SYBCom Business Economics Semester IV 2014

Dr Ranga Sai
SY BCom Semester IV
Business Economics Paper II (Recent Issues of Indian Economy)
Module I Basic Issues in Economic Development

New Economic Policy 1991: Rationale and Key, Policy Changes Trends in National
Income and Per Capita Income Sectoral Composition of National Income and
Occupational Structure Inclusive Growth Progress of Human Development Index in
India ( post 1991 ) Health, Gender Related Development and Economic Indicators
Government Policy w.r.t. Education and Health Recent Trends in Employment
Problems of Unemployment
Module II Agricultural Sector in India
Trends in Agricultural Production and Productivity New Agricultural Policy 2000 and
Recent Policy Measures Public Distribution System and Food Security WTO and
Indian Agriculture
Module III Industry and Service Sectors in India
Industrial Development Since 1991: Growth and Diversification MRTP and Competition
Act Comprehensive Policy Package for SSIs 2000 and Recent Policy Measures Service
sector: Growth and Performance since 1991.
Semester IV
October 2014
Module IV Banking and Monetary Policy Since 1991

Banking Sector Reforms since 1991: Rationale and Measures Structure of Banking in
India Performance of Commercial Banks Developmental and Promotional Functions of
RBI RBIs Recent Measures of Money Supply Inflation: Trends and Causes Recent
Changes in Monetary Policy in India
S.Y.B.Com.
Lecture Notes
Dr. Ranga Sai

Vaze College, Mumbai
Business Economics Paper II

Revised October 2014
SYBCom Semester IV Business Economics ( wef June 013
Dr Ranga Sai
SYBCom : Business Economics Paper II

Semester IV
Based on the syllabus prescribed by University o Mumbai
[With effect from June 2013]
Module I : Basic Issues in Economic Development

New Economic Policy 1991: Rationale and Key, Policy Changes Trends in
National Income and Per Capita Income Sectoral Composition of National
Income and Occupational Structure Inclusive Growth Progress of Human
Development Index in India ( post 1991 ) Health, Gender Related
Development and Economic Indicators Government Policy w.r.t. Education
and Health Recent Trends in Employment Problems of Unemployment
Module II : Agriculture, Industry and Service Sectors
Trends in Agricultural Production and Productivity New Agricultural Policy
2000 and Recent Policy Measures Public Distribution System and Food
Security WTO and Indian Agriculture
Module III :Industry and Service Sectors in India
Industrial Development Since 1991: Growth and Diversification MRTP and
Competition Act Comprehensive Policy Package for SSIs 2000 and Recent
Policy Measures Service sector: Growth and Performance since 1991.
Module IV : Banking and Monetary Policy Since 1991
Banking sector reforms since 1991: Rational and measures Structure of
Banking in India performance of commercial banks since 1991
Promotional and Developmental functions of RBI, RBIs recent measures of
Money supply-Trends and Causes of Inflation since 1991 Recent changes in
monetary policy in India.
For private circulation only

Available at www.rangasai.com
Dr Ranga Sai
Contents
Module I :Basic Issues in Economic Development
New Economic Policy 1991
Trends in National Income and Per Capita Income
Sectoral Composition of National Income and Occupational Structure
Inclusive Growth
Progress of Human Development Index in India
Human Development and Health,
Human Development and education
Gender Related Development and Economic Indicators
Recent Trends in Employment
Module II : Agriculture
Significance of Agriculture
Trends in Agricultural Production and Productivity
New Agricultural Policy 2000 and
Recent Policy Measures
Public Distribution System
Food Security
WTO and Indian Agriculture
Module III : Industry and Service Sectors in India
Industrial Development Since 1991
MRTP and Competition Act
Small and m,edium industries: Policy Package for SSIs 2000
Service sector: Growth and Performance since 1991.
Module IV : Banking and Monetary Policy Since 1991
Banking sector reforms since 1991
Structure of Banking in India performance since 1991
Reserve Bank of India Promotional and Developmental functions
RBIs recent measures of Money supply
Trends and Causes of Inflation since 1991
Recent changes in monetary policy in India.
Dr Ranga Sai
Dear Student friends

During these days of commercialization it becomes very difficult to find
information on web which is relevant, authentic as well as free.
We believe that knowledge should be free and accessible to all those who
need.
With this intention the notes, which are originally intended for the students of
Vaze College, Mumbai, are made available to all, without any restrictions.
These notes will be useful to all the S.Y.B.Com students of University of
Mumbai, who will be writing their Business Economics Paper III
examinations on or after March 2014. Distance Education students are advised
to refer the recommended syllabus.
This is neither a text book nor an original work of research. It is simple
reading material, complied to help the students readily understand the subject
and write the examinations. We no way intend to replace text books or any
reference material.
This is purely for academic purposes and do not have any commercial value.
Feel free to use and share.
We solicit your opinions and suggestions on this endeavor.
Dr. Prof. Ranga Sai

rangasai@rangasai.com
October 2014
Dr Ranga Sai
Module I
Basic Issues in Economic Development
New Economic Policy 1991: Rationale and Key, Policy Changes Trends in National
Income and Per Capita Income Sectoral Composition of National Income and
Occupational Structure Inclusive Growth Progress of Human Development Index in
India ( post 1991 ) Health, Gender Related Development and Economic Indicators
Government Policy w.r.t. Education and Health Recent Trends in Employment
New Economic Policy of 1991

The Indian Government has introduced many Economic Reforms in India
since 1991. In 1990-91 India had to face grave economic problem. India
was facing serious deficiency in her foreign trade balance and it was
increasing. Since 1987-88 till 1990-91 it was increasing in such a rapid scale
that by the end of 1990-91 the amount of this deficit balance became 10,644
crores of rupees.
Need for A major Policy change
1. Economic instability monetary deficit reached 8.4percent of GDP.
Current account deficit $9.9 billion
2. Unfavorable balance of payments- trade share decreased to
0.4percent in 1991 from 2percent in 1951
3. Petroleum crisis Gulf war foreign remittances decreased,
petroleum prices increased $34
4. Shortage of forex reserves - $1 Billion
5. Debt burden : 1990-91 it was 62.5percent of GDP
6. Scanty industrial growth 1950-80 growth rate was 3.5 percent
7. Fall in economic growth 2.6percent
8. Inflation : 11.2 percent in 1991
9. Wave of liberalization Germany, EC, China
10. Collapse of Soviet union
The main characteristics of new Economic Policy 1991 are:
a. Delicencing. Only six industries were kept under licensing
scheme.
b. Entry to Private Sector. The role of public sector was limited
only to four industries; rest all the industries were opened for
private sector also.
c. Disinvestment. Disinvestment was carried out in many public
sector enterprises.
Dr Ranga Sai
d. Liberalization of Foreign Policy. The limit of foreign equity was

raised to 100percent in many activities, i.e., NRI and foreign
investors were permitted to invest in Indian companies.
e. Liberalization in Technical Area. Automatic permission was
given to Indian companies for signing technology agreements
with foreign companies.
f. Setting up of Foreign Investment Promotion Board (FIPB). This
board was set up to promote and bring foreign investment in
India.
g. Setting up of Small Scale Industries. Various benefits were
offered to small scale industries.
Three Major Components or Elements of New Economic Policy:
There are three major components or elements of new economic policy1. Liberalization
2. Privatization
3. Globalization
4. Marketization
1. Liberalization:
Liberalization refers to end of license, quota and many more restrictions and
controls which were put on industries before 1991. Indian companies got
liberalization in the following way:
A. Abolition of license except in few.
B. No restriction on expansion or contraction of business activities.
C. Freedom in fixing prices.
D. Liberalization in import and export.
E. Easy and simplifying the procedure to attract foreign capital in India.
F. Freedom in movement of goods and services
G. Freedom in fixing the prices of goods and services.
2. Privatization:
Privatization refers to giving greater role to private sector and reducing the
role of public sector. To execute policy of privatization government took the
following steps:
A. Disinvestment of public sector, i.e., transfer of public sector
enterprise to private sector
B. Setting up of Board of Industrial and Financial Reconstruction
(BIFR). This board was set up to revive sick units in public sector
enterprises suffering loss.
C. Dilution of Stake of the Government. If in the process of
disinvestments private sector acquires more than 51percent
shares then it results in transfer of ownership and management to
the private sector.
Dr Ranga Sai
3. Globalization:
It refers to integration of various economies of world. Till 1991 Indian
government was following strict policy in regard to import and foreign
investment in regard to licensing of imports, tariff, restrictions, etc. but after
new policy government adopted policy of globalization by taking following
measures:
Import Liberalization- Government removed many restrictions
from import of capital goods.
Foreign Exchange Regulation Act (FERA) was replaced by
Foreign Exchange Management Act (FEMA)
Rationalization of Tariff structure
Abolition of Export duty.
Reduction of Import duty.
As a result of globalization physical boundaries and political boundaries
remained no barriers for business enterprise. Whole world becomes a global
village.
Globalization involves greater interaction and interdependence among the
various nations of global economy.
4. Market Friendly State:
The role of the state is to ensure a smooth functioning of the market economy.
For this, the state has to ensure stability in the market through the use of
macro economic policies. The state will also intervene in the market when it
fails.
Trends in National Income

Trends in National Income
The gross domestic product (GDP) or gross domestic income (GDI) is one of
the measures of national income and output. GDP can be defined in three
ways, which should give identical results. First, it is equal to the total
expenditures for all final goods and services produced within the country in a
specified period of time (usually a 365-day year). Second, it is equal to the
sum of the value added at every stage of production by all the industries, plus
taxes and minus subsidies on products. Third, it is equal to the sum of the
income generated by production like compensation of employees, taxes on
production and imports less subsidies, and gross operating surplus.
GDP per capita is obtained by dividing the countrys gross domestic product,
adjusted by inflation, by the total population.
Dr Ranga Sai
Plan
I Plan
II Plan
III Plan
IV Plan
V Plan
VI Plan
VII Plan
VIII Plan
IX Plan
X Plan
XI Plan
GDP growth
3.7
4.2
2.8
3.4
4.9
5.4
5.6
6.6
5.0
7.6
7.9
Growth per
capita income
2.4
2.2
0.3
0.9
2.6
3.1
3.3
4.6
3.5
5.9
6.3
1951-1965: Post independence the country was wrought with economic

stagnation and extreme poverty, as a result this phase witnessed rapid
industrialization. While the agricultural sector contributed more than
50percent to the GDP, the consumer goods industry were completely
neglected. As a result the growth rate kept fluctuating during this period.
1966-80: During this period, Indias economic growth can be characterized by
one word volatile. The 1971 war with Pakistan, successive changes In
Government in the late
1970s and the huge drought in 1979 which affected nearly 200 million people
in the agricultural sector, had a major impact on the national income.
1981-1991: In the 1980s, the businesses were able to drive efficiency and
react to supply and demand incentives, the economy took off. The plan laid
stress on improving the productivity level of industries by upgrading of
technology. So, the national income always increased as depicted by the graph
shown. Progress toward that goal was slow but steady. In the late 1980s,
however, India relied on foreign borrowing to finance development plans
to a greater extent than before.
Trend since 1991: Economic liberalization of India began in 1991. The
economic abolished license raj, reduced tariffs, removed entry-exit barriers
and ended various trade barriers. The period from 1991 saw the Indian
economy get integrated with global economy and the steady flow of foreign
investment chipped in. The structural reforms and the stabilization measures
undertaken since have had far reaching effects on the Indian economy. Deregulation, Liberalization and Globalization was able to attract international
capital and modern technology.
The Indian economy has undergone substantial changes since the introduction
of economic reforms in 1991. These reforms were a comprehensive effort
consisting of three main components namely, liberalization, privatization and
Dr Ranga Sai
globalization. They included various measures like deregulating the markets

and encouraging private participation; trade liberalization; dismantling the
restrictions on domestic and foreign investments; reforming the financial
sector and the tax system, etc. All such policy initiatives radically changed the
economic set-up of the country and integrated it with the rest of the world.
Thus, India was placed in a globally competitive position so as to fully utilize
its potentials and opportunities for rapid growth of the economy.
Net National Product (NNP) at factor cost (at 1993-94 prices) increased from
0.5 per cent in 1991-92 to 6.3 per cent in 1999-2000. It increased to 8.8
percent in 2003-04 at 1999-2000 prices. Similarly, per capita NNP increased
from -1.5 per cent to 4.4 percent and then to 7.0 percent during the same
period. Gross National Product (GNP) at factor cost (at 1993-94 prices)
increased from 1.1 per cent in 1991-92 to 6.2 percent in 1999-2000. It
increased to 8.7 percent in 2003-04 at 1999-2000 prices. Gross Domestic
Product (GDP) at factor cost ( at 1999-2000 prices) has increased from 4.4
percent in 2000-01 to 7.5 per cent in 2004-05.
The industrial sector has been going through a process of restructuring and
consolidation after liberalization. The industries have responded to the
reforms through mergers and acquisitions, adoption of cost cutting measures,
foreign collaboration, technology up gradation and outward orientation in
sectors such as cement, steel, aluminum, pharmaceuticals, and automobiles.
Industrial growth increased sharply in the first five years after the reforms, but
then slowed to an annual rate of 4.5 percent in the next five years. From low
growth rate of 2.7 per cent in 2001-02, the industry sector grew at a rate of 7.1
per cent in 2002-03 and further to 9.8 per cent in 2004-05.
There has been steady and continuous rise in supply of money in the economy
since initiation of reforms. Reserve Money(Mo) has increased
from Rs. 99,505 crores in 1991-92 toRs. 573066 crores (Provisional) in 200506. Narrow money (M1) has increased from Rs.114406 crores to Rs. 825245
crores (Provisional), while, broad money (M3) has increased from Rs. 317049
crores to Rs. 2729535 crores (Provisional) during the same period.
Low and volatile growth rates in Indian agriculture and allied sectors was
reflected in the average annual growth rate of value added in the sector
declining from 4.7 per cent during the Eighth Plan (1992-1997) to 2.1 per cent
during the Ninth Plan (1997-2002). From negative growth rate of -7.2 percent
in 2002-03, the agriculture sector grew at a rate of 10.0 per cent in 2003-04
and at a rate of 6.0 per cent in 2005-06.
As a proportion of GDP, the share of exports, which had grown from 5.8 per
cent in 1990-91 to 12.2 per cent in 2004-05, grew further to 13.1 per cent in
Dr Ranga Sai
2005-06. The corresponding rise in imports was from 8.8 per cent in 1990-91
to 17.1 per cent in 2004-05 and further to 19.5 per cent in 2005-06. Thus,
trade deficit as a proportion of GDP, which had declined from 3.0 per cent in
1990-91 to 2.1 per cent in 2002-03, widened to 4.9 per cent in 2004-05 and
further to 6.4 per cent in 2005-06.
The recent trends show that the 2012-13 per-capita national income in real
terms is estimated to have risen to Rs.39,168 from Rs.38,037 in 2011-12. The
growth rate in per-capita income is estimated at 3percent in 2012-13 against
4.7percent in 2011-12.
Inclusive growth
Inclusive growth is a process, in which, economic growth, measured by a
sustained expansion in GDP, contributions to opportunity, capabilities, access
and security.
Inclusive Growth basically means the following:
1. Opportunity: The economy should generate more and varied
ways for people to earn a living and increase their incomes
over time.
2. Capability: The economy shall provide the means for people
to create or enhance their capabilities in order to exploit
available opportunities.
3. Access: The economy shall provide the means to bring
opportunities and capabilities together.
4. Security: The economy shall provide the means for people to
protect themselves against a temporary or permanent loss of
livelihood.
Inclusive growth and India

Poverty Reduction and increase in quantity and quality of
employment: There are 458 million workers in India in 200405. Out of this 423 million workers are unorganized workers
(92 percent). Thus, quality of employment needs to be
improved. Workers in this sector do not have social security.
Government shall provide minimum social security to
unorganized workers
Agricultural Development: The agricultural growth has been
reducing from 3.5 percent during 1981-97 to 2 percent
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during 1997-2005. There are land and water problems.

Agricultural policy shall consider these aspects. There are
disparities in growth across regions and crops: growth rate
declined more in rain fed areas. The per capita land
availability is fast decreasing. There is a reduction in share of
employment (still 55 percent )
Social Sector Development: In social sector there is a need for

significant achievements in education and health. The Human
development index rank is 127 out of 170 countries. The
problems in Social Sector are slow progress, large regional,
social and gender disparities, low level and slow growth in
public expenditures particularly on health, poor quality
delivery systems, privatization of health and education
Reduction in regional disparities: There are significant
regional disparities in India. In terms of per capita income the
highest is Rs.16,679 in Punjab and lowest at Bihar with
Rs.3557. Female infant mortality varies from 12 in Kerala to
88 in Madhya Pradesh. These disparities are mostly due to
low investment in physical and human capital, Technology
and bad governance
Protecting the environment: There is a need to prevent
degradation of land, water, and control in pollution levels. The
challenges of climate need to be met effectively. Finally,
higher economic growth should not lead to decline in our
environment
Human Development Index and Human Resource

Development
Human development is a process of developing quality embodied in human
beings. According to human development report 1997, Human development is
a process of widening peoples choice as well as raising the level of well
being achieved.
The Human Development Index (HDI) is a statistical tool used to measure a
country's overall achievement in its social and economic dimensions.
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Pakistani economist Mahbub ul Haq created HDI in 1990 which was further
used to measure the country's development by the United Nations
development Program (UNDP). Calculation of the index combines four major
indicators: life expectancy for health, expected years of schooling, mean of
years of schooling for education and Gross National Income per capita for
standard of living.
UNDP measures HD in terms of HDI. This is a composite index
encompassing selected information on literacy and education, expectation of
life at birth and measures of material well being. HDI shows the quality of life
of the people.
The Human Development Index (HDI) is the measure of life expectancy,
literacy, education, standard of living, and GDP per capita for countries
worldwide. It is a standard means of measuring well-being, especially
child welfare.
The HDI human development index is a summary composite index that
measures a country's average achievements in three basic aspects of human
development: longevity, knowledge, and a decent standard of living.
Longevity is measured by life expectancy at birth; knowledge is measured by
a combination of the adult literacy rate and the combined primary, secondary,
and tertiary gross enrolment ratio; and standard of living by GDP per capita
The HDI combines three basic dimensions:
Life expectancy at birth, as an index of population health and
longevity
Knowledge and education, as measured by the

adult literacy rate (with two-thirds weighting) and the
combined primary, secondary, and tertiary gross enrollment
ratio (with one-third weighting).
Standard of living, as measured by the natural
logarithm of gross domestic product(GDP) per capita
at purchasing power parity (PPP)
Countries with high HDI are USA, Japan and Norway with HDI 0.8 and
above. These are countries with high HDI ranking.
HDI lower than 0.5 are poor countries like Pakistan and Bangladesh
India with HDI of 0.577 ranks 124th belongs to group with HDI score. HDI
Score between 0.5 and 0.8 are called medium countries.
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The national human development index report for India found that Kerala
ranks top of the list with a HDI of 0.638 and Bihar ranks the last with HDI of
0.367. The next top three positions go to Punjab, Tamilnadu, and Maharashtra
with HDI value of over 0.52. The lowest three states apart from Bihar are
M.P, U.P, and Assam.
The Gender Empowerment Measure (GEM) is a measure of inequalities
between men's and women's opportunities in a country. It combines
inequalities in three areas: political participation and decision making,
economic participation and decision making, and power over economic
resources. It is one of the five indicators used by the United Nations
Development Programme in its annual Human Development Report
The gender empowerment measure is a composite indicator that captures
gender inequality in three key areas:
1. Political participation and decision-making, as measured by
womens and mens percentage shares of parliamentary
seats;
2. Economic participation and decision-making power, as
measured by two indicatorswomens and mens
percentage shares of positions as legislators, senior officials
and managers and womens and mens percentage shares of
professional and technical positions;
3. Power over economic resources, as measured by womens
and mens estimated earned income
Dr Ranga Sai
Human Development through Education

Education is universally recognized as an important element of HD. It plays
an important role in economic growth and population control.
There has been an increase in Gross Enrolment Ratios in the field of
education. Gross Enrolment Ratio has improved in both primary and upper
primary levels during the period of 1950-51 to 2005-06.
According to economic survey 2006-07, Gross Enrolment Ratio of the
primary level has risen from 42.6 percent in 1950-51 to 95.4 percent in 200203. Similarly GER at upper primary level has increased from 12.7 percent to
60.9 percent in the same period.
The literacy rate of the country as a whole has increased from 18.33 percent to
65.38 percent between 1951-2001.The literacy rate for males has increased
from 27.16 percent to 75.85 percent and for females from 8.86 percent to
54.16 percent during the same period. The growth rate of literacy during 1991
to 2001 has been higher in case of females as compared to males and has been
higher in rural areas as compared to urban areas.
But after this much growth also we have not achieved that level of growth
where there is complete literacy. The failures of literacy are due to:
Lower enrollment of girls

Increase in number of students per teacher
High dropout rates
Inadequate infrastructure
Neglect of quality in education
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Human development through health

As it is rightly said health is wealth, health forms an important aspect of HD.
In India over the years economic growth and development are not merely
confined to increased GDP or per capita income but in broader terms it has
been extended to enhancement of human well being .This includes not only an
adequate level of consumption of food and other types of consumer goods but
also access to basic social services especially education, health, safe and clean
drinking water, sanitation as well as expansion of economic and social
opportunities for all individuals.
In India social welfare and social security measures were introduced only after
independence:
1.
Employees State Insurance Act,1948 was passed to provide

compulsory and contributory health insurance
2.
Family Pension: family pension schemes were introduced

from March 1st 1971 called Coal Mines Family Pension
Scheme and Employment Family Pension Scheme to
provide long term financial securities to families.
3.
Gratuity: The payment of gratuity act was passed in 1972.

According to this act completion of 5 years of service the
employees are entitled to gratuity payable at the rate of 15
days wages for each completed years of service.
4.
Maternity Benefit Act was enacted to provide uniform

standards for maternity protection
Achievements in Health Care

1.
The death rate dropped from 12.5 in 1981 to 8.5in 2007.The

death rate is expressed per thousand.
2.
Infant mortality reduced from 110 in 1981 to 68 in 2007.

Infant mortality expressed as deaths of infants below 12
months of age per thousand.
3.
The number of primary health centers increased from 5700

to 24000, between 1918 and 2007.
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4.
Increase in life expectancy: Life expectancy has increased

from 50.8 in 1981 to 60.3 in current levels.
5.
Control of diseases: national health programs are

implemented to control communicable and non
communicable diseases.
Limitations:
1.
2.
3.
4.
20 percent of population does not have access to safe

drinking water as a result of which they are affected by
water borne diseases.
Huge stock of food grains are held by government, yet a
good number of people suffer from hunger and malnutrition
People in India are reluctant to use of medical health until
the sickness becomes severe.
Due to population and congestion in urban areas there are
many health problems.
Human development through family welfare

Government of India has adopted several family welfare programs during
planning period. It aimed at:
1.
2.
3.
4.
5.
to stabilize the growth of population

to improve health of mothers and children
to reduce infant mortality rate and maternal mortality rate
to ensure responsible rate
to ensure responsible parenthood.
Nature of Unemployment in India

Types of Unemployment:
1. Frictional unemployment: This unemployment caused by people
moving in between jobs, e.g. graduates or people changing jobs.
There will always be some frictional unemployment.
2. Structural Unemployment: This occurs due to a mismatch of skills in
the labour market it can be caused by:
a) Occupational immobility's. This refers to the difficulties in
learning new skills applicable to a new industry, and
technological change.
b) Geographical Immobility's. This refers to the difficulty in
moving regions to get a job.
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c) Technological Change. If there is the developments of labour

saving technology in some industries there will be a fall in
demand for labour.
d) Structural change in the economy. The decline of the coal
mines due to a lack of competitiveness meant that many coal
miners were unemployed and they may find it more difficult
to get jobs in new industries such as computers.
3. Classical or Real Wage Unemployment: This occurs when wages in a
competitive labour market are pushed above the equilibrium. This is
sometimes known as "disequilibrium" unemployment. Wages will
also be sticky downwards. This could be caused by minimum wages,
or trades unions.
4. Demand Deficient or "Cyclical Unemployment": This occurs when
the economy is below full capacity. e.g. in a recession when AD
falls there will be a fall in output, therefore firms will employ less
workers because they are producing less goods.
5. Seasonal Unemployment: Unemployment tends to be higher during
certain times of the year, either in summer or winter depending on
the country.
The Expert Committee on Unemployment Estimates (1970) suggested three
different approaches to measure employment and unemployment.
The three approaches are:
1. Usual status approach with a reference period of 365 days
preceding the date of survey. The person is unemployed for
the entire period
2. Current weekly status : A person is considered to be employed
if he or she pursues any one or more of the gainful activities
for at least one-hour on any day of the reference week.
3. Current daily status The person is employed least one day of
the seven days of the reference period.
Trends in Employment
The growth in employment was 4.68 million per year between 2009-10
and 2011-12. Between 2004-05 and 2009-10 employment growth was,
however, lower, at 0.8 million per year, and was higher at 2.93 million
per year. The employment growth slowed between 2009-10 and 2011-12.
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In 2011-12, 36.4percent
percent of the Indian population
lation was active in the labour
force, that is, either working or actively seeking work according to the
UPS.2
.2 Of the total population, 35.4
35.4percent was employed and 2.7percent
2.7
was unemployed (or 5.6
5.6percent according to CDS).3 About 45percent
percent of
Indian workers
ers were engaged in agriculture and related activities, whereas
in 2009-10
10 it was just about 50percent.
50
In terms of type of employment, 50
50percent of Indian workers were self
selfemployed, 20percent were employed on a regular wage or salary, and
29percent were on a casual wage. Since 1999
1999-2000
2000 the proportion of self
selfemployed workers has been around 50
50percent (except in 2004-05,
05, when it
was 52percent).
). However, between 19
1999-2000 and 2011-12.
Participation in the labor force, the proportion of males in both rural and
urban areas was much higher than that of females.
Urban female participation, which also increased in 2004
2004-05,
05, fell in 2009
200910 and then increased marginally in 2011
2011-12,
12, but to a level lower than that
in 2004-05.
Rural female workers engaged in agriculture as a proportion of total
workers has declined since 1999
1999-2000,
2000, but the fall was more drastic
between 2004-05
05 and 2009
2009-10, and continued till 2011-12.
According to International Labor Organization (ILO) data, labor force
participation for pers
persons
ons aged 15 years and above in India was
55.6percent in 2011, while it was 69.9
69.9percent in Brazil, and 74.1percent
74.1
in
China. In the same year, the worker to population ratio was 53.6
53.6percent in
India, while it was 64.8percent
64.8
in Brazil and 70.9percent in Chi
China. India
has less labor participation levels seen in other developing countries.
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Employment policy since 1991

Planning commission task force on employment generation identifies the
following factors important in framing any policy on employment
Economic growth of > 8 percent, together with increasing

savings and investment, better infrastructure and fiscal
consolidation
Sectoral growth : growth in specific sectors like, agriculture
and allied activities, food processing, small scale industries
and service sector
Designing special employment programs for marginal
farmers, fishing and diary farming
Skill development through reforms in education
Emphasis on poorer states
Reforms in the labor laws
The government of India has come up with some employment generation and
poverty alleviation programs. The objective is to create more employment and
also improve the quality of present employment. The policy aimed at creating
10 million employment opportunities per year over the plan period; alongside
improve certain labour intensive sectors like agriculture, small industries and
tourism. This way, an additional 20 million jobs can be created.
Some of the employment programs launched since 1919 are:
Swarnjayanthi Gram Swarozgar Yojana

It was launched in April 1999 by merging programs like IRDP,
TRYSEM, DWCRA etc into a single self employment scheme.
Food for Work Programme
It was launched in February 2001 to give food through wage
employment in the drought affected areas in eight states. Wages
are paid by the state governments partly in cash and partly in
food grains. These are provided free of cost by the centre to the
drought affected states.
Pradhan Mantri Gram Sadak Yojana
This was launched in December 2000 to provide connectivity to
all rural areas with a population of more than 1000 by the year
2003 and with a population of more than 500 by the year 2007
through good roads.
Dr Ranga Sai
Samagra Awas Yojana

It was launched in 1999-2000 as a housing scheme to ensure
provision of shelter, sanitation and safe drinking water.
Pradhan Mantri Gramodaya Yojana
This program was launched in 2000-2001 focusing on five
important areas of village development, health, drinking water,
primary education, housing and rural roads with the aim of
improving the quality of life of people in rural areas.
Sampoorna Grameen Rozgar Yojana
It was launched in September 2001 to provide wage employment
and food security in rural areas and also to create durable
economic and social assets.
Jawahar Gram Samridhi Yojana
It was launched in April 1999 by restructuring the Jawahar
Rozgar Yojana and is implemented by Gram Panchayats for
creating productive community assets.
Employment for the urban poor: Under Nehru Rojgar Yojana,
earlier known as Urban Self employment Program, 7 lac man
days of employment was created . Similarly, during VIII Plan, 7
lac micro entrepreneurs were launched under Self employment
for Educated Youth.
Khadi and Village Industries Commission has played an active

role in reaching technology to rural households for promoting
cottage/micro enterprises.
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Module II:
Agriculture, Industry and Service Sectors
Trends in Agricultural Production and Productivity New Agricultural Policy 2000 and
Recent Policy Measures Public Distribution System and Food Security WTO and
Indian Agriculture
Indian agriculture
Although agriculture contributes only 21percent of Indias GDP, its importance
in the countrys economic, social, and political fabric goes well beyond this
indicator. The rural areas are still home to some 72 percent of the Indias 1.1
billion people, a large number of whom are poor. Most of the rural poor depend
on rain-fed agriculture and fragile forests for their livelihoods. The sharp rise in
foodgrain production during Indias Green Revolution of the 1970s enabled the
country to achieve self-sufficiency in foodgrains and stave off the threat of
famine. Agricultural intensification in the 1970s to 1980s saw an increased
demand for rural labor that raised rural wages and, together with declining food
prices, reduced rural poverty.
Sustained, although much slower, agricultural growth in the 1990s reduced rural
poverty to 26.3 percent by 1999/00. Since then, however, the slowdown in
agricultural growth has become a major cause for concern. Face Indias rice
yields are one-third of Chinas and about half of those in Vietnam and Helvetica
"Indonesia. With the exception of sugarcane, potato and tea, the same is true for
most other agricultural commodities.
The Government of India places high priority on reducing poverty by raising
agricultural productivity. However, bold action from policymakers will be
required to shift away from the existing subsidy-based regime that is no longer
sustainable, to build a solid foundation for a highly productive, internationally
competitive, and diversified agricultural sector.
Significance of Agricultural sector

(i) Share of Agriculture in National Income
Agriculture has got a prime role in Indian economy. Though the share of
agriculture in national income has come down, still it has a substantial share in
GDP The contributory share of agriculture in Gross Domestic Product was
55.4percent in 1950-51, 52percent in 1960-61 and is reduced to 18.5percent only
at present. The share of the agricultural sectors capital formation in GDP
declined from 2.2percent in the late 1999s to 1.9percent at present.
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(ii) Important Contribution to Employment

Agriculture sector, at present, provides livelihood to 65 to 70percent of the total
population. The sector provides employment to 58.4percent of countrys work
force and is the single largest private sector occupation.
(iii) Important Source of Industrial Development
Various important industries in India find their raw material from agriculture
sector -cotton and jute textile industries, sugar, vanaspati etc are directly
dependent on agriculture. Handloom, spinning oil milling, rice thrashing etc are
various small scale and cottage industries which are dependent on agriculture
sector for their raw material. This highlights the importance of agriculture in
industrial development of the nation.
(iv) Importance in International Trade
Indias foreign trade is deeply associated with agriculture sector. Agriculture
accounts for about 14.7percent of the total export earnings. Besides, goods made
with the raw material of agriculture sector also contribute about 20percent in
Indian exports. In other words, agriculture and its related goods contribute about
38percent in total exports of die country.
Agricultural productivity
Agricultural productivity has two aspects. Land productivity and labour
productivity. The former implies the productivity of land per hectare or acre
and the latter refers to the productivity per worker employed. Both land and
labour productivity in Indian agriculture is extremely low.
In the post-independence period, particularly after 1962, the previous
stagnant agricultural scenario was reversed and the following changes have
been observed:
1. There has been a steady increase in areas under cultivation.
2. There has been an increase in the intensity of cropping.
3. The production and productivity, particularly in case of wheat has
increased significantly.
Trends in Agricultural Productivity

a. Production of rice and wheat grew at 28.0 per cent and 23.6 per cent,
respectively, during 1967-68 while their yields during the same year
grew at 19.6 per cent and 24.4 percent, respectively.
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b. This was the first time that such high growth in production and yield of
both rice and wheat was witnessed in the country. These levels of
growth remain one of the highest achieved so far.
c. The development of high-yielding variety (HYV) of seeds in mid 1960s
and the subsequent use of the fertilizer-pesticides-irrigation package,
better seeds, improved irrigation and education of farmers led to
quantum jumps in the productivity. Consequently, production of wheat,
rice and food grains grew at an average rate of 21.9 per cent, 10.3 per
cent and 10.9 per cent, respectively, during the subsequent years 19671970.
d. High growth in production and yield continued during the subsequent
decades of 1970s and 1980s. Production of wheat, rice and food grains
during 1970s-1980s grew at an average rate of 5.1 per cent, 4.0 per cent
and 3.3 per cent, respectively.
e. The yields of wheat, rice and food grains grew at an average rate of 3.1
per cent for wheat and rice, and 2.9 per cent for food grains,
respectively, during the same period.
Growth of agricultural productivity

Rice
1970-90
1990-2010
1968-70
2006-11
3.1
1.2
7.9
1.3
Wheat
percent
Pulses
3.1
1.7
11.2
2.3
0.7
1.1
13.9
3.0
Food grains
2.9
1.6
8.1
2.4
Measures to improve Indian Agriculture

Various measures taken by the central and state governments from time to time,
some of them are:
1. To begin with government took lead in providing various facilities on its own.
In course of time different types of activities were entrusted to specific public
agencies.
2. The government abolished the zamindari system. It was followed with the
consolidation of small holdings to make them economically viable.
3. Another important input was the widespread use of radio and television for
acquainting farmers in new and improved techniques of cultivation.
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4. The crop insurance was another step to protect the farmers against losses
caused by crop failure on account of natural calamities like drought, flood,
hailstorm, cyclone, fire, diseases etc.
5. Easy availability of capital or investment input through a well-knit network of
rural banking and small scale cooperative societies with low interest rates were
other facilities provided to the farmers for modernisation of agriculture.
6. Special weather bulletins for farmers were introduced on radio and television.
7. The government announced minimum support price for various crops
removing the elements of uncertainty. It ensures minimum price for the crop
grown by the farmers.
National Policy on Agricultural 2000

The National Policy on agriculture aims at :
A growth rate in excess of 4 per cent per annum in the
agriculture sector
Growth that is based on efficient use of resources and

conserves our soil, water and bio-diversity;
Growth with equity, i.e., growth which is widespread across

regions and farmers;
Growth that is demand driven and caters to domestic markets

and maximizes benefits from exports of agricultural products in
the face of the challenges arising from economic liberalization
and globalization;
Growth that is sustainable technologically, environmentally and
economically.
Specific areas of policy:
1. Sustainable Agriculture: To promote technically sound,
economically viable, environmentally non-degrading, and
socially acceptable use of country's natural resources - land,
water and genetic endowment to promote sustainable
development of agriculture.
2. Food and Nutritional Security: To raise the productivity and
production of crops to meet the increasing demand for food
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generated by unabated demographic pressures and raw materials

for expanding agro-based industries.
3. Transfer of Technology: To improve the role of Krishi Vigyan
Kendras,
Non-Governmental
Organizations,
Farmers
Organizations, Cooperatives, corporate sector and paratechnicians in agricultural extension will be encouraged for
organizing demand driven production systems.
4. Resource management: Emphasis is placed on resource
management in respect of soil, water, and land. Technologies
have been developed to improve the quality of land and soil
resources, soil resource maps for some states have been
prepared and crop weather relationship models have been
developed for different agro ecosystems.
Policy outline
1. Privatization of agriculture
2. Private sector participation for technology transfer, capital
flow and development of horticulture
3. Increase in investment for better human resource
development
4. Agricultural research
5. Guards against quantitative restrictions of WTO
6. National livestock breeding strategy
7. Developing plant varieties
8. Review of excise duty on farm machinery
9. Rural Electrification
10. Developing renewable sources of energy
11. Package insurance policy in rural sector
Farmers Policy 2007
In continuation with the National Policy of Indian Agriculture, the
Government enacted the Farmers Policy in 2007. The policy aims at:
1.
2.
3.
4.
5.
6.
7.
8.
Economic wellbeing of farmers

New technologies
Agricultural bi-security system
Support services to women
Credit and insurance
DnyaChuapaals provide Information and Communication
technology for farmers
Minimum support price on crops to farmers
Food security
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Public distribution system

Evolution of public distribution of grains in India had its origin in the
'rationing' system introduced by the British during the World War II. In view
of the fact that the rationing system and its successor, the public distribution
system (PDS) has played an important role in attaining higher levels of the
household food security and completely eliminating the threats of famines
from the face of the country, it will be in the fitness of things that its
evolution, working and efficacy are examined in some details.
The system was started in 1939 in Bombay and subsequently extended to
other cities and towns. The Department of Food under the Government of
India was created in 1942, which helped in food matters getting the serious
attention of the government. On attaining Independence, India was forced to
reintroduce it in 1950 in the face of renewed inflationary pressures in the
economy immediately after independence "which were accentuated by the
already prevailing high global prices of foodgrains at the end of the War.
It was also decided to have two variations of the system, Statutory Rationing
Areas, where foodgrains availability was. supposed to be only through the
Ration Shops and Non-Statutory Rationing Areas, where such shops would
only supplement the open market availability.
Objectives of Public distribution system
o Providing food grains and other essential items to

vulnerable sections of the society at reasonable
(subsidised) prices;
o to have a moderating influence on the open market prices
of cereals, the distribution of which constitutes a fairly big
share of the total marketable surplus; and
o to attempt socialisation in the matter of distribution of
essential commodities.
o to provide to the beneficiaries two cereals, rice and wheat
and four essential commodities viz. sugar, edible oil, soft
coke and kerosene oil.
Review of PDS in India
Its greatest achievement lies in preventing any more famines in India. As
recently as during the 1987 drought, considered worst in the century, the PDS
helped the country overcome it with dignity and effectiveness.
PDS is not cost effective, its operations are too costly and the ratio between
procurement and transportation is too high pointing to 'wasteful' movements.
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it has been found that "the value of the subsidy is so little even for those
households who make all their purchases of cereals from rationshops.
The main weakness in PDS i.e. not reaching poor effectively
Suggestions for improvement
o Retail price at FPSs should be uniform throughout the state/area after
weight-averaging the transport cost for the FPS.
o Regular supply of good quality grains has to be ensured.
o Entitlement card's easy availability and improvement in its design and
durability.
o FPS doorstep delivery of PDS commodities instead of delivery to FPS
owners at FCI godowns.
o Improvement in the viability of FPSs.
o Enlarging the basket of PDS commodities to enhance its utility as also
to improve economic viability of FPSs.
o Streamlining of the supply chain by construction of small intermediary
godowns between FCI's base godown and FPSs in the interior.
o Introduction of a more effective Management Information System.
o A number of new FPS to be opened so that physical access of
beneficiaries is improved;
o Special campaign to be mounted by the state governments to cancel the
bogus entitlement cards and to issue new cards to households found to
be without them;
o To progressively bring more and more FPS under the system of FPS
doorstep delivery of PDS commodities;
o Set up vigilance committees of local people with substantial
representation of women for each FPS at the village level and also at
higher levels;
o Improve the supply chain by constructing or hiring small intermediary
godowns;
Food Security in India

Food security means availability of food to all people all the time. Food
security has following dimensions:
a. Availability of food: This means the food production within the
country, food imports and previous years stock stored in government
granaries.
b. Accessibility of food: This means food should be within reach of every
person.
Dr Ranga Sai
c. Affordability: This means that every individual has enough money to

buy sufficient, safe and nutritious food to meet ones dietary needs.
The National Food Security

The National Food Security Act, 2013 (Right to Food Act) is an Act of
the Parliament of India which aims to provide subsidized food grains to
approximately two thirds of India's 1.2 billion people.
Salient features of Food security
a. 75percent rural and 50percent of the urban population are entitled for
three years from enactment to five kg food grains per month at Rs
3 , Rs 2 , Rs 1 ) per kg for rice, wheat and coarse grains, respectively;
b. The states are responsible for determining eligibility;
c. Pregnant women and lactating mothers are entitled to a nutritious "take
home ration" of 600 Calories and a maternity benefit of at least Rs
6,000 for six months;
d. Children 6 months to 14 years of age are to receive free hot meals or
"take home rations";
e. The central government will provide funds to states in case of short
supplies of food grains;
f. The current food grain allocation of the states will be protected by the
central government for at least six months;
g. The state government will provide a food security allowance to the
beneficiaries in case of non-supply of food grains;
h. The Public Distribution System is to be reformed;
i. The eldest woman in the household, 18 years or above, is the head of
the household for the issuance of the ration card;
j. There will be state- and district-level redress mechanisms; and
k. State Food Commissions will be formed for implementation and
monitoring of the provisions of the Act.
l. The cost of the implementation is estimated to be $22 billion(1.25 lac
crore), approximately 1.5percent of GDP.
m. The poorest who are covered under the Antodaya yojna will remain
entitled to the 35 kg of grains allotted to them under the mentioned
scheme.
Limitations
o High fiscal burden- subsidy cost above 1.25 lakh crore rupees per year.
(Budget 2014 allotted 1.15 lakh crores, out of that, 88000 crore
specially for Food security act.)
o Government will have to keep large stock of foodgrains but FCI storage
capacity insufficient.
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o If so much food grains kept out of open market will cause food
inflation, and middle class will suffer.
o Government may have to import foodgrain during drought years
leading to an additional current account deficit.
o An Adult needs ~14kg foodgrain. While NFSA gives only 5 kg per
person to Priority households.
o Focusing only cereal. What about pulses (to give protein), edible oil (to
give fat), fruits, vegetables (for vitamin) and milk- to combat
malnutrition?
o Malnutrition has its connections with lack of sanitation and medical
facilities in rural areas. NFSA alone insufficient.
o Parliamentary standing Committee has recommended GPS tracking of
trucks, CCTVs in go-downs to prevent diversion. But this are not
implemented.
o identifying households eligible for this scheme will be a big challenge
o Section 44 of the act: During natural calamity and wars- Union and
state govt. will not be responsible for non-supply of foods.
o Stopping institutional corruption in state PDS machinery is difficult.
WTO and India Agriculture

From 1947 to 1994, General Agreement on Trade and Tariff (GATT) was the
forum for managing trade barriers. The World Trade Organization (WTO)
was established on 1st January 1995. . The WTO has 148 members,
accounting for over 97 percent of world trade. Around 30 others are
negotiating membership.
WTO prescribes several conditions governing trade agreements in service
sector, intellectual property rights, international disputes and also agriculture.
Important among them is the Agreement on Agriculture.
WTO Agreement on agriculture covers
1. Market access: This involves tariffication, and reduction in
tariff and access opportunities. Tariffication means all nontariff barriers like quotas, variable levies, minimum support
prices, discretionary licensing and state trading measures need
to be placed with tariffs. This is 24 percent for developing
countries.
2. Domestic support: Policies are subject to reduction, from the
total support given 1986-88. Total Aggregate Measure of
Support (Total AMS) shall be 13 percent.
3. Export subsidies: Export subsidy expenditure to be reduced to
36 percent and for developing countries is 24 percent.
Dr Ranga Sai
As special differential treatment, developing countries are permitted

untargeted subsidized food distribution to meet requirements of urban and
rural poor.
In operation WTO prescribes four fold approach:
Green Box: It contains fixed payments to producers for
environmental programs, so long as the payments are not a part
of current production
Blue Box: Minimum support price and direct payments to
agriculture
Special and differential box: Investment subsidies
Amber Box: Contains domestic subsidies that governments
have agreed to reduce but not eliminate. The Blue Box contains
subsidies which can be increased without limit, so long as
payments are linked to production-limiting programs.
India and WTO:
India has undertaken is to bind its tariffs on primary agricultural products
at 100 percent; processed foods at 150 percent; and edible oils at 300
percent. Further, Indias share in total agricultural exports from
developing Asia is 8 percent
Maintains quantitative restrictions due to Balance of
Payments reasons
No commitment regarding market access.
Green box is considered with development box
Agricultural exports do not get direct subsidy.
Indirect subsidy by way of exemption of export profit from
Income tax
Subsidies on cost of freight on export shipment of fruits,
vegetables, floral products
Share of Indian agriculture in world market is negligible
except rice
Subsidies of rich nations does not effect Indian exports
Indian products are cost effective
No fear of Indian markets being flooded by imports
It is important to protect food and livelihood security to
alleviate poverty, rural development and employment
There is a need to create opportunities for expansion of
agricultural exports with meaningful market access in
developing counties.
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Module III
Industry and Service Sectors in India
Industrial Development Since 1991: Growth and Diversification MRTP and Competition
Act Comprehensive Policy Package for SSIs 2000 and Recent Policy Measures Service
sector: Growth and Performance since 1991.
Monopolies and Restrictive Trade Practices Act, 1969

The Monopolies and Restrictive Trade Practices Act, 1969 is a competition
law of India. It is based on the ground that that the operation of the economic
system does not result in the concentration of wealth and means of production
to the common detriment.
The Monopolies Inquiry Commission (MIC) was set-up in 1964 which
reported that there was high concentration of economic power in over
85percent of industries in India at that point in time. MRTP has been
promulgated to prevent damage by concentration of economic power in the
hands of only a few and thereby causing damage.
The principal objectives of MRTP Act are:
i) prevention of concentration of economic power to the common
detriment;
ii) control of monopolies;
iii) prohibition of Monopolistic Trade Practices (MTP);
iv) prohibition of Restrictive Trade Practices (RTP);
v) prohibition of Unfair Trade Practices (UTP).
Competition Act, 2002

The competition Act, 2002 received assent of the president of India on
January 13, 2003 and was published in the Gazette of India on January 14,
2003.
The main features of the Bill were:
i. Prevent non-competitive practices,
ii. Promote and sustain competition,
iii. Protect consumer interest, and
iv. To endure free trade for participants in the market
The Competition Act, 2002 was based on the Raghvan Committee Report.
The principle elements of the Raghvan Committee Report being:
i. Prohibit Anti-Competitive agreements,
ii. Prohibit Abuse of Dominant position by enterprises, and
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iii. Regulate Combinations exceeding threshold limits in terms of

prescribed turnover and assets.
Competition Act, 2002 has essentially four compartments:
Anti - Competition Agreements
Abuse of Dominance
Combinations Regulation
Competition Advocacy
The Act aims to prevent
a) creation of barriers to new entrants in the market,
b) driving existing competitors out of the market,
c) foreclosure of competition by hindering entry into the market,
d) accrual of benefits to consumers,
e) improvements in production or distribution of goods or provision of
services, and
f) promotion of technical, scientific and economic development by
means of production or distribution of goods or provision of
services.
MRTP ACT, 1969
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Based on the pre-reforms scenario

Based on size as a factor
Competition offences implicit or not
defined
Complex in arrangement and
language
14 per se offences negating the
principles of natural justice
Frowns upon dominance
Registration
of
agreements
compulsory
No combinations regulation
COMPETITION ACT, 2002

Based on the post-reforms scenario
Based on structure as a factor
Competition offences explicit and defined
Simple in arrangement and language and

easily comprehensible
4 per se offences and all the rest subjected
to rule of reason.
Frowns upon abuse of dominance
No requirement of registration of
agreements
Combinations regulated beyond a high
threshold limit.
Competition Commission appointed Competition Commission selected by a
by the Government
Collegium (search committee)
Very little administrative and Relatively more
autonomy for the
financial
autonomy
for
the Competition Commission
Competition Commission
No competition advocacy role for the Competition Commission has competition
Competition Commission
advocacy role
No penalties for offences
Penalties for offences
Reactive and rigid
Proactive and flexible
Unfair trade practices covered
Unfair trade practices omitted (consumer
fora will deal with them)
Dr Ranga Sai
The Small Scale Industry Sector

The Small Scale Industry Sector has emerged as India's engine of growth in
the New Millennium. By the end of March 2000, the MSME sector accounted
for nearly 40 per cent of gross value of output in the manufacturing sector and
35 per cent of total exports from the country. Through over 32 lakh units, the
sector provided employment to about 18 million people.
The on going programme of Economic Reforms based upon the principle of
liberalisation, globalisation and privatisation and the changes at the
international economic scene including the emergence of World Trade
Organisation (WTO), have brought certain schallenges and several new
opportunities before the MSME Sector. The most important challenge faced
by the sector is that of growing competition both globally and domestically.
At the sametime sector has also been facing some problems which relate to
credit, infrastructure, technology, marketing, delayed payment hassels on
account of so many rules and regulations etc. In order to enable this sector to
avail the opportunities and play its role as an engine of growth, it is essential
to address to these problems effectively and urgently.
Major Policy Initiatives

A separate Ministry for Small Scale Industries & Agro and Rural Industries
set up on August 14, 1999 to focus concerted efforts on the problems of small
and tiny enterprises. Investment limit for the SSI sector in plant and
machinery reduced from Rs 3 crore to Rs 1 crore.
A Comprehensive Policy Package

A Group of Ministers on SSI was constituted under the Chairmanship of Shri
L K Advani, the Union Minister for Home Affairs to promote and strengthen
the SSI sector in the context of dismantling of Quantitative Restrictions.
Based on the recommendations of the Group of Ministers, a comprehensive
policy package was announced for the SSI sector on August 30, 2000 by the
Prime Minister at the first ever National Conference on SSI organised by the
Ministry of SSI & ARI. The policy package aimed at enhancing
competitiveness of SSIs both globally and domestically by providing easier
access to credit, infrastructure support, marketing avenues etc. Out of actions
points emerging from the comprehensive policy package, action has been
completed on 26 points.
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Technology Upgradation
To meet the urgent need of technology upgradation, the Government has
announced a capital subsidy of 12 per cent for investment in technology in
select sector and setting up of an inter-ministerial committee of experts to
define the scope of technology upgradation and sectorial priorities. To
encourage total quality management, the Government has decided to continue,
for the next six years, granting Rs 75,000 to each small scale unit that obtains
ISO 9000 certification. The Ministry has formulated a comprehensive plan for
preparing Small Scale Industries for e-commerce with appropriate
infrastructure support. It has also sought to strengthen the IT support to Small
Scale Industry through the development of a 'Master Website' on small
industries comprising information on policies and procedures, technology,
products etc., with hyperlinks to States.
Credit Guarantee Scheme
The Government has approved a Rs 125 crore Credit Guarantee Fund Scheme
for small industries to tackle the problem of collateral guarantee and provide
necessary comfort level to banks lending money to small-scale units. The
scheme will be operational from 2000-2001 and will be implemented by a
trust set up by the Small Industries Development Bank of India (SIDBI). The
SIDBI will no longer be a subsidiary of IDBI and shall have a separate status
in order to promote development of small industries.
In the National Equity Fund (NEF) Scheme, the project cost limit has been
revised from Rs 25 lakh to Rs 50 lakh. The soft loan will be retained at 25 per
cent of the project cost subject to a maximum of Rs 10 lakh per project.
Assistance under the NEF will be provided at a service charge of 5 per cent
per annum.
Initiatives for North-Eastern region
The Government has announced a number of initiatives for the development
of SSIs in the North-eastern region at the national convention on SSIs on
August 30, 2001. A task force comprising of all North-Eastern State Ministers
in-charge of SSIs has been set up specifically for that region.
Marketing Development Assistance Scheme
SSIs face problems in marketing of their products. To help SSIs in marketing
their products a new SSI Marketing Development Assistance (MDA) scheme
has been launched to assist SSIs exporters to participate in international
exhibitions and fairs. Sub contracting and acnillarisation is being encouraged
through setting up sub-contracting exchanges and vendor development
programmes.
Dr Ranga Sai
Access to SSI Information

Adequate steps have been taken to improve access to SSI information
included comprehensive knowledge portal launched for SSIs on August 30,
2001
Special Package for Tiny Sector
The Government has decided to raise the limit for composite loans from Rs 10
lakh to Rs 25 lakh. Entrepreneurs will now be able to secure term loans and
working capital from the same agency.
The National Small Industries Corporation will continue to give composite
loan up to Rs 25 lakh to the tiny sector and continue to charge one per cent
concessional interest rate. Twenty per cent of the projected annual turnover of
tiny units would qualify for working capital loan. Under the Integrated
Infrastructure Development (IID) Scheme, 50 per cent of the plots will be
earmarked for the tiny sector as against 40 per cent done earlier.
Under the National Equity Fund Scheme, 30 per cent of the investment will be
earmarked for the tiny sector.
Service sector
The tertiary sector of the economy (also known as the service sector or the
service industry) is one of the three economic sectors, the others being the
secondary sector (approximately the same as manufacturing) and the primary
sector (agriculture, fishing, and extraction such as mining).The production of
information is generally also regarded as a service, but some economists now
attribute it to a fourth sector, the quaternary sector.
The various sectors that combine together to constitute service industry in
India are:
Trade, Hotels and Restaurants, Railways, Other Transport & Storage,
Communication (Post, Telecom), Banking, Insurance, Dwellings,
Real Estate, Business Services, Public Administration; Defence,
Personal Services, Community Services, Other Services
Growth of Service Sector

The development of a country's services sector is an indicator of its economic
development. India's services sector is a vital component of its economy, as it
presently accounts for around 60 per cent of its gross domestic product
(GDP). It has matured considerably during the last few years and has been
globally recognised for its high growth and development.
Dr Ranga Sai
India is in a position to tap the top end of the USD 3 trillion global healthcare
market because of the quality of its services and the brand equity of Indian
healthcare professionals across the globe. The Indian Government places top
priority on the healthcare sector and is focusing on indigenous research and
development and the further creation of human capital.
Tourism is estimated to contribute 5.83 per cent to the GDP and 8.27
per cent to employment in the country; the employment generated by
tourism is estimated at 51.1 million in 2006-07
In the case of engineering and integrated engineering services, India has
the single largest pool of technically qualified and trained manpower
with the potential to operate in the international market.
In the case of engineering and integrated engineering services, India has
the single largest pool of technically qualified and trained manpower
with the potential to operate in the international market. With the
growth in the manufacturing and services sector, and given the aging
demographic profile of most developed countries, the demand for
Indian engineers is likely to increase considerably in the coming years.
Professional services include the widest variety of individual and firm
based services. These include, inter alia, legal, accountancy,
engineering, architecture and medical services. This set of services is
amenable to all the four modes of supply recognised under GATS.
Education levels have a direct bearing on the sustainability of a
countrys competitiveness and economic growth. Against the
background of economic globalisation, the development of human
capital very much depends on the internationalisation of education
services.
The share of banking and insurance services in the GDP of India has
been stable between 5.5 and 6.5 per cent over the last few years even
though the sector has been showing a double digit growth in the pre2008 period.
The telecom services have been recognized the world-over as an
important tool for socio-economic development for a nation. It is one of
the prime support services needed for rapid growth and modernization
of various sectors of the economy. Indian telecommunication sector has
undergone a major process of transformation through significant policy
reforms, particularly beginning with the announcement of NTP 1994
and was subsequently re-emphasized and carried forward under NTP
1999.
Information technology essentially refers to the digital processing,
storage and communication of information of all kinds . Therefore, IT
can potentially be used in every sector of the economy.
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Module IV
Banking and Monetary Policy Since 1991
Banking sector reforms since 1991: Rational and measures Structure of Banking in India
performance of commercial banks since 1991 Promotional and Developmental
functions of RBI, RBIs recent measures of Money supply-Trends and Causes of Inflation
since 1991 Recent changes in monetary policy in India.
Narasimham Committee
In 1991, under the chairmanship of M Narasimham, a committee was set up
by his name which worked for the liberalization of banking practices.
M. Narasimham (1998) had pointed out; the reforms in the banking sector can
be classified into two phases:
1. The first phase consisted of the curative measures, which were
brought about for making the banking sector more oriented to the
market and impart competition to the environment.
2. The second phase consisted of the preventive measures, which
were brought about to ensure smooth functioning of the banking
sector in the long run.
The primary curative measures included the reduction of reserve
requirements, interest rate deregulation and lifting of entry barriers. Other
important measures introduced in this category included prudential reforms in
terms of following capital adequacy norms as well as adhering to well-defined
asset classification and provisioning standards.
Supervisory and regulatory reforms were introduced to ensure transparency
and adequate risk management practices were made mandatory. The thrust of
the preventive measures was primarily on privatization and government stake
was reduced to 30 per cent. The establishment of asset reconstruction
companies was envisaged and capital adequacy norms were made more
stringent.
Some of the recommendations offered by the committee, in its report
submitted in November 1991, are:
1. A reduction, phased over five years in the Statutory
Liquidity Ratio (SLR) to 25 percent, synchronized with the
planned contraction in Fiscal Deficit.
2. A progressive reduction in the Cash Reserve Ratio (CRR).
3. Gradual deregulation of interest rates.
4. All banks to attain Capital Adequacy o 8 percent in a phased
manner.
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5. Banks to make substantial provisions for bad and doubtful

debts.
6. Profitable and reputed banks be permitted to raise capital
from the public.
7. Instituting an Assets Reconstruction Fund to which the bad
and doubtful debts of banks and Financial Institutions could
be transferred at a discount.
8. Facilitating the establishment of new private banks, subject
to RBI norms.
9. Banks and financial institutions to classify their assets into
four broad groups, viz, Standard, Sub-standard, Doubtful and
Loss.
10. RBI to be primarily responsible for the regulation of the
banking system.
11. Larger role for SEBI, particularly as a market regulator
rather than as a controlling authority.
As a sequel to the report, the government has acted upon many of the
suggestions. These actions include reductions in CRR and SLR, stipulation of
capital adequacy norms for banks and announcement of guidelines for new
private banks.
The Report of the Narasimham Committee-II, which was submitted to the
Government in 1998 made a number of recommendations covering
institutional, supervisory, legislative and banking policies aspects. These
recommendations relate to capital adequacy, asset quality, non-performing
asset, directed credit, prudential norms, disclosure requirement, system and
methods in banks structural issues, rural and small industrial credit, regulation
and supervision, legal and legislative framework. Most of the
recommendations have been accepted and implemented by RBI.
Consideration and examination in respect of some remaining
recommendations is going on.
The Committee, recommended that the public sector banks should be
encouraged to go the market to raise capital to enhance their capital. The
Government has accepted the recommendation of Narasimham Committee for
reducing the requirement of minimum shareholding of Government in
nationalized banks to 33 per cent without changing the public sector character
of banks.
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Growth of banking since 1991

The banking sector has grown in terms of volume and quality of services
since 1991. Liberalizations of banking system, implementations of
Narasimham committee recommendations, growth of capital markets, mutual
funds, privatization of insurance business have all added to the phenomenal
growth f banking sector.
These developments also brought out need for improving policy and the
financial infrastructure.
1. Capital Adequacy and Recapitalization of Banks
Out of the 27 public sector banks, 26 Public sector banks achieved the
minimum capital to risk assets ratio of 9 per cent by March 2000. Of
this, 22 Public sector banks had CRAR exceeding 10 per cent. To
enable the Public sector banks to operate in a more competitive manner,
the Government adopted a policy of providing autonomous status to
these banks, subject to certain benchmarks. As at end-March 1999, 17
Public sector banks became eligible for autonomous status.
2. Prudential Accounting Norms for Banks
The Reserve Bank persevered with the on-going process of
strengthening prudential accounting norms with the objective of
improving the financial soundness of banks and to bring them at par
with international standards. The RBI guidelines aimed at reducing the
stock of Non-performing assets by encouraging the banks to go in for
compromise settlements in a transparent manner.
Recognizing that the high level of Non-performing assets in the Public
sector banks can endanger financial system stability, the Government in
2001 set up seven more Debt Recovery Tribunals for speedy recovery
of bad loans.
3. Asset Liability Management (ALM) System
The Reserve Bank advised banks in 1999 to follow ALM system.
Banks were expected to cover at least 60 per cent of their liabilities and
assets in the interim and 100 per cent of their business by 2000.
4. Disclosure Norms
Towards greater transparency, banks were directed to disclose the
following additional information since 2000:
(i) Maturity pattern of loans and advances, investment
securities, deposits and borrowings,
(ii) Foreign currency assets and liabilities,
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(iii) Movements in Non-performing assets and

(iv) Lending to sensitive sectors as defined by the Reserve
Bank from time to time.
5. Technological Developments in Banking
In India, banks as well as other financial entities have entered the
domain of information technology and computer networking in 1999. A
satellite-based Wide Area Network (WAN) would provide a reliable
communication framework for the financial sector. The Indian
Financial Network (INFINET) was inaugurated in June 1999.
6. Revival of Weak Banks
The Reserve Bank had set up a Working Group to suggest measures for
the revival of weak Public sector banks in February 1999. The Working
Group, in its report suggested that weak banks need to be supported on
the basis of three factors:
1. Solvency (capital adequacy ratio and coverage ratio),
2. Earnings capacity (return on assets and net interest
margin) and
3. Profitability
7. Deposit insurance system,
The Reserve Banks Working Group, Jagdish Capoor, made some
recommendations in 1999:
1. Fixing the capital of the Deposit Insurance and Credit
Guarantee Corporation (DICGC) at Rs.500 crore,
contributed fully by the Reserve Bank,
2. Withdrawing the function of credit guarantee on loans
from DICGC and
3. Risk-based pricing of the deposit insurance premium in
lieu of the present flat rate system.
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Structure of Banking: Indian Banking system:
The Indian banking sector consists of the Reserve Bank of India (RBI), which
is the central bank, commercial banks and co-operative banks.
Commercial banks are of two types:
1. Scheduled, which are subject to statutory requirements and
2. Non-scheduled, which are not.
Scheduled banks can be further classified into
a. Public sector banks comprising of the State bank of India, its seven
associates,
b. Other nationalized banks
b. Regional Rural Banks and
c. Private sector banks, which can be either domestic or foreign.
Public Sector Banks
a. State Bank of India and its associate banks called the State Bank group
b. 20 nationalized banks
c. Regional Rural Banks mainly sponsored by Public Sector Banks
Private Sector Banks
a. Old generation private banks
b. New generation private banks
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c. Foreign banks in India

d. Scheduled Co-operative Banks
e. Non-scheduled Banks
Scheduled and Un-scheduled Banks
The commercial banking structure in India consists of:
Scheduled Commercial Banks in India

Unscheduled Banks in India
Scheduled Banks in India constitute those banks which have been included in
the Second Schedule of Reserve Bank of India Act, 1934. RBI in turn includes
only those banks in this schedule which satisfy the criteria laid down vide
section 42 (6) (a) of the Act.
As on 30th June, 1999, there were 300 scheduled banks in India having a total
network of 64,918 branches. The scheduled commercial banks in India
comprise of State bank of India and its associates (8), nationalized banks (19),
foreign banks (45), private sector banks (32), co-operative banks and regional
rural banks.
"Scheduled banks in India" means the State Bank of India constituted under
the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined
in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a
corresponding new bank constituted under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970),
or under section 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank
included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of
1934), but does not include a co-operative bank".
"Non-scheduled bank in India" means a banking company as defined in clause
(c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is
not a scheduled bank".
Reserve Bank of India

The Hilton Young Commission in 1926 originated the idea of Reserve
Bank of India as the central Bank. This commission came to be known as the
Royal Commission on Indian Currency and Finance. Prior to 1926, the
Presidency Banks had the right of note issue. This was taken over by RBI in
1934 under the Reserve Bank of India Act,
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Formally, in 1935 RBI was established as an apex institution and the nation's
monetary authority. It had a division of two separate activities viz. the issue
department and the Banking department.
The Banking Regulation Act of 1949 gave RBI the control and supervision of
commercial Banks. The amendments to RBI Act in 1962 provided the RBI
right of information from commercial banks regarding their credit functions.
Currently, RBI has emerged as a potential apex monetary authority with
control over the capital markets, money markets, foreign exchange markets
and the monetary policy.
RBI as an apex institution has the overall control over the monetary policy. It
regulates the monetary economy by sets of guidelines pertaining to interest
rates, liquidity, lending operations of financial institutions etc. It also
promotes financial institutions to augment Government of India.
The broad objectives of the Reserve Bank are:
(a) Regulating the issue of currency in India;
(b) keeping the foreign exchange reserves of the country;
(c) establishing the monetary stability in the country; and
(d) developing the financial structure of the country on sound lines
consistent with the national socio-economic objectives and
policies.
Functions of Reserve Bank of India

1. Note Issue:
The Reserve Bank has the monopoly of note issue in the country. It has the
sole right to issue currency notes of all denominations except one-rupee notes.
One-rupee notes are issued by the Ministry of Finance of the Government of
India. The Reserve Bank acts as the only source of legal tender because even
the one-rupee notes are circulated through it. The Reserve Bank has a separate
Issue Department, which is entrusted with the job of issuing currency notes.
The Reserve Bank has adopted minimum reserve system of note issue. Since
1957, it maintains gold and foreign exchange reserves of Rs. 200 crore, of
which at least Rs. 115 crore should be in gold.
2. Banker to Government:
The Reserve Bank acts as the banker, agent and adviser to Government of
India:
(a) It maintains and operates government deposits,
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(b) It collects and makes payments on behalf of the government,

(c) It helps the government to float new loans and manages the public debt,
(d) It sells for the Central Government treasury bills of 91 days duration,
(e) It makes 'Ways and Means' advances to the Central and State Governments
for periods not exceeding three months,
(f) It provides development finance to the government for carrying out five
year plans,
(g) It undertakes foreign exchange transactions on behalf of the Central
Government,
(h) It acts as the agent of the Government of India in the latter's dealings with
the International Monetary Fund (IMF), the World Bank, and other
international financial institutions, (i) It advises the government on all
financial matters such as loan operations, investments, agricultural and
industrial finance, banking, planning, economic development, etc.
3. Banker's Bank:
The Reserve Bank acts as the banker's bank in the following respects:
(a) Every Bank is under the statutory obligation to keep a certain minimum of
cash reserves with the Reserve Bank. The purpose of these reserves is to
enable the Reserve Bank to extend financial assistance to the scheduled banks
in times of emergency and thus to act as the lender of the last resort.
According to the Banking Regulation Act, 1949, all scheduled banks are
required to maintain with the Reserve Bank minimum cash reserves of
5percent of their demand liabilities and 2percent of their time liabilities. The
Reserve Bank (Amendment) Act, 1956 empowered the Reserve Bank to raise
the cash reserve ratio to 20percent in the case of demand deposits and to
8percent in case of time deposits. Due to the difficulty of classifying deposits
into demand and time categories, the amendment to the Banking Regulation
Act in September 1972 changed the provision of reserves to 3percent of
aggregate deposit liabilities, which can be raised to 15percent if the Reserve
Bank considers it necessary,
(b) The Reserve Bank provide financial assistance to the scheduled banks by
discounting their eligible bilk and through loans and advances against
approved securities,
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(c) Under the Banking Regulation Act,1949 and its various amendments, the
Reserve Bank has been given extensive powers of supervision and control
over the banking system. These regulatory powers relate to the licensing of
banks and their branch expansion; liquidity of assets of the banks;
management and methods of working of the banks; amalgamation,
reconstruction and liquidation of banks; inspection of banks; etc.
4. Custodian of Exchange Reserves:

The Reserve Bank is the custodian of India's foreign exchange reserves. It
maintains and stabilises the external value of the rupee, administers exchange
controls and other restrictions imposed by the government, and manages the
foreign exchange reserves. Initially, the stability of exchange rate was
maintained through selling and purchasing sterling at fixed rates. But after
India became a member of the international Monetary Fund (IMF) in 1947,
the rupee was delinked with sterling and became a multilaterally convertible
currency. Therefore the Reserve Bank now sells and buys foreign currencies,
and not sterling alone, in order to achieve the objective of exchange stability.
The Reserve Bank fixes the selling and buying rates of foreign currencies. All
Indian remittances to foreign countries and foreign remittances to India are
made through the Reserve Bank.
5. Controller of Credit:
As the central bank of the country, the Reserve Bank undertakes the
responsibility of controlling credit in order to ensure internal price stability
and promote economic growth. Through this function, the Reserve Bank
attempts to achieve price stability in the country and avoids inflationary and
deflationary tendencies in the country. Price stability is essential for economic
development. The Reserve Bank regulates the money supply in accordance
with the changing requirements of the economy. The Reserve Bank makes
extensive use of various quantitative and qualitative techniques to effectively
control and regulate credit in the country.
5. RBI is the Controller and Supervisor of Banking Systems

The RBI has been assigned the role of controlling and supervising the bank
system in India. The RBI is responsible for controlling the overall operations
of all banks in India.
The control and supervisory roles of the Reserve Bank of India is done
through the following:
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Issue of License: Under the Banking Regulation Act 1949, the RBI has
been given powers to grant licenses to commence new banking
operations. The RBI also grants licenses to open new branches for
existing banks. Under the licensing policy, the RBI provides banking
services in areas that do not have this facility.
Prudential Norms: The RBI issues guidelines for credit control and
management. The RBI is a member of the Banking Committee on
Banking Supervision (BCBS). As such, they are responsible for
implementation of international standards of capital adequacy norms
and asset classification.
Corporate Governance: The RBI has power to control the appointment
of the chairman and directors of banks in India. The RBI has powers to
appoint additional directors in banks as well.
KYC Norms: To curb money laundering and prevent the use of the
banking system for financial crimes, The RBI has Know Your
Customer guidelines. Every bank has to ensure KYC norms are
applied before allowing someone to open an account.
Transparency Norms: This means that every bank has to disclose their
charges for providing services and customers have the right to know
these charges.
Risk Management: The RBI provides guidelines to banks for taking the
steps that are necessary to mitigate risk. They do this through risk
management in basel norms.
Audit and Inspection: The procedure of audit and inspection is
controlled by the RBI through off-site and on-site monitoring system.
On-site inspection is done by the RBI on the basis of CAMELS.
Capital adequacy; Asset quality; Management; Earning; Liquidity;
System and control.
Foreign Exchange Control: The RBI plays a crucial role in foreign
exchange transactions. It does due diligence on every foreign
transaction, including the inflow and outflow of foreign exchange. It
takes steps to stop the fall in value of the Indian Rupee. The RBI also
takes necessary steps to control the current account deficit. They also
give support to promote export and the RBI provides a variety of
options for NRIs.
Development: Being the banker of the Government of India, the RBI is
responsible for implementation of the governments policies related to
agriculture and rural development. The RBI also ensures the flow of
credit to other priority sectors as well. Section 54 of the RBI gives
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stress on giving specialized support for rural development. Priority

sector lending is also in key focus area of the RBI.
6. Ordinary Banking Functions:
The Reserve Bank also performs various ordinary banking functions:
a. It accepts deposits from the central government, state governments and
even private individuals without interest,
b. It buys, sells and rediscounts the bills of exchange and promissory notes
of the scheduled banks without restrictions,
c. It grants loans and advances to the central government, state
governments, local authorities, scheduled banks and state cooperative
banks, repayable within 90 days,
d. It buys and sells securities of the Government of India and foreign
securities,
e. It buys from and sells to the scheduled banks foreign exchange for a
minimum amount of Rs. 1 lakh,
f. It can borrow from any scheduled bank in India or from any foreign
bank,
g. It can open an account in the World Bank or in some foreign central
bank.
h. It accepts valuables, securities, etc., for keeping them in safe custody.
i. It buys and sells gold and silver.
7. Miscellaneous Functions:
In addition to central banking and ordinary banking functions, the Reserve
Bank performs the following miscellaneous functions:
(a) Banker's Training College has been set up to extend training facilities
to supervisory staff of commercial banks. Arrangements have been
made to impart training lo the cooperative personnel,
(b) The Reserve Bank collects and publishes statistical information
relating to banking, finance, credit, currency, agricultural and
industrial production, etc. It also publishes the results of various
studies and review of economic situation of the country in its monthly
bulletins and periodicals.
. Developmental and Promotional role of RBI

Along with the routine traditional functions, central banks especially in the
developing country like India have to perform numerous functions. These
functions are country specific functions and can change according to the
requirements of that country. The RBI has been performing as a promoter of
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the financial system since its inception. Some of the major development
functions of the RBI are maintained below.
1. Development of the Financial System : The financial system comprises
the financial institutions, financial markets and financial instruments.
The sound and efficient financial system is a precondition of the rapid
economic development of the nation. The RBI has encouraged
establishment of main banking and non-banking institutions to cater to
the credit requirements of diverse sectors of the economy.
2. Development of Agriculture : In an agrarian economy like ours, the
RBI has to provide special attention for the credit need of agriculture
and allied activities. It has successfully rendered service in this
direction by increasing the flow of credit to this sector. It has earlier the
Agriculture Refinance and Development Corporation (ARDC) to look
after the credit, National Bank for Agriculture and Rural Development
(NABARD) and Regional Rural Banks (RRBs).
3. Provision of Industrial Finance : Rapid industrial growth is the key to
faster economic development. In this regard, the adequate and timely
availability of credit to small, medium and large industry is very
significant. In this regard the RBI has always been instrumental in
setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI
and EXIM BANK etc.
4. Bill market : it also undertakes measures for developing bill market in
the country.
5. Provisions of Training : The RBI has always tried to provide essential
training to the staff of the banking industry. The RBI has set up the
bankers' training colleges at several places. National Institute of Bank
Management i.e NIBM, Bankers Staff College i.e BSC and College of
Agriculture Banking i.e CAB are few to mention.
6. Collection of Data : Being the apex monetary authority of the country,
the RBI collects process and disseminates statistical data on several
topics. It includes interest rate, inflation, savings and investments etc.
This data proves to be quite useful for researchers and policy makers.
7. Publication of the Reports : The Reserve Bank has its separate
publication division. This division collects and publishes data on
several sectors of the economy. The reports and bulletins are regularly
published by the RBI. It includes RBI weekly reports, RBI Annual
Report, Report on Trend and Progress of Commercial Banks India., etc.
This information is made available to the public also at cheaper rates.
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8. Promotion of Banking Habits : As an apex organization, the RBI

always tries to promote the banking habits in the country. It
institutionalizes savings and takes measures for an expansion of the
banking network. It has set up many institutions such as the Deposit
Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982,
NHB-1988, etc. These organizations develop and promote banking
habits among the people. During economic reforms it has taken many
initiatives for encouraging and promoting banking in India.
9. Strengthening banking system: By encouraging the commercial banks
to expand their branches in the semi-urban and rural areas, the Reserve
Bank helps
to reduce the dependence of the people in these areas on
the defective unorganised sector of indigenous bankers and
money lenders, and
to develop the banking habits of the people
10. Deposit insurance: By establishing the Deposit Insurance Corporation,
the Reserve Bank helps to develop the banking system of the country,
instills confidence of the depositors and avoids bank failures,
11. Savings mobilization: Through the institutions like Unit Trust of India,
the Reserve Bank helps to mobilise savings in the country,
12. Promotion of Export through Refinance : The RBI always tries to
encourage the facilities for providing finance for foreign trade
especially exports from India. The Export-Import Bank of India (EXIM
Bank India) and the Export Credit Guarantee Corporation of India
(ECGC) are supported by refinancing their lending for export purpose.
RBIs Third Working Group 1998

The Third working group in 1998 recommended compilation of monetary
aggregates which is simple, uncomplicated, comprehensive, and operationally
feasible in terms of frequency of availability of information.
Accordingly the group proposed compilation of following four measures of
monetary aggregates:
M0
= currency in circulation + bankers deposits with RBI + other

deposits with RBI.
Narrow money: Narrow money deals with transactions demand for money.
The constituents of narrow money are limited to the central bank and the
central government and commercial and co-operative banks.
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M0 is essentially the monetary base, i.e. reserve money. It is compiled weekly.

This measure denotes effects on the consumer price index.
M1
= currency with public + demand deposits with the banking system

+ other deposits with RBI
M1 reflects the banking sectors non-interest bearing monetary liabilities. It is

compiled fortnightly.
M2
= M1 + time liability of savings deposits with the banking system

+ certificates of deposit issued by banks + term deposits
= currency with public + current deposits with the banking system
+ saving deposit with the banking system + certificates of deposit
issued by banks + term deposits the banking system + other deposit
with RBI
M3
= M2 + term deposits banking system + call borrowings from Non

banking financial corporations.
M3 is the international standard of money supply. IMF, World Bank and WTO
use this measure, uniformly, for comparing different economies of the world.
M3 is similar to Milton Friedmans measure of money supply. M3 is the
measure of aggregate liquidity in the economy. This is an important measure
for monetary targeting by RBI.
Liquidity measures for Broad money
In addition, the Third Working Group proposed two liquidity measures for
broad money for measuring overall economic activities (monthly and
quarterly compilation). This measure brings out the importance of Non
depository corporations (Non banking financial corporations).
L1
L2
L3
= M3 + all deposits with post office savings bank except NSC

= L1 + term deposits with Term Lending Institutions and
Refinancing Institutions (FIs) + term borrowing by FIs and
Certificates of Deposits issued by FIs
= L2 + public deposits of non banking financial companies
Recent Trends in Inflation

Inflation has been one of the most important problems facing India's
economy. Over the past five years (2006-11), the annual average Consumer
Price Index (CPI) inflation was 8.7 percent for industrial workers and 9.7
percent for agricultural labourers, while the Wholesale Price Index (WPI)
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inflation was 6.3 percent. India's CPI inflation has been the second highest
among the Asian economies.
Nature of inflationary pressures in India:1. Deregulation of administered prices such as petrol, diesel etc and
other measures such as caps on number of subsidized cylinders a
household can use leads to upward movement in the prices.
2. Supply shocks which happen due to adverse monsoon conditions
leads to increase in demand in agricultural sector which can
spillover to other sectors.
3. Increase of indirect taxes in the recent budget of 2012.
4. Increase in the prices of crude oil imports which leads to price rise
in all those industries which use it as raw material. eg-power,
petroleum products.
5. Increase in money in the hands of people due to increased
Government spending in schemes like NREGA.
6. Increase in population which leads to increase in demand.
7. Capital stock deficiency tends to lead to bottlenecks, under which
resource constraints, including limited infrastructure and/or the
lack of manufacturing capacity delay overall production or service
generating processes, further leading to higher inflation through
shortages in supply. India's capital stock-to-GDP ratio was 1.79 in
2010, among the lowest in Asia.
8. Demand Side Drivers (The National Rural Employment
Guarantee Act (NREGA)): demand-side inflation drivers,
especially those arising from a sharp rise in personal income and
an expansionary fiscal policy, have also played an important role
in keeping inflation persistently high.
9. Food price inflation has been a major driver of inflation and the
lack of rainfall during the monsoon season often hits India's food
production. In addition, the structural change in food intake has
contributed to food price inflation.
10. Import price pressures have also been an important factor for
overall inflation as India has become a more open economy over
the past 10 years. In fact, the imported goods-to-GDP ratio
doubled from just above 11 percent in FY00/01 to 21.9 percent in
FY10/11 with bulk imports, such as crude oil, metals, rubber and
food - primarily commodity-related items - accounting for 42.7
percent of total imports.
Inflation Expectations: In the RBI's latest inflation expectations survey of
households, respondents' inflation expectations for three months ahead inched
up to 12.2 percent in the third quarter of 2011 from 11.8 percent in the second
quarter. Overall, inflation expectations have been largely driven by food price
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inflation in India as food constitutes more than 50 percent of the average

Indian household's consumption basket.
Changing trends in monetary policy

Monetary Policy deals with changing money supply and rate of interest for the
purpose of stabilizing the economy at full employment or potential output
level by influencing aggregate demand
The RBI makes use of instruments to regulate money supply and bank credit
so as to influence the level of aggregate demand for goods and services.
The monetary policy has to balance the objectives of economic growth and
price stability.
Economic growth requires expansion in the supply of money so that no
legitimate productive activity suffers due to finance shortage. Price stability
requires control the expansion of credit so that money supply does not cause
inflation.
Changes in the monetary policy can be made anytime during the year. The
Central Bank may adopt an expansionary or contractionary policy depending
on the general economic policy of the Government and conditions in the
economy.
Monetary policy may also be used to influence the exchange rate of the
countrys currency.
Monetary management
Maintenance of a sound monetary system is the basic objective of any central
bank of a nation - De kock.
Monetary management involves four major issues.
1. Price stability
2. Control over money supply
3. Control of Reserve money creation (RBI credit
government) and
4. Rationalization of administered interest rate.
to
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The pre reforms monetary regime

Existence of a spectrum of interest rates with built in elements
of concessions and cross subsidies to meet the priorities to
different sectors.
Rate of return on government securities was fixed and was
lower than market rates.
Resolution of deposit rates and borrowing rates to maintain
the cost of funds in relation to lending ratio.
Unlimited accommodation through adhoc treasury bills to
meet budgetary deficits of the central government
Maintenance of high CRR and SLR of 15 per cent and 38.5
per cent respectively.
Lack of depth in government securities market on account of
application of lower than market coupons and
Lack of depth and vibrancy in money market.
During transition to liberalized regime of monetary policy, formulation and
implementation there were several changes:
A shift in dependence from direct to indirect instruments of
monetary control
A more transparent way of formulation and implementation,
keeping up with time consistency
Recognition of the absence of trade-off between inflation and
unemployment
The monetary policy now has to deal with twin objectives. Monetary policy
now aims at striking a fine balance between high growth rate and price
stability.
Changing trends in Monetary policy

Controlled Expansion (1951-72):
RBIs main concern during this period was to moderate the
expansion of credit and money supply in such a way so as
to legitimize needs of industry and trade and to curb the
use for unproductive and speculative purposes.
Tight Monetary Policy (1972-1991):
RBI tightened the monetary policy to curb inflation. In
seventies and eighties, large fiscal deficits were incurred.
Reserve Banks credit to the Government increased
sharply which caused a rapid growth in money supply.
Dr Ranga Sai
Thus the monetary policy was to neutralize the inflationary

effect
Monetary Policy during reforms (1991 onwards):
As part of the economic reforms in 1991 it was decided
to reduce the fiscal deficit. Until 1995 the focus of the
policy was on ensuring price stability. Since 1995 the
policy has been eased to accelerate economic growth.
Since 1999, effects of policy were more encouraging
Like all emerging economies, India too has been
affected by the crisis, and much more than was
expected earlier.
GDP growth has shown lower industrial production,
negative exports, reduction in services activities, and
decreasing business confidence.
There were some strong points like well-functioning
financial markets, good rural demand, lower headline
inflation and comfortable foreign exchange reserves
which buffered the impact of the crisis.
Reduced the repo rate to 4.75 per cent
Reduced the reverse repo rate to 3.25 per cent
Kept the CRR unchanged at 5.0 per cent
Monetary Policy 2009-10

The thrust of the Reserve Bank's policy stance since
mid-September 2008 aimed at providing rupee
liquidity, ensuring comfortable dollar liquidity and
maintaining continued credit flow to productive sectors.
There is scope for banks to further reduce lending rates
so as to ensure credit flow for all productive economic
activity.
In the January 2009 policy review, there was a
projected growth for 2008-09 of 7.0 per cent.
Keeping in view the global trend in commodity prices
and domestic demand-supply balance, WPI inflation is
projected at around 4.0 per cent by end-March 2010.
RBIs Short term Liquidity management

The Government of India borrows from public by issue of securities, to
finance its deficit. RBI uses government securities to control liquidity in the
market in order to influence the interest rates.
Dr Ranga Sai
RBI may reduce liquidity by selling the securities in the market and may
increase liquidity by buying back the securities from the public.
Short term liquidity management refers to injection or absorption of liquidity
by RBI through Repos and Reverse Repos.
Liquidity adjustment facility is an instrument of monetary policy through
which the repos and reverse repos are auctioned within a corridor of interest
rates in the short run. The corridor of inertest rates refr to narrow range
predetermined by RBI.
The second Liquidity adjustment facility announced in 2005 allowed auction
twice daily. This reduced dependence on other tools like cash reserve ratio.
Liquidity adjustment facility reduces emphasis on the banks monetary
targeting and concentrates on interest rate alone.
Market stabilization scheme

RBI introduced the Market Stabilization scheme in April 2004 to mop up the
excess liquidity.
The MSS operates mainly through Treasury bills. The Government will issue
T-bills by way of auctions by the RBI in addition to its normal borrowing
requirements, for moping up excess liquidity.
The amount raised through this scheme is to be held in a separate account with
the RBI and would be used only for the purpose of redemption or buyback of
the T-bills
Repo and Reverse Repo are tools available in the hands of RBI to manage the
liquidity in the system. It either injects liquidity into the market if the
conditions are tight or sucks out liquidity if the liquidity is excess in the
system through the Repo and Reverse Repo mechanism, besides a host of
other measures.
RBI, as lender of last resort, provides liquidity to the banks
through Repo auction, where RBI purchases securities from
banks with an agreement to sell back the securities after a
fixed period.
RBI conducts Repo / reverse Repo auctions daily for
overnight funds. Currently RBI is conducting Repo actions
thrice daily, as the banks need to maintain their liquidity
Dr Ranga Sai
It is the objective of RBI policy that the money market rates

should normally move within the corridor of the policy rates
(currently within the band of 3.25 percent and 4.75 percent).
The Reverse Repo rate would lay the floor, which is the
minimum rate of interest banks can earn on excess funds.
The Repo rate would lay the upper side of the corridor as the
maximum rate of interest at which banks can borrow
overnight funds from RBI (RBI has imposed ceiling over call
money lending and borrowing by banks. Banks can borrow
and lend overnight up to a maximum of 100 percent and 25
percent respectively of their capital funds.
Negotiated Dealing System is an electronic platform for
facilitating dealing in government securities and money
market instruments.
16621

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Dr Ranga Sai

Module I Basic Issues in Economic Development

Module IV Banking and Monetary Policy Since 1991

Dr. Ranga Sai

Business Economics Paper II

SYBCom : Business Economics Paper II

Module I : Basic Issues in Economic Development

For private circulation only

SYBCom Semester IV Business Economics ( wef June 013

SYBCom Semester IV Business Economics ( wef June 013

Dear Student friends

Dr. Prof. Ranga Sai

SYBCom Semester IV Business Economics ( wef June 013

New Economic Policy of 1991

d. Liberalization of Foreign Policy. The limit of foreign equity was

Trends in National Income

1951-1965: Post independence the country was wrought with economic

globalization. They included various measures like deregulating the markets

Inclusive growth and India

during 1997-2005. There are land and water problems.

Social Sector Development: In social sector there is a need for

Human Development Index and Human Resource

SYBCom Semester IV Business Economics ( wef June 013

Knowledge and education, as measured by the

SYBCom Semester IV Business Economics ( wef June 013

Human Development through Education

Lower enrollment of girls

SYBCom Semester IV Business Economics ( wef June 013

Human development through health

Employees State Insurance Act,1948 was passed to provide

Family Pension: family pension schemes were introduced

Gratuity: The payment of gratuity act was passed in 1972.

Maternity Benefit Act was enacted to provide uniform

Achievements in Health Care

The death rate dropped from 12.5 in 1981 to 8.5in 2007.The

Infant mortality reduced from 110 in 1981 to 68 in 2007.

The number of primary health centers increased from 5700

SYBCom Semester IV Business Economics ( wef June 013

Increase in life expectancy: Life expectancy has increased

Control of diseases: national health programs are

20 percent of population does not have access to safe

Human development through family welfare

to stabilize the growth of population

Nature of Unemployment in India

c) Technological Change. If there is the developments of labour

SYBCom Semester IV Business Economics ( wef June 013

Employment policy since 1991

Economic growth of > 8 percent, together with increasing

Swarnjayanthi Gram Swarozgar Yojana

Samagra Awas Yojana

Khadi and Village Industries Commission has played an active

SYBCom Semester IV Business Economics ( wef June 013

Significance of Agricultural sector

(ii) Important Contribution to Employment

Trends in Agricultural Productivity

SYBCom Semester IV Business Economics ( wef June 013

Growth of agricultural productivity

Measures to improve Indian Agriculture

SYBCom Semester IV Business Economics ( wef June 013

National Policy on Agricultural 2000

Growth that is based on efficient use of resources and

Growth with equity, i.e., growth which is widespread across

Growth that is demand driven and caters to domestic markets