, etc. All these schemes aim at improving the social welfare. In all these activities the private sector is also welcome to play its role.g. The government makes effective use of the tools of fiscal policy viz. taxation and public expenditure, so as to achieve the objectives of economic planning. BSPATIL
    • Distortions in the planning process :We have explained above that the fundamental objective of the mixedeconomy is to subordinate the self-interest for the national-interestwhether this has been achieved in Indian situation is a moot question. Inspite of various types of regulations and controls, the fruits of mixedeconomy have not appeared to have reached the common men. Even afterfour decades after the adoption of mixed economy principle, we comeacross glaring distortions which go to prove that mixed economy inpractice has not been very effective. This is mainly because of theinfluence exercised by the private enterprise through political influence,corruptive activities, dishonest bureaucrats, powerful national andinternational lobbying, etc. The extent of distortions could be understoodif we study the following points: 1. One of the basic objectives of Indian planning is to eradicate poverty, but five decades after the adoption of planning strategy, the proportion of population below the poverty line has not significantly changed. 2. The planning mechanism has failed to check the rise in price level. Inflation has come to stay in India with no policy being effective. When double digit inflation is controlled and results in single digit inflation, the country boasts of having achieved something very great. 3. The emergence and existence of black money is yet another yardstick to prove the failure of the mixed economy. The high level of taxation has only resulted in effective tax evasion and tax avoidance. As a result the distance between the rich and the poor remains wide. BSPATIL
    • 4. Till date there has been no effective method to prevent the concentration of economic power in the hands of a few. The rich becomes richer and the poor, the poorer. 5. In spite of five decades of planning, unemployment is very much on the increase and the backlog in every plan is assuming dangerous proportions. This is mainly because of the failure to control fee growth of population and the adoption of capital intensive production techniques. 6. The failure to achieve re-distribution of income is yet another glaring distortion. All the efforts to bridge the gap between the wages of rural and urban workers or increase the real wage of the working class has not succeeded.When we study the above points, it is clear, that mixed economy has notcarried us in the desired direction. This is mainly because of the inabilityof the government as it is frequently yielding to the pressure exerted bythe vested interests. Even the recent liberalization measure could beviewed from this angle. But a country cannot remain independent of theinternational pressures, especially when India is depending upon the IMFand EBRD, all its internal policies are indirectly governed by these lendingagencies: Whether this is right or wrong is a question that could beanswered only after we evaluate the gains of liberalization policy. But onthe whole, the expected benefits of mixed economy have not beenrealized as is clearly proved by the distortions discussed above.4. Marxism BSPATIL
    • Marxism is essentially socialism in different garb. The pure socialism isproved to be impractical and it made role of government the center point.Most of the government could not fit in this role effectively. Furthercapitalism with its explicit goals threatened the success of socialism. Itwas at this juncture that Karl Marx came up with his ideology, which ledto the evolution of Marxian socialism. Marx succeeded through his logicalreasoning that economics dominates every activity of a society. This leadsto class struggle. When one struggle is tackled another one crop up. Thecontinued onslaught of the capitalist on the society would result in thecreation of haves and have-nots. This division of the society would widenwith the continuance of capitalism, which ultimately will result in classstruggle. Marx explained through his theory of value that every productshould be valued in accordance with the value of labor contained in it. Butthe laborers are rewarded at a very much lesser rate than what theycreate. That is,, every laborer contribute more by way of his work toproduce the product but he is paid a very low wages. The difference is thegain realized by the capitalists. The capitalists would accumulate profitsthis way at the cost of worsening labor condition. Over a period the dividebetween the proprietary class and the labor class would widen that much,that there would be social upheaval. Karl Marx predicted class war andargued that unless the capitalist class realizes this, there would be severeimpact on production and economic condition of a country. Hisargument came true in the case of France that the French revolutionbroke out in 1789. There were similar problems in different parts of theglobe, like in erstwhile USSR [Scissors crisis], and China. China,especially remained a closed economy till early I990s. But in China, theMarxism led to the emergence of communism. This is discussed in detailbelow.Though Marxism held sway over a number of countries for some time, yetit has inherent defects. Firstly, Marxs view that all activities in all BSPATIL
    • countries are basically economic in nature is not true. Secondly, hisargument that class struggle continuously takes place in every countrydid not hold water. A number of other reasons of economic, social andcultural nature led to the struggle and not the way Marx predicted.Thirdly, the theory of surplus value could not be applied in practice inservice industry. Fourthly, Marx never took into the interference that agovernment could make in case of exploitation of society by thecapitalists.5. CommunismCommunism is Marxs prediction at the fall of capitalism. Marx arguedthat the widening inequalities in a society coupled with class struggleshould ultimately sound the death knell of capitalism. He is of the viewthat when capitalism falls, the communism will emerge in which, thelaborers will lead the country. The government will own all the resourcesand determine the needs of the society. It will also decide various otherissues of macro and micro importance. Government will turn out to bethe custodian of the society and in a pure communistic society; peoplewill lead a life where basic necessities are provided by the government.Unemployment will be very low as every one is occupied in someavocation or other.But the way in which communism was practiced in China created animpression that the government would be oppressive in its approach thatthe people will lead a life of slavery. One has to work to earn his bread.Military type of regimentation was enforced that common people weresubjected to absolute control and regulation by government. Theeconomy remained closed without any international relations, botheconomic and social. There were no two party systems that thenominated representatives of the Communist party attended to all the BSPATIL
    • governmental responsibilities. Market mechanism is completely absent insuch a system, as government determined everything on behalf of thecountry.As has been already pointed out depending upon the economic system,the business environment will change. In a capitalist system, theenvironment provides opportunities for every one who wants to maximizegains. In a socialist system, the government undertakes the responsibilityof providing everything to the citizens. In a Marxist economy, it isultimately the laborers who will hold the reins. In a Communist economy,it is the group of administrators who run the economy in the interest ofthe economy.4. Cultural environmentCulture refers to the behaviour, attitude, way of living, belief, faith, lawand custom of people in a country. It; could be immediately understoodthat these aspects would differ from country to country and also indifferent regions of the same country. It is always said mat the culturedetermines the peoples preferences, which directly determines thesuccess or failure of business. Hence, cultural, environment has a directimpact on business. A number of examples could be cited to prove this.In olden days, eating in hotels was considered unhygienic and majority ofthe people never used to accept food from outside. But today, even theorthodox/ people freely take their requirements from fast food restaurant.This change has come about, because of the changing culture in thesociety. For instance, with the presence of a large of multi nationalcorporations, the executives working in such organizations are very wellpaid that they rarely find time to spend on food. Such executives preferworking lunch rather than lunch. So provision of such working lunch BSPATIL
    • should not take time and if food is made available readily without anytime loss, then the executives would be able to save their time. Furtherwhen executives leave home very early, it is impossible for them toprepare some food and get for their lunch. So when their working lunchrequirement is met nearby by their work Spot in am ambient atmosphereit would be welcome. This has given a fillip to the growth of Fast foodrestaurants. In this manner, certain new cultural practices are transmittedto the society. Similarly, regarding the requirement of clothes, people areslowly switching on to ready made garments of different varieties anddesign. Sensing this, several international brands in ready garments areentering the market. This is how the business adapts itself to the culturalenvironment in a country. Business also conducts research continuouslyfor the purpose of innovating and inventing new products and uses forthe existing products. It is through this process that several consumerdurable products like wet grinder, mixer, washing machine, geysers, etc.,have been introduced in the market. Having created them, the businessimpress upon the people to use them as time saving devices.Hence, cultural environment can create business opportunities. Anyorganization which is able to sense the business opportunity andcapitalize it, would be able to succeed and grow. But it should be notedthat changes in culture do not affect every part of the country or peoplein the same way or at the same time. It is possible to observe certain^regions/people lag in adopting a particular culture. This is what isreferred to as ‘cultural lag.’ For example, even to day in rural areas,certain practices like untouchability is found, though it is a crime. Suchcultural lag is found mainly because of illiteracy, ignorance, conservatism,sentimental factors, political factors and vested interests. Business shouldbe aware of this while addressing the requirements of people in differentregions and nations. One more aspect of cultural is the change. Whilesome of the changes are accepted very fast the others are resisted. While BSPATIL
    • in some families divorce is accepted as a common feature, in others,divorce is viewed very seriously and extreme efforts are taken to pacifythe parties in conflict. Another important example is the womensemployment. While in olden days women were destined to domesticworks, today women entrepreneur lead several fields. Attitude towardswork is yet another area when Indian culture lags much behind theWestern and Japanese culture.In the light of the above discussion, the following case studies wouldmake sense and prove how business environment can either give a boostto an organization or cause a doom. BSPATIL
    • CASE STUDY: 1 WILLIAM HENRY GATES, III AND THE MICROSOFT MONEY MACHINESeveral years ago, when his fortune was a mere several hundred milliondollars, a weekly magazine labeled Bill Gates as ‘America’s richest nerd.In 1992, at age 36, he had passed Donald Trump, Ross Perot and othersto be listed as Americas wealthiest person by Forbes magazine; the valueof his holdings had grown to an estimated $ 6.3 billion. How did the freeenterprise system help him to attain such phenomenal wealth?After graduating from high school in Seattle in 1973, Gates went toHarvard. While there, he learned that the personal computer [PC] was inthe development stage. He dropped out of school and threw himselfcompletely into designing an operating system [the program thatcoordinates the hardware and software of the computer] for the PC. Hissystem, [S - DOS the Microsoft Disk Opening System] was so good thatIBM agreed to use it in their line of, personal computers. With IBM settingthe industry standard, other computer manufacturers quickly adopted MSDOS as well. Today it is estimated that more than 80 per cent of allpersonal computers in the world use this system: Gates firm, Microsoft,Inc., makes money on every computer sold with MS-DOS as the operatingsystem. In the 1992, the firm recorded $2.8 billion in revenue and $ 708million in net profit. It ranks third in size in the industry, behind IBM andHewlett - Packard. Gates personal holdings of some 90 million shares ofcommon stock represent about 33 per cent ownership share of thecompany.Microsoft also produces programs for word processing, spreadsheets,and a variety of other applications. One of Gates latest ventures has been BSPATIL
    • to purchase the electronic reproduction rights to thousands of art andphotographic works from museums and libraries around the world. Thesewill be used as a part of his plan for interactive home entertainmentsystems.With extremely hard work, a creative mind, and a willingness to take risks,Gates has demonstrated how the market rewards the successfulentrepreneur. He was able to produce what consumers wanted at a pricethey were willing to pay the result was that both and they are better off !This is the essence of free market economic system.From the above case study, it would be clear how a pro-active,imaginative and innovative entrepreneur can, carry the business with him.Though a school drop out. Gates has climbed the pinnacle of businessworld, merely by his ability to anticipate the changes, in the personalcomputer industry.Failure to read the business environment and initiate appropriate steps toprotect the business, can lead to a serious threat to existence itself. Thiswould-be clsar from the following case on Maruti Udyog of India andDoordarshan. Case study : 2 MARUTI UDYOG LTD.,When Indian car market was opened for new private players, MarutiUdyog limited, which had till then enjoyed an enviable position in themarket, suddenly faced severe market erosion. Even though Maruti is themarket leader and has the largest range of products, cheaper cars, goodservice network and better cost structures, it has been steadily losing its BSPATIL
    • market share for the last three years and the valuation of the companyhas halved in 4 years time from Rs. 80 bn in 1996 to Rs. 40 bn in 2000.A Marjti udyog rival: What MUL did to Premier Automobiles and Hindustanmotors is now being done lo it.Empire under siegeJagdish Khattar, MD MUL was a man in trouble. He was facing what wasthe biggest setback ever for the company. With all strategies backfiring,he seemed to be fighting a losing battle.Problems were aplenty - the Maruti 800 segment was facing demand -erosion, Zen and its arch-rival Santro were very close in terms of volumes,Esteem was losing ground, Baleno, Wagon R and Alto were yet to provethemselves, while Gypsy was snugly ensconced in its niche. [Gypsy wasnot generating many volumes needed for MUL]Despite the fact the fact that MUL had the biggest range of products, thecheapest cars in the market and a service network and cost structuresthat were better than anyone else, it had steadily lost market share -down from 82.62 percent in 1998 to 52 per cent in 2000. With theimpending disinvestments, [Governments. policy of disinvestments inPublic sector units includes MUEL also along with other profit makingPSUs.] MD was facing flak from the government as well. With marketshare declining, MUL’s valuation had also come down drastically. While itwas valued at Rs. 80 bn in 1996, by December, 2000, the figure hadtouched Rs. 40 bn.The building blocks BSPATIL
    • MUL was the largest car manufacturer in India with a market share of over52 per cent. It was a joint sector corporation set up by the government ofIndia and Suzuki Motor Corporation, Japan. MUL was incorporated in1981 to take over the assets of the erstwhile MUL set up in June 1971 andwound up by a High Court order in 1978. The assets of MUL were thenacquired buy the Government under MUL Acquisition and Transfer ofUndertakings Act, 1980. In 1982, the Government signed a joint ventureagreement with Suzuki of Japan. Suzukis stake increased from 26 to 40%in 1987, and to 50.25% in 1992. The company was a significant exporterwith exports to over 50 countries.The company manufactured passenger cars at its factor in Gurgaon,Haryana, with an installed capacity of 350,000 vehicles. The first product,Maruti 800 was launched in 1984, followed by the all-terrain vehicleGypsy in 1985. Over the years, MUL expanded its portfolio with thelaunch of the Maruti 1000 [1990]; the Zen and the Esteem [1993]; ZenDiesel [1998]p Baleno, Wagon R and the Alto [2000].MUL was known for its ‘value for money pricing’ strategy, which had beenmade possible due to the high levels of indigenization of its vehicles.While the Maruti 800, Zen, Esteem, and Omni were indigenized to theextent of over 90%, the Gypsy was indigenized to the extent of 82% andthe Alto to the extent of 76%. The company had a network of about 375vendors and had several joint ventures with some of them to source itsraw material requirements Its sales [comprising 112 dealers and salesoutlets in 86. locations] and service [comprising 1010 service workshopscovering 412 locations] network was one of the largest in the country.The Stumbling blocks BSPATIL
    • Till October 1998, MUL enjoyed a market share of 83.6% reacting to theincreasing number, of players, its-MD commented, “Obviously, ourmarket share will decline with the entry of new manufacturers and modelsin percentage terms, but not in actual volumes.”With cars ranging from Rs. 0.21 mn to s. 0.67 mn, problems associatedwith an ever-expanding product portfolio ‘constantly plagued MUL.Besides the declining market share, cannibalization was another issue thecompany could ill-afford to ignore. Forced to take stock of what wentwrong, MUL realized that it was dependent to a large extent on a singleproduct - the Maruti 800.The 800, along with the Omrii [build on the same platform accounted for75% of units sales in the car. market in 1998; it had always been thebreadwinner for MUL. One of the biggest success sagas in Indianautomobile history, the 800 started losing its sheen in the 1990’s asnewer players emerged in the market. The entry-level segment ceased tobe the center of action as easy car finance availability and the lure of newcars made the Rs. 0.3 inn to Rs. 0.4 mn segment the most attractive one.The fact that MUL made only minor changes in the models over the yearsled to the perception that MUL was selling old models.To tackle these problems, MUL adopted a two-pronged strategy. One, tointroduce new models; two, it decided to increase the number of variantsrapidly, offering a new model with every increase of Rs. 25000. MUL alsorevamped its engines and took the 800 to semi-urban and rural areas, tocompensate for the declining urban sales. The company was aiming tomove entry-level prices up without losing out on volumes by launchingcars in the segment just above the 800. As part of this, Baleno, Wagon Rand Alto were launched in quick succession. [Alto was launched in the BSPATIL
    • same league as the 800. Industry observers contended that Altos launchin the 800-cc category signaled the beginning of a gradual phasing outof the 800. However, MUL sources were quick to deny this- and-assertedthat the 800 would be retained:] However, despite favourable reviews,these cars did not go on to become the saviors of MUL was hoping for.The engine-revamp exercise for the 800 had pushed its price close thebase model of rival Daewoos Matiz, eroding the price advantage onwhich the model survived. As a final resort, MUL decided to play what itthought was its trump card - price reduction. The move was also justifiedon the gorunds that the company was following Product Pyramid Profitmodel. [The Product Pyramid incorporated the distinct customersegments and their varied purchase -behaviour in terms of style, colour,feature and price preferences. The base of the Pyramid was occupied bylow price, high volume product s. like the 800, where the margins wereslim. The apex of the Pyramid was occupied by high-price, low volumeproducts such as the Maruti Esteem VX. Although -profits wereconcentrated near the top, the base played a crucial role as it created anentry-barrier for competitors, and insulated the profitable area near thetop from competition. In the specific case of cars, the most commonmodel was the new product profits model. Thus, the profits associatedwith a car followed the "s" curve of its life cycle, and declined as theproduct neared the end of the maturity. phase. MULs decision to dropthe prices of all the versions of the Maruti 800 came at this stage].MUL reduced the prices of Maruti 800 and Zen by about Rs. 24000 and Rs.51000 respectively in December, 1998, This resulted in a drop of Rs. 3bn in net profit for the year 1998-99. The MD justified die price cuts,saying that MUL wanted to make up for the increase in the 800’s pricedue to higher sales tax figures for the period. The move was described as BSPATIL
    • an attempt to "redefine the price-value equation." MUL sources claimedthat they expected lower prices to bring an incremental growth of 25%over the next 12 months. However, despite the price cuts, by March 1999,the companys market share decreased to 54.57%In early 2000, MUL announced that it would pass on the cost of installingEuro-II compliant engines with Multi-point fuel Injection [MPFI] toits customers. There was a rush in the market for the 800. as manyfirst-time consumers who did not want to bear the hike, hastened theirpurchase. MUL had to increase the price of the 800 from. Rs. 0,18 mn toRs. 0.22 mn. Around the same time, MUL decided to meet thecompetition head-on by having a model or variant with every increase ofRs. 25000. The idea was to give the customer the widest choice possible.By mid-2000, the company offered 43 models in a market, which hadonly 127 models.In June 2000, sales of the 800 stood at 5296 cars compared to the 11000plus cars it had been selling per month for the previous few years. MULhad no option but to again slash prices of various models by Rs. 25000 toRs. 30000, to bring back the sales to normal levels. Other changesinitiated by the-company included a transformation in its customer -interface and a revamped branding strategy with the new cars [Wagon Rand Baleno] coming with the Suzuki prefix. The price cuts, however, onlyadded to the declining bottom line problem. MUL reported a loss of Rs.6792. II on every car sold between April and October 2000. MUL sources,however, attributed this to the fact that MUL had not passed on the costof up-gradation to meet the Euro;I and Euro II emission norms to itscustomers. The industry strikes back BSPATIL
    • The Indian car market of the early 21s1 century was a burgeoning one withover 127 models on the roads, and many more in the pipeline. Increasedcompetition had radically transformed the market, manifested clearly incarmakers pricing strategy overhaul. Manufacturers were breaking theconventional rules of auto pricing by moving from cost-based tovalue-based pricing and the market soon, became a buyers market.When the new players entered the market, there were no doubts that themain artillery for the companies in the car-wars would be the pricingstrategies. It was not just a case of competition forcing a downwardrevision; the players were even ready to forego profits in the short run.Brand building and technology / feature driven campaign were to beadd-ons to the above plan. Industry observers were quick to point outthat MUL would have to get entangled in the price reducing game.A Business India report pointed : No one is better equipped to fight aprice war than Maruti. Its phenomenal profitability, cash reserves andefficiency in manufacturing will allow it to slash prices on all its modelswithout feeling the pinch as much as others.However, Hyundai was the first company to introduce what came to beknown as, pricing based on customers value perceptions. It introducedthe base model of Santro at Rs. 0.29 mn, while two other versions werepriced at Rs. 0.34 and Rs. 0.37 mn. The basic version was targeted atbuyers of the 800, and the other at the Zen. Thereafter, hunches in the Rs.0.2 mn to Rs. 0.6 mn segment by Ford and Hyundai showed highlyinnovative pricing strategies being adopted. Soon after, Ind Auto droppedthe price of the Fiat Uno Diesel by Rs. 64867 and Premier AutomobilesLtd lowered the prices of the four versions of the Premier Padmini by Rs.5000 to make it Rs. 53000. BSPATIL
    • MUL had adopted a skimming strategy for Esteem. Launched in 1993, itwas positioned as a luxury car. This continued till the arrival of DaewoosCielo in 1996, which started eating into Esteems share. In 1999, thesegment saw the arrival of Fiat Siena, Opc-1 Corsa, Ford lko.n and theHyundai Accent. MUL resorted to price slashing and brought the pricesdown. While the top end versions price was reduced to Rs. 0.52 mn, fromRs. 0.59 mn, the basic version was brought down to Rs. 0.44 mn from0.46 mn. However, this was possible only because it enjoyed substantialmargins over costs, being the first mover in the market.MUL also followed the- same modus operandi for Zen, albeit in adifferent manner. The company increased the number of Zen variants to10, with prices ranging hom Rs. 0.3 mn to Rs. 0.43 mn. The price stoodreduced for the Rs. 0.3 mn variant in terms of stripping down the model’sfeatures.The competition responded with similar moves. Daewoo offeredprice-variants for Matiz, Ind Auto offered seven variants of Fiat Uno,ranging from Rs. 0.27 mn to Rs. 0.41 mn. Hyundais Santro offered sixvariants between Rs. 0.29 mn and Rs. 0.37 mn; Telcos Indica came in therange of Rs. 0.25 mn to Rs. 0.38 mn with four models. NK Goila, VFHonda - Sicl cars, aptly summed up the situation : It is important to bepresent with grade - variation and a range to cover the range of potentialcustomers being targeted. The price - points in the car market werereplaced by price — bands. The width of a price band was a function ofthe size of the segment being targeted besides the intensity ofcompetition. The thumb rule being, the higher the intensity, the wider theprice-band.Ford’s research, before the launch of the Ikon, a car made for the/Indianmarket, revealed that over the previous two three years, the 800 segment BSPATIL
    • had graduated to the next level of Zen, Santro, Matiz, Uno and Indica.Fords research on the existing market segments and the consumerresponse to new cars revealed that beyond the Zen segment, the choiceof the consumer was limited. Models like the Esteem and Cielo had had along innings outside the country and were not exactly contemporary. Theother options were Escort, Lancer and Honda, which were priced above Rs.0.7 mn Between them and the Rs. 0.45 - 0.5 run range of the Esteem andCielo, thee was a vacuum. The gap was identified by General MotorsCorsa and Fiats Siena as well. All three competitors plugged the gap byoffering several versions at various price points. Ford first launched Ikon1.6 but later came up with a lower engine capacity Ikon I.3CLXI at a lowerprice. GM and Fiat also followed the same approach.About price reductionThe fact that 82% of the Indian market was accounted for cars pricedbelow Rs. 0.43 mn, proved how strongly price influenced volumes.Moreover, with domestic car sales dropping by 15.01% in November 1998over November, 1997 manufacturers had to turn towards price toresuscitate demand.In the prevailing conditions, the Second P of aulo marketing pricereduction, seemed to be (he only factor able to rejuvenate the stagnantdemand.However, not every player had the financial-muscle to play the price card.Instead of cutting the price of Matiz, Daewoo Motors introduced anenhanced version with product features like power steering, andproduct-plus features like better service and customer-care. Players likeHyundai and Telco did not opt for price reduction, as they simply did nothave the economies of scale to profit from such moves. Such strategies BSPATIL
    • worked best for companies with offering in several segments of themarket. Higher volumes from the combined sales of products acrosssegments enabled them to drive harder bargains with their suppliers; unitmarketing and distribution costs decreased; and the higher margins onproducts positioned near the top compensated for the pared margins onthe basic product.The players who chose to stay out of the race to cut prices had toconvince their customers that the higher prices they charged werejustified by the greater value they offered. A product and promotionalmix had to be specifically designed to convey the above message. Mostmanufacturers of mid-size cars, including General Motors, Ford,Honda-Siel, adopted this strategy rather than cut costs to increase sales.They argued that because of the snob-value of a costlier car, buyers inthis segment were not that susceptible to be swayed by price cuts.They cited the Cielo price reduction fiasco as an example. When sales ofDaewoos Cielo went down from a peak of 2260 cars in September 1956to 314 in December 1997, the company slashed the price of its basemodel Rs. 0.13 inn in January, 1998. Daewoo also introducedzero-interet finance schemes and its dealers gave unofficial discountsranging from Rs. 0.08 mn to Rs. 0.10 mn, Sales increased by 300% to 906and 1102 by March, 1998. However, this was far below the companyscapacity of 6000 ears per month. Daewoo launched an upper end version,Cielo Executive and an upgraded versions, Nexia at higher price points.However, the market had discounted Daewoo by then and sales did notpick up further, falling to a low of 148 by February, 1999.Companies realized that only when competing brands were perceived tobe equal in all other aspects, would price be a deciding issue. As thetarget segment became more affluent, upgrades as well as first time BSPATIL
    • buyers did not necessarily start at the lowest price level. Applied as abrand level strategy, price helped the auto marketers win over only theentry level customer.The biggest price a manufacturer would have to pay for playing the pricegame continuously was undoubtedly the loss of customer loyalty. Theworld over, automobile brands succeed on the basis of their relationshipwith fiercely loyal customer communities, built around sharp brandimages and unique value proportions. By choosing to shift the focus toprice, MUL risked the loss of damaging its customer relations and brandvaluation, as it ended up antagonizing the buyers who had bought MULcars just before the price reduction. This led to a feeling of betrayalamong MUL loyalist. When these customers replaced their cars, it wasdoubtful whether they would turn back to MUL or go in for a rival car witha vengeance.Much ado about nothing ?As the Indian automobile market moved from monopoly to freecompetition, market share comparisons from the old era seemed to havelost relevance. The alarm over MULs declining market share somehowdid not seem fully justified. In its heyday, huge waiting lists for itsproducts ensured that Maruti’s market share was directly linked to thesupply side of the equation. In other words, if MUL had an 80% share ofthe market, that was also its share of the total industry capacity. By thelate 1990’s, things changed radically with over 12 car manufacturershaving a presence in the country, with a total capacity of about 1,250,000cars, of which MUL produced about 400,000 [33%]. Khattar commentedtell me, if we have market share of 50% out of a capacity that is 33% [ofthe industry], are we doing badly? Why dont you ask the others whotogether have a capacity of 800,000, but cannot match our sales? All saidand done, MUL was still the leader in early -2001. It still had its early BSPATIL
    • mover advantages. Provided Khattar plays his cards right, MUL can stillrule the roost for years to come. Whether this will happen for real, is aquestion too early to be answered. Case study: 1.3 DOORDARHSAN: BROADCASTING BLUES[DD Indias national television network is one of the worlds largestbroadcasting organizations with respect to the infrastructure it possesses.It present telecasts programs on 19 channels. Over the years, DD hasbeen losing its advertising revenues to its competitors [private channels].The continuously falling Television Viewers Rating added to the problem.DD has also been facing many problems regarding its managements,right from the time when Prasar Bharati was created. In mid-90s, cabletelevision reached many Indian homes and several private channels, werelaunched. All of a sudden DD had to content with a host of channelswhose programs were better produced. Poor quality of transmission andprogram content prompted viewers, to switch to private channels. Thecase provides an overview of the problems faced by DD due tomismanagement and competition from private channels.] "DD needs anowner" - CEO, Carat Media Services India.IS DD DEAD?After years of falling revenues, in 1999-2000 DD had a revenue growthof 50%. In 1999-2000, DD earned revenues of Rs, 6.1 bn compared to Rs.3.99 bn in 1998-99. DD showed signs of revival with the launch of DD BSPATIL
    • Worlds [a channel for NRIs] and had a certain measure of success withsome of its regional channels [Table-1 DD Channels: A snapshot].However, by the end of 2000-01, DDs revenues were projected to growat 6 - 15 % while private channels such as Zee T V, Star and Sony had aprojected 40 -50 % revenue growth.According to some analysts, DDs sagging revenues were only the tip ofthe iceberg. DD was plagued by several problems. By the late 1990s,most private producers and advertisers and a good part of the audiencehad deserted DD. Not even one car company advertised on DD and eventwo wheeler manufacturers kept away. Advertisements of Pepsi and Coca- Cola were found only during sports telecasts. Only FMCG companiesstuck to DD, because its terrestrial network would help them to reach therural and semi urban audience. Despite having over 21000 employees,DD outsourced 50 % of its programs from private producers.In the late I990s, DD faced allegations of large scale scams andirregularities. Under-utilized infrastructure, improper investments andpoor financial management adversely affected DDs performance. In 1992,when the Government opened the airwaves to private players, HD had toface competition from private satellite channels. In Cable and Satellite [C& S] homes it was found that DD programs had hardly any viewers. Thedepleting Television Viewer Ratings [TVRs] of the DD programs was also acause of concern as advertisers deserted due to its low viewer ratings.According to analysts, DD would need a budgetary support of Rs. 5 bnduring fiscal 2000-01 to sustain itself, as its revenues would not cover itsexpenditure. Many analysts felt that privatization would be the onlysolution.DD : THE INSIDE STORY BSPATIL
    • DD was launched in 1959 as the National Television Network with amodest 21 community sets in Delhi. In the year 1982, with theintroduction of regular satellite link between Delhi and differenttransmitters, DD began the transmission of national programs. In thesame year, DD switched to colour transmission. Soon it had penetratedevery nook and corner of the country, cutting across demographic andgeographic barriers.DD had a three-tier program service - national, regional and local. Thenational programs focused on the national culture and included news,programs on current affairs, and science, cultural magazines, serials,music and dance recitals, plays and feature films. At the regional level theprograms were similar to the ones broadcast at the national level, theonly difference being that they were broadcast in the regional language.In 1984, DD introduced a second channel [DD2] in cities like Delhi,Mumbai, Kolkata and Chennai. DD2 was targeted at urban viewers,particularly the young viewers.In 1995, DD launched DD - India, its international channel to cater to theNRI population. This service covered SAARC countries.. Gulf countries,West Asia, Central Asia, North Africa and Europe. In the same year, DDentered into an agreement with the Cable News Network [CNN] andlaunched a 24 - hours news and current affairs channel : DD News. In1999, DD launched a separate channel for sports.In the early 1990s, about 479 mn people in Indian homes viewed DD andan additional 1.5 mn watched DD on community sets. DD was ahead ofthe private channels in terms of viewership with a 90% reach. However, inthe late 1990s, it could not maintain the lead and phase channels were BSPATIL
    • catching up in terms of revenue even though they lagged behind inviewership and reach.Cable onslaughtIn 19S4, cable television entered India. For local entrepreneurs, cabletelevision provided a good business opportunity, as investments requiredto install a cable network were low. In the early 1990s, many-privatetelevision channels were launched. Zee TV launched in 1992 led the pack.During 1992-94, there was rapid increase in the number of cableconnection in Western and Northern India. In Tamil Nadu and AndhraPradesh, a number of Tamil and Telugu channels came up in themid-1990’s.Though by 2000, DD had an incredible reach of 70 mn homes, incomparison to C & S’s reach of only 30 mn homes. It could not turn thisnetwork into an advantage [Table II for growth of cable and satellitepenetration in India]. In urban households, DD programs had hardly anyviewers. DD was also behind the private channels in terms of ad revenues,as its TVRs were very low compared to the TVRs of programs on privatechannels.Falling RevenuesDuring 1996-99, the TV advertisement market grew by 76%, but DDsrevenue from advertisement registered a negative growth [Table III for fallin revenues of DD]. Though DD continued to be number one in overallaudience share, it lost out on viewership segments that had the highestpurchasing power. BSPATIL
    • In 1998-99, DDs revenue from advertisements was Rs. 4 bn [25.8% ofthe market], Zee TV was close with Rs. 3.85 bn, Sony had Rs. 2.53 bn andStar channels grossed Rs. 2 bn. But the ad revenues of private channelshave grown significantly, when compared to those of DD. During theperiod 1996-99, Zee registered a growth of 122% in ad revenues, Sony299% and Star channels 206%. During the same period, DDs ad revenueswent down by 70.17 %. DDs falling TVRs were a matter of concern forclients like Hindustan Lever - DDs largest advertiser. Said AshutoshSrivastava, VP, HTA-Fulcrum, the media-buying arm of HLL, “Our onlysource of reaching 40% of this country is going down.” Till 1998-99, 70%of HLL’s ad spend went to DD but by 2000-01, due to tailing TVRs HLLsad spend to DD had gone down to 50%.During 1999-2000, producers and distributors stopped giving films toDD when it began to demand a minimum guarantee of Rs. 10 mn tobroadcast a film. This forced DD to repeat the same old films that it hadaired several times, and the RVRs went down further.According to some analysts, DDs revenues were going down becauseadvertisers considered it a down market channel, which catered only tothe lowest socio-economic groups, whose purchasing power was limited.The revenues earned by DD showed a negative growth during 1997-99.In 1999-2000, DD saw its revenue grow by 52.8%, but in 2000-01, it wasprojected to grow only at 6% [Table III]Identity CrisisDDs problems were largely attributed to what Kiran Karnik, former CEO,Discovery Communications; India called its loss of identity. Said Karnik,The channel has lost its identity, What is Doordharshan : Is it a publicbroadcaster or a commercial entity? Initially, DD officials had envisagedthat the national channel would play the role of public broadcaster, while BSPATIL
    • DD Metro would be the commercial channel. Private producers andadvertisers pointed out that this attitude increased the confusion. Theyargued that no other network had two channels competing against eachother.With the launch of the Star News Channel, [the first independent newschannel] in 1998, DD News lost its viewers to Star news. The in-depthanalysis of news items»by Star News caught the imagination of theviewers [Table IV Comparative study of different news channel]. DDsimage of being the propaganda machinery of the Government also wentagainst it.Some analysts said politica1 interference and corruption were anotherreason for DDs poor performance. In 1997, The Indian Broadcasting Billwas introduced in Parliament. The Bill was not passed, but it was enforcedthrough an ordinance nearly a decade after it was enacted. DD wasbrought under a holding company called the Prasar Bharati. In 1998, theGovernment sacked Prasar Bharali CEO SS Gill and the Government madeDD answerable to a parliamentary committee. Political interference at thetop level made matters worse for DD.There were allegations that members of the Central Commissioning Unitof DD look bribes from producers to air their programs. In 1998, the CBIarrested two DD officials for taking bribes from a serial producer. This,incident focused attention on the rampant corruption in the organizationand forced management to issue guidelines regarding acceptance of giftsby employees.DD had a poor track record in both payments to and collections-fromprivate players. Over 50 companies owed Rs. 18.2 mn to DD, 45 on July BSPATIL
    • 2001, Amitabh Bachchan Corporation Limited was DDs highest debtorwith outstanding dues of Rs. 330 mn.Another allegation that DD faced was that it had allowed InternationalCricket Councils [ICC] ex-chief Jagmohan Dalmiya and World Tels MarkMascarenhas to defraud it of Rs. 160 mn over the telecast of 1998tournament in Dhaka.The exorbitant prices that DD charged for advertisements slots alsocontributed to its poor performance. DD charged the producers aroundRs. 1 lakh for 10 seconds, while some of the highest rated soaps onprivate channels charged half that price.DD did not have a marketing team, which could market theadvertisements slots as a package. Private channels like ZEE and Star hadtheir own marketing teams/ which provided the advertisers with apackage of advertisement slots on their programs. But DD had 5odifferent producers with 56 different half-hour programs slots for fourhours of prime time each week. Each producer sold commercial timeseparately, to the advertisers. But advertisers preferred package deals,which, would give them airtime across the programs for a whole week.Breathing fresh life into DDAfter SS Gill was sacked in 1998, Rajeeva Ratna Shah was appointed asnew CEO of Prasar Bharti. Shah began overhauling the programs of thetwo DD channels and weeding out corruption in the network. He stoppedcommissioning programs on DD1 and DD2. He decided to auctionprogramming hours to the private players who produced the programsfor DD and market them. Shah also announced the setting up of a boardcomprising eminent film-makers, actors, poets, writers and people from BSPATIL
    • different walk of life. This board was to be entrusted the task ofrevamping DD.In 2000, the government appointed a committed headed by Shunu Sen[CEO, Quadra Advisory, a strategic marketing Consultancy], NR NarayanaMurthy [CEO, Infosys] and Kiran Karnik to work out a program for revivingDD. The committee considered three options. : Privatizing of DD,continuing to run it as a Public Service .Broadcaster [PSB], and running DDon both PSB and commercially viable lines. Of the three options, thecommittee recommended the third option. The committee felt that therewas no need to privatize DD, but recommended drastic steps for revivingit.Some of the important steps suggested by the committee were : Downsizing 25 % of DDs 21000 strong staff Getting into new media Setting up its own marketing department Developing a sharper programming focus.One of the recommendations was to improve the quality of broadcast. DDsought the help of BBC to digitize its channels. Modi EntertainmentNetwork began distributing the five DD channels via satellite. DD went infor a revenue sharing deal with B4U for showing movies, arid auctionedthe 7:10 pm slot on DD Metro to the HFCL - Nine networks. In addition toRs. 1.21 bn that DD got from this deal, the move helped DD to penetrateurban homes as well as C & S homes to some extent. DD also enteredinto an agreement with Direct to Home platforms like Echostar and Astrato distribute DD - World in 79 countries. DD employed Accenture toadvise it on how to go about revamping its financial, management andadministrative systems. The National Institute of Design was employed toredesign the logo. BSPATIL
    • In 2000, DD announced that it would start its own people meter projectthrough a separate corporate entity in partnership with a few privatechannels and some advertisers. DD felt that its programs were notgetting enough viewership ratings because the viewer samples used bythe two firms doing the ratings -IMRB - AC Nielsen and ORG MARG werelargely from C & S homes. Their ratings did not accurately reflect theviewing habits of the Indian populace.According to most, these steps were bound to have a positive effect onrevenue. However, for real growth DD had to be freed from politicalinterference.TABLE I :DD CHANNELS : A SNAPSHOTDD 1 Primary channel with national, regional, local and educational programs on a time sharing basisDD2 Metro entertainment channel targeted at urban viewers, particularly the young viewers. Programs relayed by the terrestrial transmitters in 47 citiesDD4 to DD 13 Ten separate regional language channels : Malayalam, Tamil, Oriya, Bengali, Telugu, Kannada, Marathi, Gujarati, Kashmiri and AssameseDD 14 to DD 17 Networking of the regional services of the four Hindi speaking states : UP, Bihar, MP and Himachal BSPATIL
    • PradeshDD18 Punjabi Regional ServiceDD India International channels[DD World]DD Sports Sports channelDD News 24 hours news channelTABLE : II ; CABLE TV GROWTH IN URBAN INDIA YEAR NUMBER OF HOUSEHOLDS WITH CABLE TV [IN MILLION] 1992 1.20 1993 3.30 1994 11.80 1995 15.00 1996 18.00 2000 22.00 2001 30.00TABLE III: FALL IN REVENUES OF DD YEAR REVENUE GROWTH OVER PREVIOUS [RS. BN.] UYEAR [%] 1995-96 4.30 8.10 1&96-97 5.72 33.20 1997-98 4.90 - 14.30 1998-99 3.99 - 18.50 1999-00 6.10 52.80 2000-01 6.50 6.00 BSPATIL
    • [Estimate]TABLE: IV COMPARISON OF THE NEWS CHANNELS STAR NEWS ZEE NEWS DD NEWSChannel encrypted Channel not Channel not encrypted encryptedDecoders are required Can be freely aired Can be freely airedContent caters to the Content caters to the Content caters to thepremium segment mass market mass marketEnglish predominant Hindi predominant Hindi predominantlanguage language languageOnly premium brands All brands accepted. No ads. Only socialad taken. Very selective Not selective messages wereregarding ads regarding ads. broadcastREVIEW QUESTIONS :1. Discuss the features of modern business2. What is business environment ? What are the constituents of business environment ? BSPATIL
    • 3. Write a short note on : a] political environment b] social and cultural environment c] economic environment d] religious environment4. Why should the environment be scanned? What purposes would it serve?5. Explain in detail (he features and elements of economic environment.6. What is an economic system? Discuss various economic systems with their merits and limitations.7. What are the features of mixed economic system ? Explain in detail the working of mixe-1 economy in India.8. What type of distortions could take place in planning in a mixed economic system?9. Analyse the strengths and weaknesses of capitalism and socialism.10. Distinguish between Marxism and communism. Trace their evolution. ………………………. BSPATIL
    • Chapter - IIPolitical economy- Government and business - Public control of business- Trends and structure of Indian economy - Socio - economic problemsof IndiaPolitical economy —Government and businessThe question of government interference in economic activities has beendebated for a very long time by the economists. While the earlyeconomists considered economics as a handmaid of politics, the modemview is that politics is the handmaid of economics. With the growingimportance of the role of government in economic welfare, the modemeconomists firmly believe that the sphere of government in economicdevelopment has no boundary. However, there is no unanimity among theeconomists about the extent and mode of state intervention in theeconomic sphere. Hence, we can identify the following political ideologiesregarding the government intervention in an economy.i. The earliest opinion was that the government has nothing to do in an economy as the society will regulate itself. This opinion also stated that the government will wither away over a period of time. These ideologists are called ANARCHISTS.ii. Opposing the anarchists’ view is the COMMUNISTS’ view. According to them, the individuals cannot do anything on their own and there is a need for government to supervise and regulate individuals. The state will own everything and it is the fundamental duty of the government to organize and direct all economic activities. Hence, government becomes the custodian of the society and it has a very wide role to perform. BSPATIL
    • In between the above two views, there are two more views about theextent of government intervention in an economy. While one viewhighlights the individuals, the other lays emphasis on the need for thegovernment. According to the individualists view, the government anecessary evil. Even Adam Smith advocated very limited functions for theState and to him the government should confine to the maintenance oflaw and order. This view was holding good in the case of Westerncountries while in most of the under developed countries the economiststhemselves argued for larger intervention of the state. Individualism wasfound to be exploitative and against the welfare of the society. Hence,another ideology that emerged was COLLECTIVISM. According tocollectivism, interest of the society is more important than the individuals.They considered that state has a very useful and desirable role to play inan economy. So they assigned unlimited powers on the State and arguedthat the state intervention is necessary to promote social welfare. TheState should therefore, play a very vital role in economic development.These two limits about the role of government are often referred to asCAPITALISM and SOCIALISM. The modern view is that state must play asignificant role in an economy that all the essential services should beState owned and controlled. According to the modern view the role ofgovernment includes maintenance of law and order, achieving equalityand social justice, protecting the weak from the economically strong,fighting against poverty, etc. The areas of government intervention inmodern state may be broadly discussed under the following heads :1. PROTECTIVE FUNCTIONS :By performing these functions, the modem government creates thenecessary atmosphere for performing productive activities. Protectionfrom external attacks and maintenance of internal peace are necessary sothat economic activities will be performed to maximize the welfare of the BSPATIL
    • society. Some people argue that this function of the government isunproductive, but without this function, no economy can ensureperformance of productive activities.2. ADMINISTRATIVE FUNCTIONSGovernment activities include a host of administrative works. All theseworks are performed through various departments and so thegovernment maintains a large number of officials and agencies whoimplement the government policies. Works of routine nature areperformed by these officials and the efficiency in the administration is amust for rapid economic growth.3. PROVISION OF SOCIAL SECURITYThis is a major function of the modern government as it is concernedwith the improvement in public welfare. Maintenance of public health,provision of unemployment insurance, free medical and educationalfacilities, granting old-age pensions, provision of decent housingfacilities, maintenance of public perks, libraries, museums, etc., havebecome part of the government functions. Though these functions arenot in any way productive, yet they are necessary to encourage andpromote productive activities.4. ECONOMIC FUNCTIONSOne of the basic economic functions of the modern government is toensure optimal utilization of the available resources. This involves bothidentification and proper use of the resources. Especially these days everycountry needs to put the available resources to the best use so that thesociety gets the maximum benefits. Further if the resources utilization isleft in the hands of the private enterprise, they will under utilize the BSPATIL
    • resources as they have only profit maximization as their objective. Thereare also possibilities of the emergence of monopolist tendencies,concentration of wealth in the hands of a few, etc. hence, every modernstate should interfere in resources utilization. Another important functionof the government is to maintain economic stability. This meansprotecting the economy from the influence of business cycles. In theprocess of growth, boom and depression are inevitable. But they must beunder check, as otherwise, there will be uncertainty affecting thebusiness prosperity and through that industrial development. Hence, themodern governments control and regulate the working of the economicforces so as to achieve economic growth with stability.Another very important economic function of the government is pricecontrol and rationing. This measure aims at preventing escalation inprices of essential commodities and controls the price of othercommodities. By resorting to retail and wholesale price maintenancepolicies, the government can strive to bring down the price level. Thiscalls for buffer stock operations as well as efficient demand and supplymanagement of commodities which the country is badly in need of. Thisis achieved by introducing rationing of essential commodities throughwell designed public distribution mechanism. All these mean, enormousefforts are required on the part of the government apart from the willingcooperation from the traders and businessmen. In practice it is foundthat price control and rationing are very difficult to be implementedduring inflationary period due to the exploitative and monopolisticattitude of the businessmen and traders.Yet another area where government intervention is needed is the removalof inequality in a country. This inequality arises because of themal-distribution of the economic wealth and prosperity. Though nationalincome increases, the rich becomes richer and the poor the poorer. This BSPATIL
    • tendency should be changed through legal and political steps. For thispurpose government in several countries have enacted legislations andannounced concessions in favour of poor people. Implementation ofthese legislations and concessions involve a lot of difficulties and theyhave to be periodically revised. The object of the government in thisconnection must be to prevent concentration of economic power andwealth in the hands of a few. Another important economic function of themodem government is to achieve economic growth. For this purpose thegovernment has to plan for economic development and in this task thegovernment part from deciding the targets, planning process, resourcesidentification and allocation, etc., It should also arrange for financing theplans. It should be noted that planning has become important in bothdeveloped countries as well as under developed countries. In thedeveloped countries planning is used to achieve stability in development,while in under developed and developing countries it is used foraccelerating economic development.The government intervention in an economy is a must for the followingreasons: 1. In developing economies the vicious circle of poverty impedes the economy from developing faster. This vicious circle can be broken only with the government intervention. In the absence of it, any amount of planning will fail to bring about the necessary impetus to growth in such economies. 2. In the process of economic development, instability should be avoided at any cost. Even in developed countries, such instabilities are avoided with government intervention. In developing countries, therefore, the government should plan for proper allocation and utilization of resources as well as economic stability. Allowing the market forces to operate has certainly some advantages. But in BSPATIL
    • under developed countries market forces do not operate smoothly because of external rigidities and structure bottle-necks. To overcome these forces pinning down economic development, government intervention is needed. 3. The basic requirement for rapid economic development is the economic and social infrastructure. The investment requirement for the provision of such infrastructural facilities runs to crores of rupees. This can be provided only the government and not the private sector. Further such investments are not income or profit yielding and so private enterprises may not come forth to undertake such investments. So government has a concrete role to play in inventing on such social and economic infrastructures. 4. Investment in social overheads is undertaken by the government by mobilizing financial resources from various sources. These sources of government include taxation, public borrowing and deficit financing and these sources cannot be resorted to by the private enterprises. It is also well known that private enterprises lack comprehensive approach to economic development. 5. Government intervention is indispensable in under developed economies because in such economies, there are several obstacles to economic development which can be overcome only by the government. As Mir and Baldwin observed every under developed economy needs a critical minimum of government intervention to reduce indivisibilities and discontinuities in the economy, to overcome diseconomies of scale and offset certain other forces that arise to depress development, once development begins.Public control of business BSPATIL
    • In a mixed economic set up like India, the government retains controlover strategic and key industries and operations. This is done throughthe creation of public sector units. The role of public sector units isexplained below.Discuss the role of Public Sector in IndiaSince 1948, the public sector in India has been playing a significant rolein every sphere along with the private sector. These two sectors havebeen functioning as complementary to each other, though thegovernment policies have been usually more favourable to public sectorthan to the private sector. Inspite of this, the private sector has alsoemerged victorious in several fields and since the announcement ofLiberalization polices in 1991, we can reasonably expect the privatesector to reach its potential and the public sector would also strive itsbest to withstand .he domestic and international competition. Hence, thefuture offers excellent scope for both the sectors, but it is clear that onlythe most efficient sector can survive, so how the private and publicsectors are going to react to this challenge will be known in due course.However, let us now discuss the role of public and private sector in Indiain detail.1. Role of public sector:First of all it is necessary to understand that the public sector includesthe autonomous corporations, the departmental enterprises owned andcontrolled by both the State and Central Governments. The role of publicsector would be discussed with reference to various indicators likeemployment, investment, output, national income contribution, savings,coital formation, capital stock, etc. BSPATIL
    • a) Public sector and employment generation:One of the important contributions of public sector to the Indianeconomy is that it has generated huge employment opportunities andthis has reduced the problem of unemployment to a large extent. Theemployment opportunities in public sector includes governmentadministration, defence, health, education, research and development,enterprise owned by Central and State governments. It offeredemployment for 107 lakhs of people in 1971 which slowly increased to154.8 lakhs in 1981 and it has touched 190 lakhs in March, 1991. Thisconstituted nearly 71% of the total employment generated in the economy,in 1991. As regards the sector-wise employment opportunities created bythe public sector, in 1989 public sector accounted for 47,8% of the totalemployment generated by it through employment in governmentadministration, community, social and personal services, followed closelyby transport, storage and communications with 16.1% and manufacturing10.1%Hence, it is clear that with the growth of public sector, the country isbenefited with more and more employment opportunities.b) Public sector and income of the public sector:The share of public sector income in the net domestic product has beenincreasing consistently from 7.5% in 1950-51 to about 25% in 1987-88.In a matter of about 35 years the public sector contribution to netdomestic product has risen appreciably and constitutes one fourth of thetotal net domestic product This is mainly because of the rapid expansionof the public sector since 1951. This 25% of contribution in net domesticproduct is certainly better than 9.6% of contribution by the publicadministration. However, the private sector income constituted 75.1% of BSPATIL
    • the total net domestic product. It should be noted that the public sectorunits are run on service motive and very little commercial motive.c) Public sector and saving and capital formation :This is yet another crucial yardstick to evaluate the contribution of publicsector. The percentage share of public sector in total domestic savingsincreased from 1.7 to 2.3 of Gross national product at market prices. Butin absolute terms it increased from Rs. 169 crores in I Plan period to Rs.7815 crores in VII Plan. When we consider the percentage share in totalsayings, the contribution of public sector has actually gone down from 17in I Plan period to 11 in the VII Plan. However, the contribution of publicsector in capital formation (gross domestic) is really commendable. Itincreased from a modest figure of 3.5% of Gross national product atmarket prices in I Plan period to 10.7% in VII Plan. As a result the ratio ofpercentage contribution by public sector and private sector in totaldomestic capital formation changed from 33 : 67 in the I Plan to 47 : 53in the VII Plan. From this it is clear that the contribution by the privatesector during the same period has declined from 67% to 53%d) Public sector and capital stock:Capital stock refers to the total stock of plant and machinery, equipmentand tools and other capital goods available at a point of time for furtherproduction. Based on the data available up to 1979-80, it was found thatthe percentage share of public sector in total capital stock between1960-61 and 1979-80 increased from 26 to 37 while that of privatesector declined from 74 to 63 during the same period. In absolute terms,the capital stock increased from Rs. 16,377 crores in 1960-61 to Rs.68,478 crores in 1979-80 in public sector (i.e., an increase by over Rs.52,000 crores) but in the private sector the increase was from Rs. 46,583crores to Rs. 1,16,089. crores (i.e., an increase by over Rs. 65,000 crores). BSPATIL
    • The increase is less pronounced in public sector because of the followingreasons: 1. Public sector investments are mostly in economic infrastructure which does not contribute any output. 2. Public sector is mostly concerned with high capital intensity projects like railways, iron and steel, power, irrigation, etc. 3. The gestation period of public sector projects are very long. 4. The capacity utilization is very much less in public sector units. 5. Most of the projects of public sector are having higher capital-output ratio.e) Public sector and infrastructure:The economic development of a country depends on the developmentand maintenance of infrastructural facilities. The essential requirement isprovided by public sector. The industrialization is accelerated onlythrough infrastructural development. Investment in power, roads, bridges,irrigation, etc., is non-income yielding, long gestation period oriented,and heavy investment projects. Hence these are not attractive for privatesector. But without them the country cannot develop faster. Therefore itis apt to state that the public sector units are responsible for the creationof infrastructures which constitute the backbone of economicdevelopment and industrialization.f) Public sector and industrial base:There is no denying the fact that public sector has provided a strong basefor our industrialization. Our industrial policy has clearly assigned asignificant role for public sector, till the end of the third five year plan;industrialization was taking place at a slower pace because only the BSPATIL
    • important public sector units were established till then. Since the privatesector could not really rise up to meet the task, since the IV Plan theestablishment of public sector units started on a brisk rate and theindustrialization has been accelerated to a commendable level. Furtherprivate sector with its commercial objectives could not undertake severalof the projects and investment requirement of these projects was alsobeyond the potential of the private sector. Hence, if at all India today ishaving a strong industrial base; it is mainly due to the contribution of thepublic sector.g) Public sector and export promotion:Public sector has responded well to the needs of the nation by taking upthe task of exporting our products and finding market for them in othercountries. In this respect the contribution of State Trading Corporation,Minerals and Metal Trading Corporation, Hindustan Steel Limited,Hindustan Machine Tools, etc., are worth noting. Infact, these units areprimarily responsible for exploiting the captive market for our goodsabroad. The foreign exchange earnings of the public sector has gone upfrom a modest figure of Rs. 35 crores in 1965-66 to Rs. 170 crores in1969-70, to Rs. 5,831 crores in 1984-85 and then to Rs. 9,198 crores in1991-92. The increase has been more than 300 times comparing1965-66 figures with that of 1991-92. Though there may be criticismsabout the performance of the public sector units, yet there can be nodispute about the export achievements of public sector units within aperiod of 25 years.h) Public sector and saving of foreign exchange through import substitution: BSPATIL
    • Indias balance of payments has been a cause for worry sinceIndependence, the main reason being increasing imports. This trend hadto be reversed and the government rightly selected public sector toestablish units to produce domestically the goods imported so as toconserve the foreign exchange and also utilize more the domesticresources. Units like Hindustan Antibiotics Limited and Indian Drugs andPharmaceutical Limited, have together effectively checked the inroadsattempted by the multinational corporations in the field of drugs andpharmaceutical. Similarly Indian Oil Corporation Limited and Oil andNatural Gas Commission have succeeded in bringing down ourdependence on other countries for crude to some extent. They are veryactive in identifying oil deposits and natural gas. Their efforts aresupplemented by research and development to invent methods of usingthe natural gas and reduce the imports of crude. In this respect the publicsector works towards achieving self sufficiency. With concerted efforts itshould be possible for India to achieve self-sufficiency in the near future.However, the poor performance of the public sector is causing concern,as unless steps are taken to improve their performance, the achievementof self-sufficiency may be delayed.i) Public sector and generation of internal resources :A close scrutiny of the public sector performance will certainly make oneto note the contribution towards internal resources made by the publicsector. For example, the internal resources generated by the public sectorduring V Five year plan was Rs. 3,439 crores, during VI Five year plan Rs.11,721 crores and during the period 1985-86 to 1989-90, thegeneration was Rs. 37,678 crores. In 1990-91 and 1991-92 also thepublic sector undertakings together generated Rs. 24,376 crores. Thisindicates that the public sector units have turned the corner and with the BSPATIL
    • measures taken up already to spruce up their working we should be ableto realize still greater generation of internal resources.j) Public sector and contribution to exchequer:Public sector contribution to the Central Exchequer is, in terms ofdividend, corporate tax, excise duty, customs and other forms. Thesecontributions add to the mobilization of resources for our planneddevelopment. It is interesting to note that the contributions totaled Rs.27,570 crores in the VI Plan period, Rs. 70,893 crores during the VII Planand Rs. 19,520 crores in 1990-91 and Rs. 20,366 crores in 1991-92. Itmay be noticed that the annual contributions during the VII Plan period isnearly 75% of the contributions during VI Plan. Among the different formsin which these contributions are made, Excise duty and Customs aloneconstituted more than 82% of the total in the VI Plan period, while thiswas 76% during the VII Plan. Subsequently, in 1990-91 these twoaccounted for 82% of the total contributions and in 1991-92 it wasalmost 83% indicating that public sector units do make a valuablecontribution to the Exchequer. Since the performance of the public sectoris poor, their contribution in terms of dividend is very insignificant andthis has to be changed at the earliest so as to make them contributesizably even in this form.k) Public sector and growth of ancillary units:Public sector also makes a valuable contribution by helping the growth ofancillary units and small scale units. The Bureau of Public Enterpriseshave undertaken the study to find out the public sector units which couldtransfer their production and other facilities to small scale sector. Underthis scheme about 1800 units were set up till 1986. The public sectoralso enters into regular contracts for purchasing the entire production or BSPATIL
    • 50% of the production of small scale and ancillary units. Such purchasesfrom ancillary units amounted to Rs. 451 crores in 1985-86.I) Public sector and development of states and backward regions:One of the objectives in establishing public sector units is to facilitate thestates and the backward region to develop faster. In this connection,public sector has certainly creditable performance. Public sectorcontributes to the State governments resources in terms of sales tax andother state level taxes. Public sector investments are directed towards theprojects in the backward regions and industrially poor districts. In thisway the public sector works in its own way to eliminate the industrialimbalance in states and districts.So far we have explained in detail the contributions made by the publicsector towards Indian economic development. It is often said, that evenwhen their performance is poor, the public sector contributions havebeen so much, and by improving their performance, we should be able tomake them contribute their full potential to achieve a higher rate ofeconomic development. It is satisfactory to note that efforts in thisdirection to improve the public sector performance have been initiatedand by the turn of the century public sector will emerge as the maincontributor to our economic development.TRENDS AND STRUCTURE OF INDIAN ECONOMY Features of India as anunder developed countryTo classify a country as developed or under developed, one should studythe features of an under developed country. There are several indicatorsof under development. Let us discuss each one of them with reference to BSPATIL
    • India to ultimately answer the question whether India is a developed orunder developed country.1. Existence of low per capita income:It is customary to compare the per capita income of a country with othercountries to determine whether the country in question could becategorized as under developed or developed. The IBID is also adoptingthis method and it has classified the countries as i. low income countries,ii. Middle income countries and iii. high income countries. According tothe World Development Report, 1993, the annual per capita income ofthese three types of countries is estimated as under: Low income countries $ 350 Middle income countries $ 2480 High income countries $ 21050It is clear from the above figure that any country with just 1.5% of thepercapita of the high income countries can be categorized as low incomecountry and as under developed country. In these under developedcountries, the per capita income is very low because i. net nationalincome is very low or ii. Population is very high or iii. the national incomeis very low and the population is very high. Though this used to be thebasis for categorizing the countries, "recently the IMF has measured thevalue of each countrys national income in terms of the purchasing powerof its own currency at home, instead of the currencys value oninternational exchanges. Following this Indias per capita income in 1991was assessed as $ 1150 as against $ 330 calculated following the oldbasis. Hence, on the basis of the new methodology India can no longer beconsidered as an under developed economy.2. Existence of very heavy population: BSPATIL
    • The size of population is one more index of development status. It isfound that a country with low population is developed and that with asmall size of population is under developed. It should be noted that inthe case of former the annual growth rate of population is very low,compared to the growth rate in the later. According to the WorldDevelopment Review, 1993, the annual growth rate of population in thelow income countries was 2.0 between 1980 and 1991 while in middleincome countries it was 1.8 and in the high income countries the rate was0.6 during the same period. Hence, it is clear that with a higher rate ofgrowth, the low income countries will experience population explosionover a period of time. This population explosion will have serious impacton the economy and impede every effort to achieve higher rate ofdevelopment. For example, the population explosion will result inincreased poverty, high rate of unemployment, scarcity for essentialgoods, etc.3. Predominance of agricultural sector;This is another important characteristic of the under developed economy.In such economies, the percentage of population depending uponagriculture for livelihood will easily be 70%. The contribution ofagricultural sector to national income will be high and it is estimated tobe over 35%. The nature of exports will be mainly primary goods likeagricultural raw materials. In the case of India nearly 70% of thepopulation depends on agriculture sector (both directly and indirectly)whereas in a developed country this used to be only about 20% Thecontribution by agricultural sector to national income will be around 4 to5% in developed countries and the composition of exports will be mostlymanufactured goods and high-tech products. It may also be noted that inunder developed economies, the productivity in agriculture will be BSPATIL
    • abysmally low due to the use of out-dated technology, conventionalmethod of cultivation, poor quality seeds and fertilizers, illiteracy offarmers, very high rural indebtedness, etc. The result is agriculturalproduction will be low and so the contribution to national income willalso be low. Added to this, the sector depends on the success ofmonsoon and failure of monsoon directly affects the economic growthand development.4. Existence of large scale unemployment:In under developed country there exists very large scale unemploymentdue to various factors. Further the unemployment will continue toincrease over a period of time. The unemployment is due to factors like,huge population, low level of economic activity, poor technology, lack ofinvestment, large illiteracy, etc. Even those who are employed may notadd anything significant to production. That is there will be disguisedunemployment too. The problem is worsened by the existence of underemployment, which means the available labour power is not fully utilized.The overall effect of all these is that the labour productivity will be verypoor. The efforts to improve the productivity may rot succeed due toresistance by labour unions and organizations. The economy will remainunder developed so long as the unemployment remains high.5. Existence of widespread poverty:Poverty exists in every country. But the difference is that in developedcountries, poverty exists only in certain pockets, while in underdeveloped countries, poverty is widespread - almost 3/4 of the countrylives below the poverty line. In under developed countries, thepreponderance of agricultural sector, large scale unemployment, incomedisparities, high illiteracy, etc., account for widespread poverty. Added to BSPATIL
    • these, the lack of investment opportunities, low productivity, primitivetechnology, etc., also result in poverty as any amount of production willnot generate income. The wage level is so low that the people have verylow saving. Any amount of efforts to alleviate poverty does not bear fruitdue to maladministration, corruption, etc.6. Primitive production condition:The excessive population pressure leads to heavy demand for land. Theavailable land is not put to productive use. There is very high capitaldeficiency, one because of low saving and second the conspicuousconsumption is very high. In other words, the little saving is used inunproductive ways. With poor capital formation, the government wouldinvest heavily in capital intensive projects as well as welfare projects. Thereturn is very poor and prolonged. The technology is so backward andprimitive that the input output ratio is very high. The obsolete technologyalso results in poor return and low productivity. Another major weaknessis that there is lack of entrepreneurial ability. Hence, investmentopportunities are not easily identified and risky ventures are neverundertaken. The size of market is small, the market information is absent,market intelligence is very poor, the administrative ability is at lowestlevel and there is lack of investment opportunities. All these culminate inpoor utilization of the available entrepreneurial ability and talent7. Foreign trade composition:The composition of foreign trade in under developed country is verymuch influenced by its historical relations with other countries. Most ofthe under developed countries were colonies in the recent past andnaturally their foreign trade composition clearly reflects this. They exportunfinished, agricultural raw materials and import heavy capital goods. BSPATIL
    • Obviously, their terms of trade will be unfavorable. Further there existsheavy geographic concentration in their trade. Any failure of agriculturalsector worsens the foreign trade position. With heavy reliance on theimported machineries, these countries lack latest production technology.The poor balance of trade and balance of payments deficits force them toborrow heavily from the developed countries and international financialinstitutions. They are caught up in the debt trap and outgo of interest oninternational debt is so heavy that the county will struggle to maintain theexchange rate. The increases reliance on other countries formanufactured goods will subject the countries to economic and politicalsubjugation of the exporting countries.8. Existence of wide disparity in income and poor standard of living:These countries are also noted for very high income disparities becauseof concentration of productive factors in the urban areas, very lowmobility of labour from rural to urban, low rate of employment in therural areas in relation to urban areas, high wage rate in the urban andpoor wage rate in the rural areas, etc. The income disparity is furtherwidened by deteriorating terms of trade between agricultural andindustrial sectors. As a consequence, the standard of living will be verypoor in the rural areas than in the urban areas. Even in urban centers,there will be growth of urban slums. As already pointed out in thesecountries the population depending on agriculture is very high and so theemployment opportunities as well as income generation is very lowcompared to that in the industrial sector. As in the initial stage ofdevelopment the industrial growth will be confined to urban centers, thestandard of living will be on the whole very poor.9. Existence of dualistic economy: BSPATIL
    • Dualism refers to the existence of a developed sector side by side with anunder developed or undeveloped sector. We will come across theco-existence of sophistication and primitive characteristics in every walkof life. For example, in the urban areas, one will find the use of modemtechnology in the production field as well as households, while in therural areas, the age old, antiquated techniques will be used in theproduction as well as in households. This dualism retards economicgrowth. That is, the subsistence sector in the rural areas will pull downwhatever little economic progress is achieved with the developed andmodem sector. Further in the urban areas, one can come across theexistence of dualism, in every activity. For instance there will be modern,technologically sophisticated industries existing side by side withindustries with labour intensive and poor technology. There will be highwage executives existing with poorly paid slum dwellers. Firms withinternational collaboration producing ultra modem products will be foundalong with the domestic firms using inferior technology. In the rural areasalso the dualism can be found. We can find the co-existence of farmswith vast expansive areas using modern production technology alongwith small farms where such technologies can never even be dreamt of.The bigger farms will be using trained and skilled laborers whereas thesmall farms will mostly be depending on the family labour and untrained,semi-skilled labour. While the capital investment by the big farms will beseveral times higher than those of the small farms, the rural indebtednesswill be found more with the small farms than the large farms. Themarketing strength, holding power, storage facilities, processing facilities,bargaining power, etc., will all be very much different between largefarms and small farms. From the above explanation, it could beunderstood that every effort to develop the economy should be designedso as to make it applicable to both the modern sector as well as the BSPATIL
    • undeveloped one. Hence, the overall growth will be more determined bythe contributions of the undeveloped sector.10. Existence of weak and inefficient administration:Under developed countries always evince this feature. The political andsocial factors influence to a large extent the efficiency of administration.In these countries, the administrative system is noted for lethargy, redtapism, bureaucratic interference, delay in decision making, partiality,political influence in decision making process, bending the laws forfavourable people, etc. The result of this is inefficiency. An efficientemployee never gets his due as the rules and regulations do not permitthis. The accountability at the higher levels is very much less. Theresponsiveness of the administration in a critical situation is more rulesridden or ritualistic rather than realistic. There is lack of managerial andadministrative talents in these countries. The lack of know how, theresistance to change, lack of motivation, etc., are responsible for thisadministrative inefficiency.SOCIO ECONOMIC PROBLEMS OF INDIA1. Discuss the features of Indian PopulationThe Demographic features of India can be discussed in terms of thefollowing ideas: i. Trend in population ii. Growth rate of population iii. Life expectancy iv. Infant mortality rate v. Density of population vi. Age and sex composition vii. Rural-urban distribution and viii. Literacy and levels of development. BSPATIL
    • Let us now discuss each one of these features in detail.i. Trend in population:As the country with second largest population .in the world, India hasbeen handicapped with very large population found in a small area. It issaid that India has 16% of the total land area of the world. This situationhas been remaining for decades as shown by the Table 1 below. It couldbe seen from the table below that till about 1931, the size of populationwas not increasing at an alarming rate. Specifically between 1911 and1921, the population size almost-remained stagnant. There was a slightincrease in the size between 1921 and 1931. The decade 1931 to 1921probably was the only period when Indian population almost remainedthe same. This probably was due to the epidemics, wars, etc., which tooka heavy toll during the decade. After 1941 we find a consistent increasein our population cruising ail concern. More specifically the increase inpopulation was by : about 4 crores between 41 anc. 51, 11 croresbetween 61 and 71, about 15 crores between 71 and 81 and about 16crores between 81 and 91.Hence, after the decade 1921-1931, we find the increase in populationremained almost the same during the decade 71 -81 and 81-9l. In thepast nine decades, i.e., since 1901 the addition to our population hasbeen by about 60 crores. But with the slowing down of the populationgrowth since 1981, we may expect the population to grow at a slowerrate in the corning decade.TABLE 1 : SIZE OF POPULATION (in crores) BSPATIL
    • YEAR POPULATION 1901 23.8 1911 25.2 1921 25.1 1931 27.9 1941 31.9 1951 36.1 1961 43.9 1971 54.8 1981 68.3 1991 84.6In 1993, India’s population was estimated to be 88.5 crores.ii. Growth rate of population:The growth rate in population is measured as the difference between theCrude birth rate and Crude death rate. Of course, the migration andpopulation should also be taken into account. But in Indian experience,the migration as a percentage of the total population is very insignificant.Hence, ignoring migration, we should lake the difference between thecrude birth rate and crude death rate as the normal growth rate in ourpopulation. The Table 2 below gives the normal growth rate in ourpopulation.TABLE : 2 NORMAL GROWTH RATE OF INDIAN POPULATION PERIOD CRUDE CRUDE NORMAL BIRTH RATE DEATH RATE GROWTH RATE BSPATIL
    • 1901-1911 49.20 42.60 6.60 1911-1921 48.10 48.60 0.50 1921-1931 46.40 36.30 10.10 1931-1941 45.20 31.20 14.00 1041-1951 39.90 27.40 12.50 1951-1961 41.70 22.80 18.90 1961-1971 41.20 19.00 22.20 1971-1981 37.20 15.00 22.20 1981-1991 35.20 11.40 21.10From the Table:2 above, it could be observed that the normal growth rateof population was very low from 1901 to 1921 mainly because both thecrude birth rate arid crude death rate were high. But ever since 1921,there has been quite notable decline in crude death rate but not such apronounced decline in birth rate. As a result the: normal growth rate ofpopulation has remained high and Infact has been increasing. One sign ofconsolation is that during 1981-1991, the crude birth rate has declinedby 2.00 points and the normal growth rate has also declined by about1.00 point. This trend, if continued, by the turn of this century India mayhave lesser addition to population which is a good sign. It is estimatedthat our birth rate would fall down to 27.5 during 1991-1996 and thedeath rate would go down to 9.4 during the same period thereby thenormal growth rate would be 18.1 for this period. Based on this theprojection for the period 1996-2000, birth rate will be 24.9, death ratewill be 8.4 and the normal growth rate will be 16.5.iii. Life expectancy:Life expectancy is usually used as a measure of gauging the healthcondition of population of a country. A country with a high death rate andwith death occurring at early age, the life expectancy will be low and a BSPATIL
    • country with a low death rate and with death occurring at an advancedage, the life expectancy will be high. Hence, a high life expectancy is ayardstick for health condition of the population of a country. In Indiancase, there has been a significant fall in death rate since 1951 and so ourlife expectancy which was just 23 years during 1901-1911 increased to46.4 years during 1961-71 and further to 58.2 years during 1991.However, this is very much low compared to some of the countries like SriLanka and Thailand, another interesting feature is that in India theaverage life expectancy is more for female population than for the males.The reason for this could be that the number of male deaths at earlystage is more than that of the females. The increase in life expectancy iscertainly ^ welcome sign, but i; carries with it some social problems like,the increase in number of joint families, multi-generation families,unemployment due to extension of service for those who retire lead tounemployment for youngsters, increase in dependents per family, etc.iv. Infant mortality rate:This refers to the number of child death, from birth before reaching thefirst birth day. This is measured as number of children that die beforecompleting first year after birth per 1000 children born. The infantmortality rate was very high in India during the early part of this centuryand it was 204. But thanks to the development in science and concertedefforts taken by the government, the mortality rate has come down toabout 80 per 1000 in the 90s. However, there is a variation betweenurban and rural areas. As on date the mortality rate is about 50 per 1000in urban areas and 86 per 1000 in rural areas. It is also found that thereis variation among the states in mortality rate. As for example, in Kerala itis only 17 per 1000 while it .is 122 in Orissa. Comparing other countries,the mortality rate is very high in India. For example, in Srilanka it is only32, in Philippines it is 49 and in Thailand it is 44. With improvement in BSPATIL
    • science and extension of medical facilities to rural areas, the infantmortality rate is coming down rapidly in India, but there is much toachieve in this direction.v. Density of population:This measure helps to determine the extent of burden on land area in acountry. It is measured as the ratio of number of persons per squarekilometer of land area. Indias density is one of the highest among thecountries in the world with 267. This is very high compared to countrieslike Canada. Though density is high, Japan has a very high per capitaincome of $ 25430. It is well established that there is no relationshipbetween density of population and the economic development. Countrieslike Canada with very low density of 2.5 persons/sq. km. has very highper capita income of $ 20470 and as already indicated Japan with veryhigh density has also a very high per capita income. Among the Indianstates also we come across wide variation in density as for example theUnion Territory of Delhi has 6319 as density against Arunachal Pradeshwith just 10 persons/ It is said that countries which are industriallyadvanced will have higher density and wherever the climatic conditions,rainfall, etc., are good the density will automatically be Age and sex composition :This information helps to determine and answer certain questionsrelating to employment, dependents, birth rate, etc. Age composition inIndia is such that (he young persons (0 - 40 years of age) constitute morethan 65% of our total population. Hence, even if the birth rate declines, BSPATIL
    • yet the addition to our population because of the predominance ofyounger aged persons will be more for some more years to come. Theimmediate implication of this feature is that the dependency ratio will bevery high. On an average it works out to be 50%. But when the birth ratedeclines, this would also decline and the proportion of workingpopulation would go up leading to increase in claimants for employment.As regards sex composition, in India it has come down over the decadesfrom 962 females per 1000 males in 1901 to 930/3000 in 1971 and thento 929/1000 by the turn of this century. It is found that this sex ratio isone of the lowest among the countries in the world. The reasons for thislowest sex ratio is the deliberate termination of pregnancy of female child,legislation on abortion, increasing infanticides of female children, lessercare for female children resulting in their early death, etc. But with thespread of literacy, improvement in medical facilities, change in socialattitude, etc., the sex ratio is likely to increase. Even now in some of thestates like Kerala, and Tamilnadu the sex ratio is high.vii. Rural-urban distribution:This is yet another feature of population which clearly indicates theextent of change in the concentration of population in rural and urbanareas. In the past, the rural concentration was very high and slowly this ischanging that the urban concentration is increasing. While this is a goodsign of development, yet increasing urbanization has led to several socialproblems like urban poverty, increasing number of urban slums,congestion, lack of social amenities, artificial demand for importantfacilities like transport, health, education, entertainment, etc. Theproportion of population in urban areas has consistently increased from14.1% in 1941 to about 26% 1991. It is likely to touch 32% by 2000. Therural-urban distribution is not even among the states. While in advanced BSPATIL
    • states, the urban concentration is high, in less developed states the ruralconcentration is still continuing to be high.viii. Literacy level:Literacy level refers to the number of people in the population who canread, write and understand arithmetic. The literacy rate determines theeconomic development. Any country with low literacy rate is bound to beless developed than countries with high level of literacy. In India theliteracy level was very poor before independence and since then with allthe positive steps taken the literacy rate has gone up. This could beunderstood when we compare the literacy rate of males and females in1951 and 1991. In 1951 the literacy rate of males was 25% and that offemales was just 8% and in 1991, the literacy rate of males increased to52.6% and that of females 32.38%.The substantial increase in literacy level is due to schemes likecompulsory free education for children upto 14 years of age, noon mealscheme, increasing opportunities for educated in employment, especiallyamong women, increasing self-employment opportunities for women, etc.It is also to be noted that the literacy level is high in both males andfemales in urban areas than in rural areas. This is obvious because in theurban centers the facilities are more than in die rural areas. It is also agood signal that over the period the gap between literacy rate in malesand females is narrowing down. In 1991 the female literate formed about61.56% of male literate as against just 33% in 1951. As in the case ofother features discussed so far, literacy rate is not uniform in all thestates. Economically developed states report a higher percentage ofliteracy among males and females than the less developed states. Withthe increase in allocation of fund for education with a thrust to primaryeducation, establishment of more and more correspondence course BSPATIL
    • institutes, formal arid non-formal education spread, etc., the literacylevel is bound to pick up still before 2000 A.D.Nature of population problem in India and the effects of populationgrowth on Indian economic developmentThe population problem in India is a basic problem faced by the economy.The population explosion is due to various factors. We will discuss thesecauses for population explosion first and then understand how thisaffects our economic development.Causes:It is convenient for us to classify the causes for population explosion byidentifying the causes for high birth rate and the causes for decliningdeath rate.1. Causes for high birth rate:It has been already discussed that birth rate in India has not shown anysignificant decline over the decades. This slow fall in birth rate is onereason why the country has population explosion. The following are thereasons for high birth rate in India :i) Climatic factors:Unlike the other countries, India has a climatic condition which affects thematurity age of girls. An Indian girl matures at an early age of 13 yearswhich means the reproductive span or the child bearing span is very high. BSPATIL
    • In Western countries the climate is cool that the maturity age is not solow. Obviously the reproductive span is much shorter.ii) Social institutions:a) Marriage is a social compulsion in India. That is, once a girlmatures, the social opinion is that she should get married at the earliestafter maturity. The age of maturity being 13 years, the number of womenin the reproductive age group is very large. This means females in theage group of 15 to 49 years can bear child. Once the marriage takesplace at the age of 13, every woman can bear child, at least theoreticallyfor 30 to 34 years. This age group constitutes 47% of the total femalepopulation in India. It is also found that the percentage of women in thisreproductive age group is very high i.e., 81.44% in 1981. However, thisproportion is slowly falling over the period. One more reason for highpopulation is the practice of child marriage. Though this practiceincoming down, yet the average age of marriage among females wasbelow 19 years even by 1987-88.b) The prevalence of JOINT FAMILY SYSTEM is another reason for highpopulation growth in the country. The main belief in a joint family systemis that the married couple should have babies. People who do not havebabies are looked down and there is a social stigma attached in suchcases. Further there is a specific preference for male babies. So until acouple gets a male baby they tend to encourage child bearing. Thispreference for male baby is due to various reasons like old age security,labour value of male child, laws of inheritance, social customs like deathrituals, getting dowry, etc. However, with the spread of education andincreased employment of women in various occupations in the society,the tendency is to have lesser and lesser babies and the specificpreference for male babies is also on the decline. The Joint family system BSPATIL
    • is slowly disintegrating and giving place to independent small family dueto increasing cost of living, preference for remaining independent,increasing employment after retirement, encouraging use ofcontraceptives replacing the conventional techniques of birth control, etc.iii) Economic factors:The most important factor under this category is poverty. The poorpeople prefer to have a large number of children Inspite of poverty due tothe following reasons: (i) Whether the family size is small or big, poverty is all pervasive, hence, an average family prefers to have more children than a few. (ii) Children are treated as an asset in poor families as more children can help the family in work, even at very young age, thereby raising the income earning capacity of the family. (iii) As the condition in the poor families is very poor, the infant mortality rate is very high. To neutralize this every family prefers to. have more children as this (iv) Would be in a way an insurance against high infant mortality rate. (v) A large number of children in a family can look after the aged better with large earnings and so the preference for more children, (vi) The failure of family planning programme to convince the poor people, as the consider the number of children as the best way to get more income through odd jobs. (vii) Indirect government support and subsidies for poor families like ration quantity based on the size of family, etc (viii) Possibility of getting pecuniary benefits on occasions like election, philanthropic functions, free distribution of basic necessaries, BSPATIL
    • etc., from the political parties is yet another reason for a big family size.On die whole the economic factors indicate that Inspite of being poor,there are several reasons for maintaining a large family size than smallones.Let us now discuss the impact of population explosion on economicdevelopment of India.1. The size of population has a direct impact on the size of national income of a country. In Indian experience, the net national product at factor cost went up by 215% between 1961 and 1991 but since the population increased at a rate of 92% during the same period, the percapita income increased only by 58% during the period. As the population increases, the increase in national income, even if it is substantial, will be spread over a larger number of persons thereby the percapita income is low. With lower percapita income all the other dependent variables of income, viz., saving, consumption, investment, etc., will also be lower.2. The most important effect of population growth is on the food supply. In the - past, Malthus has explained this in terms of his geometrical ratio and arithmetical ratio. He pointed out that the population increases at a slow arithmetical ratio. Consequently over a period of time the rate of growth of population will exceed that of food production. This leads to food problem. In the case of India, Inspite of a spectacular achievement on the food front, the scarcity for food continues as explained below. The net availability of food grains between 1956 and 1992 increased by 140% but the population during the same period recorded an increase of 118% BSPATIL
    • and so the percapita availability of food grains increased only by 10% . With ever increasing population, there is a need for the government to maintain the public distribution system with all its malpractices at a phenomenal cost to the exchequer.3. Another vital aspect of impact of population on economic development is that with rising population, the percentage of dependents also increases apart from the increase in non-working population deteriorated between 1961 and 1981. In 1961 the number of unproductive consumers was 256 million but it increased to 464 million by 1981, which in percentage terms is 57% and 62% respectively. The unproductive consumers are those who do not contribute anything to national income. Hence, with every addition to population the absolute number of unproductive consumers increases who make no contribution to national income, but claim a substantial share of national income. As a result the economy is impoverished. It should also be noted that with 40% of our population in the age group of 0 to 14 years of age and 6% belonging to aged group of above 60 years of age, there is increase in dependency with every addition to population. This is clearly a drain of savings of every household and the society is denied of precious savings and the capital formation.4. A very significant effect of population growth is on employment. It is very simple idea to understand. With increase in population there is sizeable addition to the labour force, but when the employment generated is less than the addition to the labour force, the result is unemployment and underemployment. For instance during the VI plan period the number of unemployed was 20.7 million accounting for 7.74% of the labour force, while by 1990 this has increased to nearly 23 million. Inspite of eight five year BSPATIL
    • plans and generation of employment, it is proved that the number of employment generated is clearly less than the addition made to the population. This means that a valuable resource is unutilized or under utilized. This is a national waste. If we consider among the unemployment, the educated unemployed, then the gravity of the situation will be easily understood.5. The increase in population makes a heavy demand on the community facilities like education, health, housing, etc. In the case of education, in India primary education is made free of cost and the expenditure incurred by the government on this account alone is Rs. 2,246 crores. Since the number of children in the age group of 6 to 14 years is about 156 million and expenditure at the rate of Rs. 144 per year per child will mean a heavy drain on the financial resources. In the case of medical facilities the number of people depending on public hospitals and other medical facilities is increasing day after day causing a heavy drain on resources for the government. Apart from the availability of education and medical facilities being threatened by the growing population, the quality of service rendered is also found to be very poor. The rising population has made housing a major problem. The result is up coming of slums in every part of the country. Leading a life of abject poverty, the poor people neither have access to education, medical or housing facilities. Added to these is the expenditure of the government on populist welfare schemes like noon meal scheme, free books and note books, free chappals, etc. All these political compulsions have denied the economy the crucial financial resources for developmental purposes.6. Rapid population growth affects capital formation in a country. With rising population, it is already pointed out that the national BSPATIL
    • income is shared by a larger number of people and so the per capita income is low. Consequently, the saving potential of the people is also low. In order to achieve rapid economic growth, there is. a need to at least maintain the growth in national income. But India with 2.2% growth rate (annual) of population, national income must rise at the same rate so that the per capita income remains the same. For this purpose capital investment should take place at least in the order of about 12% whereas in India the capital investment growth is poor because of poor saving.-Even though it is said that our annual saving rate is about 23%, majority of saving is used for unproductive purposes like marriage, on jewels, etc. Hence, the capital formation is very poor and the population growth eats away whatever increase in national income is possible.7. Population growth has impact on environment. This was explained by Anne Ehrlich in terms of a formula I = PAT, where I refers to environmental impact, P stands for population, A refers to per capita consumption and T refers to environmentally harmful technology that supplies A. The three factors PAT have multiplicative relationship and so their combined effect is very serious. Further with every significant addition to population, there is misuse of resources like water, electricity, land, etc. The result of this misuse is that a huge quantity of waste is generated in different forms which directly affect the environment. For example, the demand for fuel will go up with increasing.8. Population, then people will start cutting trees to get the cheapest fuel available. Slowly this leads to denudation of forests leading to ecological imbalance affecting the environment. Substitutes used also affect the environmental purity as in the case of atomic power or plastics, etc. BSPATIL
    • 9. Population explosion carries with it severe social problems. When the population increases, we will find migration of workers from, rural to urban centers seeking employment which directly means additional pressure on the urban facilities. Apart from mushrooming of urban slums, several problems like communal riots, thefts and other such anti-social activities are committed. The crime rate goes up disturbing the peace and mental strain, causes a change in attitude and social values get eroded. People become more and more self-centered and such an environment is not good for shaping the future generation.10. There is a direct impact on quality of population due to population explosion. By quality of population we mean the work potential, mental make up, work culture, etc. With ever increasing population, every individual family is unable to maintain the standard of living and this affects the health and mental conditions of people. Automatically these would affect the productivity of workers. The work force is so weak physically and mentally. With pressure of family, the workmen demand for more wages and salaries. They try to earn maximum by carrying out inferior quality work or working in more places with lesser efficiency. The work culture is tampered that every person wants to minimize work and maximize leisure. The effect of all these is the productivity is very low and the country loses.11. In an agricultural oriented country like India, the increasing population exerts a heavy pressure on limited land resources. With millions depending on agricultural sector, the pressure would be more and this leads to sub-division and fragmentation of land BSPATIL
    • holdings making them unfit for adopting modem methods of cultivation. This affects the productivity of land. Though this is neutralized through scientific methods like using high yielding variety of seeds, application of fertilizers and pesticides, multiple cropping, etc. All these depend on availability of water. With environmental degradation, the monsoon fails and the increasing demand for drinking water, etc., will result in scarcity of water for multiple cropping: Further more frequent use of the same land even with application of fertilizers, would result only in the operation of law of diminishing returns.Therefore, without controlling population growth it is not possible for anycountry to achieve rapid economic growth, and maintain it if achieved.For this a suitable population policy is very much needed.Population policy of government since independenceDuring the first five year plans, the government was not sufficientlyconcentrating on a sound population policy. It was merely allotting fundsthrough every five year plan for family planning. From a modest sum ofRs. 65 lakhs during the I Plan, the amount increased to Rs. 5 crores in IIPlan, Rs. 25 crores in III Plan, Rs. 277 crores in the IV Plan. With such aserious problem on hand viz., control of population, the amount allocatedtill the IV Plan was sufficient enough to sustain the family planningprograms but not for extending it to the rural areas in a big way. Duringthe V Plan the allocation touched Rs. 409 crores which was increased toRs. 1,448 crores in the VI Plan, hence, only V Plan onwards, was there anyconcrete attempt to control the population. Till the IV Plan thegovernment was focusing on the following lines of action to controlpopulation: 1. Spreading knowledge of family planning technique. BSPATIL
    • 2. Supply of contraceptives to all in the rural and urban areas. 3. Financial incentives for people who undergo family planning operations. 4. Conducting a large number of camps for sterilization operation for both males and females.After the lifting of emergency the government seriously considered thefollowing for controlling population: (ii) raising the minimum marriageable age of males and females through legislative provisions (iii) raising the level of education among the females (iv) raising the monetary compensation for sterilization operation especially in the rural areas (v) making sterilization operation compulsory for couples with two children etc.But such coercive tactics failed to yield the fruit, as in most of the cases,the officials were more concerned about the target fixed for them thanthe public sentiments and reaction.The VI Plan fixed the target for net reproduction late as one to beachieved by 1996 against the present level of 1.67. The target forsterilization operation, IUD insert ion and CC usage, could not be reacheddue to the following reasons: absence of infrastructural facilities, politicalcompulsions, cultural values, religious sentiments, high infant mortalityrate, etc.During the VII Plan certain basic understandings about our population asgiven below made the government to approach the problem from adifferent angle. BSPATIL
    • (i) It was understood that the majority of Indian population is living below the poverty line and it is this group which has a very high birth rate. (ii) In a democratic set up it is necessary to set the minimum age for marriage and also the prescription of sterilization operation through legislation. (iii) To increase the acceptance of sterilization operation, the infant mortality rate should be brought down. (iv) Using other incentive like priority in housing, increase in salary, preference in employment, adult ration for child, etc., as followed by China, which could successfully bring down its birth rate significantly in a decade.The VU Flan accordingly fixed the following targets :(Current level given in brackets) i. Population growth rate 1.2% (2.03%) ii. Crude birth rate21/1000 (30.6/1000) iii. Crude death rate 9/1000 (10.3/1000) iv. Infant mortality rate 60/1000 (91/1000)With these targets, the Plan formulated the Family planning and maternityand child health strategies. Through this the Plan also aimed at reducingthe maternal mortality rate. .The family planning programs werere-oriented to make them family welfare programs, thereby givingemphasis on every aspect of the family than on/ the birth rate andreproduction rate. However, mere was a heed for orientation of everybodyconcerned in order to achieve that target set. The government on its partmade a hefty contribution through plan allocations.Population policy in the VU Plan : BSPATIL
    • With the findings of the Census conducted in 1991, the government hasdecided lo formulate an Action plan on following lines : i. To extend the family welfare services to more areas and improving the quality of service. ii. To give more autonomy for States to manage these programs so as to avoid the target focused action. iii. To introduce innovative programs for achieving higher level of family welfare especially among the urban slums. iv. To identify the districts with birth rate above 39/1000 and develop special programs for these districts. v. To invite and appreciate the involvement of voluntary and non¬ governmental agencies to these programs. vi. Relating the grants to the village panchayats and the State government for rural development with the achievement in bringing down the birth rate. vii. To encourage small family concept. viii. To dispel the son-preference attitude. ix. Devising schemes for post-retirement period so as to discourage unnecessary issue of children. x. To improve the political will in implementing all these programs. BSPATIL
    • With these policy options, one may expect that during the VIII Plan, therate of growth of population would slow down so as to bring down thenet reproduction rate to 1 as targeted already.Balance of payments position since 1991 and critical evaluation of theNew export-import policy 1992 - 1997.The balance of payments position, which had reached a point of nearcollapse in June, 1991, slowly stabilized during the course of 1991-92.Although new policies to deal with the situation were quickly formulatedby the new government and implemented within a few months theexternal payments situation took time to stabilize primarily because ithad been allowed, to deteriorate to a state of near bankruptcy in June1991. Foreign currency reserves had declined to $ 1.1. billion despiteheavy borrowing from the IMF in 1990-91 and a substantial part of thiswas held in illiquid deposits which could not have been easily mobilized ifneeded. International confidence had all but collapsed, commercialborrowings had dried up-and even letters of credit opened by Indianbanks were being generally rejected unless accompanied by confirmationby foreign banks.The strategy for the management of the balance of payments outlined inthe Budget for 1991-92 which was presented in July, 1991 relied upon acombination of macro economic stabilization and structural reformsindustrial and trade policy. It was recognized that in the medium term,the solution to the balance of payments problem would have to comefrom a much stronger export performance, but in the shorter run thestrategy had to be underpinned by mobilization of external financingfrom the multilateral agencies and from bilateral donors. Restoration ofaccess to imports through liberalization had to depend initially uponadditional financing since the export efforts would take time to show BSPATIL
    • results. Since access to external commercial borrowing was constrainedthe only other sources of funds were the bilateral and multilateralagencies. Visible support from the multilateral agencies was importantfor restoring international confidence.Accordingly, the government negotiated a standby arrangement with theIMF in October, 1991 for $ 2.3 billion over a 20-month period, aStructural Adjustment Loan with the IBRD of S 500 million and aHydrocarbon Sector Loan with the ADB for $ 250 million. Parallel with theeffort to draw on multilateral sources, the government also launched theIndia Development Bonds aimed at mobilizing NRI sources of funds.With the assurance of external support through these efforts, there was agradual stabilization of the balance of payments position in the course of1991-92. Foreign exchange reserves were restored to more normal levelsincreasing from $ 1.1 billion in June, 1991 to $ 5.6 billion at the end ofMarch, 1992, The entire amount of drawls from the IMF in 1991-92 withthe accretion from India Development Bonds together amounted to aninflow of $ 2.87 billion. This was less than the increase in reserves of $4.51 billion from June 1991 to end March, 1992. In effect, the exceptionalfinancing mobilized in 1991-92 was used primarily to build up reserves.Import restrictions were gradually lifted in the course of 1991-92 as thebalance of payments stabilized. By the end of 1991-92 the newLiberalized Exchange Rate Management System introduced in the Budgetfor 1992-93 eliminated import licensing in most capital goods, rawmaterials, intermediates and components and introduced a dualexchange rate system with one rate effectively floated in the market. TheBudget for 1992-93 also reduced the customs duties in line with declaredGovernment policy in order to make the Indian economy morecompetitive and gradually exposing Indian industry to external BSPATIL
    • competitive pressure. The trade and exchange rate policy regime for1992-93 was therefore characterized by major progress in eliminatingunnecessary administrative and discretionary controls over foreign tradewhich were contributing to making our economy uncompetitive.The year 1992-93 saw a revival of imports to more normal levels. Thetotal value of imports in US $ in the period April-December 1992increased by 16.5% over the level in the corresponding period of 1991-92.The increase appears large only in comparison with a highly depressedlevel prevailing in 1991-92. In fact the level of imports in 1992-93 as awhole is expected to be around $ 25 billion which is somewhat lowerthan the level in 1990-91.Exports in 1992-93 performed far better than in 1991-92. Total exportgrowth in the period April-December was 3.4% in dollar terms comparedwith an observed decline of 1.5% in 1991-92, The performance of totalexports is depressed by the decline of more than 60% in exports toRussia and other States of the former Soviet Union in 1992-93. Thegrowth of exports to the general currency area in the periodApril-December was 11.4%. The average growth rate in April-December,1992 has been adversely affected by a decline in exports of I2.5%! inDecember, reflecting the disturbed conditions prevailing in that month,figures for January are also likely to be depressed by the riots US $ 19billion. But it is hoped that the export performance in subsequent monthswill return to the high growth rates of 15 - 16 per cent observed duringSeptember-November.The current account deficit in 1992-93 is expected to be around $ 7billion, reflecting the revival of imports to more normal levels. This deficit BSPATIL
    • is being financed through a combination of traditional financing sourcesand exceptional financing.However, there are important uncertainties in the balance of payments.The full impact of the disturbances in December, 1992 and January, 1993on exports and-imports is difficult to assess at this stage. Clearly, thereceipts on account of tourism would be less than anticipated. The inflowof NRI deposits has in any case been small this year. The inflow ofexternal assistance is also subject to some uncertainties consequentupon constraints that affect the rate of utilization. A step up incommercial borrowings was, in any case, not envisaged. Finally, there isthe uncertainty arising from leads and lags. Interest rates and,exchange rate expectations do affect the timing of receipt of exportproceeds and payment of import costs. However, while theseuncertainties justify a measure of caution in assessing prospects, thebalance of payments in 1991-92 has performed more or less as expected.New export-import policy 1992 -1997 :On March 31, 1992, the Government announced a new export-importpolicy for the period 1992-1997. This policy has the following objectives: 1. To institute the required framework for globalization of the Indias foreign trade. 2. To improve the export capabilities of our industry, the policy aims at promoting the productivity, modernization and competitiveness. 3. To facilitate improvement of image of our products in foreign markets, the policy encourages the attainment of high quality in the export products. 4. By allowing liberal access to raw materials, intermediates, components, consumable and capital goods etc., in the BSPATIL
    • international market, the policy wants to achieve higher exports.5. The policy provides for deregulation to achieve self-reliance so that the domestic producers can improve their efficiency and become competitive internationally.6. The policy also lays emphasis on research and development as well as technological advancements so that the domestic producers will benefit from globalization.7. A significant object is to simplify the procedure for exports and imports.Subsequently, the government announced further modification to theabove policy by April 1, 1993. The important features of this modifiedpolicy are: (i) The duty-free export benefit given to the Export oriented units and the units in Export Processing Zones is extended to units engaged in agriculture and allied activities provided they export 50% of their total production. (ii) The government removed 144 items from the negative list of exports leaving only prohibited items, items requiring license and canalized items. (iii) As a step to tap the potential of farm sector, professionals, hotels, travel agents and diagnostic centers, the government extended the Export promotion capital goods scheme to them. (iv) For more than 2200 items, standard input-output norms are fixed to enable the issue of license under the duty exemption scheme. BSPATIL
    • (v) The criterion for recognizing export houses is now based on the foreign exchange earning to FOB values of physical exports. (vi) The procedure relating to export and import has been further simplified. (vii) Compensation would be given for unutilized import licenses for duty free license scheme and exam scrip holders.These provisions in the latest export-import policy would certainly enableIndia to improve her exports and bring down imports. This has beenexperienced during the first half of 1994 itself.Structural composition of national income in India. The limitations ofNational income estimation in India.According to the First report of the National Income Committee, "Nationalincome estimate measures the volume of commodities and servicesturned out during a given period, counted without duplication." Thismeans the total volume of goods and services produced in a year in acountry is valued in monetary terms to obtain the National income of thecountry concerned.Regarding the measurement of National income, it could be done in threedifferent ways depending upon the interpretation of concept of nationalincome. If National income is considered as a flow of goods and services,then the method used is called Product method. If National income istreated as a flow of income then the relevant method of measuring it iscalled Income method. Alternatively, if National income is treated as aflow of expenditure, the method used is called the Expenditure method.Apart from these traditional methods of measuring National income, one BSPATIL
    • more method is evolved and it is called the Value added method. Let usnow look into the contents of each of these methods. i) Product method: In this method, the value of goods and services produced in an economy during a year is found at the market prices, to obtain the gross national product at market prices. By subtracting indirect taxes and adding subsidies, we obtain the Gross national Product at factor cost. By deducting from Gross national product the depreciation, we obtain the Net national product. ii) Income method: When we aggregate the income received by various factor services, like rent, wages/salaries, interest and profit we obtain the National income at a factor cost. By deducting depreciation from this we obtain the Net National income at factor cost. iii) Expenditure method: By classifying expenditure as consumption expenditure and investment expenditure, and then adding them will get is the National income. This could be calculated at market prices or at factor cost as in the other methods. iv) Value added method : .In all the above methods, there is a possibility of double counting and to avoid this the best method is to sum up only the value added to the product or services at every stage. In that manner only the net accretion in value of a product or service will be taken into account to arrive at the final value of all goods and services produced in a year. This method is by far considered as the best though it bristles with certain problems and-difficulties. BSPATIL
    • In India we adopt a combination of the product method and incomemethod for measuring National income.Trend in National income since 1951 :The growth of National income in India since 1951 can be understoodfrom the Table given below.RATE OF GROWTH OF NATIONAL PRODUCT-IN INDIA(Figures in percentage) PLAN ACTUAL TARGETFIR5T 3.6 2.1SECOND 4.0 4.5THIRD 2.4 5.6FOURTH 3.3 5.7FIFTH 5.0 4.4SIXTH 5.4 5.2SEVENTH 5.7 5.0EIGHTH --- 5.6Analysis of the National income in India has yielded the following trends :1. There has not been a consistent increase in our National income as revealed by the growth figure given in the table above. Our real national income was going up at an annual average rate of 3.9% while the population was also increasing at an average annual rate of 2.13% Consequently the per capita income increased at an annual rate of only 1.8% BSPATIL
    • 2. It could be observed that the rate of growth declined over the decades. While it was around 3.8% during 50s, it came down to 3.5% during 60s and then further to 3.1% during 70s. I980s witnessed a reversal of the trend by recording 5% per annum. But again in the first three years of 90s the rate came down to 3.5% , A similar movement was also observed in the per capital income.3. Changes and fluctuations in the growth rate of National income was very nigh between years. The main reason for this is that we continue to depend on uncertain monsoon to succeed every year. A successful monsoj3fi boosts up the rate of growth while an adverse monsoon brings down the rate. In Indian experience, the failure of monsoon is a regular feature and so the growth rate in National income has been declining over the decades.4. As years rolled, it was observed that the fluctuations in growth of national income also widened. For instance during the first decade the fluctuation was between - 1.7257 and + 8.1568 while it widened in the second decade lying between - 4.7565 and + 9.2071. Fortunately there was negative growth rate in the eighties and the fluctuations were ranging between + 2.2 to + 11.2 but early nineties repeat the earlier performance with the growth rate varying between + 1.5 and + 5.8. The fluctuations widening over the decades clearly indicate that our planned efforts are not really bearing fruits and that we still depend on uncertain monsoon.5. An interesting observation is that this overall fluctuations over the period is quite consistent with the fluctuations recorded by the primary, secondary and tertiary sectors. In other words, these basic sectors were not free from fluctuations and in a way the fluctuations in them cause the over all fluctuations. Among the BSPATIL
    • sectors, the primary sector understandably recorded wide fluctuations followed by the secondary and then the tertiary sectors. This observation is more confirmed when we study the sectoral contribution.6. Composition of Net Domestic Product (NDP): The contribution by different sectors to the NDP will vary from country to country and even for a country from time to time depending upon the stage of economic development. It is usual that in the initial stage of development the contribution by primary sector will be very much higher than in the other sectors and over a period this would change. In Indian case also this has become true. For example in the table given below the; contribution of the three sectors underwent a change over a period of four decades.It would be clear from the table below that the contribution by thetertiary sector is on the increase over the period followed by thesecondary sector and then the primary sector. This is because the rate ofgrowth of the tertiary and secondary sectors has been more than doublethat of the primary sector. The secondary sector which accounted for ahigher growth rate till the end of the II Plan started receding and thetertiary sector has retained the lead in growth rate.1. COMPOSITION OF NET DOMESTIC PRODUCT (In percentage) SECTOR 1952-53 to 1955-56 1985-86 to 1989-90 1991-92PRIMARY 56.06 34.58 27.00SECONDARY 15.63 26.57 29.00TERTIARY 28.31 38.95 41.30 BSPATIL
    • 2. When we study the compound growth rate of commodity andnon-commodity sectors, we find that the rate of growth is higher in thecase of latter. This tendency is welcome because the primary andsecondary sectors can only generate limited employment opportunitieswhile the service sector or the tertiary sector or the non-commoditysector has greater potential in respect of employment. With economicdevelopment, the share of transport, communication, energy, bankingand insurance to the national product would automatically increase as isexperienced in India.3. The study of per capita distribution of GDP in agricultural andnon-agricultural sectors indicates that over four decades the per capitadistribution is more in the case of non-agricultural sector than theagricultural sector. The reasons for this are that: a) the growth rate is high in the non-agricultural sector than in the agricultural sector and b) as the population increases, there is no significant shift taking place from the agricultural to non-agricultural sector.This is clear from the table given below: PER CAPITA DISTRIBUTION OF GDP (Amount in Rs.)SECTOR 1950-5 1960-61 1970-7 1980-81 1990-91 BSPATIL
    • 1 1AGRI¬CULTURAL 860.83 956.17 955.60 940.48 1143NON-AGRI¬ 1886.52 2573.32 3302.69 3506.47 5189CULTURAL4. Share of the rural and urban sector to NDP is also used tounderstand the composition of NDP. In Indian case, the contribution bythe urban sector to NDP is very much higher than that of the rural sector.Similarly the per capita income in the rural and urban sectors in terms ofratio shows that the per capita income was high in the urban sector andlow in rural sector. The ratio increased from 1: 208 in 1951 to 1 : 241 in1970-71. But subsequently it declined because with the increase inpopulation, the size of urban population increased and that of ruralpopulation declined. Hence, in 1980-81 the ratio was 1 : 232 and 1 : 246in 1989-90.5. The analysis of the share of organized and unorganized sectors inthe NDP in terms of the factor income revealed that the share of factorincome in the organized sector increased consistently over the last threedecades, but that of the unorganized sector remained dormant even in1990. This is because the size of unorganized sector consisting ofagricultural sector, corporate sector and service sector. The share offactor income in the organized and unorganized sector is given in thetable below.SHARE OF ORGANIZED AND UNORGANIZED SECTORS IN NDP (In percentage)SECTOR 1960-61 1970-71 1979-80 1989-90UN-ORGANIZED 74.40 72.28 64.81 63.35 BSPATIL
    • ORGANIZED 25.60 27.82 35.15 36.656. To study the share of public and private sectors in-the GDP let us look into the table below: SECTORS 1960-61 1970-71 1980-83 1990-91PUBLIC 10.56 14.49 19.80 26.40PRIVATE 39.34 85.51 80.20 73.60The table above clearly indicates that the share of private sector in GDPremains high and constitutes nearly 75% of GDP even in 1990-91. But theshare of private sector has declined from about 90% to about 74%between 1960-61 and 1990-91. On the other hand, with the emphasison public sector, its share in GDP has shown a consistent increase in thepast three decades and it is constituting more than 25% by 1990-91. Thereason for the low share of public sector in GDP is mainly because that itstarted developing late, and that the agricultural sector is mostly inprivate sector.Based on the above indicators we may come to a conclusion that over thepast four decades, the secondary and tertiary sectors have emerged asimportant sectors with the tertiary sector occupying the top position. Theurban sector is continuing to hold a more important place than the ruralsector. The unorganized sector still remains in the predominant positionand the public sector is yet to make a significant leap in contribution toGDP.Limitation of national income estimation in India : BSPATIL
    • The conceptual confusions associated with national income estimationhave not been cleared satisfactorily and so the estimation process issubjected to various interpretations. Apart from these the followinglimitations are also found in the estimation:1. The existence of non-monetized sector and the output flowing from it has remained outside the computation of national income. In Indian case, in the agricultural sector the barter system still continues that a sizeable quantity of produce does not enter into the market system at all. For example, the wages paid in kind itself is substantial quantity and it is not included in the valuation process.2. Lack of data relating to the income of small producers and household enterprises is yet another serious limitation. Most of the households engage in alternative occupation and the income earned through that is never accounted for. For example, the services of cook, household preparations of edible items, etc., are valuable but the income earned through such occupations is never known, similarly in the rural areas, the small producers never maintain details of income, expenditure and other data relating to their production. It is reasonable to expect that the income generated through these sources is substantial and when it is not included in national income the estimate of national income is very much less.3. Difficulty in differentiating (he economic functions performed is yet another limitation in. the estimation of national income. For example, an agricultural peasant during the season may work in his own field, and also in the farm yard of the neighbour, during the off-season he may work at a match factory, or just rear cattle of BSPATIL
    • others, etc. Then how to classify his income? The usual practice is to classify the income earned under industry origin. but with a sizeable section of the people depending on agricultural sector where the occupation is seasonal, it is very difficult to estimate the income earned from various occupations.4. Existence of black money and unaccounted money is another major hurdle in the estimation of national income. Of course this problem is experienced by every country. In India the National Institute of Public Finance and Policy h:ts estimated in 1983-84, the size of beck money to be around 18 to 21% of the total income. With every possible increase in this category of income over the period, the estimation of national income is bound to be very much less.5. The compilation of data for national income estimation is taking place in a very loose manner. Usually the data at the village level are compiled by the village head man who may not collect these data in the scientific way in which it should be collected. Obviously the aggregation of these data will involve lot of inaccuracies. Further there is more than one official agency supplying the data which rarely tally. Another bad practice is to round off the data in an unscientific manner. All these have serious implications on the data base for national income estimation.On the whole, the national income estimation is subjected to the abovelimitations. Efforts are being taken at every stage to improve theestimation process, computerization of data, has been started onlyrecently and with tins a reasonable j level of accuracy in the data can beexpected. Further centers like Center for Monitoring the Indian Economyhave been established and their work is integrated. With these, nationalincome estimation should become satisfactory in future. BSPATIL
    • PROBLEM OF POVERTY1. Distinction between absolute and relative poverty. Poverty linein Indian context. The causes for poverty in India andevaluate the various poverty eradication programme.Absolute poverty is a state in which a person lacks resources even tomeet or his familys biological needs,-lives in a condition of isolation witha high degree of insecurity. This condition is likely to be hereditary.Further the person may neither be educated nor have anyone to care forhim and may live in poor or inadequate housing and work in inhumanconditions. Basically such persons may not be able to meet thefundamental costs of living.Relative poverty is a state in which the position of a person or a familycan be f expressed in relation to others in the society, especially in termsof the living and f working conditions. This clearly picturises theinequalities in the society. The poverty of a person or a family is alwaysexplained and understood with reference to the average level of thesociety. Those people who are found to live with low income, lessremunerative employment, poor living conditions, etc compared to theaverage determined for the society are said to be living under poverty.In Indian context, we examine absolute poverty to understand the extentof poverty and also the causes as well as the eradication programsundertaken by the f government. In order to estimate the poverty and thenumber of poor people in the country, the concept of poverty line is used.In defining the poverty line usually three important factors are consideredviz., i) minimum nutritional level for subsistence, ii) cost of this minimumdiet and iii) per capita consumption expenditure. .While using thesefactors, care is taken while making inter-year comparison of poverty by BSPATIL
    • using appropriate deflators to neutralize the effect of inflation. Most ofthe studies on poverty have used the data supplied by the NationalSample Survey. But all these studies have been able to make only a roughmeasure of Indian poverty. Hence, for our purpose we will consider themeasure adopted by the Planning commission.The Planning commission has used the nutritional requirement as thebasis for computing the poverty line. According to the Commission, thereis a need to define poverty line for rural areas and urban areas separately.Accordingly, interms of calorie requirement per person per day, theCommission fixed 2400 calories for rural areas and 2100 calories forurban areas. In terms of monetary unit, it works out to be Rs. 10,890 forrural areas and Rs. 12,570 for urban areas (at 1991-92 prices).On this basis the Economic survey 1992-93 estimated the percentagepopulation below the poverty line as shown in the table below : AREA 1987-88 1989-90RURAL 33.40 28.20URBAN 20.10 19.30ALL INDIA 29.90 25.80The estimate of poverty given in the above table by the PlanningCommission is contradicted by various studies undertaken by researchscholars. For example, while the Planning Commission estimated about22% points fall in poverty between 1972-73 and 1987-88, Prof. Minhasand others have pointed out that the decline during the above period wasonly by 12% points. BSPATIL
    • Another aspect of the poverty estimate is that there is a significantregional difference as well as inter-state difference. For example, in 1988,the percentage population living below the poverty line in differentregions is as given below:REGION 1970 1983 1988SOUTH 61.0 46.2 43.2EAST 61.8 57.3 51.3CENTRAL 46.9 40.2 37.2WEST 46.1 38.2 34.9NORTH 12.6 9.8 8.3Based on the above tables, it could be understood that "the poverty hasdeclined over a period and significantly during the 80s. This isattributed to the following reasons : i. The GNP increased by 5J% during the 80s compared to about 3.5% increase till the 70’s. ii. The poverty eradication programs undertaken by the government has started yielding the fruits. iii. The increasing urbanization has resulted in the increase in income, especially the urban migrants remit sizeable amount of money to their relatives in the rural areas resulting in improved standard of living in rural areas. iv. The spread of education and impact of education together have contributed to the reduction of poverty. v. The development of non-farm activities in the rural areas has also helped to improve the status of the rural poor.Causes of poverty BSPATIL
    • 1. The ever increasing population: This is one of the basic reasons for poverty, especially the rural poverty. It is well known that the annual addition to population was more than the rate of economic growth. The quality of our population, especially the productivity and health condition, is so poor that population growth merely adds only the size of claimant to the available resources without making any significant contribution to the output.2. The large scale unemployment is the next factor which is both a cause for poverty as well as the effect of poverty. It is a cause in the sense that when millions of people remain without employment, their contribution to output is nil but they claim a share in the output. When the claimants to the limited output is high, then the per capita availability -is so low which causes poverty. Unemployment is the result of poverty in the sense that when the poor people, mostly unskilled, want employment, they do not get employment Even if they manage to get the employment is purely seasonal and temporary.3. Another important reason is the under utilization of the available resources. Inspite of technological advancement, scientific improvements, etc., the utilizationis very much far from satisfactory. As a result the total output is less whereas the claimant is more which causes poverty.4. The growth strategy adopted by the country through Five year plans has not yielded the desired or the targeted results. Most of the schemes of poverty BSPATIL
    • 5. Eradication has touched only a small segment of the population. The agricultural sector is still remaining in the same position that it is unable to contribute significantly through increased production and productivity to our national income. 6. The existence of inequalities in income is yet another reason for poverty. The inequalities are mainly due to the concentration of wealth and property in the hands of a few. As a result the percapita income is very low resulting in poverty. 7. Ecological degradation and deforestation are also causing poverty. The urban poor reed forest based resources mainly wood for fuel purposes. This they obtain by indulging in indiscriminate felling of trees and denudation of forests. This directly affects the earning scope for the rural poor, as they depend mostly on the forest resources and agricultural lands for their livelihood. With the fast denudation of forests, the rural poor become poorer. 8. The distribution of resources in the country is not even and this is evident from the inequalities existing among the states. For example, even in the 90s Orissa remains a backward state while Maharashtra is in the forefront like Punjab, Haryana, Uttar Pradesh, etc. This is one of the reasons for the prevalence of poverty in certain states.Measures to alleviate poverty1. The first step towards eradication of poverty is to achieve fast economic growth. It is realized that poverty in India is more due to institutional factors and so there is a need to attack directly poverty through programs aimed at particular group of people. BSPATIL
    • That is why programs like Integrated Rural Development Programme, Jawaharlal Rojgar Yojana, etc have been introduced.2. The large scale producers have to be oriented towards v/elfare of the community and the small scale industries should be Moro employment generating and help in the removal of unemployment, especial in the rural areas.3. At the national level, the country should improve the rate of surplus generation by increasing resources mobilization. But this will be difficult when the propensity to save and invest is very low among people and the tax rates are very stiff. This could be achieved by achieving better utilization of resources, using better techniques, improving the technology, etc. All these will help to generate the income in the economy and the percapita income will also go up.4. With the application of improved technology, use of high yielding variety .seeds, fertilizers and insecticides, it should be possible to increase the production and productivity in the agricultural sector which directly will increase the income of the farmers. This in turn means higher per capita income for the rural folks thereby reducing poverty in the rural areas.5. It is well known that nearly 70%, of Indian population is depending on agricultural sector and the agricultural sector is completely depending on monsoon, Monsoon is most uncertain that the famous saying is “Indian agricultural is gamble with monsoon.” There is a need to improve the irrigation facility .and relieve the dependence on monsoon so that the agriculturists will have good BSPATIL
    • production and achieve a higher level of productivity with which they can be relieved from poverty.6. Several other measures like a forestation, massive rural employment generation, improving soil conservation, adopting latest technology in production process, improving the allied occupation to provide alternative employment opportunities for the farmers during the off-season, etc., can certainly bring down the level of rural poverty.7. As recommended by the World Bank, the rural employment schemes should be more oriented towards women as it is found that in nearly 35% of the rural family women’s’ share in the family income is quite significant. Special schemes could be devised to improve the employment opportunities for women so as to supplement the income of the family with women’s’ earnings.8. The rural credit system needs review, especially after nearly 25 years after nationalization of banks. The banks should be involved more in the rural schemes and new employment oriented schemes have to be identified and liberal financial assistance should be provided for such schemes so as to help remove poverty in the rural areas.9. Efforts should be made to discourage conspicuous consumption among the people and encourage them to make productive investment. This, calls for a change in life style of the people and their consumption behaviour. Though it would fake a long time to achieve this, yet steps should be initiated at the earliest in this direction. BSPATIL
    • 10. Encouraging co-operative efforts in various fields, improving and spreading educational opportunities, creating the awareness among the people that the poverty is only a stage and it could be overcome with consistent efforts, devising new schemes targeting specific group and its peculiarities, rigorous implementation of land reform policies, etc are all other measures which would bring down poverty in India.All the schemes were in operation for quite some time and an evaluationof these schemes has brought out certain deficiencies of them. Effortshave to be taken up to overcome these deficiencies so that theseschemes would help to eradicate poverty in India.(i) The first deficiency is that these schemes are weakly integrated with other plans for area development.(ii) The community assets created through various schemes has not been employment generating in nature.(iii) The welt to do farmers and people in the rural areas are found to be the beneficiaries of the schemes aimed at eradicating poverty.(iv) The delay in the implementation of the schemes and the allotment as well as release of funds for these schemes is robbing the expected benefits of these schemes.(v) Politicians interfere in the process of identification of the beneficiaries that the fruits of these schemes do not reach the targeted group of people.(vi) Failure to provide adequate training to the persons: in-charge of implementing various schemes is also another reason for the schemes not being effective.(vii) Poor flow of communication and details about the various schemes to the rural folks is one more reason for the deficiency of BSPATIL
    • these schemes. There is a need to strengthen the publicity for these schemes so that the needy will be benefited.As has been already stated, the government has introduced variousschemes aimed at eradicating poverty, especially in the rural areas, butthe above mentioned deficiencies should be viewed seriously so that theefforts to eradicate poverty will start bearing fruits.Problem of unemployment in IndiaUnemployment is of different types. Every type of unemployment is foundin India. Before we analyse the nature of unemployment, we shouldunderstand the types of unemployment 1. Structural unemployment: This is a type of unemployment caused mainly by the change in the development strategy adopted by an economy. For example, suppose a country basically agricultural in nature, plans to adopt industrialization as a strategy. This will result in displacement of labour in agriculture and not all of them can be accommodated in the industries. This type of unemployment caused is called Structural unemployment. 2. Cyclical unemployment: Every economy goes through the ups and downs in the process of development. This type of economic fluctuations is studied through the behaviour of business cycles. Hence, during the period of inflation, the unemployment will be less and during the period of depression unemployment will be more. Such type of unemployment is caused mainly because of the deficiency of effective demand. Keynes has discussed this type of unemployment in his theory. Such unemployment is caused due to the economic fluctuations and every country will experience this type of unemployment. BSPATIL
    • 3. Frictional unemployment: This is another type of unemployment which is caused by shift in the productive effort. For example, during war time, workers are absorbed in war-time industries. Once the war is over, these workers are rendered unemployed as the war-time industries and production do not continue. Such an unemployment is called factional unemployment. An economy which is flexible can quickly solve this type of unemployment.4. Seasonal unemployment: This type of unemployment is very closely linked with the seasonality in production in any sector. For example, in the agricultural sector, during the harvest season, there is heavy demand for labour. All unemployed laborers will get work. But once the harvest season is over, these laborers remain unemployed.5. Under-employment or disguised unemployment: This is the type of unemployment which is never practically seen, but only experienced. Suppose a job which can be performed by just 10 worker, has in reality has 20 workers, then the excess 10 workers who are not actually required are said lo be under employed or disguised unemployed. In other words, the surplus labour do not make any addition to the output. Technically, their marginal product is zero. Such a situation is called wider-employment or disguised unemployment. In India this is the type of unemployment which is found in large scale in agricultural sector and public sector. Alternatively, when a Post-graduate qualified person is employed as a peon, then he is said to be under employed as his true potential is not really put into use.6. Educated unemployment: This type of unemployment is found among the educated persons. Though there are different levels of BSPATIL
    • education, at any level, if a qualified person is unemployed, then he adds to the number of educated unemployment. 7. Rural and urban unemployment: Depending upon where there is unemployment, we may classify unemployment as rural an.1 urban unemployment.TREND IN EMPLOYMENT IN INDIAWhen we analyse the growth rate of employment by sex and residence weobserve the following trend:1. The employment on the whole has been growing at the rate of 2.21 per annum during the 15 year period (1972-73 to 1987-88).2. The rate of growth in urban employment was found to be more than that of the rural employment, the respective rate being 4 per cent and 1.75 per cent. As a result, the share of employment in the total employment had gone from 16% to 22% during the 15 year period studied.3. It is of interest to note mat unemployment among male and female increased more or less at the same rate and their share in total employment also remained the same over the 15 year period.4. However, the rate of growth of employment had been declining when we divide the 15 years into three 5 year period.5. As regards the growth rate of employment in organized and unorganized sectors, it was found that in both the rate of employment was on the decline, though the rate of employment in the unorganized sector was greater than that of the organized sector during the 15 years studied. BSPATIL
    • 6. Among the sub-sectors in the organized sector, the rate of employment was more in public sector than in private sector. While in public sector the rate of employment was growing at the rate of 3% per annum the employment in private sector increased at a lower rate of 0.5% per annum.7. The study of growth rate of employment in major sectors of our economy indicated that in terms of growth rate of employment the sectors could be listed in the following order: Construction, Electricity, gas and water supply. Mining, Transport, storage and Communication, Manufacturing, Services and Agriculture.NATURE OF UNEMPLOYMENT IN INDIAEven before we discuss the extent of unemployment in India, it should benoticed no accurate estimate of the problem is available. This is mainlybecause of various types of unemployment and lack of data base onunemployment even agencies like Directorate General of Employment andTraining or Census or National Sample Survey or the Employmentexchanges can give accurate information on unemployment. However, theavailable estimates could be used to understand the magnitude of thisproblem.Looking into the Plan documents one can get the information about thebacklog of unemployment at the beginning of each Plan. This is given inthe Table below.BACKLOG OF UNEMPLOYMENT DURING FIVE YEAR PLANS BSPATIL
    • PLANS I II III Annl VI VIIBack log - at the start of 3.3 5.3 7.3 9.6 11.3 7.8the PlanAddition to the labour 9.0 11.8 17.0 14.0 32.1 36.3force during the PlanTotal (1+2) 12.3 17.1 24.1 23.6 43.4 44.1Additional employment 7.0 10.0 14.5 11.0 35.6 40.4generatedBack log - at the end of 5.3 7.1 9.6 12.6 7.8 3.7the PlanFrom the Table it could be seen, that the unemployment at the end ofevery Plan has gone up to the Annual Plans and after that the Backlog hadcome down during the VI and VII Plans, This implies that efforts taken togenerate employment have yielded the desired result, though the entirebacklog could not be erased completely.It may be noticed that this reduction in backlog need not be taken as anindicator of the problem being solved.It is necessary to study the unemployment sex-wise, and residencestatus-wise to understand the problem in right perspective. This arebeing studied below.The analysis of unemployment rates sex-wise and residence status-wiseindicated that: (i) The current daily status unemployment rates was found to decline both in urban and rural areas for both males and females BSPATIL
    • (ii) A current weekly status unemployment rate was found to increase for males whereas among the urban females this rate was almost constant while in the case of rural females it was found decline. (iii) The usual status of unemployment was found increasing among males and females in both the rural and urban areas.CAUSES FOR UNEMPLOYMENTThe problem of unemployment in India is caused by various causes. Letus now discuss the main causes for this problem: 1. The first cause for unemployment is the steady increase in population. The rate of population growth is around 2.2% per annum while the rate of employment growth is hardly matching with it. Hence, the unemployment situation worsens with every addition to population. 2. The rate of labour absorption in the organized sector in India is very limited as most of the segments in this sector are already full with labour force. Hence, the best way to absorb the surplus labour is by expanding the small scale units which are highly labour intensive. 3. The low productivity in agricultural sector is another reason for unemployment. With a large scale under-employment and disguised unemployment in the rural sector, there is limited addition to the output. As a result majority of the rural folks remain unemployed and they cannot also be absorbed by the industrial or other sectors as they do not have training. BSPATIL
    • 4. The indiscriminate increases in the number of graduates coming out of the universities and the lack of link between the curriculum and the actual requirement by the industries are the next set of reasons for large scale unemployment among the educated persons.5. The mushrooming of technical institutions throughout the country is yet another reason for the unemployment among the technicians.6. The large scale failure and sickness among the small scale units in the country is another reason for unemployment.7. The failure of several schemes for generating employment is itself a reason for the existence of large unemployment.8. The lack of co-ordination among various agencies engaged in generating employment also results in unemployment prevailing.9. The delay in identifying the potential sectors for generating employment has resulted in the building tip of huge backlog of unemployment.10. The lack of training facilities and the lacunae between the training institutions and employing agencies is another reason for unemployment among the trained persons.11. The inherent resistance to mobility among the laborers itself is a reason for unemployment For example; laborers do not prefer to go to places where jobs are available even if it amounts to remaining unemployment otherwise. BSPATIL
    • Solutions to solve the problem of unemployment:The unemployment problem needs solution at different levels. Thesolution for this problem at the urban level is different from those at therural level. Hence, steps are to be taken at both the levels to bring thisproblem under control. We discuss below the solutions for this problemunder urban level and rural level separately.Suggestions for solving urban unemployment: 1. The foremost step is to make education relevant to the society. Instead of continuing with the purely academic orientation, efforts should be made to spread vocational education. 2. Industries with low capital intensity should be started in large scale so that they can generate more employment. Though the small scale units have come into existence in large scale, yet the failure rate among them is very high. Steps should be taken to minimize this sickness among small scale units so that they can generate employment in large scale and help to solve this decades old problem. 3. The import of technology should be discouraged and the domestic technology should be updated so that it can generate more employment. 4. Industrial units with short gestation period should be encouraged in large scale. BSPATIL
    • 5. Decentralization of units and incentives for location outside the urban limits to industries, would help to relieve the urban unemployment to a large extent. 6. Financial assistance to self-employed persons should be made more liberal that such types of employment will help to minimize the intensity of the unemployment problem. 7. Considering the potential of the service sector, organized and co-coordinated efforts are required to encourage establishment of units in the service sector which can take the load to a large extent. 8. Productivity in industrial sector should be improved that more opportunities arc automatically created.Solutions for rural unemployment includes the following points : 1. Establishment of small scale units to utilize the locally available resources is one important step. 2. Providing training facilities for the rural folks in various areas will help them to improve their skills so that they can get employment in various sectors. 3. Extension of rural oriented jobs will also help to solve the problem. 4. Large irrigation schemes with excellent capacity to generate large scale employment should be started 5. Community development projects should be initiated with guidance to effectively tap the rural man power. 6. Several agricultural oriented small units like dairy farm, poultry farm, bee¬keeping, etc., should be set up in large scale so as to BSPATIL
    • provide off-season employment and also supplement agricultural income. 7. Spreading vocational education among the rural folks will also help them to improve their skills with which they can get employment. 8. Liberal financial assistance, managerial and technical guidance will go a long way to minimize rural unemployment. 9. Effectively monitoring the rural employment schemes to prevent malpractice and wrong diversion of funds will, help in realizing the objectives of these rural employment schemes arid projects. 10. Establishing links with the urban market to ensure ready market for the products from the rural areas will help to ease the unemployment among the self-employed rural folks,The problem of rural unemployment Measures to solve this problemThe agricultural sector offers livelihood for millions of people in India.One segment of these dependents is the agricultural laborers. There is noparallel to the sufferings of these agricultural laborers. This is a uniquegroup of laborers with certain peculiar characteristics. Infact it is becauseof these peculiarities of agricultural laborers that they remain always inobject poverty.One of the peculiarities is that these agricultural laborers remainunorganized. Unlike the laborers in industrial sector, the agriculturallaborers have no opportunity to come together. They remain independentthat once a laborer gets the work on a day he does not bother aboutothers. When he remains unemployed no other laborer takes any interestor shows any concern. Being illiterate these laborers have not understoodthe importance of collective bargaining. BSPATIL
    • Another peculiarity of the agricultural laborers is that they mostly remainunskilled. This is because of their nature of occupation, which is seasonaland mostly temporary. Further there is no specific work that any laborerconcentrates and every laborer is prepared to do any type of workconnected with cultivation. Hence, no specialization or skill is acquired bythem. The extent of illiteracy among them also stands in their way ofimproving their skill through training.The agricultural laborers are highly migratory in nature unlike theindustrial workers who are more stable in their jobs. This is a peculiaritythat could be found only with agricultural laborers. The nature of theiroccupation is such, that these agricultural laborers get temporary jobwherever they go. Being unskilled they go in search of job and accept anyoffered to them. Further, unlike the industrial workers who do morespecialized and specific work, the agricultural laborers have several, oddjobs that they need not stick on to a particular job or employer for ever. Itis because of this migratory nature of their work, that they are unable tocommand any remunerative reward for their work and get organized.A very important peculiarity of the agricultural laborers is that theiremployers in most of the circumstances also are poor and so they do notoffer remunerative wages. Further the employer and his family membersalso involve themselves in every work along with the hired workers. Thisresults in very close contact between the agricultural laborers and theiremployers. Till very recently, there is no codified rule or regulation forprotecting the interest of the agricultural laborers. In the case ofindustrial workers, several legislation are enacted at various points oftime to protect their interest. In the absence of such well defined rulesand regulations, agricultural laborers are subjected to various types of BSPATIL
    • exploitations and they are denied of their dues. Further these workershave no appellate authorities to appeal and get their grievances redressed.Mostly, the disputes relating to agricultural laborers are settled at thevillage level where the money power is found to be final. In other words,the rich farmers and landlords always decide cases against the interest ofthe workers and the latter also do not react to such one-sided judgments,lest they should remain unemployed for ever.With all the above peculiarities explained it is not a surprise that theagricultural laborers lead a .life of misery. This is clearer when we studytheir economic condition. (i) Majority of the agricultural laborers do not own any land. Even those owning land, the average size of landholding is just 1.33 acre. (ii) The employment that the laborers get is temporary and purely seasonal. It is well known that on an average an agricultural worker gets employment only for about 4 months per year and this too not at one stretch. Obviously, the laborers borrow heavily and remain in debts forever. (iii) With no fixed hours of work and regular wages, these laborers lead a life of penury and they are never able to balance their income and expenditure. It is estimated that more than 52% of the agricultural workers are in debts which range between Rs. 244 in West Bengal and Rs. 1808 in Rajasthan. Inspite of the minimum wages legislation, the wages of the laborers remain abysmally low as in most of the places the legislation has no relevance. Further, the agricultural wages do not go up on par BSPATIL
    • with the industrial wages due to the absence of collective bargaining, exploitation by landlords, illiteracy of laborer, etc. (iv) A very significant feature of the agricultural laborers is that most of them come under ‘bonded laborers.’ This means, when a laborer is unable lo meet his family expenditure with his meager income, he borrows from the money lenders or landlords at very high rate of interest. The repayment does not arise with his income level. Hence, the entire family is indebted to the money lender or the landlord, who uses these laborers through generation for cultivation and other purposes. This if, how the agricultural laborers families become bonded laborers. (v) With very poor economic back ground, the agricultural laborers lead a life of misery. Naturally, their productivity is very low. This affects not only their ability to command better wages, but also the country with lesser productivity in the sector.So far we have discussed the peculiarities and the economic conditions ofagricultural laborers. What are the reasons for this? The causes; for thepoor position of the agricultural workers are as follows:1. The excessive growth of population is the basic reason for this condition of agricultural laborers. With sizeable addition every year, the dependence on agricultural sector increases which in turn increases the unemployment. As a result the laborers arc prepared to work even for very low wages. The employment that they get is not permanent and purely seasonal. They migrate from place to place in search of good employment but not permanent employment. With large scale unemployment, they BSPATIL
    • lead a poor life and they have very little strength to be productive. Another outcome of this dependence on land is indebtedness.2. It is well known that the agricultural laborers are paid poor wages and the wages are paid even today in kind. This affects the purchasing power or the capacity of the workers. Immediately after the harvest, when the laborers are paid their wages in terms of the crop, these laborers try to dispose of this in the market, or the village shops and they realize lesser money value much less than what they would get if they are paid in cash. Hence even if the agricultural laborers get their wages", their purchasing power is relatively low.3. The tenure of employment is highly uncertain in the case of agricultural workers. In the absence of any rule or regulation the employment of laborers is subjected only to the personal likes and dislikes of the employer. They are exploited to the maximum extent by the land lords. There is no bargaining power in the absence of any organization to protect their interest. This in turn has encouraged bonded laborer system. The laborer? Always live in poverty and in the absence of alternative occupation work under suppressing conditions. This affects their productivity as well as initiative to get organized. They remain unskilled being satisfied with what they get.4. One more important reason for the pathetic condition of the agricultural laborers is that they do not get any protection from the government also. Whatever legislation are there, they all only help the powerful landlords who are able to circumvent the legislation finding loopholes. Further, State is a silent spectator to the exploitations of the laborers, as without the aggrieved BSPATIL
    • protesting, there is no scope for the government to intervene. The poor laborers also do not have any other alternative source of income. Another problem is even if the government is able to relieve the bonded laborers from their bondage; the expenditure on their rehabilitation is very huge that States hesitate to accept this burden. Once the laborers are free to work, they do not get job as they mostly are unskilled. There is also no scope for accommodating, them in any other productive sector as they do not possess any other skill. Assuming that the government is able to allot them land so that they can cultivate it and survive, these laborers do not have the wherewithal to use the land and survive. In several cases, these laborers who are given land, are found to pledge the land with the money lenders and once again remain agricultural laborers.Hence, when we consider the above explanation, we find that theagricultural laborers have no scope for leading a normal life. However, wemay suggest the following ideas with which their problems may be solvedat least to some extent. The National Commission on Rural Labour hasalso made certain recommendations to improve the position of theselaborers. Let us now discuss these in detail. 1. On its part the government has passed the Minimum Wages Act to ensure that the agricultural laborers are not exploited. While the Act has provisions to pay minimum wages, it has no teeth. In other words, though the Act has been passed, it remains ineffective, in the sense that the government is not able to enforce this Act. The main reason for this is that agricultural laborers are highly unorganized unlike the industrial workers. In the absence of unions, the provisions of this Act are not effectively implemented. Further the laborers are in debts and in certain cases these debts BSPATIL
    • have been incurred in the past by their forefathers. They do not come forward to rise against their employers for fear of losing their occupation. Hence, mere passing of Minimum Wages Act would not help the workers, unless the government follows it up with measures for effective implementation.2. In order to protect the interests of agricultural workers, the government has launched several special programs like Small Farmers Development Agency, and Marginal Farmers and Agricultural Laborers Development Agency. These are specific programs to protect a particular group of laborers falling in small farmers, marginal farmers and agricultural laborers category. These programs are implemented to start with in certain areas so that slowly they could be extended to other areas. In the past the government launched community development programs to protect the weaker sections in the agricultural sector. With such programs, the benefits ma^ flow to the target group, but there is a need to extend these programs to others in other areas and also to come up with corrective steps wherever these programs do not reach the targeted group.3. Another important step taken to mitigate the condition of the agricultural workers is land reclamation and settlement. The government as well as service organizations are engaged in the process of reclaiming lands from the big farmers .and rich land lords. These land are pooled and then* redistributed among the agricultural- workers and landless peasants. Bhoodan movement was started by Vinoba Bhave mainly to encourage philanthropic land lords to donate voluntarily lands which were redistributed among the landless peasants and workers. These efforts met with very little success and the lands mobilized in this way either were BSPATIL
    • found to be not fit for cultivation or in litigation. Further there were several problems in the redistribution process. For instance, proving die identity and domiciles bf agricultural laborers were main problems. In several cases after the lands were redistributed, the laborers either retained the lands uncultivated for want of funds for cultivation or pledged them for raising funds for running their families. Hence, there is an urgent need to attend to this problem of reclamation and resettlement and eliminate all the obstacles and hurdles in the process.4. Several new rural employment programs have been launched by the government-at different points of time. Certainly these programs have helped to bring down the problem of unemployment in the rural areas and divert the surplus manpower in the agricultural field to the of her closely related occupations. These programs range from laying of roads to minor irrigation, canal construction, soil conservation, social forestry, etc. As lakhs of people are involved in these programs, to some extent there is scope for using the idle manpower in the rural areas. However, these schemes themselves cannot eradicate poverty or unemployment in the run areas. Apart from the shortage of funds for implementing such schemes the government has to monitor several such schemes at the same time which adds to the administrative burden of the government. Possibility of making the local rural agencies responsible for the administration and operation of these schemes would help to make the benefits flowing from such schemes to reach the targeted group.5. A very significant improvement in this connection is the passing of The Bonded Labour System (Abolition) Act, 1976. This Act has completely liberated all the bonded laborers at one stroke. But the BSPATIL
    • effectiveness of this Act is still in doubt, because laborers themselves have preferred to stay with the landlords or their employers for fear of losing their livelihood and the difficulty for the government to find them alternative employment. Hence, Inspite of this Act, the bonded labour system is still found in several parts of the country. The government should now seriously think of implementing this legislation and simultaneously create agencies which will arrange for the rehabilitation of the released bonded laborers. The contribution of the voluntary organizations can also be invited as government alone cannot attend to this task. As a step towards rehabilitation these agencies can train the displaced bonded laborers in simple works like printing press, book binding, stitching, carpentry, etc., so that the released laborers can start with a new occupation instead of once again coming into the fold of agricultural occupations.6. Another positive step in this direction has been the Central government coming out with the insurance scheme for ails-the agricultural laborers. The premium of Rs. 10 per year is paid by the government and the insurance cover is for Rs. 1000. Every head of a family is insured, and this is a small beginning. This scheme should be slowly extended so that the family of agricultural laborers will have some tort of protection after the death of bread winner.7. With the establishment of the National Backward Classes Finance and Development Corporation recently, the government has shown its determination to attend to the problems of the poor and downtrodden agricultural laborers. This Corporation will help to generate self-employment opportunities, provide concession in BSPATIL
    • finance and assist to improve the technical skill of laborers belonging to Backward Class. 8. A major development in alleviating the problems of agricultural laborers is the setting up of the National Commission on Rural Labour by the government, which submitted its report in July, 1991. The Commission has gone into the depth of the conditions of the small fanners, marginal farmers and the agricultural laborers and made a number of .recommendations. Basically the Commission felt that the level of living of the agricultural laborers should be improved and they should be involved in the development process.In this connection the following are the recommendations made by theCommission:(i) Free and compulsory education for all children in the rural areas upto the age of 14.(ii) Prohibition of child labour in every form in any industry.(iii) To provide collateral - free loans to women, a separate National Credit Fund has to be set up from which loans could be given to women.(iv) Fixation of minimum wages as Rs. 20 per day with a provision to change it by linking the wages with Consumer Price Index.(v) Provision of liberalized credit to laborers through co-operative banks. These suggestions are being examined by the State governments and the Central government and when they are accepted, then we may expect the condition of the agricultural laborers to improve.THE INFLATIONARY TREND IN INDIA AND THE STEPS TAKEN BY THEGOVERNMENT OF INDIA TO CONTROL INFLATION IN INDIA. BSPATIL
    • Immediately after independence, the inflationary pressure was controlledby the government by taking the following measures: 1. The government imposed new taxes and increased the rate of old taxes to absorb the surplus purchasing power in the hands of the people. 2. The government also simultaneously reduced the money supply. 3. The public expenditure was also reduced to some extent. 4. The government announcement of increase in bank rate from 3 to 31/2 per cent in November, 1951 had a good impact. 5. Government also simultaneously took several steps to increase the volume of production. In spite of these efforts during the period five year plans the inflationary pressure continued.During the I Plan period in spite of the increase in agricultural andindustrial output, the inflation set in mainly because of the failure ofmonsoon in 1955 and a heavy dose of deficit finance to the tune of Rs.420 crores. In the II Plan, the increases in prices of ail commoditiescontinued to be experienced. There was very limited success on thecontrol inflation. However, the government could resort to a lower level ofdeficit finance to the tune of Rs. 948 crores against a target of Rs. 1200crores. The III Plan witnessed further spiraling up of prices. During thisplan several factors contributed towards the inflationary pressure.Specifically the Chinese aggression, increased money supply, increase ingovernment expenditure and acute shortage of foreign exchange fuelledthe inflation. The actual deficit finance was Rs. 1133 crores much abovethe provision of Rs. 550 crores. The reliance on deficit financingcontinued during the annual plans the government resorted to nearly Rs.682 crores of deficit financing. The IV Plan period witnessed someefforts on the part of the government to bring down the inflationary BSPATIL
    • pressure. For instance, the government decided to finance its publicexpenditure through non-inflationary means as far as possible, the bankrate was raised from 6 to 7% The cash reserve ratio was jacked up from3 to 5%. The minimum rate of interest to be charged by the commercialbanks on their loans and advances was fixed at 10% But all these stepsfailed to bring the desired result as the government resorted to a hugedose of deficit financing to the tune of Rs. 2150 crores against theoriginal target of Rs. 850 crores. During the V Plan period there was nolet up on the price front. The inflation rate was so alarming that thegovernment had to introduce several measures. Through severalordinances, the government froze all profits and wages at current levelsand through the third ordinance, the compulsory deposit scheme for theincome tax payers was introduced. So prices slowly started declining.By March, 1976 the price level in India rose by 11 % To control this highrate of inflation, the government resorted to supply management policies.It curbed further increase in money supply and the effort was to increasethe supply of wage goods. But the policies failed because the governmentgave a greater emphasis on controlling credit rather than controllingmoney supply. During the VI Plan the deficit finance was to the tune of Rs.5000 crores and so the inflationary pressure continued to build up. thegovernment came up with its anti-inflationary policy by laying emphasison: increasing the production, better capacity utilization, imports ofessential commodities in short supply, regulated exports of those neededdomestically, curbing the activities of hoarders and black marketers,constant monitoring of the prices of essential good and makingpermanent the Compulsory Deposit scheme and enhancing the rate ofthis deposit. The RBI increased the Bank rate from 9 to 10% and it alsoincreased the CRR to 7% from 6% and the Statutory liquidity ratio from34% to 35% It raised the minimum margin for the food credit to 10%inspite of all these tasks the inflationary pressure not only continued butbecame more aggravated. During the VII Plan period also the government BSPATIL
    • continued with most of the above mentioned measures with greaterseriousness. But even at the end of the VII Plan period the inflation ratewas hovering above 10% which taken is really high. It is to be noted thatthere is nothing wrong with the measures taken up by the government ofIndia to curb inflation in India. The main problem is the implementationof these measures. In practice there is no co-operation from the publicand other financial institutions especially in the unorganized sector. As aresult all the efforts of the RBI are nullified. Large scales smuggling,hoarding, black marketing, etc continue to take place in the economywithout any check. Further large scales tax evasion and existence of blackmoney and the working of the parallel economy, etc., have also posedserious challenges to the effective implementation of the policies of thegovernment. On its part the government is unable to brig down the sizeof deficit finance due to its commitment to the welfare activities. Hence,the time has come to take a drastic decision in the interest of economicstability to put an end to all the evils nd evil practices in the economy.THE PRICE MOVEMENTS IN INDIA SINCE INDEPENDENCE AND CAUSESFOR RISE IN PRICE IN INDIAPrice movements in a country can be analyzed only when the wholesaleprice index is available. In India, though this wholesale price index wascomputed after independence, yet the price quotations were notcomplete as they did not include all the commodities. Further thegovernment had been changing the base year frequently with an anxietyto prevent people from really comparing the purchasing power over aperiod of time. Hence, in India the base year originally was 1950-51,which was changed to 1960-61 and then to 1970-71 and finally to1980-81. BSPATIL
    • Of course, now the wholesale price index is more comprehensive as itincludes almost all the commodities traded. We will discuss the pricemovements in four phases: phase I : 1951 to 1971, Phase II : 1971-1980,Phase III : 1981-1990 Phase IV : l990’s.Phase I (1951-1971) :In this phase, roughly we study price movements through the first threefive year plans and the annual plans. During the I Plan, the pricemovements were very much less and the wholesale price index was 99(base year 1952-53 = 100). As regards the food articles, the price indexwas hovering around 90 which indicated a very comfortable positionduring this Plan. But encouraged by this trend, the government undertookvarious new projects by resorting to deficit financing. The result of thiswas that during the II Plan the price level went up by 20 per cent. Theprice position worsened during the III Plan as this was the time whenthere was Chinese aggression and Pakistan invasion. As a consequencethe defence budget went up leading to soaring up of prices. For instance,between 1961 and 1966, the prices of foodstuffs went up by 40 per cent,the price of cereals was up by 45 per cent and in the case of pulses itwent up by 70 per cent. There was inflationary spiral. Fortunately in1967-68, with the sudden spurt in food production (Green Revolution),the price level came down and in 1968-69, there was a marginal fall inprices by one percent.Phase II (1971-1980) :This is a very crucial period as far as Indian price situation is concerned.It was during this period that India witnessed a very steep rise in pricelevel. Though the rate of increase in price level was very much less(around 5 to 7 per cent) in the first three years of the III Plan, it soared upby 19 points in the fourth year and by 47 points by the last year The BSPATIL
    • reasons for this were: heavy influx of refugees from Bangladesh and theexpenses incurred on them, the failure of the kharif crop in 1972-73, thefailure of the take over of the wholesale trade in wheat and the rise incrude oil price. For the first time in India, the wholesale price indextouched a peak of 331 in September, .1974. The government initiated anumber of measures like compulsory deposit scheme, nabbing of blackmarketers, smugglers and hoarders invoking the provisions of theMaintenance of Internal Security Act (MISA), etc., which together resultedin the decline" in the price level. The wholesale price index stood at 309by March, 1975 and then further dropped to 283 by March, 1976.Though immediately after the pronouncement of-emergency the pricelevel declined, it once again started increasing at the September, 1974level by March, 1977. After the emergency period, the Janata governmentcame to power and following various policies it succeeded in arrestingthe price rise. It could maintain the price at 185 points applying thedemand - supply management, higher buffer stock, high foreignexchange reserve, increased food production as well as industrialproduction. But the inflationary budget of 1979, contributed to thereversal of trend in price that by January 1980, the wholesale price indexstood at 234.Phase III (1980-1990)In January, 1980, the Congress (I) government came back to power and itkept controlling inflation as the prime objective. The government tried toachieve this through demand and supply management. All theanti-inflationary policies were brought in to contain inflation. Thetemporary price stability found by the end of 70s did not continue as theinflationary spiral resulted in the alround increase in prices. The wholesale price index increased from 218 in 1979-80 to 338 by 1984-85. Thedemand side adjustments announced by the government included BSPATIL
    • altering the cash reserve ratio of commercial banks, ceiling on lending bycommercial banks, ban on recruitment by government, reduction in themoney supply, etc. On the demand side, the government attempted toincrease the supply of goods and services using short term and long termmeasures. With all these measures the annual increase in price wasaround 7 to 8 per cent.However during the later part of 80s, the situation did not continue to bethe same. The wholesale price index which came down to 125 by1985-86 started increasing and by 1989-90 it was around 166. Theannual rate of inflation which was just 4.7 per cent by 1985-86, shot upto 8.1 per cent by 1989-90. The main reasons for this was the seriousshortfall in the production of essential agricultural goods like edible oils,cotton, pulses, etc. Government resorted to tightening of selective creditcontrol policies, and also used the supply management side by side.Specifically, it used the buffer stock built up over the previous yearseffectively and even imported edible oils, introduced employmentschemes, relief programs, etc.Phase IV ( :This phase was marked by hefty increase in price right from 1990. Severalreasons could be attributed to this viz.: high administered prices,gulf-surcharge on petroleum products, high dose of deficit financing,high indirect taxes, etc. The combined effect of all these was that thewholesale price index stood at 180 by 1990-91 and increased to 229 by1992-93. The annual rate of inflation, however, came down from 12.1per cent in 1990-91 to 13.6 per cent in 1991-92 and then to 9.9 in1992-93. Having experienced a decline in price rise, the governmentannounced reduction of excise duties, customs duties, etc., in 1993-94budget to achieve a further fall in price by 1993-94. BSPATIL
    • DEMAND-PULL FACTORS THAT CAUSED INFLATION IN INDIA.The demand-pull factors which caused inflation in India are :Demand-pull factors:The demand-pull factors are responsible for increase in price, because,when the demand for goods and services increase at a higher rate thanthe rate at which the supply of these goods and services increase, therewill be shortage which results in price rise. Under demand-pull factors wemay mention the following factors to be very important:a) Heavy government expenditure :The administrative expenditure of the Central and State governmentsincrease from a mere Rs. 740 crores in 1950-51 to nearly Rs. 2 lakhs by1991-92. Added to this was the increase in; government investment onseveral welfare schemes and programs from Rs. 1000 crores in 1950 toRs. 50000 crores by 1990. Apart from the plan expenditure, the non-planexpenditure of the government increased at a greater speed. With highergovernment expenditure, more money entered into circulation of theeconomy which fuelled inflation.b) Deficit financing:Deficit financing-is one basic reason for the drag in our development andthe inflation prevailing in the economy. The justification that in the initialstage of development every country is bound to have deficit financing isno longer reasonable in Indian case, as the time has come that our Fiveyear plans should lead us to generate more resources from other sourcesinstead of depending too much on deficit financing. The amount ofdeficit financing has increased from Rs. 330 crores during the I Five yearplan to a huge amount of Rs. 20,000 crores during the VIII plan. This BSPATIL
    • implies that our planners have started using deficit financing as the mainsource of funds for meeting our plan expenditure. It should be noticed,that over the five year plan period since I plan there has been anincreasing reliance on deficit financing that the peak is found during theVII Plan. With consistent efforts, the planners are hoping to bring downthis quantum of deficit financing to around Rs. 20,000 crores during theVIII Plan. Whether this is going to be achieved or not can be found outonly in future.c) Existence of black money :One of the reasons for the existence of too much money supply in theeconomy is the circulation of black money in -the economy in very largequantity. There is no reliable estimate of the extent of black money incirculation in India. According to one estimate the quantum is about thesame size as that of the legal tender money. The large scale tax evasion,tax avoidance, black marketing, hoarding, corruption, buying and sellingof real estate in the urban centers, etc., are the reasons for the existenceof black money. While the source of this type of money cannot be easilyfound out, it is very difficult to bring to book those who are indulging insuch illegal activity. With uncontrollable volume of black money incirculation, the price level continues to rise, and any measure to controlthe price will not be effective. So inflation will continue to remain in theeconomy.d) Population explosion :Ever since independence the growth of population has eaten away all thefruits of development. With the annual rate of population increasehovering above 2 per cent, the scarcity for foodstuffs and essentialcommodities will persist. As a result the prices continue to spiral up BSPATIL
    • inspite of efforts to check the price level. Basically the size of populationwill work on (he demand forces and so the available quantity of output isproved to be inadequate always. As a result the prices continue to soar.THE COST-PUSH FACTORS CAUSED INFLATION IN INDIA.There are factors which act on the cost of production. These factors pushthe cost upwards and once the cost of production is high, the producersand manufacturers have to raise the price to recover the cost ofproduction. As a result the price level will go up. There are severalreasons for the operation of the cost-push factors. They are:a. Erratic fluctuations in the supply of goodsIn Indian situation, as agriculture is a gamble with the monsoon, die foodproduction depends on the successful monsoon. Except a few years,there had been failure of monsoon. The shortage in agricultural outputaffects the supply of not only the food grains but also the raw materialsto agro-based industries. Added to this are the power shortage, fuelshortage, labour problems, strikes and lockouts, transport bottlenecks,etc., The end result is that both the agriculturists and the industrialistsexperience rise in cost of production. They recover this by fixing a higherprice for the finished product The position is worsened by the operationsof the black marketers, smugglers, hoarderers, middlemen and others.b. Imposition of heavy taxesTaxation in India is itself a reason for the inflationary situation. There hasbeen all-round heavy taxation on individuals, corporate bodies as well ascommodities. With higher taxes, the cost of production only increases BSPATIL
    • leading to rise in price. Whenever a fresh tax is imposed, themanufacturers simply pass this on to the consumers by raising the pricemore than the amount of tax. Added to this is the heavy allocation offunds by the government to public sector which added a precious little tothe coffers of the government. Considering the investment in the publicsector units, the return from them is meager that even the available fundsare fritter away that the government simply imposes new levies toaugment funds. This in turn affects the cost and the price.c. Administered pricesIn a socialist economy like ours, the market forces are intervened by thegovernment in terms of administered price policy. As per this policy thegovernment stipulates the minimum price for most of the essentialcommodities and raw materials. For example the railways have beenrevising their freight rate and passenger fare that the cost oftransportation is going up adding significantly to the cost of productionand in turn the price level. In the case of steel, cement, coal, etc., thegovernment fixes a higher price which inflates the cost of production inalmost every sector indirectly contributing to the inflationary spiral.d. Rising oil priceThe heavy import bill on petroleum crude itself makes a significantaddition to our price level. The international price has been going up andto meet the import commitment, the government raises the internal priceof petrol, diesel and petroleum products. One argument given for the stiffrise in the price of these products is that it would discourage theconsumption of these products. But the increasing sale of two wheelers,three wheelers, cars, trucks and Lorries prove that there has infact beenan increasing demand for oil. Further the major consumer of oil is BSPATIL
    • government. As a result the overall rise in price cannot be controlled withany measure. Any change in international oil price immediately affects thedomestic price of oil. For instance in 1980 alone, the oil price went up by130 per cent in the international market followed suit by the domesticprice. The gulf surcharge which was imposed also caused the rise in priceof petroleum products. On the whole the fuel price adds fuel to fire.METHODS OF CONTROLLING INFLATIONInflation has to be controlled, otherwise the extent of damage done tothe economy will be something substantial and the economy would take along time to recover from the effects of inflation. In this direction ofcontrol of inflation, the following are the theoretical measures available.These measures could be classified into three groups viz., 1. Monetarymeasures, 2. Fiscal measures and 3. Other measures.I. MONETARY MEASURES :Monetary measures are steps taken by the Central bank of a country asthe head of the monetary system. These measures are usually refereed toas the, quantitative credit controls and qualitative credit controls. Theformer include bank rate, open market operations and the variablereserve ratio. The, latter include margin requirements, moral suasion,direct action, control through directives, Consumer credit regulation orrationing, publicity, etc.a) Quantitative credit controls : Bank rate is the first, measure to curb credit creation activity of the commercial banks, as during inflationary period the volume of money supply has to be reduced. Bank rate is the rate at which the central bank of a country re-discounts the bills already discounted by the commercial banks. When the central bank wants to control credit creation by BSPATIL
    • commercial banks, it would simply increase the bank rate. Correspondingly the commercial banks would increase the discount rate which acts as a disincentive for the businessmen and others to approach the commercial banks for discounting their bills. However, the success of this policy depends on the co-operation of the commercial banks. Open market operations are another quantitative credit control measure. In this, the central bank would buy or sell securities in the open market which are sold or purchased by the commercial banks for cash. During inflationary situation, the central bank would sell securities; in the open market, and when the commercial banks purchase them, for cash then capacity of the commercial banks to create credit will be very much restricted With less credit created, the money supply in the economy will come down bringing down the pressure of inflation. The third: policy is variable cash reserve ration. As per statute, every commercial bank should maintain a certain percentage of its total deposits in terms of cash reserve with the central bank. The percentage of reserve to be maintained, called as cash reserve ratio, is determined by the central bank. By increasing the cash reserve requirement, the central bank can reduce the cash available with the commercial hanks thereby controlling their capacity to create credit.b) Qualitative credit controls : Qualitative credit-controls aim at channelising the available funds in the most productive uses or applications. In terms of various measures the central bank can govern the credit policies of the commercial banks. The first of these control measures is the margin requirements. According to this policy, the central bank specifies the amount of margin that each commercial bank should maintain while lending on securities to the common public. By increasing the margin requirements, the BSPATIL
    • central bank can discourage borrowings on certain securities. If the central bank wants to help the priority sector it can accordingly instruct the commercial banks to maintain a lower margin on securities offered for borrowing for priority purposes. Moral suasion refers to the persuasive technique adopted by the central bank with; the commercial banks in making the later understand the need to pursue a particular type of credit control policy. Though the central bank is empowered with statutory powers to regulate the commercial banks, yet the central bank believes persuasive policies rather than using its statutory authority. Central bank can also issue directives to the commercial banks outlining the details of the objectives of the various credit control policies, the need to follow them, the expected result of them, etc. This will help the commercial banks to understand and co-operate with the central bank in times of financial crisis. Central bank also regulates the flow of credit towards consumer requirements. This called as regulation of consumer credit The central bank can even specify the types of consumer credit which could be encouraged and those that could be discouraged. On receipt of directions from the central bank, the commercial bank act accordingly, either by liberalizing consumer credit or restricting consumer credit. Direct action may also be taken by the central bank to control the commercial banks. This can range between issuing warning to cancellation of license. But in practice central bank never resorts to this measure as all the commercial banks invariably follow the policies of the central bank.2. FISCAL MEASURESBy fiscal measures we refer to the steps taken by the head of the fiscalsystem viz., the government. The fiscal measures include . BSPATIL
    • a) government expenditure b) taxation c) public borrowing and d) debt management e) Over valuation of currency.a) Government expenditure : This is also known as publicexpenditure. It is well known that in a socialist country like India, thegovernment undertakes several activities ranging from defence to welfareactivities. All these mean that government pumps in a lot of money intothe economy which ultimately adds to the money supply and fuel inflation.During the period of inflation, the money supply is high, the purchasingpower of the people is also high and so the private consumption andinvestment expenditures will be of the high order. If the government alsocontinues to invest heavily then the inflationary spiral will be worsening.To avoid this the government should slowly reduce its expenditure duringinflation so that at least to that extent, the money supply in the economywill be reduced. But in practice such a policy is not at all possible as withever rising prices, the poor and downtrodden needs protection from theinflation and this will be lost if the government reduces its expenditure.However, this is considered as one of the measures to control inflation bycombining it with the other measures.b) Taxation: Taxation is a well conceived measure against inflation.Under this the government will be able to achieve two purposes at thesame time. Firstly, it will be able to augment the revenue of thegovernment and secondly it will be able to curb unwanted consumptionexpenditure of the people by bringing down their purchasing power anddisposable income. During inflation the government should increase thetaxes so that it can achieve both the purposes mentioned above. Furtherthe government can also design its tax policy in such a way that the laxburden is more on the rich and less on the poor. This is achieved byimposing heavy direct taxes which will directly affect the rich people. Byimposing moderate indirect taxes, the government will be able to collect BSPATIL
    • more from those who spend more. The rich as well as poor will becontributing towards the exchequer. However, it is often said thatimposition of indirect taxes will only add to the increase in prices,especially when the producers shift the burden of tax to the consumers.But the object of indirect taxes is to curb the consumption of unwantedcommodities. Hence, with the direct and indirect axes, the governmentshould be in a position to redistribute the income in the economy whichis a must during inflationary period.c) Public borrowing : Public borrowing or public debt is one moremethod of controlling inflation. According to this policy, the governmentaims at siphoning-off the excess purchasing power in the economy byencouraging people to lead to the government. This can be done eithermaking lending voluntary or compulsory. Under the voluntary lending,the government educates the people of the need to lend to thegovernment especially during the inflationary period. However,sometimes compulsory lending is to be resorted to because, the peoplemay not respond to the calls of the government. Compulsory lending canbe i different forms. But it is often said that such compulsory lending willaffect only the salaried class and not the rich people. In that case, thesalaried class is worst affected during inflation and making them tosurrender whatever little surplus that they have with them amounts todouble taxing them. Further compulsory saving or lending may alsoencourage people to find ways of evading Such policies. In general,economists have favored only the voluntary saving or lending by thepublic.d) Debt management : Debt management refers to the way in whichthe , government deals with the retirement or repayment of the publicdebt. This has to be done in such a way that brings down the moneysupply in the economy. So when there is inflation, the government should BSPATIL
    • retire or refund the debt to the commercial banks by encashing thesecurities only out of the budget surplus. This will help to curb thecommercial banks ability to create credit. But a major problem with thispolicy is that during inflation budgetary surplus is not so easily created.Alternatively, the central bank can retire the debt by sales of bankineligible bonds to non-bank investors like insurance companies, savingsbank individuals, etc. This will take away the spend-able money from thepublic thereby reducing the inflationary pressure. But even this methodcan fail as the non-bank investors can always refuse to exchange thespend-able money for these bonds.e) Overvaluation of currency : This is another method used tocontrol inflationary pressure in an economy. According to this method,the value of the currency is revised upwards so that exports will becostlier and imports cheaper. This will help in increasing the stock ofdomestically produced gods and encourage more imports. This will meanthe availability of goods int he country will increase [hereby the price levelof them will have to come down. But this measure has to be cautiouslyadopted as it carries with it seeds of deflation.3. OTHER MEASURES :Apart from the measures discussed above, the government can alsoimplement the following policies :a) Increase output : This policy may appear to be very easy one but inpractice this involves several difficulties. To make the producers increasetheir output, they should be assured of their profit as otherwise they willnot be inclined to increase the output. Further the increase in output canbe brought about by fuller utilization of the existing resources,prevention and settlement of industrial disputes, updating the technology, BSPATIL
    • lending liberally to expansion and new establishment purposes of theindustry, maintaining industrial peace by activating all the machineries ofsettlement of industrial disputes, etc. Mere increase in output will notbring down the inflation, it has to be followed by increased availability ofproducts for the consumers. This calls for curbing and punishing blackmarketing, hoarding and smuggling activities so that the benefits ofincreased production will be enjoyed by the economy.b) Wage policy : This is another important control measure. This isoften misunderstood as wage freeze policy. This means that thegovernment should not stand in the wage increase sanctioned to theemployees if their productivity is very high. The government canencourage the employees to make voluntary contributions andreduce their expenditure. Simultaneously, through other measures, thegovernment should bring down the cost of living so that the laborers willnot demand higher wages. Wage policy cannot be effective unless it iscoupled with several other policies.c) Price controls and rationing: This is one of the most popularpolicies applied in every country while they face inflation. Under thismeasure, the government should prevent escalation in prices of essentialcommodities and control the price of other commodities. By resorting toretail and wholesale price maintenance policies the government can striveto bring down the price level. This calls for buffer stock operations aswell as efficient demand and supply management of commodities whichthe country is badly in need of. This is achieved by introducing rationingof essential commodities through well designed public distributionmechanism. All this mean, enormous efforts are required on the part ofthe government apart from the willing co-operation from the traders andbusinessmen. In practice it is found that price control and rationing arevery difficult to be implemented during inflationary period due to the BSPATIL
    • exploitative and monopolistic attitude of the businessmen and traders.However, with stringent penal measures the government can make thispolicy effective in controlling inflation in a country. BSPATIL
    • Review questions1. Assess the need for government intervention in an economy.2. Discuss the role of public sector in India3. Comment whether India is an under developed country4. Discuss the features of Indian population5. Examine the nature of population problem in India and the effects of population growth on Indian economic development6. Outline the population policy of the government since independence7. Analyse the Balance of payments position since 1991 and critically evaluate the New export-import policy 1992-1997.8. Discuss the structural composition of national income in India. Explain the limitations of National income estimation in India.9. Distinguish between absolute and relative poverty. Discuss the concept of Poverty line in Indian context. What are the causes for poverty in India and evaluate the various poverty eradication programme.10. Analyse Problem of unemployment in India.11. Discuss the problem of rural unemployment and the measures to solve this problem.12. Examine the inflationary trend in India and discuss the steps taken by the government to control inflation in India.13. Discuss the causes for inflation in India and suggest measures to arrest inflation. BSPATIL
    • CHAPTER IIIGovernment controls and regulations - Regulating economic andindustrial activities- Industrial Licensing policy- Control of monopolies -Capital issues control - Government control over FDI and collaboration -Distribution and price control - New EXIM policy - Foreign exchange flowregulation -Technology transfer GOVERNMENT CONTROLS AND REGULATIONSSince independence, Government of India introduced a number ofcontrols and regulations so as to lead the country on the path of progress.Originally these controls and regulations were considered to be a part ofdevelopment strategy. But subsequently, they emerged as the need of thesociety. While the 1948 Industrial policy resolution did not lay muchemphasis on the controls and regulations, in 1951 the governmentbrought in the Industrial [Development and Regulations] Act. This Actmade licensing a part of industrial development. The objectives oflicensing were stated as: Facilitate desired pattern of industrial development Provide for development of backward regions To encourage broad based ownership of industries To prevent concentration of power in the hands of a few To offer protective environment for the small scale industries To regulate inflow of foreign capital and technology To provide for the use of appropriate technology To eliminate industrial pollution To encourage more of exports and adopt import substitution measures BSPATIL
    • To ensure conservation of foreign exchange resources and to ensure proper allocation of the exchange resources To achieve high growth in employment opportunitiesWith the above objectives, the government passed the Act. Consequent tothis Act, the following categories of industries were required to obtainlicense: New undertaking Manufacture of new article Expansion of existing capacity substantially Continuation of certain category of business in certain areas Changing the location of the industryThis licensing policy continued for a long time till 1991 Industrial policyadopted the policy of liberalization. The licensing policy has resulted in anumber of malpractices among the large industrial houses. This wasbrought to light by the Dutt Committee report in 1967 The revelations ofthe Dutt committee led to the enactment of Monopolies and RestrictiveTrade Practices Act in 1970. In 1991, the government changed thecontents of the Licensing policy and the important provisions are speltout hereunder.The Dutt committee identified 20 larger industrial houses, 53 largeindustrial. houses and 60 large independent concerns through its study.Some of the important findings of the Committee are given below: 1. a] 73 large houses accounted for 56 % of the total proposed investment on machinery by the entire private corporate sector BSPATIL
    • b] 60% of the value of import of capital goods by the entire private corporate sector was accounted for by these 73 large industrial houses c] 20 larger industrial houses accounted for 41 % in the total proposed investment on machinery and for 40 % in the total approved import of capital goods.2. The percentage of unimplemented issued licenses was the highest for the large independent companies and other foreign companies. The largest number of unimplemented licenses was for the house of Birlas [168] followed by Tatas [41J. The Birlas were also leading on charges of pre¬emption.3. The private sector was allowed to participate in areas reserved exclusively for the public sector,4. The four industrially advanced states namely Maharashtra, West Bengal, Gujarat and Tamilandu were able to acquire 62 % of the J0tal licenses issued. This was against the spirit of balanced regional development.5. There was no indication as to which industries could be treated as specifically reserved for the small and medium sector.6. Foreign collaboration was allowed even in non-essential consumer goods. The Committee observed that: “as a matter of fact, by permitting foreign collaborations sometimes in multiple numbers, and thus permitting capacities to be created, an inevitable demand for import of various components and raw materials for feeding plants is set up. This, combined with the allocation of other scarce materials, helps to satisfy the demand BSPATIL
    • of the higher income groups, but it is not necessarily a contribution to economic growth nor is it the best way of utilizing the scarce foreign exchange resources of the country. 7. Financial institutions showed a distinct preference to the large industrial houses over the public sector.All these would help to judge that industrial licensing system failed toachieve the objectives of planned economic development as well as ofpreventing concentration of economic power.The Dutt committee made the following recommendations To set up a core sector consisting of industries of basic, critical and strategic importance to the economy To adopt the concept of ‘Joint Sector’ or undertakings where both the public and private sectors acted as partners in a project. The Joint Sector could have collaborations with foreign concerns as well as with the private sector in India To change the basis of financial assistance by nationalized banks and public sector financial institutions i.e., away from the large industrial houses The government to have the right to convert its loans and debentures into equity The middle sector to be kept open for new entrepreneursINDUSTRIAL LICENSING POLICYTo achieve the objectives of the strategy of the industrial sector in the 90’s a number of changes in the system of industrial approvals have beenbrought about. The domestic producers will be able to withstand thecompetition in the country as well as abroad only through procedural BSPATIL
    • reforms. Hence, the role of government will be changed from that ofexercising control to one of providing help and guidance. Changes in thepolicy towards public sector in the last few years have clearly indicatedthat private sector enterprises will be allowed to compete in many areashitherto earmarked for public sector. Consequently, the new policy hascompletely reclassified the Indian industries as below:a) Eight industries have been completely reserved for the public sector. They are: i. Arms and ammunition and allied items of defence equipment, defence aircraft and warships, ii. atomic energy, iii. coal and lignite, iv. mineral oils, v. mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tin, molybdenum and wolfram, vii. mineral specified in Schedule to the Atomic Energy Order, 1953 and viii. railway transportb) Eighteen industries have been listed as industries which require compulsory licensing. However, this provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacturing in small scale sector. Compulsory licensing would be required in the following industries:i. coal and lignite, ii. petroleum other than crude and its distillation products, iii. distillation and brewing of alcoholic drinks, iv. sugar, v. animal fats and oils, vi., cigars and cigarettes of tobacco and manufactured tobacco substitutes, vii. asbestos and asbestos based products, viii. plywood, decorative veneers and other wood based products such as particle board, medium density fibre board, block board, ix. raw" hides and skins, leather, chamois leather and patent leather, x. tanned or dressed fur skins, xi. BSPATIL
    • motor cars, xii. paper and newsprint except bagasse based units, xiii. electronic aerospace and defence equipment of all types, xiv. industrial explosives, xv. hazardous chemicals, xvi. drugs and pharmaceutical xvii. entertainment electronics and xviii. white goods like domestic refrigerators. As regards the provisions of the industrial licensing policy,i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector ,and the list of 18 industries and the areas reserved for small scale industries will continue.ii) Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations.iii) In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported goods does 1101 exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required.iv) Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central government for their location in ares other than cities of more than one million population. In cities with more than one million BSPATIL
    • population, non-polluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery. If such cities require industrial re-generation policies will be made more flexible. However, the existing zoning and land use regulation and environmental legislation will continue to regulate industrial locations. All efforts will be made through incentives and other methods like infrastructural development, to disperse the industry to rural and backward areas.v) New Broad banding facility will be provided to the existing units so as to enable them to produce any article without additional investment. The exemption from licensing will be applicable to all substantial expansion of existing The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects.vii) A very significant step is to abolish all the existing registration schemes.viii) In case of substantial expansions and new projects, it is enough if the entrepreneurs file the information memorandum.ix) The list of industries requiring compulsory licensing and industries for automatic approval of foreign technology agreements will be notified in the Indian Trade Classification (Harmonized system).As a result of the wide changes in the Licensing policy, the governmentalso brought about changes in the MRTP Act. The following is thesummary of the changes effected in that Act. BSPATIL
    • MRTP ACTA major deviant of the new policy is in respect of the MRTP Act. The newpolicy aim at removing the unnecessary bureaucratic controls and allowthe industries to breathe in an atmosphere of freedom. The efforts of thegovernment in the past intervening in the investment decisions of theMRTP companies; have been proved to be counter-productive. Hence, thenewly empowered MRTP Commission will enquire into complaintsreceived from individual consumers or classes of consumers. Thefollowing is the essence of the provisions in the new policy regardingMRTP Act.i. The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course.ii. The need to obtain the prior approval of the central government for establishing new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed.iii. The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair tarde practices. As a follow-up the MRTP Commission will be authorized to inquire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices. BSPATIL
    • iv. All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers to the MRTP Commission.Control of capital issuesSince independence, capital issues in India have gone through differenttypes of control mechanism. Initially control of Stock exchanges wascontemplated and accordingly Securities Contracts [Regulation] Act waspassed in 1956. It aimed at centralization of control, regulation of thestock exchanges and the transactions entered therein, the avoidance ofillegitimate and manipulative speculation and the protection of genuineinvestors, The Act applied to all transactions whether forward or readyand it prohibited or regulated factors, which facilitated speculation instock exchanges. But the Act could not abolish forward trading whichultimately caused erratic behaviour of the Stock exchange. Thegovernment basically depended on two institutions to control the capitalmarket viz., the Controller of Capital Issues [CCI] and the Directorate ofStock Exchanges. CCI gave consent to the issue of non-governmentcompanies consisting of equity and preference shares, partly and fullyconvertible debentures, bonus shares and right shares. It also gaveconsent to the issue of bonds of public sector undertakings. But on therecommendations of the Narasimham committee, the governmentabolished the office of CCI and freed the primary capitol market from thegovernment regulations.The recommendations of Narasimham Committee – II on financialsector reformsThe main recommendations of the Narasimham committee are: BSPATIL
    • 1. Phased reduction of Statutory Liquidity Ratio to 25 % over a period of five years2. Progressive reduction in Cash Reserve Ratio3. Phasing out of directed credit programs and redefinition of the priority sector.4. Deregulation of interest rates so as to reflect emerging market conditions5. Stipulation of minimum capital adequacy ratio of 4% to risk weighted assets by March 1993, 8% by March 1996 and 8% by those banks having international operations by March, 1994.6. Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts.7. Imparting transparency to bank balance sheets and making full disclosures8. Setting up of special tribunals to speed up the process of recovery of loans9. Setting up of Asset Reconstruction Fund to lake over from banks a portion of their bad and doubtful advances at a discount10. Restructuring of the Banking system so as to have three or four large banks which could become international in character, 8 to 10 national banks and local banks confined to specific regions and rural banks including RRBs confining to rural areas.11. Setting up one or more rural banking subsidiaries by public sector banks12. Permitting RRBs to engage in all types of Banking business13. Abolition of branch licensing14. Liberalising the policy with regard to allowing foreign banks to open offices in India15. Rationalisation of foreign operations of Indian banks16. Giving freedom to individual banks to recruit officers BSPATIL
    • 17. Inspection by supervisory authorities based essentially on the internal audit and inspection reports 18. Ending duality of control over Banking system by Banking division and RBI 19. A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI 20. A revised procedure for selection of Chief Executives and Directors on Boards of Public Sector banks 21. Segregation of direct lending functions of IDBI to a separate institution 22. Obtaining resources from the market on competitive terms by DFIS 23. Speedy liberalization of capital market by removing restrictions on premia dispensing with prior government approval etc. 24. Supervision of merchant banks, mutual funds, leasing companies, etc., by separate agency to be set up by RBI and enactment of separate legislation providing appropriate framework for mutual funds and laying down prudential norms for such institutions.After the abolition of CCI, the government set up the Securities andExchange Board of India [SEBI] in 1988 which became a statutory bodysince 1992. SEBI has the following objectives: Regulating the business in stock markets and other securities market Registering and regulating the working of the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers and other intermediaries associated with the securities market BSPATIL
    • Registering and regulating the working of collective investment schemes including mutual funds Promoting and regulating the self regulatory organizations Prohibiting fraudulent and unfair trade practices relating to securities market Promoting investors education and training of intermediaries of Securities market Prohibiting inside trading in Securities Regulating substantial acquisition of shares and take over of companies Performing such functions and exercising such powers under the provisions of Capital Issues [Control] Act, 1947, and Securities Contract [Regulation] Act, 1956, as may be delegated to it by the Central governmentSince its inception, SEBI has achieved the following: guidelines to suingcompanies, regulation of portfolio management services, regulation ofmutual funds, action for delays in transfers and refunds, action for delaysin transfers and refunds, issue of guidelines to protect investors,ensuring proper functioning of the Stock exchanges, regulation of foreigninstitutional investors and periodical review of the working of the capitalmarket.FOREIGN CAPITAL AND THE POLICY OF GOVERNMENT REGARDING THEUSE OF FOREIGN CAPITALForeign capital or investment has become significant part of sources offunding for various projects in every country. This source of funding hasreceived the attention of both the government as well as the corporatesector that there has been increasing reliance on this source for planning BSPATIL
    • and execution of projects by the government as well as the corporatesector. Foreign capital can come into a country in different forms. Let usfirst understand these forms of foreign capital before discussing the needfor foreign capital.Forms of foreign capital:(a) Direct entrepreneurial investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad may participate in the stocks or share capital of Indian companies. Whenever the Indian companies go for public issue of shares or debentures, the foreign investors may respond by participating in such public issue. This is also called foreign capital. In the past external business group used to invest in new companies and that form of foreign capital used to flow much, but now-a-days participation in the equity or debenture of companies by foreign investors and non-resident Indians is becoming more predominant.(b) Foreign collaboration: Foreign collaboration is another form of foreign capital. Under this a domestic company may join with the foreign company, mostly the reputed one in the industry, and start with the joint operation in India. Usually this type of effort is undertaken to get the state of the art1 or the latest technology available abroad in the Indian companies. Foreign collaboration may be only for technology or for funding or both. Accordingly we may have technical collaboration, financial collaboration or mixed BSPATIL
    • collaboration. The collaboration may be between private parties or companies in the two countries, or the foreign company with Indian Government or between the foreign government and the Indian government.(c) Inter-government loans: This type of foreign capital refers to the loans granted by the government of one country to that of the other for a specific purpose or for general economic reconstruction. For example under the Marshall plan, USA gave loans to various European governments to help them in the reconstruction of their war-shattered economies. The developed countries also grant loans and grants to the under developed countries to help them in economic development programme.(d) Loans from international institutions: This source of foreign capital has emerged as a very important source in the recent years. Most of the developing countries get sizeable quantum of funds from this source. International institutions like International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD), Asian Development Bank, Aid India Consortium, and others have all become very important providers of funds for developing countries. The role of IMF and IBRD in tiding over the balance of payment difficulties and execution of power and irrigation projects, cannot be exaggerated. The Asian Development, Bank has also been a major provider of funds for development in Indian case.(e) External commercial borrowing: Another source of foreign capital is the borrowing in the capital market of other countries. This can be done either directly or indirectly by the government. In both ways, the inter-government understanding and political BSPATIL
    • relationship apart from the domestic investment climate are all important. Such capital is normally used for international trade purposes and specifically for export credits. Agencies like US EXIM bank, Japanese EXIM bank, ECGC of UK, etc., are all playing vital role in this segment of foreign capital.Need for foreign capital:No country can be self-sufficient today. Even developed countries have todepend on the developing countries for certain purposes and also formarketing their products. Further the specialisation in finance hasbecome world wide, that every investor wants to maximise return on hisinvestments and minimize the risk. This is applicable both to governmentinvestment as well as corporate and private investments. These are daysof multi-national corporations and giants that closed economic systemcan no longer be realistic. In this situation, flow of capital from onecountry to another in different forms takes place for several reasons.From the view point of a country, there is a need to execute their plansfor economic development. Specifically in Indian case, the need forforeign capital cannot be exaggerated. This could be explained in termsof the points given below:(a) The availability of funds for execution of plans and achieve rapid economic development determine the objective of such plans. Domestic availability of funds, especially in the developing countries is becoming difficult with the government in these countries undertaking increasing responsibility for the welfare activities. Hence, these countries have to tap the source lying outside to get the funds required for their development purposes. BSPATIL
    • In this respect the foreign capital should be attracted at any cost and in any form.(b) Domestic investors and managers of funds available, may not have the required expertise or entrepreneurship in identifying the right and profitable avenues for investment. This may be due to lack of experience or inability to identify opportunities. When foreign capital is allowed to flow, the benefits of the experience of the foreign technicians, finance specialists, production specialists, marketing wizards, etc., are made available to the domestic ventures. This will improve the efficiency of the domestic projects which is directly benefitting the country. On this count foreign capital should be welcomed.(c) One of the basic requirements for achieving rapid economic development is mobilising savings. Savings depend upon income and income depends on the level of economic activity. Hence, any attempt to increase savings should start with attempts for increasing income which necessitates increasing investment If the domestic rate of savings and the purpose for which savings is used is unproductive, then efforts should be made to obtain the necessary investment from abroad. This would accelerate economic development leading to income generation and increased savings. Hence, in the process of economic development foreign capital becomes an essential ingredient.(d) Foreign capital is necessary for one more reason. In every developing country, the economic development requires investment in certain projects relating to infrastructural development, basic industries, etc., which are long gestation projects, low income yielding, but accelerating economic BSPATIL
    • development. No private investment or corporate investment in these projects will come about in the early stage of development either because the investors have no inclination or because the capital market in such a situation is not developed. But the government has to initiate development activities, for which foreign capital becomes essential. Once the ‘economic engine’ is activated, in due course, the economic development will start taking place. Until then foreign capital is needed.(e) Foreign capital can be in different forms as has been already explained. Countries like India having high rate of savings, but low investment in productive projects, with large human force but with less employment opportunities, have to seek technical know-how and technology available abroad. These can be slightly modified to suit the domestic conditions so that the production can take place in large scale, cost can be minimized and employment opportunities can be generated in large scale. Further there are areas like atomic energy, automobile industry, management, marketing and others where we do not have the best of experts or expertise. The best available talent or technology available abroad can be imported so that we can improve our strength in these areas and become a force to reckon with. This will also help us to achieve higher level of economic development.(f) One of the methods of achieving higher levels of development is through mutual co-operation with other countries through bi-lateral or multi-lateral agreements which provide excellent scope for transfer of technology, etc., between countries. Political wisdom warrants use of such agreements for mutual benefits BSPATIL
    • which leads to flow of foreign capital from one country to another.Problems of foreign capital:So far we have discussed the need for and role of foreign capital in Indianeconomic development. Let us now study the problems that areassociated with the foreign capital.1. The foreign investors are choosy in extending their funds to projects floated in our country. It is found that foreign capital flows easily towards the private sector projects but with a lot of hesitation to the projects of public sector. While there is justification for hesitant flow towards public sector, our government has been giving pride of place only to pubic sector in achieving rapid economic development Hence, it is clear that there is no lack of investment opportunities, but there is difference in ideology. Therefore, flow of foreign capital is not uniform to all sectors. This trend has to be observed so that corrective measures can be taken to attract more foreign capital to public sector projects.2. Another serious problem of foreign capital is the domestic technology is simply duplicated due to over indulgence and dependence on external assistance. There are several areas where India has achieved excellence as in electronics industry, but there are collaborations with foreign products in this field. Such duplication is in no way beneficial to the country. This has to be corrected. BSPATIL
    • 3. One more experience is that under the pretext cf transferring technology, foreign countries simply Jump their obsolete technology in India. Apart from importing inappropriate technology, there are also situations when the technology not required is imported. Further, there are tie-up agreements with such imported technology which are unfavourable to India. But such agreements have been approved much against the interest of our domestic manufacturers and technologists.4. Often me complaint about foreign capital is the restrictive conditions imposed by the exporting country. It may be relate to spares or technicians or repatriation of profits, etc. An increasing number of such agreements would only be against our own interest5. Heavy remittance of profits, dividends, etc., is yet another problem under foreign capital. In Indian experience, there were cases when the inflow of foreign capital was less than the remittance of profits, the classic examples being ESSO and CALTEX, the two oil companies of US origin. Such remittances cause severe strain on our already strained balance of payments and foreign exchange reserve position. Even if the agreement provides for such remittances, the country cannot afford to lose the hard earned foreign exchange resources under this type of remittances.6. One more consequence of foreign capital is that it causes serious balance of payments problem. When foreign capital in different forms is permitted, with the preference of the foreign investors, the private sector is able to attract more than the public sector. As a result the private sector indulges in importing heavily their requirements which results in heavy outflow of earned exchange BSPATIL
    • reserves on the one hand and leads to balance of payments deficits on the other. Even if the government has to ultimately approve of such imports, yet the private sector is able to appease the officials through liaison officers and get the necessary approvals.7. One of the essential conditions laid by the government while approving the foreign collaboration is that in due course there should be Indianisation of personnel. This policy is easily defeated in practice. In the past under the provisions of Foreign Exchange Regulations Act, every foreign multinational company is made to dilute their ownership to 74% and in case of branches of foreign companies their total holding should not exceed 40%. It is found that these foreign companies have very high profitability, as in the case of Colgate Palmolive with 89% of profit rate, are able to very easily raise capital from the Indian capital market. Their shares are being quoted at very high rate that they raise the necessary funds easily. The shareholders of these companies indirectly support the company through political lobbying. The Indianisation of personnel is easily by-passed as these companies retain the powers to appoint their own Chairmen and Managing Directors. Obviously even with a holding of only 26% of the shares, these foreign companies have control over the companies easily by-passing the policy. Whenever the multinationals become Indian companies they stand to gain. So long they remain multinationals they are subjected to heavy taxes. But once our Indianisation of Personnel policy is invoked, these multinationals become Indian companies and pay less tax. Hence, our policy is in no way affecting the foreign companies, in tact, the policy is turning out to be unfavourable to India itself BSPATIL
    • Government policy:Since independence, the government has been declaring its policytowards foreign capital of different types. The policy declared in April,1949 has remained the main framework for the subsequent policies. Thesalient features of the 1949 policy are:(i) Foreign capital will have the same treatment as given to domestic capital.(ii) The investors will be allowed to remit the profits earned.(iii) The ownership and control of the foreign companies should in due course be in the hands of Indians.(iv) In case of take over of the undertaking, a fair and equitable compensation would be paid.(v) In case a foreign company wants to have control for some time, the government may examine this in each individual case before giving permission.This policy in nut shell means that there will be no discrimination againstthe foreign companies or their investments in India. This remained as thebasic framework of foreign policy all through. With this policy, thegovernment pursued its foreign policy making minor changes at times.Broadly we may refer to three phases through which our foreign policyrelating to foreign capital and investments evolved. In the first phasewhich lasted from 1951 to 1965, the government was liberal in itsattitude towards foreign capital. This included concessions and incentivesto foreign capital which helped us to achieve industrial development. Thesecond phase which started from 1965, is a period in which thegovernment was very strict and imposed several restrictions andregulations. Once again in Phase III, starting from 1991, a liberal policy isintroduced. The salient features of the latest policy towards foreigncapital (199i) is given below: BSPATIL
    • Foreign investments:Foreign investments carry with it the benefit of technology transfer,marketing expertise, modern managerial techniques and new possibilitiesfor promotion of exports. As this requirement is felt in this world ofindustrial change and co¬operation, the New Industrial Policy (NIP) hasclearly contained the following provisions relating to foreign investments:1. In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed. Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments to the FERA will be made.2. The general policies governing the domestic units in regard to import of components, raw materials and intermediate goods and payment of knowhow fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on payments are balanced by export earnings over period of time.3. All the other foreign investments not included in the category 1 stated above will require prior clearance.4. Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in 1 above. However, the provisions of his export-import policy applicable to the domestic units will also be applicable to such trading companies. BSPATIL
    • 5. To encourage substantial inflow of foreign investment, a Special Empowered Board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market. Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.As regards foreign technology agreement, a welcome change in theoutlook of the government is the realisation that the sophisticatedtechnology from abroad can be brought in only through liberal and lessrestrictive procedures and policies. The interference of the government inthis regard is to be reduced so as to enable the domestic industries inachieving a high rate of industrialization. As a result of this liberalization,automatic approval for technology agreements related to high priorityindustries will be made with respect to certain specific parameters. Otherindustries which can enter into such agreements without incurring theexpenditure of foreign exchange will also be extended liberal treatment.The industrialists are left to themselves to decide and enter into foreigntechnology agreements depending upon the commercial viability of theirenterprises. In due course this measure is expected to pave the way forexchange of superior technology from India with other countries. Withthe overall liberalization, the competition will be high and it is expectedthat industries will invest much more in research and developmentactivities. Keeping in view all these expectations, the government hasannounced the following changes in regulation governing foreigntechnology agreement:1. No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such BSPATIL
    • activities involving payments will be governed by the guideline of the RBI and such payments can be made through blanket permits.2. Automatic permission will be given for foreign technology agreements, relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provisions. Upto the payment of Rs. 1 crore royalty will be at the rate of 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of the sales over a 10 year period from the date of agreement or 7 year period from the date of commencement of production.3. In case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does not entail any foreign exchange payment commitment.4. In all the other cases, the general procedures in practice will be adhered to and such industries will require specific approval.Foreign assistance and Indian five year plans:In the Table given below we find that the external assistance is playing avital role in the financing of our five year plans. Right from the I Five YearPlan, we find that in absolute terms the inflow of foreign assistance isvery much on the increase. While it was a modest figure of Rs. 190 croresin the I Plan, it was Rs. 15,139 crores by VII Plan and during the VIII Planit rose to nearly Rs. 28,700 crores. Hence, it is clear that the externalassistance or foreign capital has become a major component of financingof Indian five year plans. In terms of percentage, the external assistancewent up from a mere 9.6 in the I Plan to 28.2 in the III Plan, 35.9 duringthe Annual plans. From the IV Plan onwards, the percentage of externalassistance declined from 13 to 8.2% during the VIII Plan, but this declineshould not be misunderstood as declining importance of external BSPATIL
    • assistance in the financing of our five year plans. The table given belowwill clarify this aspectFOREIGN ASSISTANCE AND INDIAN FIVE YEAR PLANS PLAN AMOUNT Percentage (Rs.crores)FIRST 190 10SECOND 1,090 24THIRD 2,390 28FOURTH 2,090 13FIFTH 5,830 15SIXTH 10,930 11SEVENTH 15,139 8.4EIGHTH 28,700 8.2POLICY ON FDIThe government policies on Foreign Direct Investment [FDI] have beenchanging since 1991 - 92. Analysis of these policies would help to placein proper perspective the prospects and problems of FDI. This was alsotaken into consideration while suggesting methods of improving theinflows of FDI.As apart of the structural adjustment policies introduced in the Indianeconomy by Government of India since July 1991, policies relating toforeign financial participation in Indian companies and those relating toforeign technology agreements have also undergone a radical charge.Briefly stated, three tiers for approving proposals for foreign directinvestment in this country were introduced: (1) the Reserve Banksautomatic approval system; (2) Secretariat for Industrial Approvals forconsidering proposals within the general policy framework but outside BSPATIL
    • the powers delegated to Reserve Bank; and (3) Foreign. InvestmentPromotion Board, specially created to invite, negotiate and facilitatesubstantial investment by international companies that would provideaccess to high technology and world markets. The foreign investmentpolicy was further liberalized during the period under review. Fully ownedforeign enterprises will hence forth be allowed to set up giant powerprojects without the requirement to balance dividend payments withexport earnings. The general permission granted by the Reserve Bank under theprovision of.: the Foreign Exchange Regulation Act, 1973 has brought theFERA companies (i.e. those having more than 40% foreign equity) on parwith the Indian companies and thus provides a level playing field to all.The existing FERA companies have also been extended the facility of 51%equity. Also, the use of foreign brand names and trademarks on goodsfor sale within the country has been permitted. Significant amendmentsto the FERA for relaxing several of its restrictive provision have beencontemplated. The following measures were introduced in the recent period tofurther liberalise the foreign investment policy:(1) Except for 22 industries in the consumer goods sector, the earlier stipulation that dividend remittances of companies receiving approval under the foreign equity up to 51% scheme, must be balanced by export earnings over a period of 7 years, was scrapped in respect of all foreign direct investment (by non -NRIs) in June 1992. The measure was extended to investment by NRIs /Overseas Corporate Bodies (OCBs) in September 1992. BSPATIL
    • (2) For the purpose of investment in oil refineries and development of discovered oil fields, foreign private equity participation to the extent of 26 per cent is considered as sufficient. For making investment in Indian companies, NRIs/OCBs have been granted automatic approval by the RBI to invest, with full repatriation benefits, up to 100% in the issue of capital or convertible debentures of a private/public limited company engaged in or proposing to engage in high priority industries, subject to certain conditions.The existing scheme of 100% NRI investment in cent per cent exportoriented units and also for the revival of sick units will continue cent percent NRI participation in power generation has also been permitted. In thecontext of such revisions, the earlier 74% scheme has been discontinued.The Government has set up a Bureau, officially known as the Interface forNRI Scientists and Technocrats (INRIST), that will bring NRI scientists andtechnocrats in contact with Indian industries which would benefit fromthe expertise of NRIs.The Department of Industrial Development has set up an “investmentpromotion and project monitoring cell” popularly known as facilitationceil, to provide pre and post investment services for different industrialapprovals and respond to queries relating to various ministeries /departments.RBI has granted general permission to foreign citizens of Indian origin,whether resident in India or not, to acquire / hold and transfer by scale orinheritance, residential properties situated in India subject to certainstipulations. BSPATIL
    • General permission has been granted to Non-resident Indian citizens andforeigns citizen of Indian origin to let out their residential propertiesacquired for their bonafide residential purpose but which on account oftheir residence abroad, are not required for their immediate residentialpurpose. The rental income or proceeds of any such income shall both berepatriable outside India at any time in future and such funds should becredited to the owner’s Ordinary Non Resident Rupee account maintainedwith an authorized bank in India.In order to simplify and remove regulations which hinder free flow offoreign capita! in to India as also investment by Indian companies in jointventure overseas, restriction imposed on FERA companies (i.e. companiesincorporated in India in which the non-resident interest is more than 40%)under sec 26 (7), 28, 29, and 31 of FREA, 1973 have all been removed asoutlined below, there by placing them on par with other Indian companiesin regard to their operations in India. FERA companies are now permitted. a. To borrow money or accept deposits from persons resident in India. b. To accept appointment as agent or technical or management advisers in India, of any person or company. c. To allow their trademarks to be used by any person or company. d. To carry on in India any activity of trading, commercial, or industrial nature except agricultural and plantation activity. e. To acquire any undertaking in India carrying on any trade, commerce or industry or purchase the shares of any such company, and f. To acquire, hold, transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise any improvable property in India. BSPATIL
    • Person of Indian nationality or origin and others (returning home after aminimum stay of immediate preceding 6 months abroad) have beengranted general permission to bring into India as part of their baggage,gold, in any form, up to 5000gms, provided duty is paid at the rate ofRs220 / per 100 gms. (earlier Rs, 450/- per 10 gms ) in any convertibleforeign currency (I). BSPATIL
    • As part of the continuing efforts to provide an investment friendlyenvironment in India for foreign investors, the following policy initiativewere undertaken during the year 1992-93. (I) To keep pace with the ever expanding global technological revolution in the field of computers, an Electronic Hardware Technology Park (EHTP) scheme was set up allowing for 100% equity participation, duty free import of capital goods and a tax holiday i.e. exemption from corporate income tax for block of 5 years commencing from the date of the starting of commercial production. (II) In the new National mineral policy, the ceiling on foreign .equity participation in Indian companies engaged in mining activities was hiked to 50%. In the area of non-captive mines, equity participation of over 50% by foreign partners could be considered on a case by case basis. (III) Authorized dealers were delegated powers to allow remittance of dividend (including interim dividend) on equity/preference shares to non-resident shareholders of all Indian companies, as also those in which investments have been made by NRIs/OCBs under the 40% scheme or any other scheme with repatriation benefits. (IV) NRIs were allowed to invest up to 100% on non-repatriation basis, in any partnership / proprietorship concern or in private / public limited companies (expect in agricultural / plantation activities) without seeking prior approvals of other RBI. However, OCBs are not permitted to invest-In proprietorship / partnership concerns (2). BSPATIL
    • In keeping with the objective of attracting funds from the NRIs in theform of deposit and foreign investment several steps were taken duringthe year 1993 -94, such inflows, even while adhering to considerations ofcost effectiveness and dampening of volatility. Major policy initiativesundertaken during the year were as follows:-(I) Deposits Under Foreign Currency Non Resident Account (FNCRA)scheme proved to be volatile during the payments crisis, of 1990-92.They were also relatively costly given the spread above internationalinterest in the prescription of interest rates for these deposits as also thecost implicit in the provision of exchange guarantee for such deposits. Inthis regard, the Banks Annual Report for 1992-93 had observed:"attempts have been made in the recent period to restructure the existingFCNRA scheme and to put in place new schemes which (a) reduce thereliance on the FCNRA scheme, (b) make exchange risk cover acommercial proposition, and (c) reduce volatile components of depositsunder the existing FCNRA scheme.” In pursuance of this objectivedeposits of four different maturities i.e. “6 months and above but lessthan one year", one year and above but less than two years” two yearsand above but less than three years,” and three years only" werecompletely withdrawn effective from May 15,1993, Oct. 12,;993, Feb 15,1994 and August 15, 1994 respectively. Furthermore, interest ratesprescribed on FCNRA of various maturities were fine-tuned from time totime to secure alignment with movements in international interest rates.Interest rates on Non Resident (External) Rupee Accounts (NR (E) R)deposits were also revised downwards effective Oct 18,1994 while theinterest rate on savings deposits was brought down from 5% to 4.5%those on term deposits are not allowed to exceed 8%. BSPATIL
    • (II) In consonance with the move toward full convertibility in thecurrent account, the interest accruing on deposits under Non Resident(Non - Repatriable) Rupee Deposits (NR (NR) RD) was rendered eligible forrepatriation effective from Oct 1, 1994. The principal amount under thescheme will continue to be non-repatriable(III) The Foreign Currency Ordinary Non-repatriable (FCON) scheme,introduced in June J991, under which the principal as well as interestearned were not repatriable, was suspended with effect from August 20,1994. Interest accruing on the existing FCON-scheme from the quarterbeginning Oct 1, 1994 was however made eligible for repatriation.Major policy changes were, effected with a view to ensuring thatinvestment flows were channelled in a manner consistent with overallMacro-economic requirements. The following policy guidelines weredrawn out in this regard:(IV) With a considerable improvement in the external payments positionand the level of reserves, it was considered necessary to follow arestrictive policy towards Foreign Currency Convertible Bonds (FCCBs) asthey constitute a part of the countrys external debt till their conversion into equity. As per the fresh guidelines of the government (issued on May11. 1994 ) for Euro issues, companies were allowed to issue FCCBS onlyon merits as a part of the external debt restructuring programme whichwas intended to lengthen maturity and soften terms.(V) Under the automatic approval scheme for foreign investments, newguidelines were issued for determining issue price of preferential sharesissued 10 foreign investors to increase their stakes up to 51% in thebusiness of any Indian company engaged in the high priority industries BSPATIL
    • shown in the Annex-Ill to the statement on industrial policy of July 24,1991.Consequent upon the abolition of the office of the Controller of CapitalIssues (CCI) and subsequent guidelines issued by the Securities andExchange Board of India (SEBI) on June 11 and 17,1992, existingcompanies wishing to raise foreign equity were to make the issue at aprice decided by the shareholders in a special resolution. In certainproposal received from the existing companies for enhancement offoreign equity, however, the companies were found to be issuing foreignequities at a large discount to the market price, (set out in the last yearsReport). This mismatch in the price of shares for investment and dis¬investment could cause distortion in the inflows and outflows of foreignexchange under the head of foreign investment.With the objective of preventing a few shareholders from gettingsubstantial and undue enrichment and unearned gains, to ensure higherforeign equity flows, and to make both investment and dis-investmentsmarket-related, It was decided with effect from August 4, 1994 thatpreferential allotment of shares by companies must be at market relatedprice applicable to all foreign investment proposals whether approved bythe RBI or by the SIA / FIPB subject to the following, guidelines:The issue price of shares under preferential allotment (other thanallotment on rights basis), would have to be at the market value of theshares determined on the basis of their average price during theimmediate preceding six months at the main listing center calculated onthe monthly average of the high and low rates quoted for the shares atsuch centres. In the absence of a market price, however, (as in the case ofUnlisted companies, Listed companies, where shares are not regularly BSPATIL
    • traded, etc) the RBI would be guided by the net asset value and earningsper share.(V) Indian companies engaged in or proposing to engage in housingand real estate development, i.e. (1) development of serviced plots andconstruction of built-up residential premises, (2) real estate coveringconstruction of residential and commercial premises including businesscenters and offices, (3) development of townships, (4) city and regionlevel urban infrastructure facilities including roads and bridges, (5)manufacturing of building materials and (6) financing of housingdevelopment were allowed to issue shares/convertible debentures to NRIsup to 100% of the new issue on repatriation basis. Repatriation of originalinvestment in such cases would be permitted by the RBI only after a lockin period of three years from the date of issues of shares / debentures.The above facilities which were not available to OCBs, have now beenextended to them on the same terms and conditions as applicable to NRIsVII) NRIs / OCBs were so far permitted to invest in schemes of domesticMutual Funds floated by public sector banks / financial institutions onnon-repatriation basis. With a view to providing further incentives to NRIs/ OCBs to invest in domestic Mutual Funds, they were permitted to investon repatriation basis also. As a new policy measure, such investmentswere also permittedto be made through secondary market.(VIII) Under the Oct 1993 guidelines for issue of bonds by Public SectorUndertaking (PSUs). Government have allowed PSUs to issue bonds underits public issues to NRIs / OCBs through prospectus by private placementwith the facility of repatriation of both principal and interest on the bonds. BSPATIL
    • No limit, however has been specified for NRI / OCB investments in suchbonds.(IX) Besides the various investment facilities extended to NRIs / OCBson repatriation basis and under various non repatriable schemes, theNRIs / OCBs were permitted to make investment inpartnership/proprietorship concern, shares, debentures of Indiancompanies, Indian mutual funds floated by public sector banks/financialInstitutions, deposits with Indian companies, real estate, etc. Neither theinvestment/deposit amount nor the income/interest thereon, was eligiblefor repatriation. Further, the investment/deposits held in India by Indiannationals who have become non-residents on account of their goingabroad on employment/immigration, as well as income/interest earnedon such investment / deposits was not allowed earlier to be repatriatedabroad. The income /interest on such investment / deposits are, however,now permitted to be repatriated in a phased manner over a period ofthree years, as indicated below:(I) Income accruing during 1994-95 and thereafter to the extent of US Si000 per annum is remittable with immediate effect (b) income earned over and above US $1000 in a year would be allowed to be remitted as follows:- (1) One third of the annual income earned during the financial year 1994-95, (2) Two third of the annual income earned during 1995-96 and (3) the entire amount earned during 1996-97 and onwards Remittance of such income, However would be allowed only after the payments of tax as per the provision of the Income Tax Act (3).With a view to opening more areas for investment by NRIs / OCBs RBI hasdecided to allow them to invest, on a repatriation basis, in all activities BSPATIL
    • except agriculture and plantation activities, subject to certain conditionsduring 1994 -95. Accordingly, existing or new Indian companies (bothprivate and public limited companies) engaged/proposing to engage inany activity including financial, hire purchase leasing, trading otherservices etc. (except agricultural/plantation activities) are allowed to issueequity shares/convertible debentures on repatriation basis to NRIs/OCBsprovided the aggregate allocation of shares/ convertible debenturesqualifying for repatriation benefits to such non-residing investors doesnot exceed 24% of the new issue. Earlier NRIs and OCBs were permitted toinvest on a repatriations basis in new issues of shares/convertibledebentures made by companies engaged in industrial or manufacturingactivities and also in certain other sectors such as hotels, hospitals,shipping development of computer software and oil exploration. It hasalso been decided to permit authorized dealers to grant loans to NRIsholding Indian passports for acquisition of a house / fiats for residentialpurpose against security of immovable property proposed to be acquiredby them subject to certain conditions.(II) As a process of further liberalization , general permission has beengranted to NRIs/OCBs to purchase the shares on repatriation basis ofPublic Sector Enterprise (PSES) dis-invested by Central Governmentsubject to the condition that (a) the holding of share by a NRI or by anOCB, at any-time, does not exceed one percent of the paid-up capital ofthe PSE concerned, (b) the purchase consideration/bid money is receivedby way of remittance from abroad through normal banking channels. BSPATIL
    • (III) NRIs resident in Nepal will be permitted hence forth to makeinvestment in India provided the funds for the purpose are remitted infree foreign exchange through proper banking channels. Suchinvestments will either be on repatriation or on non-repatriation basisdepending on the terms and conditions applicable under the existingschemes under NRI investment.(IV) In the context of on going economic liberalization, the policy andprocedures governing approvals under the schemes for 100% ExportOriented Units (EOUS) and Export processing Zones (EPZs) were furtherrevised. All proposals conforming to the parameters presented vide pressnote No 13 (1991) series dated Oct 9,1991, Department of IndustrialDevelopment, Ministry of Industry, shall receive automatic approvalwithin two weeks from Secretariat of Industrial Approvals (SIA), Ministryof Industry (Department of Industrial Development) in the case of 100%EOUs and from the Developments Commissioners (DCs) concerned forunits to be set up in EPZs. All other proposals which do not conform tothe parameters for automatic approvals, shall be considered by the Boardof Approvals (BOA) and disposed within 45 days from SIA(V) Under the National Telecom Policy, 1994 which enunciates theguidelines for the entry of private sector into Basic Telecom Services, jointventure between an Indian and a foreign company is allowed subject to amaximum of 49% equity participation from the latter.(VI) It has been decided that foreign investment up to 51% and foreigntechnology agreements in the cast of bulk drugs, their intermediates andformulations thereof (except those produced by the use of recombinantDNA technology) will be granted automatic approval subject to theparameter of RBI. BSPATIL
    • Since the second half of 1993-94, the Indian economy has experiencedsurges in capital flows which took the forms of foreign investment flowsboth direct and portfolio, and inflows into various deposit schemes fornon-resident Indians. With current account deficits remaining modestduring 1993-94 and 1994-95, the policy response to the capital flowswas accommodative and this enabled on unprecedented build up ofinternational reserves. With the consequent attenuation of monetarytargets threatening the objective of inflation control, the policy stanceswitched to one of throwing sand in the wheels in the second half of1994-95. Various measures put in place were progressively tightenedduring the first half of 1995-96 in support of the conduct of monetarypolicy. With the widening of the current account deficit and the onset ofvolatility in the foreign exchange markets in the second half of 1995-96,the restrictive stance of policy was eased and a number of measures weretaken to relax controls and allow for a larger inflow of foreign capital. Asin the past, these measures were related to foreign investment flows anddeposits by NRIs and the policy objective of attracting capital flows hasbeen carried forward during the first half of 1996-97.Policy changes in 1996 - 97 were: Under the Automatic route, theceiling for lump sum payments of technical know-how fee was, increasedfrom Rs. I crorc to US $ 2 million, effective Nov 5,1996. With a view toliberalizing the existing facility for investments by NRIs in India, it wasdecided to allow investments by NRIs to establish schools and colleges inIndia subject to certain regulations. With a view to expanding thecoverage of investment proposals considered under the AutomaticApproval Route effective Jan 17,1997, the Government announced theinclusion in Annexure III of the statement of Industrial Policy 1991 (i) 3categories of industries / items relating to mining activities for foreignequity up to 50% (II) 13 additional categories of industries/items for BSPATIL
    • foreign equity up to 51% and (III) 9 categories of industries / items forforeign equity up to 74%Foreign Direct Investment was allowed into sixteen non-banking financialservices (merchant banking, underwriting, portfolio managementservices, investments advisory services, financial consultancy, stockbroking, asset management, venture capital, custodial services,factoring, credit refinance, credit rating, leasing and finance, housingfinance, forex holding and credit card services) during the year 1997 98,through the Foreign Investment Promotion Board (FIPB) subject toguidelines relating to minimum capitalization norms, schedule ofcapitalization and domestic equity participation. In a major drive tosimplify procedures for foreign direct investment under “automatic” route,the Reserve Bank dispensed with the need for its prior approval for suchproposals. In order to simplify procedures further in respect to foreigndirect investment cases already approved by the Government of India(SIA/FIPB), the Reserve Bank dispensed with requirement for its“in-principle” permission before receiving overseas investment or forissuing shares to foreign investors. Indian companies satisfying theconditions stipulated in the letter of approvals issued by SIA / FIPB couldissue shares / securities to foreign investors and file one copy of theapplication together with required documents with the concernedRegional office of Reserve Bank within 30 days from the date of issue ofshares. Expanding the scope of “automatic route” for foreign directinvestments, the government of India approved 13 additional categoriesof industries / items under services sector for foreign equity participationup to 51% of the equity, three items relating to mining activity up to 50%foreign equity participation and nine categories of industries/activities upto 74% foreign equity participation. BSPATIL
    • As a part of liberalization process, Reserve Bank of India decided topermit foreign banks operating in India to remit their profits surplus totheir head offices without the approvals of the Reserve Bank. Thepermission is subject to the banks complying with the provisions ofBanking Regulation act, 1949.Financial turmoil in the world economy, imposition of economic sanctionsand sluggishness in domestic activity had some bearings on foreigninvestment during the year. The Union Budget, 1999-2000 announcedthe establishment of Foreign Investment Implementation Authority [FIIA]in order to rationalize and simplify approval and implementationprocedures of foreign1 investment proposals. With a view to furtherfacilitating inflows of foreign direct investment, expansion of automaticlist of approvals and a more dynamic role for Foreign InvestmentPromotion Board were also announced.Foreign investment recovered during 1999 - 2000 reflecting the stabilityof the domestic currency, broad-based industrial revival, easing ofeconomic sanctions and return of orderliness in the financial marketscoupled with strong stock market performance.A number of policy initiatives were taken during the year to furtherfacilitate inflows of foreign investment. In August 1999, a ForeignInvestment, Implementation Authority (FIIA) was established for speedyconversion of approvals to actual flows. The Insurance Regulatory andDevelopment Act (IRDA) was passed in December 1999 permitting foreignequity participation in domestic private insurance companies up to 26% ofthe paid-up capital. Moreover, investments in all sectors, except for smallnegative list, were placed, in February 2000, under automatic route fordirect investments. Indian companies v»ere allowed, subject to specifiednorms, to raise funds for investments through issue of ADRs / GDRs BSPATIL
    • without prior government approval and up to 50% of these proceeds wereallowed for acquisition of companies in overseas markets. Indiancompanies could acquire companies engaged in information technologyand entertainment software, pharmaceuticals and bio - technology in theoverseas market through stock - swap options up to $ 100 m onautomatic basis or ten times the export earnings during the precedingfinancial year as reflected in the audited balance sheet, whichever is lower.FDI is seen as a means to supplement domestic investment for achievinga higher level of economic growth and development. FDI benefitsdomestic industry as well as the Indian, consumers by providingopportunities for technological up-gradation, access to global managerialskills and practices, optimal utilization of human and natural resources,making Indian industry internationally competitive, opening up exportmarkets, providing backward and forward linkages and access tointernational quality goods and services. Towards this end, the FDI policyhas been constantly reviewed, and necessary steps have been taken tomake India a most favourable destination for FDI. The major initiativetaken to attract FDI during 2000 -2001 & 2001 - 2002 are as follows: In pursuance of Governments commitment to further facilitate Indian industry to engage unhindered in various activities, Government has permitted, except for a small negative list, access to the automatic route for FDI, whereby, foreign investors only need to inform the Reserve Bank of India within 30 days of bringing in their investment, and again within 30 days of issuing any shares. Non-Banking Financial Companies (NBFCs) may hold foreign equity up to 100% if these are holding companies. BSPATIL
    • Foreign investors can set up 103% operating subsidiaries (withoutany restriction on number of subsidiaries) without the condition todisinvest a minimum of 25% of its equity to Indian entities, subjectto brining in US $50 m out of which US $ 7.5 m to be broughtupfront and the balance in 24 months. Joint venture operatingNBFCs that have 75% or less than 75% foreign investment will alsobe allowed to set up subsidiaries for undertaking other NonBanking Financial Company activities, subject to the subsidiariesalso complying with the applicable minimum capital inflow.FDI up to 49% from all sources is permitted in the private bankingsector on the automatic route subject to conformity with RBIguidelines.In the process of liberalization of FDI policy, the following policychanges have been made:(i) 100% FDI permitted for B, to B e-commerce(ii) Condition of dividend balancing on 22 consumer items removed forthwith(iii) Removal of cap on foreign investment in the Power Sector(iv) 100% FDI permitted in oil-refining.Automatic Route is available to proposals in the Information andTechnology Sector, even when the applicant company has aprevious joint venture or technology transfer - agreement in thesame field. Automatic Route of FDI up to 100% is allowed in allmanufacturing activities in Special Economic Zones (SEZs), exceptfor the following activities:(i) Arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships;(ii) Atomic substances; BSPATIL
    • (iii) Narcotics and Psychotropic substances and hazardous chemicals;(iv) Distillation and brewing of alcoholic drinks;(v) Cigarettes/cigars and manufactured tobacco substitutes.FDI up to 100% is allowed with some conditions for the followingactivities in Telecom Sector:(i) ISPs not providing gateways (both for satellite & submarine cables);(ii) Infrastructure Providers providing dark fiber (IP Category I);(iii) Electronic Mail;(iv) Voice Mail.FDI up to 74% is permitted for the following telecom servicessubject to licensing and security requirements (proposals withbeyond 49% shall require prior Government approval): (i) internetservices providers with gateways; (ii) Radio Paging; and (iii)End-to-end bandwidth.Payment of royalty up to 2% on exports and 1% on domestic sales isallowed under automatic route on use of trademarks and brandname of the foreign collaborator without technology transfer.Payment of royalty up to 8% on exports and 5% on domestic salesby wholly owned subsidiaries to offshore parent companies isallowed under the automatic route without any restriction on theduration of royalty payments.Offshore Venture Capital Funds / Companies are allowed to investin domestic venture capital undertakings as well as othercompanies through automatic route, subject only to SEBIregulations and sector specific caps on FDI. BSPATIL
    • FDI up to 26% is eligible under Automatic Route in the Insurancesector, as prescribed in the Insurance Act, 1999, subject to theirobtaining licence from Insurance Regulatory & DevelopmentAuthority.FDI up to 100% is permitted in airports, with FDI above 74%requiring prior approval of the Government.FDI up to 100% is permitted with prior approval of the Governmentin courier services subject to existing laws and exclusion ofactivities relating to distribution of letters. FDI up to 100% ispermitted with prior approval of the Government, for developmentof integrated township, including housing, commercial premises,hotels, resorts, city and regional level urban infrastructure facilitiessuch as roads and bridges, mass rapid transit systems, andmanufacture of building material in all metros, including associatedcommercial development of real estate. Development of land andproviding allied infrastructure will form an integral part oftownships development.FDI up to 100% is permitted on the automatic route in hotel andtourism sector and for Mass Rapid Transit Systems in allmetropolitan cities, including associated commercial developmentof real estate. FDI up to 100% in drugs and Pharmaceuticals(excluding those, which attract compulsory licensing or producedby recombinant DNA technology and specific cell/tissue targetedformulations) placed on the automatic route. BSPATIL
    • The defence industry sector is opened up to 100 per cent for Indian private sector participation with FDI permitted up to 26 per cent, both subject to licensing. International Financial Institutions like Asian Development Bank, International Financial Corporation, Commonwealth Development Corporation, German Investment and Development Company (DEG) etc., are allowed to invest in domestic companies through the automatic route, subject to Securities and Exchange Board of India / Reserve Bank of India Guidelines and sector specific caps on FDI (10).FDI policies for the year 1998 -1999Financial turmoil in the world economy, imposition of economic sanctionsand sluggishness in domestic activity had some bearings on foreigninvestment during the year. The Union Budget, 1999 - 2000 announcedthe establishment of Foreign Investment Implementation Authority [FIIA]in order to rationalize and simplify approval and implementationprocedures of foreign investment proposals. With a view to furtherfacilitating inflows of foreign direct investment, expansion of automaticlist of approvals and a more dynamic role for Foreign InvestmentPromotion Board were also announced.FDl policies for the year 1999 - 2000Foreign investment recovered during 1999 - 2000 reflecting the stabilityof the domestic currency, broad-based industrial revival, easing ofeconomic sanctions and return of orderliness in the financial marketscoupled with strong stock market performance.A number of policy initiatives were taken during the year to furtherfacilitate inflows of foreign investment. In August 1999, a Foreign BSPATIL
    • Investment Implementation Authority (FIIA) was established for speedyconversion of approvals to actual flows. The Insurance Regulatory andDevelopment Act (IRDA) was passed in December 1999 permitting foreignequity participation in domestic private insurance companies up to 26% ofthe paid up capital. Moreover, investments in all sectors, except for asmall negative list, were placed, in February 2000, under automatic routefor direct investments. Indian companies were allowed, subject tospecified norms, to raise funds for investments through issue of ADRs /GDRs without prior government approval and up to 50% of theseproceeds were allowed for acquisition of companies in overseas markets.Indian companies could acquire companies engaged in informationtechnology and entertainment software, pharmaceuticals andbio-technology in the overseas market through stock - swap options upto $ 100 m on automatic basis or ten times the export earnings duringthe preceding financial year as reflected in the audited, balance sheet,whichever is lower.FDI Policies For The Year 2000 - 2001FDI is seen as a means to supplement domestic investment for achievinga higher level of economic growth and development FDI benefitsdomestic industry as well as the Indian consumers by providingopportunities for technological up-gradation, access to global managerialskills and practices, optimal utilization of human and natural resources,making Indian industry internationally competitive, opening up exportmarkets, providing backward and forward linkages and access tointernational quality goods and services. Towards this end, the FDI policyhas been constantly reviewed, and necessary steps have been taken tomake India a most favourable destination for FDI. The major initiativetaken to attract FDI during 2000 -2001 & 2001 - 2002 are as follows: BSPATIL
    • In pursuance of Governments commitment to further facilitateIndian industry to engage unhindered in various activities,Government has permitted, except for a small negative list, accessto the automatic route for FDI, whereby, foreign investors onlyneed to inform the Reserve Bank of India within 30 days of bringingin their investment, and again within 30 days of issuing any shares.Non-Banking Financial Companies (NBFCs) may hold foreign equityup u 100% if these are holding companies.Foreign investors can set up 100% operating subsidiaries (withoutany restriction on number of subsidiaries) without the condition todisinvest a minimum of 25% of its equity to Indian entities, subjectto bringing in US $50 m out of which US $ 7.5 m to be broughtupfront and the balance in 24 months. Joint venture operatingNBFCs that have 75% or less than 75% foreign investment will alsobe allowed to set up subsidiaries for undertaking other NonBanking Financial: Company activities, subject to the subsidiariesalso complying with the 3, applicable minimum capital inflow.FDI up to 49% from all sources is permitted in the private bankingsector on the automatic route subject to conformity with RBIguidelines.In the process of liberalization of FDI policy, the following policychanges have, been made:(v) 100% FDI permitted for B to B e-commerce(vi) Condition of dividend balancing on 22 consumer items removed forthwith(vii) Removal of cap on foreign investment in the Power Sector(viii) 100% FD permitted in oil-refining. BSPATIL
    • Automatic Route is available to proposals in the Information and Technology Sector, even when the applicant company has a previous joint venture or technology transfer agreement in the same field. Automatic Route of FDI up to 100% is allowed in all manufacturing activities in Special Economic Zones (SEZs), except for the following activities:(vi) Arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships;(vii) Atomic substances; mi(viii) Narcotics and Psychotropic substances and hazardous chemicals;(ix) Distillation and brewing of alcoholic drinks;(x) Cigarettes/cigars and manufactured tobacco substitutes. FDI up to 100% is allowed with some conditions for the following activities in Telecom Sector:(v) ISPs not providing gateways (both for satellite& submarine cables);(vi) Infrastructure Providers providing dark fiber (IP Category I);(vii) Electronic Mail;(ix) Voice Mail. FDI up to 74% is permitted for the following telecom services subject to licensing and security requirements (proposals with beyond 49% shall require prior Government approval): (i) internet services providers with gateways; (ii) Radio Paging; and (iii) End-to-end bandwidth. Payment of royalty up to 2% on exports and 1% on domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer. BSPATIL
    • Payment of royalty up to 8% on exports and 5% on domestic salesby wholly owned subsidiaries lo offshore parent companies isallowed under the automatic route without any restriction on theduration of royalty payments.Offshore Venture Capital Funds / Companies are allowed to investin domestic venture capital undertakings as well as othercompanies through automatic route, subject only to SEBIregulations and sector specific caps on FDI.FDI up to 26% is eligible under Automatic Route in the Insurancesector, as prescribed, in the Insurance Act, 1999, subject to theirobtaining licence from Insurance Regulatory & DevelopmentAuthority.FDI up to 100% is permitted in airports, with FDI above 74%requiring prior approval of the Government.FDI up to 100% is permitted with prior approval of the Governmentin courier services subject to existing -laws and exclusion ofactivities relating to distribution of letters, FDI up to 100% ispermitted with prior approval of the Government, for developmentof integrated township, including housing, commercial premises,hotels, resorts, city and regional level urban infrastructure facilitiessuch as roads and bridges, mass rapid transit systems, andmanufacture of building material in all metres, including associatedcommercial development of real estate. Development of land andproviding allied infrastructure will form an integral part oftownships development. BSPATIL
    • FDI up to 100% is permitted on the automatic route in hotel and tourism sector and for Mass Rapid Transit Systems in all metropolitan cities, including associated commercial development of real estate. FDI up to 100% in drugs and Pharmaceuticals (excluding those, which attract compulsory licensing or produced by recombinant DNA technology and specific cell/tissue targeted formulations) placed on the automatic route. The defence industry sector is opened up to 100 per cent for Indian private sector participation with FDI permitted up to 26 per cent, both subject to licensing. International Financial Institutions like Asian Development Bank, International Financial Corporation, Commonwealth Development Corporation, German Investment and Development Company (DEG) etc., are allowed to invest in I domestic companies through the automatic route, subject to Securities and Exchange Board of India / Reserve Bank of India Guidelines and sector specified caps on FDI.Industrial policy resolutions of 1948,1956 and 1980.Industrial policy comprises of the procedures, principles, rules, policiesand regulations which together govern the industrial sector to guide theindustrial development or the country in conformity with the objectives offive year plans and the needs of the economy. As the economy develops,the government has to closely study the process of economicdevelopment and make necessary changes and modifications in thepolicies so as to make the policies relevant for the situation or theenvironment prevailing in the country at different points of time. ASometimes the changes in policies are so drastic that a new approach atthe industrial development or the development of any other sector isarrived at. When these changes are announced the reactions from thesector concerned are studied closely by the government and necessary BSPATIL
    • amendments are made to the policies already announced. In Indian scene,the situation prevailed immediately after independence was completelydifferent from what is being witnessed today. Hence, if we study theindustrial policies announced in the later 40s and early and middle ‘50’swe would get a background with which we will be able to understand andappreciate the changes that have been announced in 1991. This wouldalso help us to understand the justifications for the drastic changesannounced at periodical intervals. Hence, we would discuss now in brief,the features of 1948, 1956 and 1980 Industrial Policy Resolutions.INDUSTRIAL POLICY 1948Immediately after independence, the government had to give a guidelinefor the industries in India and so it announced its policies for industries.The political freedom attained in 1947, posed a challenge to thegovernment, to devise its own policies. With the production at low levels,population increasing, partition impacts, rising price level, industries tobe developed to accelerate economic development, etc., the 1948Industrial policy resolution was announced. Through that the governmentclearly accepted its responsibility of ensuring planned development ofindustries of various types. The 1948 policy laid the foundation for a newexperience as would be clear from the following features of the policy.The industries were classified into the following four categories: 1. The strategic industries to be completely owned by the government included manufacture of arms and ammunition, production and control of atomic energy, ownership and management of railway transport, etc. No private sector participation or existence will be permitted in this category of industries. BSPATIL
    • 2. The second group included the basic and key industries. Private sector existence in this group would be tolerated for a period of 10 years after which their performance would be evaluated. New units in this category will be established only by the government and the existing ones would be taken over by the government if their performance is found to be not satisfactory after the review. The industries included in this category include: aircraft manufacture, coal, iron and steel, ship building, radio sets and mineral oils, etc. 3. In this category government included the basic industries like salt, automobiles, tractors, prime movers, electrical engineering, heavy machinery, machine tools, heavy chemicals, fertilzsers, electro-chemical industries, non-ferrous metals, rubber manufacture, power and industrial alcohol, cotton and woollen textiles, cement, sugar, paper and newsprint, air and sea transport, minerals and industries relating to defence. Private sector will be given complete freedom to enter into this category, but the government can intervene and regulate any of them, if found necessary. 4. All the other industries formed the fourth category. Mainly left for private sector, the government pointed out that progressively it may participate but not eliminate the private sector. Both individual as well as co-operative undertakings will be permitted in this sphere.This policy also gave importance to small scale industries and suggestedthat both the central and state governments should join together insolving the problems faced by the small scale industries. As theseindustries would offer good scope for absorbing the displaced labourers, BSPATIL
    • and agricultural workers and wee also ideal for co-operative type oforganisation, the government felt that they must be developed. Asregards the foreign capital, the government clearly pointed out that thereis need for free flow of capital as well as technology. At the same time thegovernment also said that it should regulate; no discrimination will bemade between the Indian and foreign undertakings with regard to theapplications of the provisions of the policy resolutions. Profits andrepatriation of capital would be permitted subject to the provisions of the-foreign exchange control. Further if any undertaking is nationalised,then fair and equitable compensation would be paid.Evaluation:The main aspect of this policy is that it laid the foundation for theintroduction of MIXED ECONOMY in India. Under this the government willencourage co¬existence of both private and public sector units inindustries according to the provisions of the policy. This paved theway-for the participation of government and the corporate sector in theindustrial building process of the country. This also facilitated a directcomparison between the performance of both the sectors, in terms ofvarious indicators. Being the first policy resolution the government hadmade a good beginning. But this policy was criticised for beingclassificatory. It gave an impression that the private sector, even in spiteof possessing the potential was not allowed to play its due role in theindustrial development. Secondly, there was a threat of nationalisation,specifically, in the case of industries under the second category. Thirdly,the government intervention was present even in the case of thirdcategory of industries. Hence, on the whole, being the first policy, the BSPATIL
    • government could not make the policy more imaginative, except, ofcourse, introducing the principle of mixed economy.INDUSTRIAL POLICY 1956A new policy was necessitated after 1951, because, India adopted asocialistic pattern of society, the Constitution guaranteed FundamentalRights and Directive Principles of State policy and the First five year planwas completed by 1956. After reviewing the developments andachievements, the government came out with the Industrial PolicyResolution of 1956. For all the later policies, this became the basis anduntil 1980, the provisions of this policy remained more or less in force.The following are the important features of this Policy:The industries were classified into three categories. This was indicated interms of Schedule A, Schedule B and Schedule C industries. The Schedule A industries are completely slate owned and the state is responsible for the development and growth of them. The Schedule B included industries which were under the control of government, especially new units. The private sector is also permitted to enter into this category, but it will be given only a supplementary role. The Schedule C industries included all the remaining industries, the future of which would be completely in the hands of private sector. Of course, government regulation in general would be formulated and made applicable to them as any other industries. The first classification (Schedule A) included 17 industries, the Schedule B included 12 industries and Schedule C included all the rest. BSPATIL
    • The government clearly indicated that the above classification is not veryrigid, and private participation and presence even in the first category inthe nature of allied units, user of by-products, etc., would be permitted,similarly the government may enters the Schedule C industries if theplanning and development warrants it. The private sector is expected towork in close unison with the state. The government assured fair and freetreatment to private sector units and non-discriminatory treatment wasalso promised. The government continued to encourage the growth anddevelopment of small scale and village industries by extending subsidies,tax concessions, protection from large and medium industries, andassisting them in modernisation to improve their competitive strength.The Resolution also aimed at reducing the regional disparities in thegrowth and development of industry so as to achieve balanced industrialdevelopment throughout the country. The Resolution also highlighted theneed to protect and improve the conditions of industrial workers in thecountry. Mainly several machineries for settling industrial disputes werethought of. The government continued with its policy regarding foreigncapital without much change.Evaluation:This resolution assigned a major role to the public sector. It created acondition in which the public sector units could be established anddeveloped well. This was fell necessary to achieve the desired rate andpattern of development of industries in India. The government made itclear that it had no intention to wipe out the private sector, instead itwanted the private sector to emerge as the supplementary sector for thepublic sector and join the latter to achieve rapid industrial and economicdevelopment. After the resolution came into force, over a period it wasfound that the private sector developed faster by taking advantage ofloopholes and exceptions in the Resolution. There were cases where BSPATIL
    • licenses were issued to private sector while public sector should havebeen given the license. Hence, it was found that this Resolution in fact,led to the rapid growth of private sector.INDUSTRIAL POLICY OF 1980As already pointed out the Industrial policy of 1956 formed the basis ofthis policy in 1980. This new policy had the following objectives: (i) to achieve the optimum utilisation of the installed edacity (ii) to achieve maximum production and through that achieve higher productivity and employment generation (iii) to rectify the regional imbalance by focusing on the backward areas (iv) giving priority treatment for agro-based industries (v) to promote inter-sectoral relationship (vi) to encourage the growth of export oriented and import substitution industries (vii) to speed up the growth of small scale units, etc.With these objectives in view, the new policy laid down the followingprovisions:1. After reviewing the performance of the public sector units the government has decided to introduce measures for improving the efficiency of these units so as to make them contribute more towards the economy.2. In order to promote economic federalism, the policy provided for integration of industrial development in the private sector. The government also decided to eliminate the artificial division between small and large scale industrial units. In each BSPATIL
    • district a few nucleus plants will be set up which would generateopportunities for a number of small, cottage and ancillary units.This would ultimately create the scope for faster industrialdevelopment in the industrially backward districts. BSPATIL
    • 3. To provide the scope for more and more small and cottage industries, the government redefined these units as below: a. the limit of investment for tiny units was to be raised from Rs. 1 lakh to Rs.2 lakhs b. the limit of investment for small scale units was to be raised from Rs. 10 lakhs to Rs. 20 lakhs and c. increase the limit of investment for ancillaries from Rs. 15 lakhs to Rs. 25 lakhs.4. to promote industrial growth in rural areas and also to improve the employment opportunities there and raise their percapita income, the policy provided for promoting industries in the rural areas. This was also expected to maintain the ecological balance in the country. Greater attention would be given to the growth of handlooms, handicrafts and khadi and other village industries.5. Another important provision was that the government decided to regularise the unauthorized excess capacity with the industrial units, especially the FERA & MRTP units by allowing them automatic expansion by 25% of the existing licensed capacity on a selective basis.6. To prevent spread of industrial sickness, the government indicated that very stringent steps would be taken against those units which are deliberately mismanaged and indulging in financial improprieties. As regards the existing sick units, arrangements would be explored to revive them or to encourage their mergers with healthy units by introducing suitable tax concessions to encourage such actions. When other methods of revival of sick BSPATIL
    • units are not found feasible, then the management of such sick units would be taken over.EVALUATIONThis policy has several lapses. Its claim to eliminate the division betweensmall scale and large scale units is something contradicting the basis ofsuch divisions. There was a need to treat the small scale with liberaltreatment so that in a labour intensive economy, these units can createemployment opportunities. There is nothing wrong with such specificpreferential treatment of small scale units. But this policy aimed atremoving such differences. Secondly, this policy created a precedence byregularising the unauthorized excess capacity created by large units,instead of taking action against such erring big units. While the big unitswelcomed this move of the government, yet this has resulted in theexpectation that the government would continue to have such liberaltreatment in future also. This indirectly has also affected the growthprospects of new industries and the existing medium and small scaleunits. Though the government justified its move by stating that such amove would facilitate fuller utilisation and higher output, yet theconsequence of such a move was not thought about. However, it may bepointed out that the seeds of liberalization were sown through this policyand the governments intention to select capital intensive path ofdevelopment.The features of 1991 Industrial policyThe government announced its new Industrial policy in July 1991. Thenew policy has outlined several changes which have together opened anew era to the growth and development of industrial sector in India, Theconventional regulations and restrictions have been replaced with BSPATIL
    • liberalization and reliefs. Consequent to the announcement of the newpolicy, there has been all round jubilation in the industrial sector. Thefollowing are the salient features of the new industrial policy.Even by 1985-86, the government realised the need to encourage theindustrial sector to stand on its own legs and towards achieving this anumber of policies and procedural changes have been announced. Thiswas expected to increase productivity, reduce costs and improve thequality with which the domestic industries are expected to facecompetition with strength. There was an honest attempt to release thepublic sector from a number of constraints and it was given a largemeasure of autonomy. Technological and managerial modernizationprograms were taking place in large scale. All these measures togethercontributed to the achievement of an impressive annual growth rate of8.5% during the VII Five year plan. Having understood the effectiveness ofall the policy changes in the past, the new industrial policy will continueto pursue a sound policy to encourage entrepreneurs, develop theindigenous technology through intensive research and developmentactivities, dismantle the regulatory system, improve the capital market,etc. Small scale sector would get a special attention and the governmentpromised to come out with a new policy towards the small scaleindustries. Foreign technology and investment would be welcomed toimprove the domestic production base and increase the exports. TheMRTP Act would be suitably modified to encourage competition. Publicsector will be made to run on commercial lines and play a vital role ineconomic development. The essence of this new policy will be discussedunder the following heads: 1. Industrial licensing, 2. Foreign investment,3. Foreign technology agreement, 4. Public sector, 5. MRTP Act and 6.Small scale and tiny sector policy.INDUSTRIAL LICENSING POLICY BSPATIL
    • To achieve the objectives of the strategy of the industrial sector in the90s a number of changes in the system of industrial approvals have beenbrought about. The domestic producers will be able to withstand thecompetition in the country as well as abroad only through proceduralreforms. Hence, the role of government will be changed from that ofexercising control to one of providing help and guidance. Changes in thepolicy towards public sector in the last few years have clearly indicatedthat private sector enterprises will be allowed to compete in many areashitherto earmarked for public sector. Consequently, the new policy hascompletely reclassified the Indian industries as below:a) Eight industries have been completely reserved for the public sector.They are: i. Arms and ammunition and allied items of defenceequipment, defence aircraft and warships, ii. atomic energy, iii. coal andlignite, iv. mineral oils; v. mining of iron ore, manganese ore, chrome ore,gypsum, sulphur, gold and diamond, vi. mining of copper, lead, zinc, tm,molybdenum and wolfram, vii. mineral specified in Schedule to theAtomic Energy Order, 1953 and viii. railway transport.b) Eighteen industries have been listed as industries which requirecompulsory licensing. However, this provision would not apply in respectof the small scale units taking up the manufacture of any of the itemsreserved for exclusive manufacturing in small scale sector. Compulsorylicensing would be required in the following industries;i. coal and lignite, ii. petroleum other than crude and its distillationproducts, iii. distillation and brewing of alcoholic drinks, iv. sugar, v.animal fats and oils, vi., cigars and cigarettes of tobacco andmanufactured tobacco substitutes, vii. Asbestos and asbestos basedproducts, viii. plywood, decorative veneers and other wood based BSPATIL
    • products such as particle board, medium density fiber board, block board,ix. raw hides and skins, leather, chamois leather and patent leather, x.tanned or dressed fur skins, xi. motor cars, xii. paper and newsprintexcept bagasse based units, xiii. electronic aerospace and defenceequipment of all types, xiv. industrial explosives, xv. hazardouschemicals, xvi. drags and pharmaceutical xvii. entertainment electronicsand xviii. white goods like domestic refrigerators.As regards the provisions of the industrial licensing policy, (i) Industrial licensing has been completely abolished for all projects except for the industries classified above, i.e., the area reserved for public sector and the list of 18 industries and the areas reserved for small scale industries will continue. (ii) Public sector will continue to maintain monopoly in industries coming under the areas of security and strategic considerations. (iii) In projects where imported capital goods are required, automatic clearance will be given provided the foreign exchange availability is ensured through foreign equity. Or alternatively if the value of imported, goods does not exceed 25% of the total value of plant and equipment subject to the ceiling of Rs. 2 crores, automatic clearance will be given. However, this would come into effect only from April, 1992 in view of the current balance of payments position. In all the other cases, the prior approval and clearance from the Secretariat of Industrial approvals in the Department of Industrial development will be required. (iv) Except the list of industries requiring compulsory licensing, the other industries will not require any approval from the Central BSPATIL
    • government for their location in ares other than cities of more than one million population. In cities with more than one million population, non-polluting industries like electronics, computer software and printing will be permitted outside 25 kms. of the periphery. If such cities require industrial re-generation policies will be made more flexible. However, the existing zoning and land use regulation and environmental legislation will continue to regulate industrial locations. All efforts will be made through incentives and other methods like infrastructural development, to disperse the industry to rural and backward areas.(v) New Broad-banding facility will be provided to the existing units so as to enable them to produce any article without additional investment. The exemption from licensing will be applicable to all substantial expansion of existing units.(vi) The mandatory convertibility clause will no longer be applicable for term loans from the financial institutions for new projects,(vii) A very significant step is to abolish all the existing registration schemes.(viii) In case of substantial expansions and new projects, it is enough if the entrepreneurs file the information memorandum.(ix) The list of industries requiring compulsory licensing and industries for automatic approval of foreign technology agreements will be notified in the Indian Trade Classification (Harmonized system), BSPATIL
    • FOREIGN INVESTMENTForeign investment carries with it the benefits of technology transfer,marketing expertise, modem managerial techniques and new possibilitiesfor promotion of exports. As this requirement is felt in this world ofindustrial change and co¬operation, the new policy has clearly containedthe following provisions related to foreign investment: (i) In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed- Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments will be made in the FERA. (ii) The general policies governing the domestic units in regard to import of components, raw materials and intermediate good and payment of know-how fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on account of dividend payment also to ensure that such payments are balanced by export earnings over a period of time. (iii) All the other foreign investments not included in the Category I slated above will require prior clearance. (iv) Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in (i) above. However, the provisions of the Export-Import policy BSPATIL
    • applicable to the domestic units will also be applicable to such trading companies. (v) To encourage substantial inflow .of foreign investment, a Special empowered board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market. Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.FOREIGN TECHNOLOGY AGREEMENTA welcome change in the outlook of the government as evidenced by thenew policy is the realization that the sophisticated technology, fromabroad can be brought in only through liberal and less restrictiveprocedure and policies. The interference of the government in this regardis to be reduced so as to enable the domestic industries in achieving ahigh rate of industrialization. As a result of this liberalization, automaticapproval for technology agreements related to high priority industries willbe made with respect to certain specific parameter. Other industrieswhich can enter into such agreements without incurring the expenditureof foreign exchange will also be extended liberal treatment. Theindustrialists are left to themselves to decide and enter into foreigntechnology agreements depending upon the commercial viability of theirenterprises. In due course this measure is expected to pave the way forexchange of superior technology from India with other countries. Withthe overall liberalization, the competition will be high and it is expectedthat industries will invest much more in research and developmentactivities. Keeping in view all these expectations, the government has BSPATIL
    • announced the following changes in regulations governing foreigntechnology agreement: (i) No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through the blanket permits. (ii) Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provision. Upto the payment of Rs.1 crore, royally will be @ 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of sales over a 10 year period from the date of agreement or 7 year period from the dale of commencement of production. (iii) In the case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does riot entail any foreign exchange payment commitment. (iv) In all the other cases, the general procedures in practice will be adhered to and such industries will require approval.PUBLIC SECTORThe public sector was given the predominance in the industrialdevelopment over the last four decades and the amount of investmentmade in this sector, though justified from the point of view of socialistic BSPATIL
    • democracy, it has been struggling with so many problems like poorproductivity, excess staffing, lack of continuous technologicalup-gradation, inadequate attention to research and development, etc.The rate of return on investment in public sector has been so low that ithas prevented the automatic growth of these assets to the government.The main reason for this poor performance of the public sector has beenthe taking over of the sick units from the private sector and the numberof units which are in the consumer goods and service sector. Hence, inthe new policy the government has rightly given the emphasis to thedevelopment of public sector in the field of essential infrastructure goodsand services, technology development and building of manufacturingcapabilities, manufacture of products such as defence equipment. Thepublic sector will also enter the other areas not strengthened if theygenerate good profits and the management will be granted moreautonomy through a system of memorandum of understanding. Privatesector will be invited to induce competition in these areas. In selectedindustries in public sector, the government would disinvest a part of theequity share holding to provide market discipline to the performance ofthe public sector. Based on these views the new policy has the followingprovisions regarding the public sector: (i) A review of the public sector portfolio investment will be made to give the emphasis on the role of public sector in the strategies, high tech and infrastructure. Public sector units will be allowed entry into areas not strictly reserved for it. (ii) The Board for Industrial and Financial Reconstruction will be approached to help the sick units to rehabilitate them. To protect the interest of workers who are likely to be affected due to rehabilitation of public sector sick units, a social security system is proposed to be devised. BSPATIL
    • (iii) A significant policy aimed at raising the resources and encouraging public participation in the growth of public sector units is that the government will offer a part of its share holding in the public sector to the mutual funds financial institutions, genera! public and workers. (iv) In the direction of strengthening the management of public sector units the Board of public sector management will be made more professional and given more powers. Further to make the management of such units more autonomous and accountable a system of memorandum of understanding will be adopted. Apart from improving the expertise of the government in implementing the MOU, the government also would place in the Parliament the MOU to facilitate detailed discussion.MRTP ACTA major deviant of the new policy is in respect of the MRTP Act. The newpolicy aims at removing the unnecessary bureaucratic controls and allowthe industries to breathe in an atmosphere of freedom. The efforts of thegovernment in the past intervening in the investment decisions of theMRTP companies have been proved to be counter-productive. Hence, thenewly empowered MRTP Commission will enquire into complaintsreceived from individual consumers or classes of consumers. Thefollowing is the essence of the provisions in the new policy regardingMRTP Act: BSPATIL
    • (i) The limits of assets in respect of the MRTP companies and dominant undertakings have been removed and suitable amendment in the MRTP Act will be made in due course. (ii) The need to obtain the prior approval of the central government for establishing new units, expansion of existing units, merger, amalgamation and take over as well as appointment of Directors have all been removed. (iii) The MRTP Act will be used only for controlling and regulating monopolistic, restrictive and unfair trade practices. As a follow-up the MRTP Commission will be authorized to inquire suo moto or complaints lodged by individual consumers or classes of consumers regarding monopolistic, restrictive and unfair trade practices. (iv) All the necessary amendments will be made in the MRTP Act to give more punitive and compensatory powers of the MRTP Commission.Industrial pattern in India on the eve of planning and growth since theI Five Year PlanBy 1950, the industrial pattern in India was completely under the shacklesof the British policy. Till independence, India was used as a market for thefinished goods of Briton and so nothing spectacular could be explainedabout the industrial pattern in India at that time. The main features of theindustrial pattern on the eve of planning (1950) were: 1. There was a conspicuous lop-sided pattern of industry found by 1950. On the one side large industries owned by British businessmen was existing and the other extreme the indigenous BSPATIL
    • industries of small size but in large numbers was found. There was no medium scale industries at all. Obviously the employment pattern was concentrated in these two extreme types of industries. 2. The capital intensity in Indian industries was very low compared to several other Western countries. This was because of low wage level and very small market size for the products. So there was no scope for large scale production. 3. The composition of industrial output was such that the ratio between consumer goods and capital goods was 62: 38. This amply explains the under developed nature of the capital goods sector.On the eve of the I Plan the government studied the prevailing situationand then decided to launch the process of industrialization in India inorder to achieve a higher rate of growth. For this purpose steps weretaken to design the industrial development to accelerate growth. Theplan-wise steps for achieving a higher rate of industrial development isgiven below:I Plan: During this Plan the emphasis was more on the development ofagricultural sector than the industrial sector. However, the effort was toimprove the power and irrigation facilities so as to facilitate rapidindustrialization. The target for the growth was to achieve 7% But inreality this called for huge investment which did not come forth. Out ofthe total investment planned for the industrial sector (Rs. 797 crores), Rs.94 crores was the outlay fixed for the public sector. The Plan also aimedat fuller utilization of the existing capacity. However several important BSPATIL
    • industries like Sindiri Fertilizer factory, Chittaranjan Locomotive factory,Indian Telephone industries, etc were set up during this Plan.II Plan: The seeds of industrialization were sown during this Plan. Duringthis Plan period several important changes took place and the mostnotable one being the government declared its Industrial policy resolution1956. Heavy industries and large scale industries were to be set up. Thetotal investment by the private and public sector was Rs. 1575 crores.The following priorities were set up to achieve a desirable pattern ofindustrial development during this Plan. (i) To give top priority to heavy engineering and machine building industries. (ii) Expanding the capacity of some of the industries producing aluminium, cement, chemical pulp, fertilizers, etc. (iii) To undertake modernization and re-equipment of the major national industries like cotton textile and jute. (v) To achieve fuller utilization of available capacity and (vi) To expand the capacity of the consumer goods industries.With these priorities, major iron and steel plans were set up in publicsector in collaboration with other countries. Apart from these theindustrial development also included the development of several othermedium scale and small scale units in large scale. The combined effect ofall these industrial development was during this Plan period the index ofindustrial production shot up to 194 in 1960-61 from a mere 139 in1955-56.III Plan: This Plan provided for a big leap in industrial development byraising the rate of investment to a new peak to strengthen the industry,power and transport and also to achieve a rapid rate of industrialprogress. With this view, the total investment ear-marked for industrial BSPATIL
    • development was Rs. 3000 crores in which public sector contributionalone amounted to Rs. 1700 crores. In fact in this Plan the public sectorwas given predominant role. Apart from this the village and small scaleindustries received a great impetus in the form of Rs. 425 crores ofinvestment by private and public sector. Added to this was to set up 300new industrial estates throughout the country. The target for industrialdevelopment was" fixed at 14%, though the actual achievement was only7.6% per annum. There was overall industrial development and it wasthought that the country could receive the stage of self-reliance.IV Plan: With a good agricultural output on the eve of this Plan (whichcoincided with the start of Green revolution), the industrial developmentstarted picking up. This Plan had specific objectives for industrialdevelopment as indicated below:1. To fulfill the commitments made for investments2. To expand the production capacity as required by the future3. To bring down the level of dependence on import for supplies4. To exploit the existing internal development to lay the base for new industries.With a total investment of Rs. 5300 crores by the private and publicsectors, the Plan provided for the development of large, medium andsmall scale and village industries. But during this Plan the achievementwas well below the target due to several factors. Specifically, operationalproblems in some of the basic industries, lack of integrated planning,deficiency in design, loss of man-days due to strikes and lock-outs,decline in demand for industrial machinery, inadequacy of investment,stagnation in the production of commercial crops, etc. BSPATIL
    • V Plan: This Plan started with the emphasis on the following with theobjective of achieving self-reliance and growth with social justice: i. Rapidgrowth of the core sector, ii. Encourage development of industries whichaccelerate rapid diversification and growth of exports, iii. Increasing theproduction of industries which supply for mass consumption, iv. Tocurtail the production of non-essential commodities except for exportpurposes.With this emphasis the total investment by the public private sectorsworked out to Rs. 10135 crores. The Village and small scale industriesreceived tremendous encouragement during this Plan and thegovernment reserved production of 124 items for small scale industries.Inspite of all these, the actual achievement of industrial development wasjust 5.3% per annum against a target of S.1% This was mainly because ofthe capacity constraints in industries like cement, paper and fertilizer,lack of transport facilities, shortage of fuel, electricity, low administeredprice, strained industrial relations, inefficient management, etc.VI Plan: This Plan started with a strategy to achieve structuraldiversification, modernization and self-reliance. Towards this, the Planformulated policies on the following lines:i. Enhancing the manufacturing capacity in a substantial way coveringa wide range of industries, ii. Giving special attention to the capital goodsindustry and electronics industry in particular, iii. In order to meet theforeign exchange requirements, the exports of the engineering goodsand industrial products would be stepped up, iv. Providing for acombination of the import of contemporary technology and alsodevelopment of indigenous technology through intensive research anddevelopment and v. Developing a strategy for backward regions. BSPATIL
    • The Plan provided for an overall of investment of Rs. 22187 crores,though the actual expenditure was of the order of Rs. 30000 crores.However, the industrial growth did not exceed the target determined dueto various reasons, the important of which are: Power shortage, poorindustrial relations and continued labour unrest, poor demand conditions,lack of concern for improvement of efficiency failure to give greateremphasis on the technology up-gradation, etc.VII Plan: This Plan provided for a total investment of Rs. 19708 crores bythe Public sector and Rs. 2752 crores for the development of the villageand small scale industries. Over and above this the private sectorinvestment of a very huge size was also forthcoming. The Plan developedan industrial strategy with the following elements: (i) to completely remove the infrastructural deficiencies like power shortage, by providing for more efficient use of the existing capacity and also establishing new power plants. (ii) to encourage modernization of industries especially sugar and textile industries through up-gradation of technology. (iii) to determine specific targets for productivity for major industries like steel fertilizer, paper, cement etc. (iv) to identify the industries which possess competitive advantage and then encourage them more to improve their export by making the export production an integral part of the domestic production. (v) to encourage the ‘sunrise’ industries which carry enormous potential for improving productivity and quality (vi) to reduce regional disparities in industrial development and also ensure dispersal of industries by locating new industries in industrially backward states and districts, (vii) to extend the coverage of pollution control system in more industries. BSPATIL
    • An encouraging note during this Plan was that the actual achievement ofgrowth was very much better than what it was in other plans, against atarget of 8.5% This better growth rate was achieved mainly because of i.better performance of infrastructural sector, changes in the area oflicensing, higher import of capital goods, higher utilization of theexisting capacity, extending of broadbanding policy to more industries,etc. The overall outlay during this Plan was Rs. 22148 crores.VIII Plan: At the start of this plan, the government had taken a crucialdecision to change its fiscal, monetary, trade, industrial and foreigninvestment policies. In one word, the liberalization policy was announced.The continued emphasis on public sector was dropped as it had providedthe necessary momentum for growth and so the private sector initiativeshave to be encouraged. The overall efficiency of the private sector provedthat it has come off age and play a greater role in the economicdevelopment. The competitive advantage of Indian industries should bemade full use of and so the private sector is vested with the responsibilityfor improving the efficiency and productivity. An open door policy isadopted to facilitate the growth of private sector and also to integrate thedomestic production with the rest of the world. External collaboration,joint ventures, etc will all be viewed with a main focus on the flow ofbenefits. The overall outlay in this Plan was set at Rs. 40673 crores. ThePlan has fixed 8.9% as the annual average growth rate and with theprevailing conditions, this target appears to be reasonable and achievable.EXIM Bank and the functions of EXIM Bank The schemes of financing ofthe BankThe Export-Import Bank of India (EXIM Bank) established on 1st January,1982 is a wholly owned financial institution of the government. It was BSPATIL
    • established, by an Act of Parliament, for the purpose of financing,facilitating, promoting foreign trade of India. It is a principal financialinstitution for co-ordinating the working of institutions engaged infinancing exports and imports.Chapter IV of the EXIM Bank Act provides: “The EXIM Bank may grant, inor outside India, loans and advances, by itself or in participation with anybank of financial institution whether in or outside India, for the purposeof export or import and shall also function as the principal institution forco-ordinating the working of institutions engaged in financing of theexport in such manner as it may deem appropriate." The Chapterprovides further: "The EXIM Bank may also carry on and transact all or anyof the following kinds of the following business, namely: (a) granting loans and advances to a scheduled bank or any other bank or financial institution notified in. the Official Gazette by the Central Government in this behalf by way of refinance of loans and advances granted by it for purpose of export or import. (b) underwriting the issue of stocks, shares, bonds or debentures of any company engaged in export or import, the Export-Import Bank of India Act, 1981. (c) issuing bid bonds or guarantees in or outside India by itself or in participation with any government bank or financial institution in or outside India. (d) accepting, collecting, discounting, re-discounting purchasing, selling or negotiating in or outside India bills of exchange or promissory notes arising out of transactions relating to export BSPATIL
    • or import and granting of loans and advances in or outside India against such bills or promissory notes.(e) granting, opening, issuing, confirming or endorsing letters of credit and negotiating or collecting bills and other document drawn there under.(f) undertaking any transaction involving a combination of government to government and commercial credit for purpose of export or import.(g) granting loans and advances outside India for any Indian joint venture.(h) granting lines of credit to the government of any foreign state or any financial institution or person outside India for purpose of export and import.(i) granting loans and advances to any person in India in connection with his equity contribution in any joint venture in any country outside India.(j) financing export or import of machinery and equipment on lease basis.(k) subscribing to or entering into such other dealings in foreign exchange, as may be necessary for the discharge of its functions.(l) subscribing to, or investing in, or purchasing of, stock, shares, bonds, or debentures of any country outside India. BSPATIL
    • (m) opening of any account in any bank in or outside India or the making of any agency arrangement with, or acting as agent or correspondent of, any bank or other institution in or outside India.(n) transferring for consideration, any instrument relating to loans and advances granted by it.(o) issuing participating certificate.(p) subscribing to, or investing in, or purchasing of stock, shares, bonds, or debentures to the extent necessary for the enforcement of a line, pledge or other contractual right(q) undertaking and financing of research, surveys, techno-economic or any other study in connection with the promoting and development of international trade.(r) providing technical, administrative and financial assistance of any kind for export or import.(s) planning, promoting, developing and financing export-oriented concerns.(t) forming or conducting subsidiaries for carrying out its functions.(u) acting as agent of the Central Government, any State Government, the RBI, the Development bank or any other person as the Central Government may authorize. BSPATIL
    • (v) collecting, compiling and disseminating market and credit information in respect of international trade, (w) doing any other kind of business which the Central (x) government may authorize. (y) generally doing such other acts and things as may be incidental to or consequential upon, the exercise of its powers or to discharge of its duties under this Act or any other law of the time being in force, including sale or transfer of any of its assets.Financing schemes of the EXIM Bank:The present focus of the Bank is on medium term and long term credits.Whenever a buyer of goods or services exported from India is allowed todefer payment, an export credit, arises. Deferred export credit is availablefor the sale of machinery, manufactured goods and related services. Suchcredit may be in the form of “Suppliers credit” or “Buyer’s credit” -Suppliers credit arises when an Indian exporter extends credit to theoverseas buyer and finances himself through the EXIM Bank. Deferredexport credit takes the form of Buyers credit when the EXIM Bank extendscredit directly to the buyer.The EXIM Bank operates three broad programs of financing viz. Loans,Rediscounting and Guarantees. At present the Bank operates nine lendingschemes which are briefly described below1. Loans to Indian companies: BSPATIL
    • Direct financial assistance to export: Funds are provided, on deferredpayment terms, to Indian exporters of plant, equipments and relatedservices, which enable the exporter to extend deferred credit to theoverseas buyer. This programme covers project exports, which could beturn-key projects/construction projects. Such project exports arise whenan Indian company contracts either to set up on a turnkey basis anytextile mill, sugar plant or contracts a construction project overseas.Financing export of eligible goods is covered under this programme.Consultancy and technology services: Indian companies can borrow fundsfrom EXIM Bank and provide deferred credit overseas buyers of Indianconsultancy of technology services.Overseas investment financing: The bank provides financing, where anIndian company establishes a joint venture overseas, and requires fundstowards equity participation.Pre-shipment credit: This programme is available for companies, thathave won an export contract for the eligible goods and are seekingfinance to produce the goods which entails a production periodexceeding six months.Loans to foreign government companies and finance institutions:This is offered directly to foreign importers for the import of eligibleIndian goods and related services with repayment terms spread over aperiod of years.Lines of credit to foreign governments: BSPATIL
    • Besides Foreign Government, such lines of credit are available to foreignfinancial institution. Such lines provide long term finance for import ofIndian capital goods related services.Relending facility to banks overseas: Relending facility to banks overseasis made available to enable them finance to importers, for import ofIndian capital goods. Banks overseas would intermediate between foreignbuyer and EXIM Bank, and the latter would intermediate with the supplier.Rediscounting facility: Under this type of assistance, specific mention maybe made about the following schemes:Export Bills Rediscounting: This lending programme is available tocommercial banks, in India, who are authorized to deal in foreignexchange. Such banks can re-discount their short term usance exportbills portfolio with EXIM Bank. EXIM Bank provides funds, under thisprogramme, for a period of 90 days against export bills that have equalperiod to run, before realization.Refinance of export credit: Under this programme, commercial banks, inIndia, who are authorized to deal in foreign exchange, can obtain fromEXIM Bank 100% refinance of term loans extended for export of eligibleIndian goods. Such credit enables Indian Exporters to offer credit termsto foreign Importers. For an export contract upto Rs. 10 million,commercial banks can obtain financing participation under EXIM Banksother programme, including syndication facility.Guaranteeing of obligation: The Guarantee programme is available in thecase of construction and turnkey contracts. Construction contractsinvolve erection, civil works and commissioning. BSPATIL
    • In such contracts, an Indian exporter usually requires bid bond, advancepayment guarantee, performance guarantee, guarantee for retentionmoney and guarantee for borrowings abroad. EXIM Bank participates withCommercial banks in India in the issue of guarantee.Various facilities offered by the EXIM Bank to the exporters ofdifferent categoriesi) Facility to exporters of engineering goods and turnkey project exporters:Deferred payment exports arise when the export proceeds are to bereceived beyond six months from the date of shipment (in case ofexports to Afghanistan and Pakistan beyond three months). Turnkeyprojects arc those which involve rendering of services like design, civilconstruction, erection and commissioning of plant along with supply ofequipment. Typical projects include supply, erection and commissioningof equipment for generation, transmission and distribution of power andplants for manufacture of cement, sugar, textiles, chemicals, etc.When an Indian exporter extends deferred credit directly to the overseasbuyer, the export contract falls under the category of “Supplier’s Credit.”On the other hand, if a foreign buyer is offered credit by a financialinstitution or a consortium of financial institutions in India and the Indianexporter is paid the export value by the institution(s) concerned, therelative export contract falls under the category of “Buyers credit.”Suppliers credit: Credit is provided by the EXIM Bank on deferredpayment basis, in participation with commercial banks, to Indianexporters, of engineering goods and turnkey projects to enable them toextend credit to importers overseas. BSPATIL
    • Where individual contract value is not more than Rs. 1 crore banks mayprovide the credit and avail 100 per cent refinance from the EXIM Bank.Overseas buyers credit: As an alternative to Suppliers credit availed bythe exporters, credit extended by the EXIM bank to buyers abroad with aview to enable the latter to import engineering goods and projects fromIndia, on deferred credit terms. Credit to overseas buyers is also availablefrom the EXIM Bank in the form of Lines of Credit to overseas financialinstitutions, foreign governments and agencies, and relending facility tooverseas banks.Pre-shipment credit: Credit is available to eligible exporters to buy rawmaterials and inputs required to produce capital equipment that has tobe exported. EXIM bank participates in the credit if the requirement is fora period of more than 180 days.Foreign currency loans: Foreign currency loans can be availed of from theEXIM Bank at market rates to cover purchase/procurement of machineryfrom third countries.Technology and consultancy services finance:Credit is also available to eligible Indian exporters of technology andconsultancy services to enable them to extend term credit to importersoverseas.Non-funded facilities: Exporters of engineering goods and turnkeyprojects abroad arc also provided the following facilities: i) issue of BidBonds ii) issue of advance payment guarantees, iii) issue of performanceguarantees, iv) issue of guarantees for release of Retention Moneys and v)issue of guarantees for raising Borrowing overseas. BSPATIL
    • ii) Facility to overseas construction project exporters:Construction projects involve civil work, Steel structural works, as well asdesign, equipment supply, erection and commissioning. Typical projectsinclude electrification and utility, power transmission, pipelines, waterresource management systems, airports, roads, bridges, hotels, housingand erection of industrial plants. The EXIM Bank offers funded,non-funded and advisory services to Indian construction projectexporters.Pre-shipment credit:The Bank finances the exports from India and the preliminary expenses inrupees relating to the execution of the project. Commercial banks alsoextend this facility for definite periods at confessional rates of interest.Post-shipment rupee credit:The EXIM Bank enables financing of exports until progress payments arereceived commercial banks extend this facility at confessional rates ofinterest.Foreign currency loan:The Foreign currency loan can be availed of from the EXIM Bank, atmarket rates, to cover purchase/procurement of machinery from thirdcountries.Deferred credit:The EXIM Bank provides deferred credit facilities against security for aportion of the contract covering export of selected items and technicalservices from India. BSPATIL
    • Non-funded facilities:Exporters of construction projects overseas are also provided severalfacilities as explained already.iii) Consultancy and technology service finance:Indian companies executing overseas contracts, involving consultancyand technology services, can avail of EXIM Banks financing programmewith a view to offer deferred payment terms of their clients. This enlargesthe market for export of Indian consultancy services. The consultancy andtechnology services for this purpose include:a) providing personnel including skilled and unskilled workmen arepersons for rendering technical or other services;b) Transfer of technology, know how expertise or other skills;c) furnishing any information, blue prints, plans or advice; andd) any other activity considered acceptable by the EXIM Bank.Indian consultants, having corporate status or otherwise who-havesecured a contract for export of services wherein deferred payment termneed to be offered to the client, can utilize the facility.iv) Lines of credit:EXIM Bank extends lines of credit to overseas Government of Agenciesnominated by them to enable buyers in those countries to import capitalengineering goods from India on deferred payment terms. This facilitiesenables Indian exporters to offer deferred credit terms to customers inthose countries as per terms and conditions already negotiated betweenthe EXIM Bank and the overseas governments. The exporters can obtainpayment from the EXIM bank against negotiation of shipping documents,without recourse to the exporters. BSPATIL
    • v) Facility for syndication of Export credit risks:Commercial banks, in participation with EXIM Bank provide long termcredit, at competitive rate of interest, to Indian exporter of capital goods,turnkey projects and consultancy services, thereby enabling Indianexporters to compete effectively in the international markets.The facility for syndication of term export risks lends flexibility to. theexport credit mechanism by allowing banks to assume risks, withoutblocking their funds -for long terms, at fixed interest rates, commercialbanks can now support export proposals without impairing their liquidity.Commercial banks seeking enhancement in their export portfolio canavail of this facility end participate in the syndication Facilities for deemed exports: ."Deemed export” occur in case of specified transaction within India whichresult in foreign exchange earnings or foreign exchange savings.Deemed exports involving supply of capital goods and other eligiblegoods have access to the EXIM banks deferred credit facility .atinternationally competitive interest rates. EXIM bank extends creditthrough the supplier or directly to the buyer. Intermediatingbanks/institutions can also avail of refinance facility from the EXIM bankcovering the full value .of the term credit. EXIM bank may, in addition,provide pre-shipment (working capital) facility, normally for largetransactions involving long manufacturing cycle time. BSPATIL
    • Other facilities available from the EXIM bank relating to deemed exportsinclude issue of guarantees and bridge financing in foreign currency.These facilities are normally availed by project exporters.vii) Advisory services:Through its International Merchant Banking division, the EXIM Bank offersthe following advisory services: (a) work closely with Indian companies in designing financing packages for joint ventures in third countries; (b) advise Indian companies executing contracts abroad, on sources of favourable financing overseas; (c) providing access to Euro-financing sources and global credit sources to Indian companies engaged in exports; (d) advise on exchange control practices globally and (e) advise and design financial packages for export oriented industries in IndiaThese services are being added to in order that tailor-made financingpackages for high value export contracts are available.Ministry of Commerce, Government of India, determines the eligibility oftransactions which are to be treated as deemed exports. These arepublished, from time to time, in the Imports and Export Policy Book.New export-import policy 1992 - 1997.The balance of payments position, which had reached a point of nearcollapse in June, 1991, slowly stabilized during the course of 1991-92.Although new policies to deal with the situation were quickly formulatedby the new government and implemented within a few months theexternal payments situation took time to stabilize primarily because ithad been allowed to deteriorate to a state o/ near bankruptcy in June1991. Foreign currency reserves had declined to $ I.I. billion despite BSPATIL
    • heavy borrowing from the IMF in 1990-91 and a substantial part of thiswas held in illiquid deposits which could not have been easily mobilized ifneeded.International confidence had all but collapsed, commercial borrowingshad dried up and even letters of credit opened by Indian banks werebeing generally rejected unless accompanied by confirmation by foreignbanks.The strategy for the management of the balance of payments outlined inthe Budget for 1991-92 which was presented in July, 1991 relied upon acombination of macro economic stabilization and structural reforms iindustrial and trade policy. It was recognized that in the medium term,the solution to the balance of payments problem would have to comefrom a much stronger export performance, but in the shorter run thestrategy had to be underpinned by mobilization of external financingfrom the multilateral agencies and from bilateral donors. Restoration ofaccess to imports through liberalization had to depend initially upon–additional financing since the export efforts would take time to showresults. Since access to external commercial borrowing was constrainedthe only other sources of funds were the bilateral and multilateralagencies. Visible support from the multilateral agencies was importantfor restoring international confidence.Accordingly, the government negotiated a standby arrangement with theIMF in October, 1991 for 5 2.3 billion over a 20-month period, aStructural Adjustment Loan with the IBRD of $ 500 million and aHydrocarbon Sector Loan with the ADB for $ 250 million. Parallel with theeffort to draw on multilateral sources, the government also launched theIndia Development Bonds aimed at mobilizing NRI sources of funds. BSPATIL
    • With the assurance of external support through these efforts, there was agradual stabilization of the balance of payments position in the course of1991-92. Foreign exchange reserves were restored to more normal levelsincreasing from $ 1.1 billion in June, 1991 to $ 5.6 billion at the end ofMarch, 1992. The entire amount of drawls from the IMF in 1991-92 withthe accretion from India Development Bonds together amounted to aninflow of S 2.87 billion. This was less than the increase in reserves of $4.51 billion from June 1991 to end March, 1992. In effect, the exceptionalfinancing mobilized in 1991-92 was used primarily to build up reserves.Import restrictions were gradually lifted in the course of 1991-92 as thebalance of payments stabilized. By the end of 1991-92 the newLiberalized Exchange Rate Management System introduced in the Budgetfor 1992-93 eliminated import licensing in most capital goods, rawmaterials, intermediates and components and introduced a dualexchange rate system with one rate effectively floated in the market.The Budget for 1992-93 also reduced the customs duties in line withdeclared Government policy in order to make the Indian economy morecompetitive and gradually exposing Indian industry to externalcompetitive pressure. The trade and exchange rate policy regime for1992-93 was therefore characterized by major progress in eliminatingunnecessary administrative and discretionary controls over foreign tradewhich were contributing to making our economy uncompetitive.The year 1992-93 saw a revival of imports to more normal levels. Thetotal value of imports in US $ in the period April-December 1992increased by 16.5% over the level in the corresponding period of 1991-92.The increase appears large only in comparison with a highly depressedlevel prevailing in 1991-92. In fact the level of imports in 1992-93 as awhole is expected to be around $ 25 billion which is somewhat lowerthan the level in 1990-91. BSPATIL
    • Exports in 1992-93 performed far better than in 1991-92. Total exportgrowth in the period April-December was 3.4% in dollar terms comparedwith an observed decline of 1.5% in 1991-92. The performance of totalexports is depressed by the decline of more than 60% in exports toRussia and other States of the former Soviet Union in 1992-93. Thegrowth of exports to the general currency area in the periodApril-December was 11.4%. The average growth rate in April-December,1992 has been adversely affected by a decline in exports of 12.5% inDecember, reflecting the disturbed conditions prevailing in that month,figures for January are also likely to be depressed by the riots US $ 19billion. But it is hoped that the export performance in subsequentmonths will return to the high growth rates of 15 - 16 per cent observedduring September-November.The current account deficit in 1992-93 is expected to be around $ 7billion, reflecting the revival of imports to more normal levels. This deficitis being financed through a combination of traditional financing sourcesand exceptional financing.However, there are important uncertainties in the balance of payments.The full impact of the disturbances in December, 1992 and January, 1993on exports and imports is difficult to assess at this stage. Clearly, thereceipts on account of tourism would be less than anticipated. The inflowof NRI deposits has in any case been small this year. The inflow ofexternal assistance is also subject to some uncertainties consequentupon constraints that affect the rate of utilization. A step-up incommercial borrowings was, in any case, not envisaged. Finally, there isthe uncertainty arising from leads and lags. Interest rates and exchangerate expectations do affect the timing of receipt of export proceeds andpayment of import costs. However, while these uncertainties justify a BSPATIL
    • measure of caution in assessing prospects, the balance of payments in1991-92 has performed more or less as expected,New export-import policy 1992 - 1997On March 31, 1992, the Government announced a new export-importpolicy for the period J 992-1997, This policy has the following objectives: 1. To institute the required framework for globalization of the Indias foreign trade. 2. To improve the export capabilities of our industry, the policy aims at promoting the productivity, modernization and competitiveness. 3. To facilitate improvement of image of our products in foreign markets, the policy encourages the attainment of high quality in the export products, 4. By allowing liberal access to raw materials, intermediates, components, consumable and capital goods etc., in the international market, the policy wants to achieve higher exports. 5. The policy provides for deregulation to achieve self-reliance so "that (he domestic producers can improve then- efficiency and become competitive internationally. 6. The policy also lays emphasis on research and development as well as technological advancements so that the domestic producers will benefit from globalization. 7. A significant object is to simplify the procedure for exports and imports.Subsequently, the government announced further modification to theabove policy by April 1, 1993. The important features, of this modifiedpolicy are: (a) The duty-free export benefit given to the Export oriented units and the units in Export Processing Zones is BSPATIL
    • extended to units engaged in agriculture and allied activities provided they export 50% of their total production. (b) The government removed 144 items from the negative fist of exports leaving only prohibited items, items requiring license and canalized items. (c) As a step to tap the potential of farm sector, professionals, hotels, travel agents and diagnostic centers, the government extended the Export promotion capital goods scheme to them. (d) For more than 2200 items, standard input-output norms is fixed to enable the issue of license under the duty exemption scheme. (e) The criterion for recognizing export houses is now based on the foreign exchange earning to FOB values of physical exports. (f) The procedure relating to export and import has been further simplified. (g) Compensation would be given for unutilized import licenses for duty free license scheme and EXIM scrip holders.These provisions in the latest export-import policy would certainly enableIndia to improve her exports and bring down imports." This has beenexperienced during the first half of 1994 itself.Public Distribution1. Meaning and objectives of Public Distribution System [PDSJThe countries like India with more population commensurate withproduction of minimum needs especially food grains, are necessarily in aposition to have a streamlined system of distributing the essential BSPATIL
    • commodities to the population living with lesser purchasing capacity tofulfill the objectives of democratic government.As a fundamental Constitutional right, in India the producers and tradersof food grain have the right to do business freely and can earn profit asmuch as possible. They were given every right to influence the market bymeans of pricing, supply, distribution, etc. At the same time theconsumers are also given rights to protect themselves from greedytraders, who are indulged in malpractices in trade. It becomes the duty ofthe government to protect the rights of both producers, traders andconsumers. In our country the government is liable (o protect consumersand that too consumers who are living below the poverty level.Consumers who are living below the poverty line are to be provided theirminimum needs. "Poverty is concerned with the relationship between theminimum needs of people and their ability to satisfy their needs."Minimum needs" and the amount of money required to satisfy theirneeds" - first its minimum food budget. [Economic and Social Issues -Leftwich & Sharp]Gradually out government took steps to safeguard the interest of thepopulation who are under poverty line and also to improve the growthrate of productivity in agriculture and industry and trade. These steps ledto the dual price mechanism in market, legislation in pricing andmarketing and introduction of PDS.PDS is at present functioning for the cause of middle income and poorincome group with consumer orientation. Consumerism has beenexplained as follows: "Measures are intended to protect consumers fromunscrupulous sellers who presumably charge more for goods andservices. Then they are worth to buyers. The price^ controls on variousitems fall into this category. These consumers who can get as much at BSPATIL
    • the controlled price as they would purchase at an uncontrolled priceclearly gains.The market mechanism may be able to bring about an "equilibrium"between demand and supply. Even in this sphere, but it will not be able tobring about a balance between need and supply. Planning is necessary totake care of the poor and down trodden who are for the most part,outside the market system and have little asset endowment to benefitfrom the natural growth of economic activity."The market alone cannot ensure employment and a living wage to all ourrural poor" [Prime Ministers statement on 8th Plan]TABLE: 1.1 Net availability of foodgrains in India Year Population in Net availability of Per capita Mn. foodgrain in m.t. availability in gms 1956 397 63 431 1961 442 76 469 1972 562 96 467 1979 659 114 474 1984 738 128 478 1988 799 132 448 1989 816 147 494 1990 833 144 474 1991 849 158 510[Source: Govt. of India, Economic Survey, quoted by Ruddar Dutt & KPMSundaram in Indian Economy, 1993)The net availability of food production has increased from 63 m to 158 mbetween 1956 and 1991, whereas the population has increased from 397 BSPATIL
    • m to 849 m during the same period. To be more specific the greatergrowth of population was in the rural areas. It also signified that theshare of family consumption in total food production will increase andmuch less will be left over as marketable surplus. This type of deviation,indicated the government to enter into equitable distribution system offood supply.TABLE: 1.2 The growth of population and growth of food supply Year Population in .m. Food Production in m.t.1979-80 659 1101983-84 738 1521987-88 799 1401990-91 833 1771991-92 849 175(Source: Indian Economy, Ruddar Dutt & KPM Sundaram)During the past planning years our country has faced heavy inflationarypressure. The vulnerable section of the community was very muchaffected by the heavy raise in prices. During unproductive seasons thedaily bread winners in urban areas and the rural agricultural landlesslaborers are the ones very much affected by the steep rise in prices ofessential commodities.Hence it is the duty of our government to protect the vulnerable classfrom this crisis. Thus the government entered into this PDS.The crop yield in India is very low when compared to other countries. Thecrop yield in India is quite disproportionate to the abnormal growth rateof population needs, Even after Green revolution, which took up the foodproduction spectacularly, the international, comparison brings a low BSPATIL
    • position of India. Hence it is the sole responsibility of our government tostreamline the food supply to protect the weaker sections of the society.TABLE: 1.3 Average yield per hectare [in Qtls.]Commodity Country 1951-56 1961-66 1987-88Rice India 8 10 17 China 17 18 35 Japan 26 33 40Wheat India 7 8 20 China 9 9 30 France 21 29 30 Germany 28 33 68Source: Economic Survey 1990, P …..The seasonal fluctuations create disparity in the quantum of production.The growing regional disparity in food production creates an artificialfood scarcity. The amount of food supply and other demand are takeninto consideration by the Central government to fix up the prices. So itbecomes important to distribute the food grains on the basis ofpopulation, supply and demand. Hence it is inevitable on the part of thegovernment to bring a streamlined system in food production,management for equal distribution.Food problem and its management become complex and multifariousdue to black marketing and hoarding. These practices create artificialdemand for food supply and reflects as the high prices, the worstsufferers would be the poorer and middle class people. This paved theway for PDS.Famine were frequent in the past but rare in the present. Bihar [1965-66],Maharashtra [1972-73], West Bengal [1974-75], etc., Through PDS BSPATIL
    • government shall augment food supply to tackle the food crisis. Thereare certain other factors which affect the free open market system suchas social and political revolutions. So the government is liable to lay itshand and supply food grains and other essentials at the cost of affectedpeople.Fluctuations in prices of food grains affect producers and consumers aswell. The negative effect of price rise will be more severely felt by theweaker sections of the society. The distribution system should aim atequal and fair distribution of commodities to the general public.Quality food is the other criteria taken into consideration by thegovernment.More than 75% of the Indians cannot afford to pay for quality diet whichresults in malnutrition. Adulteration is one of the reasons for poor qualityof food grains. Mass and mushroom growth of slums in Indian cities andtheir belt areas also necessitated the PDS. Hence PDS is becoming anessential system in urban areas.Over crowding and the consequent pressure of population on land henceled to subdivision and fragmentation on land, decline in per capita area,disguised unemployment and thus marginal productivity of labour is zeroor negative. The unemployed or under employed gets only seasonalemployment only. They are not getting any personal income. This needseffective PDS.2. Evolution of PDS in IndiaBefore II World War the deficiency in food production was met out byimporting food grains from Burma, Japan and other countries. During thistime the import of food grain was highly affected. In 1941 the Central BSPATIL
    • government fixed the statutory wheat price and in 1942 statutory pricewas fixed for rice also. The administration of controls was vested initiallyin the state government. The 3rd Price control conference in 1941 led tothe interference of the central government The conference held in 1942recommended an All India Plan for distribution of wheat and rice. Forfurther streamlining, a Food grain Policy committee was appointed in July1943 under the Chairmanship of TN Gregory [Food Policy and EconomicDevelopment in India, Jospeh, S.C., Madras 1961]The recommendations of the Committee to bring all major food grainsunder statutory price control, calling for Central supervision to supply offood grains to deficit areas, introducing rationing system in the largercities with over one lakh population initially and extendable to othergradually, to all food grains and all sections of society. Based on thescheme, the distribution of rice was introduced first in Madras inrationing and then in Bombay.In 1950 government of India appointed a committee to review thesituation known as Food grains procurement committee. The followingwere recommended by that Committee: Effective co-ordination and fodproduction, distribution system of essential commodities and a goodcontrol over the distribution of the same.In 1950 due to bad crop and steep rise in food grain prices, due toKorean war, India had to face a slump period. This was overcome bygetting a loan of 2 m t of wheat from USA.During the First five year plan the government of India had the objectiveof reducing the dependence on foreign food and food and was to attainself sufficiency in domestic production. The series of good harvests in thecountry and the consequent decline in food grain prices during I Plan BSPATIL
    • period made the government to relax the control and later remove italtogether. Food prices during this period were reduced by 23%In 1955, the problem of food shortage and rise in prices again emerged.But soon it was rapid. In 1956 the government of India entered into anagreement with USA under PL480. USA agreed to supply 3.1 m t of wheatand 0.19 m t of rice for the next three years. This gave the opportunityfor the government of India to stabilize the price structure.In 1958-59, the crisis was acute. There was severe food crisis in Bihar,Bombay, Rajasthan, Tamilnadu, Orissa, etc. In 1959, food grains pricesrose to 41% in the first three years of II Plan. In 1957, the government ofIndia appointed a Committee to review the food problem called as "Foodgrains Enquiry committee" The recommendations were as follows: 1. compulsory procurement of food grains from foreign countries till a successful policy is framed by the central government of India. 2. it recommended for an organized PDS through a network of fair price shops and also to maintain buffer stock.[Dandekar committee report] - about the fair price shop during 1961 -64the prices of domestic grains in general continued to rule considerablyabove the price at which the imported grains were being issued throughthe fair price shops. So the government has set up in 1964-65 FCI tobuild up buffer stock of 5 m t every year. But it has failed due to twoconsecutive drought years.During 1967-68, the name of the Fair Price Shop Scheme was correctedinto PDS without arty change in the system of organization. However the BSPATIL
    • PDS came in full swing during 4th and 5th Plan. This Plan hasrecommended the following: 1. It is needed on a regular basis 2. To havean adequate buffer stock system. Moreover the requirements of the PDSshould be met mostly through internal procurement. Due to shortage ofstock in 1973-74, the government had to import food grains and therewas a high rise in price due to this the PDS could not fulfill its objectives.In 1975 the government of India appointed the National commission onAgriculture. The recommendations were: 1. Al! towns and cities with apopulation of over one lakh should have a full fledged system of PDS. 2.All chronically drought prone areas should be covered under PDS. 3. Allindustrial town workers covered under all India Consumer Price Indexnumbers should have PDS. 4. Areas affected by flood, are to be coveredunder PDS.All these recommendations were at a later stage fully implemented andexecuted by the government of India. Fifth five year plan was with the aimof removing poverty and growth of social justice and equality and alsoattainment of self-sufficiency in all areas. Since 1974, the PDS hashandled efficiently the distribution of food grains with FCI. In 1974 thegovernment created a full fledged system of civil supplies andco-operation to ensure orderly production and distribution ofcommodities.The Central government has developed support organization such asNational Agricultural Co-operative Marketing Federation [NAFED] andNational Consumers Co-operative Federation [NCCF] to undertakewholesale trading. Sixth and Seventh Plan took steps to minimize theproblems of the society to get basic amenities like education, health care,sanitation, and safe drinking water food grains. The Seventh plan pays BSPATIL
    • special attention in increasing the production of food grains, edible oils,sugar, textile and other items of mass consumption.The Eighth plan aims at the growth of diversification of agriculture toachieve self- sufficiency in food production and to generate surplus forexports. The estimated agricultural production during the Eighth Plan isgiven below.TABLE: 1.4 ESTIMATED AGRICULTURAL PRODUCTION DURING 8th PLAN 91-92 m t 96-97 Annual growth outputRice 72.5 88 3.95Wheat 56 66 3.34Course cereal 30 39 5.4Pulses 14 17 3.96All food grains 172.3 210 4.01Sugar cane 235 275 3.198th Plan proposed to raise the production of rice, pulses, oilseeds. ItAimed at self sufficiency and to prevent exports of food grain. The mainobjective of this Plan w-£s the extension of PDS to in accessible rural,tribal areas, etc.Evaluation of consumer co-op. Fair price shopsBefore 1912, co-ops. Was started in India as Agricultural co-ops. Duringthe I World War period, a number of consumer stores came up in fewimportant cities and towns. In 1928-29 there were in a) 323 primarystores in India. Before H World War period there were 396 stores with43000 members. During II World war the dimension of (he objectives ofthese stores changed. The acute shortage of food supply during andafter the II World War forced the government to intervene into the BSPATIL
    • functions of consumer co-ops. Then the co-op stores acted as agenciesfor the government in the distribution of controlled commodities toprevent black marketing to ensure equitable distribution. In the first fiveyear plan the importance of consumer societies was emphasized but itwas not properly implemented. The Second five year plan reiterated thescope of the development of a network of the co-op societies in urbanareas also. A committee was appointed by the Government to review thefunctions of these societies. They have recommended a goodorganizational set up an" effective structural pattern of consumer co-ops,their size, viability and whole sale stores promoters, etc.The Committee differentiated the primary, wholesale and districtwholesale societies and norms specified is given below. (Co-op sector inIndia - Sami Uddin, Mafazur Rahman,.............. Share Capital Turnover MembersPrimary co-op. Stores 5000 1 lakh 250Wholesale stores 50000 2 lakh 100 Primary stores are membersWholesale stores 100000 300 lakh 200 Primary membersIn the 3rd five year plan it was observed that conditions for thedevelopment of consumer co-ops are generally favourable and if thespecial efforts are made rapid progress can be achieved. This will be ofgreatest help not only on in the stabilization of retail prices but also inpreventing the evils of adulteration in food stuffs. After Chineseaggression the government of India felt the need of co-op. Consumersocieties to ensure the supply of food grains at controlled rate to thehome needs. Hence the government provided financial and alsoestablishment assistance to all co-op consumer stores.Share Capital Primary Stores Apex wholesale stores BSPATIL
    • Contribution Rs. 2500 Rs. 50000Management expenses Rs. 1800 Rs. 6000Godown contribution Rs. 125000Rent subsidy Rs. 9000 (Maximum)(Ref: S. P. Jain President Indian Chamber of Commerce and Industry,Hindustan Times, Nov. 1962, P 6)During III Plan period the number of stores promoted were as follows:More than 1 lakh populated city 113In towns with more than 50000 population 137District primary stores 4000During 4th 5 year plan it was extended to urban areas with population of 1lakh and more and stores opened to cover population of over 20% ofurban and to capture at least 20% of retail trade. Co-op fair price shopsin rural areas were also promoted during 5th and 6th plan periods. 2.12lakh villages with 15000 societies undertook supply of daily essentialgoods of life. It rose up to 80000 during 1964-65. During 1973-74Indian economy has witnessed an unprecedented inflation of essentialgoods.In 1975 the emergency was declared in India and the then Prime Ministerannounced the 20 point programme. As per this programme thegovernment envisaged to provide economic and social justice to commonman. Drastic financial and fiscal measures were taken up againstsmugglers, hoarders, black marketers, etc., by the government. BSPATIL
    • In order to manage that situation, the government of India set up twonew departments of Civil supplies and co-operative section is tocoordinate and harmonize the activities at various levels of the stategovernment and ministry of the central government for an effective PDS.These new departments have evolved a broad strategy for an effectivePDS.The strategy evolved with multi dimensional approach, and the vitalpoints are identification of essential goods for different areas, effectivemonitoring of function and of retail prices of consumer goods andessential goods selection of vulnerable areas for introducing the schemeof public distribution, ear marking of manufactured goods in theorganized sector for distribution through co¬operatives, forging closerlinks between co-op. Marketing and public distribution, inductionof representatives of consumers, including housewives in keeping awatch on the PDS, making administrative arrangements to ensure smoothfunctioning of the system and a more effective enforcement of variouslegislative measures designed to protect the interest of the consumers.Thus co-ops have been given an important place in the PDS. Furtheressential items were being supplied to students hostels, universities andcolleges on preferential terms. Accordingly, it has become the policy ofthe state government to the possible extent, new fair price shops shouldbe allotted to the co-ops. And the co-op. Fair price shops. In due course,the central government advised the state governments that (hey shouldnot deal directly with the manufactured essential commodities and shoulduse the consumer co-ops as an agency to distribute the commodities.The 6th and 7th five year plans of government of India had followed anintegrated approach and paid attention not only to production andprocurement but also to storage and transportation of selected BSPATIL
    • commodities. Further the plan insisted to expand PDS quickly to cover allareas of the country, particularly backward, remote and inaccessible areas.Hence the government of India instructed all state governments to extendPD points inmost difficult inaccessible areas. The government ofTamilnadu took steps to open additional fir price shops in the said areasand also took steps to develop the infrastructure needed to open fairprice shops in those areas.From 1992, an additional quantity of 830 t of rice per month were issuedin these areas under special subsidy scheme. Government of Indiareduced the issue price by Rs. 50 per quintal to these areas. GovernmentIndia also bears Rs. 25. per quintal as incidental cost for effectivedistribution to tribal areas.The price per quintal charged by Tamilnadu Civil Supplies Corporationltd., after adjusting central contribution is given below:Rice Central pool price Tamilnadu PDS price (per quintal in Rs.)Common 337 512Fine 617 592Super fine 648 623The price in PDS is comparatively lower than the price under central pool.Four-; Kgs. Extra quantity of rice were given to card holders in tribal areain addition to general quota prescribed in other areas. Accordingto integrated Tribal development. Programme, the issue price of rice isas follows in Tribal areas in Tamilnadu Rice Before 1.2.94 After 1.2.1994 (per kg.) (per kg.) Common 2.25 3.25 Fine and Superfine 3.50 4.75 BSPATIL
    • Wheat 3.05 3.80In order to protect the weaker sections of the society the government hasfurther reduced the issue price of food grains by Rs. 50 per quintal byJuly 1994. The government of Tamilnadu consequently ensures minimumavailability of 20 kg. Per person per month and per family in those areas,which are predominantly tribal and remote.According to the report of the Ministry of Civil supplies, the governmentof India between April, 1993, to March 1994 over 4000 tonnes were liftedby states in the revamped PDS. With an off take of 85% After 1995 April,the position improved to 100% State governments are advised tointegrate the schemes such as Jawahar Rozgar Yojana employmentassurance scheme, wage employment programme, etc., along with issuesunder PDS. This indicates that the PDS has given very little to the poor.The responsibility of the revamping system will be, if there is truetargetting. Targetting in terms of keeping high income group away fromPDS." The poorer class should be taken care of by the PDS fully.[RamManohar Reddys article in The Hindu, 12.7.194]Further Chief Minister of Tamil Nadu said "It is not enough to associatewomen in the vigilance panels alone, the shops should be made to beentirely manned by women." [The Hindu dt. 12.7.1994] She appealed towomen to adopt the PDS as a peoples movement since it was an essentialmovement.The structure of Organization: It has the following components: Centralgovernment, FCI, State government and Tamil Nadu Civil suppliescorporation ltd., Co-operative societies, Link co-operative societies, Fairprice shops, Village primary co-operative societies. BSPATIL
    • After the famine in 1962 the Central government took pains to tackle theproblem of food supply. Thus according to the 5 year plan, thegovernment had proposed to streamline the ration supply of essentialcommodities. One of the main objective of the central government was tomaintain a sufficient amount of buffer stock. With this view thegovernment of India promoted a separate company known as foodcorporation. FCI is procuring food grains during heavy harvest seasonsand supplies to all over the country. Later during shortage of food supplycivil supplies wasThe food supply was fairly maintained by the FCI though PDS. FCI ismaintaining their own purchase points, hulling and processing points,etc., all over the country. The government of India has appointed aCommission for the analysis of Agricultural Prices. This commission fixesthe price considering the cost of production, cost of fertilizer, labour cost,cost of seeds, cost of scientific implements, transportation cost, etc.The role of Civil supplies and consumer protectionThe government of Tamil Nadu has a separate department and a ministryof Civil supplies. If is under the control of a minister of food and civilsupplies. The policies and other objectives are effectively implementedthrough the ministry.Policy and aim of Civil supplies department: To ensure that food articlesand essential commodities are supplied in adequate quantity: To ensurethat essential commodities are available at fair price. To supply adequatequantity of essential goods at an affordable price to all low and middleincome group people m the country and to protect them from blackmarketers, hoarders, etc.Main function of civil supplies department: BSPATIL
    • Consumer education is the main aim of the Government of India. Bypublishing pamphlets, dialogue and visual media through TV, movies newpapers, government bulletins; etc., Civil supplies department co-ordinatethe activities of officials so that the essential "commodities will beavailable at fair price. It has taken steps to maintain uniformity in theprice allover the state, equitable distribution of commodities.Procurement and distribution of commodities are entirely at theirdisposal. Civil supplies department is empowered to issue licenses totraders, who are dealing in commodities: They regulate their marketdealings and has the right to take steps against the black marketers,hoarders, etc., thus maintaining a strong and good PDS. In TN there is aCommissioner for Civil supplies controlling al districts. Below the rank ofCommissioner there is one Joint commissioner. A district is divided intoseveral zones, which are under the control of Deputy Commissioners.There are Assist Commissioners, in the rank of Deputy collectors. Theseofficials are controlling the issue 2nd use of family cards and supply ofessential commodities through family cards.They play the role of inspecting authorities in the free flow of publicdistribution. Commissioners of civil supplies in Tamil Nadu is apexenforcing authority of government policies and laws in the stateregarding food supply. Out of the total 1150 shops, 318 are managedand owned by TNSC ltd., and 832 run by co-ops. In Madras4. Problems of PDSProblems experienced under PDS in Chennai city reported by thesample respondents are classified source-wise and presented below. BSPATIL
    • Problems at the PDS shop levei 1. The allotment order for issue of commodities from the godown is issued regularly in the case of TNCSC ltd., while it is delayed in the case of Co-operatives because the TNCSC ltd., the allotment is directly made by the Food Corporation of India while for the Co-operatives it is done through the Civil Supplies department. Allotment to Co-operatives is made only when the payment is made before the liftment of commodities. In the absence of regular allotment and supply of essential commodities, consumers suffer and they have to make several trips to the respective: shops: to draw their requirement. 2. In the absence of sizable quantity of commodities are lost through pilferage, damage by white ants, rats, rodents, etc While TNCSC ltd., shops experienced this problem to a limited extent, the shops in the co-operative segment reported this as a serious. problem. Poor storage facilities affect the quality of commodities, which drives the public from the PDS shops. As a result the objective of the PDS is defeated. 3. One of the important problems stated at the shop level was the non-issue of the essential commodities. But the surveys revealed that 72 per cent of the non-issue was due to the failure of the card holders to draw their requirement. 4. Under weighment is one of the standing complaints against the PDS shops. But most of these complaints are not properly registered in the complaint book. This is because the consumers are illiterate and not aware of the existence of such complaint book. This is because the consumers are illiterate and not aware of the existence of such complaint book. Another reason for not BSPATIL
    • registering the complaint is the consumers do not want to incur the displeasure of the shop employees and face consequences of complaining. 5. Though the rules governing the administrating of the PDS shops provided for punishment of erring staff and actions against any malpractice, in more than 80 per cent of the cases no punishment was added. This is because of the Trade union interference, political pressure, inconvenience which will be caused to the customer due to the closure of shops, corruptive practices etc. The examination of the reasons for the prevalence of such malpractice among the staff in PDS shops revealed that the salary for the staff is very low and the several of them are not regularized in their services. 6. An important problem at the shop level is the security risk faced by the shops located in slum areas and other violence prone areas. They are under, constant threat from anti-social elements.Problems of consumers 1. As no credit facility is extend by PDS, poor people, who are the target segment never get the benefits of PDS. Illiteracy coupled with poverty make them pledge their ration cards with the pawn brokers or other shop keepers, who in turn draw essential commodities from PDS shops using these ration cards, and sell the essential commodities at open market prices. 2. A serious problem reported by the consumers is the underwieghment. Nearly 40 per cent of the consumers of TNCSC ltd., shops and 90 per cent of the consumers of shops in Cooperative segment reported this problem. This brings to light BSPATIL
    • the poor performance pf the PDS shops, which has a great impact on the overall performance of the PDS. 3. Indirectly, the consumers of the PDS shops are themselves responsible for the ills of the PDS. The failure of these consumers to draw their allotted quota of essential commodities facilitate all malpractices. The consumers cite poor quality of commodities, underweighment, inconvenient location of shops, absence of credit facility and non-availability of commodities in times of need as the reasons. But this leads to several other problems like, deterioration of quality of commodities, forced diversion of commodities to unauthorized persons through duplicate cards or cards on which only sugar and kerosene alone are bought. 4. To control the malpractices at the shop level, government has provided for a complaint register in each PDS shop. But the study, revealed that more than 40 per cent of the consumers are not aware of the existence of complaint register with the PDS shops. Even though the other consumers are aware of this facility, only four per cent of the complaints are registered. The reasons stated for this are: fear of consequences like protracted disputes with the staff concerned at the PDS shops, need .to establish the basis of complaint, time taken for enquiry, etc.Problems of Officials of PDS 1. Issuing of cards is reported as a very difficult work as it involves a multi¬stage operation involving issue of application, receipt of application, verification through enquiry and spot inspection, preparation of cards and issue of cards. Deliberate concealment of vital information like income details, size of family, correct address, etc. pose severe hurdles in the issue of cards. Added to BSPATIL
    • these, the upcoming of new residential colonies and slum area pose a challenge to the officials in the verification of genuineness of the applicants.2. Delay in the allotment to co-operative shops cause a serious of other problems. Delay in allotment, and liftment add, to the woes of the officials of PDS. This results, in delay in distribution infuriating the consumers of these shops.3. Malpractices at the-shop level is another serious problem reported. In the absence of registered complaints no concrete and corrective actions could be taken. Whenever such actions are initiated, the political intervention and union threats make, them inactive.4. Funds management is another problem of the officials of PDS. The source of income for these shops is the commission earned on quantity sold. With this the salary payable to staff, improvement of facilities at the shops like storage, issue counters, security for goods, etc., have to be managed. The necessity to make advance remittance to lift the controlled commodities from the godowns add to the financial difficulties.5. Labour problems of different types at the PDS shops are experienced. For instance, aggressive unions stand in the way of any disciplinary action against erring staff; adoption of pressure tactics to get the regularization of service of laborers, demand for higher pay and allowances, etc. BSPATIL
    • Policy optionsThe evaluation of PDS with reference to the objectives set for the studyrevealed the need for formulating policies on various aspects. These aresuggested hereunder.Suggestions for shop level problems: 1. One of the primary need of PDS is the objective evaluation at regular intervals by an external body. Such an evaluation would bring to light the problems crippling the PDS, and once the problems are identified, they could be eliminated at the root itself, instead of allowing them to assume unmanageable proportions. This evaluation process could be handled by a Committee consisting of representatives of all interests - card holders, shop officials, policy makers, academicians, finance professionals and lawyers: The membership in the Committee should be strictly based on the credentials and exposure in such tasks. The Committee shall be constituted fresh once in two years, to avoid any scope for influence or interference. The policies formulated by the Committee shall be publicized and public are implemented, the follow up action shall be called for a monthly basis. 2. One of the basic problems of the shops in the Co-operative segment is the delay in the allotment. Efforts should be taken to study the system of allotment and eliminate unnecessary bureaucratic delays. The Food Corporation; of India (FCI] could be made, to supply directly to all shops thereby avoiding the delay. The allotment to shops for a month may continue to be on the basis of closing stock of the previous month, but the closing statements from each shop should be collected within first/two days of a month and consolidated area-wise. This would facilitate BSPATIL
    • pooled shifting of commodities from the FCI godowns thereby economizing on transportation and avoiding delay. As regards the verification of closing stock, staff could be deputed from shops in another area to avoid any manipulations.3. A major hurdle in. the successful functioning of Co-operative shops is the availability, of funds. This could be solved by implementing the following suggestions: a) Shops in an area could be grouped and the shop in-charge of each shop could be made to undergo a training in funds management. This training could be on a regular basis involving Finance professionals. b) State government may consider granting financial assistance for the shops in the Co-operative segment on concessional terms through the Regional office of these Co-operative shops. A proposal for development plans shop-wise may be obtained and evaluated by the Regional office. Then the required funds may be obtained and allotted to each shop. As regards the repayment the shops could be allowed to sell controlled items to generate revenue. Priority in this regard, should be given for improvement of; storage facilities at the shop level. c) The advance remittance to be made for allotment of commodities by FCI could be determined in advance on the basis of three monthly average allotment, instead of waiting for the closing stock statement each month. Any excess, advance remitted may be adjusted against the subsequent remittance and any deficit may, also be collected once the amount of, deficit is intimated. This would help to avoid BSPATIL
    • delay in allotment and liftment of commodities. Consequently; the diversion of commodities to generate required funds, could be reduce to large extent. Further the quality of commodities, would also be maintained as with government funding the storage facilities could be improved. 4. Wide publicity should be given among the public, especially among people dwelling in slum areas to make them conscious of their right to complaint against any malpractice at the; PDS, shops achieved by printing in, bold letters, the information on the availability of complaint book in all the PDS shops. This could very easily be achieved by printing in bold letters, the information on the availability of complaint book in all the PDS shops, on the e ration card itself. 5. A frequently reported problem at the shop level is the labour, problem. This needs an integrated effort to solve. Apart from involving the & staff union in labour related matters, the reasons for the problems should be studied seriously. This may even be entrusted to the Committee constituted for evaluation of PDS shops. As the main reason for labour problem is related to service conditions and the salary structure and other allowances, the government must recommend the salary structure making it flexible to provide for modifications as and when the need arises. At the Regional level, establishment of a separate cell to address the labour problems would go a long way to improve the working relationship.Suggestions for card holder related problems: 1. As regards the problem of under weighment, a multi-level approach is necessary to solve this. A flying squad with necessary BSPATIL
    • powers and authority may be constituted which would check the weighment at the shops periodically and submit a report to the authority concerned. Any punitive action taken on erring staff should be, strictly in accordance with the procedure laid down by the government. In the case of complaints from card holders, their identity should be kept confidential. This would encourage, the card holders to come without any apprehension, whenever any manipulative practices are noticed. 2. Any unauthorized issue of controlled commodities should be viewed very seriously. The shop level workers should be made familiar with the series of actions that would be initiated in the event of such unauthorized issues. Preferably an undertaking from the shop level staff could be obtained at the & time of recruitment itself, explicitly empowering the organization to prosecute them for any such violation of rules and regulations. Publicizing the manipulative actions resorted to by shops would also serve as a deterrent -apart from educating the customers.Suggestion for problems of Officials of PDS 1. The effectiveness of the PDS depends on the fool proof system of issue of cards. In this regard, the existing system of verification and cross checking are found to be operating well and these could be reviewed from time to rime. It would also be better to get an undertaking from the employers to the correctness of salary details in the application for cards renewed or new cards issued. 2. Issue of new cards or renewals to applicants in new residential localities or slum areas should be strictly under the supervision of a field inspection team headed by a person at the Assistant Commissioner level. BSPATIL
    • 3. Wide publicity about the malpractices at the shop level should be given to educate the public and encourage them to register complaints. 4. Recruitment of staff at every level should be structured and preferably handled by an independent government body to eliminate any favoritism in recruitment,Other suggestions 1. It would be a healthy practice to encourage independent study of functioning of PDS in different states so as to improve the existing system in any state. Interaction with the academic bodies on this would be much rewarding to strengthen the system. 2. Publication of the functions and performance of PDS in the state would help to invite suggestions for improvement from the common public. 3. While the policies are formulated, involvement of all interests like card holders, shop level workers and officials should be called for. This would help in drafting viable policies. 4. Incentive schemes could be announced at zonal level for shops which function efficiently. The criteria for determining the performance could be generated by involving the people concerned. 5. Similarly incentives and promotion could be announced for flying squads which are effective in detection and elimination of malpractices at the shop level. BSPATIL
    • 6. There is an urgent need to constitute Card holders council in each area which would help to resolve the disputes of various nature among the public and shops in that area Disputes beyond the powers of the Card holders council could be referred to higher level authorities for disposal. 7. Professionals from different fields may be invited to function as the Honorary Consultants to improve the efficient functioning of the PDS. 8. Card holder contact week could be organized every quarter to provide a forum for ventilating their grievances and making suggestions for improvement. These meetings should be held in the presence of Deputy Commissioners and the suggestions given should be examined and implemented.Price controlsPrice control refers to the policy of the government to monitor andregulate the price changes in an economy. This is attempted by thegovernment with the following objectives: 1. To ensure that there is social and distributive justice. The fruits of planning and development should reach all the people so that the benefits of development is equally distributed. While the rich people in a community have the wherewithal to protect themselves under any eventuality, the poor and down trodden always get exposed. To protect such people price control is essential. 2. To ensure that people get quality goods at a reasonable price. This is achieved by controlling the price as well as the quality of the commodities produced. BSPATIL
    • 3. To protect the community from the exploitative tendency of the monopolies who resort to restrictive trade practices. 4. To achieve supply control and management the government should control price. 5. As the price of inputs would ultimately get reflected on the output, [here is a need to control both the input price and output price. 6. To ensure that the available resources are properly allocated and directed and also to eliminate the misuse of resources, price control is necessary. 7. Unless there is price stability, the value of money is bound to; fluctuate which in turn, affect the exchange, rate. This results serious balance of payments problems. 8. To insulate the economy from wide fluctuations, inflation and deflation - price controls are necessary.Agricultural price policy of the government:Terms of trade refers to the relative changes in prices in two sectors, andthe I corresponding effect of these on the respective sector. For example,suppose the agricultural prices increase at a slower rate than the prices inthe manufacturing sector and industrial sector. Then the agriculturistshave to pay a higher price for manufactured goods and sell their owngoods at a lower price. This is certainly unfavorable to the agriculturists.On the other hand suppose the agricultural prices increase at a higherrate than that of the industrial prices, then the situation is favourable toagriculturists. Usually in developing countries the terms of trade isunfavorable to agriculturists and India is not an exception to this. To BSPATIL
    • change this trend, government has been announcing its agricultural pricepolicy so as to ensure that the terms of trade does not deteriorate.Thanks to the steps taken by the government that today to some extentthe terms of trade is better than what it was in the past. The logic behindthe government trying to design a policy in favour of agricultural sector isthat when the agricultural sector is benefited by the terms of trade, thenthe agriculturists get better prices and this makes their occupationprofitable. This would encourage them to demand, more of industrialgoods. Automatically the industrial sector will be able to develop basedon this ever increasing demand and market prospects It is always saidthat demand is a more potential factor in accelerating growth ofindustrial sector than the supply. Hence, the government is formulatingthe agricultural price policy to make me terms of trade better andfavourable for agricultural sector.The price policy for agricultural sector in India could be discussed in twodistinct phases. One before 1965 and the other after 1965. Before 1965,our agricultural price policy was more consumer based. As the percapitaincome was low, the government felt the prices of agricultural goodsshould be controlled and when they have to be distributed through fairprice shops, the consumer price was very much less than the openmarket price. This directly affected the interest of the agriculturists.Hence, the government decided to set up in 1965 the Commission onAgricultural Costs and Prices (CACP). This CACP has the following majorfunctions to perform: 1. To function as the advisory body to government in matter- relating to price policy for major food crops and commercial crops to formulate a balanced and integrated price structure taking due care of the producers and consumers interest. BSPATIL
    • 2. To review periodically the price policy already determining and then make necessary adjustments and revisions to make the price policy effective. 3. To examine the existing method* of determining cost of marketing and marketing margins for different crops in different regions, so as to make suggestions for reducing marketing costs and margins to ensure that the" producers get a fair return on their investment. 4. To make regular review of the studies on agricultural prices and collect, information and data relating to agricultural prices and to suggest methods of improvement. 5. To study and advise the government on all matters relating to agricultural production and prices referred to it by the government.With the setting up of the CACP, India is able to follow a consistent pricepolicy, for agriculture. This has helped to narrow the gap in agriculturalprices prevailing in surplus and deficit states and stabilize the price offood grains. The CACR follows a specific procedure before giving shapeto the price policy for crops. First it collects the opinions and informationfrom various State Governments, the producers organization, marketingorganization and other agro-based industries, consumer organizations,research institutions and others through a detailed, questionnaire. Oncethe reply is received from the State governments, the CACP holddiscussions with other agencies for each commodity. Then it finalises itsfindings and recommendations and sends its report to the government.This report, is circulated among the concerned ministries anddepartments as well as Planning" Commission. After getting the views ofthese institutions and organizations, the final report is submitted to the BSPATIL
    • Parliament for its approval and final decision. The agricultural price policyhas the following constituents:1. Minimum support price:This is the price announced by the government for various crops well inadvance of the harvest. If the actual market price falls below this level,then the government has the commitment to buy the quantity availablefor sale irrespective of the ruling price in the market. This is basically toensure that the fanners are not affected due to fall in price in the market.The CACP arrives at this minimum price for each crop after taking intoaccount the cost of production, input prices, the prices for competingcrops and the need to maintain the economic stability. Once the price isannounced well before the harvest, the expectation is that the farmersare certain atleast to get the minimum assured by the government. But amajor problem in arriving at the price is that sufficient data are notavailable on a continuous basis. To overcome this the data relating tocost of production and input prices are being collected regularly by theresearch institutions throughout the country from whom the CACP iscollecting the data.2. Procurement prices:These are prices at which the government buys the agricultural producefrom the farmers mainly for the purpose of public distribution. It is easyto understand that the procurement prices should be higher than theminimum support price, so that the government can encourage thefanners to sell the produce to the government. The CACP arrives at theprocurement prices for all crops on the basis of input prices, price ofrelated crops, inter-state disparities in prices of the produce, fair returnto the farmers, etc.3. Public distribution: BSPATIL
    • This is in fact the back bone of the pricing policy in that through thisarrangement the government ensures availability of produce to thecommon man at a reasonable price. Through statutory rationing as wellas the informal rationing the government achieves the object ofstabilizing the prices of agricultural commodities. At the same time thegovernment also allows the open market in all these commodities so thatany one who can afford to pay the open market price can buy thesegoods and those who cannot afford can get these from the ration shopsor fair price shops.4. Minimum buffer stocks:This is yet another important constituent of the price policy. Through thisthe government maintains sufficient stocks to prevent any violent pricefluctuations in the market for agricultural produce. For example, supposethe price in the open market soars up, then the government wouldrelease the produce from its stock and brings down the price while whenthe price in the open market goes down, the government makes thepurchase to add to its buffer stock, thereby prevents further fall in price.All efforts to maintain the agricultural price have not been successful dueto the following reasons:(i) Procurement policy of the government has not been very successfuland it is found that hardly 15% of the total food grain produced iscovered by the procurement of the government. This shows clearly theinadequate, effectiveness of the procurement policy.(ii) The prices fixed for the various crops do not have any link with therising cost-of cultivation. As a result the farmers incur loss. This theyavoid or minimize either by curtailing the output or switching on to someother crop. BSPATIL
    • (iii) The public distribution is found to have several loop holes. Right fromthe stage of procurement, storage, till the stage of sale through fair priceshops several malpractices are noticed. The result, the public distributionfails to bring the benefits expected of it.(iv) Consumers often complain that the price they pay is much higherthan the price paid to the farmers by the government. This pricedifferential is due to various taxes and costs incurred apart from themargins claimed by the; intermediaries. As a result the governmentplans for price stabilization taking the price it pays to the fanners, whilethe actual price at which the consumers pay is much in variation. Hence,the price policy objective is not accomplished.(v) The objective of price policy is to obtain an integrated price by takinginto account various components before arriving at the final price. Butsuch an integration is not found in practice and more frequently, thefarmers use political pressure to get a higher price for the produce. Thisdefeats the principles on which the price policy is formulated.In order to rectify the defects in the price policy, the followingsuggestions are made: 1. The minimum support price fixed by the government should protect only the efficient producer and not just every producer. 2. The price policy should only help the farmers to prevent the losses and not to make profits. 3. The minimum support price should be arrived at on the basis of the cost of cultivation of efficient farmers. BSPATIL
    • 4. The support price announced by the government should enable the farmers to make necessary adjustments to minimize their loss. 5. The price fixed by the government should not be inflationary in nature. 6. The price policy should help to discourage and eliminate oligopolistic practices in the market.The government on its part, having realized the need to revise the basisof arriving at the cost of cultivation figures, set up a committee under thechairmanship of Hanumantha Rao in 1990 to suggest an alternativemethodology for computing the cost of cultivation. This committeesuggested the following revised methodology which was accepted by thegovernment: I. The wages paid to the laborers included in the valuation of labour could be based on either the statutory minimum wages or actual wages whichever is higher. II. Managerial element is valued at the rate 10% of the total cost. III. The procurement price and the minimum support price announced in advance could be adjusted according to the actual in the market.With all the above development, we are slowly coming closer to thedetermination of a realistic price for agricultural produce. But a veryrecent development is now posing a new challenge. The Dunkels drafthas suggested that the government should slowly withdrew all thesubsidies extended to the agricultural sector that the farmers should bemade to compete with each other and also the international farmerspurely on the basis of the quality of the produce. The protection given tothe agricultural sector should slowly be withdrawn that only the efficient BSPATIL
    • farmers; can continue in the fold and that way the country would bebenefited. Though there is some truth in this argument, yet, in ourcountry liberalization is catching up, in the industrial sector and theagricultural sector is not matured enough to react positively toliberalization policies and there is a school of thought that the acceptanceof Dunkels draft may make the situation difficult for the Indian farmers,in spite of the governments assertions to the contrary.Foreign exchange regulationsForeign exchange refers to the earnings and payments made by a countryon its exports and imports of goods and services over a year. The morethe country earns, the better it is. There are several sources throughwhich the foreign exchange flows into a country. Apart from the exportsof goods and services, there are remittances made by the non - residentsIndians living abroad, other countries making payments to theirconsulates and embassies, gifts and grants from other governments toIndian government, loans and advances received by Indian government,other adhoc receipts under various heads, etc. Similarly, the if outflow offoreign exchange would include the corresponding payments made byany source in India to countries abroad. Over and above all these officialsources of inflows and outflows, there are several other unofficialresources, of inflows and outflows. In fact, the government can controleffectively the official sources but the unofficial sources remain outsidethe government control and so 4-they cause havoc to the economy.There is a need to control and regulate the foreign exchange resources,as otherwise, they might have a direct impact on the exchange rate andthe balance of payments position, which, in turn would affect the internalprice stability. Hence after independence, the government passed aForeign exchange regulation Act in 1947 which was subsequentlymodified in 1973. BSPATIL
    • The following are the objectives of regulating foreign exchange: To conserve the foreign exchange resources. To account for all inflows and outflows of foreign exchange to eliminate any negative impact on balance of payments and exchange rate. To monitor, control and channelising the utilization of foreign exchange resources and through that to accelerate the economic developmentAs per the regulations, RBI is the institution vested with all powers to dealwith all aspects of foreign exchange. Normally, the RBI empowers travelagencies and the commercial banks to deal with foreign exchange. Theyare required to submit returns on a daily basis so that the extent offoreign exchange received and issued is closely monitored. The 1991Industrial policy resolutions had specific provisions relating to foreignexchange regulations. These are briefly summed up below.Foreign investments:Foreign investments carry with it the benefit of technology transfer,marketing expertise, modern managerial techniques and new possibilitiesfor promotion of exports. As this requirement is felt in this world ofindustrial change and co¬operation, the New Industrial Policy (NIP) hasclearly contained the following provisions relating to foreign investments: 1. In high priority industries approval will be given for direct foreign investment upto 51% foreign equity and all the bottlenecks in this process will be removed. Clearance in such cases will be given if the foreign equity covers the foreign exchange requirements for imported capital goods. The necessary amendments to the FERA will be made. BSPATIL
    • 2. The general policies governing the domestic units in regard to import of components, raw materials and intermediate goods and payment of know-how fees and royalties will also be applicable to the high priority industries in which foreign investment is limited to 51% However, the payment of royalty will be routed through the RBI to enable it to monitor the outflow of foreign exchange on payments are balanced by export earnings over period of time. 3. All the other foreign investments not included in the category 1 stated above will require prior clearance. 4. Trading companies primarily export oriented will also be permitted under the foreign equity proposals as indicated in 1 above. However, the provisions of he export-import policy applicable to the domestic units will also be applicable to such trading companies. 5. To encourage substantial inflow of foreign investment, a Special Empowered Board would be constituted. This Board would negotiate with the large international firms and approve direct foreign investment in select areas. This is expected to fetch foreign technology and open the industries in India to wider world market Such investments will be subjected to favourable treatment based on the merits irrespective of the rules, regulations and procedures in practice.As regards foreign technology agreement, a welcome change in theoutlook of the government is the realization that the sophisticatedtechnology from abroad can be brought in only through liberal and lessrestrictive procedures and policies. The interference of the government inthis regard is to be reduced so as to enable the domestic industries in BSPATIL
    • achieving a high rate of industrialization. As a result of this liberalization,automatic approval for technology agreements related to high priorityindustries will be made with respect to certain specific parameters. Otherindustries which can enter into such agreements without incurring theexpenditure of foreign exchange will also be extended liberal treatment.The industrialists are left to themselves to decide and enter into foreigntechnology agreements depending upon the commercial viability of theirenterprises. In due course this measure is expected to pave the way forexchange of superior technology from India with other countries. Withthe overall liberalization, the competition will be high and it is expectedthat industries will invest much more in research and developmentactivities. Keeping in view all these expectations, the government hasannounced he following changes in regulation governing foreigntechnology agreement: 1. No prior permission is needed for hiring foreign technicians, foreign testing of indigenously developed technologies. Such activities involving payments will be governed by the guidelines of the RBI and such payments can be made through blanket permits. 2. Automatic permission will be given for foreign technology agreements relating to the high priority industries. The royalty payments through such agreements will be subjected to certain provisions. Upto the payment of Rs. 1 crore royalty will be at the rate of 5% for domestic sales and 8% for foreign sales or exports. However, the total royalty payment should not exceed 8% of the sales over a 10 year period from the date of agreement or 7 year period from the date of commencement of production. BSPATIL
    • 3. In case of industries not covered in the high priority list automatic permission will be given for technology agreement provided it does not entail any foreign exchange payment commitment. 4. In all the other cases, the general procedures in practice will be adhered to and such industries will require specific approval.In 1999, some more modifications were brought in the Foreign ExchangeManagement Act [FEMA]. These modifications are to come into effectfrom May 31, 2000 and until then the Enforcement Directorate was giventime to probe and investigate all cases of FERA violations. The basicdifference between FERA and FEMA is stated by the RBI as ; the object ofFERA was to conserve foreign exchange resources, whereas the object ofFEMA is to facilitate external trade and payments and to promote orderlymaintenance of foreign exchange market in India. FEMA has the followingimportant features: FEMA substantially liberalized various provisions to make the external trade and payment very simple, which, specifically benefited .the residents traveling for business / professional reasons. The Exchange Earners Foreign Currency account holders and the Residents Foreign Exchange account holders are now permitted to freely use the funds held in both the categories of accounts for any permissible current account transactions. The rules relating to foreign investment have been made more transparent. FEMA provided for civil procedure in cases of violation and contained elaborate redressal machinery for total justice and fairness to the aggrieved persons. BSPATIL
    • The FEMA also prohibited seven categories of current account transactions in lotteries, banned magazines, football pools, narcotics, etc,Technology TransferJawaharlal Nehru was responsible for the improvement of Science andTechnology in India. Under his leadership several research institutionslike The Council of Scientific and Industrial Research [CSIR], Departmentof Atomic Energy, The Indian Council of Agricultural Research were allestablished. These were followed by Department of Electronics,Department of Space Technology, the Indian Space Research organization,etc. In 1958 the Science Policy Resolution was passed with the objectivesto: Foster, promote the sustain by appropriate means the cultivation in science and scientific research in all its aspects - pure, applied and educational. Ensure an adequate supply within the country of research scientists of higher quality and recognize their work as an important component of the strength of the nation. Encourage and initiate with all possible speed programs for the training of scientific and technical personnel on a scale adequate to fulfill the countrys needs in regard to science and, education, agriculture, industry and defense. Ensure for the people of the country all the benefits that can accrue from the acquisition and application of scientific knowledgeFollowing this policy, on the agricultural front, the country witnessedGreen Revolution, which made the entire world turn to India for itsexperience and experiments in agriculture. The success achieved wasphenomenal that production and productivity increased manifold. Butcorrespondingly the irrigation and other infrastructure facilities like BSPATIL
    • storage facility, transport, communication, etc., developed slowly. For along time, there was absence of effective linkage between the scientificlaboratories and the fanners. But this was overcome by early 1970s andsince then Indian agriculture has been on the forward march.On the industry front, though there was wide talk about self-reliance, yetin reality the industries spent precious little on Science andtechnology. Modernization was given low priority. Research anddevelopment activity and investment was found only in a very fewindustrial units. Another aspect was the improvement in Science andTechnology never crossed the urban frontiers. Though India rankedsecond in the world in terms of technical manpower, this was neverutilized to our advantage. Only government organization gave someserious considerations to research and development activities. Furtherthe attempt was to develop and apply technology to meet therequirements of the rich community in India. Whatever technology thatwas imported never suited our domestic requirements and attempts toadopt them for Indian environment did not succeed. After the declarationof Liberalization in 1991, the government has given very seriousconsideration to Technology and development. The summary of theTechnology policy of 1991 is given below.A welcome change in the outlook of the government as evidenced by thenew policy is the realization that the sophisticated technology fromabroad can be brought in only through liberal and less restrictiveprocedure and policies. The interference of the government in thisregards to be reduced so as to enable the domestic industries inachieving a high rate of industrialization. As a result of this liberalization,automatic approval for technology agreements related to high priorityindustries will be made with respect to certain specific parameter. Otherindustries which can enter into such agreements without incurring the BSPATIL
    • expenditure of foreign exchange will also be extended liberal treatment.The industrialists are left to themselves to decide and enter into foreigntechnology agreements depending upon the commercial viability of theirenterprises. In due course this measure is expected to pave the way forexchange of superior technology from India* with other countries. Withthe overall liberalization, the competition will be high and it is expectedthat industries will invest much more in research and developmentactivities. Keeping in view all these expectations, the government hasannounced the following changes in regulations governing foreigntechnology agreement:(i) No prior permission is needed for hiring foreign technicians, foreigntesting of indigenously developed technologies. Such activities involvingpayments will be governed by the guidelines of the RBI and suchpayments can be made through the blanket permits.(ii) Automatic permission will be given for foreign technology agreementsrelating to the high priority industries. The royalty payments throughsuch agreements will be subjected to certain provision. Upto the paymentof Rs. I crore, royalty will be @ 5% for domestic sales and 8% for foreignsales or exports. However, the total royalty payment should not exceed8% of sales over a 10 year period from the date of agreement or 7 yearperiod from the date of commencement of production.(iii) In the case of industries not covered in the high priority list automaticpermission will be given for technology agreement provided it does notentail any foreign exchange payment commitment.(iv) In all the other cases, the general procedures in practice will beadhered to and such industries will require approval. BSPATIL
    • REVIEW QUESTIONS 1. Discuss the objectives of licensing policy in India. 2. List the findings and recommendations of Dutt committee report. 3. Discuss the features of Indian licensing policy. How far the current policy is a deviation from the old ones ? 4. Explain the circumstances under which MRTP Act was brought. Why was it given up on the eve of Liberalization? 5. What do you understand by control of capital issues ? List the recommendations of Narasimham committee II in this context. 6. Discuss the forms of foreign capital. 7. Why is foreign capital required? 8. Discuss the role of foreign capital in economic development. 9. Analyze the problems of foreign capital. Discuss in this context the policy of the government towards foreign capital since independence. 10. Explain the government policy on Foreign Direct Investment. 11. Critically evaluate the Industrial policy resolutions of 1948, 1956 and 1980. 12. Explain briefly the provisions of the Industrial policy 1991 which laid the foundation for liberalization. 13. What is an EXIM bank ? What are its functions? 14. What is meant by public distribution system? Discuss the justifications for it continuance. 15. Comment on the working of public distribution system in India. 16. Critically examine the functioning of public distribution system from the view point of institutions, people and government. Suggest suitable remedies. 17. Outline the contours of agricultural price policy in India. BSPATIL
    • 18. What is meant by foreign exchange? What are the justifications for regulating it? Comment on the policy of the government in relation to foreign exchange.Discuss the need for technology transfer. Analyse the policy of thegovernment in this regard. BSPATIL
    • CHAPTER IVMonetary and fiscal system - Banking and credit structure in India -Financial institution - Fiscal system - theory and practiceINDIAN FINANCIAL SYSTEM AND COMMERCIAL BANKINGThe shape and status of an economy to a large extent depend on thedevelopment it had achieved, which in turn depends on the strength offinancial sector. A country with a strong financial sector is bound toprogress faster and steadier than any other country. Financial sectorrefers to all the categories of financial institutions which provide as aconduit between those who are in need of funds and those who aresupplying funds. Such institutions are usually referred to as financialintermediaries. While these intermediaries do function at a profit, not allof them are profit centered. In other words, the financial intermediariescan be broadly classified as organized sector institutions andunorganized sector institutions. Those in the former category function inthe interest of the society and so not very much profit centered. The wayin which all these institutions are integrated is understood through astudy of financial system. The structural positioning of theseintermediaries determine the flow of funds in an economy. That is, howthese institutions mobilize funds and how they distribute or channelisethe funds mobilized depend on how they are organized. For instance, inthe olden days, only money lenders provided the needed funds eitherfrom their own savings or that of their close relatives. Obviously theyconfined their operations only to a limited locality and purposes.Depending upon the borrower and the security offered, they chargedvarying rate of interest and there was absolutely no regulation of theirbusiness practices. But once public institutions like commercial bankscame into the scene, there was a need to organize their operationsstrictly in relation to the national priorities. Thus came the institutions inthe organized sector, which are governed by a set of rules and BSPATIL
    • regulations. Hence, if in a country the size of operation of the institutionsin the organized sector is large, then the flow of funds from the savers toinvestors will be smooth and would contribute towards the economicdevelopment. Even the mere presence of unorganized sector institutionswill countervail the contributions of the organized sector institutions.In the Indian context, the financial system includes a number ofinstitutions in the organized sector and unorganized sector.. Under theorganized sector we could include: the State bank of India and itsassociates, all the nationalized commercial banks, the Regional Ruralbanks, private sector Indian and foreign banks, non-scheduled hanks, allthe levels of co-operative banks, Government institutions like NationalSavings Corporation, Post office savings banks, Provident fund, all thecorporations created by legislature like LIC, UTI, etc. In the unorganizedsector, the institutions are of several types ranging between moneylenders, chit funds, nidhis, finance companies, etc.The constituents of Indian Financial system changed over a period of time,as the nature of demand for funds changed and so institutions had tocome up to meet the specific needs of a demand segment. For instance,while the rationalized commercial banks and co-operative banks arefocussed more towards the priority sector and rural segment, the chitfunds and nidhis came into the scene to cater to the needs ofbusinessmen and small firms. Finance companies entered the scenemainly to meet the funds requirements of hire purchase and leasing firms.While specialised institutions add to the maturity of the financial system,the difficulty in regulating them exposes the gullible small savers andinvestors to a great risk. The regular failure of finance companies, nidhis,etc., have rudely -shaken the confidence of the common public anddiscouraged them from investing activities. BSPATIL
    • Growth of NBFCs:Non banking financial companies have emerged as a single mostimportant constituent of our Financial system. These institutions haveoriginally started functioning as hire purchase agencies, but introduced indue course a host of innovative services, that their number has swelled tonearly 50000 by 1998. They have been very popular in the Indian scenemainly because they could mobilize huge funds by offering attractivehigh rate of interest, adopting a simple procedure for processing andlending, improving customer relations and introducing new customeroriented funding schemes. To understand their extent of coverage, thereare hire purchase finance companies, housing finance companies,investment companies, mutual benefit financial companies, etc.Though their growth was actually adding to the financial products in themarket,the operation of a number of them raised questions about their stability.and genuineness of intentions. When a number of such NBFCs failed, inresponse; public outcry, regulatory guidelines were brought by the RBI.A number, of committees were set up to examine the nature and contentof the regulatory mechanism. Particularly, the recommendations of theShah committee of 1992 and Khanna committee of 1996 assumesignificance. Their recommendations included: Abolition of categorywise classification of finance companies. Application of uniform regulation for all finance companies. Focussing regulatory attention on large size companies. Compulsory registration of all deposit accepting companies. Determining capital adequacy standards and prudential norms. Prescription of provision for bad and doubtful debts. Compulsory annual credit rating. BSPATIL
    • Following this, a number of provisions in the Regulations Act wereamended and the RBI [Amendment] Act 1997 has brought forth thefollowing regulations: NBFCs are more clearly defined and their minimum net owned funds was, fixed at Rs. 25 lakhs. Registration with RBI at the time of entry is made compulsory. Existing units were given time of three years to reach the minimum level of), net owned funds. NBFCs should transfer not less than 20% of their profits to the reserve fund every year.In case of any violation of any of the regulations by the NBFCs, the RBIwill prevent them from accepting deposits and also sell, transfer, etc.their properties.Several other regulatory measures were announced in January, 1998which include: NBFCs with credit rating below A are not allowed to accept deposits. For any violation of norms, the repayment of deposits will be ordered by RBI. Interest rate and brokerage fixed. Regular tax returns should be filed. No lending is permitted against the own security.But the NBFCs appealed to the RBI to relax the provisions, as otherwisetheir business would be at stake. Accordingly RBI some of the regulations,providing for the growth of these NBFCs at the am protecting the interestof investing public. BSPATIL
    • Housing SchemesHousing emerged as one of the important priority sector lending schemes.This so because of both increase in the demand for houses in both theurban and rural areas. With considerable number of people settling downin urban slums, housing problem has assumed a tremendous proportion.As a sequel to this, the government has established National HousingBank in 1988 with a number of programmes to address the housingneeds of various sections of the population.Specifically a Home Loan Account is devised to promote the savings habitamong the public for acquiring houses. With a minimum periodicity of 5years, any one can open a Home loan account with any scheduled bank.The amount deposited into the account is also exempted from income ax.The balance in the account earns interest at 10%. Once the specifiedperiod of deposit is over, the account holder is eligible for housing loan.The loan amount is determined as a multiple of accumulated savings inHousing Loan Account.Loans granted under this category will be refinanced by the NationalHousing Bank. The Commercial banks are advised to provide 1.5% of theirincremental deposit over the previous year for direct or indirect loans orinvestments. Schemes funded by HUDCO, like Nehru Rojgar Yojani havegone a large extent in easing the housing problems of the rural masses.Apart from this under Priority Sector allocations the following housingloans are provided :A] Direct advance : Loans upto Rs. 5 lakh are granted for construction ofhouses and upto Rs. 50,000 towards repairs of houses for all categoriesof borrowers. BSPATIL
    • B] Indirect advance : Under refinancing scheme, non governmentalagencies are also eligible when they lend for house construction.Advances are also given for the clearance of the slum and rehabilitationof the slum dwellers.Subscribing to the bonds issued by the National Housing Bi.nk andHUDCQiis also extended.As regards the margin on loans, the percentage of margin is determinedbased on the loan amount. As a security, mortgage of the property andGovernment guarantee are acceptable. Maximum repayment periodis-fixed at 15 years, and the repayment holiday is also granted to theborrower. The eligibility condition for getting loan is fixed in relation tothe income of the borrower. Interest rate on loan is again linked to theamount borrowed.Through Indira Ayas Yojana scheme free dwelling units are given to thepersons living below poverty line in the rural areas, belonging to SC andST community and bonded labourers. The scheme is, also extended tofamilies of servicemen of the armed forces and paramilitary forces killedin action irrespective of their income limit.- This scheme isimplemented through the District Rural Development Agency.Beneficiaries are identified through Gram Panchayat or BlockDevelopment Officer. The beneficiary has to under take the constructionof the house and the money is released in stages.THE FUNCTIONS OF COMMERCIAL BANKSThe functions performed by the commercial banks may be listed 2.5follows :1) Accepting deposits, 2) Lending loans and advances, BSPATIL
    • 3) In vestment of funds, 4) Promote the use of cheques,5) Agency functions, 6) Purchase and sale of foreign exchange,7) Financing of internal and international trade,8) Creation of credit, 9) Other functions and10) Fulfillment of socio-economic objectives.1. Accepting deposits:This is one of the primary functions of commercial banks. Thecommercial banks accept different types of deposits, the deposits may bebroadly classified as a) demand deposits and b) time deposits. Theformer refer to the deposits which are repayable by the banks on demandby the depositors, while the time deposits are accepted by the banks for afixed period of time before the expiry of which they dont return thedeposit. The demand deposits include the current account deposits andsavings bank account deposits. These two types of deposits earn very lowrate of interest as they can be withdrawn any time. In the case of savingsdeposit, the depositor is not allowed to withdraw more than a fixednumber of times or amount over a period of time. The time or termdeposits include the fixed deposit and recurring deposits. In the formera sum is deposited for a fixed period of time determined at the time ofdeposit and is never allowed to be withdrawn before the expiry of periodof deposit. Any such foreclosures will invite penalty apart from forfeitingthe interest. Recurring deposits are the type of deposits in which adepositor agrees to deposit a fixed sum of amount every month for anumber of months as determined in advance, and at the end of which thedepositor will be repaid his deposit amount along with interest. Everybank will be interested in mobilising as much deposit as possible as itwould improve its liquidity with which the bank can meet is liabilities andexpand its business. BSPATIL
    • 2. Advancing of loans :Commercial banks accept deposits and use them for expansion of theirbusiness. The banks never keep the deposits mobilized idle. Afterkeeping some cash reserve, they invest the funds and earn. They alsolend loans and advances to the common men after satisfying themselvesabout the credit worthiness of the borrowers. They grant different typesof loans like ordinary loans in which the banks lend money againstcollateral security. Cash credit is another type of loan in which the entireamount sanctioned is credited into the borrowers account and he ispermitted to withdraw only a specified sum at a time. Overdraft is yetanother facility under which the customer is allowed to withdraw anamount subject to the ceiling fixed, from his account and he pays intereston the amount of overdrawn. Discounting bills of exchange is anothertype of advance granted by the commercial banks in which a genuinetrade bill is discounted by the banks and the holder of the bill is given theamount and the banks arrange to collect the due from die drawer of thebill on the date of maturity.3. Investment of funds :One of the main functions of the commercial banks is to invest theirfunds so as learn interest and returns apart from utilizing their funds in aproductive manner. India as per the statutes, they must invest a part oftheir total investments government securities and other approvedsecurities so as to impart liquidity. Banks apart from enabling them toearn out of their investment Banks now. days have set up mutual fundsthrough which they mobilize funds from the people invest them in veryattractive projects which is a help rendered to the investors whootherwise will not have the benefit of participating in the project. Banksadminister these mutual funds through specialists and experts whoseservices are not available to the common men. BSPATIL
    • 4. Promote use of cheques:By the spread of banking habit, banks have achieved a remarkablesuccessi-pil promoting and encouraging the use of cheques by people inthe settlement of their-claims. Cheques are not only safe but are diecheapest medium of exchange in me place of cash, apart from being fullynegotiable instrument5. Agency functions of commercial banks :Commercial banks function as he agent of their customers and help themseveral ways. For these agency services, the banks charge a nominalamount The agency services include, transfer of customers funds,collection of funds on behalf of the customers, transactions in the sharesand securities for their customers, collection of dividends on shares andinterest on debentures for their customers, payments of subscriptions,dues, bills, premia on behalf of the customers, acting as the Trustees andExecutor of the customers, offering financial and other consultancyservices, acting as correspondents of the customers, etc.6. Purchase and sale of foreign exchange :The banks also undertake to help their customers in dealing ortransacting in foreign exchange. Though only banks with license to dealin foreign exchange along can act on behalf of their customers, yet inIndia several commercial banks by virtue of their relationship help thecustomers in this connection.7. Financing internal and international trade :This is a major function of the commercial banks. The international tradedepends to a large extent on the financial and other support given by thebanks. Apart from encouraging bills transactions, the banks also issueletter of credit facilitating the importers to conduct their trade smoothly.The banks also process all the documents through consultancy services BSPATIL
    • and reduce the botheration of the traders. They also lend on the basis ofcommercial bills warehouse receipts, etc., which help the traders toexpand their business.8. Creation of credit:It is worth noting the credit created by the commercial banks. In theprocess of their lending operations they create credit The processinvolves the following mechanism: whenever the banks lend loans, theydo not pay cash to the be Towers; instead they credit the accounts of theborrowers and allow them to withdraw from their accounts. This meansevery loan given will create a deposit for the banks. Since every deposit isequal to money, banks are said to be creating money in the form of creditAs a result the volume of funds required by the trade, government andthe country is met by the banks without any necessity to use actual cash.9. Other functions:Other functions of the commercial banks include providing safety vaultfacility for the customers, issuing travellers cheques acting as referees oftheir customers in times of need, compiling statistics and other valuableinformation, underwriting the issue of shares and debentures, honouringthe bills drawn on them by their customers, providing consultancyservices on financial and investment matters to customers, etc.10. Fulfillment of socio-economic objectives :In the process of performing all the afore-mentioned services, the banksdo play key role in the economic development and nation building. Theyhelp the country^ in achieving its socio-economic objectives. With thenationalization of banks, the priority sector and the needy people areprovided with sufficient funds which helm them in establishingthemselves. In this way the commercial banks provide a firm and durablefoundation for the economic development of every country. BSPATIL
    • CREDIT CREATION BY BANKSCommercial banks accept deposits and lend loans and advances. In thisprocess* they create two types of deposits, namely primary deposits andderivative or deposits. The form refers to the cash deposited by acustomer in a bank or deposit a cheque with the bank for collection.The banker merely accepts cash am converts it into a deposit. Hence,this is merely a passive role performed by the banks. These primarydeposits do not add to the money stock in the economy From theirexperience and observation the banks know that not all the customs willwithdraw their deposits on any single day. Hence, after providing forsome reserve to meet the cash requirement of the depositors, the bankslend the balance to the borrow. The amount of reserve to be maintainedby the banks is Cash Reserve Ratio which is determined by the centralbank.The derivative or active deposits refer to the deposits which are createdout of the %x loans and advances granted by the banks. Suppose anindividual is sanctioned loan of Rs. 10000 by a bank A. The bank doesnot give him cash while sanctioning the loan. Instead the bank merelyopens an account in the name of individual and credits his account withRs. 10000. He is then allowed to withdraw this amount whenever hewants. When the bank credits his account with Rs. 10000, it is treated asa new deposit received by the bank. Hence, the bank derives this newdeposit from the loan given and the bank has actively created this newdeposit. This is the reason why it is always said that loans create deposit.The new deposit created in this manner will add to the money stock ofthe economy. Whenever the loan is returned by the borrower to the bank,then there is no further possibility of creating new deposit. This resultsin net decrease in money stock. BSPATIL
    • Therefore creation of credit or granting of loan adds to money supply toin the economy and the return of loan results in reduction in moneysupply.It should also be noted that the banks create active deposits while theypurchase assets or securities from others or discounting the bills ofexchange or any other negotiable instruments. But the majority of creditis created only out of the loans given.The multiple credit creation process can be explained with a single bankor more than one bank. The former is called single bank credit creationand the latter multiple bank credit creation model. To explain both thesemodels, let us assume i) there are three banks A, B, and C ii) the cashreserve ratio is 10% and iii) an initial deposit (primary deposit) of Rs.10000 is made into bank A.When bank A receives the new deposit its balance sheet will appear asbelow : BALANCE SHEET OF BANK A LIABILITIES ASSETS Rs. Rs.New deposit 10000 New Cash 10000 10000 10000Out of this new deposit of Rs. 10000 the bank has to maintain a reserveof 10% which works out to Rs. 1000. The balance of Rs. 9000, can be lentby the banker. Suppose Bank A lends Rs. 9000 to P, a borrower, who usesthis fund to pay off his creditors. On giving the loan to P, the balancesheet of Bank a will be : BSPATIL
    • BALANCE SHEET OF BANK A LIABILITIES ASSETS Rs. Rs.Deposit 10000 Cash (Reserve) 1000 Loan to Mr. P 9000 10000 10000The creditors of P may have an account with bank B" and so they maydeposit Rs. 9000 received from P in bank B. This is the primary deposit offresh deposit bank B. Of this the bank will maintain a reserve of Rs. 900and it may give a loan, of Rs. 8100 to Q. Then the balance sheet of bankB will appear thus : BALANCE SHEET OF BANK B LIABILITIES ASSETS Rs. Rs.New deposit 9000 Cash (Reserve) 900 Loan to Mr. Q 8100 9000 9000Suppose Q uses this loan of Rs. 8100 to pay off his creditor who has anaccount with Bank C. Bank C will, then, get a fresh deposit of Rs. 8100and it would lend^ Rs. 7290 after keeping a cash reserve of Rs. 810 Thebalance sheet of bank appear as below : BALANCE SHEET OF BANK C LIABILITIES ASSETS Rs. Rs.New deposit 8100 Cash (reserve) 810 Loan to Mr. R 7290 8100 8100 BSPATIL
    • R may use this loan to repay his creditor who may have an account withBank D and it would create loan out of the new deposit received. Hence,in the above example, a fresh deposit of Rs. 10000 in Bank A has resultedin the creation of loans to the tune of Rs. 24390 (9000 + 8100 + 7290).If this process continues more amount of credit will be created.In the above example, we have assumed that each borrower has enabledfresh deposits in different banks. Suppose the amount lent by Bank A isretained by it (because the creditors of P deposit the money in bank Aitself). Hence, the example given above explain the multi-bank creditcreation model and if it is altered sightly, assume the existence of bank Aalone, then it becomes an example for single bank credit creation model.It is of interest to know the total amount of credit created by thecommercial banks in the above example. This could be found out that diefollowing formula K = 1/r. In the formula K is the deposit multiplier and ris the cash reserve ratio. In the above example r = 10%, ie., 1/0.10 whichis equal to 10. This means that original deposit will multiply by 10 timesif the cash reserve ratio is 10% Suppose we increase the cash reserve ratioto 20% then the multiplier will be 5 and the cash reserve ratio is 5%, themultiplier will be 20. Hence a rise in cash reserve ratio will reduce thevolume of credit created and a fall in cash reserve ratio will increase thevolume of credit created. We find the total amount of credit created wecan use the deposit multiplier calculated above multiply it with the initialdeposit In otherwords, Addition aggregate deposits - Fresh deposit x KIn the above example, fresh deposit is Rs. 10000 and the multiplier is 10.Hence the total credit created is 10000 x 10 = 100000. BSPATIL
    • So far we have explained the credit creation process by the commercialbanks. We can also explain the credit contraction process which means,that whenever the depositors withdraw their deposits then the banks willbe left with lesser cash to create only lesser credit. Both the creditcreation and contraction are subjected to the following limitations: 1. The volume of cash in circulation determines the extent of credit created. With larger volume of cash, the primary deposits will be more thereby the credit created will also be more. Any reduction in the volume of cash will reduce primary deposits and so the credit created. 2. Cash reserve ratio, in fact, is a primary determinant of credit created. It has been already shown that higher the cash reserve ratio lesser will be credit created and lower the ratio greater will be the credit created. 3. The external drain or the extent of withdrawal of cash by the depositors also determine the volume of credit created. When there is heavy withdrawal of cash by depositors there will be reduction in credit crated and lesser withdrawal will encourage a larger volume of credit created. 4. Banking habit of the people is one of the factors influencing the credit created; If people conduct most of their businesses using cheques rather than cash, then the banks will have more cash (primary deposits) to create more credit when people use more of cash rather than cheques, bills, etc. 5. The central bank is the leader of the monetary system and its decision to follow a liberal credit policy will encourage more of BSPATIL
    • credit creation and a stringent credit policy will bring down the credit created. 6. The availability of a large volume of collateral securities will facilitate larger volume of credit creation and with lesser volume of collateral securities only, lesser credit will be created. 7. The business condition prevailing in the country will be one more factor; determining the extent of credit creation activity. With prosperity and boom conditions prevailing there is greater opportunity for additional investment and: so the credit creation will take place in large scale. During the period of depression and. adversity, as the investment opportunities are very limited, there is no scope for credit creation.PERFORMANCE OF THE COMMERCIAL BANKS IN INDIA, THEIRPROBLEMS AND SOLUTIONS TO IMPROVE THEIR FUNCTIONINGThe trends in performance of commercial banks in India can be explainedin terms of various indicators given below.I. Deposit mobilization : A phenomenal success in deposit mobilization isachieved by the commercial banks since nationalization. In 1950-51 thetotal deposit with the commercial banks was Rs. 880.6 crores which roseRs. 102127 crores in 1986-87. This was mainly due to raid branchexpansion after nationalization, the increase in money supply in theeconomy, the improved banking habits among the public, etc, however,the rate of increase in deposit has not been commensurate with the rapidrate of increase in branch expansion. BSPATIL
    • This is easily understood from the low per capital deposit of Rs. 723.further even in 1986 the total deposit with the commercial banksamounted to only 34% of the national income. However, encouragingsigns and indicators are being observed which may herald a sizeableincrease in deposit mobilization in the years to come. The main indicatorsare the increasing fixed deposit and declining current deposits. Withbetter interest on deposits, the banks should be able to improve theirdeposit mobilization. 2. This objective has been certainly achieved as is clearly indicated by the following facts. From a mere Rs. 546.93 crores in 1950-52 the total advances by the commercial banks stood at Rs. 57518 crores in 1986-87. This is more than 100% increase in advances compared to 1950-51. In 1950-51, the banks were lending only 62.1% of their total deposit in the form of advances which has increased to 65.7% in 1986-87. Since the nationalization, the advance to priority sector by the commercial banks has infact enabled this sector to grow without any financial constraint. In 1986-87, the advances to the priority sector out of the total bank credit rose to 43.6% achieving a significant objective of nationalization in providing the scarce resources to the priority purposes. An important feature of this sizeable advances is that the share of the public sector banks is the maximum and the commercial banks have also started concentrating on the priority sector. 3. Substantial increase in investments : One of the important reasons for maintaining: the profitability in the commercial banks is their pattern of investments. The investments by thebanks went up from about Rs. 360 crores in ,1955-56 to more than Rs. 38563 crores in BSPATIL
    • 1986-87. Of this about 37.8% of the investments are in government securities.4. Branch expansion : One of the significant achievements of the government is the rapid branch expansion achieved over these 36 years. From a few thousand branches in 1050-51, the number of branches stood at 8321 in 1969 which increased to 53567 branches by June, 1987. This was also due to the merger of smaller banks into bigger banks. The voluminous banking operations^ in the country today is mainly due to the fact that almost every third village has a branch 6f a bank. Though initially such a branch expansion activity led to competition among them, yet over a period with the measures taken by the banks, the competition among the banks have come down.5. Sizeable increase in the advance towards the priority sector : Banks have played a commendable role in the provision of advance to the priority section Apart from the quantum of assistance, the coverage of banks in terms of assistance to various segments also increased. By December, 1979 the priority sector advances constituted 34.4% of the total bank credit as against 25.8% un June 1977. The government fixed a target of 40% which was achieved by the banks as already indicated under the advances given by the banks. The banks;" have been strictly instructed that they should extend 60% of the deposit mobilized in the rural and semi-urban areas to the priority segments in those areas. By June 1987, the commercial banks advance was 43.6% of their total deposits which was extended to the priority sector.6. Declining profitability of banks : A very serious matter of concern about the operation of the commercial banks in India is that their BSPATIL
    • profitability is fast declining. There are several reasons for this. Firstly, the banks have to mobilize; their deposits among the increasing competition among themselves and also, among the various schemes of savings announced by the government. As a result the banks have to bear a higher cost of deposit mobilization which directly, affect their profitability. Secondly, the interest paid on the reserves maintained by the commercial banks with the central bank is very low and this considerably reduces their profitability. Thirdly, with the expansion of branches throughout the country, the operational cost of the banks have gone-Up, thereby bringing down their profitability. Fourthly, the outgo in terms of staff salary and other allowances also take away a sizeable amount of income from the banks bringing down their profitability. Fifthly, the priority sector lending by the banks at concessional rates is yet another reason for poor profitability. Sixthly, the banks have been lending large amounts to the sick units due to the compulsion from the government. Consequently their profit is affected.Problems of the commercial banks : 1. Commercial banks, though very large in number have not effectively mobilized the deposits in the country. This is very clear from the fact that a large number of non-banking financial institutions mobilize considerable deposits from the public. 2. The banking habits among the public is not yet at an encouraging level. Especially in the rural areas people prefer to keep their money at home at great risk man depositing with the banks. 3. Government is also responsible to some extent for the slow development of banks in India. There is no compulsion from any BSPATIL
    • government institution that the funds available with the government agencies should be kept as deposits with commercial banks only. 4. Competition from foreign banks, non-banking financial intermediaries, a score of government aided institutions have also made the business of the banks difficult. 5. A sizeable amount of funds of the commercial banks are locked with the sick units. The investments in these units are made.only on the government insistence. 6. The frequent loan melas organized and disbursal of unproductive loans have also created a big problem to the banks. Further the cancellation of loans from banks, waiver of these loans for specified period, etc., also add to the problems of banks.To overcome the above problems in an effective manner the followingsuggestions can be considered: 1. The competition between the commercial banks and the other non-scheduled banks as well as foreign banks should be eliminated. This is being done by various provisions relating to opening of a new branch, working hours, investment of funds, allotment of area for each bank, etc. But in terms of working it is better that the competitive spirit is maintained so that the banks will be constrained to maintain and improve their efficiency. 2. The existing banking structure should be modified to match the requirements and changes. For instance, instead of allowing the existence of a number of small banks, attempts should be made to BSPATIL
    • amalgamate the small and inefficient ones with the big and efficient ones. Especially in the case of branch expansion a more critical study is called for so that establishment of uneconomic and] unviable branches can be avoided. The areas really in need of banking facilities should be carefully identified with long term perspective and then the branches! should be opened. A close monitoring of the working performance of each] such new branch should be made so as to determine the justification allowing their existence.3. The banking functions should be thoroughly overhauled so as to introduce; modern methods of functioning. For instance, the age-old method of maintaining a large number of ledgers should be done away with and; computers should be used in large way. Apart from this, possibility, of extending banking services throughout the day (24 I/ours banking) should be; thought of. Some of the branches of foreign banks have started offering this 1 facility and Indian counterparts can also think of such methods.4. Streamlining the banking procedure is a long felt need in India. Surprisingly, even among the nationalized banks there is no uniform procedure for several functions. Uniformity will not only help the people to understand; the procedure but also the banks to economic their operations, for instance, if there is a uniform account opening for prescribed for all the banks, then possibly large scale printing of this form will bring down the cost of printing. Like this; uniformity in every procedure wherever possible should be identified and-implemented. This will be identified an effort to economize the use of resources. BSPATIL
    • 5. Periodical and stringent review of the competency and efficiency of the staff is also a must By devising a healthy procedure for staff evaluation, every bank can attempt to maximize the output and minimize the strain. Mere-strengthening of the staff without arrangement for improving the staff performance through rigorous training, updating of knowledge, evaluation, etc., will only weaken the functioning efficiency of the bank.6. Innovative methods of deposit mobilization should be thought of, apart from the conventional methods. The banks could call for opinion from the public regarding the methods of deposit mobilization and may even consider giving rewards and prizes for the best suggestions.7. Extending the area of operation of the banks should take up new areas like leasing, hire purchase, etc., to mop up the additional deposits and also to extend the banking coverage.8. Investment of funds should be very carefully planned and every attempt should be made to maximize the return on various types of investments. As far as possible the loan recovery should be maximized. Any attempt to waive the loans or cancel the loans will only encourage defaulters.9. Government should also be sympathetic towards these banks by allowing their funds to flow towards the banking sector. The surplus funds available with the government could be placed at the disposal of the banks which will strengthen their operation and in fact the economy would be benefited more in terms of new loans and advances. BSPATIL
    • 10. Efforts should also be made to solve the customer problems by involving them in the decision making process. The service charges imposed on various services should be rationalized and restructured and as far as possible the uniformity in this regard must be achieved. It is often seen that the private sector banks give concessions or even waive the service charges to some of the major customers, while the nationalized banks have no such provision. As a result, private sector banks are able to attract a sizeable volume of funds through deposits. 11. Educating the common public about the manipulative activities of the non-balance financial institutions like chit funds, nidhis, mutual funds, etc., so as to make them understand that the same type of services can be availed of from the banking system but with lesser risks. The regulation in this regard should be made more rigid so as to discourage any ‘blade companies’ from resorting to any shady dealing and manipulative activities. 12. Considering the pivotal position occupied by the banking sector in the country, it is high time that politicians are prevented from pressurizing the banking sector to yield to their unhealthy practices with ulterior motives. A country where banking sector is completely free from political interference alone reaps the expected benefits from that sector and encourage health banking practices.LEAD BANK SCHEMEA milestone in the history of banking in India is the nationalization of the14 major commercial banks in 1969. This process was undertaken withthe main objective of involving the banking sector in a big way in thenation building and economic development. To help to achieve this BSPATIL
    • commendable objective, two committees were set up viz., National CreditCouncil Study Group with D.R. Gadgil as the Chairman and the Committeeof Bankers under the chairmanship of Nariman. These committeesindependently went into their terms of reference and recommendedan area approach for involving the banks in economic development.This paved the way for giving a concrete shape to the, lead bank ofscheme. As nationalization of banks took place to extend and expandthe banking services to all the un-banked areas especially the rural areas,the RBI decided to implement its Lead Bank scheme through thenationalized banks. But this did not discourage the private sector banksfrom playing their role in economic development. Infact the Lead bankscheme involved all the nationalized banks, State bank of India and itsassociates and three private sector banks. Hence, the era ofbank-propelled economic development started.The Lead bank scheme has the following features : 1. All the districts in the country except the Metropolitan area were allotted among the banks selected for this purpose. 2. Each bank was expected to take all the initiative to develop the district allotted to it. The initiative includes conducting a detailed survey to identify the resources and the potential of the district concerned and then to devise suitable schemes for utilizing these resources. 3. The identification of unbanked centers is also included in this regard and such centers will be examined thoroughly to determine whether bank should be established in such places or not. 4. The districts were allotted to the different banks depending upon the size of the bank, the resources with which they operated, the BSPATIL
    • ability to handle additional volume of work, regional orientation of the bank concerned, etc. 5. The district allotted to a bank should not be considered as the area wherein only the bank concerned alone should initiate or carry out the developmental works. In otherwords, the lead bank should not become a monopoly in the district allotted, but it should also invite participation from other agencies in the district. In that manner the lead bank will function as a leader of a consortium. 6. To co-ordinate all the development activities taking place in the allotted district and other potential projects for the district, the lead bank is expected to set up a district level consultative committee of banks and other financial institutions. This committee was vested with the powers to review the performance in various schemes periodically.Working of the Lead bank schemeTo start with the 25 banks selected a, lead banks have completed thesurvey of the district allotted, to each of them. The district consultativecommittee in each district has also been formed. The lead bank schemealso designed and monitored the branch expansion activities in all theunbanked areas and with nationalization in 1969, the branch expansiontook place simultaneously in about 336 district of the country. The leadbanks also started co-ordinating the activities of various agencies in therural areas like co-operative banks, commercial banks, other financialagencies and other development agencies. The lead banks also startedidentifying the potential of each district and studied critically the existingline of business and other activities. It also could identify the credit gapin each district. Credit gap refers to the difference between the credit BSPATIL
    • needs of the rural areas and the credit supplied by all the agencies, tobridge this credit gap the lead bank took several steps. Firstly, it decidedto improve the deposit mobilization in the area concerned. Secondly, thequantum of funds required for the development activities in the districtwas estimated. Thirdly, the various agencies in the district were,approached to participate in the scheme. Fourthly, with the districtconsultative committee the performance of each scheme would bereviewed periodically and corrective steps if any required, would be takenup. I this manner the lead bank scheme aimed at removing the credit gapin each district.The lead bank scheme was expected to generate the following benefits: 1. The entire country would inherit a sound banking system. 2. there will be perfect and effective supervision and expansion of the credit facilities. 3. The various agencies connected with the developmental activities in each district would be able to achieve a high degree of co-ordination and operation. 4. The available scarce resources in each district would be mobilized and used for the development of the district concerned. 5. The banks will start playing a significant role in the economic rebuilding! and development. 6. A systematic attempt will be made to identify the credit gaps in each district and appropriate action will be taken to fill up these gaps. 7. There is absolutely no scope for achieving development in ont- district at tiles cost of other district. In otherwords, the lead bank scheme would also." contribute in its own way towards the balanced regional development. BSPATIL
    • But the lead bank scheme failed in certain respects encouraging thecritics of this scheme to argue against this scheme on the followinggrounds: 1. While it is true that lead bank would take up the role of initiating-the development in the district allotted, but it cannot assume the role of the Planning commission. 2. A lot of confusion prevailed among the lead banks regarding their exact function and objectives. However this confusion was removed later on when the lead banks started sharing their survey findings with other interested agencies in the district and also started opening branches themselves in the areas identified by them. 3. Critics also pointed out that a financial and commercial institution like bank cannot be best suited to analyse and solve the task of techno-economic work. r Further the banks can be taken as professional institutions in the field of finance and not in the area of development. It was pointed out that banking function is completely different from the development function. In the absence of trained and skilled staff the lead banks could not accomplish the objectives for which they were created. 4. There were several other practical difficulties in executing this scheme. For instance, the allotment of districts to the banks was not done strictly, on the basis of regional orientation of the banks. As a result the banks could not effectively attend to the initial spade work in the district allotted to them. Operational difficulties like language barrier, difficulty in controlling the work from long distance, difficulty in finding staff for the newly opened rural branches, reluctance of the staff to move to rural areas, absence of BSPATIL
    • trained and skilled people, etc., together raised serious doubts about the success of this Scheme. 5. A major criticism of the scheme was that the authors of this scheme thought that once the banks are established in the rural or unbanked areas, the other problems in those areas would automatically be solved. Development of any region or area depends on the availability of infrastructural facilities, in that area. Hence, without the other facilities basically required for developmental efforts, banks alone cannot transform the area or region.Considering these problems of the lead bank schemes, steps have beentaken to improve the scheme. For instance, the Banking commission itselfhas recommended the regrouping of the banking system so as to make;the allocation of districts more meaningful and purposeful. A detailedtraining programme was charted to be implemented by every bankamong the existing and the newly recruited staff. The detailedrequirement of each region including finance, was assessed so as tomake the appropriate agencies to come up with necessary assistance tothe bank to implement the scheme. Another effort taken up was-toarrange for multi-level discussion among the participating banks thescheme so as to share the available information and other details of thescheme to find out solutions for various problems. A close co-ordinationand cordial relationship was maintained with the state governmentconcerned to strengthen the scheme.FUNCTIONS OF CENTRAL BANKAccording to De Kock, modem central bank performs six importantprimary functions. They are: 1. Central bank has the monopoly of note-issue. BSPATIL
    • 2. Central bank acts as-the banker, agent and adviser to the government. 3. Central bank acts as bankers bank. 4. Central bank acts as the custodian of the nations gold and foreign exchange reserve. 5. The Central bank collects and publishes economic statements and other useful information. 6. The Central bank acts as the controller of credit.Apart from the above functions, Central bank also performs the followingtwo functions:a) it is the custodian of the cash reserves of commercial banks and -b) it acts as the bank of central clearance, settlement and transfer.Let us now discuss each one of these eights functions in detail.Central bank has the monopoly of note issue :In olden days when the paper currency was introduced, each king issuedhis own currency or in each province a paper currency was used. Whencommercial banks were established, each one issued its own currency.Under both these situations, % there was lack of uniformity in the notesissued. There was also lack of recognition of the notes issued, furtherthere was a maximum limit up to which the commercial bank could issuenotes as they had been maintaining limited cash reserve and sometimescommercial banks failed to convert their notes into other forms of assetswhich shook the confidence of the common public. Therefore, thegovernment itself undertook the issue of currency in its own hand. Eventhis was not satisfactory as it lacked elasticity and flexibility, hence,finally central bank was made in charge of issue of currency.This centralized system of note issue has the following advantages BSPATIL
    • 1. It facilitated uniformity and absolute control over the monetary system. 2. It built up public confidence on banks. 3. It offered complete flexibility to the monetary system. 4. It enabled perfect control over the credit created by the commercial banks. 5. It also helped to maintain the internal and external value of money.Hence, in these days every country has vested the Central bank with theresponsibility of issuing currency and it started with Bank of England in1884. In India the Reserve Bank of India is issuing currencies. Everycurrency issued is backed up by suitable asset of value, like foreigncurrencies, government securities, other securities and other metallicreserves. As a result of this back up, the public confidence on the banksand the currency issued has gone up.ii. Central bank acts as the banker, agent and adviser to thegovernment:As the banker of the central government, the central bank performsseveral functions. Some of the important functions are: 1. It keeps the account of the government and so accepts receipts to the government and payments by the government. 2. It acts as the collecting banker of the cheques, drafts, etc., payable to the government. 3. It also transfers funds from one place to another on behalf of the central government. 4. It also provides short term loans to the government to tide over the temporary crisis. BSPATIL
    • 5. It also conducts all the international financial transactions on behalf of the government. Any payment for imports or receipts from exports are all accepted by it on behalf of the government. 6. It manages the public debt on behalf of the government, spent from receiving tax payments from the common public.By virtue of the information that it possesses, the central bank functionsas the adviser of the government It helps the government to monitor theeconomy. It formulates the monetary policy and helps in theimplementation of the policy. It suggests to the government the type offoreign policy, tax policy, commercial policy, exchange rate policy, etc.,depending on the economic conditions prevailing in the country. It alsomaintains the foreign exchange reserves of the government.iii. Central bank acts as the bankers bank:This function of the central bank can be classified into two sub-functions.They are: BSPATIL
    • 1. It is the custodian of the cash reserve of the commercial banks and 2. It is the lender of the last resort.Let us discuss each one these sub-functions.As regards the first sub-function, it is mandatory in the case ofcommercial banks in every country to keep a part of their total liabilitiesin the form of cash reserves. The quantum of cash reserves which thebanks have to maintain depends on the policy of the central bank. Usuallythe commercial banks maintain two types of cash reserve. One type ofreserve is maintained with the central bank and the other is maintainedby the commercial banks with themselves. This type of centralization ofreserve of commercial banks confer the following advantages : 1. It improves the public confidence. 2. It facilitates effective and fuller utilization of cash reserve of the country. 3. It enables the central bank to go to the rescue of the commercial bank which is in need of funds. 4. On the basis of the serve, the commercial banks are able to create credit. 5. It also conducts all the international financial transactions on behalf of the government Any payment for imports or receipts from exports are all accepted by it on behalf of the government. 6. It manages the public debt on behalf of the government, apart from receiving tax payments from the common public. 7. The central bank is able to exercise absolute control over the activities of the commercial banks.We have already stated that the central bank acts as the lender of the lastresort. This means whenever the commercial banks, in times of need, arenot able to get financial accommodation from any other source, they can BSPATIL
    • get it from the central bank. This is done in several ways. One popularway is that the commercial banks sell their securities and rediscount validtrade bills with the central bank and in turn get financial resources. Thefinancial support by the central bank enables the commercial banks toimprove their liquidity apart from carrying on their functions with limitedfunds. While this strengthens the public confidence, this also empowersthe central bank to impose and exercise absolute control over thecommercial banks. A significant merits of this function is that it hasenabled the central banks over the globe to direct and regulate the flowof credit. They could ensure the availability of adequate funds for thepriority sectors.iv. The Central bank is the custodian of the nations gold and foreignexchange reserves:Central bank performs this very important function to protect the countryfrom the consequences of foreign, trade. It issues the export and importpermits to the traders and others. Through this, it ensures that all theinternational transactions are performed only through the central bankand the payments and receipts are routed through it. This preventsmisuse and speculation in foreign exchange. With the centralized system,the central bank is able to maintain the exchange rate and resort toselling or buying of foreign currencies to minimize the fluctuations in theexchange rate. It is also able to encourage all the productive exportoriented activities and discourage the unnecessary and wasteful importactivities. It also formulates and executes exchange regulation policies,punishing and penalizing the erring individuals and institutions. Itstrengthens the countys trade relations with other countries. BSPATIL
    • v. The Central bank collects and publishes economic statistics andother useful information:In every country, it is the central bank which is given the powers to collectall the economic data related to the country and publish them asauthoritative information. This helps the government to understand theactual economic condition prevailing in the country and take suitablepolicies. For instance, through the collection and analysis of price datathe government is able to understand and formulate the necessary pricepolicies to maintain internal price stability. Similarly, credit policy,agricultural policy, industrial policy and other policies are all formulatedon the basis of the economic data and useful information provided by thecentral Central bank acts as the bank of central clearance, settlement andtransfer:With the expansion of branch of banks and increasing use of bankingservices, the transmission of funds from one place to another place hasbecome essential. The volume of funds transmission has gone up byseveral times these days that any delay is causing irreparable damage tothe economy. The transfer of funds takes place efficiently and quicklyonly with the help of central bank. Central bank is the /centre of clearinghouse operations. Every bank having an account with central bank isable to easily settle its payments receipts without any need to go throughcumbersome cash movement. Further the credit base in an economy canexpand only when the negotiable instruments can be freely transferredand honored with minimum delay possible. In this respect the clearinghouse operation of the central^ bank in every country assumes specialimportance. The value of this service of thereof central bank can beunderstood only when this service is affected in times of banker strikes.Huge amounts of cash transactions remain immobile causing immense ofdifficulties and paralyzing the economy. BSPATIL
    • vii. Central bank acts as the controller of credit:Of all the functions of the central bank, this function of the central bankis very important. Indiscriminate and uncontrollable creation of credit willresult in serious implications. Hence, the central bank performs thisfunction. It helps in first limiting the quantum of credit created throughits quantitative credit control policies and second it also ensures that theavailable funds are channelized properly; so that the funds will be usedproductively. The central bank achieves this through its qualitative creditcontrol policies or selective credit control policies. Through the creditcontrol policies, the central bank strives to maintain domestic pricestability, exchange rate stability, high level of employment, etc. Centralbank has several weapons to discharge this function which are interlinkedand help to achieve the objectives of credit control policies.OBJECTIVES OF CREDIT CONTROL POLICY OF THE CENTRAL BANKVARIOUS INSTRUMENTS OF QUANTITATIVE CREDIT CONTROL ALONGWITH THE LIMITATIONS OF EACH ONE OF THE INSTRUMENTS.The following are the objectives of the credit control policy of the centralbank : 1. Maintaining the internal price stability. 2. Controlling the economic fluctuations, i.e., business cycle. 3. Achieving the stability in exchange rate. 4. Maintaining the stability in the money market. 5. Promotion of economic growth through well planned and coordinated efforts and 6. Preparing the country to meet any eventuality like wars.Broadly, the various methods of credit control can be classifiedi) Quantitative credit control and ii) Qualitative credit control. BSPATIL
    • The former aims at controlling the volume of credit and money supply inthe economy, while the latter aims at channelising the available credit inthe desired direction. The quantitative credit control policy makes use ofthree important methods of controlling the volume of credit and moneysupply in a country. The three methods are: 1. Bank rate or discount rate policy. 2. Open market operations and 3. Variable cash reserve ratio.1. Bank rate or discount rate policy :It is one of the earliest methods of general credit control developed bythe Bank of England and it was considered an effective method till theoutbreak of I World war. After the war, Bank of England developed othermethods as it found the bank rate policy to be not so effective. Theessence of this policy that commercial banks approach the central bankwhenever they are in need of financial accommodation. They get thenecessary assistance by re-discounting the eligible bills and othersecurities. The Central bank would re-discount these instruments at arate which directly determines the volume of funds which the commercialbanks can get through this method of financial accommodation. Arevision of this re-discounting rate by the central bank will necessitatethe commercial banks to change their rate of discounting of eligible billsand securities.As a result the businessmen will be encouraged or discouraged inapproaching the commercial banks to get financial accommodation.Hence, it could be understood that the re-discounting rate is very muchlinked with all the other market rates and; discounting rate. In order tounderstand the process let us take an example. Suppose a commercialbank has a discounted trade bill worth Rs. 2 lakhs at 15% and given BSPATIL
    • holder of he bill Rs. 1.70 lakhs. Suppose the commercial bank is in needof funds it can approach the Central bank and get the same billre-discounted. Suppose the re-discounting rate 10%, then thecommercial bank will get after re-discounting the bill Rs. 1.8 lakhs. Nowit should be noted that the rate at which the Central bank discounts theeligible bills already discounted by the commercial banks is calledre-discount rate or bank rate. The discount rate refers to the rate atwhich the commercial bank discounts the bills of the businessmen. Thebank rate or the re-discount rate and the discount rate are very closelyrelated. Suppose there" is inflationary situation prevailing in the economyand the Central bank wants to> reduce the purchasing power. It will thenraise the bank rate. Suppose the bank rate is raised from 10% to 15%correspondingly the commercial banks will also raise their discountingrate from 15% to say 22% As a result the commercial bank/ will get onlyRs. 1.7 lakhs after re-discounting the bill and the businessman will getonly Rs. 1.56 lakhs after discounting the bill. Since the rate of discountis very high or the cost of borrowing in the market becomes high, thebusiness men will start borrowing less and so volume of credit will comedown. This will lead to decline in economic activity and the price level