Indian Economy Civilsdaily

Venkates
Indian Economy
By
Himanshu Arora
Doctoral Scholar in Economics & Senior Research Fellow, CDS, Jawaharlal Nehru
University
Source: Civils Daily

Venkates
Content
Chapter 1- Growth and development
 Economic Growth in India: National Income Determination, GDP, GNP, NDP, NNP,
Personal Income
 Economic Growth versus Economic Development
 Measures of Economic Development: Human Development Index, Green GDP, Gross

National Happiness Index
 Economic and Social Development in India: Millennium Development Goals
 Sustainable Development Goals and India
Chapter 2- Issues related to planning

 Issues related to planning in India
 Planning in India: Bombay Plan; People’s Plan; Mahalanobis Plan; Wage-Good

Model; Gandhian Plan
 Mobilization of Resources
Chapter 3- Inflation
 Inflation in India: CPI, WPI, GDP Deflator, Inflation Rate
 Types of Inflation: Demand Pull, Cost-Push, Stagflation, Structural Inflation,

Deflation, and Disinflation
 The Cost of Inflation
Chapter 4- Monetary policy in India

 Monetary Economics: Barter System, Definition, Function and Evolution of Money
 Monetary Policy in India: Inflation, deflation, Recessionary and Inflationary

Scenarios
 Monetary Policy tools and Money Supply in India
 Monetary Policy Agreement in India
Chapter 5- Banks & Financial markets

 Banking in India: Definition, Functions, and Types of Banks
 Development Finance Institutions: IFCI, ICICI, SIDBI, IDBI, UTI, LIC, GIC

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 Nationalisation of Banks
 Banking Sector Reforms in India: Narasimhan Committee 1&2, Nachiket Mor

Committee, P J Nayak Committee
 Problem of Non-Performing Assets in India
 Non-Banking Financial Companies in India
 Financial Inclusion in India: Need and future; PMJDY; Payment Banks and Small
Banks
Chapter 6- Indian Agriculture

(a) Historical background and current status
 Land reforms in India
 Situation of Indian Agriculture
(b) Cropping Patterns
 Cropping Patterns in India: Factors Affecting; Most Important Cropping Patterns
 Types of Cropping Systems: Mono-cropping; Crop Rotation; Sequential Cropping;

Inter Cropping; Relay Cropping
(c) Issues related to direct and indirect farm subsidies and minimum support prices
 Farm Subsidies in India: Definition; Working; Need; Negative Impacts
 Types of Farm Subsidies in Indian Agriculture: Irrigation and Power Subsidies;

Fertilizer Subsidy; Seed Subsidy; Credit Subsidy
 Government Intervention in Indian Agriculture
 Minimum Support Prices in Indian Agriculture: MSP definition; Working; Issues;

Drawbacks; Way Ahead; Buffer Stocks
 Public Distribution System in India: Definition; Issues; Working; Need;

Disadvantages
 Targeted PDS in India, Antyodaya Anna Yojana (AAY), Alternative to the PDS,
Direct Benefit Transfers, National Food Security Act
(d) Agriculture Marketing
 Marketing of Agricultural Produce in India: Definition; Role; APMC Act, Model

APMC Act, 2003
 Private and Co-operative

operative Sector in Marketing of Agriculture Produce in India

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(e) Technology missions and e-technology in the aid of farmers
 Technology Missions in India
 E-Technology in Indian Agriculture to Aid the Farmers
Chapter 7- Poverty, Inequality, and Unemployment

(a) Poverty
 Poverty in India: Types of Poverty, Causes of Poverty, Vicious Circle of Poverty
 Poverty Lines in India: Estimations and Committees
 Poverty in India: Trickle Down Approach, Inclusive Growth and Multi-Dimensional

Poverty Index
 Addressing Poverty in India/Poverty Eradication Schemes
(b) Inequality
 Inequality in India: Definition and Measures; Lorenz Curve, Gini Coefficient, Income
held by Top 10%
 Income Inequality in India: Causes, Remedies, and Consequences
(c) Unemployment
 Unemployment in India: Definition, Types, and Measures
 Unemployment in India: Causes and Consequences
 Jobless Growth in India: Reasons and Consequences
(d) Other important issues
 Economics of Animal Rearing in India
 Government Policies towards Women Empowerment: Beti Bachao Beti Padhao, SSA,
Kasturba Gandhi Balika Vidyalaya, Saakshar Bharat, SABLA, STEP
 Education in India: Role and Channels in Promoting Economic Growth
Chapter 8- Government budgeting

 The Role of the Government in the Economy
 The Government Budget: Revenue Budget, Capital Budget, Government Deficits
 Budgetary procedure in India
 Types of Budgets in India

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Chapter 9-Taxation in India

 Taxation in India: Classification, Types, Direct tax, Indirect tax
 Goods and Services Tax
 Tax Reforms in India
 Concept Related to Taxation: Tax Incidence, Tax Evasion, Laffer Curve, CESS and
Surcharge
Chapter 10-External sector

 India’s Balance of Payments: Current Account, Capital Account, Goods and Services
Account
 India’s BOP Performance: Balance of Payment versus Balance of Trade, Current

Account versus Capital Account
 FDI and FPI in India, External Commercial Borrowings, Foreign Exchange Reserves
in India
 Foreign Exchange Rate Determination in India and Types of Exchange Rate
 Capital and Current Account Convertibility in India
Chapter 11- International economic organizations

 The Bretton Woods Twins- World Bank and IMF
 ADB, BRICS Bank, AIIB
 Bilateral, Regional and Global Groupings and Agreements involving India
 The World Trade Organisation (WTO) and India
Chapter 12-Food processing & related industries

 Food Processing Industry: Definition and Dimensions; Channels of Transitions; Inter
linkages between Agriculture and Industry
 Food Processing Industry: Food Based Industry versus Non- Food Based; Location,
Upstream, Downstream Requirements
 Food Processing Industry: Forward, Backward Linkages; Food Processing Industry

and Economic Development
 Food Processing Industry in India: Growth Drivers, FDI Policy, Investment

Opportunities; Schemes Related to Food Processing Sector
 Supply Chain Management in Indian Agriculture

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Chapter 13-Industrial sector

 Industrial development in India
 Industrial Policy in India and its effects on growth
 Public sector undertakings in India
 Privatisation of the Public Sector Enterprises
Chapter 14-Infrastructure
 Infrastructure Sector in India: Definitions; Growth and Infrastructure Linkage
 Infrastructure Development in India
 Infrastructure Sector in India: Growth Drivers; Government Policy Initiatives
 Road Transport in India
 Civil Aviation Sector in India
 Railways Sector in India
 Recent Initiatives by the Railways
 Telecommunication Sector in India
 Notable Initiatives of Indian Telecom Sector
 Port sector in India
 Energy and Power Sector
 Government Policy Support for the Energy Sector
Chapter 15-Investment Models

 Investment Models: Public Sector Led Investment Model; Private Sector-Led
Investment Model
 Public-Private Partnership Model: Definitions; Need for PPP; Prerequisites.
 Public-Private Partnership Models: Contracting, Build Operate Transfer, Design Build

Finance Operate (DBFO), Concessions, Build Operate Transfer, EPC Model, Swiss
Challenge Model, HAM Model

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Chapter 1- Growth and Development

Economic Growth in India: National Income Determination, GDP, GNP,
NDP, NNP, Personal Income
National Income Accounting in India
National income of a country can be defined as the total market value of goods and services
produced in the economy in a year.
The three-important measures of calculating National Income of a country are:
 The sum of the value of all final goods and services produced.
 The sum of all incomes accruing to factors of production, i.e., Rent, Interest, Profit
and Wages.
 The sum of consumer’s expenditure, net investment, and government expenditure on

goods and services.
Circular Flow of Income in a Three Sector Economy
 The modern economy is a monetary economy. Money changes hand from one sector
to another.
 The Household sector supplies their services like labour, land, Capital and
entrepreneurial abilities to firms and receives payments in return in terms of money.
 In the first stage of the model, the Household sector provides their services of labour,
land, capital and entrepreneurial skills to the Business firms.
 In the second stage, the Business firms pay back in monetary terms to the Household
sector in the form of Wages, Rent, Interest and Profits.

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 In the third stage, the money received by household is spent on the goods and services
produced by the firms in the form of consumption expenditure. At the same time, the
Firms provide their goods and services to the Household in return for the money.
 Thus, we see, that money flows from business firms to households as payments for a
factor of production (Labour, Land, Rent and Entrepreneurial skills), and then it flows
from Household to firms when Household purchased goods and services produced by
the firms. This money flow is called circular flow of income.
Saving and Investment in the Circular Flow
 Along with consumption, the household also saves part of their money.
 When Household saves, their expenditure on purchase of goods and services decline.
The decline in the purchase will result in a decline in money received by firms. This
will result in less money flow to the household as the firms will reduce hiring and
production operations. Thus, saving act as a leakage from the economic system.
 But the important question to ask is, where will savings go in the economy?
 The savings in the economy does not lead to any reduction in aggregate spending and
income as the savings flows back into the economic system through Financial
Markets (Banks, Stock markets, insurance etc.)
 From Financial Markets, the savings flows back to the Business firms who borrow
them and invest it into new forms of investments.
 Thus, the saving which is a leakage in the system also flows back into the system
through investment by a firm which acts as injections.
Government Sector in the Circular Flow
 Government affects the economy in a number of ways. The main components of

government intervention are in the form of taxes, spending and borrowings.
 Government purchase goods and services just as household and firms do.
 Government financed its expenditure through taxes and borrowings.
 The money flow from Household and firms to the government is in the form of taxes.
 The other form of money flow from Household and firms to government is in the
form of Borrowings through financial markets.
 The Government pay back to household and firms in the form of provision of public
goods like health, education, Policing, National Defence etc.
National Income and National Product

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Gross National Product Gross Domestic Product
GNP is the total market value of all final goods GDP is the value of all final goods and
and services produced in a year in a country. services produced by the normal residents
as well as non-residents in the domestic
territory of the country but does not
includes Net Factor Income from Abroad.
The important thing to remember about GNP is The important point to remember is
that it is measured at market prices/value. whatever is produced in India, whether by
an Indian or foreign national is part of
Indian GDP.
To calculate GNP, only the final goods and The key difference between GNP and GDP
services produced in an economy during in a is the exclusion of Net Factor Income
given year must be counted. No intermediate Abroad from GDP.
goods and services should be included in GNP.
GNP includes only those goods and services GDPMP = GNPMP – Net Factor Income
that are produced by the residents of India from Abroad.
whether working in India or Abroad.
Net Factor Income from Abroad: GDP = Consumption + Gross Private

Investment + Government Expenditure +
The sum of factor incomes like rent, wages, Net Exports
interest and profits generated within the
domestic country is called domestic factor Net Exports= Exports – Imports.
income.
If we want to calculate Net Domestic
The domestic factor income includes both Product from the GDP, then we just have
incomes earned by residents as well as non- to minus depreciation from the Gross
residents/foreigners working in India. Private Investment.
At the same time, Indian go abroad to work and NDP= Consumption + Net Private
earn wages, salaries, profits and rents. Investment + Government Expenditure +
Net Exports.
Now the Net Factor income abroad= the
difference between factor income received by Where, Net Private Investment= Gross
the residents of India working abroad and the Private Investment – Depreciation.
factor income paid to the foreign residents for
working in India.
GNP includes Net Factor Income Abroad
GNP= Consumption + Gross Private

Investment + Government Expenditure + Net
Exports + Net Factor Income from Abroad.

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Net National Product or National Income
 In the production of GNP of a year, a country uses some fixed assets or capital goods
like Machinery, Equipment’s and technology etc.
 The capital goods like machinery, building and equipment’s undergo regular wear and
tear during the production process, which reduces their value. This fall in the value of
capital assets due to regular wear and tear is called depreciation.
 When the Depreciation is deducted from the Gross National Product, then we get Net
National Product.
 It simply means to include all market value of goods and services produced in a year
after deducting depreciation.
 NNPMP = GNP- Depreciation.
National Income at Factor Cost
 National Income from Factor Cost is also called National Income of a country.
 National Income means the sum of all incomes earned by the citizens in the form of
Rent, Wages, Interest and Profits.
 The difference between National Income at Factor Cost and National Income at
Market Price (NNPMP) arises from the fact that indirect taxes and subsidies cause the
market price to be different from the factor income received by the citizens.
 Example, A mobile handset of Rs10,000 purchased by you includes a GST of 12%. In

this case, while the market price of RS 10,000 includes the GST. The factor of
production used to produce mobile handset will only get RS 8800. Thus, the
difference between market price and factor cost is the tax.
 Similarly, a subsidy results in the market price of a product to be less than the factor
cost.
 Therefore, while calculating National Income, we must deduct indirect taxes and add
subsidies into Net National Product at Market Price.
 NNPFC = NNPMP – Indirect Taxes + Subsidies.
Personal Income
 Personal Income includes the sum of all incomes actually received by all the
individuals or households during a given year.
 The individual pays income taxes, firms pay corporate taxes, individual also
contribute towards social securities in the form of Cess etc., and some individuals
receive social security benefits (transfer payments) like pension, unemployment
allowances from the government.

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 In order to move from National Income to Personal Income of individuals and firms,
we must deduct all forms of direct taxes and social security contribution by the
individuals and must add transfer payment received by the individuals.
 The basic idea here is to subtract all those incomes from National Income that is
earned by an individual but has not been received like taxes and add all those incomes
which are received by the individuals but has not been earned like Old age Pensions.
 Personal Income= National Income – (Undistributed Corporate Profits+ Corporate

Taxes + Social Security Contribution) + (Transfer Payments).
GNP GDP NNPMP NNPFC Personal Income
Personal Income=
GNPMP= National Income
GDPMP =
Consumption + Gross NNPFC = (NNPFC) –
GNPMP –
Private Investment + NNPMP = NNPMP – (Undistributed
Net Factor
Government GNPMP – Indirect Corporate Profits+
Income
Expenditure + Net Depreciation. Taxes + Corporate Taxes +
from
Exports + Net Factor Subsidies. Social Security
Abroad.
Income from Abroad. Contribution) +
(Transfer Payments).

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Economic Growth versus Economic Development

Real versus Nominal GDP
Nominal GDP is the money value of all the goods and services produced in a year. Nominal
GDP is calculated at the current market prices. However, Nominal GDP does not truly
indicate the real performance of the economy as the prices changes over time.
Back to Basics: Suppose, India as a country only produced cars in its economy. In the year
2016, India produced 100 Cars which were sold at RS 100,000 each. India’s GDP in this case
will be RS 10,00,00,00 (100*100000).
In the year 2017, supposedly due to demonetization India only produced only 90 Cars, but
their price has risen to RS 15,0000. India’s GDP in the year 2017 will be 1,35,00,000.
The Increase from RS 10,00,00,00 to RS 1,35,00,000 is the nominal GDP. The GDP of India
has risen not because we have produced more units of Car but because the prices of the car
have increased.
Therefore, the Nominal GDP does not capture the changes in the real economy.
Real GDP
The real GDP is calculated as the money value of all the goods and services produced in a
year using the constant set of market prices that have prevailed in the certain chosen base
year. The Real GDP is calculated at a fixed set of prices so that only the change in real output
or real production of goods and services is captured.
Back to Basics: Suppose, India as a country only produced cars in its economy. In the year
2016, India produced 100 Cars which were sold at RS 100,000 each. India’s GDP in this case
will be RS 10,00,00,00 (100*100000).
In the year 2017, supposedly due to demonetization India only produced only 90 Cars. If we
take the year 2011-12 as the base year and assumes that the price of the car in that year was
RS 90,000. Then, India’s Real GDP will be 90*90,000= 81,00,000.
The Nominal GDP is RS 1,35,00,000 whereas the Real GDP is RS 81,00,000. The difference
is due to the prices which have risen from 90,000 in the base year to RS 15,00,00 in the
current year.
Limitations of the Concept of GDP/Economic Growth

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Note: The following examples will make it clear why GDP is not a perfect measure of Well
Being.
 Suppose, due to unemployment in the economy the youth drifts towards Crime. To
overcome the crime rate, the government decides to hire more police personnel. Due
to the hiring of police personnel, the economic activity in the economy increased as
the newly employed personnel will be paid salaries, which they will spend on
purchasing goods and services. Hence Production of Goods and services will increase.
The final outcome is increase in the GDP.
Now tell me is this increase in the GDP is worth considering? The GDP has risen due to
wrong reason, i.e., increase in crime.
In the above case, the GDP fails to capture the deteriorating situation of the society.
 Suppose, the Government of India decides to mine resources from the fragile Western
Ghats. The mining of the resource leads to the production of resources which are used
in the production of goods and services. The increased production will lead to
increase in the GDP. But, due to mining activity, the population near the Ghats were
disposed of or removed. At the same time, the mining activity has made the region
prone to flooding. The floods in the coming year will destroy valuable life and
property. The loss due to dispossession and flooding will not be captured in the
calculation of the GDP. Thus, in this case also GDP has risen but at the cost of
negative externality in the form of loss of livelihood and lives.

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Economic Growth versus Economic Development
The two-argument provided above are also valid for the shortcomings of growth.
Economic Growth is a monetary concept. It only takes into account the value of goods and
services produced in the economy. It tells how much a country has progressed in terms of
economic indicators like GDP, Per Capita Income, Production, employments etc. It measures
only quantifiable outcomes.
Let’s Understand Growth
The First Stage:
The story so far is very impressive a business-friendly government with pro-business policy
increased growth and employment.
The Second Stage:

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The Third Stage

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The Fourth and Final stage: The Crisis
The above model is just an easy explanation of a complex system. Is it really the pro-business
policies of the government that have led to the crisis?
The answer is no. It is the lack of balanced policy or a single point focus on the growth that
has led to the crisis.
What has the Government missed in the process?
 If at the very beginning, along with pro-business policies, the government had
adopted the policies to promote education, skill development, research and
innovation, health and social empowerment, the outcome could have been very
different. A progressive education and health sector along with technological
advancement would have taken care of skilled and educated labour needed in the
production processes.
The First lesson, therefore, is “Along with the policies to promote Physical Capital the
government must promote the policies of Human Capital”. Therefore, the first difference,
“Promotion of Physical Capital is a growth oriented measure, but promoting
prom the Human
capital along with Physical Capital is a development oriented measure”.

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 In the above setup, the government had adopted a policy of excessive deregulation of
the economy. The problem with excessive deregulation is that it does more harm than
good. If the government have moved cautiously with the deregulation, it could have
avoided the crisis.
If for example, when the first stage boom had happened, the government should have adopted
the policy of promoting new firms by encouraging competition, by providing the new firms
with opportunities in the form of lower taxes, interest-free capital. Instead, the government
followed the existence firms demand of more rebates, more deregulation which created a
monopoly like the situation with restricting enter. The new firms would have competed with
the older firms, and in the process, the poor performing firms would have thrown out of the
market, and the best surviving firms could have produced efficiently and at a much lower
price.
The second lesson, therefore, is “The role of government is to promote competition and
healthy environment for the firms to operate and not to practice Crony Capitalism in nexus
with old firms”. Therefore, the policy of excessive deregulation along with creating a
monopoly kind structure is a growth oriented move, but promoting and encouraging new
firms through fair competition is a development oriented measure”.
 The government promoted a policy of Land reforms which favoured firms and
Businesses. Instead, the government must have come up with a policy which could
have taken care of the poor and farmers. The government should have provided land
at the fair market price along with the provision of forcing firms to undertake
developmental activities like promoting primary health centres, secondary schools and
another social sector initiative like computer training and skilling of rural youth who
have lost their lands. This could have fastened the land reform process and makes it
more acceptable to poor.
The Third lesson, therefore, is “A balanced approach towards resource redistribution does
more good as compare to a one-sided measure of promoting business welfare”. The
governments must force the firms to provide essential services in the areas of the land
takeover. Therefore, land acquisition along with welfare of the region is a development
measure.
 The last point is with respect to labour reforms. The flexibility of the labour market is
the need of the hour. But it should be done keeping in mind the welfare of the labour.
The government must do labour reforms which promote healthy employment along
with bringing the labour in the social security net. The opening up of labour markets
by killing unions and bargaining power of labour will only lead to labour exploitation
and labour unrest and business loss. A better approach is to make labour market
flexible for both employer and employee so that they can move out easily from one
job to another. This can be done through proper contracts, well-functioning legal
system, working social security net for labourers and skilling and training of
labourers.

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Therefore, the fourth lesson “Labour Market reforms carried with the welfare of the labour is
a development oriented measure”.
The story in a nutshell, therefore, is “Growth is only a necessary condition and not a
sufficient condition for promotion of well-being and raising the standard of living of the
people”.
ECONOMIC GROWTH ECONOMIC DEVELOPMENT
Economic growth refers to an Economic development implies an upward movement

increase over time in a country`s of the entire social system in terms of income, savings
real output of goods and services and investment along with progressive changes in
(GNP) or real output per capita socioeconomic structure of country (institutional and
income. technological changes)
Economic Growth relates to a

Development relates to the growth of human capital
gradual increase in one of the
indexes, a decrease in inequality figures, and structural
components of Gross Domestic
changes that improve the general population’s quality
Product: consumption, government
of life.
spending, investment, net exports.
It is a Qualitative concept. it includes HDI (Human

It is a Quantitative concept. Development Index), gender- related index (GDI),
Increases in real GDP. Human poverty index (HPI), infant mortality, literacy
rate etc.
It only Brings quantitative changes Its effect is that it Brings Qualitative changes in the
in the economy economy.
Economic development is more relevant to measure

Economic growth is a more
progress and quality of life in developing nations. like
relevant metric for progress in
India where there is rampant inequality in the
developed countries. But it’s
distribution of wealth.
widely used in all countries because
growth is a necessary condition for
Concerned with structural changes in the economy for
development. example generally economic development is associated
with fall in the share of Agriculture in the total GDP,
Growth is concerned with increase
while the increase in the share of manufacturing in the
in the economy’s output
total GDP.

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Measures of Economic Development: Human Development Index, Green GDP,

Gross National Happiness Index
Measures of Economic Development
Green GDP
 Green GDP is a term used for expressing GDP after adjusting for environment
degradations.
 Green GDP is an attempt to measure the growth of an economy by subtracting the

costs of environmental damages and ecological degradations from the GDP
 The concept was first initiated through a System of National Accounts.
 The System of National Accounts (SNA) is an accounting framework for measuring

the economic activities of production, consumption and accumulation of wealth in an
economy during a period of time. When information on economy’s use of the natural
environment is integrated into the system of national accounts, it becomes green
national accounts or environmental accounting.
 The process of environmental accounting involves three steps viz. Physical

accounting; monetary valuation; and integration with national Income/wealth
Accounts.
 Physical accounting determines the state of the resources, types, and extent
(qualitative and quantitative) in spatial and temporal terms.
 Monetary valuation is done to determine its tangible and intangible components.
 Thereafter, the net change in natural resources in monetary terms is integrated into the
Gross Domestic Product in order to reach the value of Green GDP.
Green GDP and India
 While explicitly green GDP is not measured in India, but environmental accounting
has been done in India from last 2 decades
 A Framework for the Development of Environmental Statistics (FDES) was

developed by the Central Statistics Office (CSO) of India in the early 1990s. The
Compendium of Environment Statistics is being released since 1997.
 As per the recommendations of Technical Working Group on Natural Resource

Accounting (NRA) in the later 1990s, a pilot project on NRA in the State of Goa was
initiated during 1999-2000. Thereafter, resource accounting studies were carried out
in 8 states on a different set of natural resources. Later a Technical Advisory
Committee was constituted in the year 2010 under the Chairmanship of Dr Kirit
Parikh to bring out a Synthesis Report combining the findings of all these studies. The

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report recommended the preparation of a National Accounting Matrix that would

include environmental accounts. The High powered expert group under Partha
Dasgupta was constituted subsequently in 2011 with the mandate of developing a
framework for green national accounts of India and for preparing a roadmap to
implement the framework.
 Following the guidance of International Organisation of Supreme Audit Institutions

(INTOSAI) on the framework for of environmental auditing, the supreme audit
institution of India (CAG) also conducts an environmental audit in India. This process
was formalised with the introduction of specialized guidelines for the conduct of
environmental audits. This laid down broad guidelines to enable India’s auditors to
examine whether the auditee institutions gave due regard to the efforts of
promulgating sustainability development and environmental concerns, where
warranted.
 Thus, in India, the Environmental audit is conducted within the broad framework of
Compliance Audit and Performance Audit at the central level by the Office of
Principal Director of Audit (Scientific Departments) and by the state Accountant
Generals (Audit) at the state level. Over the years, more and more states have taken
up environmental audits. This compliance as well as performance audits have been
printed in the respective state/ central audit reports and presented to
Legislature/Parliament. All these reports deal with the environmental themes of water
issues, air pollution, waste, biodiversity and environmental management systems. All
the environment audits done at the state level and at the central level since 2001 are
collated in the CAG report on environmental audit.
Gender Inequality Index
 Gender inequality remains a major barrier to human development. Girls and women
have made major strides since 1990, but they have not yet gained gender equity.
 The disadvantages facing women and girls are a major source of inequality. All too
often, women and girls are discriminated against in health, education, political
representation, labour market, etc.—with negative consequences for development of
their capabilities and their freedom of choice.
 The GII is an inequality index. It measures gender inequalities in three important

aspects of human development—reproductive health, measured by maternal mortality
ratio and adolescent birth rates; empowerment, measured by proportion of
parliamentary seats occupied by females and proportion of adult females and males
aged 25 years and older with at least some secondary education; and economic status,
expressed as labour market participation and measured by labour force participation
rate of female and male populations aged 15 years and older.
 The GII is built on the same framework as the IHDI—to better expose differences in
the distribution of achievements between women and men. It measures the human

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development costs of gender inequality. Thus, the higher the GII value, the more
disparities between females and males and the more loss to human development.
 The GII sheds new light on the position of women in 159 countries; it yields insights
in gender gaps in major areas of human development. The component indicators
highlight areas in need of critical policy intervention, and it stimulates proactive
thinking and public policy to overcome systematic disadvantages of women.
Gross National Happiness Index
 Gross National Happiness is a term coined by His Majesty the Fourth King of Bhutan,
Jigme Singye Wangchuck in the 1970s. The concept implies that sustainable
development should take a holistic approach towards notions of progress and give
equal importance to non-economic aspects of well-being.
 “How are you?” We ask that question of one another often. But how are we doing – as
a country, a society? To answer that question, Bhutan uses its Gross National
Happiness (GNH) Index.
 In 2015, a total of 91.2% of Bhutanese were narrowly, extensively, or deeply happy.

43.4% were extensively or deeply happy. The aim is for all Bhutanese to be
extensively or deeply happy. Bhutan is closer to achieving that aim in 2015 than it
was in 2010.
 GNH is a much richer objective than GDP or economic growth. In GNH, material
well-being is important, but it is also important to enjoy sufficient well-being in things
like community, culture, governance, knowledge and wisdom, health, spirituality and
psychological welfare, a balanced use of time, and harmony with the environment.
The four pillars of GNH:

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The Nine Domains of GNH
Criticism of GNH
 From an economic perspective, critics state that because GNH depends on a series
of Subjective judgments about well-being, governments may be able to define GNH
in a way that suits their interests
 Other critics say that international comparison of well-being will be difficult in this
model; proponentss maintain that each country can define its own measure of GNH as

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it chooses and that comparisons over time between nations will have validity. GDP
provides a convenient, international scale.
 Research demonstrates that markers of social and individual well-being are

remarkably transcultural: people generally report greater subjective life satisfaction if
they have strong and frequent social ties, live in healthy ecosystems, experience good
governance, etc. Nevertheless, it remains true that reliance on national measures of
GNH would render international comparisons of relative well-being more problematic
since there is not and is not likely ever to be a common scale as “portable” as GDP
has been with other countries.
Human Development Index
 The Human Development Index (HDI) is a statistical tool used to measure a country’s
overall achievement in its social and economic dimensions. The social and economic
dimensions of a country are based on the health of people, their level of educational
attainment and their standard of living.
 Pakistani economist Mahboob 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 the standard of living.
Why do we require HDI?
 Firstly, GDP method of calculating progress ignores non-income aspects like

education and health thus, for example, Arab countries have high GDP per-capita, but
the progress in health and education field is limited in those countries which do not
get measured in GDP. Similarly, in countries like Cuba and Sri Lanka GDP per capita
is low, but the quality of life is much better than many high GDP per capita countries
of the Arab world and Latin America because of high-quality indicators in social
sectors. HDI will overcome this problem
 Secondly, GDP per capita ignores income inequality or distribution of wealth in a

country for example in countries of Latin America has high GDP per capita but due to
skewed income distribution, the masses are excluded from growth process.
 The HDI was created to emphasize that people and their capabilities should be the
ultimate criteria for assessing the development of a country, not economic growth
alone
Method of calculating HDI
 The Human Development Index (HDI) is a summary measure of average achievement

in key dimensions of human development: a long and hea healthy life, being

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knowledgeable and have a decent standard of living. The HDI is the geometric mean
of normalized indices for each of the three dimensions.
(a)Life Expectancy Index assessment
 The minimum value for life expectancy is fixed at 20 years in the new calculation.
The maximum value for life index is kept at 83.2 years.
 Formula to calculate Life Expectancy Index (LEI) = Life Expectancy of a country -

20/ 83.2-20
(b) Education Index assessment
Education Index (EI) assessment is composite of two indices. They are
1. Mean Years of Schooling Index (MYSI)
2. Expected Years of Schooling Index (EYSI)
 Formula to calculate Mean Years of Schooling Index (MYSI) = Mean years of

schooling – 0/ 13.2 – 0
 Formula to calculate Expected Years of Schooling Index (EYSI) = Expected Years of

Schooling – 0/ 20.6 – 0
(C) Income Index assessment
 To calculate this index, goal posts are set as per observations during 1980 – 2010 in
various countries. Gross National Income per capita is taken as a measure to calculate
new Income
me Index in new HDI. Minimum income is set as $163, and maximum
income is set as $108,211.

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 Formula to calculate Income Index = Log (Country’s GNIpc) – Log ($163) / Log
($108,211) – Log ($163)
How to calculate Human Development Index as per new method?
Formula to calculate Human Development Index (HDI) = (Life Expectancy Index X

Education Index X Income Index) 1/3
New Human Development Index (HDI) is geometric mean of Life Expectancy Index (LEI),
Education Index (EI) and Income Index (II).
After this calculation total value will be between 0 and 1. As per the values gained, countries
will be placed in the list of the division of countries. They are divided into very high human
development, high human development, medium high human development and low high
human development countries
Global Trends in HDI
 The Scandinavian countries which include Norway, Sweden, and Denmark etc. are
world leaders in HDI since most of them occupy positions within top 10 in HDI list
and Norway always tops the list. According to 2015 HDI rankings, Norway is top
ranked country. The reasons why these countries are performing so well In HDI are
manifold. These countries have high per capita income; along with this positive state
interference in education and health along with a well-developed social security
system ensure that these countries maintain their dominance in HDI ranking.
 Among India’s neighbours, Bhutan and Bangladesh figure in Medium development

category. Pakistan (ranked 146) and Nepal (145) are in the ‘low development’
category, while Sri Lanka (73) is in the ‘high development’ category.
 The five countries that made up the bottom of the list were Niger (0.348), Central
African Republic (0.350), Eritrea (0.391), Chad (0.392) and Burundi (0.400).
Strength of HDI index
 There is widespread use of HDI to compare development levels, and it does reveal
clear global patterns.
 Does not solely concentrate on economic Growth, and takes into consideration that
there are other, more social, ways to measure progress.
 Increase in education and health shows an improvement in countries progress index.
Weaknesses of HDI index
 The fact that the HDI uses GDP per capita in its calculations opens many criticisms.
Here are some of them.

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 GDP per capita does not give an indication of the income distribution. Issues about
Rich and poor divide etc.
 GDP does not show how the income is spent by the government. Some countries
spend more on military than on health care
 The range of variables included by the HDI is too narrow and does not include much-
needed factors such as the % of people living on under 1$ a day
 Out of the three main constituents of the HDI, some factors are more important than
others. The HDI is flawed for this reason as the score of the three is averaged out.
 When knowledge is measured it only takes into account what children learn at school
not in the family. And so maybe knowledge statistics may be distorted if the family
play more of a role in education in the home.
 Longevity can also be distorted as the life expectancy of a person does not consider
how healthy the life was led. i.e. A person aged 90 years old but has suffered serious
illness in the last 30 years of their life would have a higher HDI value compared to a
70-year-old who has led a very healthy life.
 Countries like are countries with booming economic growth. And also, it has well-
developed health and education sector. There is no religious freedom, there’s
censorship on the internet, and the state is everywhere.
 Data from some developing countries may not be very reliable and may be difficult to
confirm.
 The measures chosen may seem very arbitrary to some because there are another way
of measuring relative qualities in health and education
 No indication in the education index about access to education for all groups in
society.
The HDI and India
 India’s human development index (HDI) ranking for 2015 puts Asia’s third largest
economy among a group of countries classed as “medium” in the list, as opposed to
“low” in the 1990s, thanks to factors such as an increase in life expectancy and mean
years of schooling in the past 25 years.
 But the bad news from the report released on Tuesday in Stockholm is that regional
disparities in education, health and living standards within India—or inequality in
human development—shave off 27% from India’s HDI score.
 As it stands, India is ranked 131 out of 188 countries in a list that is topped by
Norway.

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 India’s HDI value for 2015 is 0.624—which puts the country in the medium human
development category but behind fellow South Asian countries like Sri Lanka and the
Maldives.
 India’s 2015 score is up from 0.428 in 1990, i.e. an increase of 45.8% between 1990-
2015.
 India’s improved HDI value is second among BRICS countries, with China recording
the highest improvement—48%.
 Between 1990 and 2015, India’s life expectancy at birth increased by 10.4 years,
mean years of schooling increased by 3.3 years and expected years of schooling
increased by 4.1 years,” the report said, adding that India’s Gross National Income, or
GNI, per capita, increased by about 223.4% during the same period.

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 In South Asia, countries that are close to India in HDI rank with a comparable
population size are Bangladesh and Pakistan, which are ranked 139 and 147,
respectively.
 The HDI report also showed that almost 1.5 billion people in developing countries
live in multi-dimensional poverty. Of this, 54%, or 800 million people, are in South
Asia while 34% are in Sub-Saharan Africa.

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Economic and Social Development in India: Millennium Development Goals

Millennium Development Goals and India
In 2000, 189 nations made a promise to free people from extreme poverty and multiple
deprivations. This pledge became the eight Millennium Development Goals to be achieved
by 2015. In September 2010, the world recommitted itself to accelerate progress towards
these goals.
The MDGs consists of eight goals, and these eight goals address myriad development issues.
The eight (8) Goals are as under:
Eighteen (18) targets were set as quantitative benchmarks for attaining the goals. The United
Nations Development Group (UNDG) in 2003 provided a framework of 53 indicators (48
basic + 5 alternatives) which are categorized according to targets, for measuring the progress
towards individual targets.
A revised indicator-framework drawn up by the Inter-Agency and Expert Group (IAEG) on

MDGs came into effect in 2008. This framework had 8 Goals, 21 targets and 60 indicators.
India has not endorsed this revised framework.

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MDG and India Progress
MDG 1: Eradicate extreme poverty and hunger.
Target: Halve, between 1990 and 2015, the proportion of people whose income is less
than one dollar a day.
India’s Progress:
 The all India Poverty Head Count Ratio (PHCR) estimate was 47.8% in 1990. In
order to meet the target, the PHCR level has to be 23.9% by 2015. In 2011-12, the
PHCR at all India level is 21.9%, which shows that, India has already achieved the
target well ahead of time.
 During 2004-05 to 2011-12, the Poverty Gap Ratio reduced both in rural and urban
areas. While the rural PGR declined from 9.64 in 2004-05 to 5.05 in 2011-12 in the
urban areas it declined from 6.08 to 2.70 during the same period.
Target: Halve, between 1990 and 2015, the proportion of people who suffer from
hunger.
India’s Progress:
 It is estimated that in 1990, the proportion of underweight children below 3 years as

52%. In order to meet the target, the proportion of under-weight children should
decrease to 26% by 2015.
 The National Family Health Survey shows that, the proportion of under-weight
children below 3 years declined from 43% in 1998-99 to 40% in 2005-06. At this rate
of decline the proportion of underweight children below 3 years is expected to reduce
to 33% by 2015, which indicates India is falling short of the target.
MDG 2: Achieve Universal Primary Education
Target: Ensure that by 2015, children everywhere, boys and girls alike, will be able to
complete a full course of primary education.
India’s Progress:
 The Net Enrolment Rate (NER) in primary education (age 6-10 years) was estimated
at 84.5 per cent in 2005-06 (U-DISE) and the NER has increased to 88.08 per cent in
2013-14 (U-DISE), and is unlikely to meet the target of universal achievement.
 The youth (15-24 years) literacy rate has increased from 61.9% to 86.14 per cent
during the period 1991-2011 and the trend shows India is likely to reach 93.38%
which is very near to the target of 100% youth literacy by 2015. At national level, the
male and female youth literacy rate is likely to be at 94.81% and 92.47%.

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MDG 3: Promote Gender Equality and Empower Women
Target: Eliminate gender disparity in primary, secondary education, preferably by 2005, and
in all levels of education, no later than 2015.
India’s Progress:
 At present, in primary education the enrolment is favourable to females as Gender

Parity Index (GPI) of Gross Enrolment Ratio (GER) is 1.03 in 2013-14.
 In Secondary education also gender parity has achieved GPI of GER is 1 in 2013-14
and in tertiary level of education, the GPI of GER is 0.89 in 2012-13. 9
 As per Census 2011, the ratio of female youth literacy rate to male youth literacy rate
is 0.91 at all India level and is likely to reach the level of 1 by 2015.
 As in January 2015, India, the world’s largest democracy, has only 65 women
representatives out of 542 members in Lok Sabha, while there are 31 female
representatives in the 242-member Rajya Sabha and hence presently the proportion of
seats in National Parliament held by women is only 12.24% against the target of 50%.
MDG 4: Reduce Child Mortality
Target: Reduce by two-thirds, between 1990 and 2015, the under-five Mortality Rate.
India’s Progress:
 Under Five Mortality Ratio (U5MR) was estimated at 125 deaths per 1000 live births
in 1990. In order to achieve the target, the U5MR is to be reduced to 42 deaths per
1000 live births by 2015. As per Sample Registration System 2013, the U5MR is at
49 deaths per 1000 live births and as per the historical trend, it is likely to reach 48
deaths per 1000 live births, missing the target narrowly. However, an overall
reduction of nearly 60% happened during 1990 to 2013, registering a faster decline in
the recent past, and if this rate of reduction is sustained, the achievement by 2015 is
likely to be very close to the target by 2015.
 In India, Infant Mortality Rate (IMR) was estimated at 80 per 1,000 live births in
1990. As per SRS 2013, the IMR is at 40 and as per the historical trend; it is likely to
reach 39 by 2015, against the target of 27 infant deaths per 1000 live births by 2015.
However, with the sharp decline in the recent years, the gap between the likely
achievement and the target is expected to be narrowed.
 The Coverage Evaluation Survey estimates the proportion of one year old children
immunised against measles at 74% in 2009. Although, there is substantial
improvement in the coverage which was 42% in 1992-93, yet at this rate of
improvement, India is likely to achieve about 89% coverage by 2015 and thus India is
likely to fall short of universal coverage.

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MDG 5: Improved Mental Health
Target: Reduce by three quarters between 1990 and 2015, the Maternal Morality Ratio.
India’s Progress:
 In 1990, the estimated MMR was 437 per 1,00,000 live births. In order to meet the
MDG target, the MMR should be reduced to 109 per 1,00,000 live births by 2015. As
per the latest estimates, the MMR status at all India level is at 167 in 2011-13. As per
the historical trend, MMR is likely to reach the level of 140 maternal deaths by 2015,
however, assuming the recent sharper decline is sustained, India is likely to be slightly
nearer to the MDG target.
MDG 6: Combat HIV/AIDS, Malaria and Other Diseases.
Target: Have halted by 2015 and begun to reverse the spread of HIV/AIDS.
India’s Progress:
 The prevalence of HIV among Pregnant women aged 15-24 years is showing a
declining trend 8 from 0.89 % in 2005 to 0.32% in 2012-13.
 According to NFHS –III in 2005-06, Condom use rate of the contraceptive prevalence
rate (Condom use to overall contraceptive use among currently married women, 15-49
years, was only 5.2 % at all India level.
 According to Behavioural Surveillance Survey (BSS), the national estimate for

proportion of population aged 15-24 years with comprehensive correct Knowledge of
HIV/AIDS (%) in 2006 was 32.9% reporting betterment from 2001 (22.2%).
Target: Have halted by 2015 and begun to reverse the incidence of Malaria and other major
diseases.
India’s Progress:
 The Annual Parasite Incidence (API) rate – Malaria has consistently come down from
2.12 per thousand in 2001 to 0.72 per thousand in 2013, but slightly increased to 0.88
in 2014 (P) but confirmed deaths due to malaria in 2013 was 440 and in 2014 (P), 578
malaria deaths have been registered.
 In India, Tuberculosis prevalence per lakh population has reduced from 465 in year
1990 to 211 in 2013. TB Incidence per lakh population has reduced from 216 in year
1990 to 171 in 2013. Tuberculosis mortality per lakh population has reduced from 38
in year 1990 to 19 in 2013.
MDG 7: Ensure Environment Sustainability.
Target: Integrate the principle of sustainable development into country policies and
he loss of environmental resources.
programmes and reverse the

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India’s Progress:
 As per assessment in 2013, the total forest cover of the country is 697898 sq.km
which is 21.23% of the geographic area of the country.
 During 2011-2013, there is an increase of 5871 sq. km in forest cover.
 The network of Protected Areas comprising 89 National Parks and 489 Sanctuaries
giving a combined coverage of 155475.63 km2 in 2000, has grown steadily over the
years. As of 2014, there are 692 Protected Areas (103 National Parks, 525 Wildlife
Sanctuaries, 4 Community Reserves and 60 Conservation reserves, covering
158645.05 km2 or 5.07% of the country’s geographical area.
 Per-capita Energy Consumption (PEC) (the ratio of the estimate of total energy
consumption during the year to the estimated mid-year population of that year)
increased from 6205.25 KWh in 2011-12 to 6748.61 KWh in 2012-13, thus, the
percentage annual increase of 8.76%.
 In 2010, consumption of CFC is estimated at 290.733 ODP tonnes (ODP –Ozone

Depletion Potential), down from 5614 ODP tones in 2000. From the year 2000, the
CFC consumption decreased steadily till 2008, but showed minor increase in 2010.
 As per Census 2011, 67.3% households are using solid fuels (fire wood / crop
residue/cow dung cake/ coke, etc.) for cooking against 74.3% in 2001. Census 2011,
further reveals that, in Rural areas 86.5% households and in Urban areas 26.1%
households are using solid fuels for cooking.
TARGET: Halve, by 2015 the proportion of people without sustainable access to safe
drinking water and basic sanitation
India’s Progress:
 During 2012, at all India level, 87.8% households had access to improved source of
drinking water while 86.9% households in rural and 90.1% households in urban area
had access to improved source of drinking water.
 The target of halving the proportion of households without access to safe drinking
water sources from its 1990 level to be reached by 2015, has already been achieved in
rural areas and is likely to be achieved in urban areas. At all India level also, the target
for access to improved source of drinking water has already been achieved.
TARGET: By 2020, to have achieved a significant improvement in the lives of at least 100
million slum dwellers
India’s Progress:
 Census 2011 reported that 17.2% of urban households are located in slums.

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 The percentage of slum households to urban households (slum reported towns) is

22.17%. Census recorded a 37.14% decadal growth in the number of slum
households.
 Census further reveals that in 2011, 17.37% of the urban population lives in slums.
The Percentage of population in slum households to urban households (slum reported
towns) is 22.44%.
MDG 8: Develop a Global Partnership for Development
Target: In co-operation with the private sector, make available the benefits of new
technologies, especially information and communication.
India’s Progress
 The overall tele-density in the country has shown tremendous progress and is at 76%
as on 31st July 2014.
 The internet subscribers per 100 population accessing internet through wireline and
wireless connections has increased from 16.15 in June 2013 to 20.83 in June 2014.
India’s Progress in a Nutshell

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Sustainable Development Goals and India

 The Sustainable Development Goals (SDGs), otherwise known as the Global Goals,
are a universal call to action to end poverty, protect the planet and ensure that all
people enjoy peace and prosperity.
 The 17 Goals build on the successes of the Millennium Development Goals, while
including new areas such as climate change, economic inequality, innovation,
sustainable consumption, peace and justice, among other priorities.
 The goals are interconnected – often the key to success on one will involve tackling
issues more commonly associated with another.
 The SDGs work in the spirit of partnership and pragmatism to make the right choices
now to improve life, in a sustainable way, for future generations.
 They provide clear guidelines and targets for all countries to adopt in accordance with
their own priorities and the environmental challenges of the world at large.
The SDGs are an inclusive agenda. They tackle the root causes of poverty and unite us
together to make a positive change for both people and planet. “Poverty eradication is at the
heart of the 2030 Agenda, and so is the commitment to leave no-one behind,” UNDP
Administrator Achim Steiner said. “The Agenda offers a unique opportunity to put the whole
world on a more prosperous and sustainable development path. In many ways, it reflects what
UNDP was created for.”
The Goals

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Goal 1: No Poverty
Targets
 By 2030, reduce at least by half the proportion of men, women and children of all
ages living in poverty in all its dimensions according to national definitions.
 Implement nationally appropriate social protection systems and measures for all,
including floors, and by 2030 achieve substantial coverage of the poor and the
vulnerable.
 By 2030, ensure that all men and women, in particular the poor and the vulnerable,
have equal rights to economic resources, as well as access to basic services,
ownership and control over land and other forms of property, inheritance, natural
resources, appropriate new technology and financial services, including microfinance.
 By 2030, build the resilience of the poor and those in vulnerable situations and reduce
their exposure and vulnerability to climate-related extreme events and other
economic, social and environmental shocks and disasters.
 Ensure significant mobilization of resources from a variety of sources, including

through enhanced development cooperation, in order to provide adequate and
predictable means for developing countries, in particular least developed countries, to
implement programmes and policies to end poverty in all its dimensions.
 Create sound policy frameworks at the national, regional and international levels,
based on pro-poor and gender-sensitive development strategies, to support accelerated
investment in poverty eradication actions.
Goal 2: Zero Hunger
Targets
 By 2030, end hunger and ensure access by all people, in particular the poor and
people in vulnerable situations, including infants, to safe, nutritious and sufficient
food all year round
 By 2030, end all forms of malnutrition, including achieving, by 2025, the

internationally agreed targets on stunting and wasting in children under 5 years of age,
and address the nutritional needs of adolescent girls, pregnant and lactating women
and older persons
 By 2030, double the agricultural productivity and incomes of small-scale food

producers, in particular women, indigenous peoples, family farmers, pastoralists and
fishers, including through secure and equal access to land, other productive resources
and inputs, knowledge, financial services, markets and opportunities for value
farm employment
addition and non-farm

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 By 2030, ensure sustainable food production systems and implement resilient

agricultural practices that increase productivity and production, that help maintain
ecosystems, that strengthen capacity for adaptation to climate change, extreme
weather, drought, flooding and other disasters and that progressively improve land
and soil quality
 By 2020, maintain the genetic diversity of seeds, cultivated plants and farmed and
domesticated animals and their related wild species, including through soundly
managed and diversified seed and plant banks at the national, regional and
international levels, and promote access to and fair and equitable sharing of benefits
arising from the utilization of genetic resources and associated traditional knowledge,
as internationally agreed
 Increase investment, including through enhanced international cooperation, in rural

infrastructure, agricultural research and extension services, technology development
and plant and livestock gene banks in order to enhance agricultural productive
capacity in developing countries, in particular least developed countries
 Correct and prevent trade restrictions and distortions in world agricultural markets,
including through the parallel elimination of all forms of agricultural export subsidies
and all export measures with equivalent effect, in accordance with the mandate of the
Doha Development Round
 Adopt measures to ensure the proper functioning of food commodity markets and
their derivatives and facilitate timely access to market information, including on food
reserves, in order to help limit extreme food price volatility.
Goal 3: Good Health and Well Being
Targets
 By 2030, reduce the global maternal mortality ratio to less than 70 per 100,000 live
births
 By 2030, end preventable deaths of new-borns and children under 5 years of age, with
all countries aiming to reduce neonatal mortality to at least as low as 12 per 1,000 live
births and under-5 mortality to at least as low as 25 per 1,000 live births
 By 2030, end the epidemics of AIDS, tuberculosis, malaria and neglected tropical
diseases and combat hepatitis, water-borne diseases and other communicable diseases
 By 2030, reduce by one third premature mortality from non-communicable diseases

through prevention and treatment and promote mental health and well-being
 Strengthen the prevention and treatment of substance abuse, including narcotic drug
abuse and harmful use of alcohol
 By 2020, halve the number of global deaths and injuries from road traffic accidents

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 By 2030, ensure universal access to sexual and reproductive health-care services,

including for family planning, information and education, and the integration of
reproductive health into national strategies and programmes
 Achieve universal health coverage, including financial risk protection, access to

quality essential health-care services and access to safe, effective, quality and
affordable essential medicines and vaccines for all
 By 2030, substantially reduce the number of deaths and illnesses from hazardous
chemicals and air, water and soil pollution and contamination
 Strengthen the implementation of the World Health Organization Framework

Convention on Tobacco Control in all countries, as appropriate
 Support the research and development of vaccines and medicines for the
communicable and non-communicable diseases that primarily affect developing
countries, provide access to affordable essential medicines and vaccines, in
accordance with the Doha Declaration on the TRIPS Agreement and Public Health,
which affirms the right of developing countries to use to the full the provisions in the
Agreement on Trade Related Aspects of Intellectual Property Rights regarding
flexibilities to protect public health, and, in particular, provide access to medicines for
all
 Substantially increase health financing and the recruitment, development, training and
retention of the health workforce in developing countries, especially in least
developed countries and small island developing States
 Strengthen the capacity of all countries, in particular developing countries, for early
warning, risk reduction and management of national and global health risks
Goal 4: Quality Education
Targets
 By 2030, ensure that all girls and boys complete free, equitable and quality primary
and secondary education leading to relevant and Goal-4 effective learning outcomes
 By 2030, ensure that all girls and boys have access to quality early childhood
development, care and pre-primary education so that they are ready for primary
education
 By 2030, ensure equal access for all women and men to affordable and quality
technical, vocational and tertiary education, including university
 By 2030, substantially increase the number of youth and adults who have relevant
skills, including technical and vocational skills, for employment, decent jobs and
entrepreneurship

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 By 2030, eliminate gender disparities in education and ensure equal access to all
levels of education and vocational training for the vulnerable, including persons with
disabilities, indigenous peoples and children in vulnerable situations
 By 2030, ensure that all youth and a substantial proportion of adults, both men and
women, achieve literacy and numeracy
 By 2030, ensure that all learners acquire the knowledge and skills needed to promote
sustainable development, including, among others, through education for sustainable
development and sustainable lifestyles, human rights, gender equality, promotion of a
culture of peace and non-violence, global citizenship and appreciation of cultural
diversity and of culture’s contribution to sustainable development
 Build and upgrade education facilities that are child, disability and gender sensitive
and provide safe, nonviolent, inclusive and effective learning environments for all
 By 2020, substantially expand globally the number of scholarships available to

developing countries, in particular least developed countries, small island developing
States and African countries, for enrolment in higher education, including vocational
training and information and communications technology, technical, engineering and
scientific programmes, in developed countries and other developing countries
 By 2030, substantially increase the supply of qualified teachers, including through

international cooperation for teacher training in developing countries, especially least
developed countries and small island developing states
Goal 5: Gender Equality
Targets
 End all forms of discrimination against all women and girls everywhere
 Eliminate all forms of violence against all women and girls in the public and private
spheres, including trafficking and sexual and other types of exploitation
 Eliminate all harmful practices, such as child, early and forced marriage and female
genital mutilation
 Recognize and value unpaid care and domestic work through the provision of public
services, infrastructure and social protection policies and the promotion of shared
responsibility within the household and the family as nationally appropriate
 Ensure women’s full and effective participation and equal opportunities for leadership
at all levels of decision-making in political, economic and public life
 Ensure universal access to sexual and reproductive health and reproductive rights as
agreed in accordance with the Programme of Action of the International Conference

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on Population and Development and the Beijing Platform for Action and the outcome
documents of their review conferences
 Undertake reforms to give women equal rights to economic resources, as well as

access to ownership and control over land and other forms of property, financial
services, inheritance and natural resources, in accordance with national laws
 Enhance the use of enabling technology, in particular information and

communications technology, to promote the empowerment of women
 Adopt and strengthen sound policies and enforceable legislation for the promotion of
gender equality and the empowerment of all women and girls at all levels
Goal 6: Clean Water and Sanitation
Targets
 By 2030, achieve universal and equitable access to safe and affordable drinking water
for all
 By 2030, achieve access to adequate and equitable sanitation and hygiene for all and
end open defecation, paying special attention to the needs of women and girls and
those in vulnerable situations
 By 2030, improve water quality by reducing pollution, eliminating dumping and

minimizing release of hazardous chemicals and materials, halving the proportion of
untreated wastewater and substantially increasing recycling and safe reuse globally
 By 2030, substantially increase water-use efficiency across all sectors and ensure
sustainable withdrawals and supply of freshwater to address water scarcity and
substantially reduce the number of people suffering from water scarcity
 By 2030, implement integrated water resources management at all levels, including

through transboundary cooperation as appropriate
 By 2020, protect and restore water-related ecosystems, including mountains, forests,

wetlands, rivers, aquifers and lakes
 By 2030, expand international cooperation and capacity-building support to

developing countries in water- and sanitation-related activities and programmes,
including water harvesting, desalination, water efficiency, wastewater treatment,
recycling and reuse technologies
 Support and strengthen the participation of local communities in improving water and
sanitation management
Goal 7: Affordable and Clean Energy
Target

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 By 2030, ensure universal access to affordable, reliable and modern energy services
 By 2030, increase substantially the share of renewable energy in the global energy
mix
 By 2030, double the global rate of improvement in energy efficiency
 By 2030, enhance international cooperation to facilitate access to clean energy

research and technology, including renewable energy, energy efficiency and advanced
and cleaner fossil-fuel technology, and promote investment in energy infrastructure
and clean energy technology
 By 2030, expand infrastructure and upgrade technology for supplying modern and
sustainable energy services for all in developing countries, in particular least
developed countries, small island developing States, and land-locked developing
countries, in accordance with their respective programmes of support
Goal 8: Decent Work and Economic Growth
Targets
 Sustain per capita economic growth in accordance with national circumstances and, in
particular, at least 7 per cent gross domestic product growth per annum in the least
developed countries
 Achieve higher levels of economic productivity through diversification, technological

upgrading and innovation, including through a focus on high-value added and labour-
intensive sectors
 Promote development-oriented policies that support productive activities, decent job

creation, entrepreneurship, creativity and innovation, and encourage the formalization
and growth of micro-, small- and medium-sized enterprises, including through access
to financial services
 Improve progressively, through 2030, global resource efficiency in consumption and

production and endeavour to decouple economic growth from environmental
degradation, in accordance with the 10-year framework of programmes on sustainable
consumption and production, with developed countries taking the lead
 By 2030, achieve full and productive employment and decent work for all women and
men, including for young people and persons with disabilities, and equal pay for work
of equal value
 By 2020, substantially reduce the proportion of youth not in employment, education

or training
 Take immediate and effective measures to eradicate forced labour, end modern
slavery and human trafficking and secure the prohibition and elimination of the worst

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forms of child labour, including recruitment and use of child soldiers, and by 2025
end child labour in all its forms
 Protect labour rights and promote safe and secure working environments for all
workers, including migrant workers, in particular women migrants, and those in
precarious employment
 By 2030, devise and implement policies to promote sustainable tourism that creates
jobs and promotes local culture and products
 Strengthen the capacity of domestic financial institutions to encourage and expand

access to banking, insurance and financial services for all
 Increase Aid for Trade support for developing countries, in particular least developed
countries, including through the Enhanced Integrated Framework for Trade-Related
Technical Assistance to Least Developed Countries
 By 2020, develop and operationalize a global strategy for youth employment and
implement the Global Jobs Pact of the International Labour Organization
Goal 9: Industry, Innovation and Infrastructure
Targets
 Develop quality, reliable, sustainable and resilient infrastructure, including regional

and trans-border infrastructure, to support economic development and human well-
being, with a focus on affordable and equitable access for all
 Promote inclusive and sustainable industrialization and, by 2030, significantly raise

industry’s share of employment and gross domestic product, in line with national
circumstances, and double its share in least developed countries
 Increase the access of small-scale industrial and other enterprises, in particular in

developing countries, to financial services, including affordable credit, and their
integration into value chains and markets
 By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with
increased resource-use efficiency and greater adoption of clean and environmentally
sound technologies and industrial processes, with all countries taking action in
accordance with their respective capabilities
 Enhance scientific research, upgrade the technological capabilities of industrial

sectors in all countries, in particular developing countries, including, by 2030,
encouraging innovation and substantially increasing the number of research and
development workers per 1 million people and public and private research and
development spending

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 Facilitate sustainable and resilient infrastructure development in developing countries

through enhanced financial, technological and technical support to African countries,
least developed countries, landlocked developing countries and small island
developing States 18
 Support domestic technology development, research and innovation in developing

countries, including by ensuring a conducive policy environment for, inter alia,
industrial diversification and value addition to commodities
 Significantly increase access to information and communications technology and

strive to provide universal and affordable access to the Internet in least developed
countries by 2020
Goal 10: Reduce Inequalities
Targets
 By 2030, progressively achieve and sustain income growth of the bottom 40 per cent
of the population at a rate higher than the national average
 By 2030, empower and promote the social, economic and political inclusion of all,
irrespective of age, sex, disability, race, ethnicity, origin, religion or economic or
other status
 Ensure equal opportunity and reduce inequalities of outcome, including by

eliminating discriminatory laws, policies and practices and promoting appropriate
legislation, policies and action in this regard
 Adopt policies, especially fiscal, wage and social protection policies, and
progressively achieve greater equality
 Improve the regulation and monitoring of global financial markets and institutions
and strengthen the implementation of such regulations
 Ensure enhanced representation and voice for developing countries in decision-

making in global international economic and financial institutions in order to deliver
more effective, credible, accountable and legitimate institutions
 Facilitate orderly, safe, regular and responsible migration and mobility of people,
including through the implementation of planned and well-managed migration
policies
 Implement the principle of special and differential treatment for developing countries,
in particular least developed countries, in accordance with World Trade Organization
agreements
 Encourage official development assistance and financial flows, including foreign

direct investment, to States where the need is greatest, in particular least developed

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countries, African countries, small island developing States and landlocked

developing countries, in accordance with their national plans and programmes
 By 2030, reduce to less than 3 per cent the transaction costs of migrant remittances
and eliminate remittance corridors with costs higher than 5 per cent
Goal 11: Sustainable Cities and Communities
Targets
 By 2030, ensure access for all to adequate, safe and affordable housing and basic
services and upgrade slums
 By 2030, provide access to safe, affordable, accessible and sustainable transport

systems for all, improving road safety, notably by expanding public transport, with
special attention to the needs of those in vulnerable situations, women, children,
persons with disabilities and older persons
 By 2030, enhance inclusive and sustainable urbanization and capacity for

participatory, integrated and sustainable human settlement planning and management
in all countries
 Strengthen efforts to protect and safeguard the world’s cultural and natural heritage
 By 2030, significantly reduce the number of deaths and the number of people affected
and substantially decrease the direct economic losses relative to global gross domestic
product caused by disasters, including water-related disasters, with a focus on
protecting the poor and people in vulnerable situations
 By 2030, reduce the adverse per capita environmental impact of cities, including by
paying special attention to air quality and municipal and other waste management
 By 2030, provide universal access to safe, inclusive and accessible, green and public
spaces, in particular for women and children, older persons and persons with
disabilities
 Support positive economic, social and environmental links between urban, peri-urban
and rural areas by strengthening national and regional development planning
 By 2020, substantially increase the number of cities and human settlements adopting
and implementing integrated policies and plans towards inclusion, resource
efficiency, mitigation and adaptation to climate change, resilience to disasters, and
develop and implement, in line with the Sendai Framework for Disaster Risk
Reduction 2015-2030, holistic disaster risk management at all levels
 Support least developed countries, including through financial and technical

assistance, in building sustainable and resilient buildings utilizing local materials
Goal 12: Responsible Production and Consumption

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Targets
 Implement the 10-year framework of programmes on sustainable consumption and

production, all countries taking action, with developed countries taking the lead,
taking into account the development and capabilities of developing countries
 By 2030, achieve the sustainable management and efficient use of natural resources
 By 2030, halve per capita global food waste at the retail and consumer levels and
reduce food losses along production and supply chains, including post-harvest losses
 By 2020, achieve the environmentally sound management of chemicals and all wastes
throughout their life cycle, in accordance with agreed international frameworks, and
significantly reduce their release to air, water and soil in order to minimize their
adverse impacts on human health and the environment
 By 2030, substantially reduce waste generation through prevention, reduction,

recycling and reuse
 Encourage companies, especially large and transnational companies, to adopt

sustainable practices and to integrate sustainability information into their reporting
cycle
 Promote public procurement practices that are sustainable, in accordance with

national policies and priorities
 By 2030, ensure that people everywhere have the relevant information and awareness
for sustainable development and lifestyles in harmony with nature
 Support developing countries to strengthen their scientific and technological capacity

to move towards more sustainable patterns of consumption and production
 Develop and implement tools to monitor sustainable development impacts for

sustainable tourism that creates jobs and promotes local culture and products
 Rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by

removing market distortions, in accordance with national circumstances, including by
restructuring taxation and phasing out those harmful subsidies, where they exist, to
reflect their environmental impacts, taking fully into account the specific needs and
conditions of developing countries and minimizing the possible adverse impacts on
their development in a manner that protects the poor and the affected communities
Goal 13: Climate Actions
Targets
 Strengthen resilience and adaptive capacity to climate-related hazards and natural

sters in all countries
disasters

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 Integrate climate change measures into national policies, strategies and planning
 Improve education, awareness-raising and human and institutional capacity on climate

change mitigation, adaptation, impact reduction and early warning
 Implement the commitment undertaken by developed-country parties to the United

Nations Framework Convention on Climate Change to a goal of mobilizing jointly
$100 billion annually by 2020 from all sources to address the needs of developing
countries in the context of meaningful mitigation actions and transparency on
implementation and fully operationalize the Green Climate Fund through its
capitalization as soon as possible
 Promote mechanisms for raising capacity for effective climate change-related

planning and management in least developed countries and small island developing
States, including focusing on women, youth and local and marginalized communities
Goal 14: Life below Water
Targets
 By 2025, prevent and significantly reduce marine pollution of all kinds, in particular
from land-based activities, including marine debris and nutrient pollution
 By 2020, sustainably manage and protect marine and coastal ecosystems to avoid
significant adverse impacts, including by strengthening their resilience, and take
action for their restoration in order to achieve healthy and productive oceans
 Minimize and address the impacts of ocean acidification, including through enhanced
scientific cooperation at all levels
 By 2020, effectively regulate harvesting and end overfishing, illegal, unreported and
unregulated fishing and destructive fishing practices and implement science-based
management plans, in order to restore fish stocks in the shortest time feasible, at least
to levels that can produce maximum sustainable yield as determined by their
biological characteristics
 By 2020, conserve at least 10 per cent of coastal and marine areas, consistent with
national and international law and based on the best available scientific information
 By 2020, prohibit certain forms of fisheries subsidies which contribute to

overcapacity and overfishing, eliminate subsidies that contribute to illegal, unreported
and unregulated fishing and refrain from introducing new such subsidies, recognizing
that appropriate and effective special and differential treatment for developing and
least developed countries should be an integral part of the World Trade Organization
fisheries subsidies negotiation

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 By 2030, increase the economic benefits to Small Island developing States and least
developed countries from the sustainable use of marine resources, including through
sustainable management of fisheries, aquaculture and tourism
 Increase scientific knowledge, develop research capacity and transfer marine

technology, taking into account the Intergovernmental Oceanographic Commission
Criteria and Guidelines on the Transfer of Marine Technology, in order to improve
ocean health and to enhance the contribution of marine biodiversity to the
development of developing countries, in particular small island developing States and
least developed countries
 Provide access for small-scale artisanal fishers to marine resources and markets
 Enhance the conservation and sustainable use of oceans and their resources by
implementing international law as reflected in UNCLOS, which provides the legal
framework for the conservation and sustainable use of oceans and their resources, as
recalled in paragraph 158 of The Future We Want
Goal 15: Life on land
Targets
 By 2020, ensure the conservation, restoration and sustainable use of terrestrial and
inland freshwater ecosystems and their services, in particular forests, wetlands,
mountains and drylands, in line with obligations under international agreements
 By 2020, promote the implementation of sustainable management of all types of

forests, halt deforestation, restore degraded forests and substantially increase
afforestation and reforestation globally
 By 2030, combat desertification, restore degraded land and soil, including land
affected by desertification, drought and floods, and strive to achieve a land
degradation-neutral world
 By 2030, ensure the conservation of mountain ecosystems, including their

biodiversity, in order to enhance their capacity to provide benefits that are essential
for sustainable development
 Take urgent and significant action to reduce the degradation of natural habitats, halt
the loss of biodiversity and, by 2020, protect and prevent the extinction of threatened
species
 Promote fair and equitable sharing of the benefits arising from the utilization of
genetic resources and promote appropriate access to such resources, as internationally
agreed
 Take urgent action to end poaching and trafficking of protected species of flora and
fauna and address both demand and supply of illegal wildlife products

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 By 2020, introduce measures to prevent the introduction and significantly reduce the
impact of invasive alien species on land and water ecosystems and control or
eradicate the priority species
 By 2020, integrate ecosystem and biodiversity values into national and local planning,
development processes, poverty reduction strategies and accounts
 Mobilize and significantly increase financial resources from all sources to conserve
and sustainably use biodiversity and ecosystems
 Mobilize significant resources from all sources and at all levels to finance sustainable
forest management and provide adequate incentives to developing countries to
advance such management, including for conservation and reforestation
 Enhance global support for efforts to combat poaching and trafficking of protected
species, including by increasing the capacity of local communities to pursue
sustainable livelihood opportunities
Goal 16: Peace, Justice and Strong Institutions
Targets
 Significantly reduce all forms of violence and related death rates everywhere
 End abuse, exploitation, trafficking and all forms of violence against and torture of
children
 Promote the rule of law at the national and international levels and ensure equal
access to justice for all
 By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery
and return of stolen assets and combat all forms of organized crime
 Substantially reduce corruption and bribery in all their forms
 Develop effective, accountable and transparent institutions at all levels
 Ensure responsive, inclusive, participatory and representative decision-making at all

levels
 Broaden and strengthen the participation of developing countries in the institutions of

global governance
 By 2030, provide legal identity for all, including birth registration
 Ensure public access to information and protect fundamental freedoms, in accordance

with national legislation and international agreements

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 Strengthen relevant national institutions, including through international cooperation,

for building capacity at all levels, in particular in developing countries, to prevent
violence and combat terrorism and crime
 Promote and enforce non-discriminatory laws and policies for sustainable

development
Goal 17: Partnership for the Goals
Targets
Finance
 Strengthen domestic resource mobilization, including through international support to

developing countries, to improve domestic capacity for tax and other revenue
collection
 Developed countries to implement fully their official development assistance

commitments, including the commitment by many developed countries to achieve the
target of 0.7 per cent of ODA/GNI to developing countries and 0.15 to 0.20 per cent
of ODA/GNI to least developed countries ODA providers are encouraged to consider
setting a target to provide at least 0.20 per cent of ODA/GNI to least developed
countries
 Mobilize additional financial resources for developing countries from multiple

sources
 Assist developing countries in attaining long-term debt sustainability through

coordinated policies aimed at fostering debt financing, debt relief and debt
restructuring, as appropriate, and address the external debt of highly indebted poor
countries to reduce debt distress
 Adopt and implement investment promotion regimes for least developed countries
Technology
 Enhance North-South, South-South and triangular regional and international

cooperation on and access to science, technology and innovation and enhance
knowledge sharing on mutually agreed terms, including through improved
coordination among existing mechanisms, in particular at the United Nations level,
and through a global technology facilitation mechanism
 Promote the development, transfer, dissemination and diffusion of environmentally

sound technologies to developing countries on favourable terms, including on
concessional and preferential terms, as mutually agreed

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 Fully operationalize the technology bank and science, technology and innovation
capacity-building mechanism for least developed countries by 2017 and enhance the
use of enabling technology, in particular information and communications technology
Capacity building
 Enhance international support for implementing effective and targeted capacity-

building in developing countries to support national plans to implement all the
sustainable development goals, including through North-South, South-South and
triangular cooperation
Trade
 Promote a universal, rules-based, open, non-discriminatory and equitable multilateral

trading system under the World Trade Organization, including through the conclusion
of negotiations under its Doha Development Agenda
 Significantly increase the exports of developing countries, in particular with a view to

doubling the least developed countries’ share of global exports by 2020
 Realize timely implementation of duty-free and quota-free market access on a lasting

basis for all least developed countries, consistent with World Trade Organization
decisions, including by ensuring that preferential rules of origin applicable to imports
from least developed countries are transparent and simple, and contribute to
facilitating market access
Systemic issues
 Policy and institutional coherence
 Enhance global macroeconomic stability, including through policy coordination and

policy coherence
 Enhance policy coherence for sustainable development
 Respect each country’s policy space and leadership to establish and implement
policies for poverty eradication and sustainable development
 Multi-stakeholder partnerships
 Enhance the global partnership for sustainable development, complemented by multi-

stakeholder partnerships that mobilize and share knowledge, expertise, technology
and financial resources, to support the achievement of the sustainable development
goals in all countries, in particular developing countries
 Encourage and promote effective public, public-private and civil society partnerships,
building on the experience and resourcing strategies of partnerships
 Data, monitoring and accountability

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 By 2020, enhance capacity-building support to developing countries, including for

least developed countries and small island developing States, to increase significantly
the availability of high-quality, timely and reliable data disaggregated by income,
gender, age, race, ethnicity, migratory status, disability, geographic location and other
characteristics relevant in national contexts
 By 2030, build on existing initiatives to develop measurements of progress on

sustainable development that complement gross domestic product, and support
statistical capacity-building in developing countries

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Chapter 2- Issues related to Planning

Issues related to Planning in India
Economic planning has been a central belief of India’s development strategy since
independence. Since the time of independence, India has successfully followed the path of
planned development.
Understanding How Planning Worked: The Model
The Indian Situation at the time of Independence.
The Choices
The basic questions that planners had to decide are:
The First question:

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The Second Question:
The Third Question:

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The Chosen Path by the Indian Planners: Mahalanobis Model
Centralised (Imperative) versus Capitalist Economic Planning

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Indicative versus Imperative Economic Planning

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The Rationale for Planning in India

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The Feature of Indian Planning
The Key Objectives of Planning in India
The Achievements of Planning in India
India’s development strategy, commitments, and approaches towards growth and

development, as reflected in the Plans, have undergone various shifts over the years in

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response to the objective conditions of the economy and challenges of the moment. Some of
these changes have been strikingly bold and original, others more modest.
Criticism of Indian Planning: The Debate
Despite the achievement, however, in recent years Indian planning has come under attack
from a number of quarters, both within and outside the country. Countries which for long had
centrally-planned economies have abandoned planning, at least overtly. It sometimes comes
as a surprise to people abroad that India continues to preserve planning as a central pillar of
its development strategy despite having had a vibrant market economy for many years now.
The dissatisfaction with planning originates from two main directions.

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The Counter Arguments

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The Relevance of Planning in the 21st Century India

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The Way Forward
1. All this is not to say, however, that the planning methodology should not change so as
to reflect the new economic realities and the emerging requirements. It has, it must,
and it will.
2. First of all, the – inter-sectoral balancing and indicative planning, at least in the sense
of working out the optimal investment programme, which has been the centre-piece of
Indian planning since the Second Plan, will continue to remain important in the
foreseeable future.

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3. Despite the much greater openness of the Indian economy, our very size and diversity
will ensure that imports will continue to play a relatively small role in the economy,
except in a very few products. Thus, the requirement of planning in estimating the
sectoral investment needs will remain.
4. A more important conceptual issue relates to the nature of the planning problem itself.
In a controlled or directed economy, it is only necessary to work out a feasible path
from the initial condition to the target. However, in a largely market economy this is
not sufficient. Although working out the traditional feasible path continues to be
necessary, it needs to be complemented by an assessment of the path the economy is
likely to take on a business-as-usual basis.
5. The planning problem then is how to move from the projected path to the desired.
Thus, in addition to the standard planning model, there is need to have two other
models: (a) a projection model; and (b) a model which adequately captures the effect
of policy measures on key parameters.

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Planning in India: Bombay Plan; People’s Plan; Mahalanobis Plan; Wage-Good

Model; Gandhian Plan
Planning in India
The Planning Debates
The Bombay Plan
1. A small group of influential business leaders in Bombay drew up and published in

January 1944, a plan for the economic development of India. The Bombay Plan, as it
is now popularly called, did not represent the opinion of the whole business
community. But it claimed public attention because it set forth the considered views
of some of the front-rank businessmen and captains of Indian industry.
2. Mr. J. R. D. Tata and Mr. G. D. Birla were primarily responsible for the initiation of
the study. The other industrialists who were part of Bombay plan were P. Thakurdas,
Kasturbhai Lalbhai and Sir Shri Ram, Ardeshir Dalal, Mr. A. D. Shroff and Dr. John
Matthai.
3. Toward the end of March 1944, the Federation of Indian Chambers of Commerce
representing all business organizations of the country endorsed the Bombay Plan at its
annual meeting, and from then on, the plan came to be regarded as the proposal of
India’s business community, if not of India’s big business.
4. The Bombay Plan put forward as a basis of discussion, a statement in as concrete a

form as possible, of the objectives to be kept in mind in economic planning in India,
the general lines on which development should proceed and the demands which
planning is likely to make on the country’s resources.
5. The principal objectives of the plan are to achieve a balanced economy and to raise
the standard of living of the masses of the population rapidly by doubling the present

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per capita income — i.e. increasing it from $22 to about $45 — within a period of 15
years from the time the plan goes into operation.
6. The planners have laid down minimum living standards on the basis of about 2,800
calories of well-balanced food a day for each person, 30 yards of clothing and 100
square feet of housing; and they also outline the minimum needs for elementary
education, sanitation, water supply, village dispensaries and hospitals. The plan points
out that absolutely minimum needs require an annual income of at least $25; and if
the income of the country were equally distributed it would give each individual only
about $22.
7. The shares of agriculture, industry and services in the total production is to be

changed from 53, 17 and 22 percent, respectively, to 40, 35 and 20 percent.
8. The plan emphasizes the importance of basic industries but also calls for the
development of consumption goods industries in the early years of the plan. Power
heads the list of basic industries which are to be developed, followed by mining and
metallurgy, engineering, chemicals, armaments, transport, cement and others.
9. The plan proposes doubling the present total of 300,000 miles of roads, increasing
railway mileage by 50 percent from its present 41,000 miles, expanding coastal
shipping and investing $150,000,000 on improvement of harbours.
10. The plan offers a comprehensive program of mass education, including primary,
secondary and vocational and university schooling. Provision is also made for adult
education and scientific training and research.
Sarvodaya Plan (1950)
It was drafted by Jaiprakash Narayan. The plan was mainly inspired by the Gandhian Plan
provided by S N Agarwal & the Idea of Sarvodaya presented by another Gandhian leader
Vinoba Bhave.
The Sarvodaya plan put forward and emphasized the importance of agriculture and village
industries especially small-scale textile & cottage industries in the process of economic
development. The plan also recommended the Luddite approach and was pessimistic towards
the usage of foreign technology.
The most important and well acclaimed part of the plan was its emphasis upon land reforms
and decentralized participatory people planning.
People’s Plan
The People’s Plan was Authored by M N Roy and drafted by the Post- War Re-Construction
Committee of the Indian Federation of Labour.
The object of the Plan is to provide for the satisfaction of the immediate basic needs of the
Indian people within a period of ten years. This objective is to be achieved by expanding

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production and by ensuring an equitable distribution of the goods produced. Therefore, the
Plan prescribes increased production in every sphere of economic activity. But its main
emphasis is on agricultural development, since its authors believe that the purchasing power
of the people cannot be raised unless agriculture, which is the biggest occupation in the
country, becomes a paying proposition.
Agriculture, it is argued, forms the foundation of a planned economy for India. Apart from
the nationalization of land and the compulsory scaling down of rural indebtedness, the Plan
formulates two schemes for increasing agricultural production: (a) extension of the area under
cultivation and (b) intensification of cultivation in the area which is already under cultivation.
In the field of industry, the People’s Plan gives priority to the manufacture of consumer
goods. It is argued that as a large volume of demand for essential good for the community
remains perpetually unsatisfied, the goal of planned economy in industry must be to satisfy it
first.
The People’s Plan attaches great importance to railways, roads and shipping in a planned
economy. Therefore, it recommends the rapid development of the means of communication
and transport to cope with the increased movement of goods and traffic between town arid
country.
The Mahalanobis Strategy
The three main aspects of the strategy of development in the earlier phase of planning was:

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The Critique of Mahalanobis Model:
The Wage Good Model
Prominent Economist like, C N Vakil and P R Brahmananda advocated Wage Good model
for the development of the Indian economy and Industrialisation. Vakil and Brahmananda
differed from the Mahalanobis strategy as they believe “At the low level of consumption (this
was the situation in India) the productivity of the workers depends on how much they
consumed.
According to them, if people were undernourished, they will lose their productivity and
become less efficient, at this juncture it is necessary to feed them to increase their
productivity. But this is not true for all consumer good; so they differentiated between Wage
Good (whose consumption increase worker productivity) and Non-Wage Good (whose
consumption did not).
To sum up, Wage Good model says; worker’s productivity depends on not on whether they
use machines to produce goods but also on the consumption of wage goods like, food, cloth
and other basics. Therefore, the first step towards development is to mechanize agriculture
and raise food production; once this objective is reached, one should go for Mahalanobis
strategy of Heavy Industrialisation.
Anyway, Vakil and Brahmananda strategies were ignored and India launched heavy
Industrialisation in the Second plan without mechanising agriculture. The result was failure
of Mahalanobis Strategy and by 1965-66 India was hit by a severe food shortage crisis.
Finally, in the wake of the crisis, the government adopted Brahmananda strategy of
mechanizing agriculture sector and engineered green revolution.
Changing Objectives of Successive Plans.
 In the Fourth Five-year plan, the basic framework of industrialisation

was retained.
 The objective of self-reliance was not given up, but the main emphasis
was shifted to economic growth.
Fourth  The government had starting putting focus on light industries. The
Five-year agriculture sector was given due importance with adoption of new
plan technologies, improved seeds and fertilizers.
 The biggest paradox of the industrialisation strategy was that ‘poverty

has failed to subside despite growth.
 The paradox is rightly captured by the Renowned Economist Mahboob-

Ul Haq in his famous quote “People are not going to eat tractors”.

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 The Fifth plan bough the focus of poverty reduction back on the agenda
with government prioritising ‘Minimum Needs Program’. The plan had
accorded highest priority to the removal of poverty.
 The plan document mentioned “The existence of poverty in incompatible

with the vision of an advanced, prosperous, democratic, egalitarian and
just society”.
 The forthcoming periods saw turmoil in the country in general and

economy in particular. The new Janta Party government decided to
terminate the strategy of planning and put a moratorium on the fifth five
year plan.
Fifth plan
 The Janta Party presented their own draft plan (1978-83) which stated a
new development strategy. For the first time, the planning commission
acknowledge the fact that the benefits of growth had failed to reach the
poor.
 The commission further decided that there would not be undue emphasis
on numbers such as growth rates. The focus will be on raising the
standard of living of the people.
 The Janta government however could not last long and when the new
congress government come in power it terminated the fifth plan and
adopted sixth five-year plan (1980-85).
The Sixth plan puts its objective as:
 To structurally transform the economy;
 To achieve sustained and high growth rate;

Sixth plan
 To improve standard of living of masses & Eradication of poverty and
unemployment.
Several anti-poverty programs like IRDP AND NREM was initiated with the
aim of removing poverty and unemployment.
The Seventh plan marks a departure from earlier plan strategies and spelt out
new long-term strategy.
Seventh  The plans objectives were: solving the basic problems (food, shelter,
plan clothing, education and health) of the people besides creating conditions
for self-sustaining growth in terms of both the capacity to finance growth
internally and the development of technology.

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 The seventh plan contained key elements of change.
 It gave highest priority to increasing agricultural production through

adoption on new technology.
 It reversed the role of public sector and induced privatisation of industrial

activity.
 Liberalisation of external sector with the aim of increasing efficiency in

the manufacturing sector.
 The administrative procedures were changed from regulatory to

facilitator procedures. The strategy was a variant of what is now known
as “Agricultural Development led Growth” Strategy.
The new development strategy:
 The economic growth during the 1980s was not capable of stopping the
economy from economic crisis. The reckless spending’s and fiscal
mismanagement by the government has put India on the edge of an
economic crisis.
 The full-scale crisis began in 1990-91 and the year of 1991-92 turned out
be a severely bad year for the Indian economy. The crisis was market by
an Inflation rate of 16 percent and severe shortages of foreign exchange
and Balance of payment difficulties. The severity of the crisis was such
that India had to shipped its gold to the Bank of England as collateral
against a loan of $ 600 million.
Eighth  As a response to the economic crisis, India adopted structural changes to

Five-year its economy. The changes which will transform the Indian economy for
Plan betterment and will took economy to new heights.
The new approach (Liberalisation, Privatisation and Globalisation) adopted

have major policy initiatives:
 Macroeconomic stabilisation
 Fiscal reforms
 Trade policy reforms
 Industrial Policy reforms
 Financial sector reforms
The new development strategy was a complete reversal form of the earlier
strategies. The old rigidities of the command economy were dismantled and the

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strategy of external pessimism was eliminated. The new strategy favoured

globalisation and was characterised with Export Led Growth.
The Ninth plan proposed to achieve a 7% growth rate during the plan period. It
introduced fiscal discipline and aimed to control rise in prices through
controlling money supply. It aimed at resource mobilization and attracting
Ninth plan foreign direct investment. The thrust of the plan was to achieve agricultural
growth. The proposition was to broaden the direct tax base for raising resources
at the centre.
Target Growth: 6.5% Actual Growth: 5.35%
The Tenth plan laid emphasis on the role of government in the new emerging
economic scenario.
The plan mentions specific areas where the state has to play a proactive role.
 The social sector
 The infrastructure sectors.
 Equity and social justice was given priority.
Tenth plan The 10th Five Year Plan (2002-2007) targeted at a GDP growth rate of 8% per
annum. The primary aim of the 10th Five Year Plan was to renovate the nation
extensively, making it competent enough with some of the fastest growing
economies across the globe.
It intended to initiate an economic growth of 10% on an annual basis. In fact,

this decision was taken only after the nation recorded a consistent 7% GDP
growth, throughout the past decade.
GDP growth target: 8% (realized: 7.8%), savings rate target: 27% (realized:
31.4%)
The Eleventh plan emphasised on ‘faster and more inclusive economic growth’.
 The objective of inclusiveness and sustainability were accorded with

highest priority.
Eleventh
plan  The plan mentioned that the strategy must be based on sound
macroeconomic policies which establish the precondition for rapid and
inclusive growth.
The eleventh plan aimed at:

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 Rapid growth (more than 9%) to reduce poverty and unemployment.
 Access to health and education for all.
 Equality of opportunity
 Empowerment through skill development
 Employment opportunities underpinned by the National Rural

Employment Guarantee Act.
 Environment Sustainability
 Good Governance
 Recognition of Women’s agency.
The Twelfth Plan seeks to achieve the growth rate of 8.2 per cent, down from 9
per cent envisaged earlier, in view of fragile global recovery.
The theme of the plan document is “Faster, Sustainable and more Inclusive
growth”.
The plan projects an average investment rate of 37 per cent of GDP in the 12th
Plan. The projected gross domestic savings rate is 34.2 per cent of GDP.
Besides other things, the 12th Plan seeks to achieve 4 per cent agriculture sector
growth during 2012-17. The growth target for manufacturing sector has been
pegged at 10 per cent. The total plan size has been estimated at Rs.47.7 lakh
crore, 135 per cent more that for the 11th Plan (2007-12).
Twelfth Key Highlights:

Plan  The target growth rate has been set at 8.2 percent.
 The priority areas are: Infrastructure, Health and Education.
 Agriculture is given its due importance and it has been documented in

the plan that agriculture should maintain a growth rate of 4%, in order to
reduce rural poverty.
 The targeted growth rate for the manufacturing sector has been pegged at
10 percent.
 Health, Education and Skill development continues to be the focus areas

for the government in the Twelfth Plan. The plan mentioned that there is
a need to ensure adequate resources to these sectors.
 Simultaneously, it also points to the need to ensure maximum efficiency

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in terms of outcomes for the resources allocated to these sectors. The

need to harness private investment in these sectors has also been
emphasized by the approach.
 Poverty alleviation needs to be done at a much faster rate. The Planning

commission envisage reducing the poverty Head count Ratio by
additional 10 percent during the plan period. At present, the poverty
HCR is 21.8 per cent of the population.
 The outlay on health, Drinking Water and Sanitation should be increased.
 It suggests the need to take steps to reduce energy intensity of production

processes, increase domestic energy supply as quickly as possible and
ensure rational energy pricing that will help achieve both objectives viz.
reduced energy intensity of production process and enhance domestic
energy supply, even though it may seem difficult to attempt.
 Generation of employment for the youth is the key challenge. The plan
targets the creation of additional 50 million jobs.
 Infrastructure investment should be increased to 9% of GDP.
 The plan document mentions of providing ‘Affordable and accessible

Banking Facility to at least 90% of the population’.

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Mobilization of Resources
1. Planning Commission
2. NITI Aayog (National Institution for Transforming India)
3. Mobilization of Resources: National Development Council; Finance
Commission; States Finance Commission
The Planning Commission

The Planning Commission was set up on the 15th of March 1950, through a cabinet
resolution.
Planning Commission had evolved over time from developing a highly centralised planning
system towards indicative planning where Planning Commission concerns itself with the
building of a long term strategic vision of the future and decide on priorities for the nation.
The commission works out sectoral targets and provides promotional stimulus to the
economy (through its “plan funds allocation”) to grow in the desired direction.
Planning Commission attempted to play a system change role and provided consultancy
within the Government for developing better systems. In order to spread the gains of
experience more widely, Planning Commission also played an information dissemination
role.
Thus, historically, Planning Commission’s work was three dimensional.
(a) design policy direction and suggest required schemes/ programmes;
(b) influence the resource allocation from budget; and
(c) oversee the performance and record the same on a standard framework for comparative
assessment of all the states from time to time.
In short, Planning Commission was doing the job both that of a think tank and the function of
allocation of plan resources among the Central Ministries and States in as judicious a manner
as possible, given the limitations of resources.
The announcement on setting of Planning Commission and its expected role in the economic
management was first made in the Parliament by the President, and the details were disclosed
by the Finance Minister (Shri John Mathai) through his budget sppech in the first year of the
Republic (1950-51).
Rightly, Planning Commission was anchored to India’s political history of immediate past
and the Directive Principles of State Policy as enunciated in the Constitution of India.
Functions of Planning Commission
The 1950 resolution setting up the Planning Commission outlined its functions as to:

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1. Make an assessment of the material, capital and human resources of the country,
including technical personnel, and investigate the possibilities of augmenting such of
these resources as are found to be deficient in relation to the nation’s requirement;
2. Formulate a Plan for the most effective and balanced utilisation of country’s
resources;
3. On a determination of priorities, define the stages in which the Plan should be carried
out and propose the allocation of resources for the due completion of each stage;
4. Indicate the factors which are tending to retard economic development, and determine
the conditions which, in view of the current social and political situation, should be
established for the successful execution of the Plan;
5. Determine the nature of the machinery which will be necessary for securing the
successful implementation of each stage of the Plan in all its aspects;
6. Appraise from time to time the progress achieved in the execution of each stage of the
Plan and recommend the adjustments of policy and measures that such appraisal may
show to be necessary; and
7. Make such interim or ancillary recommendations as appear to it to be appropriate

either for facilitating the discharge of the duties assigned to it, or on a consideration of
prevailing economic conditions, current policies, measures and development
programmes or on an examination of such specific problems as may be referred to it
for advice by Central or State Governments.
Planning Commission was replaced with NITI Aayog on 1 January 2015. However, the
financial powers like setting sectoral priorities, designing the schemes and programmes,
estimating the entitlements to State development programmes (other than devolution), and
influencing the annual allocations as per the priorities etc. now come under the direct
influence of the Ministry of Finance, Budget Division.
NITI Aayog (National Institution for Transforming India)
The NITI Aayog (National Institution for Transforming India), is a think tank of the
Government of India established on 1 January 2015 as a replacement for the Planning
Commission to provide Governments at the central and state levels with relevant strategic,
directional and technical advice across the spectrum of key elements of policy / development
process (e.g. special attention to marginalized sections who may be at risk of not benefitting
adequately from economic progress, on technology
(E.g. special attention to marginalized sections who may be at risk of not benefitting
adequately from economic progress, on technology upgradation and capacity building etc.) In
addition, the NITI Aayog will monitor and evaluate the implementation of programmes.

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The NITI Aayog also seeks to foster better Inter-Ministry coordination and better Centre-
State coordination. This is to help evolve a shared vision of national development priorities
and to foster cooperative federalism, as strong states make a strong nation.
To achieve this, NITI Aayog also envisages creation of regional councils comprising of chief
ministers of concerned states / central Ministries to address specific issues and contingencies
impacting more than one state or region.
National and international experts, practitioners and partners are intended to be part of the
NITI Aayog.
The shift to NITI Aayog was taken due to the changing economic landscape of India in the
globalised world with greater role for private players, technology and evolving demographic
aspirations.
Since the inception of Economic reforms of 1991, it has been argued by various renowned
Economists and Policy makers (Both inside the Government and Outside Experts) that the
Planning Commission has served India well for the past 60+ years and now it needs either to
be revamped or abolished all together because:
 India has changed with the adoption of globalisation
 India’s demography has changed
 Indian States have changed,
 India’s private sector has changed,
 the level of technology has changed, and
 India’s integration with global markets has changed,
Keeping the changes in mind, the NITI Aayog has been created to replace the Planning
Commission. It is also stated that the NITI Aayog will ‘facilitate a transition from the isolated
conceptualization of merely ‘planning’, to ‘planning for Implementation’.
Further, NITI Aayog would also be a sounding board and offers internal consultancy services
to State and Central government departments for programme design, evaluation, monitoring,
capacity building, structuring of PPPs etc. However, such services would be available ‘on-
demand basis’.
Objectives
The NITI Aayog has the following objectives as outlined in the cabinet resolution forming it.
1. To evolve a shared vision of national development priorities, sectors and strategies

with the active involvement of States in the light of national objectives. The vision of
the NITI Aayog will then provide a framework national agenda for the Prime Minister
and the Chief Ministers to provide impetus to.

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2. To foster cooperative federalism through structured support initiatives and

mechanisms with the States on a continuous basis, recognizing that strong States
make a strong nation.
3. To develop mechanisms to formulate credible plans at the village level and aggregate
these progressively at higher levels of government.
4. To ensure, on areas that are specifically referred to it, that the interests of national
security are incorporated in economic strategy and policy.
5. To pay special attention to the sections of our society that may be at risk of not
benefitting adequately from economic progress.
6. To design strategic and long term policy and programme frameworks and initiatives,
and monitor their progress and their efficacy. The lessons learnt through monitoring
and feedback will be used for making innovative improvements, including necessary
mid-course corrections.
7. To provide advice and encourage partnerships between key stakeholders and national
and international like-minded Think Tanks, as well as educational and policy research
institutions.
8. To create a knowledge, innovation and entrepreneurial support system through a

collaborative community of national and international experts, practitioners and other
partners.
9. To offer a platform for resolution of inter-sectoral and inter-departmental issues in

order to accelerate the implementation of the development agenda.
10. To maintain a state-of-the-art Resource Centre, be a repository of research on good

governance and best practices in sustainable and equitable development as well as
help their dissemination to stake-holders.
11. To actively monitor and evaluate the implementation of programmes and initiatives,
including the identification of the needed resources so as to strengthen the probability
of success and scope of delivery.
12. To focus on technology upgradation and capacity building for implementation of

programmes and initiatives.
13. To undertake other activities as may be necessary in order to further the execution of
the national development agenda, and the objectives mentioned above.
NITI Aayog vs. Planning Commission
1. NITI Aayog is Planning Commission with expanded scope but without its financial
powers. The financial powers like setting sectoral priorities, designing the schemes
and programmes, estimating the entitlements to State development programmes (other

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than devolution), and influencing the annual allocations as per the priorities etc. now
come under direct influence of the Ministry of Finance, Budget Division / Department
of Expenditure.
2. Good or bad, Planning Commission’s influence and impact were perceived, felt and
measured through annual plan allocations, acceptance of utilization certificates,
discretionary grants in the form of Additional Central Assistance up to autonomous
organisations, Zilla Panchayats and municipalities.
3. Be it rationale or not, the influence of Planning Commission was also reflected in the
accounting protocol where budget lines are shown separately for Plan non-Plan,
discussed in the CAG Reports and in several proposals by Budget Division, where
Plan funds are referred as proxy for development expenditure. But, sans the ability to
influence the annual allocations, and influence on the annual budget proposals, the
NITI Aayog needs to have a framework to prepare its own annual business plans, to
define its outputs and to put in place a framework to assess impact of its outputs and
institute an accountability mechanism.
4. There are some apprehensions as to whether NITI Aayog will be performing such
allocative functions just as the erstwhile Planning Commission. This is because the
Ministry of Finance (MoF) has created a new budget head titled ‘Special Assistance’
since 2015-16 in Demand No 37 (formerly Demand No. 36) of MoF. The Budget
Estimates for 2015-16 is Rs. 20000.00 crore. Ministry of Finance has informed
the parliament standing committee that this amount shall be disbursed based on the
recommendation of NITI Aayog. (However, the Committee was not appreciative of
such allocations.)
5. Like planning commission NITI sans a legal support or any constitutional foundation.
Hence, like Planning Commission, NITI Aayog needs to have its own assessment
framework as relevant to its collaborative operations with central government and the
respective state governments so that its existence is continuously accepted and
respected on the basis of its performance.
6. As per relevant Rules or Acts, Budget Manual, SC & ST Act, General Financial Rules
etc., the Planning Commission as an ‘Organization’ and its officers had ex-officio
positions in the decision-making processes or had a direct influence on the financing
strategies, including sanctioning and releasing of grants to NGOs and the State
Governments, particularly the funds other than those connected to Annual Plan
process.
Composition of NITI Aayog
Like Planning Commission, NITI Aayog is chaired by the Prime Minister.
For all practical purposes a Vice Chairman in the rank of a Cabinet Minister (equivalent to
Dy Chairman, Planning Commission) and a Chief Executive Officer (equivalent to Secretary
Planning Commission) runs the affairs of the institution.

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The following are the members of the current team for NITI Aayog:
Chair Person Shri Narendra Modi
Vice Chair Person DR. Rajiv Kumar
Full Time Member Prof. Ramesh Chand
Full Time Member Shri V K Saraswat
Full Time Member DR Bibek Debroy
Chief Executive Officer Shri Amitabh Kant

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Mobilization of Resources: National Development Council; Finance

Commission; States Finance Commission
National Development Council:
The National Development Council or the Rashtriya Vikas Parishad was set up on 6th August
1952 to strengthen and mobilise the effort and resources of the nation in support of the plan,
to promote common economic policy in all vital spheres, and to ensure the balanced and
rapid development of all parts of the country.
The Council which was re-constituted on October 7, 1967 is the highest decision-making
authority in the country in the area of development matters.
It is a constitutional body with representation from both the Centre and States. The
Council is headed by the Prime Minister and all Union Cabinet Ministers, State Chief
Ministers, representatives of Union Territories; Members of Planning Commission are
its members. The Secretary/ Member-Secretary of Planning Commission functions as
the Secretary of the Council and all administrative assistance is rendered by Planning
Commission.
The Secretary/ Member-Secretary of Planning Commission functions as the Secretary

of the Council and all administrative assistance is rendered by Planning Commission.
The functions of NDC are
1. to prescribe guidelines for formulation of the National Plan, including assessment of

resources for the Plan
2. to consider the National Plan as formulated by the Planning Commission
3. to consider important questions of social and economic policy affecting national

development and
4. to review the working of the Plan from time to time and to recommend such measures
as are necessary for achieving the aims and targets set out in the National Plan.
5. The prime function of the Council is to act as a bridge between the Union
government, Planning Commission and the State Governments.
It is a forum not only for discussion of plans and programmes but also social and economic
matters of national importance are discussed in this forum before policy formulation. It is a
very democratic forum where the States openly express their views. No resolution is passed
by the Council.
The practice is to have a complete record of the discussion and gather out of its general trends
pinpointing particular conclus Committees under the Chairmanship of Union
conclusions. Sub-Committees
Cabinet Minister/State Chief Minister are also formed under the NDC to deliberate on policy
areas requiring wide-range of consultations.

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The NDC ordinarily meets twice a year. So far 58 meetings of the NDC have been held.
Finance Commission:
Article 280 of Indian Constitution
Finance Commission:
1. The president shall, within two years of the commencement of the constitution and
thereafter at the expiration of every five years or as such earlier time as the President
considers necessary, by order constitute a finance commission which shall consist of a
chairman and four other members to be appointed by the President.
2. Parliament may by law determine the qualifications which shall ne requisite for
appointment as members of the commission and the manner in which they shall be
selected.
3. It shall be the duty of the commission to make recommendations to the president as

to:
4. The distribution between the Union and the States of the net proceeds of taxes which
are to be, or may be, divided between them under this chapter and the allocation
between the states of the respective share of such proceeds.
5. The principles which should govern the grants-in-aid of the revenue of the states out
of the consolidated fund of India.
6. Any other matter referred to the commission by the President in the interest of sound
finances.
Finance Commission Working
Vertical and horizontal imbalances are common features of most federations and India is no
exception to this. The Constitution assigned taxes with a nation-wide base to the Union to
make the country one common economic space unhindered by internal barriers to the extent
possible.
States being closer to people and more sensitive to the local needs have been assigned
functional responsibilities involving expenditure disproportionate to their assigned sources of
revenue resulting in vertical imbalances.
Horizontal imbalances across States are on account of factors, which include historical
backgrounds, differential endowment of resources, and capacity to raise resources. Unlike in
most other federations, differences in the developmental levels in Indian States are very
sharp. In an explicit recognition of vertical and horizontal imbalances,
The Indian Constitution embodies the following enabling and mandatory provisions to
address them through the transfer of resources from the Centre to the States.

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1. Levy of duties by the Centre but collected and retained by the States (Article 268)
2. Taxes and duties levied and collected by the Centre but assigned in whole to the States
(Article 269).
3. Sharing of the proceeds of all Union taxes between the Centre and the States under Article
270. (Effective from April 1, 1996, following the eightieth amendment to the Constitution
replacing the earlier provisions relating to mandatory sharing of income tax under Article 270
and permissive sharing of Union excise duties under Article 272).
4. Statutory grants-in-aid of the revenues of States (Article 275)
5. Grants for any public purpose (Article 282).
6. Loans for any public purpose (Article 293).
In addition to provisions enabling transfer of resources from the Centre to the States, a
distinguishing feature of the Indian Constitution is that it provides for an institutional
mechanism to facilitate such transfers. The institution assigned with such a task under Article
280 of the Constitution is the Finance Commission, which is to be appointed at the expiration
of every five years or earlier. Under the Constitution, the main responsibilities of a Finance
Commission are the following.
The institution assigned with such a task under Article 280 of the Constitution is the Finance
Commission, which is to be appointed at the expiration of every five years or earlier. Under
the Constitution, the main responsibilities of a Finance Commission are the following.
1. The distribution between the Union and the States of the net proceeds of taxes which are to
be divided between them and the allocation between the States of the respective shares of
such proceeds.
2. Determination of principles and quantum of grants-in-aid to States which are in need of

such assistance.
3. Measures needed to augment the Consolidated Fund of a State to supplement the resources
of the Panchayats and Municipalities in the State on the basis of the recommendations made
by the Finance Commission of the State.
The last function was added following the 73rd and 74th amendments to the Constitution in
1992 conferring statutory status to the Panchayats and Municipalities. These Constitutionally
mandated functions are the same for all the Finance Commissions and mentioned as such in
the terms of reference (ToR) of different Finance Commissions.
To enable the Finance Commission to discharge its responsibilities in an effective manner,

the Constitution vests the Finance Commission with the power to determine its procedures.
Under the Constitution, the President shall cause every recommendation made by the Finance
Commission together with an explanatory memorandum as to the action taken thereon to be
laid before each House of Parliament.

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So far, thirteen Finance Commissions have given their reports. The Union government has
always been accepting the recommendations of the Finance Commissions, exception being
the recommendations of the Third Commission relating to Plan grants.
There have been major changes in the public finances of the Union and the States during the
period of over 55 years covered by the Finance Commissions. A number of new matters have
been referred to the Commissions in consonance with these developments.
How the different Finance Commissions have discharged their responsibilities in the ever-
changing fiscal situation is covered in the following sections under different heads.
State Finance Commission:
In India, decentralization reforms, aimed at empowering local people through local

governments, assumed significance in early 1990s. Though the Panchayats and the
municipalities (rural local bodies and the urban local bodies) existed even before the 73rd and
74th amendment of the Constitution in the year 1993, these amendments provided an impetus
to the decentralisation process through a system of self-government for the panchayats and
municipalities and devolve greater powers, functions and authority to them.
It also envisaged the panchayats and municipalities as an institution of self-government.

These amendments also underscored the organic link in the public finances of the multi-
layered federal polity in India. The devolution of financial resources to these bodies was
ensured through periodic constitution of the State Finance Commissions (SFCs).
Articles 243 (I) and 243 (Y) of the Constitution spelt out the task of SFCs. Accordingly,
SFCs are required to recommend
1. the principles that should govern the distribution between the State on the one hand
and the local bodies on the other of the net proceeds of taxes, etc. leviable by the state
and the inter-se allocation between different panchayats and municipalities,
2. the determination of taxes, duties, tolls and fees which may be assigned to, or
appropriated by the local bodies, and
3. Grants-in-aid from the consolidated fund of the State to the local bodies. SFCs are
also required to suggest the measures needed to improve the financial position of the
panchayats and municipalities.
The importance of the SFCs in the scheme of fiscal decentralization is that besides arbitrating
on the claims to resources by the state government and the local bodies, their
recommendations would impart greater stability and predictability to the transfer mechanism.
So far, three SFCs have submitted their reports in most of the States. These cover different
time period. The convention established at the national level of accepting the principal
recommendations of the central finance commission without modification, is not bei being
followed in the states.

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Often, even the accepted recommendations are not fully implemented due to resource
constraints. There is no synchronization of the periods covered by the reports of SFCs with
that of the central finance commission, which affects the central finance commission in
assessing the resource required to state governments to supplement the resources of the
panchayats and municipalities.

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Chapter 3- Inflation
Inflation in India: CPI, WPI, GDP Deflator, Inflation Rate
Inflation in India
Understanding Inflation
Back to Basics: In 1947, when India got independence, the Indian economy was suffering
from low growth, poverty and resource shortages. The salary of an average Indian was very
low. Ask your Grand Parents ‘how much they use to earn in the 1950’s?
Today, an average Indian earns 100 times more than what his grandparents use to earn. Does
it mean that the standard of living of the people has also risen 100 times? Before reaching to
such a conclusion, one must remember that the prices of goods and services in the economy
have also risen.
In 1950’s a Delhi-Mumbai air ticket cost in some hundreds, today it cost in thousand.
Similarly, the price of Wheat was in few Paisa; it cost around Rupee 50/kg. Therefore, it is
not clear from income, that whether the standard of living of people have risen or not.
To compare the salary of your grandparents to yours, we need some measure of purchasing
power or price. The meaningful measure that can perform the task is “Consumer Price
Index”.
Consumer Price Index: CPI is used to monitor changes in the cost of living over time.
When the CPI rises, the average Indian family has to spend more on goods and services to
maintain the same standard of living. The economic term used to define such a rising prices
of goods and services is Inflation.
Inflation: Inflation is when the overall general price level in the economy is increasing.
Inflation Rate: Inflation Rate is the percentage change in the price level from the previous
period. If a normal basket of goods was priced at Rupee 100 last year and the same basket of
goods now cost Rupee 120, then the rate of inflation this year is 20%.
Inflation Rate= {(Price in year 2 – Price in year 1)/ Price in year 1} *100
Whole sale Price Index: WPI is used to monitor the cost of goods and services bought by
producer and firms rather than final consumers.
GDP Deflator: Another important measure of calculating standard of living of people is

GDP Deflator. GDP Deflator is the ratio of nominal GDP to real GDP. The nominal GDP is
measured at the current prices whereas the real GDP is measured at the base year prices.
Therefore, GDP Deflator reflects the current level of prices relative to prices in a base year.
Example, In India the base year of calculating deflator is 2011-12.

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The Difference
Consumer Price Index GDP Deflator
CPI reflects the price of goods and services GDP deflator reflects the price of all the
bought by the final consumers. goods and services produced domestically.
Example: Suppose the price of a satellite to The price rise of the ISRO satellite will be
be launch by ISRO increases. Even though reflected in GDP deflator.
the satellite is part of the GDP of India, but it
is not a part of normal CPI index, since we
don’t consume satellite.
Similarly, India produces some crude oil, but The price change of oil products is not
most of the oil/petroleum is imported from reflected much in the GDP deflator since we
the West Asia, as a result, when the price of do not produce much crude oil.
oil/petroleum product changes, it is reflected
in CPI basket as petroleum products
constitute a larger share in CPI.
The CPI compares the price of a fixed basket The GDP deflator compares the price of
of goods and services to the price of the currently produced goods and services to the
basket in the base year. price of the same goods and services in the
base year. Thus, the group of goods and
services used to compute the GDP deflator
changes automatically over time.

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Types of Inflation: Demand Pull, Cost Push, Stagflation, Structural Inflation,

Deflation and Disinflation
Causes of Inflation
Inflation is mainly caused either by demand Pull factors or Cost Push factors. Apart from
demand and supply factors, Inflation sometimes is also caused by structural bottlenecks and
policies of the government and the central banks. Therefore, the major causes of Inflation are:
 Demand Pull Factors (when Aggregate Demand exceeds Aggregate Supply at Full
employment level).
 Cost Push Factors (when Aggregate supply increases due to increase in the cost of
production while Aggregate demand remains the same).
 Structural Bottlenecks (Agriculture Prices fluctuations, Weak Infrastructure etc.)
 Monetary Policy Intervention by the Central Banks.
 Expansionary Fiscal Policy by the Government.
Demand and Supply factors can be further sub divided into the following:
Demand Pull Inflation
 Demand Pull Inflation is mainly due to increase in Aggregate demand. The increase in
Aggregate demand mainly comes from either increase in Government Expenditure
(Expansionary Fiscal Policy) or by an increase in expenditure from Households and
Firms.
 The root cause of demand pull inflations is- Aggregate demand > Aggregate Supply.
This simply means that the firms in the economy are not capable of produc
producing the

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goods and services demanded by the households in the present time period. The
shortages of goods and services due to increase in demand fuels inflation.
 Imagine what happened when there was an outbreak of swine flu in India. Due to the
outbreak of swine flu epidemic in India, the government notified a warning that
people should wear Breathing Masks to protect them from the infection. As a result,
the demand for mask had risen to a very high level, but the supply being limited as the
producers of the mask had no anticipation of the swine flu epidemic. Due to the high
demand and limited supply of masks, the prices had risen manifold. The case above
captures the mechanism of demand pull inflation.
 The above example only captures the mechanism of Demand led inflation and that too
for a particular product. What happens at Macro level? What fuels inflation in the
entire economy? Before answering the question. Let’s understand some basic concept
related to the economy:
 Full Employment Level: Full employment is an economic situation in which all the
available resources of the economy are fully utilised, and there exists no further scope
of improvement in the economy. The Full employment level represents that economy
is operating at its maximum potential. The level of unemployment is minimum, the
prices in the economy are stable, resources are fully utilised, whatever firms are
producing is getting sold, and there exist no shortages in the economy.
Inflationary Gap: the Inflationary gap is a situation which arises when Aggregate demand in
an economy exceeds the Aggregate supply at the full employment level.

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Inflation in a Demand-Pull scenario is basically caused by a situation whereby the Aggregate

demand for goods and services in the economy rises and exceeds the available supply of the
goods and services. In such a situation, the excessive pressure on demand will fuel the
inflation in the economy.
Deflationary Gap: Deflationary Gap is a situation which arises when Aggregate demand in
the economy falls short of Aggregate Supply at the full employment level.
Cost Push Inflation
 There exists a situation in an economy where inflation is fuelled up, not because of
increase in Aggregate Demand but mainly due to increase in the cost of producing
goods and services.
 The cost can be increased mainly due to three factors:
Wage Push Inflation Profit Push Inflation Raw Material Push Inflation
The raw material push

inflation also known as
When the employees push for an
The firms sometimes supply shock inflation is the
increase in wages which are not
decide to increase their main and the most important
justifiable either on the grounds of
profit margins and starts reason for cost push
employee productivity or increase
charging higher prices for inflation.
in the cost of living. In such
their product. This
scenarios, an unwarranted wage
phenomenon pushes the If for any reason the
increase leads to increase in the
price upward and results economy under goes a
cost of production and hence cost supply shock in the form of a
in Profit Push Inflation.
push inflation. rise in the price of essential
raw materials like crude oil,
it will fuel inflation due to

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rise in the cost of production.
Wage Push Inflation generally

For Example, during the
happens during high growth
1970s, the OPEC countries
periods. During which workers The Profit Push Inflation
decided to increase the price
anticipate a hike in their wages generally happens when
of crude oil, this acted as a
due to rising cost of living. The there are few of single
supply shock for the entire
employer responds to their producer producing the
World economy and price of
demand by increasing wages in goods for the entire
petroleum products (an
the hope that he will pass them on market.
essential raw material) went
to the consumers in the form of
up, fuelling inflation.
higher prices.
Cost Push Inflation/Supply Shock
Stagflation: The most important difference between the Demand Pull and Cost Push
Inflation is that while in the case of Demand Pull Inflation the overall output in the economy
does not fall. Whereas, in case of Cost Push Inflation, along with an increase in prices the
output level of the economy also falls.
The fall in output will cause employment to fall in the economy along with fall in growth.
The falling growth along with rising prices makes cost push inflation more dangerous than
the demand-pull inflation. The situation of rising prices along with falling growth and
employment is called as stagflation.
Hyperinflation: Hyperinflation is a situation when inflation rises at an extremely faster rate.

The rate of inflation can increase from 50 times to 300 times.

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The effects of hyperinflation can be devastating for the economy. The situation can lead to
total collapse of the value of the currency of the economy along with economic crisis and
rising external debt and fall in purchasing power of money.
The major causes of the hyperinflation are; government issuing too much currency to finance
its deficits; wars and political instabilities and unexpected increase in people’s anticipation of
future inflation.
When people anticipate that future inflation will rise at a very fast pace, they start consuming
more goods and services due to the fear that higher inflation in the future will destroy the
purchasing power of money. As a result of this, the demand for goods and services rises and
fuels further inflation. The cycle continues and results in a hyperinflation scenario.
Structural Inflation
 Structural Inflation is another form of Inflation mostly prevalent in the Developing

and Low-Income Countries.
 The Structural school argues that inflation in the developing countries is mainly due
to the weak structure of their economies.
 They further argue that increase in money supply and government expenditure could
explain the inflationary scenario only partially.
 The Structuralist argues that the economies of developing countries like, Latin
America and India are structurally underdeveloped as well as highly volatile due to
the existence of weak institutions and imperfect working of markets.
 As a result of these imperfections, some sectors of the economy like agriculture will
witness shortages of supply, whereas some sectors like consumer goods will witness
excessive demand. Such economies face the problem of both shortages of supply,
underutilisation of resources as well as excessive demand in some sectors.
 The major bottlenecks/road blocks of developing economies that fuels Structuralist

form of inflation are:

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Deflation versus Disinflation
Deflation: Deflation is when the overall price level in the economy falls for a period of time.
Disinflation: Disinflation is a situation in which the rate of inflation falls over a period of
time. Remember the difference; disinflation is when the inflation rate is falling from say 5%
to 3%.
Deflation is when, for instance, the price of a basket of goods has fallen from Rs 100 to Rs
80. It’s the reduction in overall prices of goods.
Reaganomics
Reaganomics is a popular term used to refer to the economic policies of Ronald Reagan, the
40th U.S. president (1981–1989), which called for widespread tax cuts, decreased social
spending, increased military spending and the deregulation of domestic markets. These
economic policies were introduced in response to a prolonged period of economic stagflation
that began under President Gerald Ford in 1976.
Back to Basics:
Headline versus Core Inflation
The headline inflation measure demonstrates overall inflation in the economy. Conversely,
the core inflation measures exclude the prices of highly volatile food and fuel components
from the inflation index.
The inflation process in India is dominated to a great extent by supply shocks. The supply
shocks (e.g., rainfall, oil price shocks, etc.) are temporary in nature and hence produce only
temporary movements in relative prices. The headline CPI inflation in India tends to increase
whenever there is a surge in food and fuel prices. Since monetary policy is a tool to manage
aggregate demand pressures, the response of the policy to such temporary shocks is least
warranted according to traditional wisdom.
Core inflation excludes the highly volatile food and fuel components and therefore represents
the underlying trend inflation. The trend inflation drives the future path of overall inflation.
Hence, even when food and fuel inflation moderates over time, persistently high inflation in
non-food, non-fuel components pose an upward risk to overall future inflation, creating
challenges to monetary policy.
The Relationship between Inflation and Interest Rate.
In order to understand the relationship between Inflation and Interest Rate, it is necessary to
understand the distinction between Real interest rate and nominal Interest rate.
Back to Basics: Example, if you decide to deposit all your money (Rs 1 Lakh) in a Bank as
Fixed Deposit,, Banks will pay you Interest rate @ say 10%. The rate of interest that banks
pay you is Nominal Interest Rate. Going by this logic, you will be expected to earn Rs 10,000

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as interest on your Fixed deposit in a year. In the second year, you will be having Rs 1,10,000
in your bank account.
But what about the value or purchasing power of your deposit? Is the money worth Rs
1,10,000 is sufficient for you to buy the same basket of goods that you were purchasing last
year? Will Rs 1,10,000 will buy you the same amount of goods, less amount of goods or
more amount of goods will all depend on the rate of inflation in the economy.
Let’s say, the inflation rate in the economy during the period is 20%. What will be the value
of your deposit at 20% inflation rate?
The real value in terms of goods that can be purchased from Rs 1,10,000 is actually much
less than what it used to be a year ago. The basket of goods that had cost Rs 10,0000 in the
previous year is now costing Rs 1,20,000. But the bank has paid you only Rs 1,10,000 in
return. The interest rate of the bank has failed to beat the inflation in the economy. Therefore,
the real interest adjusted after inflation that the banks have paid you on your deposit is
actually negative 10%.
Real Interest Rate= Nominal Interest Rate – Inflation Rate.
-10 = 10 – 20
The Cost of Inflation

 The inflation is considered to be bad for an economy mainly because it destroys the
purchasing power of the money. When Price rise, each Rupee that you had will buy
less quantity of goods and services. Therefore, inflation destroys the real income of
the people and makes them worse off.
 The argument is particularly true for a country like India, which has a large informal
sector and agriculture sector. Since most of the population is employed in informal
and agriculture sector where minimum wage laws and social security benefits do not
apply, the people in such sectors suffer the most due to inflation. The wages in these
sectors are not indexed for inflation. Thus, when the price rises their wage does not
rise, and they lose due to a reduction in real income on the one hand and no rise in
wages on the other.
There is also two associated social cost of inflation.
 The Shoe Leather Cost
Suppose in an economy the inflation is raising at the rate of 5% from the past few years. In
such a case, everybody will expect the inflation to be 5% in future also. In such a case, all the
economic transactions will be done adjusting for 5% inflation. In such an anticipated inflation
scenario, the only cost of inflation will be shoe leather cost.

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The Shoe Leather Cost occurs because of the cost associated with holding money during
inflation. Since inflation destroys the real power of money, and cash holding does not pay
any interest, people will start depositing their money in banks to earn interest rate.
The less money they hold in cash, the more they have to visit banks or ATMs to withdraw
money. Since going to the bank is not free of cost both in terms of time and the transaction
cost levied by banks on ATM usage, counter withdrawals, as well as the cost of travel to
banks will all add to Shoe Leather Cost.
 Menu Cost
Menu cost is another social cost associated with anticipated inflation. The name menu cost is
derived from the restaurants business. Menu cost arises because inflation makes the business
change their listed price often. The change requires the firm to bear expense related to
printing of new catalogues, new price list etc. they also have to incur expenditure on
advertisement to inform customers about their new prices.
Effects of Inflation on Different Sections
Wealth
Creditor/lender Debtor/Borrower Pensioner Producers
Holders
Inflation harms
creditors, as they lose They stand to
in real terms. Inflation gain by inflation
They stand
harms the since the price
A 1000 RS lent @ 5%, to lose due
pensioners, if of goods and
will pay an interest Inflation benefits their pensions services rise
to inflation,
rate of 50. If inflation the Debtor as they are not faster than the
as their real
rises to 10%, the price gain in real terms. indexed to cost of
returns fall
of goods will be 1100, due to rise
inflation, and production as
but after interest, the in prices.
loses money. wages take time
return will only be lag to react.
1050.

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Chapter 4- Monetary policy in India

Monetary Economics: Barter System, Definition, Function and Evolution of
Money
The Barter System
Money as a medium of exchange was not used in the early history of mankind. Exchange of
the goods was not very frequent as households were self-sufficient. Whatever exchange took
place between the households was in the form of barter, that is, exchange of goods for other
goods.
The barter system does not provide for the direct purchase of goods since there was no
common unit of account and medium of exchange (Money).
Note for Students: Example, if a person grows only wheat and after his self-consumption, he
wants to exchange it for apple. He can do so only if the other person having apples wants
wheat. If that is not the case, no exchange will take place. This problem is called double
coincidence of wants.
Moreover, if they both agree to trade an apple for wheat, then the next problem is how to
determine how much apple is worth one kg of wheat and vice versa. Both the individuals will
argue for more of another person commodity in return of his. Therefore, exchange of goods
will be limited and most of the time will not take place at all.
Difficulties under Barter System of Trade
To overcome the problems of Barter trade, early humans started devising a system of
payments and exchange that allows direct purchase of goods using any instrument that
has following features:
 A unit of Account (it must be measured)
 High Liquidity

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 It can be stored
 It must be wanted by everyone (It should have high demand)
 It can be exchanged easily (Medium of Exchange)
Evolution of Money
Commodity Money Metallic Money Paper Money
The advent of State and

In the very beginning, there With further progress of
political structure had given
exist few commodities which civilisation commodity
rise to a new form of money
were needed by everyone. money is replaced by
which although has no
Commodities like arrows, bows, precious items like Gold
underlying value but has a
sea shells which are used mostly and Silver for monetary
guarantee by the governments.
in hunting become the first form use. Gold and Silver
The government guaranteed
of medium of exchange and largely formed the
money is known as Paper
hence acted as money. Metallic Money.
Money.
The Metallic money

offered several
advantages.
They were easy to Paper money acted as money

In the second stage of the handle. They can be not because it has some value
evolution, when the early easily stored. (unlike gold which has high
human shifted from hunting to value) but simply because they
They do not deteriorate. are guaranteed by the
agriculture, animals like cattle’s,
goats, sheep become the They have the right governments and are scared.
medium of exchange and acted degree of scarcity which With time, paper money took
as money. made them valuable for the form of Bank Notes to be
all, hence acted as a printed by the Central Banks.
perfect medium of
exchange.
Since commodities have certain With time and The last stage of evolution of
limitations like lack of a technology, the hard form money was in the form of Bank
standard unit of account, limited of gold and silver was Deposits Especially Demand
supply and natural factors etc. replaced by coinage deposits, which people hold
Their use limited
ted and replaced system (gold and silver with the commercial banks and
by other forms of money. coins) which were to that can be withdrawn at any

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widely used as money. time. Thus, providing high

liquidity.
Money and its Functions
Definition of Money:
“Anything which is widely accepted in payment of goods or in the discharge of other

kind of payment obligations”.
“Money can be defined as anything that is generally acceptable as a medium of

exchange and at the same time act as a measure and a store of value”.
Economist has simply defined money as “Money is what Money does”. That is money is
anything which performs the function of money.
Functions of Money:
The four main functions of money are;
Medium of Standard of
Store of Value Measure of Value
Exchange Payments
A can sell goods Money act as a store of Money serves as a Money also
to B and in value. common measure of value serves as a
return can or a unit of account. standard mode
demand money Money being the most
of Deferred
for his sale. liquid asset is the most As the value of all goods
payments.
convenient way to store and services are now
B can use the wealth. measured in terms of If a loan is
money to buy money, the relative
taken today, it
other goods from Thus, money can be stored comparison of goods is will be paid
C. as an asset. possible. back in future
As long as the It thus, becomes very Each commodity has its time using the

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money is important that the good own price and monetary money.
accepted, the chosen as money should be value now. A car is worth
process of such that can be easily Rupee 10 Lakh, and A kg The loan
exchange keeps stored. of apple is worth Rupee amount is
on happening. 100. One can simply pay measured in
The case for other liquid the price and buy car or terms of money
This feature of assets like gold or real apple. and is paid back
money is known estate is different; they first in money.
as Medium of have to be sold and
Exchange. converted into money. The
money realised from them
can be used to buy goods
and services.
Modern Monetary Systems
Convertible Paper
Minimum Reserve
Money/Full Reserve In-convertible/ Fiat Money
System
System
Paper money has come to

occupy a very important With the passage of time, the
place in the modernrelative scarcity of gold and silver
The ‘Minimum Reserve
monetary system of almost has increased. Therefore, the
System’ is the current
all the countries. governments find it very difficult
form of currency system
to back all their legal currency with
The term paper money an equal value of gold and silver. practised World over and
applies only to the notes Thus, nowadays paper currency is in India too since 1957.
issued by the government of inconvertible type.
and the central banks.
For quite a long time, Paper Under the Inconvertible monetary Under this system, the
money remained a system, money is not convertible central banks are required
convertible paper money. into gold or silver or other precious to keep only a minimum
Under this system, money is metals. amount of gold and other
convertible into standard The paper money issued by the approved securities (In
coins made of gold and central banks is not backed by India the RBI is required
silver. underlying precious metal. The to keep Rupee 200
Crores).
The Paper money issued by issuing authorities are not
the governments and central responsible to convert the paper On the basis of minimum
banks was fully backed by notes into gold and silver. reserve, the central banks

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the gold and reserve of equal Thus, the currency notes issued by can issue the currency in
value. Therefore, this paper the Central Banks are ‘Fiat any number subject to the
currency system is called Money’, that is, they are issued by economic condition of
‘Full Reserve System’. a ‘Fiat’ (which means ‘Order’) of the country.
the government.
Fiat Paper money is in the form

legal tender promised by the
governments. Since they are legal
tender, they can be widely used to
purchase goods and services.
Importance and Significance of Money

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Monetary Policy in India: Inflation, deflation, Recessionary and Inflationary

Scenarios
How Monetary Policy Works
The Inflation
The Deflation

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How RBI Controls Recession
The Recessionary Scenario
The Relationship between Interest Rate and Bond Prices:
The Bond Price and Interest Rate always have an inverse relationship with each other.

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How RBI Controls Inflation
The Inflationary Scenario

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Monetary Policy tools and Money Supply in India

RBI Tools for Controlling Credit/Money Supply
Broadly speaking, there are two types of methods of controlling credit.
Bank Rate Policy
 Bank rate is the minimum rate at which the central bank of a country provides a loan
to the commercial bank of the country.
 Bank rate is also called discount rate because the central bank provides finance to
commercial banks by rediscounting bills.
 The RBI uses bank rate to control credit in the economy.
 For instance, in an inflationary scenario, the RBI increases the Bank Rate, which
increases the cost of borrowing for commercial banks, this would discourage the
commercial bank from borrowing from the RBI, hence lending in the economy will
fall along with increase in lending rates by commercial bank, increase in lending rate
will discourage investment and hence Aggregate Demand will fall. A fall in AD will
reduce income and output in the economy. Thus, Inflation will Subside.
Open Market Operations
 OMO are another important instrument of credit control.

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 OMO means the purchase and sale of securities by the RBI.
 For instance, in an inflationary scenario, the RBI will start selling government
securities, the selling of securities will reduce money supply from the system (Since
the buyer of the securities will pay for them in Rupee, hence currency from the system
goes out), reduction in money supply will lead to reduction in funds with the
commercial banks, which further reduce their lending capability. A fall in lending
thus contracts credit in the economy.
 However, there are certain limitations that affect OMO viz; underdeveloped securities
market, excess reserves with commercial banks, indebtedness of commercial banks,
etc.
Cash Reserve Ratio
 Banks in India are required to keep certain proportions of their deposits in the form of
cash with themselves as reserves.
 If the legal CRR is 10%, then the bank will have to keep Rs 100 as reserves against
the deposit of Rs 1000.
 If at any time, the RBI decides to increase the CRR from 10 to 20%, then bank have
to keep Rs 200 as reserves against the deposit of Rs 1000. This will reduce the credit
in the economy as the banks now have less money to lend (800 in our example), less
lending means less borrowing and investment and hence reduction in income and
aggregate demand.
 Similarly, a reduction in CRR from 10 to 5%, will reduce the reserve requirement and
hence increases the lending capacity of the banks. Increased lending will lead to
increased investment; increase investment will increase AD and Income.
CRR Controversy
Context: Time and again many Bankers and economists have recommended scrapping of
CRR. With Banks facing rising NPA in recent years, demand has again been raised my few
experts to scrap CRR.
Why CRR should be abolished
 All banks put together maintained a cash balance of Rs3,14,900 crore with the RBI
every day, and this keeps on growing with the growth in deposits of the banking
industry. This huge amount does not earn any interest for the banks. If you calculate
the interest on this amount at the average lending rate of banks, say at 10%, the total
loss to the banking industry is in excess of Rs31,000 crore per year.
 According to many Bankers, CRR policy had denied the country growth, and its
abolition would allow banks to lower the lending rate.

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 Since the RBI did not pay any interest, the CRR acted like a tax on the banking
system, placing the banks at a competitive disadvantage versus non-banking financial
companies and mutual funds that do not require paying CRR.
 According to experts, the loss to the banking sector due to CRR was Rs 21,000 crore.
 If a bank falls short of its CRR requirements, the RBI collects interest on the shortfall
from the bank at the bank rate as if the defaulting bank has borrowed that money from
the central bank. While the RBI’s action is justified, as it is the only way the central
bank can enforce discipline among the banks, this is a source of irritation to the
Banks.
 Most of the central banks in developed countries have dispensed with the system of
CRR and have been using the tool for open market operations to control inflation.
Why should it not be abolished?
 CRR system acts as a hedging strategy for banks. CRR is important as it provides
banks with the immediate liquidity of their own. Since bank operates on a minimum
reserve system, any bad situation like bank run will push millions of depositors
withdrawing their money at the same time. In such a situation if banks have its
liquidity reserves it will stop the banking system from total collapse.
 Till the time the crisis day doesn’t come this is just blocked fund which is not put to
full use, but when the crisis day comes CRR serves a useful purpose – surely banks
and thereby customers have to bear the cost, but it comes at the price of increased
safety.
 CRR and SLR are two Safety Valves built in the system by prudent bankers to protect
banks from all types of adversities.
 If a bank falls short of its CRR requirements, the RBI collects interest on the shortfall
from the bank at the bank rate as if the defaulting bank has borrowed that money from
the central bank. While the RBI’s action is justified, as it is the only way the central
bank can enforce discipline among the banks, this is a source of irritation to the SBI.
 A few years ago RBI had ceased to pay an interest rate on CRR, which affects the
commercial banks. This is one of the main reasons why SBI chairman wanted CRR to
be abolished.
Liquidity Adjustment Facility
 LAF is a monetary policy instrument which allows commercial bank and primary
dealers to borrow money through repurchasing agreement or repos/reverse repos.
 LAF is used to aid banks in adjusting day to day fluctuations in liquidity.

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 RBI extends LAF facility only to commercial banks (excluding RRBs) and Primary
dealers.
 LAF allowed banks to park their excess money with the RBI in case of excess
liquidity or to avail liquidity from the RBI at the time of deficit on an overnight basis
against the collateral of government securities.
 The operations of LAF are conducted by way of repos and reverse repos.
 Repos or Repurchase Agreements is an instrument which allows banks to borrow

money from the RBI to manage short term needs of liquidity against the selling of
government securities with an agreement to repurchase the same government
securities at a predetermined date and rate. The rate at which the RBI lends to the
banks is called Repo Rate.
 Reverse Repo is an instrument which allows the RBI to borrow from the banks by
lending government securities. The rate at which the Banks lends to the RBI is called
Reverse Repo Rate.
 Repo injects money into the system whereas Reverse Repo takes money out of the
system.
 The RBI increases the Repo Rate during the time of inflation and decreases the Repo
Rate during the time of deflation and low growth.
 The important point to remember is that the window of LAF does not allow the banks
to borrow the unlimited amount from the RBI. The Banks are permitted to borrow
only a limited percentage of its Net Demand and Time Liabilities under LAF window.
Marginal Standing Facility
 MSF is a new scheme announced by the RBI in the year 2011-12.
 MSF is a penal rate at which banks can borrow money from the RBI over and above
of what they can borrow from the RBI under the LAF window.
 MSF is a penal rate and is always fixed at a higher rate than the Repo rate.
 The MSF would be a penal rate for banks, and the banks can borrow funds by
pledging government securities within the limits of the statutory liquidity ratio.
 The scheme has been introduced by RBI with the main aim of reducing volatility in
the overnight lending rates in the inter-bank market and to enable smooth monetary
transmission in the financial system.
Statutory Liquidity Ratio
 SLR is that percentage of the deposits which the banks have to hold with themselves
in highly liquid government securities.

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 SLR is one of the many arrows in the RBI’s monetary policy quiver. These are used,
sometimes in isolation, sometimes in combination, to manage the money supply,
interest rates and credit availability in the country.
 The SLR is an important tool of monetary policy, and its primary aim is to ensure that
banks always have enough liquidity (cash and cash equivalent securities) to honour
depositor’s demands and that they don’t lend away all their funds.
 The current rate of SLR is 20%. It simply means that the bank has to invest 20 Re out
of every 100 Rupee deposited with him in government securities.
 The SLR is being used by the RBI to tighten or easing money supply in the economy.
For instance, a 50 BPS reduction in SLR will leave more money with the banks to
lend. More lending means more investment and hence more income and growth.
 Over the years, the use of CRR and SLR as instruments of monetary control has been
reduced. From 37-38 percent in the early 1990s, the RBI has reduced the SLR to 20
percent now. But this is still significant to influence credit and rates.
 The RBI doesn’t always prefer bringing out the big guns in its monetary tools
armament for fear of causing collateral damage — the risk of stoking inflation due to
a repo rate cut.
 In such situations, SLR can be an effective pistol, so to speak. Reducing SLR can free
up banks’ funds, which if deployed for lending can boost investment cycle. The RBI
lowering SLR this time was broadly seen as an attempt to revive the slack credit
demand in the economy.
Bank Base Rate
 The Base Rate is the minimum interest rate of a bank below which it is not
permissible to lend, except in some cases if allowed by the RBI.
 BR is the minimum interest rate that a bank must charge because below the base rate
it is not viable for the bank to lend.
 The base rate, introduced with effect from 1st July 2011 by the Reserve Bank of
India, is the new benchmark rate for lending operations of banks.
 Thus, all categories of domestic rupee loans should be priced only with reference to
the Base Rate.
 The reason for introducing Base Rate was to bring out the transparency in bank
lending rates as well as to improve monetary transmission mechanism.
 Base Rate has replaced the previous benchmark prime lending rate (BPLR) which
bank charged to its most trustworthy customers.

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 The committee constituted under the than DY Governor of the RBI Deepak Mohanty
recommended the abolishment of the BPLR and establishment of more transparent
Base Rate.
Qualitative Measure of the RBI
Fixing Margin Requirements
 The margin refers to the “proportion of the loan amount which is not financed by the
bank”. Or in other words, it is that part of a loan which a borrower has to raise in
order to get finance for his purpose.
 A change in a margin implies a change in the loan size. This method is used to
encourage credit supply for the needy sector and discourage it for other non-necessary
sectors. This can be done by increasing margin for the non-necessary sectors and by
reducing it for other needy sectors.
 Example, If the RBI feels that more credit supply should be allocated to agriculture
sector, then it will reduce the margin and even 85-90 percent loan can be given.
Consumer Credit Regulation
 Under this method, consumer credit supply is regulated through hire-purchase and
instalment sale of consumer goods. Under this method, the down payment, instalment
amount, loan duration, etc., is fixed in advance. This can help in checking the credit
use and then inflation in a country.
Publicity
 This is yet another method of selective credit control. Through it, Central Bank (RBI)
publishes various reports stating what is good and what is bad in the system. This
published information can help commercial banks to direct credit supply in the
desired sectors. Through its weekly and monthly bulletins, the information is made
public, and banks can use it for attaining goals of monetary policy.
Credit Rationing
 Central Bank fixes credit amount to be granted. Credit is rationed by limiting the
amount available for each commercial bank. This method controls even bill
rediscounting. For certain purpose, the upper limit of credit can be fixed, and banks
are told to stick to this limit. This can help in lowering banks credit exposure to
unwanted sectors.
Moral Suasion
 It implies to pressure exerted by the RBI on the Indian banking system without any
strict action for compliance with the rules. It is a suggestion to banks. It helps in
restraining credit during inflationary periods. Commercial banks are informed about

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the expectations of the central bank through monetary policy. Under moral suasion,
central banks can issue directives, guidelines and suggestions for commercial banks
regarding reducing credit supply for speculative purposes.
Control Through Directives
 Under this method the central bank issue frequent directives to commercial banks.
These directives guide commercial banks in framing their lending policy. Through a
directive, the central bank can influence credit structures, the supply of credit to a
certain limit for a specific purpose. The RBI issues directives to commercial banks for
not lending loans to the speculative sector such as securities, etc. beyond a certain
limit.
Direct Action
 Under this method, the RBI can impose an action against a bank. If certain banks are
not adhering to the RBI’s directives, the RBI may refuse to rediscount their bills and
securities. Secondly, RBI may refuse credit supply to those banks whose borrowings
are in excess to their capital. The Central bank can penalize a bank by changing some
rates. At last, it can even put a ban on a particular bank if it does not follow its
directives and work against the objectives of the monetary policy.
Measure of Money Supply in India
M1 M2 M3 M4
M4 includes all
It is also
It is a broader items of M3 along
known as It is also known as Broad
concept of the with total deposits of
Narrow Money.
money supply. post office saving
Money.
accounts.
M1=
C+DD+OD M2= M1 + Saving
M3 = M1+ Time Deposits with
deposits with the M4= M3+Total
C= Currency post office saving the Bank. Deposits with Post
with Public. banks. Time deposits serve as a store Office Saving
Organisations.
DD= Demand M1 is distinguished of wealth and represent a saving
Deposit with from M2 because of the people and are not as M4 however,
the public in the post office liquid as they cannot be excludes National
the Banks. withdrawn through cheques or
saving deposits are Saving Certificates
ATMs as compared to money
not as liquid as of Post Offices.
OD= Other deposited in Demand deposits.
Bank deposits.
Deposits held
by the public

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with RBI.
M3 is the most popular and

essential measure of the money
supply. The monetary
It is the most
committee headed by late Prof
liquid form of
Sukhamoy Chakravarty
the money
recommended its use for
supply.
monetary planning in the
economy. M3 is also called
Aggregate Monetary Resource

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Monetary Policy Agreement in India

Monetary Policy Agreement
What is Monetary Policy Agreement?
 In 2015 The Government of India and Reserve Bank of India signed a Monetary
Policy Framework Agreement. The new monetary policy framework was formed
following the recommendations of a committee headed by RBI Deputy Governor
Urjit Patel.
 The objective of monetary policy framework is to primarily maintain price stability

while keeping in mind the objective of growth.
 As per the agreement, RBI would set the policy interest rates and would aim to bring
inflation below 6 per cent by January 2016 and within 4 per cent with a band of (+/-)
2 per cent for 2016-17 and all subsequent years.
 The central bank will be deemed to have missed its target if consumer inflation is at
more than 6 percent or at less than 2 percent for three consecutive quarters starting in
the 2015/16 fiscal year.
 If the central bank misses the inflation target, it will send a report to the government
citing reasons and remedial actions.
 The central bank will also need to give an estimated time-period within which it
expects to return to the target level.
Significance of Monetary Policy Agreement
 While the agreement gives a free hand to the RBI Governor to decide on the monetary
policy measures to achieve the inflation target, it also requires the RBI to give out to
the Central Government a report in case the target is missed for a period of time.
Thus, it is a fine balance between autonomy and accountability.
 The World over, the Central banks are moving towards an inflation targeting based
criteria for managing monetary policy. The MPA is a step in that direction.
 The MPA will put India into the League of Nations that followed a rule based
monetary policy mechanism.
Monetary policy committee
What is the MPC?
 The monetary policy committee framework will replace the current system where the
RBI governornor and his internal team have complete control over monetary policy
decisions. While a technical advisory committee advises the RBI on monetary policy
decisions, the central bank is under no obligation to accept its recommendations.

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 The committee will have six members, with three appointed by the Reserve Bank of
India (RBI) and the remaining nominated by an external selection committee. The
RBI governor will have the casting vote in case of a tie.
 According to the Finance Bill, the committee will consist of the RBI governor, the
deputy governor in charge of monetary policy and one official nominated by the
central bank.
 The other three members will be appointed by the central government through a
search committee.
 This search committee will comprise of the cabinet secretary, the secretary of the
Department of Economic Affairs, the RBI governor and three experts in the field of
economics or banking as nominated by the central government.
 The members of the MPC appointed by the search committee shall hold office for a
period of four years and shall not be eligible for re-appointment.
 The idea to set up a monetary policy committee was mooted by a RBI-appointed

committee led by deputy governor Urjit Patel in 2014.
 The current members of the MPC are:
1. Governor: DR Urijit Patel
2. DY Governor RBI: DR Viral Acharya
3. Executive Director RBI: Michael Patra
4. External Member: Prof. Pami Dua
5. External Member: Prof. Chetan Ghate
6. External Member: Prof Ravindra Dholakia
Analysis of the MPC
 There is very little to disagree about the desirability of transitioning from the current
decision process to that of an MPC, imparting as it does a greater diversity of views,
specialized experience and independence of opinion.
 With the introduction of the monetary policy committee, the RBI will follow a system
similar to the one followed by most global central banks. The US Federal Reserve sets
its benchmark rate—the Fed funds rate—through the Federal Open Market
Committee (FOMC). The Bank of England’s monetary policy committee is made up
of nine members.
 Setting up of MPC would make monetary policy making more democratic since
currently, the RBI governor alone decides key interest rates. The committee will take
a decision based on the majority vote. Each member will have one vote.

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 The final composition of MPC announced by the government seems to tread the
middle path as it tries to address concerns over excessive government influence over
monetary policy in the country Which the draft MPC invoked since under it proposed
to strip the Governor of veto vote on the monetary policy besides powers for the
government to appoint four of the six members.. The government, however, has
reserved the right to send its views to the monetary policy committee, if needed.
 Communicating the rationale of monetary policy actions is central to both the

credibility of the central bank and to enable the incidence targets of the policy to
adjust behaviour appropriately.

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Chapter 5- Banks & Financial markets

Banking in India: Definition, Functions and Types of Banks
Definition of a Bank
A bank is a financial institution which performs the deposit and lending function. A bank
allows a person with excess money (Saver) to deposit his money in the bank and earns an
interest rate. Similarly, the bank lends to a person who needs money (investor/borrower) at an
interest rate. Thus, the banks act as an intermediary between the saver and the borrower.
The bank usually takes a deposit from the public at a much lower rate called deposit rate and
lends the money to the borrower at a higher interest rate called lending rate.
The difference between the deposit and lending rate is called ‘net interest spread’, and the
interest spread constitutes the banks income.
Essential Features/functions of the Bank
Financial Intermediation
The process of taking funds from the depositor and then lending them out to a borrower is
known as Financial Intermediation. Through the process of Financial Intermediation, banks
transform assets into liabilities. Thus, promoting economic growth by channelling funds from
those who have surplus money to those who do not have desired money to carry out
productive investment.
The bank also acts as a risk mitigator by allowing savers to deposit their money safely
(reducing the risk of theft, robbery) and also earns interest on the same deposit. Bank
provides services like saving account deposits and demand deposits which allow savers to

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withdraw money on an immediate basis thus, providing liquidity (which is as good as holding
cash) with security.
How Banks promote economic growth?
Types/Structure of Banks in India

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Scheduled Commercial Banks
 All the commercial banks in India- Scheduled and Non-Scheduled is regulated under
Banking Regulation Act 1949.
 By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of
India Act, 1934 is considered a scheduled bank. The list includes the State Bank of
India and its subsidiaries (like State Bank of Travancore), all nationalised banks
(Bank of Baroda, Bank of India etc.), Private sector banks, foreign banks, regional
rural banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank NA) and some co-
operative banks.
 Till 2017, Scheduled commercial banks in India comprised 26 Public sector banks
including SBI and its associates, and 19 Nationalised Bank and IDBI. The creation of
Bhartiya Mahaila Bank has increased the total no of Public sector SCB’s to 27, but the
recent merger of the Mahaila Bank with SBI had reduced the list back to 26.
 The scheduled private sector bank includes old private sector banks and new private
sector banks. There are 13 old private sector banks and 9 new private sector banks
including the newly formed IDFC and Bandhan Bank.
 There are also 43 Foreign National Banks operating in India.
 The Regional Rural Banks were started in India back in the 1970s due to the inability
of the commercial banks to lend to farmers/rural sectors/agriculture. The governance
structure/shareholding of RRBs is as follows:
 Central Government: 50%, State Government: 15% and Sponsor Bank: 35%.
 RBI has kept CRR (Cash Reserve Requirements) of RRBs at 3% and SLR (Statutory
Liquidity Requirement) at 25% of their total net liabilities.
Important Facts Relating to Scheduled Commercial Banks
 In terms of Business, Public sector banks dominate the Indian Banking.
 PSB accounts for close to 50% of total assets, 70% of deposits and close to 70% of
the advances.
 Amongst the Public-Sector Banks, SBI and its Associates has the highest number of
Branches.
 The committee on Regional Rural Bank headed by M Narasimhan recommended the

setting up of RRBs for the purpose of providing rural credit.
 An RRB is sponsored by a Public-Sector Bank which also provides a part of its share
capital. Example: Maharashtra Gramin Bank (sponsored by the Bank of Maharashtra)
and the Himachal Gramin Bank (Sponsored by Punjab National Bank). RRBs were

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set up to eliminate other unorganized financial institutions like money lenders and
supplement the efforts of co-operative banks.
 The Private Commercial banks account for close to 1/4th of the assets of the total
banking assets.
Why RRBs Failed to Achieve ITs Objective
The RRB Amendment Bill, 2014
 The Regional Rural Banks (Amendment) Bill, 2014 was introduced by the Minister of
Finance, Mr Arun Jaitley, in Lok Sabha on December 18, 2014. The Bill seeks to
amend the Regional Rural Banks Act, 1976. It was passed by parliament in April
2015.
 The Regional Rural Banks Act, 1976 mainly provides for the incorporation,
regulation and winding up of Regional Rural Banks (RRBs).
 Sponsor banks: The Act provides for RRBs to be sponsored by banks. These sponsor
banks are required to (i) subscribe to the share capital of RRBs, (ii) train their
personnel, and (iii) provide managerial and financial assistance for the first five
years. The Bill removes the five-year limit, thus allowing such assistance to continue
beyond this duration.
 Authorized capital: The Act provides for the authorized capital of each RRB to be Rs

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five crore. It does not permit the authorized capital to be reduced below Rs 25
lakh. The Bill seeks to raise the amount of authorized capital to Rs 2,000 crore and
states that it cannot be reduced below Rs one crore.
 Issued capital: The Act allows the central government to specify the capital issued by
an RRB, between Rs 25 lakh and Rs one crore. The Bill requires that the capital
issued should be at least Rs one crore.
 Shareholding: The Act mandates that of the capital issued by an RRB, 50% shall be
held by the central government, 15% by the concerned state government and 35% by
the sponsor bank. The Bill allows RRBs to raise their capital from sources other than
the central and state governments, and sponsor banks. In such a case, the combined
shareholding of the central government and the sponsor bank cannot be less than
51%. Additionally, if the shareholding of the state government in the RRB is reduced
below 15%, the central government would have to consult the concerned state
government.
 The Bill states that the central government may by notification raise or reduce the
limit of the shareholding of the central government, state government or the sponsor
bank in the RRB. In doing so, the central government may consult the state
government and the sponsor bank. The central government is required to consult the
concerned state government when reducing the limit of the shareholding of the state
government in the RRB.
 Board of directors: The Act specifies the composition of the Board of Directors of
the RRB to include a Chairman and directors to be appointed by the central
government, NABARD, sponsor bank, Reserve Bank of India, etc. The Bill states
that any person who is a director of an RRB is not eligible to be on the Board of
Directors of another RRB.
 The Bill also adds a provision for directors to be elected by shareholders based on the
total amount of equity share capital issued to such shareholders. If the equity share
capital issued to shareholders is 10% or less, one director shall be elected by such
shareholders. Two directors shall be elected by shareholders where the equity share
capital issued to them is from 10% to 25%. Three directors shall be elected in case of
equity share capital issued being 25% or above. If required, the central government
can also appoint an officer to the board of directors to ensure the effective functioning
of the RRB.
 The Act specifies the term of office of a director (excluding the Chairman) to be not
more than two years. The Bill raises this tenure to three years. The Bill also states
that no director can hold office for a total period exceeding six years.
 Closure and balancing of books: As per the Act, the books of an RRB should be
closed and balanced as on December 31 every year. The Bill changes this date to

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March 31 to bring the Act in uniformity with the financial year.
Non-scheduled Banks
 Non-scheduled banks by definition are those which are not listed in the 2nd schedule
of the RBI Act, 1934.
 Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled
banks.
 Unlike scheduled banks, they are not entitled to borrow from the RBI for normal
banking purposes, except, in emergency or “abnormal circumstances.”
 Jammu & Kashmir Bank is an example of a non-scheduled commercial bank.
Cooperative Banks
 Co-operative banks operate in both urban and non-urban areas. All banks registered
under the Cooperative Societies Act, 1912 are considered co-operative banks.
 In the urban centres, they mainly finance entrepreneurs, small businesses, industries,
and self-employment and cater to home buying and educational loans.
 Likewise, co-operative banks in the rural areas primarily cater to agricultural-based

activities, which include farming, livestock’s, diaries and hatcheries etc.
 They also extend loans to small scale units, cottage industries, and self-employment
activities like artisanship.
 Unlike commercial banks, who are driven by profit, cooperative banks work on a “no
profit, no loss” basis.
 Co-operative Banks are regulated by the Reserve Bank of India under the Banking
Regulation Act, 1949 and Banking Laws (Application to Co-operative Societies) Act,
1965.

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Development Finance Institutions: IFCI, ICICI, SIDBI, IDBI, UTI, LIC, GIC
Development Finance Institutions
The Need of DFIs
Classification of DFIs
Investment Refinance
All India DFIs Special DFIs State Level DFIs
Institutions Institutions
IFCI
IDBI EXIM Bank

LIC
SIDBI IFCI Venture State Financial
Capitalist Fund Union Trust of National Corporation.
ICICI India. Housing
Tourism Finance Board. State Industrial
ICICI ceased to be a General
Corporation of Development
DFI and converted into Insurance NABARD.
India. Corporations.
a Bank on 30 March Corporation.
2002. IDFC.
IDBI was converted

into a Bank on 11

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October 2004.
All India Development Finance Institutions
IFCI ICICI IDBI SIDBI
The IDBI was

initially set up as a
IFCI was the first Subsidiary of the SIDBI was setup as a
It was setup in
DFI to be setup in RBI. In February subsidiary of IDBI in
January 1995.
1948. 1976, IDBI was 1989.
made fully
autonomous.
The SIDBI was

The IDBI was designated as apex
With Effect from 1 designated as apex organisation in the field
With effect from
July 1993, IFCI has organisation in the of Small Scale Finance.
April 2002, ICICI
been converted into field of Development
has been converted The Union Budget of
Public Limited Financing. However,
into a Bank. 1998-99 proposed the
Company. it was converted in a
bank wef Oct 2004. delinking of SIDBI
from IDBI.
The key function of

The key function of
The key functions of SIDBI was; to provide
IFCI was; granting The key functions of
IDBI were; it assistance to small scale
long-term loans(25 ICICI were; to
provides refinance units; initiating steps for
years and above); provide long term or
against loans granted technological up
Guaranteeing rupee medium term loans
to industries; it gradation and
loans floated in open or equity
subscribed to the modernization of SSIs;
markets by participation;
share capital and expanding the
industries; Guaranteeing loans
bond issues of other marketing channel for
Underwriting of from other private
DFIs; it also acted as the Small Scale
shares and sources; providing
the coordinator of Industries product;
debentures; consultancy services
DFIs at all India promotion of
Providing guarantees to industry.
level. employment creating
for industries.
SSIs.
IFCI was a public The ICICI differed It was a Public sector

sector DFI. from IFCI and IDBI DFI.

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with respect to
ownership,
management and
lending operation.
ICICI was a Private
sector DFI.
Investment Institutions
UTI LIC GIC
The UTI was setup on Nov LIC was setup in 1956 after the
The GIC was formed by the
1963 after Parliament insurance business was
central government in 1971.
passed the UTI Act. nationalised.
The objective of UTI was to The objective of LIC is to The GIC had four
channel the savings of provide assistance in the form of subsidiaries; National
people into equities and term loans; subscription of Insurance Co; New India
corporate debts. The shares and debentures; resource Assurance; Oriental
flagship scheme of the UTI support to financial institutions Insurance; and United India
was called Unit Scheme 64. and Life insurance coverages. Insurance.
In 2002, the Union Cabinet The General Insurance

had decided to split UTI Nationalisation Amendment
into UTI 1 and UTI 2 as a Act, 2002, has delinked the
result of the prolonged GIC from its four
crisis in UTI. subsidiaries.

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Nationalisation of Banks
Lead Bank Scheme
After the Nationalisation of the commercial Banks, the government took the initiative for
extending banking facilities in rural areas.
Prof D. R. Gadgil, chairman of National Credit Study Group, recommended the adaptation of
an “area approach” to evolve plans and programs for the development of an adequate banking
and credit structure in rural areas.
As a sequel to this “area approach”, recommended by DR Gadgil study group, the Lead Bank
Scheme was introduced in December 1969.
The Lead Bank Scheme: Under this scheme, a particular district is allotted to every
nationalized commercial bank. The allotment of districts to the various banks was based on
such criteria as the size of the banks, the adequacy of their resources for handling the volume
of work.
The lead banks initially conduct basic surveys in their respective lead districts and prepare
district credit plans designed for the purpose of estimating credit needs of the concerned
district so that physical and manpower resources available may be utilized properly.
The district credit plans are linked with the development programs and are based on the
integrated development of the concerned district with a special emphasis on the development
of rural and backward areas. Since the introduction of lead bank scheme, notable progress has
been achieved by commercial banks in respect of branch expansion, deposit mobilization and
credit deployment.
Undoubtedly, the scheme is a major step towards banks fulfilling their new social objectives
and holds promise for making banks as an effective instrument for bringing about the
economic development of the allotted districts.
Objectives of Lead Bank Scheme

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Why the Scheme Failed
Nationalisation of Banks
In a Free Market economy, business houses operate as per the invisible hand of the market
(responding to demand and supply conditions) with the sole objective of profits. The case of
commercial banks is no different. In a capitalist economy, they operate only for profit and not
for any social purpose.
In a poor country like India which lacks resources and has inequitable wealth distribution the
access to credit to all is an important bottleneck. In a poor country, the Profit making Banking
can lead to following problems:
To avoid all such problems the Government decided to Nationalised Commercial Banks in
1969. The major Rationale of Nationalisation was the following;

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The Timeline of Bank Nationalisation

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Banking Sector Reforms in India: Narasimhan Committee 1&2, Nachiket Mor

Committee, P J Nayak Committee
Banking Sector Reforms
First Narasimhan Committee Report – 1991
To promote the healthy development of the financial sector, the Narasimhan committee made
recommendations.
Recommendations of Narasimhan Committee
1. Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including
SBI) at the top and at bottom rural banks engaged in agricultural activities.
2. The supervisory functions over banks and financial institutions can be assigned to a
quasi-autonomous body sponsored by RBI.
3. A phased reduction in statutory liquidity ratio.
4. Phased achievement of 8% capital adequacy ratio.
5. Abolition of branch licensing policy.
6. Proper classification of assets and full disclosure of accounts of banks and financial
institutions.
7. Deregulation of Interest rates.
8. Delegation of direct lending activity of IDBI to a separate corporate body.
9. Competition among financial institutions on participating approach.
10. Setting up Asset Reconstruction fund to take over a portion of the loan portfolio of banks
whose recovery has become difficult.
Banking Reform Measures of Government: –
On the recommendations of Narasimhan Committee, following measures were undertaken by

government since 1991: –
1. Lowering SLR and CRR
 The high SLR and CRR reduced the profits of the banks. The SLR had been reduced
from 38.5% in 1991 to 25% in 1997. This has left more funds with banks for
allocation to agriculture, industry, trade etc.
 The Cash Reserve Ratio (CRR) is the cash ratio of banks total deposits to be
maintained with RBI. The CRR had been brought down from 15% in 1991 to 4.1% in
June 2003. The purpose is to release the funds locked up with RBI.

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2. Prudential Norms: –
 Prudential norms have been started by RBI in order to impart professionalism in

commercial banks. The purpose of prudential norms includes proper disclosure of
income, classification of assets and provision for Bad debts so as to ensure that the
books of commercial banks reflect the accurate and correct picture of financial
position.
 Prudential norms required banks to make 100% provision for all Non-performing
Assets (NPAs). Funding for this purpose was placed at Rs. 10,000 crores phased over
2 years.
3. Capital Adequacy Norms (CAN): –
 Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April
1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had attained the
ratio of 8%. It was also attained by foreign banks.
4. Deregulation of Interest Rates
 The Narasimhan Committee advocated that interest rates should be allowed to be

determined by market forces. Since 1992, interest rates have become much simpler
and freer.
 Scheduled Commercial banks have now the freedom to set interest rates on their
deposits subject to minimum floor rates and maximum ceiling rates.
 The interest rate on domestic term deposits has been decontrolled.
 The prime lending rate of SBI and other banks on general advances of over Rs. 2
lakhs has been reduced.
 The rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.
 The interest rates on deposits and advances of all Co-operative banks have been
deregulated subject to a minimum lending rate of 13%.
5. Recovery of Debts
 The Government of India passed the “Recovery of debts due to Banks and Financial
Institutions Act 1993” in order to facilitate and speed up the recovery of debts due to
banks and financial institutions. Six Special Recovery Tribunals have been set up. An
Appellate Tribunal has also been set up in Mumbai.
6. Competition from New Private Sector Banks
o Banking is open to the private sector.

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o New private sector banks have already started functioning. These new private
sector banks are allowed to raise capital contribution from foreign institutional
investors up to 20% and from NRIs up to 40%. This has led to increased
competition.
7. Access to Capital Market
 The Banking Companies (Acquisition and Transfer of Undertakings) Act was

amended to enable the banks to raise capital through public issues. This is subject to
the provision that the holding of Central Government would not fall below 51% of
paid-up-capital. SBI has already raised a substantial amount of funds through equity
and bonds.
8. Freedom of Operation
 Scheduled Commercial Banks are given freedom to open new branches and upgrade
extension counters, after attaining capital adequacy ratio and prudential accounting
norms. The banks are also permitted to close non-viable branches other than in rural
areas.
9. Local Area Banks (LABs)
 In 1996, RBI issued guidelines for setting up of Local Area Banks, and it gave Its
approval for setting up of 7 LABs in private sector. LABs will help in mobilizing
rural savings and in channelling them into investment in local areas.
10. Supervision of Commercial Banks
 The RBI has set up a Board of financial Supervision with an advisory Council to
strengthen the supervision of banks and financial institutions. In 1993, RBI
established a new department known as Department of Supervision as an independent
unit for supervision of commercial banks.
Narasimham Committee Report II – 1998
In 1998 the government appointed yet another committee under the chairmanship of Mr
Narasimham. It is better known as the Banking Sector Committee. It was told to review the
banking reform progress and design a programme for further strengthening the financial
system of India. The committee focused on various areas such as capital adequacy, bank
mergers, bank legislation, etc.
It submitted its report to the Government in April 1998 with the following recommendations.
1. Strengthening Banks in India: The committee considered the stronger banking

system in the context of the Current Account Convertibility ‘CAC’. It thought that
Indian banks must be capable of handling problems regarding domestic liquidity and
exchange rate management in the light of CAC. Thus, it recommended the merger of
strong banks which will have ‘multiplier effect’ on the industry.

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2. Narrow Banking: Those days many public sector banks were facing a problem of the
Non-performing assets (NPAs). Some of them had NPAs were as high as 20 percent
of their assets. Thus for successful rehabilitation of these banks, it recommended
‘Narrow Banking Concept’ where weak banks will be allowed to place their funds
only in the short term and risk-free assets.
3. Capital Adequacy Ratio: In order to improve the inherent strength of the Indian
banking system the committee recommended that the Government should raise the
prescribed capital adequacy norms. This will further improve their absorption
capacity also. Currently, the capital adequacy ratio for Indian banks is at 9 percent.
4. Bank ownership: As it had earlier mentioned the freedom for banks in its working
and bank autonomy, it felt that the government control over the banks in the form of
management and ownership and bank autonomy does not go hand in hand and thus it
recommended a review of functions of boards and enabled them to adopt professional
corporate strategy.
5. Review of banking laws: The committee considered that there was an urgent need for
reviewing and amending main laws governing Indian Banking Industry like RBI Act,
Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act, etc. This
up gradation will bring them in line with the present needs of the banking sector in
India.
Apart from these major recommendations, the committee has also recommended faster
computerization, technology up gradation, training of staff, depoliticizing of banks,
professionalism in banking, reviewing bank recruitment, etc.
C.Nachiket Mor committee
The Committee on Comprehensive Financial Services for Small Businesses and Low-Income
Households, set up by the RBI in September 2013, was mandated with the task of framing a
clear and detailed vision for financial inclusion and financial deepening in India.
In its final report, the Committee has outlined six vision statements for full financial
inclusion and financial deepening in India:

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The Committee further lays down a set of four design principles namely;
1. Stability,
2. Transparency,
3. Neutrality, and
4. Responsibility,
 The principles will guide the development of institutional frameworks and regulation
for achieving the visions outlined. Any approach that seeks to achieve the goals of

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financial inclusion and deepening must be evaluated based on its impact on overall
systemic risk and stability, and at no cost should the stability of the system be
compromised.
 A well-functioning financial system must also mandate participants to build

completely transparent balance sheets that are made visible in a high-frequency
manner, accurately reflecting both the current status and the impact of stressful
situations on this status.
 In addition, the treatment of each participant in the financial system must be

strictly neutral and entirely determined by the role it is expected to perform in the
system and not its specific institutional character.
 Finally, the financial system must maintain the principle that the provider is
responsible for sale of suitable financial services to customers and ensure that
providers are incentivised to make every effort to offer customers only welfare-
enhancing products and not offer those that are not.
 At its core the Committee’s recommendations argue that in order to achieve the vision
of full financial inclusion and financial deepening in a manner that enhances systemic
stability, there is a need to move away from a limited focus on anyone model to an
approach where multiple models and partnerships are allowed to emerge, particularly
between national full-service banks, regional banks of various types, non-bank
finance companies, and financial markets. Thus, the recommendations of the
Committee seek to encourage partnerships between specialists, instead of focussing
only on the large generalist institutions.
 In the spirit of the RBI’s approach paper on differentiated Banks, the Committee
recommends that the RBI may also seriously consider licensing, with lowered entry
barriers but otherwise equivalent treatment, more functionally focused banks like
Payments Banks, Wholesale Consumer Banks, and Wholesale Investment Banks.
 Payments Banks are envisaged as entities that would focus on ensuring rapid out-
reach with respect to payments and deposit services.
 The Wholesale Consumer Banks and Wholesale Investment Banks would not take
retail deposits but would instead focus their attention on expanding the penetration of
credit services.
 The Committee also recommends that the extant Priority Sector Lending norms be
modified in order to allow and incentivize providers to specialise in one or more
sectors of the economy and regions of the country, rather than requiring each and
every bank to enter all the segments.
 Finally, the Committee proposes a shift in the current approach to customer protection
to one that places a greater onus on the financial services provider to provide suitable
products and services.

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 The committee has suggested a fixed term of 5 years for the chairman/managing
director of a bank and a term of 3 years for a whole-time director.
PJ Nayak Committee
Key Observations
Specific Recommendations made by the committee.

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Problem of Non-Performing Assets in India

Non-Performing Assets
An NPA is a loan or advance for which the principle or interest payment remained overdue
for a period of 90 days.
Banks are further required to classify NPA into:
Key Facts about India’s NPA Problem
 The financial position of India’s Public Sector Banks has deteriorated sharply since
2011.
 Gross NPA has risen to 9.5 percent of total advances in 2015-16.
 Gross NPA has expected to rise further and touch 11.5 percent in coming years.
 At the aggregate level, PSBs reported a loss of 17672 crores in 2015-16.
 Most of the loans were made during the boom period of 2004-2008.
 The banks inspired by the boom kept on lending to business houses without
inspecting the projects.
 When Global Crisis happened, the projects become unviable, and losses started to
happen.
 Healthy Banking relies on healthy debt contracts. A debt contract is an agreement

between a borrower and a lender, where the borrower promises to repay the lender
principle with interest as per scheduled timeline. If the borrower can not repay, he is
in default.
 In India, most of the defaulters in recent years are not the small retail borrowers but
are large borrowers and corporate houses.

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 Across the World, when a borrower defaults irrespective of how big he is, the
borrower has to make sacrifices if he defaults. Sacrifices can be in terms of asset
confiscation, taking over of firms etc.
 The biggest problem in India’s Banking system is lack of incentives the big borrower
has to repay the loans back. They do not have to make many sacrifices if they default.
This is the single most major reason of the NPAs in Public Sector Banks.
 In much of the Globe when large borrower defaults they are filled with guilt and
desperate to convince their lenders that they should continue their trust in them.
 In India, however, large borrower insists on their divine right to stay in control despite
their unwillingness to put in new money. The firms and its workers, as well as past
bank loans, are taken as hostages in this game. The promoters threaten to run the
enterprise into the ground unless the government do not bail them out.
Reasons for NPAs

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How to Tackle Problem of NPAs
Resolving the NPA Problem
 The legacy of the NPAs must be resolved as quickly as possible so that banks can
focus on resuming lending.
 Some assets that are classified as Loss assets should be written off from banks books.
 The new Bankruptcy code can be a game changer but will take time to operationalise.
 In many cases, the projects can be turned around through a combination of fresh
capital from investors and new management.
 RBI has devised two schemes in this regard: the Strategic Debt Restructuring Scheme,
which allows the bank to convert their debts into equity, take control of the company
and then induced a new management to turn it around.
 Action has been initiated under the SDR, but no successful revival has been
completed so far.
 The second RBI scheme is the Scheme for Sustainable Structuring of Stressed Assets
(S4A) under which bank can offer existing management an opportunity to rehabilitate
the project by dividing the debt into two parts: a “sustainable component” which can
be serviced by the project based on some assumption by revenue and the “excess
component” which can be converted into equity or redeemable preference shares.
 Sustainable debt must be more than 50% of the total debt.
 S4A leaves the project in the hands of existing managements and also gives the banks
more flexibility in the time taken to resolve the problem. A key issue is how large a
part of the debt is deemed to be sustainable. Management and banks are bound to
differ on this issue.
 There is much talk of selling assets to privately managed asset reconstruction

companies (ARCs), which can then organize the turnaround.

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 Another idea is that the proposed National Infrastructure and Investment Fund (NIIF),
operating with private partners, provide both equity and new credit to stressed
infrastructure projects going through the SDR mechanism.
 The problem could be solved by creating a government-owned “bad bank” which

purchases problem loans from the banks and concentrates on turning the projects
around, possibly with the help of private ARCs.
 Bank managements will be much more willing to sell assets at a discounted price to
another public sector company, which will then undertake the task of negotiating the
best deal with potential new owners. The terms of reference of the new entity can be
sufficiently clarified to encourage it to negotiate the best possible deal with new
private managements. It could work in partnership with ARCs to fulfil this mandate.
Improving the Quality of Lending
 The quality of lending by PSB must be improved in future so that the same problem
does not arise again.
 To provide Public sector banks with greater autonomy the shareholding of the
government can be reduced to less than 50 percent or 33 percent.
 The P.J. Nayak committee had suggested that if the dilution of shareholding is not
acceptable, it should be possible to distance the government from the managements of
the banks by creating a public sector holding company and vesting the government’s
shares in the holding company. Some statements have been made that this may be
acceptable and the newly created Banks Board Bureau is the first step in this
direction.
 There are two key elements in any effort to distance government. One is that the
public sector banks should deal with only one regulator, RBI, and the extensive quasi-
regulatory control exercised by the department of financial services should be ended.
The role of the government as the owner would be performed by the holding
company, and the government would deal only with the holding company on all
issues.
 A second requirement is that public sector banks should become board-managed

institutions, with the board responsible for all appointments, including that of the
chief executive officer (CEO). If the shares of the government are actually transferred
to a holding company, then decisions regarding appointments could be taken by the
board of the new company on the recommendation of the board of the bank.
 The objective of creating a genuinely commercial environment in which public sector

banks can function and managements are made accountable can only be achieved if
the government is willing to step back from exercising direct control. Unless strong
action is taken along these lines, we can assume that things will continue as they ha
have.

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Non-Banking Financial Companies in India
Non-Banking Financial Companies
 A Non-Banking Financial Company (NBFC) is a company registered under the

Companies Act, 1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or
other marketable securities of a like nature, leasing, hire-purchase, insurance business,
chit business but does not include any institution whose principal business is that of
agriculture activity, industrial activity, purchase or sale of any goods (other than
securities) or providing any services and sale/purchase/construction of immovable
property.
 A non-banking institution which is a company and has a principal business of

receiving deposits under any scheme or arrangement in one lump sum or in
instalments by way of contributions or in any other manner is also a non-banking
financial company (Residuary non-banking company).
NBFCs are doing functions similar to banks. What is the difference between banks &
NBFCs?
NBFCs lend and make investments, and hence their activities are akin to that of banks;
however, there are a few differences as given below:
1. NBFC cannot accept demand deposits;
2. NBFCs do not form part of the payment and settlement system and cannot issue
cheques drawn on it.
3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is

not available to depositors of NBFCs, unlike in case of banks.
4. Unlike Banks which are regulated by the RBI, the NBFCs are regulated by multiple
regulators; Insurance Companies- IRDA, Merchant Banks- SEBI, Micro Finance
Institutions- State Government, RBI and NABARD.
5. The norm of Public Sector Lending does not apply to NBFCs.
6. The Cash Reserve Requirement also does not apply to NBFCs.
Classification and Categorization of NBFCs
AN AFC is a company which is a financial institution whose

Asset Finance
principle business is the financing of physical assets such as
Company
automobiles, tractors, machines etc.
Investment AN IC is any company which is a financial institution carrying on its

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Company principle business of acquisitions of securities.
LC is a financial institution whose primary business is of providing

Loan Company
finance by making loans and advances.
IFC is an NBFC which deploys 75% of its total assets in

Infrastructure
infrastructure loans and has a minimum net owned fund of Re 300
Finance Company
Crore.
CIC is an NBFC carrying on the business of acquisition of shares

and securities. CIC must satisfy the following conditions:
It holds not less than 90% of its Total Assets in the form of
investment in equity shares, preference shares, debt or loans in group
companies;
Its investments in the equity shares (including instruments

compulsorily convertible into equity shares within a period not
exceeding 10 years from the date of issue) in group companies
Systematically constitutes not less than 60% of its Total Assets;
Important Core
(c) it does not trade in its investments in shares, debt or loans in
Investment
group companies except through block sale for the purpose of
Company
dilution or disinvestment;
(d) it does not carry on any other financial activity referred to in

Section 45I(c) and 45I(f) of the RBI Act, 1934 except investment in
bank deposits, money market instruments, government securities,
loans to and investments in debt issuances of group companies or
guarantees issued on behalf of group companies.
(e) Its asset size is ₹ 100 crore or above and
(f) It accepts public funds
IDF NBFC primary role is to facilitate long term flow of debt into
Infrastructure Debt
infrastructure projects. Only Infrastructure Finance Companies can
Fund NBFC
sponsor IDF.
MFI NBFC is a non-deposit taking NBFC having not less than 85%
of its assets in the nature of qualifying assets which satisfy the
Micro Finance
following criteria:
NBFC
a) loan disbursed by a NBFC-MFI to a borrower with a rural
household annual income not exceeding ₹ 1,00,000 or urban and

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semi-urban household income not exceeding ₹ 1,60,000;
b. loan amount does not exceed 50,000 in the first cycle and 1,00,000
in subsequent cycles;
c. total indebtedness of the borrower does not exceed 1,00,000;
d. tenure of the loan not to be less than 24 months for the loan
amount in excess of 15,000 with prepayment without penalty;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not less

than 50 per cent of the total loans given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly instalments at

the choice of the borrower

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Financial Inclusion in India: Need and future; PMJDY; Payment Banks and
Small Banks
Financial Inclusion in India
Financial Inclusion is about
1. The broadening of financial services to those people who do not have access to
financial services.
2. The deepening of financial services for people who have minimal financial services.
3. Greater financial literacy and consumer protection so that people can make
appropriate choices.
4. The importance of FI is both a moral one as well as economic efficiency one.
The need for Financial Inclusion

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Reasons for Limited Success
How to Take Financial Inclusion Further?
Pradhan Mantri Jan Dhan Yojana
Jan Dhan Yojana was launched in 2014 to bring financial inclusion in India. The important
features of Jan Dhan Yojana include

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Zero Balance Account
 The accounts under PMJDY will be zero balance accounts which mean account
holders do not need to maintain any bank balance. Most regular bank accounts require
that a minimum balance which might vary from Rs 500 to Rs 5000 will have to be
maintained in the bank account failing which a penalty will have to be the customer.
 In April this year, RBI announced that banks could no longer charge a penalty for
non-maintenance of average quarterly balance; this was after it received complaints
from bank account holders that their bank balances had disappeared over several
months. Keeping this in mind, banks have now introduced zero balance accounts
under Pradhan Mantri Jan Dhan Yojana.
Insurance Cover of Rs 1 Lakh along with Rupay Cards
 All account holders will receive a Rupay Debit Card so that they can withdraw money
from any ATM and also use it to make payments at merchant establishments.
 Each Rupay Card will also insure the Card Holder with accident insurance of up to Rs
1 Lakh from HDFC Ergo and Medical Insurance of up to Rs 30,000 for sick account
holders. This money could be used for treatment and pay medical bills when the need
arises.
Pass Book and Cheque Books
 Some Banks are issuing additional pass books and cheque books to some users if they
make an additional payment of Rs 100 to Rs 500. This is an additional feature and can
be availed by account holders only if they feel the need for it.
Direct Benefit Transfers
 Another valuable feature of Pradhan Mantri Jan Dhan Yojana is that bank accounts
which are linked to Aadhaar ID’s can avail government subsidies by electronic
transfer directly into their accounts. For Example, The government might transfer
food subsidies, it provides to ration card holders directly into their bank account.
Overdraft / Loan
 Overdraft facility of Rs 5000 will be provided to account holders who transact

regularly using their Rupay card and maintain a good balance in their bank accounts.
Progress under PMJDY
 As many as 20.38 crore bank accounts were opened under the PMJDY as per the
latest data available. These 20.38 crore bank accounts had deposits of Rs 30,638.29
crore.
 As per trends available, the percentage of accounts with ‘Zero Balance’ has actually
shown a significant decline. Accounts with no balance in them were as high as 76.81

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per cent of the total opened under the scheme as on September 30, 2015. They have
come down to just about 32 per cent at the end of December 2015.
 The Finance Ministry data further showed that 8.74 crores of the accounts were
seeded with Aadhaar and 17.14 crore account holders were issued Rupay cards.
 As on January 15, 2016, banks had offered 53.54 lakh account holders overdraft
facility of which the sanction was issued for 27.56 lakh cases, and 12.32 lakh account
holders availed it. The total amount availed was Rs 166.7 crore.
Payment Banks
What is the main objective of a Payments Bank?
 Let us consider an example – You pay salary to your Car driver in cash because he
does not have a bank account. Individuals like him generally send money to his
family members (who might be residing in his native place, a small village) through
known people or he may use Money-order facility to remit the cash. But, more and
more people like him are becoming mobile phone savvy. The payments Banks
applicants will look to unbanked people like your car driver as low-hanging fruit to
harvest as their first customers.
 (India has around 90 crore mobile users and out of which around 70 crores are active
users. The total no of mobile subscribers in rural areas are 38 crores)
 Don’t get surprised if your neighbourhood supermarket or even your mobile phone
can soon be doubled up as a Bank.
 So, the main objective of Payments Banks is to increase financial inclusion (to get
more people into the banking system) by providing Small Savings Accounts, Payment
or remittance services to low-income households / labour, small businesses etc.,
 Payments banks will provide basic banking services to people who currently do not
have a bank account, including millions of migrant workers. Almost half of India’s
population is unbanked.
 These banks will aim at providing high volume-low value transactions in deposits and
Payments / remittance services in a secured technology-enabled environment.
Why do we need Payment bank?
 As discussed above, payments bank allow you only to open savings and current
accounts. But doesn’t a normal bank allow you to do that even now? Yeah, but the
difference is a payments bank can now be your mobile service provider, supermarket
chain or a non-banking finance company. (Bharti Airtel, with 20 crore subscribers,
has nearly the same number of customers as State Bank of India. The transactions
done through mobile wallets have tripled over the last two years to Rs 2,750 crore.)

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 Payment banks may make handling cash a lot easier. For example, you can transfer
money using your mobile phone to another bank or to another mobile phone holder
and also receive amounts through your device. Or you can transfer the amount to
point-of-sale terminals at large retailers and take out cash.
 Payment banks will pay an interest rate on savings accounts.
 The deposits are covered by the DICGC (Deposit Insurance & Credit Guarantee
Corporation), like your Bank Fixed Deposits.
Challenges Faced by Payment bank
 The impact of these banks is not guaranteed, and they will face the same hurdles as
any financial services provider that aims to serve the country’s low-income, rural
communities. If it were simple to serve these customers, India’s previous Business
Correspondent efforts – not to mention its experience with private services like M-
PESA, which captures almost every payment in countries like Kenya and Tanzania –
would have met with more resounding success.
 A payment bank will be working on a thin margin. They are expected to go to the
hinterland and tap the consumer base there. This is a cost-heavy structure and,
therefore, financial viability for a bank will not be easy.
Small Banks
What is a small bank?
 Small finance banks are a type of niche banks in India. Banks with a small finance
bank license can provide basic banking service of acceptance of deposits and lending.
 The main purpose of the small banks will be to provide a whole suite of basic banking
products such as bank deposits and supply of credit but in a limited area of operation.
The objective for these Small Banks is to increase financial inclusion by the provision
of savings vehicles to underserved and unserved sections of the population, the supply
of credit to small farmers, micro and small industries, and other unorganized sector
entities through high technology-low cost operations.
Why there is a need for small banks?
 India has seven branches per 100,000 population compared with 40 branches per
100,000 population in developed countries.
 The financial inclusion aims to have one bank account per member of the family. But,
there are many families those have adult members without a bank account. Cent per
cent financial literacy means one bank account per adult. Small banks can tap this
population.

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 Independent studies have revealed that around 90 per cent of the micro and small
businesses have no access to the formal mainstream financial institutions. Since their
ticket size is small, these banks can bring micro and small entrepreneurs into their
fold.
 The main purpose of the small banks will be to provide a whole suite of basic banking
products such as bank deposits and supply of credit but in a limited area of operation.
The objective for these Small Banks is to increase financial inclusion by the provision
of savings vehicles to underserved and unserved sections of the population, the supply
of credit to small farmers, micro and small industries, and other unorganized sector
entities through high technology-low cost operations.
 Many people in rural areas lend or deposit their hard-earned monies with money
lenders and financiers. Chit funds are also very popular. The main reason for all these
things is that they do not have access to banks. Small Banks can change this scenario
as According to the guidelines, at least 50% of a small bank’s loan portfolio should
constitute loans and advances of up to Rs.25 lakh. Which means loans will be smaller
in size.
 The opening of small Banks would also increase competition in the Banking sector
which could improve monetary transmission for example recently; RBI had cut the
key policy rates. But, bank customers have not yet benefited from these interest rate
cuts. Most of the banks have not yet passed on the benefits to its customers as they
have an informal understanding with other Banks. However, they are fast enough to
reduce deposits rates though. This situation could improve if more competition is
introduced in the banking sector
Challenges Small Banks will face
 Nowhere in the world so far have small banks been a roaring success. In the US,
where they are called community banks, a few are doing well, such as State Bank of
Texas and Prinz Bank, but overall, they hold less than 15 per cent of the country’s
total banking assets.

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 Small banks, apart from extending credit, will also have the job of mobilizing
deposits. This requires inspiring immense trust. Neither MFIs nor NBFCs have
experience in this aspect. “Building a retail deposit portfolio is a big challenge where
existing public and private sectors banks have an advantage because of their strong
brands.
 75% of net credits of small banks should be in the Priority Sector lending. However,
the issue really is that priority sector loans tend to become vulnerable to becoming
non-performing assets (NPAs) with the propensity being higher for them. In the past,
the NPA ratio for priority sector loans has ranged from 4-5% while that of the non-
priority sector has been around 3%. Thus this can affect the financial stability of the
small banks.
 The challenge would be to control NPAs here, as an unfavourable monsoon would

have an impact on farm loans. Similarly, any slowdown in the industrial sector is first
felt on the small and medium-sized enterprises (SMEs), which have payments
problems. Therefore, on both scores, they would be at a disadvantage compared with
the commercial banking system.
 Banks are able to diversify their portfolio by lending to all sectors which include
retail, services and manufacturing, while these banks would be left with dealing with
the smaller ones only. Besides, given that these accounts would be small and well
dispersed, the cost of monitoring would also be higher for them.

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Chapter 6- Indian Agriculture

(a) Historical background and current status
Land Tenure System in Pre-Independent India: Zamindari System; Mahalwari

System; Ryotwari System
Land Tenure System in Pre-Independent India
At the time of independence, there were three major types of land tenure systems prevailing
in the country. The basic difference in these systems was regarding the mode of payment of
land revenue.
Zamindari System Mahalwari System Ryotwari System
Under the Mahalwari

Under the Zamindari system, system, the land
the land revenue was revenue was collected Under the Ryotwari system, the land
collected from the farmers from the farmers by the revenue was paid by the farmers
by the intermediaries known village headmen on directly to the state.
as Zamindars. behalf of the whole
village.
In this system, the

In this system, the Individual
entire village is
Zamindari system was cultivator called Ryot had full rights
converted into one big
started by the Imperialist regarding sale, transfer, and leasing
unit called ‘Mahal’ and
East India Company in of the land. The ryots could not be
treated as one unit as
1793. evicted from his land as long as he
far as payment of land
pays the rent.
revenue is concerned.
Lord Cornwallis entered into Mahalwari system was

‘Permanent Settlement’ with popularised by Lord
the landlords with a view to William Bentinck in
increase land revenue. Under In this system, the responsibility of
Agra and Awadh. It
this arrangement, the paying the rent lies with the
was later extended to
landlords were declared as individual cultivator called “Ryot”.
Madhya Pradesh and
zamindars with full There exist no intermediaries
Punjab.
proprietorship of the land. between the government and the
The responsibility of individual cultivator.
The Zamindars were made collecting and
responsible for the collection depositing the rent lied
of the rent. with the village

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headmen.
The Ryotwari system though appears

satisfactory and better than
Zamindari and Mahalwari, in reality,
The share of the government the system had several deficiencies.
The Mahalwari system
in the total rent collected by The system was dominated by the
is found to be less
the zamindars was kept at mahajans and moneylenders who
exploitative than the
10/11th, and the balance granted loans to cultivators by
Zamindari system.
going to zamindars. mortgaging their land. The
moneylenders exploited the
cultivators and evicted them from
their land in case of loan default.
The system was most

The system was The system was first introduced in
prevalent in West Bengal,
prevalent in Agra, Tamil Nadu and later extended to
Bihar, Orrisa, UP, Andhra
Awadh, Punjab, Orrisa Maharashtra, Berar, East Punjab,
Pradesh and Madhya
and Madhya Pradesh. Coorg and Assam.
Pradesh.

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Land Reforms in India

Definition
Land Reforms usually refer to redistribution of Land from rich to poor. Land reforms include;
 Regulation of Ownership
 Operation, Leasing, sale
 Inheritance of Land
In an agrarian economy like India with massive inequalities of wealth and income, great
scarcity and an unequal distribution of land, coupled with a large mass of people living below
the poverty line, there are strong economic and political arguments for land reforms.
Due to all these compelling reasons, Land reforms had received top priority by the
governments at the time of independence. The Constitution of India left the adoption and
implementation of the land reforms to the state governments. This has led to a lot of
variations in the implementation of land reforms across states.
Economic Arguments in Favour of Land Reforms
Given these observations, one could make an argument in favour of land reform based not
only on equity considerations but also on efficiency considerations. For example, the inverse
relationship between farm size and productivity suggests that land reform could raise
productivity by breaking (less productive) large farms into several (more productive) small

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farms. Also, lower productivity under sharecropping suggests that land reform could raise
productivity by converting sharecroppers into owner-cultivators.
The Objectives of Land Reforms in India were:
After Independence, attempts had been made to alter the pattern of distribution of land
holdings on the basis of four types of experiments, namely;

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The Government over the years defined the aim of land reforms to cover the following:
The land reforms legislations passed/undertaken by all the state governments mainly
covers and converges to the common themes/measures of the following:

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Abolishment of Intermediaries
1. It was widely recognised that the main cause of stagnation in the agriculture economy
was to a large extent due to exploitative agrarian relations.
2. The Chief instrument of the exploitation was the intermediaries like Zamindars,
patronised and promoted by the British government.
3. About 60% of the area under cultivation was under the Zamindari system on the eve
of the Independence. The States took the task of abolishing the intermediaries like
Zamindars by passing the legislations.
4. The government estimates state that in total during first four Five years Plan, 173
million acres of land was acquired from the intermediaries and two crores tenants
were given land to cultivate.
5. Abolition of intermediaries is generally agreed to be one component of land reforms

that have been relatively successful. The record in terms of the other components is
mixed and varies across states and over time. Landowners naturally resisted the
implementation of these reforms by directly using their political clout and also by
using various methods of evasion and coercion, which included registering their own
land under names of different relatives to bypass the ceiling, and shuffling tenants
around different plots of land, so that they would not acquire incumbency rights as
stipulated in the tenancy law.
6. The success of land reform has been driven by the political will of specific state
administrations, the notable achievers being the left-wing administrations in Kerala
and West Bengal.
Tenancy Reforms
Tenancy reforms included the following set of measures:
 Regulation of rent
 Security of tenure
 Ownership rights of tenants
Tenants in India are classified into
 Occupancy Tenants: They enjoy permanent right over land and cannot be evicted
easily.
 Tenants at will: They do not enjoy any right over land and can be evicted by the
landlords anytime.
Therefore, to protect the tenants at will and subtenants, the tenancy reforms are passed by the
various state governments.

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Regulation of Rents: Under the British Government, the rents charged was highly
exploitative with no sound economics behind it. These highly exploitative rents spelt high
misery on the tenants and trapped them into vicious circles of debt and poverty.
To provide relief to the tenants from exploitative rents, the Indian government after
independence passed legislations to regulate the rents (maximum limits on rent was fixed)
and to reduce the miseries of the tenants.
Security of Tenure: To protect the tenants from arbitrary evictions and to grant them
permanent rights over land, legislations had been passed in most states.
Legislations passed by the States has three essential aims; Evictions must not take place
except in accordance with the provisions of law; Land may be resumed by the owner, if at all,
for the “Personal Cultivation” only; In the event of land taken by the owner, the tenant is
assured of a prescribed minimum area.
However, the vague definitions of Tenants Personal Cultivation and landowner under the law
made it difficult to implement the tenancy reforms. The rights of resumptions provided in the
law combined with the flaws in the definitions of the personal cultivation rendered all
tenancies insecure.
Ownership Rights of Tenants: It has been repeatedly emphasised by the government, that
the ownership rights of the land should be conferred to the actual cultivator. Accordingly,
most states have passed legislations to transfer ownership rights to the tenants.
However, the success of the states in conferring the rights to the tenants varied widely. Some
states like West Bengal, Kerala and Karnataka has performed exceptionally well in this
regard. In West Bengal due to the “Operation Barga” maximum sharecroppers were given
ownership of land.
Land Ceilings
Land Ceiling on agriculture land means a statutory maximum limit on the quantity of land
which an individual may hold. The imposition of the Land ceiling has two main aspects:
 Ceiling on future acquisitions.
 Ceilings on existing land holdings.
By 1961-62, ceiling legislation had been passed in all the States. The levels vary from State
to State and are different for food and cash crops. In Uttar Pradesh and West Bengal, for
example, the ceiling on existing holding is 40 acres and 25 acres. In Punjab, it ranges from 27
acres to 100 acres, in Rajasthan 22 acres to 236 acres and in Madhya Pradesh 25 acres to 75
acres.
In order to bring about uniformity, a new policy was evolved in 1971. The main features
featur
were:

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1. Lowering of ceiling to 28 acres of wetland and 54 acres of unirrigated land
2. Change over to the family rather than the individual as the unit for determining land
holdings lowered ceiling for a family of five.
3. Fewer exemptions from ceilings.
4. Retrospective application of the law for declaring Benami transactions null and void,
5. No scope to move the court on the ground of infringement of fundamental rights.
Why was Land Ceiling needed?
The Argument against Land Ceiling

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Land Consolidation
Land Consolidation means merging of multiple consolidated farms and giving it to each
farmer. The measure is adopted to solve the problem of land fragmentation. The Land
consolidation program required granting of one consolidated land to the farmer, which is
equal to the total land holdings in different scatters under the farmer possession. It simply
means instead of holding multiple small lands in different places; the farmer will be given a
single big piece of land.
Why the Program Failed?
 The programme failed to achieve its desired objective because the farmers are
reluctant to exchange their lands for the new one. The arguments given by the farmers
is that there existing land is much more fertile and productive than the new land
provided under land consolidation.
 The farmers also complained about nepotism and corruption in the process of
consolidation. The farmers complained that the rich and influential often bribes and
manage to get fertile and well-situated land, whereas the poor farmers get unfertile
land.
Cooperative Farming
Cooperative farming is advocated to solve the problem of sub-divisions of land holdings. The
idea was to make farming profitable for small and marginal farmers having small pieces of
land.
Under Cooperative Farming setup farmers having very small holdings come together and join
hands to pool their lands for the purpose of cultivation. Pooling of farms helps in increasing
production, and the farmers can have more produce to sell in the markets after taking out
their subsistence need.
Cooperative farming also helps in mechanisation of agriculture as the owner of the multiple
small farms can pool their money to buy a mechanical tractor or other equipment’s which
they could not afford otherwise.
Arguments in favour of Cooperative Farming

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Situation of Indian Agriculture

Indian Agriculture: A brief Outlook
1. Agriculture accounted for 14% of India’s GDP in 2016-17 and provided employment
to more than half a billion people. The share of Agriculture in employment is close to
54% as on 2016-17.
2. Indian Agriculture is dominated by the small-scale farming and is characterised by

low productivity.
3. The average size of land holding in Indian Agriculture is less than 2 hectares.
4. The low land holding size means that most of the Indian farmer practices subsistence
farming, where they consume the majority of what they produce and sell whatever is
left.
5. The Indian Agriculture remains the largest employer of the female labour force in
India. The share of women labour force out of total women labour force employed in
agriculture is close to 65%.
6. The Indian agriculture suffers from the twin problem of low productivity and excess
workforce employed in it. Due to which the per capita productivity of workforce is
very low.
7. The low productivity results in depressing the wages in the agriculture sector leading
to high level of poverty.
8. Agriculture’s importance in India’s Trade is declining, but it still has a share of about
10% in India’s total exports.
9. Compare to the high growth in other sectors of the Indian economy, the performance
of the Indian agriculture remains poor due to slow and erratic growth rates. The
average growth rate of India’s agriculture over the past decades remains low at less
than 2%.
10. At such a low growth rate of the agriculture sector, it is impossible to uplift millions
of rural poor out of poverty.
11. The agriculture sector in India has undergone very limited liberalisation. The state
still plays a predominant role in the Indian agriculture.
12. Concerns about food security and poverty with respect to the second largest
population in the world lead the government to remain strongly involved in regulating
India’s agriculture through fixing prices for key agricultural products at the farm and
consumer levels, high border protection, bans on or support for exports, and massive
subsidies for key inputs such as fertilisers, water and electricity.
13. The Indian agriculture remains one of highly subsidised sector of the economy.

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14. Total food grains production in India is estimated to be 272 million tonnes in the year
2016-17.
15. The estimated production of key cereals like wheat, rice and pulses will be 96.6
million tonnes, 106.7 million tonnes and 22.1 million tonnes respectively in the year
2016-17.
16. The other major crops grown in India are oilseeds with an estimated production of
33.6 million tonnes, sugarcane at 309 million tonnes, cotton at 32.5 million bales.
17. As per the land use statistics 2013-14, the total geographical area of the country is
328.7 million hectares, of which 141.4 million hectares is the reported net sown area
and 200.9 million hectares is the gross cropped area with a cropping intensity of 142
%.
18. The net sown area works out to be 43% of the total geographical area. The net
irrigated area is 68.2 million hectares.
19. The sharp deceleration in the growth of the agricultural sector against the backdrop of
an impressive growth of the larger economy is widening disparities between the
incomes of workers in non-agricultural and agricultural activities.
Role of Agriculture in Indian Economy

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 A growing agriculture sector is a prerequisite for the development of India.
 The growing surplus form the agriculture sector is needed to feed the millions of
people who live below poverty line and can hardly sustain themselves.
 The agriculture sector has to maintain a very high growth rate of above 4% in order to
sustain the pressure of rising population.
 A growing agriculture sector controls inflation because increased food supplies and
agricultural raw materials keep the prices down and stable.
 The agriculture sector has an important backward linkage with the industrial sector.
The rural consumers are an important source of demand for the industrial goods.

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(b) Cropping Patterns
Cropping Patterns in India: Factors Affecting; Most Important Cropping

Patterns
Cropping Pattern in India
Back to Basics: Cropping Pattern mean the proportion of area under different crops at a point
of time, changes in this distribution overtime and factors determining these changes.
Cropping pattern in India is determined mainly by rainfall, climate, and temperature and soil
type.
Technology also plays a pivotal role in determining crop pattern. Example, the adoption of
High Yield Varieties Seeds along with fertilisers in the mid 1960’s in the regions of Punjab,
Haryana and Western Uttar Pradesh increased wheat production significantly.
The multiplicity of cropping systems has been one of the main features of Indian agriculture.
This may be attributed to following two major factors:
1. Rain fed agriculture still accounts for over 92.8 million hectares or 65 percent of the
cropped area. A large diversity of cropping systems exists under rain fed and dryland
areas with an overriding practice of intercropping, due to greater risks involved in
cultivating larger area under a particular crop.
2. Due to prevailing socio-economic situations (such as; dependency of large population

on agriculture, small land-holding size, very high population pressure on land
resource etc.), improving household food security has been an issue of supreme
importance to many million farmers of India, who constitute 56.15 million marginal
(<1.0 hectare), 17.92 million small (1.0-2.0 hectare) and 13.25 million semi-medium
(2.0-4.0 hectare) farm holdings, making together 90 percent of 97.15 million
operational holdings.
3. An important consequence of this has been that crop production in India remained to
be considered, by and large, a subsistence rather than commercial activity.
Factors Determining Cropping Pattern in India

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Cropping Pattern in India
30 most important cropping patterns in India
Specific Issues Related to the Cropping Pattern

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Crop Pattern Region/State Issues Related to Crop Pattern
Over the years there is stagnation in the

production and productivity loses.
The main reasons for stagnation are:
UP, Punjab, Haryana, Over Mining of Nutrients from the soil.

Rice-Wheat Bihar, West Bengal,
Declining Ground Water Table.
Madhya Pradesh.
Increase Pest Attacks and Diseases.
Shortages of Labour.
Inappropriate use of Fertilizers.
The major issues in sustaining the

productivity of rice-rice system are:
Irrigated and Humid Deterioration in soil physical conditions.

coastal system of Orrisa, Micronutrient deficiency.
Rice-Rice Tamil Nadu, Andhra
Pradesh, Karnataka and Poor efficiency of nitrogen use. Imbalance in
Kerala. use of nutrients. Non-availability of
appropriate trans planter to mitigate labour
shortage during the critical period of
transplanting.
The major issues in the pattern are:
Tamil Nadu, Andhra Excessive Rainfall and Water Logging.

Rice- Groundnut Pradesh, Karnataka, Non-availability of quality seeds.
Orrisa and Maharashtra.
Limited expansion of Rabi Groundnut in Rice
grown areas.
Factors limiting Productivity are:
Droughts and Erratic Rainfall distribution.

Chhattisgarh, Orrisa and
Rice-Pulses Lack of Irrigation.
Bihar.
Low coverage under HYV Seeds.
Weed Attacks.

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Little attention to pest attacks and diseases.
Marginalisation of land and Removal of

Tribal from their own land.
The Reason for Poor Yields are:
Sowing Timing.
UP, Rajasthan, MP and Poor Weed Management.

Maize-Wheat
Bihar Poor Plant Varieties.
Poor use of organic and inorganic fertilizers.
Large area under Rain Fed Agriculture.
Problems in Sugarcane-Wheat system are:
Late Planting.
UP, Punjab and Haryana
Imbalance and inadequate use of nutrients.
accounts for 68% of the
Sugarcane- area under sugarcane. Poor nitrogen use efficiency in sugarcane.
Wheat The other states which Build-up of Trianthema partu lacastrum and
cover the crops are; Cyprus rotundus in sugarcane.
Karnataka and MP.
The stubble of sugarcane pose tillage problem
for succeeding crops and need to be managed
properly.
Problems in Cotton-Wheat system are:
Delay Planting.
Punjab, Haryana, West
Stubbles of cotton create the problem of
Cotton-Wheat UP, Andhra Pradesh,
tillage operations and poor tilth for wheat.
Karnataka, Tamil Nadu.
Cotton Pest like Boll Worm and White Fly.
Poor nitrogen use efficiency in cotton.
Constraints limiting the soybean production

Soya bean- Maharashtra, MP and and productivity are:
Wheat Rajasthan A relatively recent introduction of soybean as
a crop.

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Limited genetic diversity.
Short growing period available in Indian

latitudes.
Hindered agronomy/availability of inputs at

the farm level.
Rain fed nature of crop and water scarcity at

critical stage of plant growth.
Insect pests and diseases, Quality

improvement problems.
Inadequate mechanization and partial

adoption of technology by farmers have been
identified.
The major issues in Legume based system

are:
Lack of technological advancement.
Loses due to erratic weather and

waterlogging.
Legume Based
MP, Gujarat, Maharashtra, Diseases and Pests.
Cropping
Andhra Pradesh and
Systems (Pulses-
Karnataka. Low harvest index, flower drop,
Oilseeds)
indeterminate growth habit and very poor
response to fertilizers and water in most of
the grain legumes.
Nutrient needs of the system have to be

worked out considering N-fixation capacity of
legume crops.
Horticulture Crops in India
India has made a good place for itself on the Horticulture Map of the World with a total
annual production of horticultural crops touching over 1490 million tonnes during 1999-00.
The horticultural crops cover about 9 percent of the total area contributing about 24.5 percent
of the gross agricultural output in the country. However, the productivity of fruits and
vegetables grown in the country is low as compared to developed countries.
Vegetable Crops

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Vegetable crops in India are grown from the sea level to the snowline. The entire country can
broadly be divided into six vegetable growing zones:
Low productivity is the main feature of vegetable cultivation in India as farm yields of most
of the vegetables in India are much lower than the average yield of the world and developed
countries.
The productivity gap is more conspicuous in tomato, cabbage, onion, chilli and peas. The
preponderance of hybrid varieties and protected cultivation are mainly responsible for high
productivity in the developed countries.
Constraints in vegetable production:
1. Lack of planning in Production
2. Non-availability of seeds of improved varieties.
3. High cost of basic production elements
4. Inadequate plant protection measures and non-availability of resistant varieties.
5. Weak marketing facilities
6. Transportation limits
7. Post-harvest losses
8. Abiotic stresses.

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Types of Cropping Systems: Mono cropping; Crop Rotation; Sequential

Cropping; Inter Cropping; Relay Cropping
Cropping Systems/ Combinations
Mono-cropping: Example Planting Wheat year after year in the same field. Mono-cropping
is when the field is used to grow only one crop season after season.
Disadvantages: it is difficult to maintain cover on the soil; it encourages pests, diseases and
weeds; and it can reduce the soil fertility and damage the soil structure.
Crop Rotation : Example Planting maize one year, and beans the next. Crop Rotation means
changing the type of crops grown in the field each season or each year (or changing from
crops to fallow).
Crop rotation is a key principle of agriculture conservation because it improves the soil
structure and fertility, and because it helps control weeds, pests and diseases.
Sequential Cropping: Example- Planting maize in the long rains, then beans during the short
rains. Sequential Cropping involves growing two crops in the same field, one after the other
in the same year.
In some places, the rainy season is long enough to grow two crops: either two main crops, or
one main crop followed by a cover crop.
Growing Crops two crops may also be possible if there are two rainy seasons, or if there is
enough moisture left in the soil to grow a second crop.
Intercropping: Examples- Planting alternating rows of maize and beans, or growing a cover
crop in between the cereal rows. Intercropping means growing two or more crops in the same
field at the same time.
Mixed Intercropping: Distribution of the seeds of both the crops, or dibbling the seeds
without any row arrangement. This process is called mixed intercropping. It is easy to do but
makes weeding, fertilization and harvesting difficult. Individual plants may compete with
each other because they are too close together.
Planting the main crop in rows and then spreading the seeds of the intercrop (such as a cover
crop).
Row Intercropping: Planting both the main crop and the intercrop in rows. This is called
row intercropping. The rows make weeding and harvesting easier than with mixed
intercropping.
Stir Cropping: Example planting alternating strips of maize, soybean and finger millet. Stir
Cropping involves planting broad strips of several crops in the field. Each strip iis 3–9 m
wide. On slopes, the strips can be laid out along the contour to prevent erosion. The next
year, the farmer can rotate crops by planting each strip with a different crop.

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Advantages:
 It produces a variety of crops, the legume improves the soil fertility, and rotation
helps reduce pest and weed problems.
 The residues from one strip can be used as soil cover for neighbouring strips.
 At the same time, strip cropping avoids some of the disadvantages of intercropping:
managing the single crop within the strip is easy, and competition between the crops
is reduced.
Relay Cropping: Example- Planting maize, then sowing beans between the maize rows four
weeks later.
Relay cropping the process of growing one crop, then planting another crop (usually a cover
crop) in the same field before harvesting the first. This helps avoid competition between the
main crop and the intercrop. It also uses the field for a longer time, since the cover crop
usually continues to grow after the main crop is harvested.

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(c) Issues related to direct and indirect farm subsidies and minimum
support prices
Farm Subsidies in India: Definition; Working; Need; Negative Impacts

Agriculture Subsidies in India
Introduction of the HYV program in the mid-1960s necessitated a high priority to supplying
quality inputs like irrigation, water, fertilizers and electricity to the Indian farmers. These all
were classified as essential inputs for the development of the agriculture.
To ensure that these inputs are accessible to all farmers at all the times the government
decided to subsidised these inputs.
How Subsidy Works
There are two most common ways of subsidising agriculture;
1. Firstly, governments may pay much higher prices for the agricultural products than
what the farmers can obtain under free market environment, and
2. Secondly, by supplying the inputs at a price that is below the cost of supplying these
inputs or below at the price that would prevail in an open free trade environment.
 Higher prices for farm products can be provided mainly by insulating the domestic
markets from the world economy through a restrictive trade policy.
 On the other hand, vital inputs like fertilisers, irrigation water, credit, electricity used
in the agricultural sector can be supplied to the farmers at prices which are below the
open market prices. The prices of these inputs, therefore, do not reflect their true
value, i.e., the real cost of supplying these inputs.

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 Of the above mentioned two alternatives, subsidies on inputs are normally preferred
because it is believed that benefits of government expenditure can be derived by the
farmers only in proportion to their use of inputs. Input subsidisation also avoids
raising food and raw material prices, thus avoiding the plausible adverse effect on
growing industrial sector or a large mass of poor living in the developing countries.
 However, most often, it is not just a single mechanism but a combination of both
higher output prices and lower input prices which has been used to subsidise
agriculture with objectives varying from the need to raise domestic production and
protect incomes of the farming community.
 India also tinkered with both input and output prices, primarily to protect the poor
and/or to stimulate the use of modern inputs.
Rationale for subsidising Agriculture
Negative Impacts of Agriculture Subsidies

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However, the issue of agriculture subsidies is not to be examined only from the perspective of
fiscal imbalances, but from a much wider perspective of ensuring food and nutritional
security for Billions and ensuring that poor and marginal farmers do not get wiped out from
the market.
Direct and Indirect Farm Subsidies

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Types of Farm Subsidies in Indian Agriculture: Irrigation and Power Subsidies;

Fertilizer Subsidy; Seed Subsidy; Credit Subsidy
Subsidies in Indian Agriculture
Major subsidies on Agricultural Inputs
Power and Irrigation Subsidies:
Subsidies on power and irrigation are provided by the state governments.
Power subsidy is granted on power that is used to draw on groundwater. Accordingly, it is a

subsidy to privately drawing and privately-owned means of irrigation. Power subsidy is the
difference between the price paid by the farmer for the usage of electricity and the actual cost
of generating the electricity.
The sustainability of the power subsidies has come under a lot of stress in recent years mainly
because of the bad health of State electricity board’s finances. The states like Punjab and
Tamil Nadu has provided electricity to the farmers free of cost which has led to its wastage
and financial losses to the state electricity boards. Estimates further suggest that the average
cost recovered by the SEB’s form the agriculture sector is only 10 percent of the cost of
generating electricity.
Irrigation subsidy is the subsidy provided on the usage of government provided canal water.
Irrigation subsidy is the difference between operating and maintenance cost of irrigation
infrastructure in the state and irrigation charges recovered from farmers. This may work
through provisions of public goods such as canals, dams which the government constructs
and charges low prices or no prices at all for their use from the farmers. It may also be
through cheap private irrigation equipment such as pump sets.

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Irrigation subsidies have become unsustainable mainly because the states have failed to
device a rational pricing model for the canal water. Estimates suggest that the pricing of the
canal water did not cover more than 20 percent of the operational and maintenance expense
of the canals.
Fertilizer Subsidies
The fertilizer subsidies are borne by the Central Government. The need for the fertilizer
subsidy arises from the nature of fertilizer pricing policy of the government. The fertilizer
price policy is being governed with the following two objectives:
 Making fertilizer available to farmers at a low and affordable price to encourage their
use and increase production.
 Ensuring fair returns on the investment made by the fertilizer industry to attract more
investment in the fertilizer industry.
To fulfil the first objective, the government has been keeping the selling prices of fertilizers
static and uniformly low throughout the country.
As far as the second objective is concerned, the government had come up with the policy of
“Retention Price Scheme” in the year 1977.
Retention Price Scheme: Under RPS, the government fixes a fair ex-factory retention price
for various fertilizers of different manufacturers. The Government pays the manufacturers
their cost of production along with a profit margin of 12 percent (post tax) if the factory
utilises the 90 percent of the installed capacity.
Calculation of Fertilizer Subsidy
Under the fertilizer pricing policy, the farmer gets the fertilizer at a pre-determined low rate
called maximum selling price. The manufacturer was paid an amount called Retention Price
which is fixed at a high level so that manufacturer can cover his cost and yet leave a 12
percent profit.

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Fertilizer subsidies in the Post Reform Period
1. The mounting burden of subsidies compelled the policy planners to make a serious
attempt to reform the fertiliser price policy to rationalise the fertiliser subsidy. As part
of economic reforms initiated in the early 1990s, the government decontrolled the
import of complex fertilisers such as di-ammonium phosphate (DAP) and muriate of
potash (MOP) in 1992, and extended a flat-rate concession on these fertilisers. But,
urea imports continue to be restricted and canalised.
2. Based on the recommendations of various committees including the High-Powered

Fertiliser Pricing Policy Review Committee (HPC) and the Expenditure Reforms
Commission (ERC), a New Pricing Scheme (NPS) for urea units was implemented in
a phased manner from April 2003 with an objective to bring transparency, uniformity,
and efficiency, and reduce the cost of production. Similarly, based on the
recommendations of the Expert Group on P and K fertilisers, a policy for phosphatic
and potassic fertilisers has been implemented.
Nutrient Based Subsidy Scheme
The Government of India implemented a Nutrient Based Scheme with effect from 2010.
Under the NBS scheme, a fixed subsidy is announced on per KG based on nutrients annually.
An additional subsidy is also given for micronutrients.
With the objective of providing quality fertilizer to the farmers depending on the crops and
soil requirements, the government has included new grade of complex fertilizers under the
NBS scheme.
Under the NBS, manufacturers are allowed to fix the MRP. The farmers pay only 50 percent
of the delivered cost of Phosphate (P) and Potash (K) fertilizer and the rest is borne by the
government in the form of subsidy.
Neem Coated Urea Policy, 2015:
The government has made it mandatory for domestic fertilizer firms to “Neem coat” at least
75 per cent of their urea production (It can even go upto 100%).Earlier, there was a cap of
35% on this. The government has also allowed manufacturers to charge a small 5 per cent
premium on Neem-coated urea
Aim:
Checking the excessive use of urea which is deteriorating the soil health and adversely
impacting overall crop yield
Benefits:
 Reduce the subsidy outgo
 Prevent diversion of urea for industrial use

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Limitations:
The subsidy savings arising out of this pales beside the enormity (financially and politically)
of the fertilizer subsidy that is paid on the three major fertilizers, N, P and K
New Urea Policy, 2015:
To incentivize domestic manufacturers and free transportation of P (phosphorus) and K

(potassium) fertilizers. It will be in force from 2015 to 2019 (4 Financial years)
Need for the Policy:
 India is world’s third-largest consumer of fertilizers
 India is highly import-dependent in the case of urea. Presently, India is importing

about 80 lakh metric tonnes of urea out of total demand of 310 lakh metric tonnes
Objectives:
 Maximize indigenous Urea Production to reduce import dependency and reduce

subsidy burden on the government
 Promote energy efficiency to reduce Carbon-footprint (via energy efficiency) to make

Urea production environment-friendly. [This will be done via revised specific energy
consumption norms]
 Make Urea production plant to adopt the best technology available and become
globally competitive
 Rationalization of Subsidy burden
 Timely supply of Urea to farmers at the same MRP
Salient Feature:
 The government will cover the entire cost of natural gas, which is the main feedstock
of urea.
 Movement plan for P&K fertilizers has also been freed to reduce monopoly of few
companies in a particular area so that any company can sell any P&K fertilizer in any
part of the country. Rail freight subsidy has been decided to be given on a lump sum
basis so that the companies economize on transport. This will help farmers and reduce
pressure on the railway network
Proposed Outcome:
 Will cut the yearly subsidy bill
 Increase annual production by 2 million tonnes

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Imbalance in Fertilizer Use Consumption
The government interventions in the fertilizer policy over the years have resulted in uneven
pricing structure and nutrient usage. The result of this is distorted pattern and application of
the fertilizer usage in India. The application of N-Nitrogen, P-Phosphate and K-Potash in the
farms is distorted. The ideal ration of N: P: K usage IN India is 4:2:1.
However, due to inaccurate price structure, the N: P: K ratio in India has become 10:3:1 in
the year 1997-98. The ratio had further deteriorated in the succeeding years. The current
situation is, however, improved a little with N: P: K ratio at 8.2:3.2:1 in the year 2013-14.
The reason for such a gross mismatch is the relative cheap price of the urea (Nitrogen) as
compared to the other two nutrients Phosphate and Potash. The imbalance and excessive use
of urea had also resulted in the degradation of the environment and soil fertility.
Seed Subsidy: Seed subsidy is granted through the distribution of quality seeds at a price that
is less than the market price of the seeds.
Credit Subsidy: It is the difference between interest charged from farmers, and actual cost of
providing credit, plus other costs such as write-offs bad loans. Availability of credit is a
major problem for poor farmers. They are cash strapped and cannot approach the credit
market because they do not have the collateral needed for loans. To carry out production
activities, they approach the local money lenders.
Taking advantage of the helplessness of the poor farmers the lenders charge exorbitantly high
rates of interest. Many times, even the farmers who have some collateral cannot avail loans
because banking institutions are largely urban based and many times they do not indulge in
agricultural credit operations, which is considered to be risky. (Such as collateral
requirements) can be relaxed for the poor.
Infrastructural Subsidy: Private efforts to construct basic infrastructure in many areas do

not prove to be sufficient to improve agricultural production. Good roads, storage facilities,
power, information about the market, transportation to the ports, etc. are vital for carrying out
production and sale operations. These facilities are in the domain of public goods, the costs of
which are huge and whose benefits accrue to all the cultivators in an area.
No individual farmer will come forward to provide these facilities because of their long
gestation period and inherent problems related to revenue collections (no one can be excluded
from its benefit on the ground of non-payment). Therefore, the government takes the
responsibility of providing these and given the condition of Indian farmers a lower price can
be charged from the poorer farmers.

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Government Intervention in Indian Agriculture

Issues Related to Government Intervention in India’s Agriculture
Background
Government intervention in food grain marketing in India began in 1960’s. The objective of
the intervention is to revamp and incentivise the agriculture sector by using HYV seeds and
technological inputs with the ultimate aim of increasing food grain production.
Increasing production alone is not sufficient; the government needs to ensure that increase in
production benefits the poor/ consumer. Several measures were undertaken to achieve the
twin objective of ensuring food security and raising food production. The key measures were:
 Price assurance to producers using the system of Minimum Support Prices.
 Maintaining Buffer Stocks.
 Distribution of food grains at a reasonable price through a network of fair price shop
under Public Distribution System.
The policy of increasing production and providing food security has been helpful to
India in several ways.

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The biggest disadvantages of such an interventionist policy especially since the

beginning of economic reforms of 1991 are:
Why is Government intervention needed in food grain markets?
 To achieve the goal price stability at the time of bumper harvest or below normal
production.
 To provide a guaranteed price to producer farmers.
 To supply food to vulnerable and poor sections at a lower price.
The government has been carrying out procurement and storage of food grains in India since
1960’s through mainly two institutions:
 The Commission for Agriculture Cost and Prices (CACP).
 The Food Corporation of India (FCI)
The CACP is entrusted with the task of suggesting the Minimum Support Prices. The FCI is
entrusted the task of procurement and storage of food grains.

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The critical aspect of this whole intervention is the price at which the produce is procured
from farmers. Till the beginning of economic reforms MSPs for food grains were based
entirely on domestic factors, mainly on the cost of production of crops. Though CACP was
required to take into consideration the international price situation, this aspect was never
given any weight while arriving at the level of MSPs.
The situation changed post-1991 when India embraced economic reforms.

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Minimum Support Prices in Indian Agriculture: MSP definition;

Working; Issues; Drawbacks; Way Ahead; Buffer Stocks
Issues related to Minimum Support Price in India
Minimum Support Price
Definition: MSP is a part of India’s Agriculture Price Policy. MSP is the price at which the
government purchases crops from the farmers. MSP is the guaranteed ‘minimum floor price’
that farmer must get from the government in case the market price of the crops falls below
the MSP. The Rationale behind MSP is to support the farmer from excess fall in the crop
prices.
The MSP for various crops is announced by the central government at the beginning of every
crop seasons on the recommendation of CACP. The MSP is a fixed assured price that a
farmer gets in case price falls heavily due to a bumper harvest. MSP in a sense work as an
insurance policy for the farmers to save them from price falls.
The most important aim of the MSP policy is to save the Indian farmer from making distress
sales. In the event of glut and bumper harvest, when market prices fall below the announced
MSP, the government through its agencies buys the entire stock offered by the farmers at the
MSP.
MSP is currently announced for 24 commodities including
 Seven cereals: Paddy, Wheat, Jowar, Bajra, Barley, Maize and Ragi.
 Five Pulses: Gram, Arhar, Moong, Urad and Lentil.
 Eight Oilseeds: Groundnut, Rapseed/Mustard, Toria, Soyabean, Sunflower, Sesamum,

Niger seed and Safflower seed.
 Cash Crops: Raw Cotton, Copra, Raw Jute and Virginia Flu Curved Tobacco.
MSP: Historical Context
The system of MSP in India was started in the mid 1960’s amid food shortages. The idea was
to create a favourable environment and incentivise farmers to increase production by
adopting “High Yield Variety” seeds and technology for cereals like Wheat and Rice.
The adoption of the MSP Policy in India was mainly due to food scarcity and price
fluctuations provoked by drought, floods and international prices for exports and imports.
The policy, in general, was directed towards ensuring reasonable food prices for consumers
by providing food grains through Public Distribution System (PDS) and inducing adoption of
the new technology for increasing yield by providing a price support mechanism through
Minimum Support Price (MSP) system.

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In order to provide farmers an assured price for their crops and motivating them to adopt
advanced technology to increase production the Agricultural Price Commission was setup in
the year 1965 (Renamed as Commission for Agriculture Cost and Price in 1985) on the
recommendation of LK JHA Committee. The role of Agriculture Price Commission is to
advise government on agriculture price policy.
Calculation of MSP
The CACP in deciding the MSP for various crops takes into account a lot of comprehensive
factors including the supply and demand factors of each crop.
The Initial Success of the MSP Policy

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The drawbacks of the MSP Policy
The Current situation of MSP
The most important goal of any long-term agriculture development policy in India should be
to promote agriculture growth along with regional equity and natural resource sustainability.
The regional equity and resource sustainability is a precondition for achieving nutritional
security and balanced production. However, the system of the MSP has failed to achieve this
objective of sustainability.
In order to make MSP relevant and efficient, the government have to revamp the policy.
1. MSP is announced for 24 commodities after which starts the operational part of
procurement of the commodities. The procurements are made at the MSP price and
government has to ensure that farmers do not get the price below MSP. However, it
has been found that there exists no mechanism on the ground that ensures that farmers
are paid the MSP. It has been noticed that many times farmers are forced to make
distress sale at a price below the MSP.
2. For instance, it does not matter for producer of pulses or oilseeds anywhere in the
country or for paddy and wheat farmers in Chhattisgarh, Orissa, Assam, Bihar and a
majority of the other states whether the CACP recommends Rs 500 or Rs 5,000 per
quintal for their crop as there is no enforcement of the MSP in these cases. In these

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cases, the long exercises and recommendations made by the CACP remain only on
paper.
3. To make MSPs relevant to the country’s present situation requires changes in the
criterion used by the CACP to arrive at MSPs and ensuring that MSPs are effectively
implemented where they are meant to be implemented.
4. The CACP must consider both Demand and Supply factors while deciding the MSP.
For instance, CACP main criteria in deciding the MSP is to take into account cost of
production. The CACP completely ignores the demand side factors. When the
demand for commodities are falling, and if at that time MSP is kept high, then it will
lead to excess supplies and increase in government buffers stock which will be kept
idle and will get wasted. In all such situation, it is important that MSP should be
derived based on demand and supply factors.
5. Due to distorted MSP, inefficiency builds in into the system, and the farmers do not
bother if growing a particular commodity on land that is unsuitable for its production
will raise its cost and make land non-productive in the long run.
For instance, this is exactly what has happened in the case of extension of rice cultivation to
the semi-arid regions and sandy soils in states like Punjab and Haryana, which is creating a
host of environmental and natural resources problems in addition.
1. Fixing MSP for political reasons and under the pressure of the farmer leaders leads to
a total neglect of societies preference for commodities. It also leads to serious
imbalances where what is being demanded is not being produced and what is not
being demanded is being produced in the economy. It would also require the
government to buy produce all the time and everywhere if the MSP ignores demand-
side factors.
2. Everyone in India including political leaders are convinced that the agrarian crisis and
farmer distress are mainly because of low levels of MSP. The quick solution reached
by them is therefore to increase the MSP. However, a comprehensive analysis and
correct understanding of agricultural situation reveal that the problem lies elsewhere.
3. The Indian agriculture suffers from twin problems of lack of viability of practising
agriculture due to the small and marginal size of land holdings and high volatility in
farm sector due to monsoon failures and lack of irrigation.
4. The small size of land holdings, low productivity, increasing production costs,
shrinking employment opportunities outside agriculture, and declining growth rate in
agriculture are all major serious issues which cannot be simply resolved by increasing
the MSP.
5. For instance, according to the 70th round survey of the NSSO (2014), the estimated
number of agricultural households (AHHs) in India is 90.2 million, who constitute

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57.8% of the total estimated rural households (156.14 million). Clearly, 42.2% of
rural households (RHHs) are without any agricultural land.
Among the AHHs, 2.65% have only 0.01 hectares (ha) of land and are simply notional
AHHs. Another 31.89% AHHs have land between 0.1 ha and 0.4 ha, and 34.9% have land
between 0.41 ha and 1 ha. These three categories of AHHs account for 69.44% and are
classified as marginal farmers. If we add small farmers (17.14%), the proportion of marginal
and small farmers comes out to be 86.58% of the total.
The average size of the marginal holdings is only 0.41 ha (one acre), and that of
smallholdings is 1.4 ha, much lower than the upper size-class limit of 2 ha. Given their
economically unviable holding size, and small quantities of marketable surplus, there will be
a marginal increase in the total net income of these farmers from agriculture even if they are
given the higher MSP of over and above 50% of crops of production.
The relative economic conditions of the agricultural workforce (cultivators as well as

labourers) have gone poorer vis-à-vis their counterparts in the non-agricultural sectors.
Taking into account a large number of underemployed and those disguised unemployed
workers in agriculture, MSP alone is not going to address the agrarian crisis and farmers’
distress, especially in the case of marginal and small AHHs, who account for 87% of AHHs.
If not MSP? Then where lies the problem?

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Looking Beyond the MSP
The long-term fundamental solution that has the potential to solve the agrarian crisis in India
lies in the domain of.
Pricing policy for sugarcane
The pricing of sugarcane is governed by the statutory provisions of the Sugarcane (Control)
Order, 1966 issued under the Essential Commodities Act (ECA), 1955. Prior to 2009-10
sugar season, the Central Government was fixing the Statutory Minimum Price (SMP) of
sugarcane and farmers were entitled to share profits of a sugar mill on 50:50 basis. As this
sharing of profits remained virtually unimplemented, the Sugarcane (Control) Order, 1966
was amended in October 2009 and the concept of SMP was replaced by the Fair and
Remunerative Price (FRP) of sugarcane. A new clause ‘reasonable margins for growers of
sugarcane on account of risk and profits’ was inserted as an additional factor for working out
FRP, and this was made effective from the 2009-10 sugar season.

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Accordingly, the CACP is required to pay due regard to the statutory factors listed in the
Control Order, which are
 the cost of production of sugarcane;
 the return to the grower from alternative crops and the general trend of prices of
agricultural commodities;
 the availability of sugar to the consumers at a fair price;
 the price of sugar;
 the recovery rate of sugar from sugarcane;
 the realization made from the sale of by-products viz. molasses, bagasse and press
mud or their imputed value (inserted in December 2008) and;
 Reasonable margins for growers of sugarcane on account of risk and profits (inserted
in October 2009).
States also announce a price called the State Advisory Price (SAP), which is usually higher
than the SMP.
Other Major Support Schemes of Government
Market Intervention Scheme
Similar to MSP, there is a Market Intervention Scheme (MIS), which is implemented at the
request of State Governments for procurement of perishable and horticultural commodities in
the event of fall in market prices.
The Scheme is implemented when there is at least 10% increase in production or 10%
decrease in the ruling rates over the previous normal year. Proposal of MIS is approved on
the specific request of State/UT Government, if the State/UT Government is ready to bear
50% loss (25% in case of North-Eastern States), if any, incurred on its implementation.
Under MIS, funds are not allocated to the States. Instead, the central government share of
losses as per the guidelines of MIS is released to the State Governments/UTs, for which MIS
has been approved based on specific proposals received from them.
Price Supports Scheme (PSS)
The Department of Agriculture and Cooperation implements the PSS for procurement of
oilseeds, pulses and cotton, through NAFED which is the Central nodal agency, at the
Minimum Support Price (MSP) declared by the government.
NAFED undertakes procurement as and when prices fall below the MSP.
Loss if any
Procurement under PSS is continued till prices stabilize at or above the MSP. Losses,
incurred by NAFED in undertaking MSP operations are reimbursed by the central

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Government. Profit, if any, earned in undertaking MSP operations is credited to the central
government.
BUFFER STOCK
Buffer Stock is another main instrument of Agriculture pricing policy in India. India has a
policy of maintaining a minimum reserve of food grains (only for wheat and rice) so that food
is available throughout the country at affordable prices round the year.
The main supply from the government’s buffer stock goes to the public distribution system
(now TPDS) and at times goes to the open market to check the rising prices if needed.
Public sector food grain stocks are significant support of India’s food policy and food
security. They have three important societal goals.
1. To provide space for effective implementation of minimum support price for rice and
wheat through procurement mechanism.
2. To maintain price stability arising out of year to year fluctuations in output or any
other exigency.
3. As a source of supply for public distribution system and various other schemes to
sustain food and nutrition security particularly of economically weaker sections.
The Food Corporation of India is the key agency for procurement, storage and distribution of
food grains. In addition to the requirements of wheat and rice under the targeted public
distribution system, the Central Pool is essential to have sufficient stocks of these in order to
meet any emergencies such as drought/failures of the crop, as well as to allow open market
intervention if price increases.
Major objectives of Buffer Stocks:

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However, the Buffer Stock policy has raised the questions over the storage capability of the
FCI and contaminated grains in the open godowns in the country. The issue of storage had
also been highlighted by the Supreme Court, which recommended that government should
allocate the grains free to the poor section of society. The problem is huge, but the
government does not have an immediate solution. The FCI has to increase the storage
capacity to accommodate the record procurement.
Current Buffer Stock Policy of Government:
1. The current buffer norms were reviewed in January 2015. According to the new
norms, the central pool should have 41.1 million tonnes of rice and wheat on July 1
and 30.7 million tonnes on October 1 every year. These limits were 32 million tonnes
and 21 million tonnes earlier.
2. The stocking norms for the quarters beginning January’1 and April’1 have been
revised only slightly. Main drivers for increased buffer stocks were increased offtake
from the targeted public distribution system and also the enactment of National Food
Security Act.
3. It was observed that Food Corporation of India buys almost one-third of the total rice
and wheat produced in the country at minimum support prices. It does imply that
denying to any farmer who wants to sell his produce at MSP. But then it also needs to
maintain an excessive, uncontrollable and monetarily troublesome food inventory.
4. Previously, once the buffer norms were met, cabinet approval was needed to sell any
part of it in the open market. But in January 2015, it is revised.
5. The current policy is that Food Ministry is authorized to dispose the surplus stock into
open market without seeking cabinet approval. This was a major policy decision, and
it was needed to resolve the problem of burdensome inventories at Food Corporation
of India and misrepresentation created in the market.
6. The maintenance of a buffer stock is also important to ensure national food security.
Stocks mainly of rice and wheat are commonly maintained from year to year at a
substantial cost in order to effectively take care of variations in domestic food grain
production. These variations occur quite regularly due to climate and man-made
factors.
7. Buffer stocks are created from the domestic food surpluses available in years of high
production. They are also built and maintained through imports as and when required.
The optimum size of the buffer stocks at any point of time is based on the proposals
of expert committees appointed for the purpose by the government from time to time.
In the context of India, buffer stocking of food grains is theoretically seen as a mechanism to
deliver strategic food and agricultural domestic support policies, but in terms of its
o accomplish its objective, there is a growing consent, both domestically and
effectiveness to

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internationally, that the food stocking programme has been not just expensive but also
indiscreetly wasteful.
In India, the prices of agricultural products such as wheat, cotton, cocoa, tea and coffee tend
to alter more than prices of manufactured products and services. This is mainly due to the
volatility in the market supply of agricultural products coupled with the fact that demand and
supply are price inelastic.
In order to manage the fluctuations in prices, it needs to operate price support schemes
through the use of buffer stocks. Buffer stock schemes stabilize the market price of
agricultural products by buying up supplies of the product when harvests are copious and
selling stocks of the product onto the market when supplies are low.
Problems with buffer stock schemes:
 Theoretically, buffer stock schemes should be lucrative, since they buy up stocks of
the product when the price is low and sell them onto the market when the price is
high. Nonetheless, they do not often work well in practice. Evidently, perishable items
cannot be stored for a long time and can, therefore, be immediately ruled out of buffer
stock schemes.
 Cost of buying excess supply can cause a buffer stock scheme to run out of cash. A
guaranteed minimum price causes over-production of rice and wheat which has its
economic and environmental costs.
 There are also high administrative and storage costs to be considered.
 Open-ended Procurement policy leads to excess procurement and since FCI storage
capacity of grains is limited a large amount of grain procured under buffer stock
scheme is wasted and rotten.

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Public Distribution System in India: Definition; Issues; Working;

Need; Disadvantages
Issues Related to Public Distribution System
What is PDS?
The PDS is a part of India’s Agriculture Price Policy. The Agriculture price policy in India
has a twin objective of supporting farmers at the time of bumper harvest (when the price falls
due to excess production) and supporting poor consumers from price rise by providing them
cheap food grains through a network of fair price shops (Ration Shops) at a subsidised price.
The PDS makes available fixed quotas of food grains to poor households through ration
shops at a subsidised ration price called “Issue Price”.
The original aim of the PDS was to stabilise prices and remove fluctuations from the
foodgrains market. But, later on, PDS has assumed the role of an important and most
significant anti-poverty programme of the government.
The Cost of Running PDS
The cost of operation of the PDS consists of two major components:
 Subsidy Cost: The subsidy cost occurs because the cost at which foodgrains are
procured is higher than the price at which they are sold in the PDS.
 Administration Cost: Administration costs occurred due to storage, procurement

operations and transportation of foodgrains from farmers to consumers. Theft,
wastages and damages in storage and transit add to these costs.
Why PDS was needed?

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Why the Penetration of PDS is weak and PDS has failed to provide food security to
Poor?

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The Timeline of the PDS in India
The Working of the PDS
The existing structure of the PDS works in a Cooperative Federalist system in which both
Centre and State shares the responsibility.
The Central Government is responsible for buying foodgrains from farmers at MSP. The
pre-determined
Central Government than allocates the grains to each state on the basis of a pre
formula.

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The State Government is responsible for identifying the poor and eligible households in the
states.
The Centre transports the food grains to the Central depots (FCI) in each state. After that, the
state government is responsible for delivering the food grains from the centre depots to the
ration shops. The Ration shops are the ultimate end points from where the food grains are
sold to PDS beneficiaries.

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Targeted PDS in India, Antyodaya Anna Yojana (AAY), Alternative

to the PDS, Direct Benefit Transfers, National Food Security Act
Targeted PDS in India
PDS began as a Universal Programme in India due to food shortages of the mid 1960’s. But,
since 1997 it has been exclusively targeted towards the poor, providing Wheat, Rice, Sugar
and Kerosene at a highly subsidised to the below poverty line households.
The objective was to help very poor families buy food grains at a reasonably low cost to
enable them to improve their nutrition standards and attain food security. The new system
followed a two-tier subsidised pricing structure: one for BPL families, and another for Above
the Poverty Line (APL) families.
How Cheap Food Grains ensure Nutritional Security?
In both the cases, whether Substitution dominates or the Income effect dominates, the
end result will be an increase in calories intake by consumers and reduction in
nutritional deficiencies.
Note for Students:
In order to make Targeted PDS more effective the Government had launched the Antyodaya
Anna Yojana in December 2000.

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Antyodaya Anna Yojana (AAY): The objective of the scheme was to identify the poorest
households among the BPL category and to provide each of them with the following:
 Total 25 KG of food grains per month @ fixed price of RS 2 per KG for Wheat and
RS 3 per KG for Rice.
Individuals in the following priority groups are entitled to an AAY card, including:
1. landless agricultural labourers,

2. marginal farmers,
3. rural artisans/craftsmen such as potters and tanners,
4. slum dwellers,
5. persons earning their livelihood on a daily basis in the informal sector such as porters,
rickshaw pullers, cobblers,
6. destitute,
7. households headed by widows or terminally ill persons, disabled persons, persons
aged 60 years or more with no assured means of subsistence, and
8. All primitive tribal households.
The Food Corporation of India (FCI) is the nodal agency at the centre that is responsible
for transporting food grains to the state godowns. Specifically, FCI is responsible for:
procuring grains at the MSP from farmers,

maintaining operational and buffer stocks of grains to ensure food security,
allocating grains to states,
distributing and transporting grains to the state depots,
Selling the grains to states at the central issue price to be eventually passed on to the
beneficiaries.
Important Prices Related to the PDS

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How to Strengthen the Public Distribution System?
Aadhaar Based Enrolment.
The key problem in the efficient functioning of the PDS is the inclusion errors and the
exclusion errors. Aadhaar cards could be used to identify the real poor households, thereby
eliminating the inclusion errors. The use of Aadhaar would also help in eliminating the
duplicate and ghost beneficiaries.
Use of E-Technology and ICT
Technology based reforms would help in reducing the leakages. The current system of
manual recording the beneficiary is prone to corruption and tampering. The computerisation
of records will resolve this problem. The end-to-end computerisation could curb large-scale
diversion of grains to the open markets and help track the delivery of food grains from state
depots to beneficiaries.
Technology based reforms undertaken by States:

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Removing the Urban Bias
It has been found that most of the Ration shops are situated in the urban areas of cities rather
than the backward areas and slums, where most of the people poor live. The poor often have
to travel miles to procure their quota of grains. The situation of Ration shops in the Urban
centres also increase the risk of inclusion errors as urban middle class have a strong incentive
to enrol themselves in the local Ration shops. If the ration shops are restricted to slums than
the urban middle class will find it difficult to travel to slums to buy grains. Thereby
eliminating the wrongful inclusions.
Choice of Commodities sold.
The PDS in India provides cereals like Wheat and Rice to the poor. However, various studies
have found that the poor generally prefers coarse grains like ragi, maize, Jowar and Bajra.
These cereals are not only rich in carbohydrates and protein but are also less consumed by the
rich and urban middle class. If coarse cereals are sold in the PDS shops, then the rich will
automatically stop using ration shops. Thereby eliminating the inclusion problem.
Decentralisation of the PDS
The current system of centralised PDS where the centre procures the grain and then
distributes it to each state is highly inefficient. The centralised PDS further adds to the
unbearable administrative cost of transporting the grains from FCI to the state depots. It
would be better if the states are given the power to procure and distribute grains on their own
at the MSP and CIP decided by the centre.
Alternative to the PDS
Universal PDS:
Under the Universal PDS the grains are provided to every household of the state irrespective
non-classification
of the income level. The non classification of the households eliminates the risk of inclusion
xclusion errors. It also reduced the cost of running the scheme as it reduced the
and exclusion
administrative cost of identifying the poor and cost of monitoring the scheme.

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Food Coupons:
Food Coupons are another alternative to PDS. Beneficiaries are provided with food coupons
which are equivalent to money. The food coupons are used to buy grains from local markets
and grocery stores.
Retailers or grocery shop owners take these coupons to the local bank and are reimbursed
with money. According to the Economic Survey 2009-10 reports, such a system will reduce
administrative costs. Food coupons also decrease the scope for corruption since the store
owner gets the same price from all buyers and has no incentive to turn the poor buyers away.
Moreover, BPL customers have more choice; they can avoid stores that try to sell them poor-
quality grain.
Direct Benefit Transfer:
DBT provides for cash transfers to the poor. Under DBT, beneficiaries will be given money
by the government in their respective bank accounts which can be used to but grains from the
open markets. Under the DBT system the government will provide money directly to the
target group usually poor households. The identification of the poor households are much
easier under the DBT system, since the bank accounts are linked with Aadhaar and can be
easily monitored.
Some of the potential advantages of these programmes include: (i) reduced administrative
costs, (ii) expanded choices for beneficiaries, and (iii) competitive pricing among grocery
stores.
 In PDS leakage arises due to ghost ration cards. Under DBT “the identity of a person
is known and ration cards will be Aadhaar-verified, due to which, only the right
beneficiaries will get the subsidy.
 The savings from DBT on food subsidy is expected to be much larger than that for
LPG. According to budget estimates, India’s food subsidies for the 2015-16 will
be Rs.1.24 trillion. So, if government manages to save 40% of the subsidy, it will be
around Rs.50,000 crore annually.
 The saved money could be invested by Government in Infrastructure, health or

education where social returns would be much higher.
 Usually the PDS grains are of inferior quality. DBT would ensure that the poor
families will buy good quality grain from the open market. This would certainly
improve the nutritional outcome for the people and will be a step towards equality.
 Currently More than 40% of the foodgrains in PDS are diverted to open markets.
High diversion of PDS items, pilferage, transport cost ,administration cost and graft
issues would be avoided under DBT.
 Providing subsidies directly to the poor would both bypass brokers as well as reduce
the waste and holding costs of storing grains in government silos.

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 Cash transfers would help reduce fiscal deficit by curbing expenditures earmarked for
the PDS that are siphoned off through corruption, as well as avoiding substantially
higher costs of transferring food rather than cash.
 DBT system Respects the autonomy of beneficiaries and ensures that the person has
choice in terms of spending the money in-accordance with his priorities and cultural
preferences.
 DBT will ensure that Ensures that the inefficient and corruption-prone procurement
regime of government is done away.
Some issues with the DBT:
 Cash transfers may expose recipients to price fluctuation, if they are not frequently
adjusted for inflation.
 Additionally, since cash transfers include the transfer of money directly to the
beneficiary, poor access to banks and post offices in some areas may reduce their
effectiveness.
 It is also possible for people to spend cash transfers not on more nutritious food, as
proponents suggest, but instead on non-food items, which would decrease the amount
of household money left for buying food.
Advantages of PDS and DBT: A Comparison
Disadvantage of PDS and DBT: A Comparison

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The National Food Security Act
The NFSA was passed in the Parliament in the year 2013, the NFSA seeks to provide the
food to all individuals by making it a statutory right.
A comparison of existing TDPS and NFSA
Scope TPDS NFSA
Passed by the Parliament with the

An Anti-Poverty Programme with no
Legal Status statutory backing for “Right to
legal backing.
Food”.
Restricted to the Poor BPL Up to 75% of the rural population

Households. APL families can get and 50% of the Urban population
Coverage
grains from ration shops but not at are included. Total coverage is
subsidised prices. 67.5% of all Population.
AAY Households, Priority

AAY households, BPL Families and
Categorisation Households and Excluded
APL families.
Households.
BPL and AAY: 35

Priority HHs: 5 KG/Person/Month
Entitlements KG/FAMILY/MONTH.
AAY HHs: 35 KG/Family/Month
APL: 15-35 KG/Family/Month
All Categories:
AAY HHs: RS 3/KG of Rice
RS 3/KG of Rice
Prices RS 2/KG of Wheat
RS 2/KG of Wheat
RS 1/KG of Coarse Grains
RS 1/KG of Coarse Grains
Cooperative Structure with Centre

Cooperative Structure with Centre
realising the state wise estimates of
creating identifying criteria for the
the household to be covered under
poor household using poverty and
Identification the NFSA.
consumption estimates.
States are responsible for creating
States are responsible for identifying
criteria and identifying eligible
eligible households.
households.
Role of Centre Centre: Procurement at MSP and Centre & State: Some provisions

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and State Distribution and Transportation are same as with TPDS. Except that
through FCI. centre will provide food security
allowances to states to pass on to
State: Delivery of grains to final the beneficiaries.
beneficiaries through ration shops.
State and Centre are not responsible
to supply food grains during the
time of natural calamities like flood
and drought.
District grievances redressal

officers will be appointed;
States are responsible for monitoring
Establishment of the State Food
Grievances and vigilance at district and block
Commissioners; Vigilance
level.
committees at district and block
levels.

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(d) Agriculture Marketing

Marketing of Agricultural Produce in India: Definition; Role; APMC
Act, Model APMC Act, 2003
Agricultural Marketing in India
Definition:
In a very narrow sense, Agriculture marketing means delivering farm product from farmers to
the final consumers. The National Commission on Agriculture defined agricultural marketing
as a process which starts with a decision to produce a saleable farm commodity, and it
involves all aspects of market structure of system, both functional and institutional, based on
technical and economic considerations and includes pre- and post-harvest operations,
assembling, grading, storage, transportation and distribution.
The Broader role of Agriculture Marketing in India
The prerequisites to attain these goals are:

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These conditions cannot come up on their own, particularly in a developing country like
India. Therefore, agricultural market policies are treated as an integral part of development
policies and their functioning has remained an important part of public policy in India.
Government Intervention in Agriculture Markets
Policy interventions in agricultural markets in India have a long history. Till the mid-1960s, it
was mainly meant to facilitate the smooth functioning of markets and to keep a check on
hoarding activities that were considered unfriendly to producers and/or consumers.
Subsequently, the country opted for a package of direct and indirect interventions in
agricultural markets and prices, initially targeted at procuring and distributing wheat and
paddy. This gradually expanded to cover several other crops/products and aspects of
domestic trade in agriculture.
The present policy framework for intervention in agricultural markets and prices can be
broadly grouped under three categories –
(a) Regulatory measures;
(b) Market infrastructure and institutions; and
(c) Agricultural price policy.

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Regulatory Measures
Regulatory measures include development and regulation of wholesale markets in Indian;

and, adoption of legal instruments for regulation of agriculture marketing and trade.
Agriculture Produce Marketing Committee Regulation (APMC) Act
All wholesale markets for agricultural produce in states that have adopted the Agricultural
Produce Market Regulation Act (APMRA) are termed as “regulated markets”. With the
exception of Kerala, J & K, and Manipur, all other states have enacted APMC Act.
The working of the APMC
The Act is implemented and enforced by APMCs established under it.
1. It mandates that the sale/purchase of agricultural commodities notified under it are to

be carried out in specified market areas, yards or sub-yards. These markets are
required to have the proper infrastructure for sale of farmers’ produce.
2. Prices in them are to be determined by open auction, conducted in a transparent

manner in the presence of an official of the market committee.
3. Market charges for various agencies, such as commissions for commission agents
(arhtiyas); statutory charges, such as market fees and taxes; and produce-handling
charges, such as for cleaning of produce, and loading and unloading, are clearly
defined, and no other deduction can be made from the sale proceeds of farmers.
Market charges, costs, and taxes vary across states and commodities.

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The Advantages of APMC Act
Besides improving the way markets functioned, the Acts created an environment that freed
producers-sellers from exploitation by traders and mercantile capital.
The APMC act in recent years has developed certain inefficiencies, and the opponents have
strongly argued to revamp the act as per the needs of the current situations. The main
arguments for the changes are:
Because of all this, the Inter-Ministerial Task Force on Agricultural Marketing Reforms
(2002) recommended that the APMC Acts be amended to allow for direct marketing and the
establishment of agricultural markets in the private and cooperative sectors.

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The rationale behind direct marketing is that farmers should have the option to sell their
produce directly to agribusiness firms, such as processors or bulk buyers, at a lower
transaction cost and in the quality/form required by the buyers.
On the recommendation of the committee, the government had come up with a Model APMC
Act in 2003.
Model APMC Act, 2003
1. Under the model APMC Act, the private sector and cooperatives can be licensed to
set up markets.
2. The model act also provides for contract farming and direct marketing by the private
players.
3. Except for few states, all the States and UTs have either fully or partly adopted the
model APMC Act.
4. As a result of the model act, the proportion of private trade and contract farming had
increased manifold in some part of the country.
5. However, The Model Act, so far, has not succeeded in persuading the private sector
or cooperatives to set up agricultural marketing infrastructure as an alternative to the
state-owned mandi system.
How the APMC act started benefiting Middleman
Initial situation: When the APMC Act was enacted by various states in the mid-1960s, the
country was facing a serious food shortage and desperately seeking to achieve a breakthrough
in food production. It was strongly felt that it would not be possible to attain and sustain food
security without incentivising farmers to adopt new technology and make investments in
modern inputs.
Therefore, high priority was attached to enabling farmers to realise a reasonable price for
their produce by eradicating malpractices from markets, protecting them from exploitation by
middlemen, and creating a competitive pricing environment. Simultaneously, the hold traders
and commission agents had over them by providing credit was diluted by increasing the
supply of institutional credit. This, along with technology-led output growth, resulted in
increased farm incomes, making farmers less dependent on the trading class for credit and
cash requirements. It also gave farmers the freedom to choose markets and buyers for their
produce.
The Green Revolution Era: The spread and success of the green revolution during the
1970s and 1980s led to an increase in the political power of the farming class and their clout
in policymaking. This was reflected in the creation and strengthening of farmer-friendly
institutions and a policy environment favourable to farmers.

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Marketing institutions like market committees, state-level agricultural marketing boards and
many others in the public and cooperative sectors served the interests of the farming
community.
The entry of Middlemen’s Post 1991: Over time, as the country moved closer to food self-
sufficiency, public policy began losing its focus. The marketing system and marketing
institutions were plagued by inefficiencies, bureaucratic control, and politicisation.
The growth in market facilities did not keep pace with the growth in market arrivals, forcing
producers to seek the help of middlemen in the market, which, in turn, led to dependence on
them.
There was also a reversal of the credit situation after 1991, making farmers more dependent
on commission agents and traders for loans. The trading class quickly regained its marketing
power over farmers by meeting their credit requirements with interlocked transactions,
robbing producers of the freedom to decide where they would sell and whom they would sell
to. Taking advantage of the lax attitude of state governments towards marketing, the trading
class consolidated their power in mandis.
Middlemen successfully turned marketing policies to their benefit, dictating terms to

producers and thwarting modern capital from entering agricultural marketing.
Some examples of this are:
1. increasing the commission rates of arhtiyas without any justification;
2. Rejecting direct payment to producers, which would bypass commission agents; and
3. Determining prices through non-transparent methods.
The various problems facing the agricultural marketing system were summarised by
the Twelfth Plan Working Group on Agricultural Marketing (Planning Commission
2011).
 Too many intermediaries, resulting in high cost of goods and services;
 Inadequate infrastructure for storage, sorting, grading, and post-harvest management;
 Private sector unwilling to invest in logistics or infrastructure under prevailing

conditions;
 Price-setting mechanism not transparent;
 Ill-equipped and untrained mandi staff;
 Market information not easily accessible; and
 Essential Commodities Act (ECA) impedes free movement, storage and transport of
produce.

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Laws regulating agriculture marketing in India
Essential Commodity Act: Almost all agricultural commodities, such as cereals, pulses,
edible oilseeds, oilcakes, edible oils, raw cotton, sugar, gur, and jute, are included in the list
of essential commodities.
The Act provides for instruments like licences, permits, regulations and orders for
(a) Price control,
(b) Storage,
(c) Stocking limits,
(d) Movement of produce,
(e) Distribution,
(f) Disposal,
(g) Sale,
(h) Compulsory purchase by the government, and
(i) Sale (levy) to the government.
Agriculture Produce Grading and Marketing Act: The act defines standards of quality and
prescribes grade specifications for a number of products. The Act authorises an agricultural
marketing adviser in each state to grant a certificate of authorisation to persons or corporate
bodies who agree to grade agricultural produces as prescribed by it.
There are AGMARK grade specifications for 212 agricultural products, but the use and
awareness of it have remained low despite a better understanding of quality attributes among
consumers.

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Private and Co-operative Sector in Marketing of Agriculture Produce

in India
The entry of private sector in Agriculture Marketing
1. As a step towards liberalisation of agricultural trade, the union government issued an

order on 15 February 2002, which removed licensing requirements and all restrictions
on buying, stocking and transporting specified commodities, including wheat, rice,
oilseeds and sugar. They were further decontrolled after this.
2. Similarly, the dairy sector was liberalised through various amendments to the Milk
and Milk Product Order, beginning in 1992. The main purpose of these changes was
to allow increased participation by the private sector in marketing agricultural
commodities.
3. In response, private-sector investments in the dairy sector have increased, and it has a
healthy competition between cooperatives and the private sector.
4. However, the experience of liberalising grain trade has not been very encouraging.
The 2002 change in the ECA attracted big domestic and multinational players like
ITC, Cargill, Australian Wheat Board, Britannia, Agricore, Delhi Floor Mills and
Adani Enterprises to the grain trade.
5. This came after the government had accumulated excessive food grain during 2001-
03. But soon, the domestic food grain demand and supply balance, particularly for
wheat, turned adverse and India had to import more than 6 million tonnes of wheat in
2006-07.
Successful Alternative Models of Agriculture Marketing in India

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Some other Innovative Marketing Mechanisms
Some innovative marketing mechanisms have been developed in some states, which involve
the direct sale of farm produce to consumers, the sale of produce to buyers without routing it
through mandis, and group marketing. Many states have attempted to promote direct contact
between producers and consumers by making arrangements for sale at designated places in
urban areas.

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Farm producers’ organisations (FPOs) of various kinds are emerging as a new model for
organised marketing and farm business. Such models include informal farmers’ groups or
associations, marketing cooperatives and formal organisations like producers’ companies.
Producers can benefit from getting together to sell their produce through economies of scale
in the use of transport and other services, and raise their bargaining power in sales
transactions, while marketing expenses get distributed. This results in a better share of net
returns. Such models are particularly required for small farmers to overcome their constraints
of both small size and modest marketable quantities.
Organised Retail Outlets: The direct purchase of farm produce by retailers has been steadily
increasing with the growth of organised retailing in India. This is expected to accelerate if the
entry of foreign direct investment (FDI) to the field is allowed further.
Food World (of the RPG group) is the leader among organised food retail chains, and there
are many more such as Fab Mall, Monday to Sunday, Family Mart, More for You, Heritage,
Reliance Fresh and Big Bazaar.
Most food chains are regional in nature, having one or two outlets in the main cities, but no
big presence outside their states. Rapid urbanisation, urban population growth, increase in
incomes and consumer spending, changing lifestyles, and access to technology have been the
important factors behind the expansion of food retail chains in India. Despite several factors
favouring organised retail trade, it is still in a nascent stage in the country.

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(e) Technology missions and e-technology in the aid of farmers

Technology Missions in India
The technological missions in India was initiated in 1987 by the Rajiv Gandhi led Congress
government. Rajiv Gandhi had chosen his close aid Sam Pitroda to lead the Mission. The
mission had the task to cover five critical areas which were considered very important for the
development of the Indian economy and society.
The Core Focus areas were:
The sixth goal of Dairy Production was added in the succeeding years.

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The Specific Goals of the Technology mission was
The Progress Made
Drinking Water: The drinking water mission identified 100,000 problem villages. Research
was done, using geohydrological mapping, to determine where to drill new wells, increasing
water sources.
Many villages had some water, but did not have access to clean water. Water was tested in
labs, and official standards of quality and quantity were established.
The mission also included an effort to educate people how to repair broken pumps when they
broke. Before, when pumps broke, they usually stayed broken due to lack of local knowhow.
Easy to understand repair manuals were distributed in each of India’s fifteen languages, and
later made available online.
Immunization: In 1987, India had the highest amount of polio in the world. The mission met
with top immunization experts decided to begin immunizing the country using an oral
ve virus vaccine, the oral version had to be refrigerated. They developed a
vaccine. As a live

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cold chain for handling the vaccines with industrialists to get refrigeration to all parts of
India.
The mission also launched India’s polio vaccine production capacity. In 1987, India had zero
production capacity. With government backing, they began to study France and Russia’s
methods. Several years later, India was producing all of their own vaccines.
25 years later, in 2013, India was declared polio-free.
Literacy: When the Technology Missions began, India’s literacy rate was around 50%.
Several hundred million adults were illiterate, most of them women.
The mission had the dual focus of motivating people (adults in particular) to learn, and
providing materials and teachers.
Oilseeds: India was importing one billion dollars of cooking oils each year, when large
portions of Indian land are well suited to growing oil crops. Farmers did not grow these crops
because they found other crops were more profitable. This was causing India costly economic
situation.
Their goal was to make farmers see the benefits of planting oilseeds.
Kurian, who handled buffer stocks, described his plan as such: “We move into areas where
there is gross exploitation and try to restructure the marketing system so that the small
producer is not fleeced by middlemen or the oil kings.”
Once the intervention on oil was complete, India was exporting oil cakes at the rate of 600
million per year.
Telecommunication: The official goal of the telecom mission was to improve service,
dependability, and accessibility of telecommunications across the county, including rural
areas. This was through indigenous development, local young talent, rural telecom, digital
switching networks, local manufacturing and privatization.
Today, India has made maximum progress in providing accessible and cheap telecom
services to 924 Million people.
Dairy Farming: The goal of the dairy mission was to develop and implement technologies to
improve breeding, animal health, and fodder and milk production.
Today, India is the number one producer of milk in the world.
After the Defeat of Rajiv Gandhi led Congress Government at the centre, the successive
governments have transferred the responsibility of each of the core areas to the respective
parent ministries.

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Technology Missions in Agriculture and Horticulture
National Mission for Integrated Development of Horticulture
A Centrally Sponsored Scheme of MIDH has been launched for the holistic development of
horticulture in the country during XII Plan. The Scheme, which took off from 2014-15,
integrates the ongoing schemes of National Horticulture Mission, Horticulture Mission for
North East & Himalayan States, National Bamboo Mission, National Horticulture Board,
Coconut Development Board & Central Institute for Horticulture, Nagaland.
Horticulture Mission for North East and Himalayan States
HMNEH is a part of Mission for Integrated Development of Horticulture (MIDH), being

implemented for overall development of horticulture in NE and Himalayan states. The
Mission covers all NE states including Sikkim and Jammu & Kashmir, Himachal Pradesh &
Uttarakhand. The Mission addresses the entire spectrum of horticulture from production to
consumption through backward & forward linkages.
National Horticulture Mission
A National Horticulture Mission was launched in 2005-06 as a Centrally Sponsored Scheme

to promote holistic growth of the horticulture sector through an area based regionally
differentiated strategies. The Scheme has been subsumed as a part of Mission for Integration
Development of Horticulture (MIDH) during 2014-15.
National Mission on Oilseeds and Palm Oil
NMOOP envisages increase in production of vegetable oils sourced from oilseeds, oil palm &
tree borne oilseeds. The Mission is implemented through three Mini Missions (Oilseeds, Oil
Palm & TBOs) with specific targets.
The strategy includes increasing Seed Replacement Ratio with focus on varietal replacement;
increasing irrigation coverage; diversification of area from low yielding
cereals; intercropping; use of fallow land; expansion of cultivation in watersheds
& wastelands; increasing availability of quality planting materials; enhancing procurement of
oilseeds and collection & processing of TBOs.
Technology Mission on Coconut
The Mission was launched to converge & synergize all the efforts through integration of
existing programs & address the problems and bridge the gaps through appropriate programs
in mission mode to ensure adequate, appropriate, timely & concurrent action to make coconut
farming competitive & to ensure reasonable returns.

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Technology Mission on Oilseeds, Pulses and Pulses
The Mission was launched 1986 to increase the production of oilseeds to reduce import and
achieve self-sufficiency in edible oils. Subsequently, pulses, oil palm & maize were also
brought within the purview of the Mission.
Schemes under TMOP are:
 Oilseeds Production Program
 National Pulses Development Project
 Accelerated Maize Development Program
 Post-Harvest Technology
 Oil Palm Development Program
 National Oilseeds and Vegetable Oil Development Board
National Livestock Mission
The Mission covers all activities required to ensure improvement in livestock production
systems & capacity building of all stakeholders. It covers everything for improvement of
livestock productivity & support projects & initiatives subject to condition that such
initiatives cannot be funded under other Centrally Sponsored Schemes
It has 4 Sub-Missions:
1. Livestock Development;
2. Pig Development in NE Region;
3. Feed & Fodder Development; and
4. Skill Development, Technology Transfer & Extension
5. Technology Mission on Cotton.
The aims of the Mission are: to improve the yield and quality of cotton; to increase the
income of cotton growers by reducing the cost of cultivation & by increasing the yield; to
improve the quality of processing of cotton.
It had four Mini Missions-
I: Cotton Research and Technology Generation;
II: Transfer of Technology and Development;
III: Development of Market Infrastructure;
IV: Modernization / Setting up of new G&P factories

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Technology Mission on Literacy
National Digital Literacy Mission
The Digital Saksharta Abhiyan (DISHA) or National Digital Literacy Mission

(NDLM) Scheme has been formulated to impart IT training to 52.5 lakh persons, including
Anganwadi & ASHA workers and authorised ration dealers in all the States/UTs so that non-
IT literate citizens become IT literate so as to enable them to actively & effectively
participate in the democratic and developmental process and also enhance their livelihood.
National Mission on Education through Information and Communication Technology
NMEICT has been envisaged as a Centrally Sponsored Scheme to leverage the potential of
ICT in teaching and learning process for the benefit of all the learners in higher education
institutions in any time anywhere mode. It has two major components: providing
connectivity, along with provision for access devices to institutions & learners; & content
generation.
Nano Technology Mission
The Government of India, in 2007, approved the launch of a Mission on Nano Science &
Technology (Nano Mission) with an allocation of Rs. 1000 crore for 5 years.
The Department of Science and Technology is the nodal agency for implementing the Nano
Mission. Capacity-building in this area of research will be of utmost importance for the Nano
Mission so that India emerges as a global knowledge-hub in this field.
Other important Technological Missions
Technology Missions on Indian Railways
TMIR is a consortium of Ministry of Railways, Ministry of Human Resource Development,

Ministry of Science and Technology and Department of Heavy Industry on an investment
sharing model for taking up identified railway projects for applied research and use on Indian
Railways.
It will also monitor progress of research projects of the existing Railway Research Centre,
Kharagpur & other 4 upcoming Railway Research Centres sanctioned in Budget 2015-16.
Thus, Railways’ investment in applied research activities will be fruitfully converted to
technology development for actual use in railway working.
Technology Mission on Railway Safety
A Technology Mission has been launched to focus attention and drive modern technologies
of monitoring, control, communications, design, electronics and materials for railway safety.
It will help to initiate and incubate design & development projects of significant national
importance.

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Its objective is to develop & adopt state-of-the-art safety, control and design technologies
defined by needs related to Indian conditions. It will formulate and implement projects aimed
towards achieving higher throughput, lower cost of transmission per unit & safer train
movement.
Technology Mission on Technical Textiles
The Mission was announced in 2007 to address the “major constraints for improving
production & consumption of technical textiles”.
In 2008-09, 4 Centres of Excellence were set up to catalyse industry support & build capacity
in the area of Geotech (geotextiles used in civil engineering applications), Protech (personal
& property protective clothing), Meditech (medical textiles) and Agrotech (specialized
agriculture use).
Technology Mission on Water and Clean Energy
Water Technology Initiative Program
It was initiated in August 2007 aims to promote R&D activities aimed at providing safe
drinking water at affordable cost and in adequate quantity using appropriate Science and
Technology interventions evolved through indigenous efforts.
Since quality is the main consideration of safe drinking water, processes which imply nano-
material and filtration technologies have been focused.
The initiative also includes the pilot testing of credible number of products and referencing of
selected technologies to the social context of the application region.
In pursuance of directives of Hon’ble Supreme Court, Technology Mission on Winning,
Augmentation and Renovation (WAR) for Water has been launched in August 2009 to
undertake research-led solutions, through a coordinated approach, to come out with
technological options for various water challenges in different parts of the country.
Aims and Objectives
This pro-active India – centric ‘solution science’ endeavour aims to strengthen the R&D
capacity and capability to develop the technological solutions for existing and emerging
water challenges facing the country.
1. Promote national and collaborative developmental Research to address prevalent and

emerging water challenges
2. Capacity building of research professionals and water managers
3. Evolve methodology for development of customised solutions suited to social context
4. Develop synergies with line departments at Central/ State level for last mile
connectivity of the research findings

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5. Evolve S&T based sustainable models with industry and recommend appropriate
policy inputs
6. Conduct techno- economic-social analysis of technologies and their suitability in

specific context
7. Support Impact Assessment Studies/ development of Research Packages/ Technology

Status Reports and other documentation required by different users/ agencies
8. Upscaling and Replication of technologies/ solutions to credible scale.
Scope and Thrust Areas
This demand oriented user centric initiative includes development research in laboratories as
well as application research in field.
The scope of initiative covers the entire value chain of R&D right from water oriented basic
and applied research, pre competitive technology development , technology based
classification & assessment of technology options, pilot-demonstration of technology leads
from laboratories and academic institutions assessment of available technology options to
evolve a basket of technology options and mounting of technically, socially, environmentally
and eventually affordable convergent solutions based on evolving, novel as well as known
technologies suited to socio-economic context.
It also envisages to nurture enabling activities such as human and institutional capacity
building such as fellowships for researchers, training of water managers to enable identify
and select most appropriate technology option, promoting centers of excellence for water
research and nurturing nascent water technologies for last mile connectivity etc.
The thrust areas for initiative dynamically evolve based on need for technology based
solution from the users, requirement of R&D inputs by stakeholders, assessment of S&T
requirements to enable achieve technology prowess in water sector etc. The thrust areas
specific to call for proposals are articulated in call document uploaded on DST website
periodically.
Clean Energy Research Initiative
It was initiated in January, 2009 the initiative aims to develop national research competence
to drive down the cost of clean energy through pre-competitive translational research,
oriented research led disruptive innovations & human and institutional capacity development.
Aims and Objectives
CERI has been envisaged to –
1. Support upstream end of research, where knowledge, more advanced than the current
practice in the industry must have a space.

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2. Develop India centric innovations developed around user needs and forge
collaboration between industry and academics as much as possible and gain value for
such collaborations.
3. To develop critical mass of researchers to meet requirement of R&D professionals for

clean energy.
Scope and Thrust Areas
The scope of initiative includes support for solar oriented fundamental research for solar
devices, sub-systems and systems. The initiative supports feasibility assessment of fresh
ideas/ concepts, including various emerging and disruptive technologies, for their potential
conversion into useful technology/ product.
The envisaged thrust areas are –
 Solar energy materials
 Solar energy devices (for user direct load applications)
 Storage devices
 Power electronics for grid synchronization
 Capacity building to create critical mass for solar energy research
 Development of systems/ subsystems for solar photovoltaic, solar thermal, storage

smart energy grid and building energy efficiency.
 Convergent Solar thermal technology solutions (25 kw to 1 MW)
 Convergent Solar Photo Voltaic Technology solutions
 Any other topic, considered to be of relevance to country needs.

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E-Technology in Indian Agriculture to Aid the Farmers

E-Technology in Agriculture
E-Platform for Agriculture Markets in India
The electronic trading portal for national agricultural market is an attempt to use modern
technology for transforming the system of agricultural marketing.
National Agriculture Market
 The National Agriculture Market (NAM) is envisaged as a pan-India electronic

trading portal which seeks to network the existing APMC and other market yards to
create a unified national market for agricultural commodities. NAM is a “virtual”
market, but it has a physical market at the backend.
 NAM was announced during the Budget of 2014-15 and is proposed to be achieved
through the setting up of a common e-platform to which initially 585 APMCs selected
by the states are linked. NAM was launched on 14 April 2016 with 21 mandis from 8
States joining it and the first phase of connecting 250 mandis was over on 6 October
2016.
 NAM will be implemented as a Centrally Sponsored Scheme through Agri-Tech

Infrastructure Fund (ATIF). The Department of Agriculture & Cooperation (DAC),
Ministry of Agriculture will set it up through the Small Farmers Agribusiness
Consortium (SFAC).
 The Central Government will provide the software free of cost to the states, and in
addition, a grant of up to Rs. 30 lakhs per mandi /market will be given as a onetime
measure for related equipment and infrastructure requirements. In order to promote
genuine price discovery, it is proposed to provide the private mandis also with access
to the software, but they would not have any monetary support from Government.
Benefits of NAM
NAM is said to have the following advantages:
 For the farmers, NAM promises more options for sale. It would increase his access to
markets through warehouse based sales and thus obviate the need to transport his
produce to the mandi.
 For the local trader in the mandi / market, NAM offers the opportunity to access a
larger national market for secondary trading.
 Bulk buyers, processors, exporters etc. benefit from being able to participate directly
in trading at the local mandi / market level through the NAM platform, thereby
reducing their intermediation costs.

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 The gradual integration of all the major mandis in the States into NAM will ensure
common procedures for issue of licences, levy of fee and movement of produce. In a
period of 5-7 years Union Cabinet expects significant benefits through higher returns
to farmers, lower transaction costs to buyers and stable prices and availability to
consumers.
 The NAM will also facilitate the emergence of value chains in major agricultural
commodities across the country and help to promote scientific storage and movement
of agriculture goods.
1. Karnataka Agriculture Marketing Model
 Among various states of the country, Karnataka has been the forerunner in market
reforms and in devising innovative practices to improve agricultural markets and
competitiveness.
 In order to take advantage of modern technology to improve agricultural marketing,

the state prepared a plan in 2012–13 with the assistance of NCDEX (National
Commodity and Derivatives Exchange) Spot Exchange for automation of auction
process in mandis (primary agricultural markets where producers sell their
agricultural produce).
 The plan involves the creation of transparent, integrated e-trading mechanism coupled
with facilities for grading and standardisation to facilitate seamless trading across
mandis (APMCs). The approach was to integrate all such APMCs with major
consumption market to fetch remunerative prices to farmers.
 The plan has been implemented through Rashtriya e-Market Services (ReMS) Private
Limited Company, which is a joint venture created by the state government and
NCDEX Spot Exchange.
 ReMS offers automated auction and post-auction facilities (weighing, invoicing,

market fee collection, accounting), assaying facilities in the markets, facilitation of
warehouse-based sale of produce, commodity funding and price dissemination.
NCDEX is also implementing a unified market platform, whereby all mandis in the
state are being unified for single trading.
 The unified online agricultural market initiative was launched in Karnataka on 22

February 2014. A total of 105 markets spread across 27 districts have been brought
under the Unified Market Platform (UMP) as of March 2016.
 Under this initiative, every farmer who brings produce to the APMC market is given
an identified cation number for the lot brought into the mandi.
 The farmer has a choice to use the common platform or the platform of commission
agent for the auction of the produce. These lots are then assayed, and information
about quantity and quality is put on the portal of ReMS.

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Agriculture Marketing Information Network (AGMARKNET).
 Agricultural Marketing Information Network (AGMARKNET) was launched in

March 2000 by the Union Ministry of Agriculture.
 The Directorate of Marketing and Inspection (DMI), under the Ministry, links around
7,000 agricultural wholesale markets in India with the State Agricultural Marketing
Boards and Directorates for effective information exchange.
 This e-governance portal AGMARKNET, implemented by National Informatics

Centre (NIC), facilitates generation and transmission of prices, commodity arrival
information from agricultural produce markets, and web-based dissemination to
producers, consumers, traders, and policymakers transparently and quickly.
 The e-governance portal caters to the needs of various stakeholders such as farmers,
industry, policymakers and academic institutions by providing agricultural marketing
related information from a single window.
 The portal has helped to reach farmers who do not have sufficient resources to get
adequate market information. It facilitates web-based information flow, of the daily
arrivals and prices of commodities in the agricultural produce markets spread across
the country.
 The data transmitted from all the markets is available on the AGMARKNET portal in
8 regional languages and English.
 It displays Commodity-wise, Variety-wise daily prices and arrivals information from

all wholesale markets. Various types of reports can be viewed including trend reports
for prices and arrivals for important commodities.
 Currently, about 1,800 markets are connected, and work is in progress for another 700
markets. The AGMARKNET portal now has a database of about 300 commodities
and 2,000 varieties.
The information being disseminated through the AGMARKNET portal includes:
 Prices and Arrivals (Daily Max, Min, Modal, MSP; Weekly/ monthly prices/arrivals
trends; Future prices from 3 National commodity exchanges)
 Grades and Standards
 Commodity Profiles (Paddy/Rice, Bengal Gram, Mustard-Rapeseed, Red Gram,

Soybean, Wheat, Groundnut, Sunflower, Black Gram, Sesame, Green Gram, Potato,
Maize, Jowar, Cotton, Grapes, Chilies, Mandarin Orange etc.)
 Market Profiles (Contact details, rail/road connectivity, market charges, infrastructure

facilities, revenue etc.)

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 Other Reports (Best Marketing Practices, Market Directory, Scheme Guidelines,

DPRs of Terminal Markets etc.)
 Research Studies
 Companies involved in Contract Farming
 Schemes of DMI for strengthening Agricultural Marketing Infrastructure
Schemes and Projects of Government and its agencies in e-technology for farmers
Agricultural Technology Management Agency (A T M A)
 ATMA is a society of key stakeholders involved in agricultural activities for

sustainable agriculture development in the district. It is a focal point for integrating
Research and Extension activities.
 It is a registered society responsible for technology dissemination at the district level.

As a whole, the ATMA would be a facilitating agency rather than implementing
Agency.
 The scheme is supported by the Central Government. The funding pattern is 90% by
the central Government and 10% by the state government. The 10% state’s share shall
consist of cash contribution of the State, beneficiary contribution or the contribution
of other non-governmental organizations.
The objectives of ATMA are
 To strengthen research – extension – farmer linkages.
 To provide an effective mechanism for co-ordination and management of activities of

different agencies involved in technology adaptation / validation and dissemination at
the district level and below.
 To increase the quality and type of technologies being disseminated.
 To move towards shared ownership of the agricultural technology system by key

shareholders.
 To develop new partnerships with the private institutions including NGOs.
National Mission on Agricultural Extension and Technology (NMAET)
National Mission on Agricultural Extension and Technology (NMAET) is being implemented

during the 12th Plan period.
NMAET consists of 4 Sub Missions:
1. Sub Mission on Agricultural Extension (SMAE)
2. Sub-Mission on Seed and Planting Material (SMSP)

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3. Sub Mission on Agricultural Mechanization (SMAM)
4. Sub Mission on Plant Protection and Plant Quarantine (SMPP)
 Agricultural Technology, including the adoption/ promotion of critical inputs, and

improved agronomic practices were being disseminated under 17 different schemes of
the Department of Agriculture & Cooperation during the 11th Plan. The Modified
Extension Reforms Scheme was introduced in 2010 with the objective of
strengthening extension machinery and utilizing it for synergizing interventions under
these schemes under the umbrella of the Agriculture Technology Management
Agency (ATMA).
 The NMAET has been envisaged as the next step towards this objective through the
amalgamation of these schemes.
 The common threads running across all 4 Sub-Missions in NMAET are Extension and
Technology. Therefore, while 4 separate Sub-Missions are being proposed for
administrative convenience, these are inextricably linked to each other at the field
level, and most components thereof have to be disseminated among farmers and other
stakeholders through a strong extension network.
 The aim of the mission is: to restructure and strengthen agricultural extension to
enable delivery of appropriate technology and improved agronomic practices to
farmers.
This aim is envisaged to be achieved by a judicious mix of:
1. extensive physical outreach and interactive methods of information dissemination,
2. use of ICT,
3. popularisation of modern and appropriate technologies,
4. capacity building and institution strengthening to promote mechanisation, availability

of quality seeds, plant protection etc. and
5. Encourage aggregation of Farmers into Interest Groups (FIGs) to form Farmer

Producer Organisations (FPOs).
 In order to overcome systemic challenges being faced by the Extension System, there
is a need for a focused approach in mission mode to disseminate appropriate
technologies and relevant information to larger number of farmer households through
interpersonal and innovative methods of technology dissemination including ICT.
M-Kisan SMS Portal
 Though there are about 38 crore mobile telephone connections in rural areas
areas, internet
penetration in the countryside is still abysmally low. Therefore, mobile messaging is

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the most effective tool so far having pervasive outreach to nearly 8.93 crore farm
families.
 M-Kisan SMS Portal for farmers enables all central and State government
organizations in agriculture and allied sectors to give information/services/advisories
to farmers by SMS in their language, preference of agricultural practices and location.
 These messages are specific to farmers’ specific needs & relevance at a particular
point of time and generate heavy inflow of calls in the Kisan Call Centres where
people call up to get supplementary information.
 As part of agricultural extension (extending research from the lab to the field), under
the National e-Governance Plan – Agriculture (NeGP-A), various modes of delivery
of services have been envisaged. These include internet, touch screen kiosks, agri-
clinics, private kiosks, mass media, Common Service Centres, Kisan Call Centres,
and integrated platforms in the departmental offices coupled with physical outreach of
extension personnel equipped with pico-projectors and handheld devices. However,
mobile telephony (with or without internet) is the most potent and omnipresent tool of
agricultural extension.
 USSD (Unstructured Supplementary Service Data), IVRS (Interactive Voice

Response System) and Pull SMS are value added services which have enabled
farmers and other stakeholders not only to receive broadcast messages but also to get
web based services on their mobile without having internet. Semi-literate and illiterate
farmers have also been targeted to be reached through voice messages.
Kisan Call Centres
 In order to harness the potential of ICT in Agriculture, Ministry of Agriculture

launched the scheme “Kisan Call Centres (KCCs)” on January 21, 2004. The main
aim of the project is to answer farmers’ queries on a telephone call in their own
dialect. These call Centres are working in 14 different locations covering all the States
and UTs. A countrywide common eleven-digit Toll-Free number 1800-180-1551 has
been allotted for Kisan Call Centre.
 Replies to the farmers’ queries are given in 22 local languages. Call centre services
are available from 6.00 am to 10.00 pm on all seven days of the week at each KCC
location.
 A Kisan Knowledge Management System (KKMS) to facilitate correct, consistent

and quick replies to the queries of farmers and capture all the details of their calls, has
been developed. The Kisan Call Centre (KCC) Agents working at various KCC
locations throughout the country have access to it.

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Sandesh Pathak
 The Sandesh Pathak application developed jointly by C-DAC Mumbai, IIT-Madras,

IIIT Hyderabad, IIT Kharagpur, and C-DAC Thiruvananthapuram will enable SMS
messages to be read out loud, for the benefit of farmers who may have difficulty in
reading.
 It is usable by people who cannot read. A large population of farmers belongs to this
category. So, when they receive an SMS message either containing agriculture-related
advice or some other thing, this app will read aloud the content.
 It uses the text-to-speech synthesis systems developed by the Indian Language TTS
Consortium. To make it especially useful for farmers, the TTS engines of all these
languages have been tested on the agriculture domain-related texts and fine-tuned
accordingly.
 The app which is available for download from the App store of Mobile Seva
Project of the government of India.
Kisan credit card
 Kisan credit card uses the ICT to provide affordable credit for farmers in India. It was
started by the Government of India, Reserve Bank of India (RBI), and National Bank
for Agriculture and Rural Development (NABARD) in 1998 to help farmer’s access
timely and adequate credit.
 The aim of Kisan Credit Card Scheme is to provide adequate and timely support from
the banking system to the farmers for their short-term credit needs during their
cultivation for purchase of inputs etc., during the cropping season.
 Kisan Credit Card has emerged as an innovative credit delivery mechanism to meet
the production credit requirements of the farmers in a timely and hassle-free manner.
 The scheme is under implementation in the entire country by the vast institutional
credit framework involving Commercial Banks, RRBs and Cooperatives and has
received wide acceptability amongst bankers and farmers.
Sanchar Shakti scheme
 The Sanchar Shakti scheme for Mobile Value Added Services (VAS) provisioning
envisages development of content/information customized to the requirements of
women SHG members engaged in diverse activities in rural areas across India. The
scheme entails innovative application of technology in designing & delivering the
VAS content so as to ensure its easier accessibility & effective assimilation among the
targeted women beneficiaries.
 Sanchar Shakti scheme has been initiated by the Universal Service Obligation
Fund(USOF) which launched wireless broadband Scheme in 2009. USOF is funding

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the National Optic Fibre Network which is being managed by Bharat Broadband
Network Limited. Bandwidth from NOFN will be eligible to give wide range of
services to rural India.
Agropedia –ICAR initiative
Content availability and its intelligent organization continue to be a serious challenge in

agriculture. This prevents offer of meaningful and efficient advisory and allied services to
farmers and other stakeholders. Agropedia is an attempt to infuse semantic and social
networking technologies into agriculture information management to alleviate this problem.
Voice Krishi Vigyan Kendra
 KVK places a special emphasis on training and education of farmers, entrepreneurs,

farm women, rural youth, financial institutions extension functionaries as well as
voluntary organizations.
 The centre plays a First Line Extension role- A linkage between research and the field
in augmenting the socio-economic conditions of farmers, farm women and livestock
owners since 1985 – 86.
 Total 631 Krishi Vigyan Kendras-KVKs have been established across the country at
the district level with a team of multidisciplinary team of experts. The KVKs aim at
technology assessment and refinement and work as knowledge and resource centre in
the district.
 A voice KVK (VKVK) is a set of advisors (KVK experts) and peers (lead smallholder
farmers) connected through mobile and internet technologies. In the VKVK, the
interaction between the two parties can be entirely electronic.
 The Agropedia platform acts as ‘middle ware’ for this interaction providing
amplification (one-to-many and many-to-one), persistence (messages are stored and
can be searched, retrieved), monitoring and other utilities which are possible when the
content is electronically stored and semantically indexed.

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Chapter 7- Poverty, Inequality, and Unemployment

(a) Poverty
Poverty in India: Types of Poverty, Causes of Poverty, Vicious Circle of
Poverty
Poverty in India
People living in poverty are often socially excluded and marginalized. Their right to
effectively participate in public affairs is frequently ignored, and thus elimination of poverty
is much more than a humanitarian issue, as it is more of a human rights issue. Thus,
eradication of poverty and hunger is the basis of all development process.
During the last two decades, India has lifted more than 100 million of its citizens from
extreme poverty; still, it is home to a very large number of people living in abject poverty.
Common Cited Causes of Poverty in India
The above-mentioned reasons are at best half-truths. In reality causes of poverty are
much more complex.
The True causes of poverty in India are:

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Poverty as Lack of Freedom and Capabilities

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Note for Students:
 Why are People Poor?
People are poor because they lack choices both economic and social.
 Why do they lack Choices?
They lack choices because they do not have basic freedoms and capabilities.
 What are basic Freedoms and capabilities?
The freedoms through which people can empower themselves, the capabilities through which
poor can take their decisions. The broad freedoms that poor lacks are: Freedom of Choice;
Freedom of Justice etc.
 Why do the poor lack Freedoms and Capabilities?
They lack it because of the following reasons:
 The government is not willing to provide them.
 The Institutions of empowerment are weak.
 Ours is an Entitlement based system, in which the political parties and the government
prefer to take short-term measures of the distribution of freebies to attract voters.
 The Political system does not believe in Empowering people through long-term
measures of Education, awareness, Justice, Health and Productivity.
 Huge presence of Inequality.
 Lack of understanding of the nature of poverty.
 What are the solutions?
Empowerment of people through social development and education.
Providing to the poor all sorts of Choices, from which he can choose the best. In short
making the poor of the country capable.
The Vicious Circle of Poverty.

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The Vicious Circle of Poverty

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Poverty Head Count Ratio versus Poverty Gap Ratio
Poverty Head Count Ratio Poverty Gap Ratio
The Poverty Head Count ratio measures The Poverty Gap Ratio is the gap by which mean
the proportion of population whose per consumption of the poor below poverty line falls
capita income/ consumption expenditure short of the poverty line.
is below the official Poverty line or in It indicates the depth of poverty; the more the
simple terms is measures the total PGR, the worse is the condition of the poor. While
number of people living below the the number of poor people indicates spread of
poverty line. poverty, PGR indicates the depth.
During 2004-05 to 2011-12, PGR also reduced in

both rural and urban areas. While the rural PGR
The number of people living below declined from 9.64 in 2004-05 to 5.05 in 2011-12
poverty line has decreased from 74.5 in the urban areas, it declined from 6.08 to 2.70
Million in the year 1993-94 to 52.8 during the same period. A nearly 50% decline in
Million in the year 2011-12. PGR both in rural and urban areas during 2004-05
to 2011-12, reflects that the conditions of poor
have improved both in urban and rural areas.
Head Count Ratio is a simpler measure.

The poverty gap index can be interpreted as the
It is widely used and represents the cut-
average percentage shortfall in income for the
off point below which people are
population, from the poverty line
considered as poor.
HeadCount ration does not reflect the A higher poverty gap index means that poverty is
severity of poverty. more severe.
Absolute versus Relative Poverty
Absolute Poverty Relative Poverty
Absolute poverty is when we consider The difficulties involved in the application of the
every poor person as equal. The concept of “absolute poverty”, made some
general definition of poverty which is researchers to abandon the concept altogether. In
valid at all times and for all economiesplace of absolute standards, they have developed the
is called absolute poverty. idea of relative standards that is, standards which are
Absolute poverty approach considers a relative to particular time and place. In this way, the
poor in India as equal to a poor in the idea of absolute poverty has been replaced by the
USA. idea of relative poverty.

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The simplest definition of being poor Just as conventions change from time to time, and
is ‘being unable to subsistence’ that is,
place to place, so will definitions of poverty. In a
being unable to eat, drink, have shelter
rapidly changing world, definitions of poverty based
and clothing. on relative standards will be constantly changing.
Hence, Peter Townsend has suggested that any
A common monetary measure of definition of poverty must be “related to the needs
absolute poverty is ‘receiving less and demands of a changing society.
than $1 a day…’’. (In 2008, the
World Bank revised this figure to It can be argued that poverty is best understood in a
$1.25 a day, and then again to $1.90 a relative way – what is poor in New York is not the
day in 2015.) same as what is poor in Mumbai (where over 50% of
the population live in slums.

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Poverty Lines in India: Estimations and Committees

Poverty Lines in India
 The poverty line defines a threshold income. Households earning below this threshold
are considered poor. Different countries have different methods of defining the
threshold income depending on local socio-economic needs.
 Poverty is measured based on consumer expenditure surveys of the National Sample

Survey Organisation. A poor household is defined as one with an expenditure level
below a specific poverty line.
 The erstwhile Planning Commission was the nodal agency in the Government of India
for estimation of poverty. It estimates the incidence of poverty at the national and
state level separately in rural and urban areas.
 The incidence of poverty is measured by the poverty ratio, which is the ratio of
number of poor to the total population expressed as a percentage. It is also known as
head-count ratio.
Time Line of Poverty Estimation in India
The first Poverty line was created in India by the Erstwhile Planning Commission in the mid-
1970s. It was based on a minimum daily requirement of 2400 and 2100 calories for an adult
in Rural and Urban area respectively.
YK Alagh Committee (1979):
 In 1979, a task force constituted by the Planning Commission for the purpose of
poverty estimation, chaired by YK Alagh, constructed a poverty line for rural and
urban areas on the basis of nutritional requirements.
 Table 3 shows the nutritional requirements and related consumption expenditure

based on 1973-74 price levels recommended by the task force. Poverty estimates for
subsequent years were to be calculated by adjusting the price level for inflation.
Poverty Estimation Committees in India
Lakdawala Tendulkar Committee Rangarajan Committee

Committee
The committee was The Committee was constituted The Committee was constituted in the
constituted in the year in the year 2004-05 year 2012.
1993.
The criteria The committee estimated The Rangarajan Committee goes back
suggested by the poverty by using basic to the idea of Lakdawala committee
committee was requirement of the poor such as method of calculating Rural and
Calorie intake based housing, clothing, shelter,

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on consumption education, sanitation, travel Urban Poverty Separately.

expenditure. expense and health etc., to make
poverty estimation realistic. The The Rangarajan group took the view
committee suggested doing that the consumption basket should
away with the calorie-based contain a food component that
criteria. satisfied certain minimum nutrition
requirements, as well as consumption
The committee also suggested
having a uniform poverty line
expenditure on essential non-food
across rural and urban India. item groups (education, clothing,
conveyance and house rent) besides a
residual set of behaviourally
determined non-food expenditure.
The committee The Tendulkar committee C Rangarajan expert group report,

recommended for stipulated a benchmark daily recommended a monthly per capita
state-specific per capita expenditure of RS 27 consumption expenditure of RS 972 in
poverty lines. and RS 33 in rural and urban rural areas and RS 1,407 in urban
areas, respectively, and arrived
areas as the poverty line at the all-
at a cut-off of about 22% of the
India level.
population below poverty line.
Assuming five members for a family,
this will imply a monthly per
household expenditure of RS 4,860 in
rural areas and RS 7,035 in urban
areas.
The Rangarajan committee estimated

a daily per capita expenditure of RS
32 and RS 47, in rural and urban areas
respectively as the poverty line, and
worked out poverty line at close to
29.5%.
As per Lakdawala As per Tendulkar report, the The Rangarajan expert group
committee the percentage of people living estimates that 30.9 percent of the rural
percentage of below poverty line in the year population and 26.4 percent of the
population living 2004-05 were as follows: urban population were below the
below poverty line in Rural:41.8 , Urban: 25.7
poverty line in 2011-12.
the year 2004-05 was:
Total 37.2
The all-India ratio was 29.5 percent.
Rural: 28.3%
In the year 2011-12, Rural:25.7
Urban: 25.7%
Urban: 13.7
All India: 27.5%
Total: 21.9

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Poverty in India: Trickle down Approach, Inclusive Growth and Multi-

Dimensional Poverty Index
Trickle Down Approach to Poverty
Back to Basics: The Theory
It is often said that a rising tide lifts all boats. Experience tells us that the same is not
necessarily true of a growing economy. In both developed and developing economies, the
benefits of growth are seldom evenly distributed.
The proponents of trickle-down economics, argues that rising incomes at the top end of the
spectrum would lead to more jobs, more output, more income and less poverty as the growth
and higher incomes at the top end will move at the lower end and to the poor. According to
this thesis, as long as an economy is growing, the benefits will eventually reach the poor and
make their way through the system that will make everyone better off.
The theory of Trickle Down represents an unhealthy obsession with GDP and Growth as the
most reliable measure of economic success. The theory believes in the saying ‘One size fits
all’. The theory argues that to eradicate poverty, the only thing that matters is growth. A
growing economy will take care of everything. As growth happens, the fruits of growth will
eventually flow to the poorest and the lower section of the society and ultimately lifting them
up.
The Critique of Trickle-down Economics
 The IMF and the World Bank in their various reports debunked the idea of trickle-
down economics. They found out that the benefits of growth within an economy are
rarely spread evenly, but also that an unequal rise in incomes can actually slow the
rate of economic growth altogether.
 According to the report, a 1% rise in income for the wealthiest 20% of a society alone
is likely to shrink annual growth by 0.1% within five years. By contrast, raising the
income of the poorest 20% by a single percentage point increases annual growth by
0.4% over the same time frame.
 When it comes to eliminating poverty, the degree to which the benefits of growth are
shared can have a significant impact on outcomes.
 According to Martin Ravallion, the former head of research at the World Bank, as
cited in The Economist, a 1% increase in incomes in the most unequal countries
produces a mere 0.6% reduction in poverty; however, in the most equal countries, it
yields a 4.3% cut. In other words, societies can get much more ‘bang from a boom’ if
they ensure benefits are more widely shared.
 This brings us to the point at which trickle-down theory ends and inclusive growth
begins.

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According to the Organisation for Economic Cooperation and Development (OECD),

Inclusive growth is “a new approach to economic growth that aims to improve living
standards and share the benefits of increased prosperity more evenly across social groups”.
Inclusive Growth in India
Note for Students: Inclusive growth refers to both the pace and pattern of growth, which are
considered interlinked and therefore need to be addressed together. Inclusiveness represents
equality of opportunity in terms of access to markets, resources and an unbiased regulatory
environment for businesses and individuals. In a nutshell, it is not just about the quantity of
growth within our economies and societies, but also about its quality.
Inclusive Growth matters because widening inequality have been shown to lead to a range of
social and economic challenges for societies over time. These include both social and
political instability, not to mention the sheer waste of potential that occurs when large
swathes of populations do not have the opportunity to improve their situation.
Features of Inclusive Growth

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The Multi-Dimensional Poverty Index
 The Multidimensional Poverty Index (MPI), published for the first time in the 2010
Report, complements monetary measures of poverty by considering overlapping
deprivations suffered by individuals at the same time.
 The index identifies deprivations across the same three dimensions as the HDI and
shows the number of people who are multi-dimensionally poor (suffering deprivations
in 33% or more of the weighted indicators) and the number of weighted deprivations
with which poor households typically contend with.
 It can be deconstructed by region, ethnicity and other groupings as well as by

dimension and indicator, making it a useful tool for policymakers.
 The MPI can help the effective allocation of resources by making possible the
targeting of those with the greatest intensity of poverty; it can help address some
SDGs strategically and monitor impacts of policy intervention.
 The MPI can be adapted to the national level using indicators and weights that make
sense for the region or the country, it can also be adopted for national poverty
eradication programs, and it can be used to study changes over time.
 About 1.5 billion people in the 102 developing countries currently covered by the
MPI—about 29 percent of their population — live in multidimensional poverty —
that is, with at least 33 percent of the indicators reflecting acute deprivation in health,
education and standard of living. And close to 900 million people are at risk
(vulnerable) to fall into poverty if setbacks occur – financial, natural or otherwise.

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Addressing Poverty in India/Poverty Eradication Schemes

Mahatma Gandhi Rural Guarantee Employment Act (MGNREGA)
 The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) with
its legal framework and rights-based approach was notified on September 5, 2005,
and came into force with effect from 2nd February 2006.
 It aims at enhancing livelihood security by providing at least one hundred days of

guaranteed wage employment in a financial year to every rural household whose adult
members volunteer to do unskilled manual work.
 The Act covered 200 districts in its first phase and was extended to all the rural
districts of the country in phases.
 MGNREGA is the first ever law, internationally, that guarantees wage employment at
an unprecedented scale.
 The primary objective of the Act is meeting demand for wage employment in rural
areas. The works permitted under the Act address causes of chronic poverty like
drought, deforestation and soil erosion so that the employment generation is
sustainable.
 The women workforce participation under the Scheme has surpassed the statutory
minimum requirement of 33 percent, since inception, every year women participation
has been around 48%.

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The major goals of MGNREGA are to:
 Enhance livelihood security of the rural poor by generating wage employment

opportunities in works that develop the infrastructure base of the area concerned.
 Rejuvenate the natural resource base of the area concerned.
 Create a productive rural asset base.
 Stimulate the local economy by providing a safety net to rural poor.
 Ensure empowerment to women.
 Strengthen grass-roots democratic institutions.
Key Achievements of MGNREGA
 Since its inception in 2006, around Rs.1,63,754.41 crores have been disbursed directly
as wage payments to rural worker households.
 1,657.45 Crore person-days of wage employment have been generated. On an

average, five crore rural households have been provided with wage employment each
year since 2008.
 Scheduled Castes and Scheduled Tribes participation has been 48 percent till 31st
March 2014.
 Women have accounted for 48 percent of the total person-days generated. This is well
above the mandatory 33 percent as required under the Act.
 Since the beginning of the programme, 260 lakh works have been taken up under the
Act.
 Average wage per person-day has gone up by 81 percent since the inception of the
programme. The notified wage today varies from a minimum of Rs.153 in Meghalaya
to Rs.236 in Haryana.
National Rural Livelihood Mission
 The NRLM is one of the important programs of the government of India, in terms of
allocation and coverage, and it seeks to reach out to 8–10 crore rural poor households
and organize them into SHGs and federations at the village and at higher levels by
2021-22.
 While doing so, NRLM ensures adequate coverage of poor and vulnerable sections of
the society identified through Participatory processes and approved by Gram Sabha.
 A strong convergence with Panchayati Raj Institutions (P.R.I) is an important feature

of the programme.

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 During the year 2013-14, Aajeevika-NRLM has focused on supporting the State
Missions in transiting to NRLM by fulfilling all the requirements, setting up
implementation architecture, strengthening them by providing comprehensive
induction training and capacity building support.
 As of March 2014, 27 States and the Union Territory of Puducherry have transited to
NRLM.
 The Resource blocks initiated during the year 2012-13 have shown impressive results
in terms of quality of community institutions and generation of social capital.
 NRLM has focused on creating special strategies and initiating pilots to reach out to
the most marginalized and vulnerable communities – Persons with Disabilities
(PwDs), the elderly, Particularly Vulnerable Tribal Groups (PVTGs), bonded labour,
manual scavengers, victims of human trafficking, etc.
 During the year emphasis was also placed on strengthening the institutional systems
in terms of adopting Human Resource Manual, Financial Management manual and
roll out of interest subvention programme.
 Around 1.58 lakh youths have set up their own enterprises with the help of Aajeevika.
24.5 lakh Mahila Kisans have also been provided support.
Pradhan Mantri Gram Sadak Yojana
 Rural roads constitute about 80% of the country’s road network and are a lifeline for
the vast majority of the population that lives in the villages.
 Roads form a critical link for rural communities to access markets, education, health
and other facilities.
 They also enhance opportunities for employment in the non-farm sector and facilitate
setting up of shops and small businesses.
 The government of India, as part of poverty reduction strategy, launched the Pradhan
Mantri Gram Sadak Yojana (PMGSY) on 25th December 2000 as a Centrally
Sponsored Scheme to assist States.
 The primary objective of the programme is to provide good all-weather

connectivity to all eligible unconnected habitations in the core network with a
population of 500 (Census-2001) and above.
 In respect of the Hill States (North-East, Sikkim, Himachal Pradesh, Jammu &
Kashmir and Uttarakhand), Desert areas (as identified in the Desert
Development Programme), and Tribal (Schedule V) Areas and Selected Tribal
and Backward Districts (as identified by the Ministry of Home Affairs and
Planning Commission), the objective is to connect habitations with a population
of 250 (Census-2001) and above.

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 The programme envisages single all-weather connectivity.
 The country has now a network of about 3, 99,979 km of such roads. With a view to
ensuring full farm-to-market connectivity, the programme also provides for the up
gradation of the existing ‘Through Routes’ and Major Rural Links to prescribed
standards, though it is not central to the programme. Under PMGSY-II, 10,725
projects have been cleared out of eligible 50,000 projects. As on March 31, 2014,
97,838 habitations have been connected. New connectivity of 2, 48,919 km has been
achieved.
Indira Awaas Yojana
 As part of a larger strategy of the Ministry’s poverty eradication effort, Indira Awaas
Yojana (IAY), a flagship scheme of the Ministry of Rural Development, has since
inception been providing assistance to the BPL families who are either houseless or
having inadequate housing facilities, for constructing a safe and durable shelter.
 The Government has been implementing IAY as part of the enabling approach to
‘shelter for all’, taking cognizance of the fact that rural housing is one of the major
anti-poverty measures for the marginalized.
 The house is recognized not merely as a shelter and a dwelling place but also as an
asset which supports the livelihood, symbolizes social position and is also a cultural
expression.
 A good home would be in harmony with the natural environment protecting the
household from extreme weather conditions, and it would have the required
connectivity for mobility and facilities for economic activities.
 In the year 2013-14, 13.73 lakh houses have been constructed.
Pradhan Mantri Awaas Yojana
 PMAY was launched in June 2015. The Government envisages building

affordable pucca houses with water facility, sanitation and electricity supply round-
the-clock.
 The scheme originally was meant to cover people in the EWS (annual income not
exceeding ₹3 lakh) and LIG (annual income not exceeding ₹6 lakh) sections, but now
covers the mid-income group (MIG) as well.
 PMAY scheme comprises of four key aspects.
 One, it aims to transform slum areas by building homes for slum dwellers in
collaboration with private developers.
 Two, it plans to give a credit-linked subsidy to weaker and mid-income sections on

loans taken for new construction or renovation of existing homes.

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 An interest subsidy of 3 percent to 6.5 per cent has been announced for loans ranging
between ₹6 lakh and ₹12 lakh. For those in the EWS and LIG category who wish to
take a loan of up to ₹6 lakh, there is an interest subsidy (concession) of 6.5 percent for
the tenure of 15 years.
 So far around 20,000 people have availed of loans under this scheme. The
Government increased the loan amount to ₹12 lakh, targeting the mid-income
category. The interest subsidy on loans up to ₹12 lakh will be 3 percent. In rural areas,
interest subvention of 3 percent is offered on loans up to ₹2 lakh for constructing new
homes or extension of old homes.
 Three, the Government will chip in with financial assistance for affordable housing
projects done in partnership with States/ Union Territories for the EWS.
 Four, it will extend direct financial assistance of ₹1.5 lakh to EWS.
 Today, while developers in India’s metropolitan cities are sitting on lakhs of unsold
residences costing upwards of ₹50 lakh, the country is estimated to have a shortage of
nearly 20 million housing units needed by the rural and urban poor, at far lower price
points of ₹5-15 lakh.
 The PMAY aims to address this shortfall. With the increase in subsidised loan amount
to ₹12 lakh, the scheme is expected to cover a higher proportion of the urban poor.
 The PMAY will hopefully incentivise India’s construction and realty sector to reduce
its traditional obsession with affluent home buyers in the cities.
National Urban Livelihoods Mission
 Ministry of Housing & Urban Poverty Alleviation has launched “National Urban
Livelihoods Mission (NULM)” in the 12th Five-Year Plan w.e.f. 24th September
2013 replacing the existing Swarna Jayanti Shahari Rozgar Yojana (SJSRY).
 The NULM focuses on organizing urban poor in Self Help Groups, creating
opportunities for skill development leading to market-based employment and helping
them to set up self-employment ventures by ensuring easy access to credit.
 The Mission aims at providing shelter equipped with essential services to the urban
homeless in a phased manner. In addition, the Mission will also address livelihood
concerns of the urban street vendors.
The primary target of NULM is the urban poor, including the urban homeless. The NULM
has six major components:
I. Social Mobilizations and Institution Development (SM&ID): NULM envisages

mobilisation of urban poor households into thrift and credit-based
credit Self-Help
Help Groups (SHGs)
and their federations/ collectives.

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II. Capacity Building and Training (CB&T): A multi-pronged approach is planned under
NULM for continuous capacity building of SHGs and their federations/collectives,
government functionaries at Central, State and City/Town levels, bankers, NGOs, CBOs and
other stakeholders. NULM will also create national and state-level mission management units
to support the implementation of the programme for the poor.
III. Employment through Skills Training and Placement (EST&P): NULM will focus on
providing assistance for skill development / upgrading of the urban poor to enhance their
capacity for self-employment or better-salaried employment.
IV. Self-Employment Programme (SEP): Self-Employment Programme (SEP): This

component will focus on financial assistance to individuals/groups of urban poor for setting
up gainful self-employment ventures/ micro-enterprises, suited to their skills, training,
aptitude and local conditions.
V. Support for Urban Street Vendors: This component will cover the development of vendors
market, credit enablement of vendors, a socio-economic survey of street vendors, skill
development and micro enterprises development and convergence with social assistance
under various schemes of the Government.
VI. Shelter for Urban Homeless (SUH): Under this component, the construction of permanent
shelters for the urban homeless equipped with essential services will be supported.
National Food Security Mission
 The Government of India in 2007 adopted a resolution to launch a Food Security

Mission comprising rice, wheat and pulses to increase the production of rice by 10
million tons, wheat by 8 million tons and pulses by 2 million tons by the end of the
Eleventh Plan (2011-12).
 Accordingly, a Centrally Sponsored Scheme, ‘National Food Security Mission’

(NFSM), was launched in October 2007.
 The Mission is being continued during 12th Five Year Plan with new targets of
additional production of food grains of 25 million tons of food grains comprising of
10 million tons rice, 8 million tons of wheat, 4 million tons of pulses and 3 million
tons of coarse cereals by the end of 12th Five Year Plan.
 The National Food Security Mission (NFSM) during the 12th Five Year Plan is
having five components (i) NFSM- Rice; (ii) NFSM-Wheat; (iii) NFSM-Pulses, (iv)
NFSM- Coarse cereals and (v) NFSM Commercial Crops.
The objectives of NFSM are
 Increasing production of rice, wheat, pulses and coarse cereals through area expansion
and productivity enhancement in a sustainable manner in the identified districts of the
country

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 Restoring soil fertility and productivity at the individual farm level; and
 Enhancing farm level economy (i.e. farm profits) to restore confidence amongst the
farmers
The Mission is adopting the following strategies:
1. Focus on low productivity and high potential districts including cultivation of food
grain crops in rainfed areas.
2. Implementation of cropping system-centric interventions in a Mission mode approach

through active engagement of all the stakeholders at various levels.
3. Agro-climatic zone wise planning and cluster approach for crop productivity
enhancement.
4. Focus on pulse production through utilization of rice fallow, rice bunds and
intercropping of pulses with coarse cereals, oilseeds and commercial crops
(sugarcane, cotton, jute).
5. Promotion and extension of improved technologies, i.e., seed, integrated nutrient

management (INM) including micronutrients, soil amendments, integrated pest
management (IPM), input use efficiency and resource conservation technologies
along with capacity building of the farmers/ extension functionaries.
6. Close monitoring of the flow of funds to ensure the timely reach of interventions to
the target beneficiaries.
7. Integration of various proposed interventions and targets with the district plan of each
identified district.
8. Constant monitoring and concurrent evaluation by the implementing agencies for

assessing the impact of the interventions for a result oriented approach.
Integrated Child Development Services
 The ICDS Scheme implemented by Government of India is one of the world’s largest
and unique programmes for early childhood care and development.
 It is the foremost symbol of the Country’s commitment to its children and nursing
mothers, as a response to the challenge of providing pre-school non formal education
on the one hand and breaking the vicious cycle of malnutrition, morbidity, reduced
learning capacity and mortality on the other.
 The beneficiaries under this scheme are children in the age group of 0-6 years,
pregnant women and lactating mothers.
 To improve the nutritional and health status of children in the age group 00-6 years,
reduce the incidence of mortality, morbidity and malnutrition of children, and

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nutritional supplements to pregnant women and lactating mothers are some important
objectives of ICDS.
 The ICDS Scheme is universal for all categories of beneficiaries.
 The ICDS Scheme was launched in 1975 in 33 Blocks (Projects) with 4891
Anganwadi Centres (AWC).
 As on 31/12/2013, under ICDS, 7067 projects 13.41 lakhs AWCs are operational
covering 1026.03 lakh beneficiaries under supplementary nutrition.

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(b) Inequality
Inequality in India: Definition and Measures; Lorenz Curve, Gini
Coefficient, Income held by Top 10%
Inequality in India
Back to Basics: Income Inequality
Income inequality is the unequal distribution of household or individual income across the
various participants in an economy. Income inequality is often presented as the percentage of
income to a percentage of the population. The simplest way to understand inequality is by
analysing the population by dividing it into quintiles (fifth) from poorest to richest and
reporting the proportions of income held by them.
Example: if the bottom 20% of the population held 20% of the economy’s income and the top
20% held 20% of the economy’s income, then we can call the society highly equal. But it is
hardly the case, as the bottom 20% of the population hardly owns more than 3% of the total
wealth of the economy.
How to Measure Income Inequality
Gini Coefficient
Gini is the most popular measure of income inequality. The Gini coefficient is derived from
the Lorenz Curve.
Note for Students: Lorenz Curve
 The Lorenz curve shows the percentage of total income earned by cumulative
percentage of the population.
 In a perfectly equal society, the “poorest” 25% of the population would earn 25% of
the total income, the “poorest” 50% of the population would earn 50% of the total
income and the Lorenz curve would follow the path of the 45° line of equality.
 As inequality increases, the Lorenz curve deviates from the line of equality; the
“poorest” 25% of the population may earn 10% of the total income; the “poorest”
50% of the population may earn 20% of the total income and so on.
To construct the Gini coefficient, graph the cumulative percentage of households (from poor
to rich) on the horizontal axis and the cumulative percentage of expenditure (or income) on
the vertical axis.
The Lorenz curve is shown in the figure. The diagonal line represents perfect equality.
The Gini coefficient is defined as A/(A+B), where A and B are the areas shown on the graph.
If A=0 the Gini coefficient becomes 0 which means perfect equality, whereas if B=0 the Gini

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coefficient becomes 1 which means complete inequality. In this example, the Gini coefficient
is about 0.35.
Income Inequality: A Comparison
Source: World Bank, 2011.
The above graph represents the Gini Coefficient of the selected Countries for the year 2011.
The Gini index of 0 represents the perfect equality, whereas the Gini index of 100 represents
perfect inequality.
India has one of the lowest inequalities among the BRICS Countries with Gini Index of
35.15.

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Income Inequality: Percentage of Income held by top 10% of the Population
Source: World Bank, 2011
The graph represents the percentage of the income held by the top 10% of the population in
the selected countries.
The percentage of the income held by the top 10% in India is close to 30 percent.
Income Inequality: Percentage of Income held by the poorest 10% of the population.
The graph below represents the percentage of the income held by the poorest 10% of the
population in the selected countries.
The percentage of the income held by the poorest 10% in India is close to 3 percent.
Source: World Bank, 2011

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The Common measures of Inequality

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Income Inequality in India: Causes, Remedies and Consequences

Analysis of Income Inequality in India
 In the recent years, India has joined the club of most unequal countries.
 Based on the new India Human Development Survey (IHDS), which provides data on
income inequality for the first time, India scores a level of income equality lower than
Russia, the United States, China and Brazil, and more egalitarian than only South
Africa.
 According to a report by the Johannesburg-based company New World Wealth, India

is the second-most unequal country globally, with millionaires controlling 54% of its
wealth.
 In India, the richest 1% own 53% of the country’s wealth, according to the latest data
from Credit Suisse.
 The richest 5% own 68.6%, while the top 10% have 76.3%.
 At the other end of the pyramid, the poorer half held a mere 4.1% of national wealth.
 The Credit Suisse data shows that India’s richest 1% owned just 36.8% of the
country’s wealth in 2000, while the share of the top 10% was 65.9%. Since then they
have steadily increased their share of the pie. The share of the top 1% now exceeds
50%.
 The most obvious conclusion to be drawn is that economic reforms have relatively
benefited a tiny group at the top of the Indian income pyramid.
 The increase in income inequality coincides with the sharp rise in Indian economic
growth after 1980.
 This point to the famous hypothesis put forth by Simon Kuznets—that inequality
tends to rise during periods of rapid growth thanks to the uneven pace at which people
move from low productivity to high productivity activities.
 The big difference between India and China is in the fact that the middle 40% in India
got 23% of the increase in national income since 1980 while the same group in China
got 43%—a massive gap of 20 percentage points. This difference of 20 percentage
points was largely captured by the top 1% in India.
 The Indian top 1% has done extremely well, the Chinese middle has benefited far
more than the Indian middle, and the bottom half in both countries has had broadly
similar experiences.

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Causes of Income Inequality in India
How to reduce Inequalities
Promotion of Labour Intensive Manufacturing: The failure to promote labour-intensive

manufacturing like; Construction, Textile, Clothing, Footwear etc. is the single most reason
of rising inequalities. The Labour-intensive manufacturing has the potential to absorb
millions of people who are leaving farming.
The proportion of the labour force in agriculture has come down, but the workers who have
left farms have not got jobs in modern factories or offices. Most are stuck in tiny informal
enterprises with abysmal productivity levels. If India could somehow reverse this trend and
promote labour-intensive manufacturing than inequality could fall.
More Inclusive Growth: The promotion and adoption of an Inclusive Growth Agenda is the
only solution to rising inequality problem. Economic growth which is not inclusive will only
exacerbate inequality.
Skill Development: The development of advanced skills among the youth is a prerequisite if
India wants to make use of its demographic dividend. The skilling of youth by increasing
investment in education
n is the only way we can reduce inequality. India needs to become a
Skill-led economy.

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Progressive Taxation: Higher taxes on the Rich and the luxuries will help reduce income
inequalities.
Equal Opportunity for all: The Government may devise and set up some sort of machinery
which may provide equal opportunities to all rich and poor in getting employment or getting
a start in trade and industry. In other words, something may be done to eliminate the family
influence in the matter of choice of a profession. For example, the government may institute a
system of liberal stipends and scholarships, so that even the poorest in the land can acquire
the highest education and technical skill.
Consequences of Inequality

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(c) Unemployment
Unemployment in India: Types, Causes and Measures
Unemployment in India
Back to Basics: What is Unemployment?
Unemployment is a phenomenon that occurs when a person who is capable of working and is
actively searching for the work is unable to find work.
People who are either unfit for work due to physical reason or do not want to work are
excluded from the category of unemployed.
The most frequent measure of unemployment is unemployment rate. The unemployment rate
is defined as a number of unemployed people divided by the number of people in the labour
force.
Labour Force: Persons who are either working (or employed) or seeking or available for work
(or unemployed) during the reference period together constitute the labour force.
Measure of Unemployment in India
Usual Status Approach Weekly Status Approach Daily Status Approach
Usual Status approach The weekly status approach In the Daily status approach,
records only those persons records only those persons as current activity status of the
as unemployed who had no unemployed who had no person with regard to whether
gainful work for a major gainful work for a major time employed or unemployed or
time during the 365 days during the seven days outside labour force is
preceding the date of preceding the date of survey. recorded for each day in the
survey and are seeking or reference week. The measure
are available for work. adopts half day as a unit of
measurement for estimating
The status of activity on employment or
which a person has spent unemployment.
the relatively long time of
the preceding 365 days
prior to the date of survey
is considered to be
the usual principal
activity status of the
person.
The Usual Status captures The weekly status approach The approach is most
long-term
term unemployment captures both the long-term inclusive than the other two.
in the economy. open chronic unemployment Since it also captures the days

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and the seasonal of unemployment of those

unemployment. who are recorded as
employed on the weekly
status approach.
The Usual Principal

A person is considered to be A person who works for 4
Activity status (UPS), employed if he or she pursues hours or more but up to 8
written as Usual Status any one or more of the gainful hours on a day is recorded as
(PS), is determined using activities for at least one-hour employed for the full day.
the majority time criterion
on any day of the reference
and refers to the activityweek. On the other hand, if a A person who works for 1
status on which h/she spent
person does not pursue any hour or more but less than 4
longer part of the year. gainful activity, but has been hours is recorded as
seeking or available for work, employed for the half day.
Principal usual activity the person is considered as
status is further used to unemployed. Accordingly, a person having
classify him in/out the no gainful work even for 1
labour force. hour in a day is described as
unemployed for a full day.
For instance, if an
individual was ‘working’
and/or was ‘seeking or
available for work’ for a
major part of the year
preceding the date of the
survey then h/she is
considered as being part of
the ‘Labour Force’.
For example, if an
individual reports as having
worked and
sought/available for work
for seven months during
the year or having sought
or available for work for
seven months then h/she is
classified as being in the
Labour Force.

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Types of Unemployment
Frictional Unemployment Cyclical Unemployment
The minimum amount of unemployment that Cyclical unemployment is due to

prevails in an economy due to workers quitting deficiency or fall in effective demand from
their previous jobs and is searching for the new consumers which lead to fall in production
jobs is called Frictional Unemployment. and low demand for labour.
Cyclical unemployment is a type of

unemployment which is related to the
cyclical trends of booms and recessions
called as the business cycle.
If an economy is doing good, cyclical

unemployment will be at its lowest and
will be the highest if the economy faces
recession.
The major reasons for frictional unemployment The major reason for this type of
are lack of information about the availability of unemployment is lack of demand in the
jobs and lack of mobility on the part of workers economy and slowdown of economic
(it means workers are not willing to travel to a activity.
distant place or a new state for employment).
When the demand for goods and services
is low, then the firms stop the production
due to rise in the unsold stock. As a result
of stopping production, the firms lay off
workers and unemployment rises.
Frictionally unemployed person remains This type of unemployment is for a long

unemployed for a very short period of time. period of time and worker remains
unemployed during the entire phase of
slow down or recession.
This type of unemployment is of voluntary This type of unemployment is of

nature. involuntary nature.
Voluntary Unemployment Involuntary Unemployment
Voluntary unemployment refers to a situation Involuntary unemployment refers to a

where workers are either not seeking for work or situation where workers are seeking
are in transition from one job to another (quitting work and are willing to work but are
one job
b in search of another better job). unable to get work.
Voluntary unemployment remains in an economy Involuntary unemployment happens in

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during all the time. As there will always be some an economy during the time of
workers, who quit their previous jobs in search of depression and fall in aggregate demand
new ones. for goods and services.
Structural Unemployment Seasonal Unemployment
Structural unemployment refers to a situation Seasonal unemployment occurs during

which arises due to change in the structure of the certain seasons of the year. In some
economy. Example: An economy transforms industries and occupations like
itself from a Labour intensive economy to a agriculture, holiday resorts etc.,
Capital intensive economy. production activities take place only in
some seasons.
Structural unemployment usually occurs due to
the mismatch of skills. Therefore, they offer employment for
only a certain period of time in a year.
Example, due to advance technological progress,
the production of cars is done through robotic People engaged in such type of activities
machines rather than traditional Machines. As a may remain unemployed during the off-
result, those workers who do know how to season.
operate the new and advanced machines will be
removed.
The unemployment happened because the current

workers do not have the required skills as wanted
by their employers.
Technological Advancement, Robotics, Artificial Seasonal unemployment mainly occurs in

Intelligence, Mechanisation and Automation are Agricultural sector, Tourism sector and in
the main causes of Structural unemployment. factories producing seasonal goods.
Back to Basics: Disguised Unemployment
 Disguised unemployment is a situation especially prevalent in poor and developing

countries.
 Disguised unemployment is when too many people are employed than what is
required to produce efficiently. This kind of employment is not at all productive.
 It is not productive in a sense that production does not suffer even if some of the
employed people are withdrawn.
 The key point to remember is that the marginal productivity of labourers under
disguised unemployment is zero. The labourers are employed physically, but not
economically.
Example: In a piece of 5 Acres land, 5 family members are employed to grow 100 Kgs of
rice. The maximum rice that can be grown on the land is 100 Kg only. Now, the family
decides to employ additional two members of its family on the same land. In such a scenario,

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the additional two members will not contribute anything in production since maximum
production has already been reached. The additional two members will only end up
congesting the farm land. Hence, they both are disguisedly unemployed.
Member 1 20 Kg
Member 2 20 Kg
Member 3 20 Kg
Member 4 20 Kg
Member 5 20 Kg
Since maximum output of 100 Kg is already reached.
Member 6 & 7 contribution will be 0 Kg.
The situation of disguised unemployment is most prevalent in the agriculture sector of the
underdeveloped countries. The key idea is that the amount of population in agriculture which
can be removed from it without any change in the method of cultivation, without leading to
any reduction in output.
Back to Basics: Under Employment.
Underemployment is the most dangerous kind of unemployment in an economy.

Underemployment is a situation under which People with a higher level of skills are
employed in less productive jobs. It simply means that the Labour force of the economy is
not fully utilised as per their skills and experience.
Example: an individual with an engineering or management degree working as a clerk or

accountant in a firm or a social science graduate working as a pizza delivery boy.
The consequence of Underemployment

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Unemployment in India: Causes and Consequences

Unemployment in India: Causes
Consequences of Unemployment

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Jobless Growth in India: Reasons and Consequences

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The Consequences of Jobless Growth in India

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(d) Other important issues

Economics of Animal Rearing in India
Economics of Animal Rearing
India’s Position in Global Livestock Economy

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Importance of Livestock sector in the Indian Economy
Importance of Livestock sector in achieving Inclusive Growth in India
 Distribution of livestock is more equitable than that of land. In 2003 marginal farm
households (≤1.0h hectare of land) who comprised 48% of the rural households
controlled more than half of country’s cattle and buffalo and two-thirds of small
animals and poultry as against 24% of land. Between 1991-92 and 2002-03 their share
in land area increased by 9 percentage points and in different livestock species by 10-
25 percentage points.
 Livestock has been an important source of livelihood for small farmers. They
contributed about 16% to their income, more so in states like Gujarat (24.4%),
Haryana (24.2%), Punjab (20.2%) and Bihar (18.7%).
 The agricultural sector engages about 57% of the total working population and about
73% of the rural labour force. Livestock employed 8.8% of the agricultural work
force albeit it varied widely from 3% in North-Eastern states to 40-48% in Punjab and
Haryana. Animal husbandry promotes gender equity. More than three-fourth of the
labour demand in livestock production is met by women. The share of women
employment in livestock sector is around 90% in Punjab and Haryana where dairying
is a prominent activity and animals are stallfed.
 The distribution patterns of income and employment show that small farm households
hold more opportunities in livestock production. The growth in livestock sector is
demand-driven, inclusive and pro-poor. Incidence of rural poverty is less in states like
Punjab, Haryana, Jammu & Kashmir, Himachal Pradesh, Kerala, Gujarat, and
Rajasthan where livestock accounts for a sizeable share of agricultural income as well
as employment. Empirical evidence from India as well as from many other

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developing countries suggests that livestock development has been an important route
for the poor households to escape poverty.
Livestock population (2012 Livestock census)
Sl. Species Number Ranking in the world

No population
(in
millions)
01 Cattle 190.9 Second
02 Buffaloes 108.7 First
Total (including Mithun and 300 First

Yak)
03 Sheep 65.0 Third
04 Goats 135.2 Second
05 Pigs 10.3 –
06 Others 1.7 –
Total livestock 512.3
Total poultry 729.2 Seventh
07 Duck –
08 Chicken – Fifth
09 Camel – Tenth
Schemes/Policies Launched for Livestock Sector by the Government
National Livestock Mission
The National Livestock Mission (NLM) has commenced from 2014-15. The Mission is
designed to cover all the activities required to ensure quantitative and qualitative
improvement in livestock production systems and capacity building of all stakeholders. The
Mission will cover everything germane to improvement of livestock productivity and support
projects and initiatives required for that purpose subject. This Mission is formulated with the
objective of sustainable development of livestock sector, focusing on improving availability
of quality feed and fodder. NLM is implemented in all States including Sikkim.

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NLM has 4 submissions as follows:
The Sub-Mission on Fodder and Feed Development will address the problems of scarcity
of animal feed resources, in order to give a push to the livestock sector making it a
competitive enterprise for India, and also to harness its export potential. The major objective
is to reduce the deficit to nil.
Under Sub-Mission on Livestock Development, there are provisions for productivity

enhancement, entrepreneurship development and employment generation (bankable projects),
strengthening of infrastructure of state farms with respect to modernization, automation and
biosecurity, conservation of threatened breeds, minor livestock development, rural slaughter
houses, fallen animals and livestock insurance.
Sub-Mission on Pig Development in North-Eastern Region: There has been persistent

demand from the North Eastern States seeking support for all round development of piggery
in the region. For the first time, under NLM a Sub-Mission on Pig Development in North-
Eastern Region is provided wherein Government of India would support the State Piggery
Farms, and importation of germplasm so that eventually the masses get the benefit as it is
linked to livelihood and contributes in providing protein-rich food in 8 States of the NER.
Sub-Mission on Skill Development, Technology Transfer and Extension: The extension

machinery at field level for livestock activities is very weak. As a result, farmers are not able
to adopt the technologies developed by research institutions. The emergence of new
technologies and practices require linkages between stakeholders and this sub-mission will
enable a wider outreach to the farmers. All the States, including NER States may avail the
benefits of the multiple components and the flexibility of choosing them under NLM for a
sustainable livestock development.
Rashtriya Gokul Mission
Key features of the mission
 The Mission aims to conserve and develop indigenous breeds in a focused and
scientific manner and for that breeding facilities will be set up for varieties with high-
genetic pedigree”. Indigenous cattle are largely ignored in India despite the fact that
they are better adapted to the country’s climate”.
 The aim of the mission is to protect Indigenous cow from being cross-bred into
different varieties.
 Focus will be largely to give a push to local breeding programme on the line of elite
local breeds like Gir, Sahiwal, Rathi to enhance milk production.
 The local cow breed will be protected through traditional-style “gaushalas” or cattle-
care centres. • The scheme has provision to acknowledge those farmers who works
rigorously in the direction. • The “Gopal Ratna” awards will be conferred to them. •

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The scheme also makes a point about upkeep of cattle after their milk producing
phase gets over and then they often used for the purpose of meat. Official reaction.
 An amount of Rs 500 crore has been earmarked for Bovine Breeding and Dairy
Development programme and out of which Rs 150 crore will be specially allocated
for the protection of indigenous cow breeds.
Idea behind the Mission
 The idea is to increase milk production which is dismal in comparison to US, UK, and
Israel.
 Though India has attained the number one position in milk production but that is only
because the country is home of world’s largest livestock population.
 Through the programme, the aim is to increase high yield per cow which is very low
in comparison to the European countries like US. Low yield per cow in India
 The average daily milk yield for crossbred cattle in India is at 7.1 kg per day while it
is at 25.6 in UK, US (32.8) and Israel (38.6).
 The reason behind the low yield in India is because of intrinsic and extrinsic factors
both.
 The intrinsic factor is low genetic potential while extrinsic is related with number of
reasons like poor nutrition and feed management, inferior farm management practices
and inefficient implementation of breed improvement programs.
 At present, India is largely using Jersey, a native of Netherlands and British origin
Holstein for cross-breeding purposes.
Operation flood/ White Revolution in India:
‘Operation flood’ a program started by National Dairy Development Board (NDDB) in 1970
made India the largest producer of the milk in the world. This program with its whopping
success was called as ‘The White Revolution’. The main architect of this successful project
was Dr. Verghese Kurien, also called the father of White Revolution.
In 1949 Mr. Kurien joined Kaira District Co-operative Milk Producers’ Union (KDCMPUL),
now famous as Amul.
Kurien has since then built this organization into one of the largest and most successful
institutions in India. The Amul pattern of cooperatives had been so successful, in 1965, then
Prime Minister of India, Shri Lal Bahadur Shastri, created the National Dairy Development
Board (NDDB) to replicate the program on a nationwide basis citing Kurien’s “extraordinary
and dynamic leadership” upon naming him chairman.

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Operation Flood Phases
The Operation Flood was completed in three phases:
Phase I (1970-79):- During this phase 18 of the country’s main milk sheds were connected to
the consumers of the four metros viz. Mumbai, Delhi, Chennai and Kolkata. The total cost of
this phase was Rs.116crores. The main objectives were, commanding share of milk market
and speed up development of dairy animals respectively hinter- lands of rural areas.
Phase II (1981–1985):- The management increased the milk sheds from 18 to 136; 290 urban
markets expanded the outlets for milk. By the end of 1985, a self-sustaining system of 43,000
village cooperatives with 42.5 lakh milk producers were covered. Domestic milk powder
production increased from 22,000 tons in the pre-project year to 140,000 tons by 1989, all of
the increase coming from dairies set up under Operation Flood.
Phase III (1985–1996):- The dairy cooperatives were enabled to expand and strengthen the
infrastructure required to procure and market increasing volumes of milk. Veterinary first-aid
health care services, feed and artificial insemination services for cooperative members were
extended, along with intensified member education. It went with adding 30,000 new dairy
cooperatives to the 42,000 existing societies organized during Phase II. Milk sheds peaked to
173 in 1988-89 with the numbers of women members and Women’s Dairy Cooperative
Societies increasing significantly.
Amul: (“priceless” in Sanskrit. The brand name “Amul,” from the Sanskrit “Amoolya,”
formed in 1946, is a dairy cooperative in India.
It is a brand name managed by an apex cooperative organization, Gujarat Co-operative Milk

Marketing Federation Ltd. (GCMMF), which today is jointly owned by some 2.8 million
milk producers in Gujarat, India. The White Revolution’s model dairy board was that of
Amul. The whole program of NDDB was largely based the working of this dairy board. The
three-tier ‘Amul Model’ has been instrumental in bringing about the White Revolution in the
country.
Achievements of the White Revolution
 The phenomenal growth of milk production in India – from 20 million MT to 100

million MT in a span of just 40 years – has been made possible only because of the
dairy cooperative movement. This has propelled India to emerge as the largest milk
producing country in the World today.
 The dairy cooperative movement has also encouraged Indian dairy farmers to keep
more animals, which has resulted in the 500 million cattle & buffalo population in the
country – the largest in the World.
 The dairy cooperative movement has spread across the length and breadth of the
country, covering more than 125,000 villages of 180 Districts in 22 States.

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 The movement has been successful because of a well-developed procurement system

& supportive federal structures at District & State levels.
Blue Revolution in India
Realizing the immense scope for development of fisheries and aquaculture, the Government
of India has restructured the Central Plan Scheme under an umbrella of Blue Revolution.
The restructured Central Sector Scheme on Blue Revolution: Integrated Development and
Management of Fisheries (CSS) approved by the Government provides for a focused
development and management of the fisheries sector to increase both fish production and fish
productivity from aquaculture and fisheries resources of the inland and marine fisheries
sector including deep sea fishing.
The scheme has the following components:
i. National Fisheries Development Board (NFDB) and its activities.

ii. Development of Inland Fisheries and Aquaculture.
iii. Development of Marine Fisheries, Infrastructure and Post-Harvest
Operations.
iv. Strengthening of Database & Geographical Information System of the
Fisheries Sector.
v. Institutional Arrangement for Fisheries Sector.
vi. Monitoring, Control and Surveillance (MCS) and other need-based
Interventions.
vii. National Scheme on Welfare of Fishermen.
The Scheme Blue Revolution: Integrated Development and Management of Fisheries is being
implemented in consultation with all States & UTs. Besides the activities undertaken under
both the marine and inland sectors, no specific role for the coastal states has been defined.
The Blue Revolution is being implemented to achieve economic prosperity of fishermen and
fish farmers and to contribute towards food and nutritional security through optimum
utilization of water resources for fisheries development in a sustainable manner, keeping in
view the bio-security and environmental concerns.
Under the scheme, it has been targeted to enhance the fish production from 107.95 lakh
tonnes in 2015-16 to about 150 lakh tonnes by the end of the financial year 2019-20. It is also
expected to augment the export earnings with a focus on increased benefit flow to the fishers
and fish farmers to attain the target of doubling their income.
The Department has prepared a detailed National Fisheries Action Plan-2020(NFAP) for the
next 5 years with an aim of enhancing fish production and productivity and to achieve the
concept of Blue Revolution. The approach was initiated considering the various fisheries
resources available in the country like ponds & tanks, wetlands, brackish water, cold water,
lakes & reservoirs, rivers and canals and the marine sector.

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Challenges faced by the fisheries sector
 Shortage of quality and healthy fish seeds and other critical inputs.
 Lack of resource-specific fishing vessels and reliable resource and updated data.
 Inadequate awareness about nutritional and economic benefits of fish.
 Inadequate extension staff for fisheries and training for fishers and
fisheries personnel.
 Absence of standardization and branding of fish products.
The Way Forward
 Schemes of integrated approach for enhancing inland fish production and productivity
with forward and backward linkages.
 Large scale adoption of culture-based capture fisheries and cage culture in reservoirs
and larger water bodies are to be taken up.
 Sustainable exploitation of marine fishery resources especially deep sea resources and
enhancement of marine fish production through sea farming, mariculture.
Poultry Sector in India
Growth of India’s Poultry sector in recent years
 Indian Poultry Industry is one of the fastest growing segments of the agricultural
sector today in India. As the production of agricultural crops has been rising at a rate
of 1.5 to 2% per annum while the production of eggs and broilers has been rising at a
rate of 8 to 10% per annum. Today India is world’s fifth largest egg producer in the
world. Indian broiler production at 3.8 million tons is the fourth largest in the world
after US, Brazil and China.
 The broiler growing companies are becoming bigger and the feed mills are getting
larger. More than 60 per cent of the feed is being processed. The layer farming with
220 million layers is growing at six to eight per cent and the egg prices are at record
high.
 The 67,000-crore Indian poultry industry is expected to report higher margins in the
years to come.
 The Indian Poultry Industry has undergone a paradigm shift in structure and
operation. A very significant feature of India’s poultry industry is its transformation
from a mere backyard activity into a major commercial activity in just about four
decades which seems to be really
eally fast. The kind of transformation has involved
sizeable investments in breeding, hatching, rearing and processing. Indian farmers
have moved from rearing non descript birds to today’s rearing hybrids such as
non-descript

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Hyaline, Shaver, and Babcock which ensure faster growth, good liveability, excellent
feed conversion and high profits to the rearers.
 The organized sector of Indian Poultry Industry is contributing nearly 70% of the total
output and the rest 30% in the unorganized sector.
 Due to the demand for poultry increasing and production reaching 37 billion eggs and
1 billion broilers, the Poultry Industry today employs around 1.6 million people. At
least 80% of employment in Indian Poultry Industry generates directly by the farmers,
while 20 % is engaged in feed, pharmaceuticals, equipment and other services
according to the requirement. Additionally, there might be similar number of people
roughly 1.6 million who are engaged in marketing and other channels servicing the
poultry sector.
Reason Behind this growth
 The contributing factors behind this growth are – growth in per capita income, a
growing urban population and falling poultry prices.
 The Indian Poultry Industry has grown largely due to the initiative of private
enterprises, minimal government intervention, and very considerable indigenous
poultry genetics capabilities, and support from the complementary veterinary health,
poultry feed, poultry equipment, and poultry processing sectors. India is one of the
few countries in the world that has put into place a sustained Specific Pathogen Free
(SPF) egg production project.
Challenges the Poultry sector is facing
 In last 2 years the Poultry sector is facing distress due to number of factors
 There is disparity between states and hence an impairment in growth of the sector.
About 60% of the egg production comes from Andhra Pradesh. Commercial poultry
farming yet to make a mark in states like Odisha, Bihar, MP, Rajasthan. This disparity
has resulted in uncertainty in sector.
 Recent heatwaves in Andhra Pradesh and Telangana region has resulted in high
chicken prices due to killing of birds. As a result, poultry feed demand has fallen.
 Avian influenza was another issue which has resulted which has devastating effect on
Indian poultry, and it still continues to haunt the sector due to low demand and less
exports
 Shortage of raw material is another issue. Price of soybean meal, the major and only
source of protein has increased about 75%, which has forced the feed manufacturers
to comprise in terms of diet given to birds.
 Shortage of human resources is another problem because of the absence of

veterinarians, researchers, in areas where expertise knowledge is required.

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 Indian poultry sector is still unable to tap the benefit of international market. Lack of
adequate cold storage, warehouses is the major factor affecting poultry sector in India.
 Majority of the production is by unorganized which is another threat faced by sector.
 Usually, summer sees a production drop of five to 10 per cent; this year, with the heat
and drought, there is a 25-30 per cent drop. The drought has hit water supply for the
birds and the latter’s mortality rate has risen in recent months, pushing up prices for
broilers and eggs.
Way Forward
The Following measures should be taken by the Government to improve the situation.
 Strong marketing network to set the industry free from the clutches of middlemen.
 Government support to public poultry educational and R&D institutions.
 Building infrastructure to meet the growing manpower demand of the poultry sector.
 Promote both mass production as well as production by masses.
 Support and promotion of the processing sector.
 Insurance against losses.
 Provision of subsidies, and credit

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Government Policies towards Women Empowerment: Beti Bachao Beti

Padhao, SSA, Kasturba Gandhi Balika Vidyalaya, Saakshar Bharat,
SABLA, STEP
Government Policies towards Women Empowerment
Sarva Shiksha Abhiyaan
 The principal programme for universalisation of primary education is the Sarva

Shiksha Abhiyan (SSA), a Centrally-sponsored scheme being implemented in
partnership with State/UT Governments.
 The programme has been in operation since 2000-01.
 The overall goals of the SSA are: (i) all children in schools; (ii) bridge all gender and
social category gaps at primary and upper primary stages of education (iii) universal
retention; and (iv) elementary education of satisfactory quality.
 The SSA is the primary vehicle for implementing the aims and objectives of the RTE.
 In addition to programmatic interventions to promote girls’ education within the

mainstream elementary education system, girls’ education is pursued through two
special schemes for girls, which are supported under SSA. These are (i) National
Programme for Education of Girls at Elementary Level (NPEGEL), and (ii) Kasturba
Gandhi Balika Vidyalaya (KGBV).
Key programmatic thrusts under SSA for promoting girls’ education are:
 Ensuring the availability of primary schools within one kilometre of the habitation of
residence of children and upper primary schools within three kilometres of the
habitation;
 Provision of separate toilets for girls;
 Recruitment of 50 % of women teachers;
 Early childhood care and education centres in or near schools in convergence with
Integrated Child Development Services (ICDS) scheme to free girls from sibling care
responsibilities;
 Special training for mainstreaming out-of-school girls;
 Teachers’ sensitization programmes to promote equitable learning opportunities for

girls;
 Gender-sensitive teaching-learning materials, including text books;
 Intensive community mobilization efforts;

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 “Innovation fund’ for need-based interventions for ensuring girls’ attendance and
retention.
 National Programme for Girls Education at Elementary Level (NPEGEL);
 Residential programme for education of disadvantaged girls in educationally

backward Blocks -Kasturba Gandhi Balika Vidyalaya (KGBV).
National Programme for Education of Girls at Elementary Level (NPEGEL)
 The National Programme for Education of Girls at Elementary Level (NPEGEL)

launched in 2003 is implemented in Educationally Backward Blocks (EBB) and
addresses the needs of girls who are ‘in’ and ‘out’ of school.
 Since many girls become vulnerable to leaving school when they are not able to cope
with the pace of learning in the class or feel neglected by teachers/peers in class, the
NPEGEL emphasises the responsibility of teachers to recognize such girls and pay
special attention to bring them out of their state of vulnerability and prevent them
from dropping out.
 Recognising the need for support services to help girls with responsibilities with
regard to fuel, fodder, water, sibling care and paid and unpaid work, provisions have
been made for incentives that are decided locally based on needs, and through the
provision of ECCE services in non-ICDS areas to help free girls from sibling-care
responsibilities and attend schools.
 An important aspect of the programme is the effort to ensure a supportive and gender
sensitive classroom environment in the school. By the end of 2012-13, under
NPEGEL, 41.2 million girls have been covered in 3,353 Educationally Backward
Blocks in 442 districts. Under the NPEGEL 41,779 Model School Clusters have been
established.
 At the cluster level, one school is developed into a resource hub for schools within the
cluster.
 The model cluster school functions as a repository of supplementary reading

materials, books, equipment materials for games and vocational training, a centre for
teacher training on gender issues and for organizing classes on additional subjects like
self-defence and life skills.
 The model cluster school serves to motivate other schools in the cluster, to build a
gender sensitive school and classroom environment.
 The NPEGEL follows up on girls’ enrolment, attendance and learning achievement by

involving village level women’s and community groups.

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Kasturba Gandhi Balika Vidyalaya (KGBV) scheme
 The Kasturba Gandhi Balika Vidyalayas (KGBVs) are residential upper primary
schools for girls from Scheduled Caste (SC), Scheduled Tribe (ST), and Other
Backward Classes (OBC) and Muslim communities.
 KGBVs are set up in educationally backward blocks where schools are at great
distances and are a challenge to the security of girls and often compel them to
discontinue their education.
 The KGBVs reach out to adolescent girls who are unable to go to regular schools, out-
of-school girls in the 10+ age group unable to complete primary school, younger girls
of migratory populations in difficult areas of scattered populations that do not qualify
for primary/upper primary schools.
 The Scheme is being implemented in 27 States/UTs. Up to the year 2012-13, 3,609

KGBVs have been sanctioned and 366,500 girls were enrolled in these KGBVs
during the year 2012-13 as against the targeted enrolment of 373,000 girls.
Rashtriya Madhyamik Shiksha Abhiyan (RMSA)
 The Rashtriya Madhyamik Shiksha Abhiyan is a flagship scheme of Government of

India, launched in March, 2009, to enhance access to secondary education and
improve its quality.
 The implementation of the scheme started from 2009-10 to generate human capital
and provide sufficient conditions for accelerating growth and development and equity
as also quality of life for everyone in India.
 Largely built upon the successes of SSA and, like SSA, RMSA leverages support
from a wide range of stakeholders including multilateral organisations, NGOs,
advisors and consultants, research agencies and institutions.
 The scheme involves multidimensional research, technical consulting, implementation

and funding support. In 2013, in its fourth year of implementation, RMSA covers
50,000 government and local body secondary schools. Besides this, an additional of
30,000 aided secondary schools can also access the benefits of RMSA; but not
infrastructure and support in core areas.
The objectives of the Scheme are:
 To achieve a gross enrolment ratio of 75% from 52.26% in 2005-06 for classes IX-X
within 5 years of its implementation, by providing a secondary school within
reasonable distance of any habitation.
 Improve the quality of education imparted at secondary level by mak

making all secondary
schools conform to prescribed norms.

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 Remove gender, socio-economic and disability barriers.
 Provide universal access to secondary level education by 2017, i.e. by the end of the
12th Five Year Plan
 Enhance and universalize retention by 2020
The Rashtriya Madhyamik Shiksha Abhiyan (RMSA), revised in 2013, has integrated among
others, the Girls Hostel Scheme and National Incentive to Girls specially to encourage girls in
secondary level of education.
A sum of Rs. 3,000/- is deposited in the name of eligible girls as fixed deposit. The girls are
entitled to withdraw the sum along with interest thereon on reaching 18 years of age and on
passing 10th class examination.
Rashtriya Uchchatar Shiksha Abhiyan (RUSA)
 The Rashtriya Uchchatar Shiksha Abhiyan (RUSA) is a Centrally Sponsored Scheme

(CSS), launched in 2013, aims at providing strategic funding to eligible State higher
educational institutions.
 The central funding in the scheme is in the ratio of 65:35 for general category States
and 90:10 for special category states would be norm based and outcome dependent.
 The funding would flow from the central ministry through the State
governments/Union Territories to the State Higher Education Councils before
reaching the identified institutions.
 The funding to States would be made on the basis of critical appraisal of State Higher
Education Plans, which would describe each State’s strategy to address issues of
equity, access and excellence in higher education.
 One of the objectives of RUSA is to improve equity in higher education by providing

adequate opportunities of higher education to SC/STs and socially and educationally
backward classes; promote inclusion of women, minorities, and differently abled
persons.
Mahila Samakhya (MS) Programme
 The National Policy on Education (NPE), 1986 recognised that the empowerment of
women is possibly the most critical pre-condition for the participation of girls and
women in the educational process.
 The NPE, 1986, says, “Education will be used as an agent of basic change in the
status of woman. In order to neutralise the accumulated distortions of the past, there
will be a well-conceived edge in favour of women.
 The National Education System will play a positive, interventionist role in the
empowerment of women. It will foster the development of new values through

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redesigned curricula, textbooks, the training and orientation of teachers, decision-

makers and administrators, and the active involvement of educational institutions.
This will be an act of faith and social engineering…
 ” The Mahila Samakhya programme was launched in 1988 to pursue the objectives of
the National Policy on Education, 1986.
 It recognised that education can be an effective tool for women’s empowerment, the
parameters of which are:
 Enhancing self-esteem and self-confidence of women;
 Building a positive image of women by recognizing their contribution to the society,

polity and the economy;
 Developing ability to think critically;
 Fostering decision making and action through collective processes;
 Enabling women to make informed choices in areas like education, employment and
health (especially reproductive health);
 Ensuring equal participation in developmental processes;
 Providing information, knowledge and skill for economic independence;
 Enhancing access to legal literacy and information relating to their rights and
entitlements in society with a view to enhance their participation on an equal footing
in all areas.
 The main focus of the programmatic interventions under the MS programme has been
on developing capacities of poor women to address gender and social barriers to
education and for the realisation of women’s rights at the family and community
levels.
 The core activities of the MS programme are centred around issues of health,
education of women and girls, accessing public services, addressing issues of violence
and social practices, which discriminate against women and girls, gaining entry into
local governance and seeking sustainable livelihoods.
Saakshar Bharat
 Saakshar Bharat is a Centrally Sponsored Scheme of Adult Education & Skill

Development being implemented by Adult Education Bureau of Department of
School Education & Literacy, Ministry of Human Resource Development to raise
literacy level to 80% and reduce gender gap in literacy to 10% points by 2017. The
target group of this Scheme is 15 + year old, which includes youth also.

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 The Saakshar Bharat Scheme was launched in 2009 and has been extended up to
31.03.2017.
 It is being executed by National Literacy Mission Authority at National Level, State

Literacy Mission Authority at State level, Zila Lok Shiksha Samiti, Block Lok
Shiksha Samiti and Gram Panchayat Lok Shiksha Samiti at District, Block and Gram
Panchayat levels respectively.
 The principal target of the scheme is to impart Functional Literacy to 70 million non-
literates adults (15+ age group) with prime focus on women having the target of 60
million out of 70 million.
 The emphasis is also on disadvantaged group comprising of SCs-14 million, STs-8

Million, Muslim-12 million and Others-36 million including 60 million women.
 The auxiliary target of the scheme is to cover 1.5 million adults under Basic
Education Programme (Equivalency Programme) and equal number under Vocational
(Skill Development) programme.
 Under the Mission by end of September, 2014, 388 districts in 26 States and one in
UT are covered. About 3.92 crore learners appeared for biannual basic literacy
assessment tests conducted so far. About 2.86 crore learners (including 2.05 crore
females), comprising 0.67 crore SCs, 0.36 crore STs & 0.23 crore Minorities have
successfully passed the Assessment Tests under Basic Literacy conducted by National
Institute of Open Schooling (NIOS), upto March, 2014.
 In addition, about 41 lakh learners have taken up the assessment test held in August,
2014 and 1.53 lakh Adult Education Centres are functioning as of now. 2.5 million
Persons have been mobilised as Voluntary Teachers; 35 million Primers in 13 Indian
languages and 26 local dialects have been produced and distributed.
 Around 29 lakh learners have been benefited under Vocational Training programme
through Jan Shikshan Sansthan between 2009 to 2014 out of which the women
beneficiaries were 25.02 lakhs.
Kishori Shakti Yojna and Rajiv Gandhi Scheme for Empowerment of Adolescent Girls
(RGSEAG) SABLA
 The Ministry of Women and Child Development, Government of India, in the year
2000 came up with scheme called “Kishori Shakti Yojna (KSY) using the
infrastructure of Integrated Child Development Services (ICDS).
 The objectives of the Scheme were to improve the nutritional and health status of girls
in the age group of 11-18 years as well as to equip them to improve and upgrade their
homebased and vocational skills; and to promote their overall development including
awareness about their health, personal hygiene, nutrition, family welfare and
management.

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 Kishori Shakti Yojana (KSY) seeks to empower adolescent girls, so as to enable them
to keep charge of their lives. Thereafter, Nutrition Programme for Adolescent Girls
(NPAG) was initiated as a pilot project in the year 2002-03 in 51 identified districts
across the country to address the problem of under-nutrition among adolescent girls.
 Under the programme, 6 kg of free food grains per beneficiary per month are given to
underweight adolescent girls. The above two schemes have influenced the lives of
Adolescent Girls (AGs) to some extent, but have not shown the desired impact.
 Moreover, the above two schemes had limited financial assistance and coverage
besides having similar interventions and catered to more or less the same target
groups.
 A new comprehensive scheme with richer content, merging the erstwhile two schemes
addressing the multi-dimensional problems of Adult Girls, called Rajiv Gandhi
Scheme for Empowerment of Adolescent Girls (RGSEAG) –‘SABLA’ replaced KSY
and NPAG in the selected districts.
 KSY would be continued (where operational) in remaining districts. Rajiv Gandhi

Scheme for Empowerment of Adolescent Girls – SABLA is implemented using the
platform of ICDS Scheme through Anganwadi Centres (AWCs).
 SABLA aims at empowering Adult Girls of 11 to 18 years by improving their

nutritional and health status, upgradation of home skills, life skills and vocational
skills. The scheme also aims to mainstream out –of –school children to formal
education or non –formal education.
Support to Training and Employment Programme (STEP)
 The STEP Scheme was launched as a central sector Scheme in 1986 -87.
 The scheme aims to make a significant impact on women by upgrading skills for
employment on a self- sustainable basis and income generation for marginalised and
asset-less rural and urban women especially those in SC/ ST households and families
below poverty line.
 The key strategies include training for skill development, mobilising women in viable
groups, arranging for marketing linkages and access to credit.
 The scheme also provides for support services in the form of health check –ups, child
care, legal & health literacy and gender sensitisation.
 The scheme covers 10 sectors of employment I.e. Agriculture, Animal husbandry,

Dairying, Fisheries, Handlooms, Handicrafts, Khadi and Village Industries,
Sericulture, Waste land development and Social Forestry.
 The scope and coverage of the scheme has been enlarged with the introduction of
locally appropriate sectors.

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Beti Bachao Beti Padhao (BBBP)
 The new scheme Beti Bachao Beti Padhao was launched on 22/1/2015 with the
overall goal of the scheme is to celebrate the girl child and enable her education.
The objectives are:
1. Prevent gender biased sex selection elimination.
2. Ensure survival and protection of the girl child.
3. Ensure education of the girl child.
 The BBBP is an initiative to arrest and reverse the decline in Child Sex Ratio.
Through this process, efforts to empower women, provide them dignity and
opportunities will be enhanced.
 Implementation is through a national campaign and focussed multi sectoral action in

100 selected districts, covering all States and UTs. This is a joint initiative of the
Ministry of Women and Child Development, Ministry of Health and Family Welfare
and Ministry of Human Resource Development.
The commitments proclaimed under BBBP are
 Celebrate the birth of girl child
 Take pride in daughters and oppose the mentality of ‘Paraya Dhan’
 Find ways to promote equality between boys and girls
 Secure admission to & retention of girl child in schools
 Engage men and boys to challenge gender stereotypes and roles
 Report any incident of sex determination test
 Strive to make neighbourhood safe & violence free for women and girls
 Oppose dowry and child marriage
 Advocate simple weddings
 Support women’s right to inherit and own property.

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Education in India: Role and Channels in Promoting Economic

Growth
Education in India
Role of Education in Promoting Economic Growth and Development
Positive Externalities from Education
1. More educated individuals are usually more productive workers.
2. Educated citizens are more informed and usually translate into more active voters.
3. It is been observed that Educated Families have access to financial assistance through
education grants and loans.
4. Public education helps in redistribution of Income. All Child in households, no matter

what their parents income level are, must be provided with education. This will ensure
fair income distribution in the future.
5. The well governed Government public schools that provide free education, gives
every child (rich or poor) the chance to learn and develop his/her skills.
6. “A stable and democratic society is impossible without a minimum degree of literacy

and knowledge on the part of most citizens and without widespread acceptance of
some common set of values. Education can contribute to both. In consequence, the
gain from the education of a child accrues not only to the child but also to other
members of the society”
How Education Promote

omote Economic Growth

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Channel One: Economic Channel
Channel 2: Technological Channel

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Channel 3: Societal and Institutional Channel

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Chapter 8- Government budgeting

The Role of the Government in the Economy
 India embraced an economic model which has the features of both free market
capitalism and socialism. The policy makers called this a model of ‘Mixed Economy’.
 The reason for adopting such a hybrid model was to raise people’s standard of living
and reduce income inequality.
 India embraced an economic model that uniquely combined free market capitalism
with that of State intervention in essential sectors of the economy.
 The record of India’s successive governments in providing social welfare is at best

mediocre.
 The Government must build a comprehensive welfare state with a strong emphasis on
redistribution of resources to poor along with provisions of social services (Public
Health, Education, Equitable Institutions, Un-Employment Benefits, Old Age
Pensions etc.) financed through taxation.

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 In today’s changing World of high technology, the Government must do a lot of

public spending on investment in human capital and research and development.
 On Jobs creation front, the government must adopt a judicious mix of labour market
institution that includes a fairly flexible labour market allowing easy hiring and firing
of employees along with strong labour associations to safeguard the interest of
employees.
 On the External front, the government must embrace globalisation, openness to trade
and investment but with risk sharing approach. The government should share the risk
arising out of globalisation, by training and skilling those who have suffered from the
negative impact of globalisation. The process of risk sharing will make globalisation
acceptable to all.
 Adopting the above features will allow India to achieve high growth along with high
social ambitions/indicators.
 Therefore, in a nutshell, the future of India’s rapid and sustainable development lies in
the following:

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Functions of Government
Allocation Function
 The government provides certain public goods and services which the private sector
fails to provide because there exists no market for them.
 Example: National Defence, Public Parks and National Highways etc.
 The reason of government providing such goods is the nature of public goods. The
public goods are by nature non-rival and non-excludable.
 Non-Rivalry means, the consumption of the good by one individual does not stop
another individual from consuming the same good. The goods remain available to all
the citizens.
 Non-Excludability means the government cannot exclude any person from enjoying
the benefit of the good whether they pay or not. The goods are non-excludable in
nature.

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Private Goods Public Goods
They are Rival in nature. Rivalry means if They are non-rival in nature. Consumption
one person consumes a good, then it will not by one individual does not affect
be available for the consumption of another consumption of another individual.
individual. Example- Any private good like Example: National Defence or Public
a car, a pen, a mobile handset etc. if I own a Highway- if I am driving a car on the
car, then that particular car is not available highway that does not stop any other
to any other person. individual from driving his/her car on the
same highway.
They are excludable in nature. Excludability They are non-excludable in nature. It means
means that exclusion is possible. If someone exclusion is not possible. If a public park is
does not buy a metro ticket, then he/she can constructed, then no person can be excluded
be excluded from riding on the metro train. from using it, whether he pay tax/price or
not.
The market for private goods exist. The The market for public goods does not exist.
existence of market helps in their price Hence price discovery is not possible. With
discovery, and hence prices for private no price available private sector will never
goods exist which makes exclusion possible. supply such goods. Thus, Government must
provide such goods.
Property Rights of private goods are well Property Rights are not determined. No
determined. If I own a house, then I have person owns the Highway or a public park.
exclusive property rights over its usage. The They are common goods to be shared by all.
house is in my name; it belongs to me. No single person can claim that it belongs to
them.
Free Ridership is not possible. Free Free ridership is possible. Example-

ridership is a situation when someone who Government comes up with a provision that
has not paid for it started using it. all houses must contribute Re 100 towards
spreading of medicine for Dengue
prevention. Despite this, some houses refuse
to pay. The government simply does not let
its prevention program fail because some
houses are not paying. Since the issue
involves public health threat, the
government decides to provide it anyway.
Thus, the houses that had not paid Re 100
will also enjoy the benefit of dengue
prevention program.

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Distribution Function
 The government through its tax and expenditure policies attempts to bring out income
redistribution in the society that is fair to all.
 The government transfer payments from one citizen to other through taxation policy.
 Example: Old age pensions, Social sector initiatives for the poor. Through these
programs, the government provides income support to those individuals who do not
have any source of earnings. The funds for running these programs come from
progressive taxation. Those with higher income paying higher taxes.
 The idea of distribution is not to rob the rich by forcing them to pay high taxes or to
discourage people from earning more but to make just redistribution which will be
equitable for all.
 Think like this, the per capita consumption of common resources will be higher for
rich individuals as compared to the poorer individual (who survives on bare
necessities). Thus they must pay a higher price for its provision. Space taken by an
SUV or Sedan on the road is much higher than the space taken by Bicycle. Thus, the
SUV owner must pay a higher price/ tax for the construction of the road as compared
to bicycle owner. The above example explained the concept Progressive taxation.
 Similarly, the old age pensions are not grants by the government but are right of those
individuals who have worked endlessly during their productive years. Thus, the
government must take care of them by providing them old age benefits.
Stabilisation Function
 The economy tends to undergo periods of instability and fluctuations. The periods of
fluctuations require the government to play an active role in removing it.
 The year of 2008-09 witnessed the Global Financial Crisis. The GFC led to a decline
in GDP growth rate along with employment. To help recover economy from the GFC,
the government provided Fiscal Stimulus package for the industry.
 Let’s understand the channel

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 Similarly, the economy may at times overshoot when expenditure becomes greater
than output. In such a situation when consumers are spending more than what
producer are willing to supply. Inflation happens. To remove inflationary pressure
from the economy, the government intervenes through tight fiscal policy.

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The Government Budget: Revenue Budget, Capital Budget,

Government Deficits
Revenue Account
 The revenue account shows the current receipts of the government and the
expenditure that can be met from these receipts.
Revenue Receipts: RR are receipts of the government incomes which cannot be reclaimed
back by the citizens from the government.

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Revenue Expenditure
 The expenditure incurred by the government that neither creates any

physical/financial asset nor reduces the liability of the government. The Revenue
expenditure relates to the day to day functioning of the government.
 Example: Salaries of employees, Interest payments on past debts, grants given to state
governments etc.
The Expenditure under Budget is divided into two subheads.
 With the demise of Planning Commission, the Central Government has decided to do
away with the classification of plan and non-plan expenditure. The 2018-19 Budget
will not contain any such classification.
The Capital Account
 The capital budget is an account of assets as well as liabilities of the central

government.
 Capital Receipts: All those receipts of the government which either creates liability
or reduces financial asset are capital receipts.
 Examples: Market borrowings by the government from the public, Borrowings from
the RBI, Borrowings from commercial banks or financial institutions through the sale

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of T-BILLS, loans received from foreign governments or international financial

institutions, post office savings, post office saving certificates and PSU’s
Disinvestment.
 Capital Expenditure: All those expenditures of the government which either result
in the creation of physical/financial assets or reduction in financial liabilities.
 Examples: Purchase of land, machinery, building and equipment’s; investment in

shares; loans and advances by the central government to state governments and UTs.
 Capital Expenditure is also classified as plan and non-plan capital expenditure. Plan
expenditure relates to central Five-year Plan and Non-Plan relates to expenditure not
covered under the Five-year
The Distinction in a Nutshell
Revenue Expenditure Capital Expenditure Capital Receipts

Neither Creates Any Assets Either Creates Assets or Either creates liabilities or
nor reduces any liability for Reduces Liabilities reduces assets.
the government
The revenue deficit happens The fiscal deficit is the
when revenue receipts falls difference between the
short of revenue government’s total
expenditure. expenditure (both revenue
RD = Revenue Expenditure and capital) and its total
– Revenue Receipts receipts excluding
borrowings.
FD= Total Expenditure-
(Revenue Receipts+ Non-
Debt Creating Capital
Receipts)
Measuring Government Deficits
When a government spends more than it collects by way of revenues, it incurs deficits. There
are various kinds of deficits incurred by the government, and each has its own implications.
Deficits on Revenue Account or Revenue Deficit
 The revenue deficit happens when revenue receipts fall short of revenue expenditure.
 RD = Revenue Expenditure – Revenue Receipts
 Implications: When a government incurs revenue deficit, it implies that the

government is not able to cover its day to day expenses from its current receipts.
 It also implies that the government is using its past saving to finance its current
consumption expenditure.

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 The implication is the government will have to borrow in future to finance its current
consumption expenditure. This will lead to building up of government debt and rising
interest payments in future.
 Increase in interest payment obligations will again lead to increase in revenue

expenditure and hence revenue deficits.
 The vicious circle of RD will continue until government start cutting on its wasteful
expenditures.
Fiscal Deficit
The fiscal deficit is the difference between the government’s total expenditure (both revenue
and capital) and its total receipts excluding borrowings.
 FD= Total Expenditure- (Revenue Receipts+ Non-Debt Creating Capital Receipts)
 Non-Debt Creating Receipts are those receipts which are not classified as borrowings
and do not give rise to debt.
 Examples Disinvestment proceeds from Public Sector Undertakings and recovery of

loans by the central government.
 Implications: Fiscal deficit has to be financed through borrowings, thus indicating

total borrowing requirements of the government.
 Alternatively, FD can be seen as FD= Net borrowing at home+ Net borrowing from
RBI+ Net borrowing from Abroad.
 Fiscal Deficit reflects the health of the economy; A large FD indicates the economy is
under stress.
 A large FD can create inflation in the economy.
 A large FD makes the country unattractive to foreigners.
 A large FD can lead to outflow of capital from the country.
 A large FD crowd out /reduces private investment from the economy.
 If a large part of FD is due to revenue deficit, it implies the government is borrowing

to finance its consumption requirement. This is a dangerous situation, and soon the
government will go bankrupt.
Primary Deficit
 The borrowing requirement of the government includes interest obligations on

accumulated debt.
 The goal of measuring primary deficit is to focus on present fiscal imbalances.

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 To obtain an estimate of borrowing on account of current expenditures exceeding

revenues, we need to calculate what has been called the primary deficit.
 It is simply the fiscal deficit minus the interest payments
 Gross primary deficit = Gross fiscal deficit – Net interest liabilities

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Budgetary procedure in India

The budgetary procedure in India involves four different operations that are
 Preparation of the budget
 Enactment of the budget
 Execution of the budget
 Parliamentary control over finance
Preparation of the budget
The exercise of the preparation of the budget by the ministry of finance starts sometimes
around in the month of September every year. There is a budget Division of the Department
of Economic affair of the ministry of finance for this purpose.
The ministry of finance compiles and coordinates the estimates of the expenditure of different
ministers and departments and prepare an estimate or a plan outlay.
Estimates of plan outlay are scrutinized by the Planning Commission. The budget proposals
of finance ministers are examined by the finance ministry who has the power of making
changes in them with the consultation of the prime minister.
Enactment of the budget
Once the budget is prepared, it goes to the parliament for enactment and legislation. The
budget has to pass through the following stages:
 The finance minister presents the budget in the Lok Sabha. He makes his budget in
the Lok Sabha. Simultaneously, the copy of the budget is laid on the table of the
Rajya Sabha. Printed copies of the budget are distributed among the members of the
parliament to go through the details of the budgetary provisions.
 The finance bill is presented to the parliament immediately after the presentation of
the budget. Finance Bill relates to the proposals regarding the imposition of new
taxes, modification on the existing taxes or the abolition of the old taxes.
 The proposals on revenue and expenditure are discussed in the Parliament. Members
of the Parliament actively take part in the discussion.
 Demands for grants are presented to the Parliament along with the budget These
demands for grants show that the estimates of the expenditure for various departments
and they need to be voted by the Parliament.
 After the demands for grants are voted by the parliament, the Appropriation Bill is
introduced, considered and passed by the appropriation of the Parliament. It provides

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the legal authority for withdrawal of funds of what is known as the Consolidated Fund
of India.
 After the passing of the appropriation bill, finance bill is discussed and passed. At this
stage, the members of the parliament can suggest and make some amendments which
the finance minister can approve or reject.
 Appropriation bill and Finance bill are sent to Rajya Sabha. The Rajya Sabha is
required to send back these bills to the Lok Sabha within fourteen days with or
without amendments. However, Lok Sabha may or may not accept the bill.
 Finance Bill is sent to the President for his assent. The bill becomes the statue after
presidents’ sign. The president does not have the power to reject the bill.
Execution of the budget
 Once the finance and appropriation bill is passed, execution of the budget starts. The
executive department gets a green signal to collect the revenue and start spending
money on approved schemes.
 Revenue Department of the ministry of finance is entrusted with the responsibility of

collection of revenue. Various ministries are authorized to draw the necessary
amounts and spend them.
 For this purpose, the Secretary of minister’s acts as the chief accounting authority.
 The accounts of the various ministers are prepared as per the laid down procedures in
this regard. These accounts are audited by the Comptroller and Auditor General of
India.
Parliament Control over Finance
 There is a prescribed procedure by which the Finance Bill and the Appropriation Bill
are presented, debated and passed.
 The Parliament being sovereign gives grants to the executive, which makes demands.
These demands can be of varieties like the demands for grants, supplementary grants,
additional grants, etc.
 The estimates of expenditure, other than those specified for the Consolidated Fund of
India, are presented to the Lok Sabha in the form of demands for grants.
 The Lok Sabha has the power to assent to or to reject, any demand, or to assent to any
demand, subject to a reduction of the amount specified. After the conclusion of the
general debate on the budget, the demands for grants of various ministries are
presented to the Lok Sabha.
 Formerly, all demands were introduced by the finance minister; but, now, they are
formally introduced by the ministers of the concerned departments. These demands

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are not presented to the Rajya Sabha, though a general debate on the budget takes
place there too.
 The Constitution provides that the Parliament may make a grant for meeting an
unexpected demand upon the nation’s resources, when, on account of the magnitude
or the indefinite character of the service, the demand cannot be stated with the details
ordinarily given in the annual financial statement.
 An Appropriation Act is again essential for passing such a grant. It is intended to meet
specific purposes, such as for meeting war needs.

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Types of Budgets in India

Balance Budget versus Unbalanced Budget
Balanced Budget Unbalanced Budget
A balanced budget is a situation, in which The budget in which income & expenditure
estimated revenue of the government during are not equal to each other is known as
the year is equal to its anticipated Unbalanced Budget.
expenditure.
The government’s estimated Unbalanced budget is of two types:
Revenue = Government’s proposed Surplus Budget

Expenditure.
Deficit Budget
Surplus Budget
The budget is a surplus budget when the

estimated revenues of the year are greater
than anticipated expenditures.
The government expected revenue >

Government proposed Expenditure.
The surplus budget shows the financial

soundness of the government. When there is
too much inflation, the government can
adopt the policy of surplus budget as it will
reduce aggregate demand.
Deficit Budget
Deficit budget is one where the estimated

government expenditure is more than
expected revenue. Government’s estimated
Revenue is less than Government’s
proposed Expenditure.

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If over a period of time expenditure exceeds

revenue, the budget is said to be unbalanced
Such deficit amount is generally covered

through public borrowings or withdrawing
resources from the accumulated reserve
surplus. A way a deficit budget is a liability
of the government as it creates a burden of
debt or it reduces the stock of reserves of the
government.
In developing countries like India, where

huge resources are needed for the purpose of
economic growth & development it is not
possible to raise such resources through
taxation, deficit budgeting is the only
option.
In Underdeveloped countries, deficit

budget is used for financing planned
development & in advanced countries, it is
used as stability tool to control business &
economic fluctuations.
Zero Based Budgeting versus Traditional Budgeting
Zero Based Budgeting Traditional Budgeting
Zero based budgeting is a method of Traditional budgeting calls for incremental

budgeting in which all expenses are increases over previous budgets, such as 2%
evaluated each time a budget is made and increase in spending.
expenses must be justified for each new
period.
Zero budgeting starts from the zero base and Traditional budgeting analyses only new
every function of the government is expenditures, while zero based budgeting
analysed for its needs and cost. Budgets are starts from zero and calls for justification of
then made based on the needs. old recurring expenses in addition to new
expenditures.

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Outcome Budget
If was first introduced in the year 2005. Outcome budget analyses the progress of each
ministry and department and what the respected ministry has done with its budget outlay.
The Outcome Budget will comprise scheme or project wise outlays for all central ministries,
departments and organizations during an annual year listed against corresponding outcomes
(measurable physical targets) to be achieved during the year.
It measures the development outcomes of all government programs. This means that if you
want to find out whether some money allocated for, say, the building of a school or a health
centre has actually been given, you might be able to. It will also tell you if the money has
been spent for the purpose it was sanctioned and the outcome of the fund-usage.
Gender Budgeting
 Gender Budgeting is a powerful tool for achieving gender mainstreaming so as to

ensure that benefits of development reach women as much as men.
 It is not an accounting exercise but an ongoing process of keeping a gender

perspective in policy/ programme formulation, its implementation and review.
 Gender Budgeting entails dissection of the Government budgets to establish its gender
differential impacts and to ensure that gender commitments are translated in to
budgetary commitments.
 Experts define Gender Budgeting as “Gender budget initiatives. To analyse how

governments raise and spend public money, with the aim of securing gender equality
in decision-making about public resource allocation; and gender equality in the
distribution of the impact of government budgets, both in their benefits and in their
burdens.
 The impact of government budgets on the most disadvantaged groups of women is a

focus of special attention.
 The rationale for gender budgeting arises from recognition of the fact that national
budgets impact men and women differently through the pattern of resource allocation.
 Women, constitute 48% of India’s population, but they lag behind men on many
social indicators like health, education, economic opportunities, etc. Hence, they
warrant special attention due to their vulnerability and lack of access to resources.
 The way Government budgets allocate resources, has the potential to transform these
gender inequalities. In view of this, Gender Budgeting, as a tool for achieving gender
mainstreaming, has been propagated.

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Chapter 9-Taxation in India

Taxation in India: Classification, Types, Direct tax, Indirect tax
Taxation in India
The India Constitution is quasi-federal in nature, and the country has three tier government
structure.
To avoid any disputes between the centre and state the Constitution envisage following
provisions regarding taxation:
 Division of powers to levy taxes between centre and state is clearly defined.
 There are certain taxes which are levied by the centre, but their proceeds are
distributed between both centre and the state. Example- Union Excise Duty.
 There are certain taxes which are levied by the centre, but their proceeds are
transferred to the states. Example-Estate duty on property other than agriculture
income.
 There are certain taxes which are levied by the central government, but the
responsibility to collect them is vested with the states. Example- Stamp Duty other
than included in the Union List.
 There are certain taxes which are levied by the states, and their proceeds are also kept
by states. Example: Erstwhile VAT
Classification of Taxes
What is a Tax?
Taxes are generally an involuntary fee levied on individuals and corporations by the
government in order to finance government activities. Taxes are essentially of quid pro quo in
nature. It means a favour or advantage granted in return for something.
Direct Tax versus Indirect Tax
Basis Direct Tax Indirect Tax
Meaning The tax that is levied by the The tax that is levied by the government
government directly on the on one entity (Manufacturer of goods),
individuals or corporations are called but is passed on to the final consumer by
Direct Taxes. the manufacturer.
Incidence The incidence and impact of the The incidence and impact of the tax fall
direct tax fall on the same person. on different persons.

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Examples Income Tax, Corporation Tax and VAT, Service tax, GST, Excise duty,
Wealth Tax. entertainment tax and Customs Duty.
Nature They are progressive in nature. They are regressive in nature.
Objective Both Social and Economical. Social Only Economical. When an indirect tax
objective of direct tax is the is levied on a product, both rich and poor
distribution of income. A person must pay at the same rate. A person
earning more should contribute more earning 10 lakh a month pays the same
in the provision of public service by tax on the Wheat purchase as the person
paying more tax. This provision is earning 3000 Re a month. This principle
also known as progressive taxation. is called regressive taxation.
Impact Not at all Inflationary. Is inflationary.
Understanding Regressive Nature of Indirect Taxes
Government Levies a tax of 5 percent on a pack of 5KG Rice worth Re1000.
Tax Burden on the Pack: 5/100*1000= 50 Re
 Rich Individual Case (Monthly Earning 1 Lakh)
He buys the rice pack and pays a tax of 50 Re.
The proportion of his income that went on paying tax on Rice is 0.05 Percent (50/100000) of
his total earning.
 Poor Individual Case (Monthly income 1000 Re)
He buys Rice pack and pays a tax of Re 50.
The proportion of his income that went on paying tax on rice is 5 percent (50/1000) of his
total earning.
As you can clearly see, a poor individual is paying a higher proportion of his income as
indirect tax as compared to the richer individual.
Ad valorem versus Specific Tax
Ad Valorem Specific
Ad valorem tax is based on the assessed value of the Specific tax is a fixed amount tax
product. In Fact, ‘Ad Valorem’ is a Latin word based on the quantity of unit sold.
meaning ‘According to Value’.
Most Ad valorem taxes are levied based on the value of Specific tax is levied based on the

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the item purchased. volume of the item purchased.
The tax is usually expressed in percentage. Example The tax is usually expressed in
GST in India has 5 tax rate slabs- 0, 5. 12, 18 and 28 specific sums. Example: Excise
percent. Duty on Petrol.
Example: GST, Property tax, sales tax. Example: Excise duty on petrol and
liquor products.
They are progressive in nature. They are regressive in nature.
Taxes in India
In India, Taxes are levied on income and wealth. The most important direct tax from the point
of view of revenue is personal income tax and corporation tax.
Income Tax:
 Income tax is levied on the income of individuals, Hindu undivided families,

unregistered firms and other association of people.
 In India, the nature of income tax is progressive.
 For taxation purpose income from all sources is added and taxed as per the income tax
slabs of the individual.
 The budget of 2017-18 proposed the following slab structure:
Income Slab (less than 60 years) Tax Rate
Up to 2,50,000 No Tax
Up to 2,50,000 to 5,00,000 5%
Up to 5,00,000 to 10,00,000 20%
Excess of 10,00,000 30%
Surcharge of 10% of income tax where the total income exceeds Rs 50 lakh up to Rs 1
Crore
Surcharge of 15% of income tax, where the total income exceeds Rs 1 Crore
Corporation Tax
 Corporation tax levied on the income of corporate firms and corporations.
 For taxation purpose, a company is treated as a separate entity and thus must pay a
separate tax different from personal income tax of its owner.

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 Companies both public and private which are registered in India under the companies
act 1956 are liable to pay corporate tax.
 The Budget 2017-18 proposed following tax structure for domestic corporate firms:
 For the Assessment Year 2017-18 and 2018-19, a domestic company is taxable at
30%.
 For Assessment Year 2017-18, the tax rate would be 29% where turnover or gross
receipt of the company does not exceed Rs. 5 crores in the previous year 2014-15.
 However, for Assessment year 2018-19, the tax rate would be 25% where turnover or
gross receipt of the company does not exceed Rs. 50 crores in the previous year 2015-
16.
Tax on Wealth and Capital
Estate Duty: First introduced in 1953. It was levied on the total property passing on the
death of a person. The whole property of the deceased person constituted his wealth and is
liable for the tax. The tax now stands abolish w.e.f 1985.
Wealth Tax: First introduced in 1957. It was levied on the excess of net wealth (over
30,00,00,0 @ 1 percent) of individuals, joint Hindu families and companies. Wealth tax has
been a minor source of revenue. The tax now stands abolish w.e.f 2015.
Gift Tax: First introduced in 1958. The gift tax was levied on all donations except the one
given by the charitable institution’s government companies and private companies. The tax
now stands abolished w.e.f 1998.
Capital Gain Tax: Ay profit or gain that arises from the sale of the capital asset is a capital
gain. The profit from the sale of capital is taxed. Capital Asset includes land, building, house,
jewellery, patents, copyrights etc.
 Short-term capital asset – An asset which is held for not more than 36 months or
less is a short-term capital asset.
 Long-term capital asset – An asset that is held for more than 36 months is a long-
term capital asset.
From FY 2017-18 onwards – The criteria of 36 months have been reduced to 24
months in the case of immovable property being land, building, and house property.
 For instance, if you sell house property after holding it for a period of 24 months, any
income arising will be treated as long-term capital gain provided that property is sold
after 31st March 2017.
But this change is not applicable to movable property such as jewellery, debt oriented mutual
funds etc. They will be classified as a long-term capital asset if held for more than 36 months
as earlier.

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 Tax on long-term capital gain: the Long-term capital gain is taxable at 20% +
surcharge and education cess.
 Tax on the short-term capital gain when securities transaction tax is not
applicable: If securities transaction tax is not applicable, the short-term capital gain is
added to your income tax return, and the taxpayer is taxed according to his income tax
slab.
 Tax on the short-term capital gain if securities transaction tax is applicable: If

securities transaction tax is applicable, the short-term capital gain is taxable at the rate
of 15% +surcharge and education cess.
Indirect Taxes in India
Custom Duty:
 It is a duty levied on exports and imports of goods.
 Import duty is not only a source of revenue from the government but also has also
been employed to regulate trade.
 Import duties in India are levied on ad valorem basis.
 Example: if an Indian plan to buy a Mercedes from abroad. He must pay the customs
duty levied on it.
 The purpose of the customs duty is to ensure that all the goods entering the country
are taxed and paid for.
 Just as customs duty ensures that goods for other countries are taxed, octroi is meant
to ensure that goods crossing state borders within India are taxed appropriately.
 It is levied by the state government and functions in much the same way as custo
customs
duty does.

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Excise Duty
 An excise duty is in the true sense is a commodity tax because it is levied on

production of goods in India and not on the sale of the product.
 Excise duty is explicitly levied by the central government except for alcoholic liquor
and narcotics.
 It is different from customs duty because it is applicable only to things produced in

India and is also known as the Central Value Added Tax or CENVAT.
Service Tax
 Service tax is levied on the services provided in India.
 Service tax was first introduced in 1994-95 on three services telephone services,
general insurance and share broking.
 Since then, every year the service net has been widened by including more and more
services. We now have an exclusion criterion based on ‘negative list’, where some
services are excluded out of tax net.
 The current rate of service tax in India was 15% before being replaced by Goods and
Service tax.
Value Added Tax
 The India’s indirect tax structure is weak and produces cascading effects.
 The structure was by, and large uncertain and complex and its administration was
difficult.
 As a result, various committees on taxation recommended ‘Value Added Tax’. The

Indirect Taxation enquiry committee argued for VAT.
 The VAT has a self-monitoring mechanism which makes tax administration easier.
 The VAT is properly structured removes distortions.
 Accordingly, VAT has been introduced in India by all states and UTs (except UTs of
Andaman Nicobar and Lakshadweep).
 The State VAT being implemented till 1 July 2017, had replaced erstwhile Sales Tax
of States.
 The tax is levied on various goods sold in the state, and the amount of the tax is
decided by the state itself.

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Indirect Taxes in a nutshell
Tax Who Levies Revenue Nature Incidence Levied on

goes to
Custom Duty Central Centre Progressive Shifts to Export and

Government Govt Final Import
Consumer
Excise Central Both progressive Shifts to Domestically

Duty/CENVAT Government Centre Final Manufactured
and State Consumer Goods
Service Tax Central Centre Regressive Shifts to All Services

Government Govt Final
Consumer
VAT State State Govt Regressive Shifts to Sale of Goods in

Government Final the States
Consumer

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Goods and Services Tax

The Goods and Services Tax (GST), the biggest reform in India’s indirect tax structure since
the economy began to be opened up 25 years ago, at last, becomes a reality.
The Working of GST
The Manufacturing Stage:
Step 1) Imagine a Producer of Shoe. He buys raw materials like leather, cloth, thread etc.,
worth Re 1000. The Re 1000 includes a tax of Re 100. He manufactures a pair shoe using
these raw materials.
Step 2) The manufacturer by converting raw material into a finished good (Shoe) has added
value to the product. The raw leather is being converted into the wearable shoe.
Step 3) Let us assume that the value added by the manufacturer is Re 300 (After conversion
the shoe is sold in the market at Re 1300). The gross value added of the shoe will be now Re
1300 (1000+300).
Step 4) Prior to GST, assuming an excise duty of 10%, the tax that the manufacturer has paid
would be Re 130 (10/100*1300).
But under GST, the manufacturer could set off Re 130 as input credit as the tax already paid
by him on inputs Re 100(SEE Step 1)
The effective tax paid by the manufacturer under GST regime is thus, Re 30 (130-100) only.
The Wholesale Stage:
Step 1) The Wholesaler purchases the shoe from the manufacturer at Re 1300. The
Wholesaler adds value to the shoe (his profit margin) of Re 200. The gross value of the shoe
has now become Re 1500 (1300+200).
Step 2) Assuming a tax of 10% on purchase of shoe, the tax that the wholesaler has paid prior
to GST regime would be Re 150 (10/100*1500).
But under GST, the wholesaler also could set off Re 150 as input credit as the tax already
paid on the purchase of shoe from the manufacturer Re 130.
Thus, the effective GST paid by the Wholesaler under GST regime is Re 20(150-130) only.
The Retail Stage
Step 1) The Retailer buys the shoe from the wholesaler at Re 1500. The Retailer adds value
to the shoe (his profit margin) of Re 500. The gross value of the shoe has now become Re
2000 (1500+500).
Step 2) Assuming a tax of 10% on the sale of the shoe, the tax that the retailer has paid prior
to GST regime would be Re 200 (10/100*2000).

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But under GST, the retailer also could set off Re 200 as input credit as the tax already paid by
him on the previous stage Re 150.
Thus, the effective GST paid by the retailer under GST regime is Re 50 (200-150) only.
Step 3) Thus, the total GST on the entire value chain from the raw material/input
suppliers (who can claim no tax credit since they haven’t purchased anything
themselves) through the manufacturer, wholesaler and retailer is, Rs 100+30+20+50=
200 only.
Pre and Post GST a comparison
Pre-GST Scenario Post GST Scenario
Input Stage Rs 1000 (Initial Price) including 10% Rs 1000 (Initial Price) including
tax 10% tax
Manufacturing Rs 1300 (value added) at tax 0f 10%, Rs 1300 (value added) at tax 0f
Stage tax=130, Final price including tax 10%, tax=130, Final price
(1300+130) =1430 including tax under GST
(1300+30) =1330
Wholesale Rs 1630 (1430+200) after value Rs 1500 after value added.

Stage added.
Tax at 10%, tax=150.
Final price including GST
Final price including tax 1630+163= 1500+20= 1520.
1793
Retail Stage Rs 1793+500) =2293, after value Rs 2000 after value added.
added.
Tax at 10%, tax= 229.3
Final price including GST
Final Price including tax
2000+50=2050.
2293+229.3= 2522.3
The Difference Total Tax= 100+130+163+229.3= Total Tax

622.3
100+30+20+50= 200
Final Price Rs 2522.3 Rs 2050

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Taxes to be subsumed under GST
Central Taxes State Taxes
Central Excise duty State VAT
Service Tax Central Sales Tax
Duties of Excise (Medicinal and Toilet Purchase Tax

Preparations)
Additional Duties of Excise (Goods of Special Luxury Tax

Importance)
Additional Duties of Excise (Textile) Octroy Tax
Counter Vailing Duties Entertainment Tax
Additional duty on Customs Taxes on advertisement, Lottery, Betting,

Gambling
The Three Tier Structure of GST
The Parliament and the state legislatures will have the power to levy GST. There will be
complete separation of power between Centre and State.
The centre will have the power to levy GST when it comes to interstate trade and exports,
imports. The sharing of IGST between centre and state will be based on the views of GST
Council.

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Suppose a trader in Maharashtra sells goods to another trader in Maharashtra itself. In this
case, the trade is of intrastate in nature. If the applicable GST rate is 18%, then 9% will go to
the centre as CGST, and 9% will go to the Maharashtra as SGST.
Now, suppose the same trader in Maharashtra sells goods to a trader in Tamil Nadu. In this
case, the trade is off interstate nature. If the applicable GST rate is 18%, then the entire 18%
GST will be charged as IGST.
The GST Council
The Council will have the representation of both Centre and State.
 The council will be headed by Union Finance Minister.
 The Minister of State for Revenue (Central Government) will be a member.
 The Minister of Finance from each State or Minister nominated by the States will be
its member.
 The decision will be made by the majority of 3/4th members.
 The Centre government will have a 1/3rd voting share in the council.
 The State government will have a 2/3rd voting share in the council.
Advantages of GST

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Limitation of GST

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Tax Reforms in India

The Summary of India’s Tax Reforms
Income Tax In 1973-74, there were 11 income tax slabs, ranging from 10 per cent to
85 per cent.
With a surcharge of additional 15%, the implication of which is high

earning individuals paying an effective tax of 97% of their incomes.
The Wealth tax further makes a hole in their pockets. As a result, people
start evading taxes.
The tax reforms of 1986-87 reduced the tax slabs from 8 to 4 and
brought the marginal tax rate down from 60 to 50 percent.
The major tax reforms took place in 1991-92 and 1996-97, lowering the
marginal tax rate to 35 percent.
The reforms further eliminated the Wealth tax.
The Kelkar Task force recommendations for simplification of tax

structure were accepted with certain modifications by Government in
2005-06.
Corporation The rate of taxation varied highly for different types of Corporations until
Tax Two decades ago.
Tax effective rate of taxation for corporates was 45 to 65 percent.
The tax reforms of 1991-92 and 1996-97 reduced the marginal tax rates to
40% and further to 35% respectively.
The subsequent budgets have further reduced the marginal tax rates, and the
tax rate currently stands at 30%, with a plan commitment to reduce it to 25%
in the coming years.
Custom Duty India followed an import substitution model after independence for its
growth. The result of which is the need for saving foreign exchange reserve.
As a result, India started levying high customs duties on its imports.
Throughout the 1970s and 1980s, India had a very complex and regressive
custom duty structure.
India also maintains a huge negative list of imports along with quantitative
restrictions.
Things started to change post-1991 Crisis, and with liberalization and

opening up of the Indian economy, the peak rates of customs duty were

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slashed from 300% to 30% in the successive budgets.
The peak rate was further lowered after Setting up of the WTO and reduced
to 25%, 20% and 12.5% in 2003-04, 2005-06 and 2006-07 respectively.
The lower bound of current average customs duty is 10%.
Excise Duty India’s excise duty structure dis-incentivizes the manufacturers. The Excise
duty had a cascading effect (tax on tax) as the manufacturer gets no input
credit (Tax already paid by him on the previous round of purchase). As a
result, both production and manufacturing suffered heavily.
To revamp India’s manufacturing, GOI decided to make fundamental

changes in Excise duty structure.
As a first step, India introduced the MODVAT in 1986, which was further
simplified and renamed as CENVAT in the year 2000.
The CENVAT contained the provisions of input credit, if a manufacturer

purchased an input for which duty has been paid, he could avail back the
duty already paid by him as input credit.
Sales The indirect taxation enquiry committee was constituted in 1976 for
Tax/VAT suggesting reforms in India’s indirect tax structure.
The committee recommended the imposition of ad valorem type of tax due

to their high-income elasticity. The committee further recommended that
excise duty and sales tax should be replaced by a single commodity tax or
VAT.
The empowered committee of state finance ministers on June 2004, arrived

at the broad consensus to introduce VAT from April 2005.
As a result, the sales tax was replaced by VAT.
Service Tax A key drawback of India’s tax system was that it was discriminatory towards
Goods.
In India, except for a few services assigned to states such as entertainment,

electricity no other service is assigned either to the centre of the states.
The discrimination between goods and services when it comes to taxation

violated the concept of neutrality of taxation. This is especially so when the
services are more income elastic and consider to be a progressive form of
taxation.
To remove the biased ness towards services, the GOI introduced the service
tax in 1994-95 initially on three services- telephone services, insurance and

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share broking.
Since 1994-95, every year the service net has been widened.
The government has over the years increased the service tax from 10% in
2012-13 to 15% in 2017-18.
The Tax reforms committee of 1991, headed by Raja J Chelliah and

Committee on Service taxation headed by M Govind Rao are all in favour of
imposing the Service tax.
The same is also recommended by Vijay Kelkar committee on direct and

indirect taxes.

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Concept Related to Taxation: Tax Incidence, Tax Evasion, Laffer

curve, CESS and Surcharge
Tax Incidence
The key to imposing the tax is who bears its burden. If the person on whom the tax is
imposed has the flexibility to transfer it on to the other person, then we say tax incidence has
shifted. The shifting of tax form one person to the other is known as tax incidence.
All indirect tax comes under this category. For all direct tax, the incidence of tax and burden
lies with the same person.
The incidence of tax mainly depends on its elasticity. Elasticity is nothing but the
responsiveness. Example: If you are walking on the road and suddenly a car comes towards
you, you respond quickly to get out of the way. This is your responsiveness towards the speed
of the car. The faster you get out the way, the higher is your responsiveness. The same
concept is applied to income, demand and taxes. If due to a change in prices, the demand
responds at a much faster rate, then we say demand is highly elastic vis-à-vis prices.
Consumer Demand Producer Burden/Incidence
Elastic Inelastic Consumer
Inelastic Elastic Producer
Tax Avoidance
It refers to minimising the tax liabilities using an available source of exemptions and tax
laws. It is by means of taking advantage of shortcomings of tax structure. It usually happens
at the tax planning stage.
Tax Evasion
It refers to reducing the tax liabilities using illegal measures. Tax evasion is a clear case of
forgery of accounts as it uses measures which are unforbidden in law.
Cascading Effect in Taxation
A Cascading tax is one, which is not just on final product value but also on the raw materials
used as input. The tax is levied at every stage of production and distribution. It is a tax on tax.
For example, resin, rubber and carbon black are necessary for manufacturing tyres. All the
three inputs paid tax and the final products namely the tyres also paid tax. So, these three
inputs are taxed twice. Then again, the tyre is used in a car, which also is taxed. These three
inputs are now taxed thrice. So, the tax element on these inputs goes on increasing with every
production and distribution chain. The cascading effect of tax makes the tax rate much higher
than the original rate.

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Laffer curve
Laffer curve is named after noted economist Arthur Laffer. Laffer curve shows the
relationship between Government tax revenue and tax rates.
The curve is inversely U Shape, representing as the tax rate increases, the government
revenue also increases up to an optimum level. Post which, if the government tries to increase
taxes, the government revenue will start falling. Thus, a government must maintain an
optimum balance between tax rate and revenue.
Tax Buoyancy
Tax buoyancy is a measure of the responsiveness of the tax receipts with respect to GDP.
A tax is considered buoyant when revenue increases by more than one percent if the GDP has
increased by 1 percent.
Fiscal drag
Fiscal drag is a concept where inflation and earnings growth may push more tax payers into
higher tax brackets. Therefore, fiscal drag has the effect of raising government tax revenue
without explicitly raising tax rates.
An example of this would be if a person earns Rs 10 000 per year, and has to pay 20% tax on
earnings above Rs 5000 for year one. he would then pay (10 000 – 5000) *0.2, which equals
1000 or 10% of her income.
If the person pay goes up by 10% to R11000 to compensate for inflation, and the government
increases the tax threshold by 2% in year two to 5 200, he would pay (11 000 – 5200)
multiplied by 0.2 which equals 1160 or 10.54% of her income in taxes.
The proportion of Rahul’s income in taxes has increased. This is fiscal drag or bracket creep.
This illustrates that when there is inflation, taxes rise unless the tax rates or tax accordingly.
Cess Vs Surcharge
Cess Surcharge
A cess is imposed over and above the tax for a
A surcharge is a charge levied on any tax.
specific predetermined purpose. It is an additional charge on tax.
For example a cess on financing primary The main surcharge levied on income and
education as education cess or a cess for the
corporation taxes beyond a certain
cleaning and sanitation as Swach Bharat Cess.
threshold.
A cess is levied as an addition to the proposed
A sur charge of 10% in addition to the
taxes. Like a 3% education cess on Income tax.
income tax of 30% for high net worth
individuals earning more than 50 Lakhs.
The revenue from cess is not kept under The revenue from the sur charge is kept
Consolidated Fund of India. under Consolidated Fund of India.
Cess is not to be shared with States. Sur Charge is also not to be shared with
states.

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Chapter 10-External sector

India’s Balance of Payments: Current Account, Capital Account,
Goods and Services Account
India’s Balance of Payment’s
Balance of Payment Account
Bop is the oldest and the most important statistical statement for any country. In a nutshell
BOP of a country is “a systematic record of all economic transactions between the residents
of one country with the residents of the other country in a financial year”.
Economic Transactions include all the foreign receipts and payments made by a country
during a given financial year.
The Foreign receipts include all the earnings and borrowings by a country from the other
countries.
Source of Earnings (Inflows) Source of Borrowings (Inflows)
 Merchandise Exports  Foreign Direct Investments
 Services Exports  Foreign Portfolio Investments
 Interest, Profits, Dividends and Royalties  Government Loans from

received from foreign countries. Foreign Governments.
 Gifts, Grants and Aids received from  Short Term deposits by NRIs
Foreign Countries. and Foreigners.
 Private Transfers such as Remittances.
The accumulation of foreign receipts (net of payments) over the years becomes Foreign
Exchange Reserves of a Country.
The Payments include all the spending and lending by a country from the countries of the rest
of the World.
Spending’s (Outflows) Lending’s (Outflows)
 Merchandise Imports  Outward Foreign Direct Investment

by Indian Firms
 Services Imports
 Outward Foreign Portfolio
 Interests, Profits, Dividends and Investment by Indian Citizens
Royalties paid to foreign countries

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 Gifts, Grants and Aids given to foreign  Indian Governments

countries Lending’s/Loans to Foreign
Governments
 Remittances paid.
 Short Term Deposits by country
residents into foreign countries.
All the foreign receipts are financial inflows, and all the foreign payments are financial
outflows in a given year.
The Balance of Payments Accounts of any Country includes Six Major accounts which
are as follows:
 Goods Account
 Services Account
 Unilateral Transfer Account
 Long-term Capital Account
 Short-term Capital Account
 International Liquidity Account.
The six major accounts are clubbed together into two most important accounts.

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Goods Account versus Services Account
Goods Account Services Account
 It includes the value of  The services account records all the services
Merchandise Exports and exported and imported by a country in a year.
Merchandise Imports
 Unlike goods which are tangible or visible,
 They are called ‘Visible services are intangible. Hence are called
items’ in the BOP account. ‘invisible items in the BOP.
 If Export of Goods= Import  The services transactions include:

of Goods. We call it
 Transportation, Banking and Insurance.
‘Goods Balance’.
 Tourism, Travel and Tourist purchases of
 Positive Goods Balance=
Export of Goods> Import domestic goods and services.
of Goods.  Foreign Students studying in Host countries and
 Negative Goods Balance= Domestic Students studying in Foreign.
Export of Goods< Import  Expenses of Diplomatic personnel stationed
of Goods. overseas as well as income from diplomatic
personnel who are stationed in host countries.
 Investment Income: Interests, Profits, Dividends

and Royalties received from foreign countries
and paid out to foreign countries.
Unilateral Transfer Account
 The account includes gifts, grants, remittances received from foreign countries and
paid to foreign countries.
 Unilateral transfers are of two types:
Private Transfer Government Transfer
 Private Transfers are person to  Foreign economic aid and foreign military
person transfers. aid by one country government to another
country government constitute Government
 These are money/funds to Government transfer.
received from or paid to a
citizen of one country to a  Example: The United States Military Aid to
citizen of another country. Pakistan is a Government transfer
constituting a receipt/Credit item in
 Example: An Indiann (Keralite) Pakistan’s BOP (But a payment/debit item
working in UAE remitting Rs

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15000 to his aged parents in from USA’s BOP).

Kerala, India.
Why are they called Unilateral Transfers?
Unilateral receipts and payments are also called ‘Unrequited Transfers’. They are called so
because the flow of transfer is unidirectional or in one direction. There is no liability for an
automatic reverse flow or repayment obligation in other direction since they are not lending’s
and borrowings. These items are simply gifts, and grants exchanged between governments
and people of one country with that of others.
Long Term Capital Account versus Short Term Capital Account
Long Term Capital Account Short Term Capital Account
 It includes the amount of Capital that has moved in or  The Capital that
out of the country in a year. moves in or out of a
country for a period
 The Capital that has moved in or out for a period of of less than one-year
one or year or more is called Long term capital short-term capital
movement. movement.
 The Long-term capital account includes the  Bank deposits and
following: other short-term
 Foreign Direct Investment: Investments done by payments and credit
home country citizens and firms in foreign countries arrangements fall
and by foreigners in the host country. These under this category.
movements are induced by different rate of profits  These short-term
between the home and foreign country. payments are
 Foreign Portfolio Investment: Investments done by sometimes included
home country citizens and firms in stock markets under the term ‘Errors
(shares and securities) or debt markets (Bonds) of and Omissions’ in
Foreign countries and by Foreigners in host countries BOP account.
shares and securities. These movements are induced
by differences in interest rates, returns or dividends
on capital between home and a foreign country.
 Government Loans: Loan given by the home country

government to foreign country government and
foreign country government to home country
government.

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Note for Student Box: Is FDI necessarily good for Host Economies?
When a Japanese MNC invests in India, India receives a capital inflow in the form of long
term capital (FDI). It has a favourable effect on our BOP account. But when the Japanese
MNC in India, starts repatriating profits/ sending profits back to their home countries (Japan),
there will be a capital outflow from India to Japan.
The outflow will be recorded in our Services part of Current account as outflow of Income.
India therefore will experience a temporary surplus in its Capital account. But when MNCs
starts to send out profits in their home countries, India will experience a permanent outflow
from its current account.
The understanding of this treatment effect of FDI is very important, since it is always
assumed that FDI inflow is good for a host country economy.
Note: I will return to the topic in much detail when I discuss Current account deficit part.
International Liquidity Account
International Liquidity Account simply records net changes in Foreign Exchange Reserves.
Following table represents an example of how International liquidity account works.
Case 1) BOP Surplus: When Receipts are Greater than Payments in a BOP Account
Major Accounts Receipts(Credits) Payments(Debits)
A. Goods Account 2000 1000
B. Services Account 1000 500
C. Unilateral Transfers 200 100
D. Long-Term Capital Account 1500 500
E. Errors and Omissions/Short 200 300

Term Capital Account
F. International Liquidity 2500 (G-

Account (A+B+C+D+E+F)
G. Balance of Payments 4900 4900
 Total Receipts are 4900 Million, and Total Payments are 2400 Million.
 There is a BOP Surplus of 2500 Million.
The surplus of 2500 Million will enter into International Liquidity Account as payment item.
The economic logic of 2500 Million entering as the debit item is:
1. The sum represents accumulation of foreign exchange reserves of 2500 Million; or

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2. Purchase of Gold or other currencies by surplus country in order to increase their

Foreign Exchange Reserves; or
3. The surplus country might lend 2500 Million to other countries.
In all the above cases, the amount is spent on either buying gold, other country currencies or
lending. Hence treated as payments.
Case 2) BOP Deficit: When Payments are Greater than Receipts in a BOP Account
Major Accounts Receipts(Credits) Payments(Debits)
A. Goods Account 1000 2000
B. Services Account 500 1000
C. Unilateral Transfers 100 200
D. Long Term Capital Account 500 1500
E. Errors and Omissions/Short 300 200

Term Capital Account
F. International Liquidity 2500 (G-

Account (A+B+C+D+E+F)
G. Balance of Payments 4900 4900
 Total Receipts are 2400 Million, and Total Payments are 4900 Million.
 There is a BOP Deficit of 2500 Million.
 The important point to ask is how a country will finance its deficit of 2500 Million?
1. The sum will be spent by drain of past accumulated foreign exchange reserves of
2500 Million; or
2. Sale of Gold or other currencies held as foreign exchange reserves by deficit country;
or
3. The deficit country might borrow 2500 Million from other countries.
In all the above cases, the amount is financed by selling gold, other country currencies or
borrowings. Hence treated as receipts. In this case, a deficit country is receiving a payment to
finance its deficit, Hence receipts. Whereas, in a surplus case, a surplus country is siphoning
off its surplus amount to invest in Gold or Other currencies, Hence payments.

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India’s BOP Performance: Balance of Payment versus Balance of Trade,

Current Account versus Capital Account
BOP on Current Account versus BOP on Capital Account
Current Account Capital Account
BOP on current account includes the sum of BOP on capital account includes the sum of
three balances. two balances
 Goods Balance  Long Term Capital Account
 Services Balance  Short Term Capital Account
 Unilateral Transfers
BOP on Current Account is also called Net BOP on capital account includes all inward
Foreign Investment because it represents the and outward moving capital and
contribution of foreign trade to Gross national investments both Long term and short
product. term).
 Foreign Direct Investment
 Foreign Portfolio Investment
 Government Investments/loans
BOP on current account covers only earnings It only includes borrowings and lending by
and spending. It totally excludes any a country.
borrowings and lending.
Balance of Payment versus Balance of Trade
Balance of Payment Balance of Trade
It is a Broad Concept It is a narrower Concept.
It includes the sum of both Capital and Current It is defined as the difference between the
account put together. It includes all international value of exports of goods and services
transactions between a host/domestic country and and value of imports of goods and
Rest of the World. services between countries.
It includes items of goods account, services BOT= Value of Exports – Value of

account, unilateral transfers and capital accounts. Imports.
 Trade Balance>> Value of

Exports = Value of Imports.
 Trade Surplus>> Value of

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Exports is greater than Value of

Imports.
 Trade Deficit>> Value of Exports

is smaller than Value of Imports.
 Can an overall BOP surplus is a good A positive trade balance (Surplus) is

sign? And BOP deficit is a bad sign? always better and good for a country
since it represents an increase in national
 The above is not always true, and we have income.
to dig deeper to understand the nature of
surplus and deficits in overall BOP.
 If the overall BOP deficit is caused by

Current account deficits (Excess of
imports over exports), as opposed to
capital account deficits, then BOP deficits
are bad for countries.
 If the overall BOP surplus is caused by

current account surplus (Excess of
exports over imports), as opposed to
capital account surplus, then the surplus
may be good for economies.
Note for Students
There is a difference between the terminologies of Balance of Trade and Goods Balance.
Goods or Merchandise Balance is defined as difference between the value of merchandise or
goods exports and the value of merchandise or goods imports.
The Balance of Trade on the other hand includes both goods balance (Visible) and services
(Invisibles) balance.
Should a negative trade balance (excess of imports over exports) be treated as undesirable for
an economy?
The answer is No, because, a developing country needs to import vast quantities of capital
goods and technologies to build a strong industrial base. Developing countries hardly possess
resources needed for industrialisation. They have to import all these resources and in the
course of doing so, they have to experience a negative trade balance. Therefore, a negative
trade balance cannot be described as undesirable in such a situation. Moreover, once the
industrial base is setup, a country can reverse its negative trade balance into a positive trade
balance by developing export oriented industries.

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BOP Account of a Country
The items 1 to 7 show the total receipts from all sources. These receipts amount to Rs. 1000
Crores.
The items 1(a) to 7(a) Show the total payments on all accounts. These payments amount to
Rs. 990 Crores. When item 8 included, the total payment is Rs. 1000 Crores, hence the total
credit is equal to the total debit.
Thus, the current account and capital account Balance each other. Thus, the surplus in the
current account is equal to the deficit in the capital account. A deficit in the current account is
equal to the surplus in the capital account.
In the above-given table, the balance of current account shows a deficit of Rs. 200 crores but
there is a corresponding surplus of Rs. 200 crores in the balance of the capital account.
Hence the credit and debit sides balance & the balance of payments is in equilibrium.
The balance of trade of a country may not balance. For instance, if exports exceed imports,
there is a surplus and a favourable balance of trade and vice-versa. Only if the value of
exports is equal to the value of imports, the balance of trade is said to be in equilibrium.
But the balance of payments always balances because every transaction must be settled.
Hence total debits must be equal to the total credits.
Current Account Balance: An Evaluation
The very basic point is to understand what a current account deficit or surplus really means
and how it is measured?
 It can be measured as the difference between the value of exports of goods and
services and the value of imports of goods and services.

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 A deficit simply means that a country is importing more goods and services than it is
exporting.
 The current account also includes net incomes such as interests, dividends and
unilateral transfers such as Foreign aids.
 Alternatively, Current Account can also be expressed as the difference between

national savings and national investments.
 A current account deficit reflects a low level of national savings relative to

investments (S<I). Whereas, a Current account surplus reflects a high level of
domestic savings relative to investments (S>I).
 Current Account = Saving – Investment.
Whether CAD is Necessarily Bad for an Economy or Not?
 In theory, a developing country running a CAD is not necessarily a bad thing. A

deficit in current account can increase growth and economic development. Although
recent examples and research show that developing countries that run a deficit may
not grow faster mainly due to less developed financial markets and inefficient use of
foreign capital (Foreign capital used to finance consumptions and interest payments).
 If a current account deficit is financed by borrowing, it is said to be more

unsustainable. This is because borrowing is unsustainable in the long term and
countries will be burdened with high-interest payments. E.g. Russia was unable to pay
its foreign debt back in 1998. Other developing countries have experienced similar
repayment problems Brazil, African countries (3rd World debt) Countries with large
interest payments have little left over to spend on investment.
 A factor behind the Asian crisis of 1997 was that countries had run up large current
account deficits by attracting capital flows (hot money) to finance the deficit. But,
when confidence fell, these hot money flows dried up, leading to a rapid devaluation
and crisis of confidence.
A Case for India’s Current Account Deficit
 A developing country like India will have more investment opportunities due to its
huge domestic market size, but due to its low level of domestic savings, India will not
be able to undertake all such opportunities on its own. Thus, a Current account deficit
is quite natural.
 When India runs a CAD, it is increasingly getting dependent on foreign capital to

finance it. It will lead to building up of liabilities to the rest of the World. Eventually,
these liabilities need to be paid back. Common sense suggests that if India uses its
borrowed foreign funds in unproductive spending’s that yields no long term
productivity gains, then its ability to repay will be affected and will result in

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insolvency or Bankruptcy. This is what exactly happened in India during 1980’s and
1990’s leading to full-fledged Balance of Payment Crisis.
 During 1980’s and 1990’s, India was not able to generate enough surpluses in its
capital and current accounts to repay what it had borrowed leading to BOP crisis in
1991.
 Therefore, whether a country should run Current Account Deficit or not will depends
on its borrowings from Abroad and on how the country uses its borrowings; if the
borrowings/Foreign capital is used efficiently and in productive work then it will
generate future revenues and profits that will be greater than the cost of borrowings;
but if the borrowings/foreign capital is used inefficiently, and in unproductive works
then profits will be less than the cost of borrowings. Hence losses.
Therefore, the key points to remember regarding CAD is as follows:
1. If the deficit reflects the excess of imports over exports for a very long time, it may
indicate problems and loss of domestic firms’ competitiveness.
2. The deficit also reflects the excess of investment over savings, which could reflect a
highly productive and growing economy. However, if the deficit is due to low savings
rather than high investments, it could be due to unproductive consumption or badly
manage government finances (Excess subsidies, high government expenditures,
public debt etc.)
3. If the foreign capital supporting investment is used productively to generate more

output, jobs and exports, then CAD is not at all bad.
4. If the foreign capital supporting investment is used unproductively to pay for earlier
debt obligations or for consumption purposes, then CAD is bad for an economy.
Evaluation of CAD in India
Period one: 1956 to 1976
The period comprised the second, third, fourth and initial years of fifth five-year plans. The
period saw heavy deficits in the current account. The main reasons for high deficits were
three wars with China (1962) and Pakistan (1965 and 1971), severe droughts and food crisis
of 1965-66 and first oil price shock of 1973.
Period Two: 1976 to 1979
The period is considered as a golden period for India’s Current Account. The comfortable
position was due to increase in private remittances (people working abroad and sending
money to their families in home countries) from Gulf countries. The second reason was India
witnessing a very strong growth in exports and a reduction in oil imports bill mainly due to
fall in oil prices. Efforts were made towards export promotion instead of import substitution.

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Export subsidies were increased from 20% in 1979-80 to 25% in 1987-88 as a proportion of
exports.
Period Three: 1980 to 1991
The period covered roughly the sixth and seventh five-year plan and was marked by severe
balance of payments difficulties. The earnings from private remittances started to fall during
the seventh five-year plan. The gulf crisis of 1990-91 further worsened the current account
problem.
Period Four: Situation since 1991
The situation since 1991 has been distinctly different from the situation that prevailed earlier.
The current account deficit started to improve after 1993. The export performance of Indian
industries improves considerably after 1993. The most significant years in India when it
comes to current account were; 2001-02, 2002-03 and 2003-04. In all these years, the current
account saw a surplus. It is the first time since independence that India witnessed a surplus in
its current account. The period also saw strong capital inflows due to strong macroeconomic
variables.
The reasons for satisfactory Balance of Payments situation were as follows:
1. High Earnings from invisible (Private remittances from abroad and software exports).
Earnings from invisible exceeded the deficits on trade account. India was the largest
recipient of private remittances (70 Billion US $) in the World in 2012.
2. Rise in external commercial borrowings. In addition to external commercial

borrowings, the period also witnessed an increase in Non-Resident deposits.
3. Role of Foreign Investments. The liberalized policy was put into place. FDI can
happen in more markets, ownership structures.
Automatic routes were provided in many sectors where the investor merely has to notify RBI
30 days in advance from bringing the funds. Dividend balancing requirements have been
removed.
Role of FIPB: In normal cases, it has to process in 6 months. It can even meet the investor in
person to expedite the process. It is empowered to approve 100% FDI in cases of high
technology transfers.
As per 2004-05, apart from a negative list, the automatic route within prescribed limits is to
be followed by others. Procedures for FDI were also simplified and included things such as
conversion of CBs and preference shares into equity.

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Source: World Bank, World Development Indicators

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FDI and FPI in India, External Commercial Borrowings, Foreign

Exchange Reserves in India
Note4Students: External Commercial Borrowings
 An external commercial borrowing (ECB) is an instrument used in India to facilitate

the access to foreign money by Indian corporations and PSUs (public sector
undertakings). ECBs include commercial banks loans, buyers’ credit, suppliers’
credit, securitised instruments such as floating rate notes and fixed rate bonds etc.,
credit from official export credit agencies and commercial borrowings from the
private sector window of multilateral financial institutions such as International
Finance Corporation (Washington), ADB, AFIC, CDC, etc. ECBs cannot be used for
investment in Stock Market or speculation in real estate.
 The DEA (Department of Economic Affairs), Ministry of Finance, Government of

India along with Reserve Bank of India, monitors and regulates ECB guidelines and
policies. For infrastructure and Greenfield projects, funding up to 50% (through ECB)
is allowed. In telecom sector too, up to 50% funding through ECBs is allowed.
Recently Government of India allowed borrowings in Chinese currency yuan.
Corporate sectors can mobilize USD 750 million via automatic route, whereas service
sectors and NGO’s for microfinance can mobilize USD 200 million and 10 million
respectively.
 Borrowers can use 25 per cent of the ECB to repay rupee debt and the remaining 75
per cent should be used for new projects. A borrower cannot refinance its entire
existing rupee loan through ECB. The money raised through ECB is cheaper given
near-zero interest rates in the US and Europe, Indian companies can repay part of
their existing expensive loans from that.
Exports and Imports Performance of India

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The data table highlights the following facts about India’s Exports since 1990’s:
 There has been a consistent growth in exports as a percentage of GDP since 1990. The
exports witnessed highest growth rate during 2000 to 2008.
 The decline from 2008 onwards is mainly due to Global Financial crisis that hit the
World in 2008.
 Since 2009, exports recovered and reached a peak in the year 2013.
 Following 2013, exports as a percentage of GDP declined mainly due to a slow

recovery in India’s Key European markets.
The data table highlights the following facts about India’s imports since 1990’s:
 There has been a consistent rise in imports as a percentage of GDP since 1990. The
imports witnessed highest growth rate during 2000 to 2008.
 The decline from 2009 onwards is mainly due to Global Financial crisis that hit the
World in 2008 which had resulted in fall of commodity prices (Metals, Minerals,
Agricultural Commodities) in the World markets.
 Since 2009, imports started to rise and reached its peak in the year 2012.
 Following 2012, imports as a percentage of GDP declined mainly due to fall in crude
oil prices and slow recovery in the prices of key commodities.

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 One of the important impacts of favourable exports and managed Current account is
reflected in India’s increasing Foreign exchange reserves.
 Foreign exchange reserves after falling to an all-time low of less than USD 5 Billion
recovered and increased to USD 41 Billion in the year 2000. The increase in Foreign
exchange reserves is due to favourable exports earnings and foreign investments.
They both are the by-product of India’s opened up economy.
 The Foreign exchange reserves have risen steadily thereafter. The reserves were USD
250 Billion in the year 2008, USD 300 Billion in the year 2010 and more than USD
360 Billion in the year 2016.
What Caused the fall in India’s Exports in Recent Years
India’s goods exports had remained stagnant over the years. After recovering from Global
Financial Crisis of 2008, India’s exports had reached a peak of USD 310 billion in the year
2011.

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The successive years have shown stagnant exports till the year 2014. Post-2014, India’s
goods exports have collapsed sharply and reached at USD 267 billion and USD 264 billion in
the year 2015 and 2016 respectively.
The reasons for the collapse of India’s exports are as follows:
1. The Global economic situation has remained difficult and the Economies of the
Developed World especially US, Europe and Japan are recovering very slow from the
Global Financial Crisis of 2008. Due to their slow recovery, their capacity to imports
has remained limited, as a result, India losing its important export destinations.
2. The price of crude oil has collapsed since 2014. Due to fall in crude prices, the
economies of Arab nations and oil exporting countries have suffered a lot and are
growing at a dismal rate. The low growth rate had resulted in a slowdown in their
imports as well. The countries of Arab nations like UAE, Saudi Arabia are key trading
partners of India. Their slowdown has led to decline in India’s exports to these
regions.
3. The most important reason for India’s declining exports lies in domestic factors. The
main culprit of which above all is India’s exchange rate. The exchange rate is the
price of one country currency in terms of another country currency. In the Indian
context, it simply determines ‘The amount of dollar or euro or any currency that can
be bought using Indian Rupee’.
4. The Indian Rupee has been overvalued for quite some time. The overvalued rupee
simply means that rupee is very expensive for the other nations to buy. Consider the
example now.
1. The other underlying domestic factors that resulted in slow export performance are
infrastructure bottlenecks. The health of India’s Roads, Highways, Ports and power

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sector remains poor and dismal. They all contribute in making export costly and
uncompetitive. The poor quality of infrastructure simply increases the cost of
transporting goods from factories to main destinations. The increase in cost results to
increase in the prices, thereby making goods expensive and uncompetitive.
Foreign Direct Investment and Foreign Portfolio Investment in India
Foreign Direct Investment Foreign Portfolio Investment
FDI is an investment made by a FPI is an investment made by a company or an

company or individual in the business individual in the stock markets or debt markets of
of another country in the form of either another country. FPI investors merely purchase
establishing a new business or equities/shares/bonds/debentures of foreign based
acquiring the existing business. countries.
FDIs are mainly made in Open FPIs are mainly made with the objective of making
Economies as opposed to tightly quick profits by buying and selling shares, bonds
controlled closed economies. and debentures.
FDIs are made for a longer period as FPIs are made for shorter periods as the foreign
the foreign investor’s controls and own investor do not own the companies and only invest
the companies in which they have in shares of the existing companies.
invested.
FDIs are much Stable. FPIs are highly volatile.
As per Organisation of Economic As per Organisation of Economic Cooperation and

Cooperation and Development Development (OECD), investment of less than 10
(OECD), the threshold for an percent in foreign companies is treated as FPIs. All
investment to be considered as FDI is FPI taken together cannot acquire more than 24 per
10 percent or more ownership stake. cent of the paid-up capital of an Indian Company.
FDIs are normally categorised as being FPI investor includes Foreign Institutional
Horizontal or Vertical in nature. Investors (FIIs), Foreign Qualified Investors
(FQIs).
 A Horizontal investment refers
to the foreign firms establishing  Institutional investors are big institutions
the same type of Business like Asset Management Companies, Mutual
operations in the host country as Funds, and Insurance Houses etc. RBI has
it operates in his home country. mandated such big institutions to establish
to make investments in India’s security
Example; Apple opening up Apple markets.
manufacturing unit in India.
 FQIs are individual investors or
 A Vertical investment refers to
associations residing in foreign countries.
the foreign firms establishing FQIs are small individual inve
investors who
different but related business in

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host countries. Example: invest in foreign countries securities.

Hyundai Motors acquiring or
establishing a company in India
that supplies car spare parts/raw
materials required for
manufacturing Cars by
Hyundai.
FDI Policy in India and Sectoral Limits
FDI in India is allowed under two major routes; Automatic Route (Without the approval of
Government or RBI) and Government Route (requiring Government approval).
FDI in Sectors where Government approval is Cap/Limit Government

Required Approval
Mining and mineral separation of titanium-bearing 100% upto 100%

minerals and ores
Food Product Retail Trading 100% upto 100%
Defense 100% beyond 49%
Publishing Printing of Scientific and Technical Magazines 100% upto 100%
Publication of Foreign Editions Newspaper 100% upto 100%
Print Media- Publishing of newspaper 26% upto 26%
Print Media – Publication of Indian editions of foreign 26% upto 26%

magazines dealing with news and current affairs
Air Transport Service – Scheduled, and Regional Air 100% beyond 49%
Transport Service
Investment by Foreign Airlines 49% upto 49%
Satellites- establishment and operation 100% upto 100%
Telecom Services 100% beyond 49%
Trading SBRT 100% beyond 49%
Pharma- Brownfield 100% beyond 74%
Banking Private Sector 74% beyond 49%
Banking Public Sector 20% upto 20%

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Private Security Agencies 74% beyond 49%
FM Radio Broad Casting 49% upto 49%
Trading MBRT 51% upto 51%
Source: Ministry of Commerce
FDI POLICY Limits under Automatic Routes with Conditions Cap/Limits
Agriculture 100%
Plantation Sectors 100%
Mining of Metals and Non-Metal Ores 100%
Mining Coal and Lignites 100%
Manufacturing 100%
Food Retail Trading 100%
Broadcasting Carriage Services ( Teleports, DTH, Cable Networks, Mobile TV, 100%
HITS)
Broadcasting Content Service – Up-linking of Non-‘News & Current Affairs’ 100%

TV Channels/ Downlinking of TV Channels
Airport Greenfield 100%
Airport Brownfield 100%
Air Transport Service – Non-Scheduled 100%
Air Transport Service – Helicopter Services/ Seaplane Services 100%
Ground Handling Services 100%
Maintenance and Repair organizations; flying training institutes; and technical 100%
training institutions
Construction Development 100%
Industrial Parks 100%
Trading Wholesale 100%
Trading B2B E-commerce 100%
Duty Free Shops 100%

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Railways Infrastructure 100%
Credit Information Companies 100%
White Label ATMS 100%
Non-Banking Finance Corporations 100%
Pharma Greenfield 100%
Petroleum & Natural Gas – Exploration activities of oil and natural gas fields 100%
Petroleum refining by PSUs 49%
Infrastructure Company in the Securities Market 49%
Commodity Exchanges 49%
Insurance 49%
Pension 49%
Power Exchanges 49%
Source: Ministry of Commerce
How Beneficial is FDI for Developing Countries like India?
FDI has proved to be a stable and important source of capital for the developing countries
like India. FDI flows were quite consistent and stable in East Asian Countries even during the
Asian Financial Crisis of 1997-98. In sharp contrast to FDI, the other forms of foreign
investment like Portfolio Investments, equity flows and debt flows were subject to huge
reversals during the same period. The consistency of FDI was also evident during the Latin
American Crisis of 1980s.
1. The stability of FDI even during the crisis period led many developing countries to
favour FDI over other forms of Short-term inflows. Developing countries favour FDI
because it allows them (capital deficit countries) to access scarce capital and invest
them in the domestic economy, which can lead to the generation of output and
employment.
2. The Foreign Countries Investors are willing to invest in Developing countries because
it allows them to seek highest returns. It also reduces the risk faced by the owner of
capital by allowing them to diversify their investment. Example: Imagine the havoc
that Global Financial Crisis could have created if all the US and European money was
invested only in Developed Countries. They must have lost all their money, had they
not invested in developing countries, which were not affected so badly from Global
Crisis. FDI thus provides a cushion to Foreign Investors.

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3. The easy movement of capital flows in order to seek high returns also contributes to
Developing countries adopting a very high and competitive corporate governance
standards, efficient legal institutions and integrated financial markets. These high
standards and integrated markets also help the domestic investors and firms as their
money is also secure due to the efficient functioning of legal institutions.
4. The pressure to attract FDI also improves the functioning of Governments in

Developing Countries. The Governments in Developing Countries restricts
themselves from pursuing bad economic policies due to the fear of reversal of Foreign
Capital.
5. The gains to the Developing Countries from FDI can also take the form of:
 FDI allows transfer of technologies that cannot be achieved through other forms of
short-term financial investments like FPIs.
 FDI recipient’s countries also gain in the form of increased employment opportunities
due to the investment made by Foreign Firms.
 The Governments of the host countries also stands to gain due to increase in their
corporate tax revenues.
Note for Students
The short-term capital or hot money flows poses many risks in developing countries as
they are driven mainly by speculative actions based on interest rate or exchange rate
differentials. There movements are only for short-term and leaves the host country as
the first signs of trouble appears, thus can damage the host economy, thus they are
considered as ‘Bad Cholesterol’.
In contrast FDI is considered as “Good Cholesterol” because it offers a lot of benefits as

mentioned above. FDI cannot leave so easily at the first time of trouble; instead it
provides a cushion to absorb the shock.
Reasons for Caution in Dealing with FDI
Despite the above-mentioned arguments developing countries should be a little cautious

about taking a too uncritical attitude towards FDI.
1. A very high level of FDI in total capital inflows may indicate a sign of weakness for
the host country.
2. It is found that FDI tends to flow in those developing countries which are a lot riskier
and lacks proper legal institutions. What can explain these paradoxical findings? One
reason could be that FDI is more likely to take place in countries with inefficient
markets as foreign investors can operate more aggressively and directly extracting
much more than what they invest. Example: What East India Company has done to

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India or The US exploitation of Latin America in 20th Century or What Chinese Firms
are currently doing in African Nations.
3. FDI not only leads to transfer of ownership from domestic to foreign residents but
also a mechanism that makes foreign investor to take control of host country firms
and their management.
4. The foreign corporations take over the control of domestic firm not because they have
some special competence regarding the operation of companies but simply because
they have huge cash that domestic firm’s do not have.
5. FDI allows foreign investors to gain crucial inside information about firms they
control. This gives them an information advantage over domestic investors who are
investing in such firms.
6. FDI tends to come only in those sectors where returns are high and are beneficial to
foreign firms. FDIs have a long tendency to avoid crucial sectors of developing
countries like Primary Health and Primary Education.
7. FDI tends to make domestic firms indebted. The rising debt leads to rising interest
burden and reparations of money from domestic firms to parent firms.
8. Thus, developing countries should follow caution while accepting FDI and should
give much more importance on improving the domestic environment for investment
and functioning of markets.
Indian FDI Recent Trends
Source: Ministry of Commerce and RBI Statistics
 India received $51 billion in foreign direct investment (FDI), the highest-ever FDI
inflow in a fiscal, during April-February FY16. According to data from the DIPP, the
previous highest FDI inflow was in FY12 when the country received $46.55 billion,
which was a 34 percent increase over $34.8 billion it got in FY11 However, India

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recorded its largest-ever percentage increase in FDI when it received $22.8 billion in
FY07, representing a 155 percent increase over the $8.9 billion in FY06.
Sectors witnessing Highest FDI inflow
 Among the sectors, computer hardware and software segment attracted the highest
FDI of $5.30 billion (Rs 36,426.9 crore) during the period
 Followed by services sector ($4.25 billion, or Rs 29,210.25 crores) and trading

business ($2.71 billion, or Rs 18,625.8 crore).
 Automobile industry attracted FDI of $1.78 billion (Rs 12,233.9 crore), while
chemicals sector cornered $1.19 billion (Rs 8,178.87 crore) foreign equity investment
in April-December 2015.
Sources of FDI inflow
 Singapore replaced Mauritius as the top FDI source for India during the period.
 India received $10.98 billion (Rs 75,465.5 crore) overseas inflows from Singapore,
followed by Mauritius ($6.10 billion, or Rs 41,925.3 crore), the US ($3.51 billion or
Rs 24,124.2 crore), the Netherlands ($2.14 billion, or Rs 14,708.22 crore), and Japan
($1.08 billion, or Rs 7,422.8 crore).
Destination of FDI inflow
 A state-wise analysis of FDI inflows by the economic survey shows that Delhi,
Haryana, Maharashtra, Karnataka, Tamil Nadu, Gujarat and Andhra Pradesh together
attracted more than 70% of total FDI inflows to India during the last 15 years.
 States with vast natural resources like Jharkhand, Bihar, Madhya Pradesh,
Chhattisgarh and Odisha have lagged behind.

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Foreign Exchange Rate Determination in India and Types of Exchange

Rate
Foreign Exchange Rate Determination
Foreign Exchange Rate is the amount of domestic currency that must be paid in order to get a
unit of foreign currency. According to Purchasing Power Parity theory, the foreign exchange
rate is determined by the relative purchasing powers of the two currencies.
Example: If a Mac Donald Burger costs $20 in the USA and Re 100 in India, then the
exchange rate between India and the USA will be (100/20=5), 1 $ = 5 Re.
Forces behind Exchange Rate Determination
Foreign Exchange is a price of one country currency in relation to other country currency,
which like the price of any other commodity is determined by the demand and supply factors.
The demand and supply of the foreign exchange rate come from the residents of the
respective countries.
Demand for Foreign Exchange (Foreign Money Supply of Foreign Exchange (Foreign
goes out) Money Comes in)
Foreign Currency is needed to carry out The sources of foreign currency

transactions in foreign countries or for the available to the domestic country are
purchase of foreign goods and services foreigners purchasing our goods and
(IMPORTS). services (Exports).
Foreign currency is needed to invest in foreign Foreigners investing in Indian Stock

country assets/shares/bonds etc. markets, Assets, Bonds etc. (FPIs and
FDIs)
Foreign currency is needed to make transfer Transfer payments. Example: Indian

payments. Example: Indian Parents sending working in the USA, sending money to
Money to his/her son/daughter studying in the his/her old aged parents.
USA.
Indians holding money in overseas Banks Foreigners holding assets in Indian

Banks.
Indians Travelling abroad for Tourism Purpose. Foreigners travelling to India.

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 The DD curve represents the demand for foreign exchange by India. The SS curve
represents the supply of foreign exchange to India.
 The point where both DD and SS curves intersect is the point of equilibrium. At this
point demand for foreign exchange is exactly equal to the supply of foreign exchange.
 At equilibrium point E0, the exchange rate is 1 $ equal to 5 Re.
 In normal day to day functioning of markets, the exchange rate may fluctuate. If at
any point in time, the exchange rate is at E1, then the demand for foreign exchange
falls short of supply of foreign exchange, as a result at this point Indians are
demanding less foreign currency due to which Re will appreciate vis-à-vis foreign
currency. The appreciation mainly occurs due to a favourable balance of payment
situation (Surplus).
 By the same token at point E2, demand for foreign exchange is greater than the supply
of foreign exchange, at this point Indians are demanding excess foreign exchange than
what the foreigners are willing to supply, as a result, at E2 Re will depreciate vis-à-vis
foreign currency. The depreciation mainly occurs due to the unfavourable balance of
payments situation (Deficits).
Types of Exchange Rate Regimes
 Fixed Exchange Rate versus Floating Exchange Rate
Fixed Exchange Rate Floating Exchange Rate
Under this system, there is complete government Under this system, the market is
intervention in the foreign exchange markets. allowed to determine the value of

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exchange rate freely.
The government or central bank determines the The exchange rate is determined by
official exchange rate by linking exchange rate to the the forces of demand and supply.
price of gold or major currencies like US dollar.
If due to any reason, the exchange rate fluctuates, If due to any reason exchange rate
government intervenes and make sure that fluctuates, the government never
equilibrium pre-determined level is maintained. intervenes and allows the market to
function and determine the true value
of exchange rate.
The only merit of fixed exchange rate system is that The only demerit of floating
it assures the stability of exchange rate. It prevents exchange rate system is that exchange
both currency appreciation and depreciation. rate fluctuates a lot on day to day
basis.
The many disadvantages of such a system are: It puts The advantages of such a system are:
a heavy burden on governments to maintain the exchange rate is determined in
exchange rate. This especially happens during the well-functioning foreign exchange
time of deficits, as the governments need to infuse a markets with no government
lot of money to maintain exchange rate. interference.
The foreign investors avoid investing in such The exchange rate reflects the true
countries as they fear to lose their investments value of the domestic currency which
because they believe that exchange rate does not helps in establishing the trust among
reflect the true value of the economy. foreign investor.
A country can easily access funds/

loans from IMF and other
international institutions if the
exchange rate is market determined.
 Managed Floating Exchange rate
Manage Floating exchange rate lies in between of the two extremes of fixed and floating
exchange rate. Under such a system, the exchange is allowed to move freely and determined
by the forces of the market (Demand and Supply). But when a difficult situation arises, the
central banks of the country can intervene to stabilise the exchange rate.
There are mainly three sub categories under managed floating exchange rate:
1. Adjusted Peg System: In this system, a country should try to hold on to a fixed
exchange rate system for as long as it can, i.e. until the country’s foreign exchange
reserves got exhausted. Once the country’s foreign exchange reserves got exhausted,
the country should undergo devaluation of currency and move to another equilibrium
exchange rate.

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2. Crawling Peg System: In this system, a country keeps on adjusting its exchange rate
to new demand and supply conditions. The system requires that instead of devaluing
currency at the time of crisis, a country should follow regular checks at the exchange
rate and when require must undertake small devaluations.
3. Clean Floating: In the clean float system, the exchange rate is determined by market
forces of demand and supply. The exchange rate appreciates or depreciates as per
market forces and with no government intervention. It is identical to floating
exchange rate.
4. Dirty Floating: In the dirty float system, the exchange rate is to a very large extent is
determined by the market forces of demand and supply (so far identical to clean
floating), but occasionally the central banks of the countries intervene in foreign
exchange markets to smoothen or remove excessive fluctuations from the foreign
exchange markets.
Note for Students
The Bretton Woods system of exchange rate which was in operation from 1944 till 1971 was
one of relative fixed exchange rate as opposed to rigid fixed exchange rate. As a matter of
fact, rigid fixed exchange rate as defined above, is never been used in history. Even under the
system of Gold Standard 1870-1941, the exchange was relatively fixed and not rigidly fixed.
Exchange Rate Management in India
Over the last six decades since independence the exchange rate system in India has transited
from fixed exchange rate regime where the Indian Rupee was pegged to the UK Pound to a
basket of currencies during the 1970s and 1980s and eventually to the present form of market
determined exchange rate regime since 1993.
 Par Value System (1974-1971): After Independence Indian followed the ‘Par Value
System’ whereby the rupee’s external par value was fixed with gold and UK pound
sterling. This system was followed up to 1966 when the rupee was devalued by 36
percent.
 Pegged Regime (1971-1992): India pegged its currency to the US dollar (1971-1991)
and to pound (1971-75). Following the breakdown of Breton Woods’s system, the
value of pound collapsed, and India witnessed misalignment of the rupee. To
overcome the pressure of devaluation India pegged its currency to a basket of
currencies. During this period, the exchange rate was officially determined by the RBI
within a nominal band of +/- 5 percent of the weighted average of a basket of
currencies of India’s major trading partners.
 The period since 1991: The transition to market-based exchange rate was in response
to the BOP crisis of 1991. As a first step towards transition, India introduces partial
convertibility of rupee in 1992-93 under LERMS.

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 Liberalised Exchange Rate Management System (LERMS): The LERMS involved

partial convertibility of rupee. Under this system, India followed a dual exchange rate
policy, where 40 percent of the exchange rates were to be converted at the official
exchange rate and the remaining 60 percent were to be converted at the market-based
exchange rate. The exchange rates converted at the official rate were to be used for
essential imports like crude, oil, fertilizers, life savings drugs etc. All other imports
should be financed at the market-based exchange rate.
 Market-Based Exchange rate Regime (1993- till present): The LERMS was a
transitional mechanism to provide stability during the crisis period. Once the stability
is achieved, India transited from LERMS to a full flash market exchange rate system.
As a result, since 1993, exchange rate fluctuations are marker determined. In the 1994
budget, 60:40 ratios were removed, and 100 percent conversion at market-based rate
was allowed for all goods and capital movements.

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Capital and Current Account Convertibility in India

Convertibility in India
“My hope is that we will get to full capital account convertibility in a short number of years,”
said Raghuram. G. Rajan, ex-governor of the Reserve Bank of India (RBI) on 10 April 2015.
The International movement of capital is not always free; countries restrict flows of capital as
and when needed to safeguard their markets from erratic flows of capital. In India, for
example, there are restrictions on the movement of foreign capital and the rupee is not fully
convertible on capital account.
What does Capital Account Convertibility mean?
CAC means the freedom to convert rupee into any foreign currency (Euro, Dollar, Yen, and
Renminbi etc.) and foreign currency back into rupee for capital account transactions. In very
simple terms it means, Indian’s having the freedom to convert their local financial assets into
foreign ones at market determined exchange rate. CAC will lead to a free exchange of
currency at a lower rate and an unrestricted movement of capital.

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How is Capital Account Convertibility different from Current Account Convertibility?
Current Account Convertibility allows free inflows and outflows of foreign currency for all
purpose including resident Indians buying foreign goods and services (imports), Indians
selling foreign goods and services (exports), Indians receiving and sending remittances,
accessing foreign currency for travel, study abroad, medical tourism purpose etc.
On the other hand, Capital Account Convertibility is widely regarded as the hallmark of
developed countries. It is also seen as the major comfort factor for foreign investors since it
allows them to reconvert local currency back into their own currency and move out from
India.
To attract foreign investment, many developing countries went in for CAC in the 1980s, not
realising that free mobility of capital leaves countries open to both sudden and huge inflows
and outflows, both of which can be potentially destabilising. More important, unless you have
the institutions, particularly financial institutions capable of dealing with such huge flows,
countries may not be able to cope as was demonstrated by the East Asian crisis of the late
90s.
Present Situation in India
In India, the Tarapore committee had laid down a three-year road-map, ending 1999-2000,
for CAC. It also cautioned that this time-frame could be speeded up, or delayed, depending
on the success achieved in establishing the pre-conditions primarily fiscal consolidation,
strengthening of the financial system and low rate of inflation. With the exception of the last,
the other two preconditions have not been achieved. The Capital Account Convertibility in
India will depend on how fast the country meets the preconditions put forward by Tarapore
Committee such as fiscal consolidation, inflation control, low level of Non-Performing
Assets, low Current account deficit and strengthen financial markets. Sound policies, robust
regulatory framework promoting a strong and efficient financial sector, and effective systems
and procedures for controlling capital flow greatly enhanced the chances of ensuring that
such flows fostered sustainable growth and did not lead to disruption and crisis.
 Current Account Convertibility: Current account is today fully convertible

(operationalized on August 19, 1994). It means that the full amount of the foreign
exchange required by someone for current purposes will be made available to him at
the official exchange rate and there could be an un-prohibited outflow of foreign
exchange (earlier it was partially convertible). India was obliged to do so as per
Article VIII of the IMF which prohibits any exchange restrictions on current
international transactions (keep in mind that India was under pre-conditions of the
IMF since 1991).
 Capital Account Convertibility: After the recommendations of the S.S. Tarapore

Committee (1997) on Capital Account Convertibility, India has been moving in the
direction of allowing full convertibility in this account, but with required precautions.
India is still a country of partial convertibility (40:60) in the capital account, but

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inside this overall policy, enough reforms have been made, and to certain levels of
foreign exchange requirements, it is an economy allowing full capital account
convertibility. Following steps have been taken in the direction of capital account
convertibility.
1. Indian corporate is allowed full convertibility in the automatic route up to $ 500 million
overseas ventures (investment by Ltd. companies in foreign countries allowed).
2. Indian corporate is allowed to prepay their external commercial borrowings (ECBs) via
automatic route if the loan is above $ 500 million.
3. Individuals are allowed to invest in foreign assets, shares, etc., up to the level of $ 2, 50,000
per annum.
4. Unlimited amount of gold is allowed to be imported (this is equal to allowing full

convertibility in the capital account via current account route, but not feasible for everybody)
which is not allowed now.
The Second Committee on the Capital Account Convertibility (CAC)— again chaired by S.S.
Tarapore— handed over its report in September 2006 on which the RBI/the government is
having consultations.
Pros and cons of Capital account Convertibility
Advantages Disadvantages
Availability of large funds by improved Market determined exchange rates being higher
access to international financial than officially fixed exchange rates can raise
markets. import prices and cause Cost-push inflation.
Reduction in cost of capital. Improper management of CAC can lead to
currency depreciation and affect trade and capital
flows.
The incentive for Indians to acquire and The advantages have been found to be short lived
hold international securities and assets. as per studies, and also International financial
institutions are sceptical about CAC post-2008
crisis.
Greater financial competitiveness. Speculative activity can lead to capital flight from
the country as in case of some South East Asian
economies during 1997-98.
Will help Indian corporate to use Imposing control would become difficult in a
External commercial borrowing route globalized environment once CAC is introduced.
without RBI or Govt approval.
Indian residents can hold and transact
foreign currency denominated deposits
with Indian banks.
A Certain class of financial institutions
and later NBFCs can access global
financial market.
Banks and financial institutions can
trade in Gold globally and issue loans.

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Chapter 11- International Economic Organizations

International Economic Institution’s: The Breton Woods Twins- World
Bank and IMF
International Economic Institution’s
World Bank and Associated Institutions
The World Bank Group (WBG) is a family of five international organisations that make
leveraged loans to developing countries. It is the largest and most famous development bank
in the world and is an observer at the United Nation Development Group.
The World Bank
The International Bank for Reconstruction and Development (IBRD), better known as the
World Bank, was established under the Bretton Woods System along with the International
Monetary Fund.
The role of IMF was to provide the international liquidity in the International Economy
which was hampered due to World War 2. The aim of IMF was to correct Balance of
Payment difficulties.
In the similar vein, the aim of the World Bank was to provide long term development
assistance to and loans in reasonable terms to the nations.
The World Bank or IBRD is a multilateral level inter-governmental Institution. All the
member countries have their shares in the capital stock of the World Bank.

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Key Functions of the World Bank as per Article 1 of the Agreement
Organisation Structure of the World Bank
The World Bank works on a cooperative structure and currently has 189-member countries.
These member countries are represented by a ‘Board of Governor’ are the ultimate policy
makers of the World Bank. The Boards of Governors consist of one Governor and one
Alternate Governor appointed by each member country. The office is usually held by the
country’s minister of finance, governor of its central bank, or a senior official of similar rank.
The governors delegate specific duties to Executive directors, who works at the Bank
premises. The five largest shareholders appoint an executive director, while other member
countries are represented by elected executive directors.
 World Bank Group Current President is Jim Yong Kim who chairs the meetings of the
Boards of Directors and is responsible for overall management of the Bank. The
President is selected by the Board of Executive Directors for a five-year, renewable
term.
 The Executive Directors make up the Board of Directors of the World Bank. They
normally meet at least twice a week to oversee the Bank’s business, including
approval of loans and guarantees, new policies, the administrative budget, country
assistance strategies and borrowing and financial decisions.

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Is World Bank Biased Towards Developed Countries?
 It has been a complaint of many developing countries that the bank provides
developmental loans at discretionary high-interest rates. For example, some of the
loans which India has received in recent years bear an interest of 53.4 per cent
including the commission at 1 per cent which is credited to the Bank’s special
reserves.
 The financial aids given by the Bank accounts for a minuscule part of financial
requirement essential for various development projects in developing countries.
 The bank usually asks for the collateral from the under developed countries which are
difficult to provide by such countries due to their low level of income and
development. The logical question is ‘if the poor and underdeveloped countries have
an asset to provide as collateral, why they would approach institutions like the World
Bank for loans at a concessional rate?
 The working, structure and operations of the World Bank are dominated by the
Western countries led by the USA, who are also one of the highest stakeholders at the
Bank. The bank has often been criticized for not being multilateral in the true sense
and works more like a unilateral institution of the Western countries with the main
aim of providing profits to them.
 With the World Bank, there are concerns about the types of development projects
funded. Many infrastructure projects financed by the World Bank Group have social
and environmental implications for the populations in the affected areas, and the
criticism has centred on the ethical issues of funding such projects. For example,
World Bank-funded construction of hydroelectric dams in various countries has
resulted in the displacement of indigenous peoples of the area.
 The approach adopted by the bank is not suitable for all the countries. The bank
follows ‘One Size Fits All’ strategy while providing development assistance and
policies. Such strategies cannot work effectively in a real-life World since problems
and situations vary country wise, and a common solution to all of them is not possible
and utopian in nature. For example, The problem of Stunting (low height of Children
as per their age) for an Indian child can’t be compared with that of an African child.
The African child will be much longer in height as compared to its Indian counterpart
in same age group. Thus, they both need different types of calories intake as per their
geography.
International Development Assistance
 The International Development Association (IDA) is the part of the World Bank
group that helps the world’s poorest countries. Overseen by 173 shareholder nations,
IDA aims to reduce poverty by providing loans (called “credits”) and grants for
programs thatt boost economic growth, reduce inequalities, and improve people’s
living conditions.

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 IDA complements the World Bank’s original lending arm—the International Bank for
Reconstruction and Development (IBRD). IBRD was established to function as a self-
sustaining business and provides loans and advice to middle-income and credit-
worthy poor countries. IBRD and IDA share the same staff and headquarters and
evaluate projects with the same rigorous standards.
 IDA is one of the largest sources of assistance for the world’s 75 poorest countries, 39
of which are in Africa, and is the single largest source of donor funds for basic social
services in these countries.
 IDA lends money on concessional terms. This means that IDA credits have a zero or
very low-interest charge and repayments are stretched over 25 to 40 years, including a
5- to 10-year grace period. IDA also provides grants to countries at risk of debt
distress.
 In addition to concessional loans and grants, IDA provides significant levels of debt
relief through the Heavily Indebted Poor Countries Initiative and the Multilateral Debt
Relief Initiative.
 IDA is a multi-issue institution, supporting a range of development activities, such as

primary education, basic health services, clean water and sanitation, agriculture,
business climate improvements, infrastructure, and institutional reforms. These
interventions pave the way toward equality, economic growth, job creation, higher
incomes, and better living conditions. For the period July 1, 2014–June 30, 2017
(IDA17), IDA operations are placing a special emphasis on four thematic areas:
climate change, fragile and conflict affected countries, gender equality, and inclusive
growth.
 IDA17 financing is expected to provide, among other things, electricity for an

estimated 15-20 million people, life-saving vaccines for 200 million children,
microfinance loans for more than 1 million women, and basic health services for 65
million people. Some 32 million people will benefit from access to clean water and
another 5.6 million from better sanitation facilities.
 Many of the issues developing countries face do not respect borders. By helping
address these problems, IDA supports security, environmental and health concerns,
and works to prevent these threats from becoming global issues.
International Finance Corporation
 The IFC was established in 1956 to support the growth of the private sector in the
developing world. IFC, a member of the World Bank Group, is the largest global
development institution focused exclusively on the private sector in developing
countries.
 The IFC’s stated mission is “to promote sustainable private sector investment in
developing countries, helping to reduce poverty and improve people’s lives.”

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 While the World Bank (IBRD and IDA) provides credit and non-lending assistance to
governments, the IFC provides loans and equity financing, advice, and technical
services to the private sector. The IFC also plays a catalytic role, by mobilizing
additional capital through loan syndication and by lessening the political risk for
investors, enabling their participation in a given project. The IFC has worked
with more than 3319 companies in 140 countries since its inception in 1956.
 It is a public entity, although its clientele consists of transnational, national, and local
private sector companies, operating in a competitive and fast-moving business
environment.
Multilateral Investment Guarantee Agency
 MIGA is a member of the World Bank Group. Its mission is to promote FDI into
developing countries to help support economic growth, reduce poverty and improves
people’s lives.
 At the centre of MIGA’s new FY18-20 strategy are three elements:
1. A re-affirmed focus on the poorest through support for projects in IDA countries
2. A continuing emphasis on Fragile and Conflict-affected States, where MIGA has

opportunity to have impact where private PRI insurers are unwilling to go, and
3. An expanded commitment to climate change mitigation and adaptation, targeting 28%

of new issuance related to climate change mitigation or adaptation in 2020.
To deliver on these targets, MIGA’s FY18-20 strategy has four pillars:
1. Grow core business: MIGA will enable new investments across sectors and regions
through building on past efforts to improve operations and delivery in current
segments.
2. Innovate applications: MIGA will continue to create new ways of using its suite of
products to create impact, especially through the use of new vehicles, including the
IDA 18 Private Sector Window.
3. Create projects for impact: MIGA will develop structure and launch new projects by
playing a proactive role early in the pipeline through working with governments,
state-owned enterprises, and investors.
4. Create markets: MIGA will drive comprehensive country solutions and spur private
sector investment and development by working as part of the WBG’s Cascade
Approach.
 MIGA is owned and governed by its member states, but has its own executive
leadership and staff which carry out its daily operations. Its shareholders are member
governments which provide paid in capital and have the right to vote on its matters. It
paid-in-capital

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insures long-term debt and equity investments as well as other assets and contracts
with long-term periods. The agency is assessed by the World Bank’s Independent
Evaluation Group each year.
International Monetary Fund
The IMF is an organization of 189-member countries, working to foster global monetary

cooperation, secure financial stability facilitates international trade; promote high
employment and sustainable economic growth along with poverty reduction.
The IMF was conceived at a United Nation Conference in Bretton Woods, New Hemisphere,
United States in July 1944 along with the World Bank. The initial 44-member countries at the
conference sought to build a framework for economic cooperation and to avoid a repetition of
competitive devaluation of currency which has contributed to ‘Great Depression of the
1930s’.
The IMF’s primary responsibility is to ensure the stability of international monetary system
remains safe, to safeguard the system of the exchange rate and international payments so that
countries could transact with each other freely.
The IMF’s mandate was updated in the year 2012, to include all macroeconomic and
financial sector issues that can affect global financial stability.

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IMF at Glance
Total Member 189 Countries
Headquarter Washington DC, USA
Executive 24 Directors each representing a single or group of countries

Board
Total US $668 Billion

Resources
Currency Special Drawings Rights (SDR consists of 5 Key World currencies: US

Dollar, Euro, Japanese Yen, UK Pound and Chinese Renminbi.
Biggest Portugal, Greece, Ukraine and Pakistan (as on 31/08/2016)

Borrowers
Role of IMF in promoting Global Economic Stability
The IMF advises member countries on economic and financial matters that promote stability,
reduce vulnerability to crises, and encourages sustained growth and high living standards. It
also monitors global economic trends and developments that affect the health of the
international monetary and financial system.
Economic stability implies avoiding economic and financial crises, volatility in economic
activity, high inflation and excessive volatility in foreign exchange and financial markets.
Economic instability can increase uncertainty, discourage investment, obstruct economic
growth and living standards. The biggest challenge for policy makers is to minimize
instability in their own country and abroad without reducing the economy’s ability to
improve living standards through rising productivity, employment and sustainable growth.
How Does IMF help in achieving stability?
The IMF helps countries achieve stability through Surveillance, Assistance and Lending.
 Surveillance: Every country joining IMF accepts the obligation to subject its
economic and financial policies to the scrutiny of the international community. The
IMF oversees the international monetary system and monitors the economic and
financial developments of its 189-member countries. The surveillance takes place at
the global and individual country level. The IMF assesses the domestic policies and
risk associated with domestic and balance of payment stability and advises for the
same.
 The IMF produces periodic report known as “World Economic Outlook” and the
“Global Financial Stability Report” regarding the same. The report’s analyses global
and regional macroeconomic and financial developments.

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 Technical Assistance: The IMF helps countries strengthen their capacity to design and
implement sound economic policies. It provides advice and training in areas of core
expertise—including fiscal, monetary, and exchange rate policies; the regulation and
supervision of financial systems; statistics; and legal frameworks.
 Lending: Even the best economic policies cannot completely eradicate instability or
avert crises. If a member country faces a balance of payment crisis, the IMF can
provide financial assistance to support policy programs that will correct underlying
macro-economic problems, limit disruption to both the domestic and the global
economy, and help restore confidence, stability, and growth. The IMF also offers
precautionary credit lines for countries with sound economic fundamentals for crisis
prevention.
IMF’s Special Drawing Rights
The SDR is an international reserve asset created by IMF in 1969 to supplement its member
countries official reserves. The value of SDR is based on a basket of five major currencies-
the US Dollar, the Euro, the Japanese Yen, the UK Pound and the Chinese Renminbi.
The Creation of SDR: A country participating in foreign exchange market needs official
foreign exchange reserves. The domestic governments hold these foreign exchange reserves
in the form of Gold and widely accepted foreign currencies like the US dollar or the Euro.
The domestic countries use their foreign exchange reserves during the crisis period or when
they need to provide support to their respective currencies and exchange rate. The countries
do so by buying their currency in the foreign exchange rate markets by paying through dollar
or gold. But the supply of two key international reserve assets- the US dollar and the gold is
inadequate for supporting the needs and expansion of the financial flows. Therefore, the
international community decided to create a new international reserve asset called ‘SDR’
under the leadership of the IMF.
IMF Quota System
Quotas are central to IMF’s financial resource. Each member country of the IMF is assigned
a quota of resources based broadly on its relative position in the World Economy. A member
country’s quota determines its maximum financial commitment to the IMF, its voting rights
and its access to IMF lending’s.
When a country joins the IMF, it is assigned an initial quota based on its size of the economy.
The current quota formula is a weighted average of:
 Country’s GDP (50 percent weight)
 Openness of the economy (30 percent weight)
 Economic variability (15 percent)
 International/Foreign reserves (5 percent)

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1. Quotas are determined in SDR terms. The largest member of the IMF is the United
States, with a current quota of SDR 82.99 Billion and the smallest member is Tuvalu,
with a quota of SDR 2.5 Million. India’s current quota is SDR 13.1 Billion.
2. The quota plays a key role in determining a country’s financial and organisational
relationship with the IMF. A member’s quota subscription determines the maximum
amount of financial resources the member is obliged to provide to the IMF. The quota
determines the member voting power inside the IMF decision making. A number of
finances a member can access from the IMF is also based on its share of quota.
3. The 14th General Quota review which met on January 2016 decided to increase the
quota of each of the IMF 189 members to a combined SDR of 477 Billion from about
SDR 238.5 Billion. With the move, the IMF has implemented its long pending quota
reforms (under pressure from the emerging economies) which will give more voting
rights to emerging economies such as India and China in the functioning of the IMF.
4. With these reforms, India’s quota in the IMF would rise to 2.7 percent, from the
existing 2.44 percent. The voting share of Indian in IMF would also increase to 2.6
percent from 2.34 percent. The reforms reflected the increasing role of dynamic
emerging and developing countries in the World economy. For the first-time key
emerging countries of the BRIC bloc (Brazil, India, China and Russia) will be among
the 10 largest members of the IMF. China has become the third largest country in the
IMF.
5. Other top 10 countries include the US, Japan, Germany, France, UK and Italy. Also
for the first time, the IMF board will consist entirely of elected executive directors,
ending the past tradition of having appointed executive directors.
6. The reforms shifted more than 6 percent of quota shares from over represented to
under-represented countries. the reforms also shifted more than 6 percent quota shares
to emerging and developing countries.

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International Economic Institution’s: ADB, BRICS Bank, AIIB

Asian Development Bank
 The Asian Development Bank was conceived in the early 1960s as a financial
institution that would be Asian in character and foster economic growth and
cooperation in one of the poorest region on the Earth.
 A resolution passed at the first Ministerial Conference on Asian Economic

Cooperation held by the United Nations Economic Commission for Asia and the Far
East in 1963 set that vision on the way to becoming reality.
 The Philippines capital of Manila was chosen to host the new institution, which
opened on 19 December 1966, with 31 members that came together to serve a
predominantly agricultural region. Takeshi Watanabe was ADB’s first President.
Role and Aim of ADB
 The ADB aims for an Asia and Pacific free from poverty. Its mission is to help
developing member countries reduce poverty and improve the quality of life of their
people. Despite the region’s many successes, it remains home to a large share of the
world’s poor: 330 million living on less than $1.90 a day and 1.2 billion on less than
$3.10 a day.
 ADB in partnership with member governments, independent specialists and other

financial institutions is focused on delivering projects in developing member countries
that create economic and development impact.
 As a multilateral development finance institution, ADB provides loans; technical

assistance and grants. ADB also provides development assistance, policy advisory and
financial resources through co-financing operations.
 ADB operations are designed to support the three complementary agendas of

inclusive economic growth, environmentally sustainable growth and regional
integration.
 ADB employs its resources in the core areas of infrastructure, environment, regional
cooperation and integration, education and financial sector development.
New Development Bank
At the fourth BRICS Summit in New Delhi (2012), the leaders of Brazil, Russia, India, China
and South Africa first proposed the possibility of setting up a New Development Bank to
mobilize resources of infrastructure and sustainable projects in BRICS and other emerging
countries and developing countries.

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At the fifth BRICS Summit in Durban (2013), the leaders of BRICS countries agreed on
establishing NDB. It was also decided that the initial contribution to the bank should be used
to finance infrastructure in BRICS.
At the sixth BRICS Summit in Fortaleza (2014), the leaders of BRICS signed the agreement
to establish NDB. In the Fortaleza declaration, the leaders stressed that the NDB would
strengthen cooperation among BRICS and will supplement the efforts of other global
multilateral institutions like World Bank for global development and collectively work for
achieving the goal of strong, sustainable and balanced growth.
The Fortaleza Declaration further said:
“The Bank shall have an initial authorized capital of US$ 100 billion. The initial subscribed
capital shall be US$ 50 billion, equally shared among founding members. The first chair of
the Board of Governors shall be from Russia. The first chair of the Board of Directors shall
be from Brazil. The first President of the Bank shall be from India. The headquarters of the
Bank shall be located in Shanghai. The New Development Bank Africa Regional Centre shall
be established in South Africa concurrently with the headquarters.”

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Need and Significance of New Development Bank
 The creation of NDB was felt because of the discriminatory attitude of the West
towards the developing countries. The BRICS member countries accounting for
almost half of the world’s population and about one-fifth of global economic output
have only 11 per cent of the votes at international financial institution like the IMF.
Both the WB and the IMF are based on the weighted voting system, which provides
the rich countries with a big say in the management. There are informal arrangements
whereby the American is always at the top in the WB; while the European is in top
position in IMF. In those monetary institutions, the developing countries don’t have
enough voting rights.
 The expectation is that the NDB with its total capital of $100 billion would meet short
term liquidity requirement of the member countries. An effort has been made to avoid
China’s dominance on the bank; for which India is made the president of the bank for
the first six years and after this Brazil and Russia would have turns with five years
each.
 The New Development Bank is not just about setting up yet another
bank. It represents a new political will among new and emerging powers
in the world to challenge the old architecture of growth.
 Over the last 20 years, it has been obvious that the growth impetus has
shifted to Asia and also Africa. The World Bank and the IMF, dominated by the US
and Europe, cannot function with limited voting powers for the new tigers. BRICS
seeks to challenge their power structure.
 The setting up of the New Development Bank and the $100 billion currency
stabilization fund will signal the emergence of new international currencies to
challenge the US dollar’s hegemony.
 In the initial years, the Chinese yuan will get internationalized first, followed by the
Indian rupee after about a decade of strong growth in India’s economic and trade
shares. Even though the dollar will continue to remain the biggest international
currency for the foreseeable future, its share will start falling as the yuan rises. The
world will have the dollar, euro, the yen and the yuan as it main currencies over the
next decade. The dollar will not remain the only option for the settlement of
global trades, especially when intra-Asian; African and Latin American shares of
global trade start picking up in the decades ahead.
Asian Infrastructure and Investment Bank
Asian Infrastructure and Investment Bank is a new multilateral financial institution

founded to bring countries together to address the need of deficient infrastructure across Asia.
AIIB is a brain child of China. The prime aim of the AIIB is infrastructure development. By
establishing
hing interconnectivity across the Asia through advancement in the construction of

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infrastructure and other productive services, the AIIB can stimulate growth and economic
development in the Asian Region.
Focus Areas of AIIB
The AIIB and the China
China has been growing rapidly for a long time, but an important shift in its growth pattern
occurred at the time of Global Financial Crisis of 2008.
During the years preceding GFC, China’s GDP grew at an average rate of 11 percent. The
Current Account Surplus was 10 percent of the GDP during all these years. In the six years
since the GFC, the external surplus has fallen sharply into the range of 2-3 percent of the
GDP.
China’s growth rate is no doubt impressive as compared to the Rest of the World, but has lost
its upward trajectory and has fallen to a new normal of 7-8 percent post-GFC. The reason for
fall in China’s growth are; overdependence on exports which lost its momentum post GFC,
falling productivity of Chinese investment (for example; if earlier, an investment of 20
percent by Chinese firm produced an 1 percent increase in GDP, but now an investment of 20
percent by Chinese firm only produces 0.7 percent increase in GDP).

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China’s responses to these growth changes are partly internal and partly external. On the
external side, China is coming up with multilateral investment institutions like AIIB and
NDB to finance its falling growth. The plan is to develop infrastructure in and out of China
which has the potential to create more jobs, increase the productivity of investment and
increase exports of China. The AIIB and NDB are the institutions that will finance China’s
new infrastructure projects.
AIIB and Emerging Economies
The AIIB is largely welcomed by China’s Asian neighbours as they believe it has the
potential to integrate Asia further through the construction of roads, highways, pipelines and
railways.
The allies of China in Asia are also seeing AIIB and other Chinese initiatives as a set back to
the United States. They believe that the US has for long dominated the Asia-Pacific and now
it’s time for the US to recede its influence from Asia-Pacific. They see the rise of China as a
game changer in the region. The Chinese allies follow the erstwhile dream of ‘Asia for
Asians’.
Although, the US has been pressurizing its key allies in Asia, not to join the AIIB, but had
received a major setback when its key allies like South Korea, Australia, Japan and Even the
United Kingdom joined the initiative.
The most important reason of many Emerging Countries joining the AIIB is their long-term
dissatisfaction with the working of the Western Dominated Multilateral Institutions like
World Bank and the IMF.
The EMEs believes that the governance structure of the existing international financial
institutions was biased towards the Western Countries and doesn’t take care of their needs.
They further argue that the existing structure is evolving too slowly and doesn’t capture the
realities of the 21st century in which the main drivers of global growth and investment are
Emerging economies like China, India, Turkey, Indonesia, Brazil and Nigeria etc.
Their arguments get weight when one sees how slowly reforms are being done in IMF. The
US CONGRESS still holds the veto power in the functioning of the IMF.
The EMEs frustration with the World Bank and IMF is not just about the governance
structure and the United States weight in them, but also comes from the fact that the
international institution has long ignored the demands of EMEs regarding the construction of
infrastructure in their regions. Over the years, the key recommendations of the EMEs
regarding growth and development have been rejected by the World Bank and IMF.
The AIIB and the NDB, therefore, gives much-needed leverage to the EMEs to break the
dominance of the US and Europe dominated International Institutions.

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Bilateral, Regional and Global Groupings and Agreements involving India

India’s Regional Trading Agreements
1. Indian trade policy has made an important shift in the year 1991, when we have gone
for globalisation, trade liberalisation and other market reforms. Thus year 1991,
stands as a benchmark year for India’s trade policy.
2. The next big event in World trade is setting of WTO in 1995, the successor of
erstwhile GATT. WTO’s multilateral approach towards trade and as an institution of
trade ombudsman is remarkable. It acts as platform between developed and
developing countries to negotiate with each other.
3. The successive rounds of WTO have made rules of trade game much transparent and
nearly equal for all. But things have started to change after famous ‘Doha Round’ of
2001 gets staled.
4. In the initial year differentiation between developed and developing countries was
taken as basic principle, with larger responsibility lying on developed World.
However since Uruguay round focus has shifted towards reciprocity. This has resulted
in conflict between developed and developing countries over trade negotiations and
subsequent staling of conferences.
5. All these have led to development of what is known as Regional groupings, RTAs and
FTAs.
6. Countries were signing these agreements earlier also, but they were concentrated on
some part of world. These agreements give easy market access and tariff benefits to
member countries.
There are many form of integration in world. Economist Jacob Viner has given his theory of
‘Custom Union’ followed by work of J.E Meade. To summarise followings are the ways of
integration;
Preferential trade union; two or more countries can form a trading union and reduce tariffs
on imports of each other. They maintain their individual tariffs against Rest of world.
Free trade area; two or more countries come together and abolish all tariff duties on their
trade but retains individual tariffs against ROW.
Custom union; two or more countries abolish all tariff among themselves and adopts a
common tariff barrier against imports of ROW.
Common market; common market is formed, when two or more countries form a custom
union and in addition allows free movement of factor of production among member
countries.

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Economic union; it is the highest form of integration where two or more countries forms a
common market and in addition proceeds to harmonise and unify their monetary, fiscal and
exchange rate policies.
All of the above forms of integration have trade creation as well as trade diversion effects. To
check for such diversion effects WTO has come up with most favoured nation clause, which
states that,
“Any advantage, favour, privilege or immunity granted by any contacting party to any
product originating in or destined for any other country shall be accorded immediately and
unconditionally to the like product originating in or destined for territories of all other
parties”.
India’s Regional and Free Trade Agreements
Agreement Member Total Type of Start Date Coverage

Countries Members Agreement Area
Asia Pacific Trade Bangladesh, 5 Preferential 1976 All Goods

Agreement China, South Trading
(APTA) Korea, India, Sri Agreement
Lanka
India-ASEAN Brunei, 11 Free Trade 2010 All Goods

Trade in Goods Cambodia, Agreement
Agreement Indonesia, Laos,
Malaysia,
Myanmar,
Philippines,
Singapore,
Thailand,
Vietnam and
India
BIMSTEC- Bay of Bangladesh, 7 Under Under

Bengal Initiative India, Thailand, Negotiations Negotiation
for Multi Sectoral Myanmar, Sri
Technical Lanka, Bhutan
Economic and Nepal
Cooperation
IBSA- India, India, Brazil and 3 Under Under

Brazil and South South Africa Negotiations Negotiation
Africa Agreement
SAFTA- South India, Pakistan, 7 Free Trade 2006 All Goods

Asian Free Trade Nepal, Bhutan,

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Agreement Bangladesh, Agreement

Afghanistan and
Maldives
India-Sri Lanka India and Sri 2 Free Trade 2001 All Goods
FTA Lanka Agreement
India-Malaysia India and 2 Free Trade 2011 Goods

Comprehensive Malaysia Agreement and
Economic Services
Cooperation
Agreement
India-Singapore India and 2 Free Trade 2005 Goods

Comprehensive Singapore Agreement and
Economic Services
Cooperation
Agreement
India-Japan India and Japan 2 Free Trade 2011 Goods

Comprehensive Agreement and
Economic Services
Partnership
Agreement
India-Korea India and South 2 Free Trade 2010 Goods

Comprehensive Korea Agreement and
Economic Services
Partnership
Agreement
India Chile FTA India and Chile 2 Free Trade 2007 All Goods
Agreement
India-Afghanistan India and 2 Free Trade 2003 All Goods

FTA Afghanistan Agreement
India-Bhutan FTA India and 2 Free Trade 2006 All Goods

Bhutan Agreement
India- Nepal FTA India and Nepal 2 Free Trade 2009 All Goods
Agreement
European Union EU member Under Under

and India FTA countries Negotiations Negotiation
MERCOSUR Argentina, 5 Free Trade 2009 All Goods

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India FTA Brazil, Agreement

Paraguay,
Uruguay
India-ASEAN Brunei, 11 Free Trade 2015 Services

Trade in Services Cambodia, Agreement
Agreement Indonesia, Laos,
Malaysia,
Myanmar,
Philippines,
Singapore,
Thailand,
Vietnam and
India
India-Thailand India and 2 Free Trade 2004 All Goods

FTA Thailand Agreement
Source: Ministry of Commerce and WTO

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The World Trade Organisation (WTO) and India

The World Trade Organisation (WTO)
A Brief History
The Shortcomings of GATT

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As a result of these shortcomings the WTO was established as an international organization

that will oversee the operation of rule based multilateral trading system. The WTO is based
on series of trade agreements negotiated during the Uruguay Round (1986-1994). The
Marrakesh treaty established the WTO at the end of Uruguay round.
The Uruguay Round (1986-1995)
Guiding Principles of the WTO

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Major Agreement of the WTO

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Export Subsidies under AOA
 Developed countries needs to reduce the value and volume of export subsidies by 36
percent and 24 percent respectively over a 6-year period.
 Developing countries had a milder commitment of 24 percent and 10 percent

respectively over 10 years period.
 The export subsidies in the AOA (Part V, Article 9) that are subject to reduction
commitments include:
 Direct subsidies to agricultural producer’s contingent on export performance;
 Subsidies on agricultural products contingent on their incorporation in exported

products;
 Provision on favourable terms of internal transport and freight charges on export

shipments (developing countries are exempt from commitments on this form of
subsidy provided that it is not used to circumvent reduction commitments),
 Subsidies to reduce the cost of marketing exports of agricultural products excluding

export promotion and advisory services (here again, developing countries are
conditionally exempt from reduction commitments);

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 Sale or disposal for export of non-commercial stocks of agricultural products by the

government or its agencies at a price lower than the comparable price charged for a
like product by buyers in the domestic market
 Payments on the export of an agricultural product that are financed by virtue of

governmental action whether or not a charge on the public account is involved,
including payments that are financed from the proceeds of a levy imposed on the
agricultural product concerned or on an agricultural product from which the exported
product is derived.
Domestic Support under WTO
Domestic support was divided into three kinds of boxes, each representing a different kind of
subsidies.
Green Box:
 Green box subsidies are considered to be minimum trade distorting in terms of

production and trade.
 Direct income support schemes unlinked to production are examples of the green box.
Research and Development support, Providing extra income to farmers etc. falls
under this category
 Subsidies under green box do not have any reduction commitments under AOA.
 The subsidies provided by Rich nations mostly come under green box.

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Blue Box:
 Blue box subsidies are considered somewhat less trade distorting, while they directly
link production to subsidies, they also set limits on production by imposing quotas.
 Blue Box subsidies are also exempt form reduction commitments.
Amber Box:
 Amber box subsidies constitute all form of domestic support that is considered trade
distorting by encouraging excess production.
 Under WTO principles, “amber box” subsidies create trade distortions because they
encourage excessive production through farm subsidies to fertilizers, seeds, electricity
and irrigation.
 Within the amber box, de minimus is the minimal amount of subsidy WTO permits at
1986-88 prices. The de minimus figures for developed and developing countries are at
five and 10 per cent of their agricultural production respectively.
General Agreement on Trade in Services
 For the first time, trade in services like banking, insurance, travel, transportation,
movement of labour was brought within the ambit of negotiations in the Uruguay
round.
 The GATS provide multilateral framework of principles and services under condition
of transparency and progressive liberalisation.
 Negotiations is services under GATS are classified in 4 modes, interests of different

countries depend upon this classification:
Trade Related Intellectual Property Rights
 TRIPS is an international agreement administered by the World Trade

Organization (WTO) that sets down minimum standards for many forms
of intellectual property (IP) regulation as applied to nationals of other WTO
Members.
 Prior to the TRIPS agreement the IPR concerning the trade including patent,
trademarks, copyrights and industrial designs were governed by the Paris Convention
of 1863.
 The Paris convention was fairly liberal and left the subject matter of patents and IPR
on the respective governments.
 Under these lose laws the commercial interests of the Developed countries were
adversely affected.
 Therefore, TRIPS was concluded during Uruguay Round.

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Trade Related Investment Measures
 The Agreement on Trade-Related Investment Measures (TRIMS) recognizes that

certain investment measures can restrict and distort trade.
 It states that WTO members may not apply any measure that discriminates against
foreign products or that leads to quantitative restrictions, both of which violate basic
WTO principles.
 A list of prohibited TRIMS, such as local content requirements, is part of the

Agreement. Recently India was dragged to WTO by U.S. over former’s specification
of Domestic Content Requirement in relation to the procurement of Solar Energy cells
and equipment.
India and the WTO
Indian was one of the 23 founding members of erstwhile GATT. India is also a leader of
groups like G 33 and G 77 representing least developed countries. India in initial years due to
its policies of import substitution and protecting infant industry was never very active in
negotiations.
India at the WTO meetings
Ministerial Place Outcome India’s Role

conference
1 Singapore ITA agreement signed Mere Presence.
Trade and investment, competition policy,

government procurement and Trade
facilitation discussed.
2 Geneva Global e commerce agreement signed. Mere Presence
3 Seattle Negotiations failed as developed countries Was vocal in

wanted to incorporate environment and protesting against
labor related issues under WTO. developed countries.
4 DOHA A new round was launched and concerned Mostly singled out in
of developing countries related to TRIPS its protest. However
5 Cancun and Health issues were listened. Market made its presence
6 Geneva access issues were also taken. and position felt for
the very first time.
7 Hong Members could not arrive at common
Kong viewpoint regarding Doha development Actively protested
8 agenda. against EU-USA
Bali draft oon agriculture
Countries came forward to create an with other

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atmosphere for initiating multilateral developing

negotiations once again. countries.
It was considered vital if the four-year- Played a

old DDA negotiations were to move constructive role in
forward sufficiently to conclude the round the process.
in 2006. In this meeting, countries agreed
to phase out all their agricultural export Vocal in protesting
subsidies by the end of 2013, and terminate against developed
any cotton export subsidies by the end of countries.
2006. Further concessions to developing India argued for
countries included an agreement to settlement of Food
introduce duty-free, tariff-free access for stockholding under
goods from the Least Developed AMS. Has to settle
Countries, following the Everything But with Peace clause.
Arms initiative of the European Union —
but with up to 3% of tariff lines exempted.
Other major issues were left for further
negotiation to be completed by the end of
2006
Famous for Trade facilitation agreement

and Peace clause
Source: Compiled from WTO website, Ministerial document and other sources.
Recent WTO negotiations and India
 Doha round of trade negotiations has been under way since 2001.
 The negotiations cover several areas such as agriculture, market access, Trips,
dumping and anti-dumping and trade facilitation.
 The conduct, conclusion and entry into force of the outcome of the negotiations are
part of ‘Single undertaking’ that is nothing is agreed until everything is agreed.
 The Doha round has made very little progress. The subject of DDA featured in almost
every round of talks, but nothing substantive has come out.
 In October 2011, efforts were made by some of the developed countries to use the G
20 summit to advance the agenda for eight ministerial conference scheduled to be
held in Geneva in 2011.
 They wanted to set the stage for plurilateral agreements on selected issues in the WTO
negotiations rather than multilateral negotiations. Also, they wanted to introduce new
issues for negotiation, namely climate change, energy security and food security.
 These proposals are however strongly objected by various members including India.

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 At the Geneva conference, during 15-17 December 2011, ministers adopted a number
of decisions on IPR, electronic commerce, small economies, LDC’S accession and
trade policy reviews.
 A number of members expressed strong reservations against PLURILATERAL

approaches. Members including India stressed that any different approaches in work
ahead should conform to the Doha mandate, respect the single undertaking and should
be multilateral, transparent and inclusive.
 Many members highlighted the importance of agriculture negotiations, trade

facilitation, special and differential treatment and NTMs.
 Developing countries, including India, China, Brazil and South Africa met on the
side-lines of the conference and issued a declaration emphasizing the development
agenda.
India at the Bali Conference
 The Bali ministerial conferences of WTO ended in encompass.
 The two most important issues among many taken at Bali conference are agreement
on trade facilitation and public stockholding for food security purpose.
 The former relates to removing red tapes, reduction of administrative barriers to trade,
documentation and transparency, latter deals with the procurement and distribution by
government agencies for food security purpose.
 At the meeting, India maintained its stand that any agreement on trade facilitation
must not be taken until a permanent solution is granted for public stockholding issues
for food security.
 Despite intense pressure from the USA, India refused to abide and has allowed the
deadline of TFA to pass.
 The important development during the conference was that India not being able to
gather the support of other Developing and LDCs countries despite the fact the LDCs
have generally backed the issue of food security.
 Only three countries Cuba, Bolivia and Venezuela backed India. This signifies that
developing countries are divided on the issue of Trade facilitation as it is most likely
to benefit the developing countries.

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Chapter 12-Food processing & related industries

Food Processing Industry: Definition and Dimensions; Channels of
Transitions; Inter linkages between Agriculture and Industry
Food Processing Industry in India
Food Processing Industry: Definition and Dimensions
Understanding the Channels of Transitions
Food Economy and Industrial sector have traditionally been viewed as two separate sectors of
the economy. They differ both in terms of their characteristics (role in economic growth,

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share in GDP, share in total output, role in poverty reduction etc.) and potential to generate
employment.
The Food sector or Agriculture is considered to be a traditional sector of the economy.

Agriculture has been considered the hallmark of First stage development with features like:
The Industrial sector is considered to be a modern sector of the economy and represents the
second and most important stage of development. The Industrial sector has modern features
like:
The Transition from Agriculture to Industry:
1. Over the years, with the development of the economy, the traditional agriculture
sector becomes less and less productive due to disguised employment (large no of
people working on a small land without contributing to production increase).

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2. At this Juncture, the agriculture sector with excess supply of labour will start
supplying labour force to the Industries and manufacturing sector.
3. The disguised labour employed in the agriculture sector will become more productive
in the factories, where they will contribute in increasing production.
4. At the same time, the remaining labour force in the agriculture sector will also
become more productive (no of people are working is equal to no of people required)
and their wages will increase.
5. This is how a standard economy makes transition from low productive agriculture
sector to high productive industrial sector. The degree of this transition and
Industrialisation has been taken to be the most important indicator of a country’s
progress along the development path.
The New literature on Changing Role & Interlinkages between Agriculture and
Industry

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Food Processing Industry: Food Based Industry versus Non- Food Based;
Location, Upstream, Downstream Requirements
Food Based Agro-processing Industry versus Non- Food Based Agro-Processing
Industry
Upstream versus Downstream Food Processing Industries

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Potential for Food Processing Industry in India
Advantages of the Food Processing Industries

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Factors Determining Location of Food Processing Industries
There are, however, few exceptions:
 For most grains (cereals), shipment of the raw material in bulk is frequently easier,
while many bakery products are highly perishable and thus require production to be
located close to the market.
 Oilseeds (except for the more perishable ones such as olives and palm fruit) are also
an exception and can be transported equally easily and cheaply in raw form or as oil,
cake or meal, so there is more technical freedom of choice in the location of
processing.

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 The same is true for the later stages of processing of some commodities. For example,
while raw cotton loses weight in ginning, which is consequently carried out in the
producing area, yarn, textiles and clothing can all be transported equally easily and
cheaply.
Technical and Exports Considerations in deciding location
 Where there is a high degree of technical freedom in the choice of location, industries
have frequently tended to be located in proximity to the markets because of the more
efficient labour supply, better infrastructure and lower distribution costs in the large
market centres.
 With production for export, this factor has often tended to favour the location of
processing in the importing country. This tendency has been reinforced by other
factors, including the need for additional raw materials and auxiliary materials
(particularly chemicals) that may not be readily available in the raw material-
producing country; the greater flexibility in deciding the type of processing according
to the end use for which the product is required; and the greater regularity of supply
and continuity of operations that are possible when raw materials are drawn from
several different parts of the world.
 However, with improved infrastructure, enhanced labour efficiency and growing

domestic markets in the developing countries, there is increased potential for
expanding such processing in the countries where the raw materials are produced.
 In addition, with growing liberalization of world trade, more developing countries

will be able to take advantage of lower labour costs to expand their exports of agro-
industrial products.

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Food Processing Industry: Forward, Backward Linkages; Food Processing

Industry and Economic Development
Food Processing Industry: Scope, Importance & Significance in Economic Development
The Economic Linkage Effects of Food Processing Industry
Linkages is a phenomenon which measures the capability of an industry to generate

demand for the products of the other industries. Form the point of view of development
strategy, linkages is one of the essential features of an industry. Linkages are of three types:
Forward, Backward and sideways.
Forward Linkage: It is when; the establishment of a processing industry can lead to the
development and establishment of the number of advanced stage industries. Example, Forest
Industry, when established as a base industry, results in establishment of vast number of
advanced processing industries like: manufacturing of paper, paper bags, stationary, boxes
made of paper, cartons, wooden boxes etc.
There are many other examples: products such as vegetable oils and rubber are used in a wide
variety of manufacturing industries; based on the preparation of hides and skins, tanning
operations can be started, as can the manufacture of footwear and other leather goods.
Backward Linkage: The feedback effects generated by a base industry on the development
of the base sector are called backward linkage. The development of the food processing
industry has many feedback effects on the agriculture sector itself.
For Example, once a food processing industry is established, it results in increasing the
demand of raw materials provided by the agriculture sector. The establishment of processing
facilities is itself an essential first step towards stimulating both consumer demand for the
processed product and an adequate supply of the raw material.
The provision of transport, power and other infra-structural facilities required for agro-
industries also benefits agricultural production. The development of these and other industries
provides a more favourable atmosphere for technical progress and the acceptance of new
ideas in farming itself.
Sideways Linkage: Sideways linkages are mostly derived from the use of by products and
waste products of the main base industrial activity. For example: many food processing
industries using agriculture raw materials produce waste that can be used further in
production of fuel, bio-fuels, paper pulp and fertilizer. The production of sugar results in
production of molasses as a waste product, which is used by the Alcohol Brewing industry in
the production of ethanol.
The capacity of Food Processing industry to generate demand and employment in other
industries is the important aspect of the processing industry. It works because of proce
processing
industry growing potential for activating backward, forward and sideway linkages.

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The Food Processing Industry and Economic Development
Backward Channel
Forward Channel

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The growth of Food Processing Industry at different stages of Development
The Initial Stage/Less Developed Countries
The Intermediate Stage/Middle Income Countries

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The More Advanced Middle-Income Stage
The Final Stage/Developed Countries

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Food Processing Industry in India: Growth Drivers, FDI Policy,

Investment Opportunities; Schemes Related to Food Processing Sector
Food Processing Industry in India:
A Snapshot
 The Indian food industry is poised for huge growth, increasing its contribution to
world food trade every year.
 In India, the food sector has emerged as a high-growth and high-profit sector due to
its immense potential for value addition, particularly within the food processing
industry.
 Accounting for about 32 per cent of the country’s total food market, The Government
of India has been instrumental in the growth and development of the food processing
industry.
 The government through the Ministry of Food Processing Industries (MoFPI) is

making all efforts to encourage investments in the business.
 It has approved proposals for joint ventures (JV), foreign collaborations, industrial
licenses, and 100 per cent export oriented units.
 Food processing industry in India is a sunrise sector that has gained prominence in the
recent years. Availability of raw materials, changing lifestyles and appropriate fiscal
policies has given a considerable push to the industry’s growth.
 This sector serves as a vital link between the agriculture and industrial segments of
the economy. Strengthening this link is of critical importance to reduce waste of
agricultural raw materials, improve the value of agricultural produce by increasing
shelf-life as well as by fortifying the nutritive capacity of the food products; ensure
remunerative prices to farmers as well as affordable prices to consumers.
 Adequate focus on this sector could greatly alleviate our concerns on food security
and food inflation.
 India already is a leading exporter of several food products. To ensure that this sector
gets the stimulus it deserves, Ministry of Food Processing Industries is implementing
a number of schemes for Infrastructure development, technology up-gradation &
modernization, human resources development and R&D in the Food Processing
Sector.
The Ministry of Food Processing Industry defines Food Processing to include under
food processing industries, items pertaining to these two processes viz
(a) Manufactured Processes: If any raw product of agriculture, animal husbandry or fisheries
is transformed through a process [involving employees, power, machines or money] in such a

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way that its original physical properties undergo a change and if the transformed product is
edible and has commercial value, then it comes within the domain of Food Processing
Industries.
(b) Other Value-Added Processes: Hence, if there is significant value addition (increased
shelf life, shelled and ready for consumption etc.) such produce also comes under food
processing, even if it does not undergo manufacturing processes.
The Growth of Food Processing Industry in India
As seen in the graph above, the contribution of food processing sector to GDP has been
growing faster than that of the agriculture sector.
If the contribution to GDP of both agricultural sector and food processing sector were
growing at the same rate, then it would mean that the growth in food processing sector is only
due to increased agricultural raw material supply.
However, what this graph indicates is that more and more agricultural products are being
converted (in value terms) to food products. This means that the level of processing in value
terms has been increasing in India.
Person Employed by the Food Processing Industries

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Food Processing Industry is one of the major employment intensive segments constituting
12.13 per cent of employment generated in all Registered Factory sector in 2011- 12.
According to the latest Annual Survey of Industries (ASI) for 2011-12, the total number of
persons engaged in registered food processing sector is 17.77 lakhs.
During the last 5 years ending 2011-12, employment in registered food processing sector has
been increasing at an Annual Average Growth Rate of 3.79 per cent. Unregistered food
processing sector supports employment to 47.9 lakh workers as per the NSSO 67thRound,
2010-11.
Export Performance of the Food Processing Sector
All agricultural produce when exported undergo an element of processing. Hence all edible
agricultural commodities exported are included in the export data. The value of exports in the
sector has been showing an increasing trend with Average Annual Growth Rate (AAGR) of
20.53 per cent for five years ending 2013-14.
The value of processed food exports during 2013-14 was of the order of US $ 37.79 Billion
(total exports US $ 312 Billion) constituting 12.1 per cent of India’s total exports.
Food Processing Industry in India: Growth Drivers, FDI Policy, Investment

Opportunities
Growth Drivers

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Factors Contributing to Growth of the Food Processing Sector
FDI Policy

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Schemes Related to Food Processing Sector in India
Pradhan Mantri Kisan Sampada Yojana
 PM Kisan SAMPADA Yojana is a comprehensive package which will result in

creation of modern infrastructure with efficient supply chain management from farm
gate to retail outlet.
 It will not only provide a big boost to the growth of food processing sector in the
country but also help in providing better process to farmers and is a big step towards
doubling of farmers income, creating huge employment opportunities especially in the
rural areas, reducing wastage of agricultural produce, increasing the processing level
and enhancing the export of the processed foods.
Mega Food Parks
 The Scheme of Mega Food Park aims at providing a mechanism to link agricultural
production to the market by bringing together farmers, processors and retailers so as
to ensure maximizing value addition, minimizing wastage, increasing farmers’
income and creating employment opportunities particularly in rural sector.
 The Mega Food Park Scheme is based on “Cluster” approach and envisages creation
of state of art support infrastructure in a well-defined agri/ horticultural zone for
setting up of modern food processing units along with well-established supply chain.
 Mega food park typically consists of supply chain infrastructure including collection
centers, primary processing centers, central processing centers, cold chain and around
30-35 fully developed plots for entrepreneurs to set up food processing units.
 The Mega Food Park project is implemented by a Special Purpose Vehicle (SPV)
which is a Body Corporate registered under the Companies Act. However, State
Government, State Government entities and Cooperatives are not required to form a
separate SPV for implementation of Mega Food Park project. Subject to fulfillment of
the conditions of the Scheme Guidelines, the funds are released to the SPVs.
 So far Nine Mega Food Parks, namely, Patanjali Food and Herbal Park, Haridwar,
Srini Food Park, Chittoor, North East Mega Food Park, Nalbari, International Mega
Food Park, Fazilka, Integrated Food Park,Tumkur, Jharkhand Mega Food Park,
Ranchi, Indus Mega Food Park, Khargoan, Jangipur Bengal Mega Food Park,
Murshidabad and MITS Mega Food Park Pvt Ltd, Rayagada are functional .

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Integrated Cold Chains and Value Addition Infrastructure
 The objective of the Scheme of Cold Chain, Value Addition and Preservation
Infrastructure is to provide integrated cold chain and preservation infrastructure
facilities, without any break, from the farm gate to the consumer.
 It covers pre-cooling facilities at production sites, reefer vans, mobile cooling units as
well as value addition centres which include infrastructural facilities like Processing/
Multi-line Processing/ Collection Centres, etc. for horticulture, organic produce,
marine, dairy, meat and poultry etc.
 The integrated cold chain project is set up by Partnership/ Proprietorship Firms,

Companies, Corporations, Cooperatives, Self Help Groups (SHGs), Farmer Producer
Organizations (FPOs), NGOs, Central/ State PSUs, etc. subject to fulfilment of
eligibility conditions of scheme guidelines.
Schemes for Creation/Expansion of Food Processing/Processing Facilities
 The main objective of the Scheme is creation of processing and preservation

capacities and modernisation/ expansion of existing food processing units with a view
to increasing the level of processing, value addition leading to reduction of wastage.
 The setting up of new units and modernization/ expansion of existing units is covered
under the scheme. The processing units undertake a wide range of processing
activities depending on the processing sectors which results in value addition and/ or
enhancing
ing shelf life of the processed products.

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 Scheme is implemented through organizations such as Central & State PSUs/ Joint
Ventures/ Farmer Producers Organization (FPOs)/ NGOs/ Cooperatives/ SHG’s/ Pvt.
Ltd companies/ individuals proprietorship firms engaged in establishment/
upgradation/ modernization of food processing units. Proposals under the scheme are
invited through Expression of Interest (EOI) and Project Management Agencies
(PMA) are engaged by MOFPI to assist in the implementation of the scheme.
Agro Processing Clusters:
 The scheme aims at development of modern infrastructure and common facilities to

encourage group of entrepreneurs to set up food processing units based on cluster
approach. Under the scheme, effective backward and forward linkages are created by
linking groups of producers/ farmers to the processors and markets through well-
equipped supply chain consisting of modern infrastructure for food processing closer
to production areas and provision of integrated/ complete preservation infrastructure
facilities from the farm gate to the consumer.
 Each clusters have two basic components i.e. Basic Enabling Infrastructure (roads,
water supply, power supply, drainage, ETP etc.), Core Infrastructure/ Common
facilities (ware houses, cold storages, IQF, tetra pack, sorting, grading etc.) and at
least 5 food processing units with a minimum investment of Rs. 25 crore. The units
are set up simultaneous along with creation of common infrastructure.
 The Project Execution Agency (PEA) which is responsible for overall implementation
of the projects undertakes various activities including formulation of the Detailed
Project Report (DPR), procurement/ purchase of land, arranging finance, creating
infrastructure, ensuring external infrastructure linkages for the project etc. PEA may
sell/ lease plots in agro-processing cluster to other food processing units but the
common facilities in the cluster cannot be sold or leased out.
Scheme for Creation of Backward and Forward Linkages
 The objective of the scheme is to provide effective and seamless backward and
forward integration for processed food industry by plugging the gaps in supply chain
in terms of availability of raw material and linkages with the market. Under the
scheme, financial assistance is provided for setting up of primary processing centers/
collection centers at farm gate and modern retail outlets at the front end along with
connectivity through insulated/ refrigerated transport.
 The Scheme is applicable to perishable horticulture and non-horticulture produce such

as, fruits, vegetables, dairy products, meat, poultry, fish, Ready to Cook Food
Products, Honey, Coconut, Spices, Mushroom, Retails Shops for Perishable Food
Products etc.
 The Scheme would enable linking of farmers to processors and the mark
market for
ensuring remunerative prices for agri produce.

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Food Safety and Quality Assurance Infrastructure
 Quality and Food Safety have become competitive edge in the global market for food
products. For the all-around development of the food processing sector in the country,
various aspect of Total Quality Management (TQM) such as quality control, quality
system and quality assurance should operate in a horizontal fashion.
 Apart from this, in the interest of consumer safety and public health, there is a need to
ensure that the quality food products manufactured and sold in the market meet the
stringent parameters prescribed by the food safety regulator.
 Keeping in view the aforesaid objectives, government has been extending financial
assistance under the scheme under the following components:
 Setting up and upgradation of quality control/Food Testing Laboratories.
 HACCP/ISO Standards/Food Safety/Quality Management System
National Mission on food processing:
 Ministry of Food Processing Industries (MOFPI) implemented a new Centrally

Sponsored Scheme (CSS) National Mission on Food Processing (NMFP) on 1st April
2012 for implementation through States/UTs.
 The NMFP visualizes establishment of a National Mission as well as corresponding

Missions in the State and District level. The major objectives of this schemes are as
follows:
1. To augment the capacity of food processors working to upscale their operations

through capital infusion, technology transfer, skill up gradation and handholding
support.
2. To support established self-help groups working in food processing sector to facilitate

them to achieve SME status.
3. Capacity development and skill upgradation through institutional training to ensure

sustainable employment opportunities to the people and also to reduce the gap in
requirement and availability of skilled manpower in food processing sector.
4. To raise the standards of food safety and hygiene to the globally accepted norms.
5. To facilitate food processing industries to adopt HACCP and ISO certification norms
6. To augment farm gate infrastructure, supply chain logistic, storage and processing
capacity.
7. To provide better support system to organized food processing sector
Major Programs / Schemes to be covered under NMFP during 2012-13 are;

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Supply Chain Management in Indian Agriculture

Definition:
“Supply chain means flow & movement of goods from the producers to the final
consumers”.
Supply Chain is a sequence of flows that aim to meet final customer requirements that take
place within and between different stages along a continuum, from production to final
consumption.
The Supply Chain not only includes the producer and its suppliers, but also, depending on the
logistic flows, transporters, warehouses, retailers, and consumers themselves. In a broader
sense, supply chains also includes, new product development, marketing, operations,
distribution, finance and customer service.
A Graphical Presentation of Supply Chain
Supply Chain Management: The term ‘Supply Chain Management’ is relatively new. It
first appeared
ed in logistics literature in the 1980s, as an inventory management approach with
emphasis on the supply of raw materials. Logistics managers in retail, grocery, and other high

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inventory industries began to realize that a significant competitive advantage could be

derived through the management of materials that flow in their ‘inbound’ and ‘outbound’
channels.
Supply Chain Management involves following processes:
 Integrated Planning
 Implementation
 Coordination
 Control
Therefore, SCM is the integrated planning, implementation, coordination and control of all
Agri-business processes and activities necessary to produce and deliver, as efficiently as
possible, products that satisfy consumer preferences and requirements.
Contrasting Supply Chain Management with Traditional Management Chain
Element Traditional Management Supply Chain Management

Inventory Independent Efforts. Joint reduction in channel
management inventories.
approach
Total cost approach Minimize firm costs Channel-wide cost efficiencies
Time horizon Short-term Long-term
Amount of Limited to needs of own As required for planning and
information sharing current transactions monitoring purposes
and monitoring
Amount of Single contact for the Multiple contacts between levels in
coordination of transaction between channel firms and levels of channel
multiple levels in the pairs
channel
Joint planning Transaction-based On-going
Breadth of supplier Large to increase competition Small to increase coordination
base and spread risk
Channel leadership Not needed Needed for coordination focus
Speed of operations, ‘Warehouse’ orientation ‘Distribution Centre’ orientation
information and (storage, safety stock). (focus on turnover speed).
inventory flows Interrupted by barriers to Interconnecting flows; JIT, Quick
flows. Localized to channel Response across the channel
pairs
Agriculture Supply Chain Networks

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An agriculture supply chain system comprises organizations/cooperatives that are responsible

for the production and distribution of vegetable/Fruits/Cereals/Pulses or animal-based
products. In general, we distinguish two main types:
1. ‘Agriculture food supply chains for fresh agricultural products’ (such as fresh
vegetables, flowers, and fruit). In general, these chains may comprise growers,
auctions, wholesalers, importers and exporters, retailers and speciality shops and their
input and service suppliers. Basically, all of these stages leave the intrinsic
characteristics of the product grown or produced untouched. The main processes are
the handling, conditioned storing, packing, transportation and especially trading of
these goods.
2. ‘Agriculture food supply chains for processed food products’ (such as portioned
meats, snacks, juices, desserts, canned food products). In these chains, agricultural
products are used as raw materials for producing consumer products with higher
added value. In most cases, conservation and conditioning processes extend the shelf-
life of the products.
Issues Related to Agriculture Supply Chains
Participants in Agriculture supply chains, e.g. farmers, traders, processors, retailers, etc.,
understand that original good quality products can be subject to quality decay because of an
inadequate action of another participant.
For example, when a farm leaves a can of milk for pick-up on a roadside, under the sun,
without any cover, there will be a loss of quality that may even render the raw material unfit
for processing.
Similarly, if processors, on the other hand, use packaging items and/or technologies that do
not maintain freshness and nutritional characteristics of their products as much as possible,
retailers will be likely to face customer complaints.

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Characteristics of Agriculture Supply Chains and its impact on Logistics
Supply Chain Issues with Product & Process Impact on Logistic/Flow of

Stage Characteristics goods.
Overall Shelf-life constraints for raw materials, • Timing constraints (goods
intermediates and finished products and have to be supplied quickly
changes in product quality level while to avoid decay).
progressing the supply chain (decay). • Information requirements
Recycling of Materials Required. (correct information of
goods is essential).
Growers / • Long production times (producing new • Responsiveness
Producers or additional agro-products takes a lot of • Flexibility in process and
time) planning
• Seasonality in production • Variability of
quality and quantity of supply
Food processing • High volume, low variety (although the • Importance of production
industry variety is increasing) production systems planning and scheduling
• Highly sophisticated capital-intensive focusing on high capacity
machinery leading to the need to maintain utilization
capacity utilization • Flexibility of recipes
• Variable process yield in quantity and • Timing constraints, ICT
quality due to biological variations, possibility to confine
seasonality, random factors connected products
with weather, pests, other biological • Flexible production
hazards planning that can handle this
• A possible necessity to wait for the complexity
results of quality tests • Need for configurations
• Alternative installations, alternative that facilitate tracking and
recipes, product-dependent cleaning and tracing
processing times, carry over of raw
materials between successive product lots,
etc.
• Storage buffer capacity is restricted,
when material, intermediates or finished
products can only be kept in special tanks
or containers
• Necessity to value all parts because of
the complementary nature of agricultural
inputs (for example, beef cannot be
produced without the co-product hides)
• Necessity for lot traceability of work in
process due to quality and environmental
requirements and product responsibility
Auctions / • Variability of quality and quantity of • Pricing issues
Wholesalers/ supply of farm-based inputs • Timing constraints
Retailers • Seasonal supply of products requires • Need for conditioning
global (year-round) sourcing • Pre-information on quality
• Requirements for conditioned status of products
transportation and storage means

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Issues Related to Supply Chain Management in India

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Chapter 13-Industrial sector

Industrial development in India
Phases of Industrial Development in India
Industrialisation during the British Rule
Indian Industry had a global presence before the advent of Britishers in India. Before the
advent of British in India, India accounted for a quarter of World’s Industrial output.
The exports from India consisted of manufacturers goods like cotton, silk, artistic ware, silk
and woollen cloth.
The impact of British Policies and the Industrial Revolution led to the decay of Indian
handicraft industry. Post-Industrial revolution in Britain, machine-made goods starting
flooding into the Indian markets.
The decline of traditional handicraft was not followed by the rise of modern Industrialisation
in India due to the British policy of encouraging the imports of British made goods and
exports of raw materials from India.
The First Phase (1950-1965): Industrial Sector at the Time of Independence
The main features of the Indian Industrial sector on the eve of the Independence were:
1. There were majority of consumer goods industries vis-à-vis producer goods/capital

goods industries resulting in lopsided industrial development. The ratio of consumer
goods industries to producer good/capital goods industry was 62:38 during the early
1950s.
2. The Industrial sector was extremely underdeveloped with very weak infrastructure.

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3. The lack of government support to the industrial sector was considered as an

important cause of underdevelopment.
4. The structure and concentration of ownership of the industries were in few hands.
5. Technical and Managerial skills were in short supply.
As a result of these shortcomings, the national leadership reached on a consensus that

economic sovereignty and economic independence lay in the rapid industrialisation including
the development of Industrial Infrastructure.
The First Five-year Plan did not envisage any large-scale programs for industrialisation.
The plan rather made an attempt to give a practical shape to the Indian economy by providing
for the development of both private and public sector. A number of industries were set up in
the public sector. Important among those were Hindustan Shipyard, Hindustan Tools, Integral
Coach Factory etc.
The Second Five-Year plan accorded highest priority to Industrialisation. The plan was
based on famous Mahalanobis Model. Mahalanobis model set out the task of establishing
basic and capital goods industries on a large scale to create a strong base for the industrial
development. The plan includes substantial investment in the Iron and Steel, Coal, Heavy
engineering, Machine building, Heavy Chemicals and Cement Industries of basic importance.
The Third Plan followed the strategy of the Second plan by establishing basic capital and
producer good industries with the special emphasis on machine building industries. As a
result, the second and the third plan placed great emphasis on building up the capital goods
industries. Most of the capital good industries are built under the Public Sector.
The First Three-Five Year Plans are important because their aim was to build a strong
Industrial base in India. This first phase of Industrial development in India laid the foundation
for strong Industrial Phase.
As a result, the first Three Plans witnessed a strong acceleration in the growth rate of the
Industrial production. The period witnessed an increase in growth rate from 5.7% to 7.2%
and ultimately 9.0% in the first, second and third plans respectively.
The most important observation of the period was that the rate of growth of capital good
industry considered as the backbone of modern industrialisation grew at 9.8%, 13.1% and
19% during the first, second and third plan respectively.

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Source: Government of India, Handbook of Industrial Statistics
The Second Phase (1965-1980): The Period of Industrial Deceleration
The first three five-year plans mostly focused on the development of the Capital Good sector.
As a result, the consumer goods sector was left neglected. The consumer goods sector also
known as wage good sector is considered to be the backbone of the rural economy and its
complete neglect had resulted in fall in the growth rate of industrial production as well as of
the overall economy.
Note4Student
The Wage Good Model: Prominent Economist like, C N Vakil and P R Brahmananda
advocated Wage Good model for the development of the Indian economy and
Industrialisation. Vakil and Brahamanda differed from the Mahalanobis strategy as they
believe “At the low level of consumption (this was the situation in India) the productivity of
the workers depends on how much they consumed. According to them, if people were
undernourished, they will lose their productivity and become less efficient, at this juncture it
is necessary to feed them to increase their productivity. But this is not true for all consumer
good; so they differentiated between Wage Good (whose consumption increase worker
productivity) and Non-Wage Good (whose consumption did not).
To sum up, Wage Good model says; worker’s productivity depends on not on whether they
use machines to produce goods but also on the consumption of wage goods like, food, cloth
and other basics. Therefore, the first step towards development is to mechanize agriculture
and raise food production; once this objective is reached, one should go for Mahalanobis
strategy of Heavy Industrialisation.
Anyway, Vakil and Brahmananda strategies were ignored and India launched heavy
Industrialisation in the Second plan without mechanising agriculture. The result was failure
of Mahalanobis Strategy and by 1965-66 India was hit by a severe food shortage crisis.
Finally, in the wake of the crisis, the government adopted Brahmananda strategy of
mechanizing agriculture sector and engineered green revolution.

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The period between 1965 to 1975 was marked by a sharp fall in the industrial growth rate.
The rate of growth fell from 9.0% during the third plan to a mere 4.1% during the period of
1965-75. The growth rate fell to 5.3% in 1965-66, 0.6% in 1966-67, then recovering a little in
the succeeding years.
Source: Ministry of Commerce, GOI.
The deceleration it the growth rate is evident during the fourth and fifth plan. The industrial
growth rate fell from 5.6% in the year 1971-72 to 0.8% in the year 1973-74. At the end of the
fifth plan in 1979-80, the industrial growth rate fell to negative 1.6%.
The period of 1965-80 is also marked as the period of structural retrogression, where the
growth rate of the capital good sector and basic industries also fell.

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Causes of Deceleration and Retrogression
Phase Three (1980-1991): Industrial Recovery
The period of the 1980s can be considered as the period of the Industrial recovery. The period
saw a revival in the industrial growth rates. The period witnessed an industrial growth rate of
more than 6 percent during the sixth plan and 8.5 percent during the seventh plan. The period
was also marked by a significant recovery in the manufacturing and capital good sector. The
most important observation from the revival of industrial sector was that the revival is closely
associated with the increase in the productivity of Indian Industries.

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Causes of Industrial Recovery

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Phase Four (Post Reform Period)
The year 1991 ushered a new era of economic liberalisation. India took major liberalisation
decision to improve the performance of the industrial sector.
1. Abolishment of the Industrial Licensing.
2. Simplification of the procedures and regulatory requirement to start a business.
3. Reduction in the sector exclusively reserved for the Public sector.
4. Disinvestment of the selected Public-sector undertakings.
5. Foreign investors were allowed to invest in the Indian firms.
6. Liberalisation of the trade and exchange rate policies.
7. Rationalisation and massive reduction in the structure of Customs Duties.
8. Reduction in the excise duties.
9. Reduction in the Income and Corporate taxes to promote Business.
To analyse the impact of these reforms measures on the industrial growth, it is better to
divide the period into two.
The period of the 1990s
1. The average annual growth rate of the industry which was close to 8% in the post-
reform period fell to 6% in the 1990s.
2. The growth rate in the Eighth Plan was 7.3 percent which was same as the targeted
growth rate.
3. The growth rate in the Ninth Plan was 6.0 percent which was significantly less than
the targeted rate of 8.2 percent.
4. Further, the sector witnessed its worst ever performance in the last few years of the
Ninth plan with growth collapsing to just 2 percent.

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Causes of Slow Industrial Performance
The Period since 2002-03:
The period since the new millennium witnessed a sharp recovery and revival of the industrial
sector. The tenth and eleventh plan witnessed a high growth rate of industrial production.
The rate of growth of the industrial sector was 5 percent during the initial years of the Tenth
Plan. The growth picked in the following years and reached 7% in 2003-04, 8% in 2004-05
and 11% in 2006-07. For the plan as a whole, the growth rate was 8.2 percent.

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The growth in the Tenth plan was mainly driven by the manufacturing sector. The significant
acceleration in the capital good sector was the significant contributor to the overall economic
growth.
During the Eleventh Plan, the industrial growth witnessed a considerable degree of
fluctuations. After growing at more than 8 percent, the growth collapsed to 2.8 percent in the
year 2008-09. The main reason for the collapse was the Global Financial crisis that hit the
World in the year 2008.
The industrial growth started recovering in the year 2009-10 and touched a high of 10
percent. The industrial growth after some setbacks again recovered in the year 2010-11 to
reach 8.2 percent.
The period post-2011 till now
The period starting from 2011-12 saw a severe slowdown in the industrial growth and
production. The slowdown during the period is due too.
1. Weak Demand for exports from the Developed Western Countries due to Global
Financial Crisis.

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2. The slowdown in the Domestic Demand.
3. High Interest in India maintained by the RBI, due to persistently high Inflation.
4. The slowdown in the Private Investment by the private sector due to weak returns on
the investments.
5. Rising NPAs of the Public-Sector banks has led to weak credit and lending offered by
them.
6. Failure of past projects of the private sector.
7. Government reluctance to increase Public investment due to the stand of maintaining

a low fiscal deficit.
8. Uncertain Global Recovery.
9. European Debt Crisis.
10. The slowdown in the prices of commodities in International Commodity markets

mainly due to weak Chinese growth. The weakness in the prices has hit the Indian
agriculture sector where prices of the Agriculture commodities has remained low,
leading to collapse of income in the rural areas.
The annual growth rate of IIP has been decelerating post-2011. The IIP fell from 8.2% in
2010-11 to 2.9% in 21011-12. The IIP further fell to 1.1% in 2012-13, negative 0.1 percent in
2013-14 and 2.8% in 2014-15.
Trends of Plan-Wise Industrial Growth Rate

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Industrial Policy in India and its effects on growth

Industrial Policy in India: Pre 1991 Era
A brief outline of Industrial Policy
After Independence, the Government of India adopted an approach to develop Industrial

sector of India. India adopted several Industrial Policy resolutions to develop the Industrial
sector.
Industrial Policy Prior to 1991
Industrial Policy Resolution, 1948
The resolution was issued on April 6, 1948. The resolution accepted the importance of both
private and public sectors for the development of the industrial sector.
The 1948 Resolution also accepted the importance of the small and cottage industries as they
are suited for the utilisation of local resources and are highly labour intensive.
The 1948 Resolution divided the Industries into following four categories.

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Industrial Policy Resolution, 1956
The Policy Resolution of 1956 laid the following objectives for the growth of the Industrial
sector:
1. To accelerate the rate of growth and to speed up the pace of Industrialisation.
2. To develop heavy industries and machine making industries.
3. Expansion of Public Sector.
4. To reduce disparities in Income and Wealth.
5. Development of a competitive Cooperative Sector.
6. To prevent concentration of Business in few hands and Restriction in Creation of

Monopolies.
The objectives were chosen carefully with the aim of creating employment and reducing
poverty.
The 1956 Resolution further divided the Industries into three Categories.

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To sum up, the 1956 Resolution emphasised on the mutual dependence and existence of the
public and private sectors. The only 4 industries in which private sector are not allowed were
Arms & Ammunition, Railways, Air Transport and Atomic Energy. In all other sector, either
private sector was allowed to operate freely or will provide help to the government sector as
and when needed.
Industries (Development & Regulation) Act, 1951.
The Industries Act was passed by the Parliament on October 1951 to control and regulate the
process of Industrial development in the country. The Acts main task was to regulate the
Industrial sector.
The specific objectives of the Act were:
1. Regulation of Industrial Investment and Production according to Five Year Plans.
2. Protection of small-scale enterprises from giant enterprises.
3. Prevention of Monopolies and concentration of ownership of industries in few hands.
4. Balanced Growth and Equitable development of all the regions.

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5. It was also believed that the State is best suited to promote balanced growth by;
channelizing investment in the most important sectors; Correlate supply and demand;
eliminate competition; ensure optimum utilisation of social capital.
Major Provisions of the Act
Restrictive Provisions: It contains all measure provision to curb unfair trade practices.
Registration: The provisions make registration of industries mandatory irrespective of

whether they are private or public in nature. The expansion of the existing business also
required licencing and permission.
Examination and Monitoring of the Industries: After granting of license, it is the

responsibility of the state to monitor the performance of the industries. If at any point in time,
the industrial unit was found not up to the mark, underutilising its resources or charging
excessive prices, the government could set up an enquiry against the unit.
Cancellation of the Licence: The government has the power to cancel the licence granted to
the industrial unit if found, engaging in wrongful behaviour.
Reformative Provisions:
The category involved following provisions.
Direct Control by the Government: Under this provision, the government could set up an
enquiry against the industrial unit and can order reform process, if it was not being run
properly.
Control on Price, Distribution and Supply: The Government was empowered by the act to
control and regulate the prices, supply and distribution of the goods produced.
Problems of the Excessive Restrictions imposed by the Government

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Liberalisation measures adopted in the 1980s
1. Exemption from Licensing.
2. Relaxation to MRTP Act and FERA guidelines.
3. Delicensing of large range of industries.
4. Re-endorsed of capacity: Benefits were granted under this scheme to industries who
successfully achieve capacity utilisation of 90 percent.
5. Broad Banding of Industries: Under this, the government branded the industries into
broad categories. For example; cars, jeeps, tractors, light and heavy commercial
vehicles are branded as Four-Wheelers.
6. Promotion of Economies of scale in production processes to reduce cost by allowing

firms to expand.
7. Development of Backward Areas.
8. Incentives were provided to the Exporters.

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9. Promotion of Small Scale Industries by increasing their Investment limits.
10. New Industrial Policy, 1991.
Industrial Policy in India: Post 1991 Period; New Industrial Policy-1991,

National Manufacturing Policy, Make in India
Industrial Policy in India: Post 1991 Reforms, Period
New Industrial Policy, 1991
In the backdrop of severe Balance of Payment Crisis of 1991, the Government in

continuation of the measured announced during the 1980s announced a New Industrial Policy
on July 24, 1991.
The new industrial policy was a major structural break for the Indian economy. The policy
has deregulated the Industrial sector in a substantial manner. The major aims of the new
policy were; to carry forward the gains already made in the industrial sector; Correct the
existing market distortion from the industrial sector; to provide gainful and productive
employment; to attain global competitiveness.
The Government announced series of Initiative in respect of the following areas:
Abolishment of Industrial Licensing
Role of Public Sector Reduced Substantially

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Entry of Foreign Firms and Investments
Other Important Liberalisation Measures

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National Manufacturing Policy, 2011
The success of India’s economic story has mainly been due to service’s sector growth.
Despite strong policy measures, the industrial sector (especially manufacturing) has
stagnated. The maximum contribution of the sector in the overall GDP is close to 15%, which
is far less than that of other emerging economies like China (whose share is close to 45%). As
a result of which, India has failed to provide gainful employment to its massive labour force.
Lack of employment in the manufacturing sector has put excessive pressure on the
agriculture sector to provide employment, which is not possible under any economic model.
The result of this is the phenomenon called “Jobless Growth”, which is specific to India.
The Government recognising this fact and in order to promote manufacturing sector launched
National Manufacturing Policy on November 2011.
Objectives of the National Manufacturing Policy
Government Policy support under NMP
1. The manufacturing policy proposes to create an enabling environment for the growth
of manufacturing in India.
2. The NMP envisages simplification of business regulations significantly.
3. The NMP proposes the development of the MSMEs sector. The proposal includes
technological upgradations of the MSMEs; adoption of business-
business-friendly policies;
equity investments.

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4. Skill Development of the youth is the most important part of the NMP.
5. Setting up of National Investment and Manufacturing Zones (NIMZ) with significant

incentives like easy land acquisitions, integrated industrial township development,
world-class physical infrastructure.
6. A total of 12 NMIZ have been announced so far by the government. Out of the total
12, 8 NIMZ are located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is
planned to build in; Nagpur; Tumkur (Karnataka); Chittoor (Andhra Pradesh); Medak
(Andhra Pradesh).
Make in India Program
Make in India is a campaign launched by the government of India on 25 September 2015.

The aim of the Make in India program is to project India as an efficient and competitive
powerhouse of global manufacturing. The program aims to convert India into “World’s
Factory” by promoting and developing India as a leading manufacturing destination and a
Hub for the production of manufacturing goods.
Make in India is essentially an invitation to the foreign companies to come and invest in India
on the back of the Government promise to create an environment easy for doing business. But
contrary to public perception, no specific concessions have been offered to foreign investors
under this scheme till date.
The government since the launch of the program is trying to make India an attractive
destination for global Multinationals by focussing on ease of doing business, liberal FDI
regime, improving the quality of Infrastructure and Business-friendly policies.
The need for the program
1. The share of Industrial Manufacturing in India’s GDP is 14-15%, which is way below
its actual potential. The program aims to increase this share to 25%.
2. India’s economic performance is a story of “Jobless Growth”. India has failed to

generate jobs for his youth entering the labour force. The main reason for low job
creation is that the manufacturing sector has failed to take off and still remains dismal.
3. If India failed to develop a competitive manufacturing sector now than it will be

trapped in a “Middle Income Trap”, where India will not be able to grow at a higher
growth rate (India will remain a middle-income country with a deficient and
uncompetitive economic system).
4. No country in the World has become rich and developed without developing its
Manufacturing sector. The story is true for Britain (Industrial Revolution), USA (In
the 1900s), Japan (Since 1950s), and East Asian Tigers (In 1970s), China (Since
1990s).

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5. The employment elasticity of the manufacturing sector is highest. Manufacturing is

the only sector that has the potential to create jobs at a faster rate and absorb excess
labour from agriculture. A weak manufacturing sector, therefore, is a curse for the
economy.
6. The service led growth as witnessed by India since 1991 reforms is not sustainable in
the long run as the employment elasticity of the services sector is one of the lowest.
7. People start consuming services on a large scale once they cross a certain minimum
threshold of Income. In the absence of minimum threshold income, the demand for
services will stagnate in the future and the phenomenon of the service led growth will
be reversed.
8. The key for India to sustain its service-led growth is to make sure that its
manufacturing sector is well developed. A well-developed manufacturing sector will
absorb low skilled labours from agriculture sector and employ the productively in
factories. Similarly, the high skilled workers will be employed in the High-Tech End
of Manufacturing like Electrical Engineering, Aerospace, Automobiles, Defence
Manufacturing etc.
9. Moreover, the benefits from the programme are likely to be multiple and can address
issues on economic growth and employment generation as well as fuel consumer
demand.
10. Having said that, the success of the Make in India programme lies in India building
capabilities to manufacture world-class products at competitive prices. In today’s
dynamic world, achieving the same is far more complex as the variables which impact
business are extremely fluid and require businesses to be extremely flexible and
adaptive to changes in the environment and technology.
How Government is supporting the Program
• Improving Ease of Doing Business and promoting use of technology;
• Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the
economy on a vast scale;
• Introduction of new and improved infrastructure through industrial corridors, industrial

clusters and smart cities;
• Strengthening IPR infrastructure to nurture innovation; and
• Building a new mind-set in government to partner industry instead of working as a regulator

in Economic Growth of the country.
The Government has taken various measures for the success of Make in India ‘campaign as
under:

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a) Industrial Corridors
Cities/regions have been identified to be developed as investment centres in the Delhi-

Mumbai Industrial Corridor in partnership with the State Governments.
(i) Ahmedabad-Dholera Investment Region, Gujarat;
(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;
(iii) Manesar-Bawal Investment Region, Haryana;
(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;
(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;
(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and
(vii) Dighi Port Industrial Area, Maharashtra.
b) Foreign Direct Investment
Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100%
FDI under automatic route has been permitted in construction, operation and maintenance in
specified Rail Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases
of modernization of state-of-art proposals, FDI can go up to 100%; the norms for FDI in the
Construction Development sector are being eased.
c) Easing of Laws, Rules and Regulations
Major changes have been proposed in various laws and rules to overcome regulatory hurdles
d) Investment Security and Stable and Conducive Government Policies
The Government is committed to chart out a new path wherein business entities are extended
red carpet welcome in a spirit of active cooperation. Invest India will act as the first reference
point for guiding foreign investors on all aspects of regulatory and policy issues and to assist
them in obtaining regulatory clearances. The Government is closely looking into all
regulatory processes with a view to making them simple and reducing the burden of
compliance on investors. An Investor Facilitation Centre has been created under Invest India
to provide guidance, assistance, handholding and facilitation to investor during the entire
circle of the business.
What more should be done to make India an attractive destination for Global Firms?

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The Sectors:

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Public sector undertakings in India

The Role of Public Sector Enterprises in the Indian Economy
Public Sector in the India Economy
What is Public Sector: A Brief Profile
The public sector in India is composed of a number of segments

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The Importance/Presence of the Public Sector in the Indian Economy

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Role of the Public Sector in the Indian Economy

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Problems Associated with Public Sector
Public Sector Reforms in India, 1991
The Statement on Industrial Policy, of July 24, 1991, recognised the many problems that have
manifested themselves in many of the public enterprises and sought to rectify these problems.
It noted that many public enterprises have become a burden rather than being an asset to the
Government. The statement proposed “it is time therefore that the Government adopt a new
approach to public enterprises”.
1. The areas reserved for the public sector were reduced drastically from 17 to 8(and
later to 6). In manufacturing, the only areas which continue to be reserved for the
public sector are those related to defence, strategic concerns and petroleum. Even,
here there is no bar to the Government inviting the private sector to participate.
2. Specific attention was given to the issue of industrial sickness in public enterprises
and a commitment was made to refer all sick public enterprises to the Board of
Industrial and Financial Reconstruction (BIFR) or similar body so that appropriate
decisions could be taken on the rehabilitation of these enterprises after examination on
a case by case basis.
3. A commitment was made to provide greater autonomy to remaining public enterprises

through the strengthening of the MOU (Memorandum of Understanding) system and
by providing greater professional expertise in the Boards of these enterprises.

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4. The decision to dis-invest equity in the public sector enterprises was also announced
in the Statement on Industrial Policy.
5. To sum up, the intention behind the announcements made in the Statement of
Industrial Policy was to undertake a wide ranging public sector reform. The objective
was to induce greater efficiency, productivity and competitiveness in the public
sector. The enterprises currently in the public sector were to be strengthened so that
they are enabled to participate profitably in the new competitive environment that
now exists in both the domestic and international economy. If this involves
disinvestment or privatisation, it must be accomplished purposively and quickly.
The Reforms Done so far
1. De-reservation:
 In the manufacturing sector, the reserved areas for the public sector now only include
defence production and mineral oils.
 In the case of mineral oils (petroleum exploration, petroleum refining, etc.), however,
private investment including foreign investment is being actively invited, but on a
discretionary basis.
 The other reserved areas are in respect of atomic energy, minerals related to atomic
energy, coal and lignite, and railway transport. Mining of iron ore, manganese ore,
chrome ore, etc., and mining of non-ferrous metals, which was earlier reserved for the
public sector was further de-reserved in 1993.
 Thus, from the original list of 17 (see Annex III) now only 6 areas still remain
reserved for the public sector.
 The public sector enterprises are now open to competition from new entry in all areas
of manufacturing except in defence production.
Revamping of SICK PSU’s
 The Sick Industrial Companies Act (SICA) has been amended to make mandatory the
referral of sick public sector enterprises to the BIFR.
 Hence, all sick (bankrupt) public sector industrial firms now have to be restructured
through revival, rehabilitation, or closure if found to be unviable. Once the bankrupt
public sector firms are referred to the BIFR, the government has, by necessity, to
make decisions that result from the orders of this Board.
 After referral to the BIFR the Board first has to decide whether a firm has been
correctly referred to them in terms of the definition of sickness (a firm is defined as
sick if its net worth has been totally eroded, if it has made loss
losses for two consecutive
years and if it has been in existence for more than five years).

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 Once a firm is accepted by the Board for further enquiry, the firm itself is usually
asked to put forward its own proposal for a restructuring programme. If this is not
found to be satisfactory an operating agency (OA) is usually appointed in order to
examine its viability or otherwise.
Establishment of the National Renewal Fund
The National Renewal Fund was established in 1992 to provide a social safety net for
workers affected by industrial restructuring. As various enterprises (in both the public and
private sectors) undertake a restructuring process, workers would need focused assistance for
re-training, re-deployment, skill upgradation and other kinds of employment counselling.
The intention behind the NRF was
1. to provide compensation to workers who would be affected by industrial

restructuring;
2. to assist such workers in re-training and re-deployment;
3. To provide resources for employment generation in areas affected by industrial

restructuring. It also had provision for compensating workers who opt to take
voluntary retirement from existing public sector enterprises.
Greater Autonomy to Public Enterprises
In the statement on Industrial Policy, a commitment had been made to provide greater
autonomy to remaining public enterprises through the strengthening of the Memorandum of
Understanding (MOU) system and by providing greater professional expertise in the boards
of these enterprises.
Disinvestment Policy in India
The Disinvestment Program in India
Disinvestment of the Shares/Equity of Public Sector Enterprises
 The government of India has decided to withdraw from the Industrial sector, and in
accordance with this decision, it decided to privatize the Public sector enterprises in a
gradual and phased manner.
 The approach adopted by the government in this regard is to bring down its equity
shares in all non-strategic Public sector enterprises to 26 percent or lower.
 For the purpose of privatization, the government has adopted route of disinvestment
which involves the sale of the public sector equity to the private sector.
 In the first round of dis-investment

investment it was decided to (a) offer a randomly structured
portfolio of shares each with notional reserve price based on a complex valuation

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procedure and (b) to off-load the shares to institutional investors as a buffer between
the Government and the stock market.
 Financial institutions and mutual funds were offered the opportunity to bid for the
bundles. Later, the bidding process was opened up to foreign institutional investors
and to the public at large with the stipulation of a certain minimum bid. Almost all the
bidding so far has been done by financial institutions or mutual funds.
 There have been the inevitable controversies about the prices at which some of the
initial shares were sold, even though all the disinvestment has been done through an
auction process.
 The Government has decided to permit up to 49% disinvestment of equity so that the
government would continue to hold 51%. A firm is legally regarded as a public sector
firm in India if the Government holds more than 50% of equity. A company so
classified is then subject to all the rules, regulations, procedures etc. connected with
government ownership. Thus, a firm in which government ownership goes below
50% can be effectively regarded as being in the private sector even if the government
has a dominant share holding.
 One criticism of this disinvestment process has been that it has essentially been seen
as resource raising exercise by the government.
 A second and, perhaps, more valid criticism is that the valuation of shares is affected
by the decision not to reduce government holdings to less than 51 per cent. With the
continuing majority ownership of the government the disinvested public enterprises
would continue to operate within the constraints of the public sector. Thus, there is a
lack of clarity on future corporate plans and prospects of these enterprises.
Consequently, it is expected that share bids would be lower than they would otherwise
be if there was a clear announcement of eventual disinvestment of greater than 51 per
cent.
Types of Disinvestment Methods in India
The method is followed in India from time to time. The method involves the sale of the
Public sector equity to the private sector and the public at large.
Methods of Disinvestment
There are primarily three different approaches to disinvestments (from the sellers’ i.e.
Government’s perspective)
Minority Disinvestment
A minority disinvestment is one such that, at the end of it, the government retains a majority
stake in the company, typically greater than 51%, thus ensuring management control.

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Historically, minority stakes have been either auctioned off to institutions (financial) or
offloaded to the public by way of an Offer for Sale. The present government has made a
policy statement that all disinvestments would only be minority disinvestments via Public
Offers.
Examples of minority sales via auctioning to institutions go back into the early and mid-90s.
Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via
Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification
Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.
Majority Disinvestment
A majority disinvestment is one in which the government, post disinvestment, retains a

minority stake in the company i.e. it sells off a majority stake. It is also called Strategic
Disinvestment.
Historically, majority disinvestments have been typically made to strategic partners. These
partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to
IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern
Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.
Again, like in the case of minority disinvestment, the stake can also be offloaded by way of
an Offer for Sale, separately or in conjunction with a sale to a strategic partner.
Complete Privatisation
Complete privatisation is a form of majority disinvestment wherein 100% control of the

company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3
hotel properties of HCI.
Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a
vital difference between the two. Disinvestment may or may not result in Privatisation. When
the Government retains 26% of the shares carrying voting powers while selling the remaining
to a strategic buyer, it would have disinvested, but would not have ‘privatised’, because with
26%, it can still stall vital decisions for which generally a special resolution (three-fourths
majority) is required.
The Way Ahead: What should be the Objectives of Public Sector Enterprises
Disinvestment and Restructuring?

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The means of achieving these objectives involve considerations such as the injection of
greater competition into the industrial economy in order to foster a healthier market
structure.
Categories of Public Sector Enterprises: Maharatnas; Navratnas; Miniratnas
Navratnas, Maharatnas and Miniratnas
The Public Sector Enterprises are run by the Government under the Department of Public
Enterprises of Ministry of Heavy Industries and Public Enterprises. The government grants
the status of Navratna, Miniratna and Maharatna to Central Public Sector Enterprises based
upon the profit made by these CPSEs. The Maharatna category has been the most recent one
since 2009; other two have been in function since 1997.
The Maharatna Status
The Maharatna PSUs are chosen from those PSUs who holds the status of Navratnas and
must be listed on the Indian stock exchange fulfilling the minimum prescribed public
shareholding according to the SEBI regulations. The following conditions must be satisfied in
order to get Maharatna status:
 The Average annual turnover of the PSU during the last 3 years is more than Rs.
25,000 crore.
 The Average annual net worth during the last 3 years is more than Rs. 15,000 crore.

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 The Average annual net profit after tax during the last 3 years is more than Rs. 5,000
crore.
 The company should have the significant global presence or international operations.
There are 7 Maharatna CPSEs currently, namely:
1. Bharat Heavy Electricals Limited
2. Coal India Limited
3. GAIL (India) Limited
4. Indian Oil Corporation Limited
5. NTPC Limited
6. Oil & Natural Gas Corporation Limited
7. Steel Authority of India Limited
The Navratna Status
 The company must have ‘Miniratna Category – I‘status along with a Schedule ‘A’
listing.
 It should have at least 3 ‘Excellent’ or ‘Very Good’ Memorandum of Understanding

(MoU) during the last five years.
 Along with the above, it should also have a composite score of 60 or above out of
possible 100 marks in the 6 selected performance parameters:-

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1. Net Profit to Net Worth (Maximum: 25)
2. Manpower cost to cost of production or services (Maximum: 15)
3. Gross margin as capital employed (Maximum: 15)
4. Gross profit as Turnover (Maximum: 15)
5. Earnings per Share (Maximum: 10)
6. Inter-Sectoral comparison based on Net profit to net worth (Maximum: 20)
7. There are 17 Navratna CPSEs in the country
The Miniratnas Status
 The CPSEs that have shown profits in the last continuous three years and have
positive net worth can be considered eligible for grant of Miniratna status.
 Presently, there are 71 Miniratnas in total.
 The Miniratnas are divided into two categories (I and II).
Category One: The PSUs that have made profits in the previous three years or have generated
a profit RS 30 crore or more in one of the preceding three years.
Category Two: The PSUs that have made profits in the preceding three years and have a
positive net worth in all three preceding years.

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Privatisation of Public Sector Enterprises in India

Privatisation is a process by which the government transfers the productive activity from the
public sector to the private sector.
Privatisation offers many advantages.
Methods of Privatisation adopted in India
Initial Public Offers (IPO)
IPOs are the most favoured method of privatisation followed in the developed countries of
Europe and OECD. Under this method, the shares/equity holdings of the PSUs are sold to the
private retail investors and institutions like Mutual Fund houses, Pension Funds and
Insurance Companies etc.
The prerequisite for the IPOs to be successful is that a country must have a well-developed
and well-functioning Capital Market.
The main advantages of the IPO method are:
 It ensures wide participation of retail investors.
 It is likely to face less resistance from the PSUs stakeholders like employees, as the
method involves only selling of PSUs shares without any change in the management
and policies.
 It can be used to offer shares to the employees.
 The method is best suited when the government wanted to raise financial resources
without losing on the management and control of the PSU.

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Strategic Sale
Strategic Sale is a method in which the government decides to sell PSU shares to a strategic
partner. The management in all such cases passes to the strategic buyer.
The various advantages of the method are:
 The performance of the PSU is expected to improve as the private player selected will
already have an expertise in the management and operation of the PSU.
 The strategic partner will be willing to pay a better price for the PSU as his business
interest lies in combining his own business with that of PSU.
 The method helps in infusion of capital and modernisation of the PSUs.
 The method also helps the government in transferring the loss making PSU which
could not have been attractive to retail buyers otherwise. The strategic partner will
acquire such business as he has the prerequisite skills to turnaround the PSU.
 The method is very important for countries having less developed capital market.
Disadvantages:
Sale to Foreign Firms
The method is a variant of the strategic sales method where the government decides to sell
the PSUs to the foreign firms.

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Management and Employees Buy outs
In this route, management and employees come forward to but the shares and equities of the
PSUs.
Disinvestment
The method is followed in India from time to time. The method involves the sale of the
Public sector equity to the private sector and the public at large.
Methods of Disinvestment
There are primarily three different approaches to disinvestments (from the sellers’ i.e.
Government’s perspective)
 Minority Disinvestment
 Majority Disinvestment
 Complete Privatisation

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Chapter 14-Infrastructure
Infrastructure Sector in India: Definitions; Growth and Infrastructure Linkage
Infrastructure Sector
Definitions:
Infrastructure is a key driver of the overall development of Indian economy. Infrastructure

sector focuses on major infrastructure sectors such as power, roads and bridges, dams and
urban infrastructure.
“Infrastructure is generally understood as the basic building blocks required for an economy
to function efficiently”.
The National Statistical Commission headed by Dr. C. Rangarajan, attempted to identify

infrastructure based on some characteristics. The Rangarajan Commission indicated six
characteristics of infrastructure sectors:
Based on these features (except b, d, and e), the Commission recommended inclusion of
following in infrastructure in the first stage:

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Dr. Rakesh Mohan Committee in “The India Infrastructure Report” included:
The World Bank treats power, water supply, sewerage, communication, roads & bridges,
ports, airports, railways, housing, urban services, oil/ gas production and mining sectors as
infrastructure.

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The Economic Survey considers power, urban services, telecommunications, posts, roads,
ports, civil aviation, and railways under infrastructure sector.
Why do Infrastructure Matter for Growth & Development?
There is, indeed, a plethora of anecdotal and more technical evidence that suggests
development of infrastructure can lead to growth and development of an economy.
The argument is particularly true for the developing countries which lack adequate
infrastructure facilities. Intuitively, it should make sense to assume that the more developed a
country is, the higher its infrastructure facilities and hence the lower the return from
additional investment in roads, railways, ports etc. However, the less developed a country is,
the more likely the infrastructure is to matter, because the returns from the Infrastructure
development will be much more than the cost of the projects.
Example: A massive road-building exercise in a poorly developed state can offer a one-time
boost production activity and productivity of workers in the state.

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Infrastructure Sectors & Growth
Any modern textbook on industrial economics or industrial organization will point out that
for industries that enjoy network externalities (positive spill over effects/benefits to other
sectors/industries), the social rate of return has to be higher than the private rate of return in
these projects—assuming that the regulation does not allow the network externality to be
turned into a private rent. In other words, their impact on GDP and its growth should be high.
This explains for instance why the growth impact of the telecoms sector so often come out to
be high. But for specific countries or regions, this could also be true for transport or
electricity.
In general, however, all infrastructure subsectors can be good examples of sectors in which
such network externalities can matter. This section reviews the main lessons available on
each subsector on the growth impact of each infrastructure subsector.

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Energy Sector
The importance of energy sector especially electricity in promoting growth and development
via human development and physical development is well known. The single most reason
obstructing the growth of the industrial sector in general and manufacturing in particular in
India is deficiency of continuous power supply (electricity/electrification) to run factories.
Various studies have found out that, there exist a positive impact on energy infrastructure on
the growth of an economy. Therefore, investing in the energy sector may be the safest bet to
achieve a high growth. This should not be a surprise, energy is indeed an input into any of the
other infrastructure subsectors—for instance, water for irrigation purpose is often pumped
through the electric pumps.
Telecommunication
The impact of telecommunication on the growth is found to be maximum. The availability of

fixed line phones and mobile phone penetration have effectively transformed the Indian
economy and has given boost to Businesses like BPOs and KPOs (Knowledge Processing
Outsourcing).
The recent growing research on the importance of the access to internet to increase
competition in the private and public sector and from increasing competition to the higher
social return and growth of industries is well documented.
Transport
For developing countries like India, the estimated growth effects of transport investments
have been very strong. This has been a common finding in research over the last 20 years or
so. This is not surprising since the transport facilities in India are weak. The main impact of
improved transportation facilities on the development has to come from quality, from
addressing bottlenecks or from capturing new network or suprational effects which have not
been internalized in older designs of the transport networks.
In fact, studies have found, that for most of the developing countries, the construction of
Roads, Railways, Highways, Airports and Sea Ports have contributed positively towards
increasing growth.
For instance, roads are needed in Africa, if Africa wanted to match the growth rate of the rest
of the world. Constructions of Roads & Highways are essential to reduce differences across
regions in India. Ports are needed in India, if India, wants to increase its exports and become
a major player in the Global Economy.

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Infrastructure Development in India

Historical Timeline

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Infrastructure Sector: Recent Developments

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FDI Flows in the Infrastructure Sector

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Infrastructure Projects Completed during 12th Five-Year Plan
Expansion of Roads: Recent Trends

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Revenue growth of Indian Railways

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Power Generation Capacity
 Installed capacity increased steadily over the years, posting a CAGR of 10.57 per cent
in FY09–17 and stood at 326.84 (GW).
 As of June 2017, energy generation from conventional sources stood at 307.7 billion
units (BU).

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Performance of Eight Core Infrastructure Sector

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Infrastructure Sector in India: Growth Drivers; Government Policy

Initiatives
Growth Drivers for Infrastructure Sector in India
Recent Government Initiatives

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Construction Sector
Affordable Housing Scheme

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Infrastructure Development in North Eastern States

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Metro Rail and Mono Rails

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Mono Rail

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Road Transport in India

Classifications of Roads
Roads are mainly classified into following Categories:
Road Network in India

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Importance of Road Transport
Road Development in India
The major initiative undertaken by the government for the development of road sector are:
 The National Highway Development Project (NHDP).
 Pradhan Mantri Bharat Jodo Pariyojana (PMBJP): linking of major cities to

National Highways.
 Pradhan Mantri Gram Sadak Yojana (PMGSY): Construction of Rural roads.
National Highway Development Project
NHDP deal with the development of high quality highways. NHDP is the largest highway
project undertaken in the country. It has been implemented by the National Highway
Authority of India (NHAI).
Initially, The National Highway Development Project (NHDP) consists of two major
components:
The “Golden Quadrilateral”: The Golden Quadrilateral” project will connect the four major
metropolitan cities (Delhi. Mumbai, Chennai & Kolkata) with 4-6 lane highways, with a total
length of about 5,850 km.

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The “North South – East West” projects: The “North South – East West” project will
connect the Northern most point of the country to the Southernmost, and similarly from East
to West, with a total length of about 7,300 km
The NHDP was expected to cost Rs 540 billion, when started in 1998. The financing pattern
of this project indicates that private sector participation in the form of investment amounts to
only Rs 40 billion (7.4 per cent of the total).
Over the course of the project, institutions like the World Bank, Asian Development Bank
(ADB) and Japanese Bank for International Cooperation (JBIC) are expected to finance about
Rs 200 billion; another Rs 200 billion of investment would be financed from the cess.
NHDP consists of following Phases:
1. Phase 1 and Phase 2: The phase envisages construction of 4 & 6 lane highways of
about 14000 KMs. The two phases comprise construction of “Golden Quadrilateral”
and North South (Sri Nagar to Kanyakumari) – East West (Silichair to Porbandar)
Projects.
2. Phase 3: The phase consists of construction of 4-6 lane National highways of 12100
KMs connecting state capitals, tourist places, and industrial centres.
3. Phase 4: The phase involved upgradation and strengthening of 20000 KMs of

single/two lane national highways.
4. Phase 5: The phase involved construction of 6 lane national highways of 6500 KMs.
5. Phase 6 & 7: The phase 6 & 7, involved construction of 1000 KMs of expressways
and construction of 700 KMs of ring roads of major towns and bypasses and other
elevated roads, tunnels, underpasses on national highways respectively.
Problems of the Road Sector

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Road Sector in India Recent Developments

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Expansion of Roadways:

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Road Development Program for North East Region
The Special Accelerated Road Development Programme for the North-Eastern region
(SARDP-NE) is aimed at developing road connectivity between remote areas in the North
East with state capitals and district headquarters
SARDP-NE is vested with the development of double-/four-lane national highways of about

7,530 km and double-laning improving about 2,611 km of state roads, as on FY16
Implementation of the road development programme would facilitate connectivity of 88

district headquarters in North Eastern states to the nearest National Highways
The project would be undertaken in following 3 phases:

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Policy Initiatives by the Government

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Civil Aviation Sector in India

In India, a beginning in the air transport was made in the year 1920, when the government
first decided to prepare air routes between Mumbai and Kolkata. The civil aviation work
actually started in in 1924-25, but the progress was slow until the outbreak of the Second
World War
Hindustan Aeronautics Limited: The Hindustan Aircraft (now Hindustan Aeronautics

Limited), was founded in 1940. It was started at Bangalore (now Bengaluru) as a repair,
overhauling and assemblage depot, has now grown into an important manufacturing plant. It
has designed and manufactured trainer air-crafts. It belongs to the aerospace and defence
industry. It is managed by Ministry of Defence.

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Civil Aviation Recent Developments: A Snapshot
India is the 9th largest civil aviation market in the world, In FY17, domestic passenger traffic
witnessed a growth rate of 21.5 per cent
In FY17, airports in India witnessed domestic passenger traffic of about 205 million people.
Investments worth US$ 6 billion are expected in the country’s airport sector in 5 years
expected
India’s civil aviation market is set to become the world’s 3rd* largest by 2020 and expec
to be the largest by 2030

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Growth Potential & Drivers of Indian Aviation Industry

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Airport Authority of India
Airports & Airstrips in India
Major Airline Operator in India

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Private Sector Participation in Airport Development
Until 2013, AAI was the only major player involved in developing and upgrading airports in
India.
Post liberalisation, private sector participation in the sector has been increasing.
Private sector investment increased to US$9.3 billion during the 12th Five Year Plan from
US$ 5.5 billion in the previous plan.

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1. Recourse to the Public Private Partnership (PPP) model has boosted private sector
investments in airports
2. PPP route for five international airports (Delhi, Mumbai, Cochin, Hyderabad,
Bengaluru) most noteworthy
3. In Union Budget 2017, Government of India has decided to develop select airports in
tier 2 cities under PPP model in order to attract investments from private players.
4. Increasing share of private sector in equity component of major airports:
 74 per cent private shareholding in IGI Airport (Delhi) – owned majorly by GMR (54
per cent), Fraport AG (10 per cent), Eraman Malaysia (10 per cent); rest of the shares
owned by AAI
 74 per cent private shareholding in CSI Airport (Mumbai) – owned majorly by GVK
(50.5 per cent), Bid Services Division (Mauritius) Ltd. (13.5 per cent), ACSA Global
(10 per cent); rest of the shares owned by AAI
 74 per cent private shareholding in RGI Airport (Hyderabad) – owned majorly by

GMR (63 per cent), Malaysia Airports Holdings Berhad (11 per cent); rest of the
shares owned by Government of India (13 per cent) and Government of Andhra
Pradesh (13 per cent)
 74 per cent shareholding in Kempagowda International Airport (Bengaluru) – owned

majorly by Siemens Project Ventures, Germany (40 per cent), Unique (Flughafen
Zurich AG) Zurich Airport, Switzerland (17 per cent), L&T, India (17 per cent); rest
of the shares owned by AAI (13 per cent) and KSIIDC, which is an agency owned by
the state of Karnataka, India (13 per cent).

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In March 2017, by selling off 2 offshore bonds, GMR plans to raise US$250-300 million for
refinancing their debt. In June 2017, GMR announced plans to refinance loans and divest
assets in road and power sectors to cut debt so as to invest up to Rs. 7,400 (US$ 1.15 billion)
crore to expand Delhi and Hyderabad airports.
Successful PPP Model Airports in India
Presently India has 5 PPP airports each at Mumbai, Delhi, Cochin, Hyderabad and
Bengaluru, which together handle over 55 per cent of country’s air traffic.
Government of India has approved 15 greenfield PPP projects which are expected to increase
the air traffic in India. These projects would be setup in Goa, Navi Mumbai, Maharashtra,
Bijapur, Gulbarga, Karnataka, Kerala, West Bengal, Madhya Pradesh, Sikkim, Puducherry
and Uttar Pradesh.
Government Initiatives in Civil Aviation Sector

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Railway Sector in India

Indian Railways
Indian Railways (IR) have been the prime movers to the nation and have the distinction of
being the second largest railway system in the world under single management. IR has
historically played an important integrating role in the socio-economic development of the
country. Its role in economic development assumes importance due to its innate advantage as
a mode of surface transport being more energy efficient and environment friendly than other
transport modes.
Indian Railways: Segments
Railway Segments

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Importance of Railways
Railways Development in India: A Snapshot

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Growth Drivers for Railways

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Revenue Growth for Indian Railways

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Revenue Breakup for Railways

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Subsidiaries of Indian Railways

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Public Private Partnership in Indian Railways

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Recent Initiatives by the Railways

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Announcement Made in Railway Budget

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Dedicated Freight Corridor

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DFC Objectives
Dedicated Freight Corridor: Projections

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Modernisation of Railways

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Policy Support by the Government

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Automobile Freight Train Operator Scheme 2013:

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Wagon investment scheme

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Participative models for rail connectivity and capacity augmented projects
Key modernisation initiatives
1. Introduced ‘Operation 5 minutes’ scheme for passengers travelling unreserved, which

provides the passengers the time to purchase tickets within 5 minutes
2. Installing Bio–toilets by 2016. So far (till October 2016), Indian Railways have
installed more 49,000 Bio–toilets in passenger coaches, extension of built-in dustbin
facility has been approved for non-AC coaches. Setting up of 5-year safety plan
3. Introducing 24/7 All – India helpline number through which passengers could address
their problems on a real – time basis. Toll free number, 138 has been launched as 24/7
All-India helpline number and availability of Toll – free number, 182, for security
related complaints

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4. Moving towards paperless ticketing and charting by development of multi–lingual E–

ticketing portal. In the coming years, SMS on mobiles would be taken as proof instead
of tickets promoting paperless tickets throughout India.
5. Train protection warning system and train collision avoidance system have been
installed on selective routes
6. Setting up a new department that would ensure the railway stations and trains are kept
clean. Improving North-East and J&K connectivity.
7. In an initiative to decarbonize rail transport, Indian Railways will be collaborating

with various public-sector enterprises to speed up the process of electrification of
railway tracks
8. As of June 2017, the Indian Railways is preparing to acquire 25 E5 Shinkasen series

bullet trains from Japan for an estimated cost of US$743.71 million. The high speed
corridor will have urinals, western style toilets with hot water and washing closet seat
facility, separate washrooms for men and women equipped with triple mirrors for
make-up and many other facilities.

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Telecommunication Sector in India

Telecommunication Sector
The substantial progress made in telecommunications since the early 1990s is a success story.
The number of telephone lines has grown by 25-30 per cent each year throughout the 1990s.
The telecommunication sector witnessed revolutionary change in the recent years and the
Indian Telecom network is now the second largest in the World after China. From only 76
million subscribers in 2004, the number has increased to more than 1200 million in 2016. The
increased has been entirely due to spectacular increase in wireless connections or mobile
phones. The number of mobile connections rose from 35 million in 2004 to 1150 million in
2016. Tele density an important indicator of telecom penetration increased from 7 percent in
2004 to 93 percent in 2016.
Telecommunication Reforms
1. Reform in the telecommunications sector began in 1992-93 with the opening of value
added services to the private sector. Subsequently, after intensive deliberation within
the Government and outside, the National Telecom Policy (NTP 1994) announced the
opening of basic telecom services to competition, and the initiation of cellular mobile
services.
2. Private initiative was to complement public sector efforts to raise additional resources
through increased internal generation and the adoption of innovative means like
leasing, deferred payments, build-operate transfer, and the like.
3. The NTP 1994 also envisaged the provision of a public telephone becoming available
for every 500 persons in urban areas and at least one in every village.
4. The method employed for inducing the private sector into both basic and cellular
services was through the auction of licence fees, consistent with what has been
followed by many other countries. The consequence was that the auction process
elicited excessively high bids, even from bidders who had no previous history of
substantive telecom experience, or even any other experience. Once the licences had
been awarded, and operations had begun, inevitable complaints arose about the
licence fees being too high and uneconomic.
5. Since various developments had taken place in the telecom sector and new issues had
arisen, a New Telecom Policy (NTP 1999) was announced. The issues that had arisen
during this period related to:
 Perception of the original licence fee bids having been excessive
 Inadequate competition resulting from the existence of only two operators in each
circle
 Continuing changes in technology

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 The emergence of India as a significant player in the IT industry
1. Under the NTP 1999, a package for migration from fixed licence fee to revenue
sharing was offered in July 1999 to the existing cellular and basic service providers.
2. The MTNL was allowed as a third operator to provide cellular services to promote
competition. Government opened national long-distance services to private operators
without any restriction on the number of operators and with moderate entry fees.
3. International Long Distance Services were then opened in 2001, also with no limit on
the number of operators and moderate entry fees. Both are subject to licence fees
being paid as revenue sharing. Thus significant competition was introduced in the
Indian telecom market starting in 2000-2001.
4. The consequence has been dramatic: cellular mobile tariffs have fallen by about 90
per cent since 1999, and long distance tariffs, both domestic and international, fell by
75 per cent between 2000 and the end of 2012.
5. Corresponding organisational changes also took place during 2000-01. The two
service providing departments of the telecom sector were corporatised, viz.,
Department of Telecom Services (DTS) and Department of Telecom Operations
(DTO).
6. A new public sector company ‘Bharat Sanchar Nigam Limited’ (BSNL) was given all
service providing functions of these two departments with effect from October 2000.
A fourth cellular operator in all the circles was permitted.
7. With the introduction of effective competition in the cellular mobile services sector,
the Telecom Regulatory Authority of India (TRAI) made cellular mobile tariffs free
from regulation while reserving the right to intervene in the case of any malpractice
such as the offer of predatory tariffs.
Telecommunication in India: Recent Developments

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The Telecom Market Segments
Telecom subscriber base expansion

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Wireless Subscription dominates the Indian Markets

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Market Share of Wireless Service Providers

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Fixed Line/Land Line Segment

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Internet Subscription is on the Rise

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Notable Initiatives of Indian Telecom Sector

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Policy Support by Government to the Telecom Sector

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National Telecom Policy, 2012

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Mobile Application Market in India

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Port sector in India

Ports in India
A common characteristic of the fast-growing East and South East Asian countries has been
the rapid growth of trade during their high growth period. A higher share of trade in the
economy contributes to the attainment of higher efficiency. A country improves its resource
allocation by exporting those goods where it exhibits competitive advantage and imports
those where it does not. As its comparative advantage changes, so does the composition of its
exports and imports.
Thus, in order to achieve higher economic growth and higher efficiency levels, the trade-
GDP ratio needs to increase substantially. Improvement in the efficiency of ports and
expansion of their capacity is essential for promoting the growth of trade and export
competitiveness.
Ports in India: A brief Profile

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Categorisation of Indian Ports
Major Ports of India

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Capacity of Major Ports

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Recent Development & Strategies for Port Sector

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Growing External Trade and Ports Expansion

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National Maritime Agenda, 2010-2020.

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Sagar Mala Project
Need for such a project

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Objectives of the project
Suggested recommendations under the project

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National Sagarmala Apex Committee (NSAC)
Six mega ports are planned under Sagarmala project

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Energy and Power Sector

Executive Summary

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India’s Power Sector: Evolution

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World’s Leading Electricity Producer’s

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Sources of Power in India’s Installed Capacity

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Energy Security in India: Recent Developments

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Government Policy Support for the Energy Sector

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Renewable Energy: A rising Source
1. Wind energy is the largest source of renewable energy in India; it accounts for an
estimated 64.77 per cent of total installed capacity (24.7 GW). There are plans to
double wind power generation capacity to 20 GW by 2022.
2. Biomass is the 2nd largest source of renewable energy, accounting for ~12 per cent of
total installed capacity in renewable energy. There is a strong upside potential in
biomass in the coming years.
3. In May 2017, India’s solar power tariffs fell to a new low of US$ 0.038 per unit
during the auction of a 250-megawatt capacity at Bhadla in Rajasthan. This bid was
placed by South Africa’s Phelan Energy Group and Avaada Power to win contracts to
build capacities of 50MW and 100MW, respectively, at Adani Renewable Energy
Park Rajasthan Ltd.
4. In February 2017, low solar tariffs tendered in India at auction, is expected to catalyse
green investments and help in reducing the dependency on fossils fuels.
5. On account of anticipated decline in solar panel prices, due to supply glut in

international market, solar power prices in India are estimated to fall by 2018.
6. In March 2017, the Power Ministry has launched an application named – GARV-II, to
provide real time data related to rural electrification regarding all un-electrified
villages in India.
7. Declining solar power prices as compared to thermal power has prompted the
government to switch to the renewable energy resources. Three coal power projects
have been shelved in Odisha, Gujarat and Uttar Pradesh due to low rate of renewable
solar energy at US$0.038 / kWh.
Nuclear Energy in India: Recent Trends
1. Currently, the country has net installed capacity of 5.8 GW, using nuclear fuels,
across 20 reactors. Of the 20 reactors, 18 are Pressurised Heavy Water Reactors
(PHWR) and 2 are Boiling Water Reactors (BWR)
2. The government aims to quadruple India’s nuclear power generation capacity to 20

GW by 2020;
3. Nuclear Power Corporation of India Limited (NPCIL) plans to construct 5 nuclear

energy parks with a capacity of 10,000 Mwe
4. The Kudankulam Atomic power project, Tamil Nadu, by NPCIL is expected to start
operating by 2016-17 with an installed capacity of 1000 MW.

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5. Unit II of Kudankulam plant has started functioning in May 2016 with an installed
capacity of 1000 MW. The Kudankulam nuclear power plant’s 2nd unit attained
criticality on 10th July, 2016.

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Chapter 15-Investment Models

Investment Models: Public Sector Led Investment Model; Private Sector
Led Investment Model
Investment Models
Public Sector Led Investment Model
Advantages of Public Investment Model

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Private Investment Model
The Supply Side:
The Demand Side:

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Public-Private Partnership Model: Definitions; Need for PPP;

Prerequisites
Public-Private Partnership Model
Definitions:
A PPP Project means a project based on a contract or concession agreement,

between a Government or statutory entity on the one side and a private sector company on the
other side, for delivering a service on payment of user charges. The rights and obligations of
all stakeholders including the government, users and the concessionaire flow primarily out of
the respective PPP contracts.
Unlike private projects where prices are generally determined competitively and Government
resources are not involved, PPP projects typically involve transfer of public assets, delegation
of governmental authority for recovery of user charges, private control of monopolistic
services and sharing of risks and contingent liabilities by the Government.
The justification for promoting PPP lies in its potential to improve the quality of service at
lower costs, besides attracting private capital to fund public projects. For creating a
transparent, fair and competitive environment, the Government of India has been relying
increasingly on standardising the documents and processes for award and implementation of
PPP projects.
A poorly structured PPP contract can easily compromise user interests by recovery of higher
charges and provision of low quality services.
It can also compromise the public exchequer in the form of costlier or uncompetitive bids as
well as subsequent claims for additional payments or compensation.

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The process of structuring PPPs is complex and it is, therefore, necessary to rely on
experienced consultants for procuring financial, legal and technical advice in formulating
project proposals and bid documents for award and implementation of PPP projects in an
efficient, transparent and fair manner.
Model Concession Agreement (MCA) forms the core of public private partnership (PPP)
projects in India. The MCA spells out the policy and regulatory framework for
implementation of a PPP project. It addresses a gamut of critical issues pertaining to a PPP
framework like mitigation and unbundling of risks; allocation of risks and returns; symmetry
of obligations between the principal parties; precision and predictability of costs &
obligations; reduction of transaction costs and termination. The MCA allocates risk to parties
best suited to manage them.
Planning Commission developed the first version of the Model Concession Agreement
(MCA). This was done considering the need to standardize documents and processes for the
PPP framework in the country for ensuring uniformity, transparency and quality in
development of large-scale infrastructure projects.
Subsequently, the Planning Commission had developed various other versions of the MCA
considering the different PPP modes like Built Operate Transfer (BOT) (Toll), BOT
(Annuity), Design, Build, Operate and Transfer (DBOT) and Operate Maintain and Transfer
(OMT) addressing to a significant extent, the changing needs of the sector.
Why Governments Prefers PPP?

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Advantage of PPP: Graphical Analysis
Prerequisites of PPP Models

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Public Private Partnership Models: Contracting, Build Operate Transfer,

Design Build Finance Operate (DBFO), Concessions, Build Operate
Transfer, EPC Model, Swiss Challenge Model, HAM Model
Public Private Partnership Models
PPP Model: Contracting

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PPP Model: Build Operate Transfer

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PPP Model: Design Build Finance Operate (DBFO) Concessions

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PPP Model: Concessions

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PPP Model: Private ownership of Asset
The private sector remains responsible for design, construction and operation of an
infrastructure facility and in some cases the public sector may relinquish the right of
ownership of assets to the private sector.
Three main types of PPP models with private ownership of assets:
Model: Build Operate Transfer.
The private sector builds, owns and operates a facility, and sells the product/service to its
users or beneficiaries. This is the most common form of private participation in the power
sector in many countries (examples are numerous).
For a BOO power project, the Government (or a power distribution company) may or may
not have a long-term power purchase agreement (commonly known as off-take agreement) at
an agreed price from the project operator.
In many respects, licensing may be considered as a variant of the BOO model of private
participation. The Government grants licences to private undertakings to provide services
such as fixed line and mobile telephony, Internet service, television and radio broadcast,
public transport, and catering services on the railways. However, licensing may also be
considered as a form of “concession” with private ownership of assets. Licensing allows
competitive pressure in the market by allowing multiple operators, such as in mobile
telephony, to provide competing services.
Why BOO may be beneficial?
 It is argued that by aggregating design, construction and operation of infrastructure

services into one contract, important benefits could be achieved through creation of
synergies.
 As the same entity builds and operates the services, and is only paid for the successful
supply of services at a pre-defined standard, it has no incentive to reduce the quality
or quantity of services.
 Compared with the traditional public sector procurement model, where design,
construction and operation aspects are usually separated, this form of contractual
agreement reduces the risks of cost overruns during the design and construction

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phases or of choosing an inefficient technology, since the operator’s future earnings

depend on controlling costs.
 The public sector’s main advantages lie in the relief from bearing the costs of design
and construction, the transfer of certain risks to the private sector and the promise of
better project design, construction and operation.

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Private Finance Initiative (PFI) model:
In this model, the private sector similar to the BOO model builds, owns and operates a
facility. However, the public sector (unlike the users in a BOO model) purchases the services
from the private sector through a long-term agreement.
PFI projects therefore, bear direct financial obligations to the government in any event. In
addition, explicit and implicit contingent liabilities may also arise due to loan guarantees
provided to lenders and default of a public or private entity on non-guaranteed loans.
In the PFI model, asset ownership at the end of the contract period may or may not be
transferred to the public sector. The PFI model also has many variants.
Divestiture Model:
In this form a private entity buys an equity stake in a state-owned enterprise. However, the
private stake may or may not imply private management of the enterprise. True privatization,
however, involves a transfer of deed of title from the public sector to a private undertaking.
This may be done either through outright sale or through public floatation of shares of a
previously corporatized state enterprise.
Major Issues in PPP Development
Risk is inherent in all PPP projects as in any other infrastructure projects. The main types of
risks include:

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Recent Advancements in PPP Models
EPC MODEL: Engineering, Procurement and Construction.
EPC is a popular model being adopted globally in many projects like road construction, roof-
top solar projects, etc. Before government chose EPC over PPP in 2014, road construction
rate had dwindled significantly to around just 3km per day.
Problems faced by private Players under PPP (BOT) leading to inefficient

implementation:
1. Delay in land acquisition by the govt and institutional clearances like forest clearance,
defence land handovers hampered pace of construction.
2. Under PPP, capital completely or partly was to be raised by private player through
issuing private equity bonds and borrowing from banks. But –
3. Due to delayed implementation, private players weren’t able to pay back loan in time
adding to NPA in banks, eventually instigating many banks to stop lending loans
4. Delayed implementation also affected fund raising through private equities as they
couldn’t find investors for new ventures
5. Another area where private players faced difficulty was in assessing the traffic on
roads and subsequent designing of roads.
6. Due to Above mentioned problems the balance sheets of builders were over stretched
and thus forced them to exit projects.
Highway sector in India is responsible for job creation for millions of people and has
a multiplier effect on the economy. Hence government took immediate measures to
boost the sector by adopting EPC Model and the acronym stands for Engineering,
Procurement and Construction.
How is EPC different and better than PPP?
1. Govt here bears the entire financial burden and funds the project. Capital is either
raised by issuing bonds like NHAI bonds or by taking steps to secure road toll
receivables post construction. Note that the fund here is not raised through banks.
2. Govt now takes care of clearances, acquiring land and estimating the traffic a very
huge exercise that had to be done by private parties earlier.
3. With decreased risk on private builders and increased incentives for early road
construction, it creates comfortable base to lure investors to carry on the EPC work
i.e. the contractor now designs the installation, procures the necessary materials and
builds the project, either directly or by subcontracting part of the work.
4. Timeline required to construct reduces remarkably.

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5. In a nutshell, while the government takes responsibility of raising capital, procuring

clearances and such, the private builder constructs roads. Thus, significant surge in
road construction pace is expected.
Recent decision of NDA govt in Mar 2016 to develop, operate and maintain the wayside
amenities alongside National highways across India through EPC model is another example
for an EPC project.
HAM MODEL
What is Hybrid annuity model?
 HAM is a Combination of EPC model and BOT-Annuity model. Under this model.
The government will provide 40 percent of the project cost to the developer to start
work while the remaining investment has to be made by the developer.
Why do we require HAM?
 Most of the earliest highway projects allocated through PPP mode were implemented
through BOT –TOLL MODE. under this model the private party is selected to build,
maintain and operate the road based on the fact that which private bidder offered
maximum sharing of toll revenue to the government. Here, all the risks- land
acquisition and compensation risk, construction risk (i.e risk associated with cost of
project), traffic risk and commercial risk lies with the private party. The private
party is dependent on toll for its revenues. The government is only responsible for
regulatory clearances.
 To reduce the risk for private player, and to attract private players, The second model
of PPP i.e. BOT-ANNUITY model was introduced under which the private player
would built, maintain and operate the Project and government would pay the private
player annually fixed amount of annuity. Though it was a better model than BOT-
TOLL because it reduced traffic and commercial risk however cost risk remained as
private player was solely responsible for the cost incurred in the project.
 In last few years many of the highway projects were stuck due to various reasons like
Loss of promoter’s interest, Land acquisition issue, environmental reasons, excessive
and unrealistic bidding by the private players and Lack of fund availability for private
players due to high NPAs of the banks and lack of long term financing options in
India.
 To counter this and to remove the deficiencies of government brought in EPC model.
EPC stands for engineering, procurement and construction. It is a model of contract
b/w the government and private contractor. The EPC entails the contractor build the
project by designing, installing and procuring necessary labour and land to construct
the infrastructure, either directly or by subcontracting. Under this system the entire
project is funded by the government rather than the PPP model where there is cost
sharing. The project is awarded via bidding. Thus, it shifts all the risk from the private

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players to the government and is the other extreme of BOT model where all risk was
borne by the private player
Key features Of HAM MODEL
 Under this the government will pay 40 per cent of the project cost to the
concessionaire during the construction phase in five equal instalments of 8 per cent
each.
 . Revenue collection would be the responsibility of the National Highways Authority

of India (NHAI); developers will be paid in annual instilments over a specified period
of time.
 An important feature of the hybrid annuity model is allocation of risks between the
partners—the government and the developer/investor. While the private partner
continues to bear the construction and maintenance risks as in BOT (toll) projects, it
is required only to partly bear the financing risk. The developer is insulated from
revenue/traffic risk and inflation risk, which are not within its control.
 In the hybrid annuity model, one need not bring 100 per cent of finance upfront and
since 40 per cent is available during the construction period, only 60 per cent is
required to be arranged for the long term. This makes it attractive and viable for the
private player to invest in Highway projects. It also reduces burden on the
Government as unlike EPC, the government has to provide only 40% of the project
cost.
Conclusion
 By adopting the Model as the mode of delivery, all major stakeholders in the PPP
arrangement – the Authority, lender and the developer, concessionaire would have an
increased comfort level resulting in revival of the sector through renewed interest of
private developers/investors in highway projects and this will bring relief thereby to
citizens / travellers in the area of a respective project. It will facilitate uplifting the
socio-economic
economic condition of the entire nation due to increased connectivity across the
length
gth and breadth of the country leading to enhanced economic activity.

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Swiss Challenge Model
What is Swiss Challenge model?
A ‘Swiss Challenge’ is a way to award a project to a private player on an unsolicited

proposal. Such projects may not be in the bouquet of projects planned by the state or a state-
owned agency, but are considered given the gaps in physical or social infrastructure that they
propose to fill, and the innovation and enterprise that private players bring.
The government may enter into direct negotiations with a private player who submits a
proposal and, if they cannot agree on the terms of the project, consider calling for bids from
other interested players. In one variant of the Challenge, the government awards bonus points
to the project’s ideate; in another, it calls for comparative bids, but gives the first right of
refusal to the original player. All this is generally disclosed upfront.
Swiss Challenge model in India
At least half-a-dozen states have used the Swiss Challenge to award projects in sectors
including IT, ports, power and health. Gujarat included it in the Gujarat Infrastructure
Development Act, 1999, and in 2006, amended the Act to provide for direct negotiation. It
was subsequently made part of the Andhra Pradesh Infrastructure Development Enabling Act
and Punjab Infrastructure (Development & Regulation) Act. Rajasthan and Madhya Pradesh
have included it in their guidelines for infra projects. At the central level, the Draft Public
Private Partnership Rules, 2011, allow the Swiss Challenge only in exceptional circumstances
— that too in projects that provide facilities to predominantly rural areas or to BPL
populations.
What are the advantages?
Globally, there aren’t too many good examples of Swiss Challenge projects. South Africa,
Chile, Korea, Indonesia, the Philippines and Taiwan have seriously considered, awarded and
implemented unsolicited projects. The obvious advantages are that it cuts red tape and
shortens timelines, and promotes enterprise by rewarding the private sector for its ideas. The
private sector brings innovation, technology and uniqueness to a project and an element of
competition can be introduced by modifying the Challenge.
And what are the problems?
The biggest concerns are the lack of transparency and competition while dealing with
unsolicited proposals. Governments need to have a strong legal and regulatory framework to
award projects under the Swiss Challenge method. It can potentially foster crony capitalism,
and allow companies space to employ dubious means to bag projects. Given that
governments sometimes lack an understanding of risks involved in a project, direct
negotiations with private players can be fraught with downsides. In general, competitive
bidding is the best method to get the most value on public private partnership projects. The
public-private
government might also end up granting significant concessions in the nature of viability gap

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funding, commercial exploitation of real estate, etc., without necessarily deriving durable and
long-term social or economic benefits.
Is the Swiss Challenge suited to India?
The jury is still out on the success of public-private partnership (PPP) in infra projects. There
have been several controversies around large scale PPP projects. Construction costs jumped
significantly in the case of the Mumbai Metro, and then Chief Minister Prithviraj Chavan did
some loud thinking on whether the government should take over the company promoted by
Anil Ambani after it sought a threefold increase in fares just before commencement last year.
There were serious issues related to the international airport and the Airport Metro line in
Delhi. The government has now brought PPP projects under the ambit of the CAG, so there is
some scrutiny of projects where significant concessions including land at subsidised rates,
real estate space, viability gap funding, etc. are granted by the government. But there is still
no strong legal framework at the national level, and such projects may be challenged in case
of a lack of transparency or poor disclosures. Bureaucrats, who ultimately sign off on such
projects, continue to be afraid to take calls that might face an investigation later. In the
absence of transparency, and a strong element of competition, such projects may be prone to
legal challenges. Smaller projects are better off in this respect.
Government of India Initiatives for Revamping of PPP Models
Viability Gap Funding.
Viability Gap Funding (VGF) Means a grant one-time or deferred, provided to support
infrastructure projects that are economically justified but fall short of financial viability. The
lack of financial viability usually arises from long gestation periods and the inability to
increase user charges to commercial levels. Infrastructure projects also involve externalities
that are not adequately captured in direct financial returns to the project sponsor. Through the
provision of a catalytic grant assistance of the capital costs, several projects may become
bankable and help mobilise private investment in infrastructure.
Government of India has notified a scheme for Viability Gap Funding to infrastructure
projects that are to be undertaken through Public Private Partnerships. It will be a Plan
Scheme to be administered by the Ministry of Finance with suitable budgetary provisions to
be made in the Annual Plans on a year-to- year basis.
The quantum of VGF provided under this scheme is in the form of a capital grant at the stage
of project construction. The amount of VGF will be equivalent to the lowest bid for capital
subsidy, but subject to a maximum of 20% of the total project cost. In case the sponsoring
Ministry/State Government/ statutory entity propose to provide any assistance over and above
the said VGF, it will be restricted to a further 20% of the total project cost.
Support under this scheme is available only for infrastructure projects where private sector
sponsors are selected through a process of competitive bidding. The project agreements must
also adhere to best practices that would secure value for public money and safeguard user
interests. The lead financial institution for the project is responsible for regular monitoring

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and periodic evaluation of project compliance with agreed milestones and performance
levels, particularly for the purpose of grant disbursement. VGF is disbursed only after the
private sector company has subscribed and expended the equity contribution required for the
project.
India Infrastructure Finance Company Limited.
IIFCL was set up in 2006 to provide long term debt for infrastructure projects. Infrastructure
projects are typically long gestation projects and require debt of longer maturity. The
provision of long term funds from commercial banks is restricted due to their asset-
liability mismatch. IIFCL tries to address the above constraints in long term debt financing of
infrastructure.
IIFCL provides financial assistance to commercially viable projects, which includes projects
implemented by a public sector company; a private sector company; or a private sector
company selected under a Public Private Partnership (PPP) initiative. Priority is given to
those PPP projects awarded to private companies, which are selected through competitive
bidding process.
Only projects pertaining to following sectors are eligible for financing from IIFCL:
1. Road and bridges, railways, seaports, airports, inland waterways and other
transportation projects;
2. Power;
3. Urban transport, water supply, sewage, solid waste management and other physical
infrastructure in urban areas;
4. Gas pipelines;
5. Infrastructure projects in Special Economic Zones;
6. International convention centres and other tourism infrastructure projects;
7. Cold storage chains;
8. Warehouses;
9. Fertilizer Manufacturing Industry
IIFCL raises funds from domestic as well as external markets on the strength of government
guarantees. The mode of lending is either long term debt; refinance to banks and financial
institutions for loans granted by them to infrastructure companies; takes out finance;
subordinate debt and any other mode approved by Government from time to time. The total
lending by IIFCL is limited to 20% of the Total Project Cost.

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In 2008, a wholly owned subsidiary of IIFCL, IIFCL (UK) Ltd, was established in London
with the objective of utilising the foreign exchange reserves of RBI to fund off-shore capital
expenditure of Indian companies implementing infrastructure projects in India.
Infrastructure Debt Funds
The term Debt Fund is generally understood as an investment pool which invests in debt
securities of companies. However, an Infrastructure Debt Fund (IDF) registered in India
refers to a company or a Trust constituted for the purpose of investing in the debt securities of
infrastructure companies or Public Private Partnership Projects. Thus, in contrast to the
general understanding of the term, IDF does not refer to a Scheme floated by a mutual fund
or such other organizations but to the Company or Trust who is investing in debt securities.
An IDF can float various Schemes for financing infrastructure projects.
Purpose
IDF is a distinctive attempt to address the issue of sourcing long term debt for infrastructure
projects in India. Union Finance Minister in his Budget Speech of 2011-12 had announced
setting up of IDFs to accelerate and enhance the flow of long term debt in infrastructure
projects. IDFs are meant to
1. supplement lending for infrastructure projects
2. provide a vehicle for refinancing the existing debt of infrastructure projects presently
funded mostly by commercial banks
Structure& Regulation
These Funds can be established by Banks, Financial Institutions and Non- Banking Financial
Companies (NBFCs).
IDFs can be set up either as a company or as a trust. A trust based IDF would normally be a
Mutual Fund (MF) that would issue units while a company based IDF would normally be a
form of NBFC that would issue bonds. Further, a trust based IDF (MF) would be regulated
by SEBI; and an IDF set up as a company (NBFC) would be regulated by RBI.
IDF –MF can be sponsored (sponsor is akin to a promoter) by any NBFC which includes an
Infrastructure Finance Company (IFC). However, IDF-NBFC can be sponsored only by an
IFC.
Investors
The investors in IDFs would primarily be domestic and off-shore institutional investors,
especially Insurance and Pension Funds who have long term resources. Banks and Financial
Institutions would only be allowed to invest as sponsors / promoters of an IDF subject to
certain conditions. The foreign investors eligible to invest in IDFs include FIIs/Sub-accounts,
NRIs, HNIs, QFIs and long term foreign investors such as Sovereign Wealth Funds,
Multilateral Agencies, Pension Funds, Insurance Funds and Endowment Funds. To attract

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funds, an exemption from income tax for IDF has been provided and also the withholding tax
has been reduced to 5% from 20% on the interest payment on the borrowings of IDFs.
An IDF-MF would raise resources through issue of rupee denominated units of minimum 5-
year maturity, which would be listed in a recognized stock exchange and tradable among
investors. It would have to invest minimum 90% of its assets in the debt securities of
infrastructure companies or SPVs across all infrastructure sectors, project stages and project
types. The returns on assets of the IDF will pass through to the investors directly, less the
management fee. The credit risks associated with the underlying projects will be borne by the
investors and not by the IDF. This structure is focused on investors who can afford to take
risk. An existing mutual fund can also launch an IDF Scheme.
An IDF-NBFC would raise resources through issue of either rupee or dollar denominated
bonds of minimum 5-year maturity, which would be tradable among investors. It would
invest in debt securities of only Public Private Partnership projects which have
a buyout guarantee and have completed at least one year of commercial operation.
Buyout guarantee implies compulsory buyout by the Project Authority (which refers to the
government agency who is awarding the contract or who is entering into a concession
agreement with the private party) in the event of termination of concession agreement.
Refinance (essentially means replacing an older loan issued by a financial institution with a
new loan offering better terms) by IDF would be up to 85% of the total debt covered by the
concession agreement. Senior lenders would retain the remaining 15% for which they could
charge a premium from the infrastructure company. Here, the credit risks associated with the
underlying projects will be borne by the IDF. This structure is focused on investors who are
risk-averse.

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 Measures of Economic Development: Human Development Index, Green GDP, Gross

 Economic and Social Development in India: Millennium Development Goals

 Sustainable Development Goals and India

Chapter 2- Issues related to planning

 Planning in India: Bombay Plan; People’s Plan; Mahalanobis Plan; Wage-Good

 Types of Inflation: Demand Pull, Cost-Push, Stagflation, Structural Inflation,

 The Cost of Inflation

Chapter 4- Monetary policy in India

 Monetary Policy in India: Inflation, deflation, Recessionary and Inflationary

 Monetary Policy tools and Money Supply in India

 Monetary Policy Agreement in India

Chapter 5- Banks & Financial markets

Source: Civils Daily

 Banking Sector Reforms in India: Narasimhan Committee 1&2, Nachiket Mor

 Problem of Non-Performing Assets in India

 Non-Banking Financial Companies in India

Chapter 6- Indian Agriculture

 Land reforms in India

 Situation of Indian Agriculture

(b) Cropping Patterns

 Cropping Patterns in India: Factors Affecting; Most Important Cropping Patterns

 Types of Cropping Systems: Mono-cropping; Crop Rotation; Sequential Cropping;

 Farm Subsidies in India: Definition; Working; Need; Negative Impacts

 Types of Farm Subsidies in Indian Agriculture: Irrigation and Power Subsidies;

 Government Intervention in Indian Agriculture

 Minimum Support Prices in Indian Agriculture: MSP definition; Working; Issues;

 Public Distribution System in India: Definition; Issues; Working; Need;

(d) Agriculture Marketing

 Marketing of Agricultural Produce in India: Definition; Role; APMC Act, Model

 Private and Co-operative

Source: Civils Daily

(e) Technology missions and e-technology in the aid of farmers

 Technology Missions in India

 E-Technology in Indian Agriculture to Aid the Farmers

Chapter 7- Poverty, Inequality, and Unemployment

 Poverty in India: Types of Poverty, Causes of Poverty, Vicious Circle of Poverty

 Poverty Lines in India: Estimations and Committees

 Poverty in India: Trickle Down Approach, Inclusive Growth and Multi-Dimensional

 Addressing Poverty in India/Poverty Eradication Schemes

 Income Inequality in India: Causes, Remedies, and Consequences

 Unemployment in India: Definition, Types, and Measures

 Unemployment in India: Causes and Consequences

 Jobless Growth in India: Reasons and Consequences

(d) Other important issues

 Economics of Animal Rearing in India

 Education in India: Role and Channels in Promoting Economic Growth

Chapter 8- Government budgeting

 The Government Budget: Revenue Budget, Capital Budget, Government Deficits

 Budgetary procedure in India

 Types of Budgets in India

Source: Civils Daily

Chapter 9-Taxation in India

 Goods and Services Tax

 Tax Reforms in India

Chapter 10-External sector

 India’s BOP Performance: Balance of Payment versus Balance of Trade, Current

 Foreign Exchange Rate Determination in India and Types of Exchange Rate

 Capital and Current Account Convertibility in India

Chapter 11- International economic organizations

 ADB, BRICS Bank, AIIB

 Bilateral, Regional and Global Groupings and Agreements involving India