Governments intervene in markets when markets allocate resources inefficiently. Markets can become inefficient due to market failures like externalities, public goods, asymmetric information, and lack of competition. Government interventions, like subsidies, regulations, and public provision of goods and services, aim to correct for these market failures and improve resource allocation efficiency. However, government interventions can also fail if they restrict competition or are poorly designed. The optimal level and form of intervention depends on the source and severity of the specific market failure.

1. Government Influence on Trade
Dr. (Mrs.) Vijaya Katti
Professor & Chairperson (MDPs)
Indian Institute of Foreign Trade
New Delhi
CLMV Programme 15 May, 2017

2. Conflict in Trade Policy
• Trade and trade policy can greatly affect the risk of conflict.
Trade encourages the reallocation of resources to more
efficient activities, and thus opens up opportunities and
creates jobs.
• However, changes in relative prices as a result of trade can
also destroy opportunities and jobs in declining sectors, and
the people affected by these losses may, under certain
conditions, turn to violence as a source of income.
• Changes in real incomes generated by trade are particularly
important in fragile states, where trade flows tend to be larger
and more volatile than other external flows, such as aid,
remittances and foreign investment.
• In addition, the majority of fragile countries are net food
importers, so they are particularly exposed to the recent
swings in international food prices.

3. Conflicting Results of Trade Policies
Objectives may conflict
• Economic, social, and political goals of a country
often conflict
May be impossible to help some industries without
hurting other
• Proposed reforms of trade regulations results in
heated debates among pressure groups

4. Economic Rationales for Government
Intervention
• Introduction
• The only rationale for considering intervention in the
operation of an entity is that it is functioning poorly.
Poor functioning may be defined as wrong or
insufficient output or excessive wastefulness in the
way the output is produced.
• The rationale for government intervention in an
economy may concern the efficiency of the economy
(the focus here) or the social outcomes of the
economy.
• Efficiency rationales exist when the poor functioning
of the economy is due to some inherent feature of the
economy itself.

5. Government Intervention
• “Government intervention” is used here as shorthand
for “government intervention in the operation of the
economy”.
• Since the economy is one of the mechanisms by which a
society moves to satisfy its objectives, intervention is
usually triggered by dissatisfaction with the way the
economy is performing in this regard. T
• To identify all the categories of justifications for
intervention, and to specify the dimensions across which
the impact of interventions should be judged, it is
necessary to contemplate that subset of social
objectives whose degree of satisfaction is susceptible to
plausible differences in the way the economy operates.

6. Relevant Economic Constructs
Economic Efficiency
• Economic efficiency refers to the adroitness with which a society
consumes its resources to meet its needs and wants: the value for
money of its use of resources (Palmer and Torgerson 1999).
The process through which this occurs involves two
steps.
• One is the identification, either by market processes or by
government determination, of the quantity of the particular goods
and services that will be produced and distributed to members of
society to meet their needs and wants.
• The second step is the choice and management, by those in
command of productive enterprises, of the technology to be used to
convert resources into goods and services. Technology is the
conversion instrument that determines the goods and services that
can be made and the physical productivity of resources used to do
so. These resources include human resources.

7. Economic Efficiency Map

8. Physical measures of efficiency
• This is a physical ratio that may be expressed, for
example, in terms of energy or some other
dimension. This can be defined as “engineering
efficiency”.
• “Technical efficiency” (Palmer and Torgerson
1999), or “X-efficiency” (Frantz 2007), is the
extent to which engineering efficiency is actually
achieved.
• “Operating efficiency” and “operational
efficiency” are also terms sometimes used for
technical efficiency.

9. Productive efficiency
• Both engineering efficiency and technical
efficiency involve only physical relationships.
• The technology chosen to produce a good or
service will be chosen on the basis both of
engineering efficiency and the cost of inputs.

10. Allocative efficiency
• “Allocative efficiency” is the extent to which
the goods and services produced, and
distributed, maximise the welfare of society
(Palmer and Torgerson 1999, Fallon 2005).
• It peaks when there is no other mix of the
economy’s outputs, and no other pattern of
distribution of them to members of society,
which would enhance the satisfaction of
society’s needs and wants.

11. Inefficient activity
• Technical waste occurs when more input is
consumed than need be, with existing
technology and inputs, to create a unit of
output.
• Economic waste (allocative or productive
inefficiency) occurs when the output mix is
wrong or more is spent to achieve an output
than need be.

12. Dynamic efficiency
• This discussion of efficiency has been static, or
timeless, in nature. At a practical level there is
a further aspect of efficiency to consider.
• It relates directly to technological change.
Because technological change is the source of
per capita economic growth, there is
notionally an optimal allocation of some of
society’s current resources to technological
research and development.

13. Society’s preferences
• First, the economy is arguably never at an equilibrium. Thus,
the operating features of the economy that may attract
government interest may be concerning but ephemeral and
subject to natural resolution (see Randall 1983).
• Second, and less obviously, the capacity of firms, and the
economy, to adapt to relevant change depends on
capabilities which are the product of investments made over
time. That is, a focus exclusively on allocative and productive
efficiency makes no allowance for a need to change to adapt
to a changing context.
• At the level of an economy, survival is less fragile than it is for
individual firms. The adequacy of the economy’s adjustment
to relevant change is assessed (if minimally – see below), at
any point in time, with reference to the balance between
consumption and investment.

14. The Decision to Intervene
Public Benefits
• “Public benefits”, like “public goods”, is a term
that clouds communication and analysis (see
Randall 1983).
• It is important, then, to locate valid indicators
of public benefit as they stand at the time of
analysis. Indeed, even the significance of the
consequences of sand in the economic
machine can only be assessed with reference
to such a guide.

15. Analysing Dynamic Efficiency
• Static efficiency concerns, as a basis for government
intervention, are thoroughly considered in Sandall et al.
(2009). This substantially involves consideration of
dynamic efficiency.
• There is no agreed definition of dynamic efficiency. The
essence of the notion of dynamic efficiency is the
balance between current consumption and current
investment, broadly defined. In the macroeconomic
context, dynamic efficiency is measured, for example, in
terms of investment in capital: “an economy is
dynamically efficient if it invests less than the return to
capital and is inefficient if it invests more than the return
to capital” (Abel et al. 1989:2).

16. Market failure due to dynamic efficiency
• Dynamic efficiency is ultimately measured by the
consequences of the adequacy of preparedness of
an entity for adaptation to change.
• Insufficient preparedness will, in the medium
term, cause an economy to drag its feet
excessively in maintaining, or capturing available
increases in, allocative and/or productive
efficiency.
• It will cause a firm to become irrelevant to its
markets, in product or price terms, and, possibly,
disappear.

17. Conclusion
• The rationale for intervention in markets, or the
economy generally, is that material inadequacies in the
outcomes of the functioning of the economy are judged
to warrant modification.
• These judgements of its efficiency may be unrelated to
deficiencies of a technical kind in the way the economy
functions.
• Those that are, however, are what we define as
“economic efficiency rationales”. The rest may more
appropriately be defined as “social rationales”.
• The latter include concerns about the effects of income
distribution (impacting, for example, on the sicker, older
and younger members of society) and, interestingly,
some “public goods” which only reflect social rationales.

18. Automobile Industries in India
Introduction
• The Indian auto industry is one of the largest in the world. The
industry accounts for 7.1 per cent of the country's Gross Domestic
Product (GDP). The Two Wheelers segment with 81 per cent market
share is the leader of the Indian Automobile market owing to a
growing middle class and a young population. Moreover, the growing
interest of the companies in exploring the rural markets further aided
the growth of the sector. The overall Passenger Vehicle (PV) segment
has 13 per cent market share.
• India is also a prominent auto exporter and has strong export growth
expectations for the near future. In April-March 2016, overall
automobile exports grew by 1.91 per cent. PV, Commercial Vehicles
(CV), and Two Wheelers (2W) registered a growth of 5.24 per cent,
16.97 per cent, and 0.97 per cent respectively in April-March 2016
over April-March 2015.
• In addition, several initiatives by the Government of India and the
major automobile players in the Indian market are expected to make
India a leader in the 2W and Four Wheeler (4W) market in the world
by 2020.

19. Market Size
• The sales of PVs, CVs and 2Ws grew by 9.17
per cent, 3.03 per cent and 8.29 per cent
respectively, during the period April-January
2017.

20. Investments
• In order to keep up with the growing demand,
several auto makers have started investing
heavily in various segments of the industry
during the last few months.
• The industry has attracted Foreign Direct
Investment (FDI) worth US$ 15.79 billion
during the period April 2000 to September
2016, according to data released by
Department of Industrial Policy and Promotion
(DIPP).

21. Government Initiatives
• The Government of India plans to introduce a new Green
Urban Transport Scheme with a central assistance of
about Rs 25,000 crore (US$ 3.75 billion), aimed at
boosting the growth of urban transport along low carbon
path for substantial reduction in pollution, and providing
a framework for funding urban mobility projects at
National, State and City level with minimum recourse to
budgetary support by encouraging innovative financing
of projects.
• Government of India aims to make automobiles
manufacturing the main driver of ‘Make in India’
initiative, as it expects passenger vehicles market to
triple to 9.4 million units by 2026, as highlighted in the
Auto Mission Plan (AMP) 2016-26.

22. Contd…
• The Government plans to promote eco friendly cars in
the country i.e. CNG based vehicle, hybrid vehicle, and
electric vehicle and also made mandatory of 5 per cent
ethanol blending in petrol.
• The government has formulated a Scheme for Faster
Adoption and Manufacturing of Electric and Hybrid
Vehicles in India, under the National Electric Mobility
Mission 2020 to encourage the progressive induction
of reliable, affordable and efficient electric and hybrid
vehicles in the country.

23. Road Ahead
• India’s automotive industry is one of the most competitive in
the world. It does not cover 100 per cent of technology or
components required to make a car but it is giving a good 97
per cent, as highlighted by Mr Vicent Cobee, Corporate Vice-
President, Nissan Motor’s Datsun.
• The Indian automotive aftermarket is estimated to grow at
around 10-15 per cent to reach US$ 16.5 billion by 2021
from around US$ 7 billion in 2016. It has the potential to
generate up to US$ 300 billion in annual revenue by 2026,
create 65 million additional jobs and contribute over 12 per
cent to India’s Gross Domestic Product.
• According to Mr Guillaume Sicard, president, Nissan India
Operations, the income tax rate cut from 10 per cent to 5
per cent for individual tax payers earning under Rs 5 lakh
(US$ 7,472) per annum will create a positive sentiment
among likely first time buyers for entry level and small cars.

24. Banking Industries in India
Healthy Growth of Banking Sector - Deposits
• During FY 06–16, deposits grew at a CAGR of
11.47 per cent and reached 1.46 trillion in FY16.
• Strong growth in savings amid rising disposable
income levels are the major factors influencing
deposit growth.
• Deposits under Pradhan Mantri Jan Dhan Yojana
(PMJDY), have also increased. As of October 2016,
US$ 6,755.5 million were deposited, while 249.8
million accounts were opened.

25. Introduction
• As per the Reserve Bank of India (RBI), India’s banking
sector is sufficiently capitalised and well-regulated.
The financial and economic conditions in the country
are far superior to any other country in the world.
• Indian banking industry has recently witnessed the roll
out of innovative banking models like payments and
small finance banks. The central bank granted in-
principle approval to 11 payments banks and 10 small
finance banks in FY 2015-16. RBI’s new measures may
go a long way in helping the restructuring of the
domestic banking industry.

26. Market Size
• The Indian banking system consists of 26 public sector
banks, 25 private sector banks, 43 foreign banks, 56
regional rural banks, 1,589 urban cooperative banks
and 93,550 rural cooperative banks, in addition to
cooperative credit institutions.
• Public-sector banks control nearly 80 percent of the
market, thereby leaving comparatively much smaller
shares for its private peers. Banks are also encouraging
their customers to manage their finances using mobile
phones.
• Standard & Poor’s estimates that credit growth in
India’s banking sector would improve to 11-13 per cent
in FY17 from less than 10 per cent in the second half of
CY14.

27. Investments/developments
• RBL Bank Limited, an Indian private sector bank, has raised Rs 330
crore (US$ 49.6 million) from a UK-based development finance
institution CDC Group Plc, which will help RBL to strengthen the
capital base to meet future requirements.
• India’s first small finance bank called the Capital Small Finance Bank
has started its operations by launching 10 branch offices in Punjab,
and aims to increase the number of branches to 29 in the current
FY 2016-17.
• India's largest public sector bank, State Bank of India (SBI), has
opened its first branch dedicated to serving start-up companies, in
Bengaluru.
• Kotak Mahindra Bank Limited has bought 19.9 per cent stake in
Airtel M Commerce Services Limited (AMSL) for Rs 98.38 crore (US$
14.43 million) to set up a payments bank. AMSL provides semi-
closed prepaid instrument and offers services under the ‘Airtel
Money’ brand name

28. Government Initiatives
• In July 2016, the government allocated Rs 22,915 crore (US$ 3.41
billion) as capital infusion in 13 public sector banks, which is
expected to improve their liquidity and lending operations, and
shore up economic growth in the country.
• The Reserve Bank of India (RBI) has released the Vision 2018
document, aimed at encouraging greater use of electronic payments
by all sections of society by bringing down paper-based transactions,
increasing the usage of digital channels, and boosting the customer
base for mobile banking.
• To reduce the burden of loan repayment on farmers, a provision of
Rs 15,000 crore (US$ 2.2 billion) has been made in the Union Budget
2016-17 towards interest subvention.
• Under Pradhan Mantri Jan Dhan Yojna (PMJDY), 250.5 million
accounts! have been opened and 192.2 million RuPay debit cards
have been issued as of October 12, 2016. These new accounts have
mustered deposits worth almost Rs 44,480 crore (US$ 6.67 billion).
• Government of India aims to extend insurance, pension and credit
facilities to those excluded from these benefits under the Pradhan
Mantri Jan Dhan Yojana (PMJDY).

29. Road Ahead
• The Indian economy is on the brink of a major transformation, with
several policy initiatives set to be implemented shortly.
• Positive business sentiments, improved consumer confidence and
more controlled inflation are likely to prop-up the country’s the
economic growth.
• Enhanced spending on infrastructure, speedy implementation of
projects and continuation of reforms are expected to provide further
impetus to growth.
• All these factors suggest that India’s banking sector is also poised for
robust growth as the rapidly growing business would turn to banks
for their credit needs.
• The banking sector is laying greater emphasis on providing improved
services to their clients and also upgrading their technology
infrastructure, in order to enhance the customer’s overall experience
as well as give banks a competitive edge.

30. Governments intervene in markets when they
inefficiently allocate resources
Introduction
• Governments intervene in markets to address
inefficiency.
• In an optimally efficient market, resources are perfectly
allocated to those that need them in the amounts they
need.
• In inefficient markets that is not the case; some may
have too much of a resource while others do not have
enough. Inefficiency can take many different forms.
• The government tries to combat these inequities
through regulation, taxation, and subsidies.
• Most governments have any combination of four
different objectives when they intervene in the market.

31. Maximizing Social Welfare
• In an unregulated inefficient market, cartels and other
types of organizations can wield monopolistic power,
raising entry costs and limiting the development of
infrastructure.
• Without regulation, businesses can produce negative
externalities without consequence.
• This all leads to diminished resources, stifled
innovation, and minimized trade and its corresponding
benefits. Government intervention through regulation
can directly address these issues.
• Another example of intervention to promote social
welfare involves public goods. Certain depletable
goods, like public parks, aren't owned by an individual.

32. Macro Economic Factors
• Governments also intervene to minimize the
damage caused by naturally occurring
economic events.
• Recessions and inflation are part of the natural
business cycle but can have a devastating
effect on citizens.
• In these cases, governments intervene through
subsidies and manipulation of the money
supply to minimize the harsh impact of
economic forces on its constituents.

33. Socio-Economic Factors
• Governments may also intervene in markets to
promote general economic fairness .
• Government often try, through taxation and
welfare programs, to reallocate financial
resources from the wealthy to those that are
most in need.
• Other examples of market intervention for
socioeconomic reasons include employment laws
to protect certain segments of the population
and the regulation of the manufacture of certain
products to ensure the health and wellbeing of
consumers.

34. Thank You