Phase 1 - The 1950s: An era of liberal trade and foreign investment policies, A Liberal Trade policy Regime, An open

foreign investment regime, A restrictive industrial policy regime.|| In 1957, the

government gave a number of concessions to foreign firms, including reduced wealth tax and tax exemption to foreign personnel.Key elements of IPR, 1948 1. Dominant role of public sector in
heavy industry dev, 2. Regulation of private sector investment through licensing Distribution and 3.price controls this policy framework had two glaring flaws despite the appearance of
considerable coherence. First, it greatly underestimated the benefits of foreign trade via specialization in products of comparative advantage; exploitation of scale economies; transfer of
technology embodied in goods; and enhanced competition. Had the policymakers fully appreciated the cost of opting out of the world markets, they would not have insisted on self-sufficiency as the
central objective. Second, in choosing to extend its role to manufacturing as well as distribution and pricing of goods, the leadership greatly overestimated the ability of the government to
efficiently perform a wide variety of functions. As long as the economy was small, it was possible for the government to coordinate its various parts. || IPR 1948, mixed economy in which both private
and public would function side by side. 3 Cat of Industries – 1st – State has exclusive rights for investment. 2nd Minerals and Machines were to Private Players but State would establish new
undertakings. 3rd Others for the Private and the State can enter. Domestic Policy 2nd area Regulation of Private Sector Investment.(IDRA) Indust. Develop and Regulation act.1951. The IDRA
required all industrial undertakings in the scheduled industries to register with the central government. It further stipulated that no new industrial undertakings or capacity expansion in the existing
industrial undertakings in the scheduled industries was permitted without prior license. The IDRA had three provisions: It empowered the central government to specify criteria along certain
dimensions that the small scale and ancillary industrial undertakings would have to satisfy to be eligible for supportive measures, exemptions, or favorable treatment that the central government may
decide to provide. Empowered the central government assume direct management control of industrial undertakings under certain circumstances. Empowered the central government to control the
prices and distribution of specified scheduled industries or undertakings. Distribution and Price Controls As with import controls, powers for the control of distribution and prices of industrial
products had existed during the Second World War, under the Defense of India Rules.In the post-independence era, the same powers for the “scheduled industries” were included in the IDRA, 1951.
In areas not covered by the IDRA, most notably agriculture, the government acquired these powers through the Essential Commodities Act, 1955.The distribution and price controls had three
objectives: to ensure allocation of an adequate supply of inputs to “priority” sectors at “reasonable” prices; to ensure “equity” in distribution; and to control “inflationary” pressures. Why was
India able to shift its growth rate from less than 1 percent in the first half of twentieth century to 4.1 percent in the first 14 years of the post-independence era? Did the chosen policies served India
well in the ensuing decades? 1. Honest and efficient bureaucracy and judiciary, 2.strong political leadership under Nehru and vibrant entrepreneurial class. Planning was less complex Licensing
regime not as onerous foreign investment regime relatively opens Expansionary fiscal policies were unsustainable in the long run. India’s single most important mistake was to ignore the critical
importance of international trade for a poor, developing country. Rather than turn to outward-oriented policies that exploited the export potential in labor-intensive products, as Korea did starting in
the early 1960s, India pushed import substitution deeper and deeper into a diverse set of goods including machinery. Moreover, an ever-tightening licensing policy subsequently scuttled domestic
competition as well, and therefore the efficiency effects such competition brings. As we will see in the next chapter, this road was to lead India into a crisis followed by a long period of stagnation in
per-capita income. Indian Economy Phase 2 SOCIALISM – (65-81) - The Political context. The crisis and failed liberalization episode (1965-67) Strangulation of Industry Regulation of foreign
investment, (FERA, 1973) Monopolistic Restrictive and Trade Practices, (MRTP, 1969), The Small Scale Industries Reservation, Foreign Trade Factor market regulation: Labor and land,
Nationalization of banks, Nationalization of insurance, Agriculture: Green revolution and related developments. SOCIALISM The Ten-Point Program promised wide-ranging policy changes, including
nationalization of banks and general insurance companies; ceilings on urban property and income; curbs on business monopolies and concentration of economic power; public distribution of food
grains; rapid implementation of land reforms; provision of house sites to the rural poor; and abolition of princely privileges. Government raised the limit on fixed assets in land, building and machinery
below which new undertakings were exempt from licensing from 1 million to 2.5 million rupees. Failure of agriculture, borrowing from abroad and expansionary fiscal policies led to crisis. The 1960s
saw foreign borrowing on the rise as well. Loans from abroad rose steadily from 1.4 percent of the GDP in 1960–61 to 2.4 percent in 1965–66. The resulting debt was beginning to build up the
principal and interest payments, which reached 21 percent of the export earnings in 1966–67 and as much as 28 percent in 1967–68. Bernard Bell Commission to study the situation and make policy
recommendations Its major concern was the low level of foreign exchange reserves and, therefore, “maintenance” imports including agricultural products and fertilizer. It made two major policy
recommendations: a shift away from heavy industry and toward agriculture, and devaluation of the rupee accompanied by an end to licensing on the bulk of intermediate inputs (but not consumer
goods and machinery) and export subsidies. The Bell mission also recommended substantial nonproject aid for maintenance imports until the reform secured the necessary improvement. Indian
Economy Phase 3 Liberalization by Stealth Entry and expansion governed by the following rules. Schedule A of the Industrial Policy Resolution (IPR), 1956 listed industries reserved for
public sector, Schedule B of the IPR, 1956 listed industries in which state enterprises to acquire dominant role, Schedule 1 of the Industries (Development and Regulation) Act (IDRA), 1951
subjected all investments in excess of 10 million rupees to licensing, Appendix 1 of the press note on industrial policy February 2, 1973 listed industries open to MRTP and foreign companies.,
Schedule IV of the press note February 19, 1973, listed industries in which diversification and substantial expansion were disallowed regardless of the firm’s size., Schedule I of the same note listed
industries reserved for small scale units. The Political Context Deregulation of Industry (“broad-bending”) or diversification Recognition of capacity over and above the licensed capacity,
automatic expansion for appendix I industries due to R&D, re-endorsement of capacity scheme for appendixI companies. Rajiv Gandhi broad bending for licensing purposes, fixed asset limits on
MRTP cos raised to 100 crores leading to increased apps, Requirement of MRTP clearance for 27 industries waived for cos located 100kms from large cities.,Price and distribution controls on
cement and aluminum entirely abolished. Trade Liberalization Direct import controls-, Tariffs.Export Incentives and Restrictions.. (REP licenses, duty drawbacks and Cash Compensatory
Schemes (CCS) Impact of liberalization Nonoil imports/ GDP rising over time – is it sustainable?Foreign Investment and Technology Imports FERA in place MODVAT scheme introduced,
Deregulation of the industry. Direct import controls (Abolition of the Red Book) The first step toward liberalization was the rationalization of the licensing regime. Committee strongly
recommended that products not produced domestically be freed from licensing through inclusion in the open general licensing (OGL) list that had been revived in 1976. Goods in the first category
would be banned altogether, and those in the second category would require a license. Products in the third category would not require a license in principle, though they would be subject to the
actual user (but not the domestic availability) condition. 1. Share of canalized imports declined due to Increased domestic crude oil production and decline in world crude prices Green Revolution
necessitated fewer food grains imports Decline in int. prices of fertilizers, edible oils, nonferrous metals and iron and steel. 2. OGL list steadily expanded Several export incentives were introduced
which helped increase imports directly when tied to exports and indirectly by relaxing the foreign exchange constraints. Replenishment (REP) licenses freely traded in the market. 4. Exchange rates
were steadily devalued to give fillip to exporters. Tariffs Tariffs increased over time as items were moved to OGL, but machinery goods had tariff reductions to make industry more cost effective.
Export Incentives and Restrictions. Promote exports. Passbook Scheme duty free exports.Reduction in Interest Rate, Faster processing of export credit, Retain foreign exchange slips, Duty free
capital goods, || Indian Economy Phase 4 (88-06)Triumph of Liberalization The Political context 1. Growth spurt and Balance of Payments crisis GDP growth rate – 10.5%, 6.7% and 5.6%
during 1988-1991. Liberalization and expansionary fiscal policy with foreign borrowing. 2. Triumph of Liberalization: The New Industrial Policy No investment licensing and myriad entry
restrictions on MRTP firms No public sector monopolies and automatic FDIs upto 51% 3 Trade Liberalization Merchandise trade liberalization Devaluation of rupee by 18% against the dollar Trade
in services and Foreign Investment 4. Liberalization in other sectors. || 1991 crisis and reforms World Bank Structural Adjustment Loan (SAL) concluded in December 1992. The following are the
major changes that the Industrial Policy Statement, 1990 proposed: The investment ceiling in plant and machinery for small-scale industries (fixed in 1985) would be raised from Rs.3.5 million to
Rs.6 million. All new units, upto an investment of Rs.250 million in fixed assets in non-backward areas, and Rs.750 million in backward areas, would be exempt from the requirement of obtaining a
license. For the import of the capital goods, the entrepreneur would be entitled to import up to a landed value of 30% of the total value of plant and machinery required for the unit Imports of raw
materials and components would be permitted up to a landed value of 30% of the ex-factory value of annual production. To attract an effective inflow of technology, investment of upto 40% of the
equity would be automatically be allowed. 100% export-oriented units and units to be set up in export processing zones would be delicensed up to an investment limit of Rs.750 million Units set up
by MRTP and FERA companies would be covered by the procedure set out above, but they would continue to need clearances under the provisions and regulations of these two acts. More industry
came under Open General List (OGL). The external debt to GDP ratio rose from 17.7% in 1984-85 to 24.5% in 1989-90. Over the same time period, the debt service ratio rose from 18% to 27%. ||
Return to Market, 1980-2010. Key takeaways Doing business beyond the borders was a question of either making use of favorable geographical conditions or overcoming the obstacles of
unfavorable geographical conditions Empires in general were an agent in integrating regions and therefore in reducing trade costs. Despite these attempts by regional states to integrate the land and
the sea, the relationship between the two worlds changed decisively only in 19th century (rail). British empire had market integration as its aim. This led India to industrialization and laid the
foundation of world competitive service economy. Deep connection between the present and the colonial past. Education has value in the new world economy and the Indian education market
responded to that rising value with remarkable speed.|| Econ Growth Is there a link between openness, growth and poverty? Direct effect: Stolper-Samuelson effect. Indirect effect: a.“pull effect”
sustained growth of per-capita income of >3%, leads to creation of employment opportunities b. Financial resources for targeted anti-poverty programs c. Increase in income of poor families to
access social infrastructure. First 5 yr Plan The urge to econ and social change under present conditions comes from the fact of poverty and inequalities of income, wealth and opputunity. The
elimination of poverty cannot obviously be achieved merely by redistributing existing wealth. Nor can a program aiming only at raising production remove existing inequalities. The two have to be
considered together, only then a simultaneous advance along both these lines can create a condition in which the community can put forth its best efforts for promoting development.| Second 5 yr
Plan Socialist pattern of growth with the following relevant objectives: Sizeable increase in national income so as to raise the level of living in the country. Rapid industrialization with particular
emphasis on the dev. Of basic and heavy industries. Large expansion of employment objectives. Reduction of inequities in income and wealth; more even distribution of economic power.|| Poverty
alleviation Reasons for non-reduction of poverty ratios. Pull effect may be too weak. Path to industrialization that India chose failed to produce rapid growth of labor-intensive industry. 15 year plan
presented by Pant(1962) laid out a clear strategy of rapid growth complemented by expenditures targeted at bottom 20% of the population, but in effect govt. chose to control income at the top. Govt.
created labor-rights regime in the organized sector that led to high cost regime. Reservation of labor intensive products exclusively for production by small scale units stunted the growth of export-
based, large-scale labor intensive industry.|| Lakdawala poverty line for rural and urban population in terms of total consumption expenditure at 1973-74 market prices. Consumption basket
anchored in the per capita calorie norms of 2400 and 2100 in rural/ urban areas. Used till 2004-05. House hold responses vary systematically according to the length of reference period to which
expenditure are related (30 days vs 365 days). Alternative measures of mpce: Uniform Reference Period (URP) – 30 days reference period. Mixed Reference Period (MRP) – 365 days reference
period for clothing and consumer durables and 30 days reference period for other commodities. Deficiencies of Lakdawala committee poverty line: Poverty line basket remained tied to consumption
pattern observed in 1973-74. CPI for agricultural workers understated the true price increase. Assumption that health and education would be largely provided by underlying Lakdawala lines, didn’t
hold any longer. Private expenditures on these services had risen considerably, even for the poor. Tendulkar Committee poverty line used from 2009-10; In September 2011 – Rs.32 and Rs.26 for
urban and rural population. Tendulkar committee poverty line: URP based estimate of urban poverty in 2004-05 at Lakdawala poverty line of 25.7% taken as anchor to calculate MRP based per
capita consumption expenditure from the 2004-05 survey. Consumption basket associated with the national urban poverty line accepted as the rural poverty line consumption basket. Rural and
urban poverty line became fully aligned. Key points Poverty declined since 1983 along every dimensions (regional, social and religious groups). Acceleration in growth rates between 2004-05 and
2009-10 has been accompanied by acceleration in poverty reduction. For the first time, poverty reduction between 2004-05 and 2009-10 has been larger for the SC and ST than the upper caste
groups. Inter state comparison reveal that the states with large SC and ST population face a more difficulty in combating poverty. In Indian case, no robust relation between inequality and poverty.||
Employment Issues regarding poverty line. WPI & CPIAL – fixed and outdated weights and Changes in relative prices. Issues regarding poverty ratios Subject to usual sampling and non-
sampling errors. Sample size and duration varies over time. Seasonal variation and time varying effects. Price index can influence the poverty ratios. Reference period for hhld consumer expenditure
varies across items within the same round and sometimes may vary for the same commodities across rounds. India Labour and Employment Report 2014: Highlights Labour market inequalities
are large and disparities and inequalities have generally increased. The most striking is the disparity between the regular/casual and organized/ unorganized sector workers: the average daily
earnings of a casual worker stood at Rs.138 in rural areas and Rs.173 in urban areas in 2011-12, and that of a regular worker at Rs.298 in rural areas and Rs.445 in urban areas, while that of a
central public sector enterprise employee was Rs.2,005 per day. And, of course, the public sector employee has many other benefits as well as a secure job. Thus, a rural casual worker earned less
than 7 per cent of the salary of a public-sector employee. The gap between per-worker earnings in agriculture and non-agriculture has considerably widened and now stands at a ratio of 1: 6.
Notwithstanding disparities, there has been significant increase in real wages at the rate of over 3 per cent per year on average during the three decades between 1983 to 2011-12. Due to the
reservation policy, the proportion of SCs and to a very small extent STs in the public sector has increased between 1999-2000 and 2011-12, although their access to the private sector has declined.
The proportion of Muslims employed in both private and public sector has also declined. The most noticeable trend is the significant increase in the proportion of OBCs employed in both private and
public sectors, and a significant decline in the proportion of upper-caste Hindus as well as ‘others’ in both categories. Equity driven policies – How effective are they? Tax and expenditure policies
that redistribute, rather than create income from the higher income groups to lower income groups. e.g., Progressive income taxes, employment guarantee schemes, subsidies on food and fertilizers
| Policies that do not use resources but improve the ability of lower income groups to profit from the economy and its growth. Eg Affirmative actions such as reservation of jobs and slots in
educational institutions. Problems in making equity and redistribution as center of policy making is best typified in the Indian case with respect to Phase II development. Green revolution – An oasis
thanks to US interventions. Regional Inequality May spur competition among states for better governance. Migration of labor for seasonal work. Urban-Rural Inequality Increase of inequality quite
natural, Rising expectations of masses to deliver on reforms fast enough may be important, Addressing inequality may lead to redirecting expenditures from urban to rural projects. Factors that can
derail the story: 1. A slowdown or backlash against the reform agenda.2. Poor macro economic management. 3.Poor fiscal discipline. 4.Lack of investment in Agriculture. 5. Lack of investment in
education. || 4 major elements of the pre-reform regime that were addressed by the reforms starting in 1991: 1) Restrictions, in the form of tariff and nontariff barriers on imports. (2)
Restrictions on both the domestic and foreign private sector. (3) State control of banking and insurance. Creeping Liberalization Policies since 1975 pointed towards gradual retreat from closed
economy license raj model; Policies of 1975, 76, 80 and 84 regarding industrial licensing system and less import controls led to higher growth. Fiscal expansion From 1984 to 1991, large fiscal
deficits incurred by govt. By 1990-91, gross fiscal deficit stood at 10% of GDP (not including the losses of public sector enterprises. Interest payments rose from 2% of GDP and 10% govt exp. In
1980-81 to 4% of GDP and 20% of govt. exp in 1990-91. Fiscal stimulus led to sustained growth. Changing attitude By unleashing the animal spirits of the pvt. Sector and by exploiting the quality of
its existing institutions, the attitudinal change was enough to shift the economy closer to the efficiency frontier. Savings and investment Hhld savings rise substantially over the years may be due to
nationalization of banks in 1969. Between 1971 and 1981, the number of bank branches tripled. Prema-Chandra Athukorala and Sen (2002) estimate that a 1% increase in bank density resulted in a
0.03% increase in pvt. Savings rate. Sen(2007) shows that the increase in capital formation in 1970s was due to rise in equipment (machinery) investment. Increase in equipment investment due
to (1) a fall in the relative price of capital equipment due to limited trade liberalization of the 1980s, (2) financial deepening as measured by real domestic credit to private sector and (3) public
investment. Microfinance through SHGs. UBI is Good UBI will reduce poverty in one single swoop. Beneficiaries decide how they want to spend. Better targeting of beneficiaries as UBI is universal,
reduce exclusion error to almost zero. Minimum income acts as a safety net for poor against unexpected shocks. UBI will encourage usage of bank accounts, ensure profits for banking
correspondents, improve financial inclusion. Also, increased income will make people rely less on credit. Psychological benefit - Guaranteed income will reduce pressure on finding work to survive. A
single welfare program will replace numerous schemes. This will be mean efficiency and better monitoring. UBI is Bad Additional income in hands of men may lead to wasteful spending. In-kind
subsidies help achieve intended objective rather than cash transfers, reducing diversion. Sharing of UBI within households will be affected by gender norms. Universal in nature, this means rich are
also included. So, UBI is self-defeating. Banking system will be stressed more in absence of proper infrastructure. In case of failure, UBI will be difficult to wind up. Disposable income will make
people lazy as there is no incentive to work. Cash transfers are subject to market fluctuations and will curtail purchasing power. WCI Institutions Legal and administrative framework within which
individuals, firms, and govts. interact to generate wealth. Infrastructure Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy Macroeconomic
environment Inflation and exchange rate stability Health and primary education Quality of health service and education Higher education and training Secondary and tertiary enrollment rates as
well as the quality of education Goods market efficiency distortionary or burdensome taxes and by restrictive and discriminatory rules on foreign direct investment (FDI)—which limit foreign
ownership—as well as on international trade. Labor market efficiency flexibility to shift workers from one economic activity to another rapidly and at low cost, and to allow for wage fluctuations
without much social disruption Financial market development allocates the resources saved by a nation’s citizens, to those entrepreneurial or investment projects with the highest expected rates of
return Technological readiness ICT access and usage are key enablers of countries’ overall technological readiness. Market size Trade openness is positively associated with growth. Business
sophistication the quality of a country’s overall business networks and the quality of individual firms’ operations and strategies. Innovation|| Competitiveness and environmental sustainability •
Biodiversity for innovation • Improved health. • Efficient use of natural resources. Competitiveness and social sustainability • Resilience. • Inclusion. • Equity and cohesion. External Sector –
Rupee fully convertible on current account. Full capital account convertibility? 1. Insofar as foreign savings are concerned, these can be exploited through FDI and portfolio investment, to which India
has already opened. The magnitude of foreign savings a company can absorb is constrained by its ability and willingness to tolerate current account deficits; so unlikely that India would absorb more
foreign capital with full convertibility.2. With interest payment on debts amounting to >6% of GDP, a gross fiscal deficit of 8% and a debt to GDP ratio of >90%, convertibility might leave India vuln. to
a crisis. 3. Financial sector is still insufficiently developed. Banks (publicsector), Credit market shallow, insurance opened to private but Foreign Inves. cap at 26% 4. India far from fully integrated on
trade front. A move to cap a/c convertibility is initially bound to bring more capital inflows and force an appreciation of Rs. If appreciation ends up being large and persistent, could put trade
integration into jeopardy. Even if appreciation is only temporary, convertibility could hurt export growth by making the real exchange rate more volatile. 5. Embrace of full capital account convertibility,
which raises the risk of a crisis can place the reforms in other areas at a grave risk. Financial Sector – 3 imp. Components –Money and banking, capital market, insurance and retirement plan. Each
subsector in India will have a regulatory authority; banks by RBI, stock market by SEBI, insurance by IRDA and pensions will eventually have PFRDA. Given that these subsectors are ultimately a
part of the same vast financial market and many entities such as universal banks perform functions that fall under the jurisdiction of different regulatory authorities, should we have a single reg
authority? View- India has taken the right course by decentralizing the regulatory functions across subsectors rather than concentrating it in a single entity. This poses some risks of some activities
and transactions being left uncovered and others covered by two or more agencies. But it is better to resolve these problems as they arise rather than create a single and vast bureaucracy with
multiple arms that do not communicate with each other. Specialized agencies are also likely to employ specialised staff while a large bureaucracy is bound to fall into the usual trap of employing
generalists who think they are capable of turning themselves into specialists of the functions delegated to them overnight.|| Repeat of 1991 crisis in the offing? Differences – 1. former was
characterised by a much larger contribution of foreign debt. 2. In 1980s composition of foreign debt turned unfavourable. Short term borrowing increased. Now, since foreign debt is
small,composition is less of an issue. 3. High an rising debt in 1980s accompanied by v.low foreign reserves. Current level of foreign reserves is large enough to finance more than a year’s worth of
imports. 4. India is now far more open on its trade account than in late 1980s. A high external debt to GDP ratio and a low exports to GDP ratio translate into a high debt to service ratio( debt service
payments as a prop. of exports).As per RBI, latter was 30%(1989-90), 35%(1990-91), 16%(2003-04).6%(2004-05). Given these differences, despite a higher total debt to GDP ratio, chances of
repeat of 1991 crisis is negligible.
Ch10-External Sector. 1) CA convertible from 94-allows FDI freely into economy. FIIs also allowed to invest in equity, corporate and government debt instrument. This led to expansion of trade and
investment but smaller compared to China. 2) From 90s RBI managed the xchange rate-Limited movement in Rs->$ rate in short run but substantial adjustment in longer run, to hold line on xchge
rate. Rs 34% depreciated in b.w 92-02. 3) RBI Biggest challenge – Inflow of foreign exchange thru’ remittance, software export,FI and borrowing. RBI handled well thru’ reserves accumulation and
sterilising thru’ monetary expansion helped control inflation and nominal xhange rate but the real exchange rate w.r.t major markets has appreciated.4) 2 controversies relating to reserves –
Planning commission proposal to fund finance infrastructure projects, but it will increase budget deficit and CA deficit since the investment is absorb the imports and start suing pvt savings.
Reserve accumulation cost extra 2.7% growth (Lal et al), it also prevented large appreciation of rupee however it allowed export to grow at healthy pace which was positive impact.5) India most of
CA convertibility benefits, remaining is borrowing abroad with maturity <3 yrs, removal of caps on various forms of borrowings by domestic firms and inward investments by Debt instr by foreign firms
and freedom to invest abroad. It has macro-economic risk, instead of exposing immediately to CA convert, it should move gradually by deepening financial markets.6) RBI can increase greater
import liberalisation with larger Current Account deficit and slow down on sterilisation but to hold on the line to inflation, real xchange rate and CA deficit, it will be very limited option.
Sterilization: RBI Policy to counteract reserves accumulation by selling domestic assets, mainly govt securities, in return for rupees in open market such that growth in reserve money is unaffected
becoz of foreign reserves. RBI assets+Liabilities=Reserve Money=NFA+NDA. Capital Account: FDI – FERA Act only 40%, 91 opened the door –concept of automatic approval by RBI upto 51% in
34 priority ind. Below 50% are Media&Broadcasting, defense, insurance, petroleum refining, air transport, asset reconstruction and investment companies in infrastructure. Portfolio Investment –
Then 90s upto 5% in single company 24% ceiling all FIIs together in a company. Now -06s upto 10% in single company and upto 100% overall, company FII can buy corporate ($1.5 bn)and Govt
bonds ($2Bn). Indian companies can raise fund from abroad, ADR (American Depository Receipts) and GDR (Global).
External commercial Banking: Firm can borrow $20Mn - $500 mn, all firms together cap $9Bn. NRI deposits interest rate and xchange guarantee removed. Outward Flow- Individuals
$25000/year in Foreign currency. Exporters 50% and 70% for 100% export company thru’ EEFC (Exchange earners foreign currency). No limit for company borrowed under ADR. Formulae: Ip –
(Sp+Sg) =-CA=K-∆𝑹 | CA=(X-M)+NFIA+NFT | NFIA – Net factor Income earned abroad | NFT – Net transfers received from abroad
Summary:Trade and Foreign investment policies facing various sectors must promote efficiency. Trade policy in particular is a very important instrument of enforcing efficiency through competition
and specialization in the goods of competitive adv of the country. CH9-Savings-investment and its relationship to BoP - Sg- Government budget surplus (normaly it is deficit), Sf-National
expenditure-National income which is also CA deficit. Sp-Private savings of household and retained earnings of business Ip=Sp+Sg+Sf. Since Sf = CA, then Ip-(Sp+Sg)=CA. Change in official
reserve can be ∆𝑅. All Net capital inflow+Current account surplus = Net increase in reserve or vice versa K+CA = ∆𝑅
Negative govt savings undercuts private investment. Large and persistent current account deficits often give raise to macro-economic instability and crises and that the appreciation of the
exchange rate accompanying capital inflows can undercut exports Formulae: Debt to GDP ratio 𝒃 = 𝑫/𝒀 | Primary deficit to GDP: 𝝆 = 𝑷/𝒀 | G – GDP growth rate | R – nominal interest rate |
𝝆
𝝆 = 𝒃(𝑮 − 𝑹) | 𝒃 = In 01-02, b rose to 90% higher than any period, economist called it as crisis, later it was concluded that debt and govt insolvency alone cannot be the reason to alarm. This
𝑮−𝑹
show the focus to primary deficit and debt together. Despite high debt ratio, the chances of 1991 like crisis in the near future is negligible. But it can lead other forms of crisis?? Banking Crisis:
Earlier Banks were hugely funding to public sectors and governments were return is less. More over lot of Non performing assets (NPAs) in the recent govt took measures to clean up NPAs and
reduced the interest delinquency period from 180 to 90 days [to avoid Mallaya type loans]
Fiscal Consolidation – To reduce fiscal deficit and debt govt need to lower expenditures and as well improve tax collection. It also need to carryout many microeconomic reforms to improve quality
of public expenditure and the tax system. FRBM In ‘03, Fiscal responsibility and Budget Mgmt to set target to reduce fiscal deficits similar to central govt few states followed the same. Pitfall: No
incentive for govt to follow. they do only wen there is a downfall, also some powerful politicians do it for vote bank RBI Balance Sheet: Monetary Liabilites: A1Notesin circulation, A2.other
deposits, Deposits of Quasi Gvt, Balance of accounts of foreign central banks, and gvt, Accounts of International agencies eg. IMF, A3. Deposits of Banks (Reserves). Non Monetary Liabilities: B.1
Capital accounts&Networth, paid up capital, Stuatuory reserve, Contingency reserve, B2. Gvt deposits, B3, IMF ac1 B4. Miscellanoeus RBI bills, pension etc Assets: Financial Assets A1. RBI Credit
central govt, A2.Credit to State gvt B. Credit to commercial sector 1. Bonds, Loans to Financial institutions, C. RBI Gross claim on Banks 1. Refinance to Banks 2. Fixed investments in Banks,
debentures, shares, bonds D Net Foreign Assets Gold Coins, 2. Eligible foreign securities, 3. Balance held in abroad netted for balance in IMF account Key formulae: GDP (Y) = C+I+G+ Nx | GNP =
GDP+NFTA | NetIncome NI = GNP-Ti+NFT | Ip=Sp+(Td-Ti-G)-(Nx+NFT+NFTA) => Sp+Sg+(-CA)
Ch11: Financial Sector – Allocation of Capital: 1) Help augment prod capital from existing wealth that may tied up in unproductive tangible assets2) Financial intermediation can help growth by
efficiently allocating savings generated out of current production across entrepreneurs. 3) Financial market can help increase savings and investments from current production by raising the return
available to the savers & lowering the cost of funds paid by investors. Achieve the objective thru; Demand driven or supply drive approach. “Entitlement approach” rural to Metro banks Financial
Repression: 1. RBIs extension of credit to govt, rendered other bank marginal 2. RBI steadily increased CRR 3. Govt steadily increased SLR4. Low interest on govt securities 5.Govt exploited the
funds to finance deficit 6. Strict capital control-made savers to take their money abroad when rupee depreciateMonetary Policy Reforms:1. RBI freed from direct link that had existed b,w fiscal deficit
and monetary policy 2. Instead of controlling interest rate etc started managing thru’ Open market operation, repo and reverse repo rate. 3. Govt securities is now free, interest on them is based on
regular action eg zero coupon bonds, floating rate bonds 4.RBI with drew from primary market in govt securities it is now only in the secondary market. Other Policy Interventions: Credit allocation:
Priority sector Lending 2) Administered interest rates 3)Bank Infrastructure 4) Efficiency effects of Intervention. Banking Reforms: Liberalization – Govt Issuing of Licenses 2) Entry of Foreign banks
3) Public sector banks permitted to raise 49% paid up capital from the equity market 4) Govt and RBI access to fund cut off 5) Narasimham Comitte recommendation to transform to universal bank
ex. ICICI, IDFC, intensified comptn. Prudential and Supervision: 1) Min capital adequacy ration 2) Norms for income recognition 3) Pridential exposure limits for individual borrowers 4) Enhanced
disclosure requirements 5) Implementation of basel 2 norms for international practices. RBI introduced CAMELS system of supervision on above areas. Legal reforms: 1) Reconstruction of Financial
asset and Enforcement of Security Interest Act to foreclose on collateral if there is a default without lengthy legal process. Companies amendment act establishes a national tribunal. Creditor
including Banks can refer (<270 days default) where it forces company submit restructuring plan to creditors or face liquidation. (not implemented well). Case for Privatisation: Efficiency – Growth
and Productivity Social Objectives, Governance.Summary: Each sub sector in india has regulatory authority a) Banks – RBI, Capital Markets – SEBI, Insurance – IRDA, Pension – PFRDA.
Decentralisation is a good part in india compared to UK which is a single entity. Ch12: International Trade: Response to outward-oriented policies 1) Merchandise exports 91->18.1 Bn, 02->52.7Bn,
06->102.Bn | Services 04->26.9Bn, 06-60.6 Bn which is 20.5% GDP. However relatively lower than China. Likewise Direct Foreign investment has also shown healthy growth, it has been muted
relative to China. Poor performance is also becoz of unskilled labor intensive manufacturing which definitely needs a reform.Future policy Directions 1) Unilateral liberalisation and the removal of
export subsidies, trade facilitation, the Special economic zone (SEZs); anti dumping and safeguard measures; Preferential trade areas (PTAs) and Multilateral trade negotiations.
Anti dumping and Safegaurd measures: Escape clause – GATTT – General Agreement on Tariffs and Trade, india is the top user of the clause topping US. India investigation is done by same
agency. Preferential Trade Area arrangements, 2 or more countries decide to change their trade barriers but keep them unchanged for rest of countries. India had FTA with Srilanka and Singapore.
Summary- India must keep lowering tariff, remove export subsidies and take various trade facilitation measures to move the goods in and out of country