UNIT 1

Concept of Economic growth

Economic growth is the increase in the amount of the goods and services produced by an
economy over time. It is conventionally measured as the percent rate of increase in real gross
domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted
terms, in order to net out the effect of inflation on the price of the goods and services produced.
In economics, "economic growth" or "economic growth theory" typically refers to growth of
potential output, i.e., production at "full employment," which is caused by growth in aggregate
demand or observed output.

Economic growth focuses on the desire to improve a country's standard of living—the level of
goods and services that, on average, individuals purchase or otherwise gain access to. It should
be noted that if population has grown along with economic production, increases in GDP do not
necessarily result in an improvement in the standard of living. When the focus is on standard of
living, economic growth is expressed on a per capita basis.

Definition of 'Economic Growth':

An increase in the capacity of an economy to produce goods and services, compared from one
period of time to another. Economic growth can be measured in nominal terms, which include
inflation, or in real terms, which are adjusted for inflation. For comparing one country's
economic growth to another, GDP or GNP per capita should be used as these take into account
population differences between countries

Economic growth per capita is primarily driven by improvements in productivity, also called
economic efficiency. Increased productivity means producing more goods and services with the
same inputs of labor, capital, energy, and/or materials. For example, labour and land productivity
in agriculture were increased during the Green Revolution. The Green Revolution of the 1940s to
1970s introduced new grain hybrids, which increased yields around the world.

Economic development generally refers to the sustained, concerted actions of policymakers and
communities that promote the standard of living and economic health of a specific area.
Economic development can also be referred to as the quantitative and qualitative changes in the
economy. Such actions can involve multiple areas including development of human capital,
critical infrastructure, regional competitiveness, environmental sustainability, social inclusion,
health, safety, literacy, and other initiatives. Economic development differs from economic
growth. Whereas economic development is a policy intervention endeavor with aims of
economic and social well-being of people, economic growth is a phenomenon of market
productivity and rise in GDP. Consequently, as economist Amartya Sen. points out: “economic
growth is one aspect of the process of economic development.
GROWTH AND DEVELOPMENT:

Economic development is a broader term than economic growth Economic growth usually means
the growth in production of an economy. On the other hand, economic development includes
other factors such as latency health, child mortality rate, equality, regional balance, etc.

The difference between economic growth and economic development is a subtle Features of the
one. Let us take the example of a child. As a child grows her weight and height increases.
Simultaneously, her capacity to lean, recognize and distinguish between objects develops. Thus
growth is not sufficient; we need development also. Similarly, in the case of the Indian economy
economic growth is not enough; we need economic development. We need better health of
people, education for all, reduction in inequality among sections of people and regions, reduction
in infant mortality rate (IMR), access to drinking water for all, etc. The government has to devise
policies and allocate government expenditure so that these facilities are measurement of the level
of economic development is difficult, because it does not depend upon a single factor.

There are a number of indicators of economic development. These indicators could be quite
varied and too many .The per capita GDP along with annual growth rates of some of the
economies. In order to make comparison possible we have given these figures in a comparable
form (in purchasing power parity US$). You can see that Indian economy is not comparable to
developed economies. The per capita GDP in India is much lower than in developed countries.
However, it has a higher growth rate compared to others. Note that some of the countries have
very low GDP per capita and have experienced decline in it over time (see, Nigeria and
Tanzania, Economic Development Apart from low per capita income India is far below the
developed economies in terms of development indicators.

Some of these indicators are consumption of electricity, literacy rate, access to safe drinking
water, empowerment of women, etc. United Nations Development Program me (UNDP) brings
out a 'human development index' by combining several indicators of development such as life
expectancy, education, per capita income, and empowerment of women. According to Human
Development Report 2001, India ranks 1 15 out of 162 countries in terms of human development
index .A positive feature of the Indian economy is that it is not stagnant; it is developing. It is
one of the fastest growing economies in the world. There have been improvements in life
expectancy, literacy, and availability of infrastructure.

Basic Characteristics of Indian Economy:

(a) Indian economy is basically an agricultural economy. More than 60% of the population is
engaged in agriculture and allied activities.

(b) Low per capita income is the second feature of Indian economy. It is one of the lowest in the
world.

(c) The occupational structure has not been changed during the last 100 years. In 1950-51 about
73% of the workers were engaged in primary activities, 11% in secondary and 16% in tertiary
activities. In 1999-2000 the share of different sectors in employment amounted to 60%, 17% and
23% respectively.

(d) Inequality of income and wealth is other important feature of Indian economy. In India the
main resources are concentrated in the hands of the few people. 40% of the total assets is
concentrated in the hands of top 20 percent people.

(e) There has been remarkable improvement in social sectors such as education, health, housing,
water supply, civic amenities etc.

(f) Planning process is also an important feature. As the government has adopted planned
developmental economy. Five years plans are framed for economic development.

Structure of Indian Economy:

I. Long‐Term Growth and Structural Changes:

Economic growth in post‐Independence India has certainly seen several turns and
twists. Accordingly, several phases with distinctive features in terms of rates of growth
and Structural changes can be identified. It is, however, not very meaningful to highlight
Short term fluctuations in an analysis of the growth and structural changes of an
Economy over a long period of about six decades. At the same time, it is also of neither
factually realistic nor analytically meaningful to divide the entire period just in two parts, pre and
post‐reforms, as is often done in most of the recent studies and analysis of India’s economic
growth. The year 1991, when economic reforms were introduced, is seen as the
sole turnings point, providing a break from the low growth to high growth and dividing
the post‐Independence economic history into two clear phases: the pre‐reform ‘dark’
phase and the post reform ‘bright’ phase.

Such a simplistic description of India’s economic experience can easily be questioned

on the basis of historical facts. A major break in history of economic growth in India
occurred soon after Independence. An economy which had virtually stagnated over the
past half century, growing at about 0.5 per cent per annum, started growing at over three
per cent from early 1950s. State directed economic planning, presently a much maligned
Initiative (and not just the departure of the British!) was the reason for this turning point.
Growth rate averaged to 3.5 per cent euphemistically called the Hindu rate of growth,
over the next three decades though it saw a deceleration in the later part of the period,

1965‐1981. The next break in terms of growth occurred in early 1980’s, when growth rate
of GDP accelerated from around 3 to 3.5 per cent in previous decades to between 5 and 6
per cent. In this respect, introduction of economic reform in early 1990’s was not a
‘break’ as the growth rate in the post–reforms 1990’s was not significantly higher than
during 1980’s. Growth rate, in fact, slowed down in the early years of 21st century, but
Significantly picked up after 2004. The period since 2004, even after accounting for slow
Down during financial crisis in 2008‐09 represents a distinctive phase of high growth in
the post‐reforms period.

MIXED ECONOMY:
As mentioned earlier the Indian economy is a mixed economy where private sector and public
sector coexist and contribute to the production process. Some of the activities such as law and
order, justice and defenses have to be performed by the government. However, the government
enters directly into production of goods and services which the private sector can also produce.
The extent to which the government should involve itself in the production activities is a
controversial issue. During the decades of 1960s and 1 970s the Indian government produced
whatever it could and intervened in the production decisions (what to prodae, where to produce,
what technology to use) of the private sector through a rigorous licensing policy. We will discuss
about the economic policy changes in India later in this block.

Let us look into the reasons for undertaking production activities by the government.
A producer in the private sector (usually motivated by higher profits) takes the risk of setting up
an industry, purchases inputs, produces output and sells the output in the market for a price.
Imagine a situation where a producer produces a commodity or service but cannot sell it for a
price because consumers cannot be excluded from its consumption. You may have observed that
in certain cases the benefit derived by you is in no way going to obstruct others from deriving its
benefit. An example of the above could be the provision of streetlight by the local government.
Thus, if your neighbor puts a light in h n t of her house, you enjoy the benefit that the front of
your house also gets lighted; and you do not have to pay for it. In this case there is a market
failure in the sense that your neighbor cannot charge you for the benefit you derive. Thus she
does not have any incentive to put a bulb in front of her house. On similar logic you also do not
put a bulb in your house, which requires street lighting by the government.

Secondly, infrastructures such as road, ports, dams, etc., require huge investment but the rate of
return is very low in the short run. Thus no private entrepreneur would be interested in providing
roads, which prompts the government to come forward.

Thirdly, there are natural monopolies such as electricity generation, railways, etc., where a single
producer can serve the entire market. Fourthly, there are certain production activities which have
so much social benefits that the government should produce these goods and services (e.g.,
schools and colleges, hospitals, banks, etc.). Fifthly, the government may enter into production
activities to fulfill some other social objectives instead if profit motive. These objectives could
be employment generator, regional balance, of the downtrodden. Thus there is a strong case for
public sector production and Indian planners.

Year Share of Public Sector Share of Private Sector

1 960-61 9.9 90.1
 1970-71 13.7 86.3
1980-8 1 19.5 80.5
1990-9 1 25.1 74.9
1998-99 25.1 74.1

Recognized it from the very beginning. We observe the presence of public sector Features of the
in construction, hotels and restaurants, transport and communication, railways. INDIAN INDUSTRY
STRUCTURE

The term Indian economy is the outcome of two words. Indian plus economy. Indian refers to those
concerning India. Economy refers to those refers to all activities and arrangements which the citizens of
a country.

The independence-era Indian economy (from 1947 to 1991) was based on a mixed
economy combining features of capitalism and socialism, resulting in an inward-looking, interventionist
policies and import-substituting economy that failed to take advantage of the post-war expansion of
trade. This model contributed to widespread inefficiencies and corruption, and the failings of this system
were due largely to its poor implementation.

Nature:

1. Indian economy is an underdeveloped economy.

2. Indian economy is a mixed economy.

3. Indian economy is a planned developing economy.

Indian economy is an underdeveloped economy: per capita income of some countries of the world like
America, England,japan etc., is much higher than that of some other countries like India, Pakistan,
srilanka, Bangladesh etc.

Low level of per capita income: In the words of kithara low per capita real income is the main feature of
an underdeveloped economy .per capita income of India is low as compared to countries of the world.

Country Per capita income ( in Us dollars)

USA 41400
JAPAn 37180
CHINA 1290
INDIA 620
PAKISTAn 600
Low Standard of living: On account of low per capita income level of consumption of such necessaries of
life as food, clothing, shelter etc is very low. In India in 1999 average intake of an individual was 2496
carries per day.

Unequal distribution of income and wealth: in India on the one hand, per capita income is low and
other, there is large inequality in the distribution of wealth and income.

Excessive dependence on agriculture: In INDIA about 57% of population depends on agriculture in 2004-
2005.this leads to INDIA towards underdeveloped country.

Lack o proper industrialization: rate of industrial development has been very slow in India .many
important industries are lacking in India.

Lack of proper banking facilities: one of the cause of underdeveloped of India is that banking and credit
facilities, especially in rural areas have not properly developed.

Less development of means of transport: present position of means of transport like railways roads air
and waterways is adequate in view of the vast geographical area of the country like India.

Pressure of population: In the view of population India has 2nd place, when population increases it leads
to less per capita income.

Unemployment: India suffers from large scale of unemployment and under employment. On account of
unemployment there is wastage of labour power, production and low per capita income.

Shortage of efficient entrepreneurs: entrepreneurs are essential for economy development. But in India
there is a shortage of such entrepreneurs.

Low grade human capital: Modern economists consider laborers as a form of capital. They call it as
human capital. Low grade human capital is both cause and effect of under developed country.

Low level of technology: It is low level of out-moded technology that prevails in most industries and a
large sector of agriculture industries in India. In many industries like cotton, textile, sugar, etc old and
inferior machines are still in use.

India economy is a mixed economy: Mixed economy is one that has the merits of both capitalism and
socialism. In this kind of economy both part in the economic development of the country economy both
public and private sectors take active part in the economic development of the country.

Public sector: according to industrial policy 1991 three industries are reserved in the public sectors.

 Atomic energy
 Atomic minerals
 Railways
Licensed sector: industrial licensing provisions have been very liberal .now only 6 industries are covered
under licensing. They are

 Alcoholic products
 Tobacco
 Defense
 Industrial explosives
 Hazardous chemicals
 Pharmaceuticals.

Private sector: all other industries will be developed by the private sector.

 Industrial regulation act 1951

 Development of Cooperative sector
 Production reserved for small scale industries.

India economy planned developing economy:

Economic development: Increases in national income are an index of economic development.

Plans % growth of national Plans % growth of national

income income
First plan 3.6 Sixth 5.4
Second 4.1 Seventh 5.8
Third 2.5 Eighth 6.7
Fourth 33 Ninth 5.5
Fifth 5.0 Tenth 7.0

Increase in per capita income: Time to time per capita increasing in India. This is one of the reason India
became developing country.

Institutional reforms in agriculture and green revolution: because of the great Indian scientist
Ms.Swaminadhan take a great revolution in agriculture namely green revolution. This revolution showed
best efforts for high production of wheat and rice.

Development of industries: plans have succeeded a lot in industrial sector. Basic and capital goods
industries like iron and steel, machinery, chemicals, fertilizers etc. have been developed considerably.

Development of infrastructure: Transport, communication, irrigation and power generation capacity has
developed considerably.

Social services: During the period of planning, social services like production, social services like
education , health , medical , family planning etc.
Modernization: Technological up gradation tool place in almost all the areas in the period of economic
planning.

Export promotion: Diversification and import: during planning period exports have not only significantly
increased but there has also been diversified of exports items.

Development of science and technology: Using planning period significant growth of science and
technology has been achieved. In the field of information technology significant progress.

Production according to needs: economic planning leads to need oriented production goods and
services. In this time production is based on the requirements of customers.

Sartorial distribution:

 Primary sector : agriculture, forestry, dairy and mining

 Secondary sectors: manufacturing sectors, construction and power.
 Tertiary sector: services like banking, insurance, telecommunication and IT.

Indian Industry Structure:

In India before independence the industries are ruled by private people. So that most of the priority they
will share with profits as well as work exploitation and energy conjunction. After that our India became
an independent .so that they can give the priority for self development of Indian industries.

Indian industries can develop in three stages.

 In the 1st stage they develop the industries like milling grains, extracting oils, spinning
vegetables and tanning leather.
 In the second stage they develop the industries depending on technology bases like paper,
sugar, cement, textile and furniture.
 After this the Indian govt gave the priority for consumer and capital goods. Consumer
goods means transform from manufacturer to consumer , where as capital goods transfer from
one business to other for producing other products.

Other modernizations in India:

Increase in GDP rate in industries: At the time of independence we have a number of industries
are in the hands of public. So they are unable to contribute more GDP in Indian economy. The
changes in GDP from independence to present are
1950-51: Industries contribution in GDP is 13.6%
1980-1981: The GDP rate increases to 22%. In 2010 the GDP 24.6% because of Industries.
Infrastructural GDP development:
With the contribution of electricity, cement, steel and crude oil GDP was changes from 1950 –
2006.
Industry 1950-1951 2006-2007
Electricity 5.1B.Kwh 66.6B.Kwh
Coal 32.3M.T 50.7mt
Steel 1.04M.T 42.3mt
Crude petroleum 0.3M.T 34mt
Cement 2.7 million tones 61.7mt

Diversified company: At the time of independence our Indian govt have four diversified companies. Like
wood, food, textile and furniture. Now a days Indian govt diversified in all sectors.

Concentrate on consumer durability products: For benefits to the consumers Indian govt take a step
forward for producing durable goods.

Durability- long lifespan or repeated usage

Persiability: short lifespan or one or two usage capacity.

Development of heavy industries: When we compare pre independence and post independence
industrial sector and their GDP contribution is in increasing order. So that it is a need to Indian govt to
increase or develop heavy industries like automobiles, telephone and IT.

Public sector: after the independence Indian govt take contribution in industrial sector for increasing GDP
.public sectors contribution also leads a great revolution in Indian economy development.

Sickness in Indian industries:

Industrial sickness is a natural and universal phenomenon of industrial economy. In India the industrial
sickness came to being during 1970’s when large industrial units faced closure in westbengal.

The industrial sickness results great unemployment, wastage of natural resources , loss of production of
goods and social unrest.

Definition:

A sick unit referred to as one that operates at lower than BEP. Another description holds that a sick unit is
one that fails to generate internal surplus on continuing basis.

According to V.N.Nadkari “to a layman a sick unit is one which is not healthy. To an investor it is one
which skips dividends. To an industrialist it is unit which his making losses and tottering on the brink of
closure.
Causes OR factors of industrial sickness:

Industrial sickness factors can be classified into two types.

 Internal factors
 External factors.

Internal factors: internal factors again classified into two types. born sickness factors and achieved
sickness factors.

Faulty financial planning: faulty financial planning is the major factor of industrial sickness. under
capitalization is responsible for it and its signs become evident from very beginning of its functioning.

Lack of experience of promoters: sometimes promoters are new and they lack in experience. Wrong
section of the project and faulty project planning and wrong guidance given by promotional agencies of
the govt may leads to the birth of a sick unit.

Selection of wrong location

Technological factors: adoption of inappropriate technology, obsolete technology, standard machinery,

wrong technological collaboration, license, production restricted goods etc may also leads to sickness.

 Wrong estimation of capital

 Poor organization structure
 Marketing conditions.
 Achieved sickness:
 Bad management
 Unwarranted diversification and diversion
 Inventory management
 Failure in marketing
 Unsatisfactory labour-management relations.

External factors: The government interference or adverse government policy.

 Economic crisis
 Statutory price control
 Continuous power cuts
 Fast technological changes
 Cut-throat competition.

Extent of industrial sickness: there is no précised information is available regarding the prevalence of
sickness in various industries and there is no comprehensive standard and universally accepted
definition for sickness .but some other actions taken by the Indian govt for reducing industrial sickness.
Govt policy towards industrial sickness: for handle effectively and systematically the Indian govt
announced sickness policy in 1985 .according to that policy every govt should concentrate on sickness
industries who are running in India.

Role of administration plans: The administrative ministers have been assigned the specific responsibility
to deal with this problem. At the time of preparation of five years plan govt should give priority for
sickness industry.

Strengthening monitoring mechanism: banks and financial institutions should strength the system of
monitoring and also take timely corrections in industrial sickness.

Under taking diagnosis: Before support to the industrial sickness everyone should identify what is the
problems reason for sickness and who is responsible for this.

Consulting regular meeting between govt and financial institutions: There is a necessity for conducting
meetings between industry people and govt because of these both have the knowledge about different
problems faced by industrialist and policies implemented by govt.

Sickness industry Acts: An important peace of legislation dealing with industrial sickness by using
industrial sickness act 1985. They take actions like

 Timely direction of sick and potential industries who are undertaking by the govt.
 The speed up actions determined by the govt for recovery of such companies.
 Reconstruction of industries.
 Efficient management for sickness industries.
 Takeover by the efficient management.
 To sale or lease by the other successful industries.

Competition Act 2002:

The competition bill 2001 may be called as the competition act 2002, t extends to the whole of India
except Jammu and Kashmir. The competition bill 2001, has been introduced into parliament in august
.the MRTP act has been replaced by competition act 2002on the recommendations of S.V.rangarajan
committee. It will be decided the healthy competition guidelines for business people.

Coverage:

This act is applicable throughout India except the state of Jammu & Kashmir. It empowers all enterprises
and individuals from the act of applicability. it will supervise all national and international activities.
Under his act there is no civil adjudication. This act will provided policies for business activities along
with economic conditions of particular country.

Competition commission: The act provide for the establishment of competition commission of India
consisting of

 General Deputy manager

 2 chair persons
 8 other members
 Register

These all people are recruited by central govt. The chair person have duration of 5 years and he most
possess 15 years experience as high court judge and 15 years of experience in professionalism and have
knowledge in interdisciplinary. The other members in its committee are deputy manager, advisor and
consultancies.

Objectives:

1. To shift the focus from curing monopolies to promoting competition.

2. To ensure fair and healthy competition.

3. To promote and sustain competition in markets.

4. To protect interest of consumers.

5. To ensure freedom of trade carried by other participants in Indian markets.

Features:

 Competition commission of India to be established.

 Repeal of MRT act
 Prohibition of abuse dominance.
 Competition fund released.

Components of the Act:

 This act has four components.

 Prohibition of anti competitive agreement
 Prohibition of abuse dominance
 Regulation of mergers and acquisitions
 Establishment of 10 members in CCL.

Other applications:

To create barriers t the new marketers in the market: for protecting the local industries or small scale
industries competition act always maintain some barriers to the MNC”s companies and new marketers.

Hindering entry to market: by intentionally if any business people give any difficulties to the competitors
then competition act is prohibited.

Promote the production, distribution goods and services: this act not only protect enterprises but also
concentrate on production activities, distribution activities and quality of goods and services.
Promotion of technical economical and scientific method: this act also concentrate on technology
development in the business, development of science methods and also economic development
industries as well as govt.

Prohibition of anti competitive agreement: the act prohibits persons and enterprises for entering into
any agreement which has adverse impact on any area in business like production, distribution, supply
chain, storage, merger and acquisition of goods and services. The act also prohibits the following
agreements

Decision taken but an association of commission

 Directly or indirectly involving in the activities of buying and selling

 Controlling actions on production, supply, market, technical development, investment
etc.

Share the market or source of information

 Tie arrangement
 Refuse to deal
 Repositioning price maintenance
 Results in big rigging (dishonesty)

Dis-investment:

It means to take return of equities from govt public sector units. Means the
process of reducing the amount of money in govt sectors that was replaced by public and private sector.

The govt of India has been decided to withdrawal their money from industrial sector in accordance with
this decisions the govt has adopted the root of disinvestment.

Objectives:

 To strengthening of public sector units.

 To increase competition.

 To promote the growth of Indian companies.

Features:

 Under utilization of resources

 Lack of price planning and construction.

 Low price of govt shares.

 Methods followed by Indian govt for disinvestment was not effective.

  Lack of finance minister supervision.

 Labour problems

 Lack of autonomy.

Methodologies & process of disinvestment: for the disinvestment process the govt has adopted two
types of methodology. They are

1. Sale the shares in selected public sector units in strategic way.

2. Non -Strategic sales of public sector units for a pvt company.
The govt has done the strategic sale of public sector units to pvt sector through
a process of composite bidding after 2004 ,2005 in disinvestment realized that the total sale of
shares to pvt sector units.

Initially in 1991 -92 govt offers share in the form of bundle a combination
of equity from poor and good performance. In bundling method the results for govts are a very
low average price for each bundle ( group of share).
 After 1992-93 the govt has follow the abundant of bundling shares and sale the shares
of each company separately by following actions.
 In1994-95 the NRI and other persons were involved in auction process.
 In 1996-97 the globalization of disinvestment is implemented.
 In 1998-99 the disinvestment is spread throughout the universe by the transfer of
ownership.
 In 1999-2000 as stated earlier focus of govt shifted to the second method of
disinvestment.i.e the strategies scale of public sector units to pvt sector. The govt resorted to
strategy sale of a no. of companies.

Utilization of fund or money for disinvestment: by the following programme of disinvestment

was initiated in 1991-92 the finance minister of central as well as the state as announced that the
disinvestment money should be used in the form of NRF ( national renewal fund) and also for
various schemes like non-inflationary position, employment scheme and for the development of
back ward people.
The govt has used the entire process of disinvestment which will
offer to development of Indian natural resources and their proper consumption and also reduce
fiscal deficiency.

Actions for failure of disinvestment process: The different reason for disinvestment process
failure are explained below
 The govt carried out the exercise of disinvestment process in a hasty and un planned
and hesitated way.
 The govt launched the disinvestment process without creating the required positions or
conditions its takeoff.
 The govt has not adopted suitable methods for disinvestment process as well as for
supervision.
 The department of enterprise and the finance ministry adopted techniques and methods
which are resulted in low realization and justify.

Actions required in Dis-investment:

 Dilution of minor shares to navarthnas.
 Strengthening of PSU’s.
 Restructuring of PSU’s.
 Formation of a board for dis-investment.
 Selling and closing of sickness industries.

Conclusion:

On the account of all these factor there was considerable under pricing of public enterprises
shares and resulting in considerable loss to the govt.

Economic reforms had its c reforms:

The first phase: the first phase of economic reforms had its origin in 1985 initiated by young Prime
Minister Mr.Rajiv Gandhi soon after taking over the office.the prime minister in his first national
broadcast said “the public sector has entered into too many areas where it should not be.

to provide large scope to the pvt sector, a no. of changes in policy were introduced with regard to
industrial licensing, export-import policy, fiscal policy, foreign equity policy, etc.the govt introduced the
various measures in the following manner:

 Cement : cement was totally decontrolled.

 Sugar: the share of free sale of sugar in open market.

 Broad banding: it is introduced in four wheelers, chemicals, type-writer etc.

 Drug: 94 drugs were completely delicensed 27 are placed outside.

 Textile: introduction of new textile policy 1985.

 Electronics: electronics industry was liberalized from MRTP.

 Foreign trade.
 Second phase: Economic reforms introduced under Rajiv Gandhi regime didn’t yield the desired
results. Thus India was forced to approach the world bank and IMF to provide huge loan.. The
congress govt, soon after resumption of office on june,1991 realized the importance of mega-
industrialization for country to keep pace with the industrially advanced nations ‘open door’
policy by Dr.Manmohan Singh.

Economic reforms in new economic policy

Liberalization Privatization Globalization

Liberalization of the economy means to free it from direct or physical controls imposed by the
government.

Measures taken for liberalization: following measures have been taken under economic reforms for
liberalization of Indian economy:

1. Abolition of industrial licensing and registration: Main feature of the new industrial policy is to adopt
a policy of linearization in place of controlled economy. Till now private sector of the economy was
functioning under a rigid licensing system. Under new economic policy private sector has been freed, to
a rigid licensing system. Under new economic policy private sector has been freed, to a large extent,
from the yoke of licenses and other restrictions. In July 1991 a new industrial licensing has been
abolished for all other industries. Industries for which licenses are still necessary are:

 Liquor
 Cigarette
 Defense equipments
 Drugs
 Industrial explosives
 Dangerous chemicals

Any entrepreneur can float any new company and sell its shares without any restrictions.
2. Concession from Monopolies Act: According to the provisions of monopolies and restrictive trade
practices act all those companies having assets worth more than 100 crore used to be declared
monopolies and restrictive trade practices firms and were subjected to several restrictions.

3. Freedom for expansion and production to industries: Under the policy of liberalization, industries
are free to expand and produce. They need to prior official approval.

4. Increase in the investment limit of the small industries: Investment limit of the small industries
has been raised to one crore so as to enable them to introduce modernization. Investment limit of
tiny industries has also been increased to 25 lakh.

5. Freedom to import capital goods: under the policy of liberalization, Indian industries will be free
to buy machines and raw material from abroad in order to expand and modernize themselves.

6. Freedom to import technology: New economic policy of economic reforms has laid emphasis on
the use of high technique to promote modernization. The objective of this policy is to develop
sunrise industries, i.e., computers and electronics.

7. Free determination of interest rates: Interest rate of the banking system of the country will no
longer be determined by the Reserve Bank of India as per the policy of liberalization. Banks all over
the country are now free to determine the rate of interest as they like.

8. Action plan for information technology and software development: A National Task force on
information technology and software development submitted 108 point action plan in July 1998.
The recommendations have been accepted by the government and directions for their
implementations have been given to all concerned departments.

Privatization:

In the context of economic reforms, privatization means allowing the private sector to set up more
and more of industries that were previously reserved for public sector. Under it, existing enterprises
of the public sector are either wholly or partially sold to private sector.

1. Change in Ownership: The degree of privatization is judged by the extent of ownership

transferred from the public enterprise to the private sector.

 Total Nationalization
 Joint venture
 Liquidation
 Workers co-operative

2. Organizational Measures: It includes a variety of measures to limit sate control. They include:

 A holding company structure

  Leasing
 Restructuring

3. Operational Measures: The efficiency of public sector enterprises depends upon the organizational
structure. Unless this structure grants a sufficient degree of autonomy to the operators of the
enterprise or develops a system of incentives, it cannot raise its efficiency and productivity.

Globalization:

Globalization is the third pillar of the structure of economic reforms. Globalization is the process of
movement from a closed economy to an open economy and the process of removal of restrictions
on foreign trade, investments, innovations in communications and transport systems.

Globalization Indicators: there are some variables that can be considered as the indictors of
globalization. These indicators of globalization are:

 Foreign Direct investments: foreign firms falls under the category of foreign direct
investments by investing in the real assets like factories, sales offices etc.
Globalization in the form of FDI happened in the middle of the 1980s
 Foreign portfolio investment: foreign portfolio equity investment has also happened
globally by the FDI
 Trade: the step of world trade has happened, reaching an average annual rate of 6 to 7
% since 1983. It out paces the expansion of the world GDP, which has risen at an
average of only 3.5% p.a. the step of world trade has been slower than the step of
world FDI, which has risen at above 15% per year since 1985.
 Global governance by international organizations like world trade organizations:
from the following three factors outlined it is clear that
1. Economic integration is very deep.
2. Reduction in import duty rates
3. Cooperation between countries for foreign investment is increased.
 Business Restructuring – Flexibility and closeness to Market
1. Flexible, just in time production system
2. Moving production closer to the consumer and securing access to the local market
3. Diversification of operations.

EMPLOYMENT STRUCTURE:

India being the second largest country in tern of population, it has a large labor force (people
who are able to and willing to work). In the year 1999-2000 there were 39.7crore employed
workers in the country, which is about 40 per cent of the total population. The remaining 60 per
cent population In the country are dependents. Thus for every worker there is 1.5 dependents.
These dependents constitute children, aged and the unemployed. Because of high population
growth rate the percentage of children in India is higher than in developed 'countries.
Agriculture has been the main source of employment in India. During the period 1950-70 it
provided employment opportunity to more than two-third of the labor force. We mentioned
earlier that the share of the primary sector (agriculture and allied activities) in GDP has declined
over time in Indian economy. For the year 2000-01 primary sector contributed 24.2 per cent of
the GDP. Compare this with the employment share! In the year 1999-2000 nearly 60 per cent of
the labor force was engaged in agriculture. We observe that the decline in GDP share of the
primary sector is not accompanied by a corresponding decline in employment share. An
implication is that workers employed in primary sector have a very low productivity than in
secondary and tertiary sector. In the developed economies less than five per cent of the labor
force is engaged in agriculture. It has been made possible by using modem technology and
mechanization of agriculture. In some parts of India modem technology is employed in
agriculture. However, a majority of farmers in India continue to we obsolete technology.

A second implication is that there are too many people engaged in agriculture. In agriculture has
been a way of life for the households engaged in the agri-activities. Very few children look for
employment outside agriculture. And those who do not get employment anywhere else start
working in the family owned land. As a result, often we see a feature termed 'disguised
unemployment' in Indian agriculture. It is a situation where a person is engaged llly in
agriculture but his contribution is zero. It implies that if we take away the forcer agricultural.

Output will not decline. Suppose five persons &working in a field and the output is 10 tomes of
wheat. If we reduce the number of workers to four, then also output will remain the same. Thus
the fifth worker worked in the field, but he is as good as unemployed, because his contribution is
zero. It has been a policy of the government to shift the additional labor hence in the agricultural
sector to secondary and tertiary sectors. Recall that service sector contributes more than half of
the GDP but provides employment to less than one-fourth of the labor force. Thus the
productivity of labor is higher in the service

The occupational structure of India:

The distribution of the population according to different types of occupation is referred to as the
occupational structure. In India, about 64 per cent of the population is engaged only in
agriculture. The proportion of population dependent on secondary and tertiary sectors is about 13
and 20 per cent respectively. There has been an occupational shift in favor of secondary and
tertiary sectors because of growing industrialization and urbanization in recent times.

In modern India, with industrialization, modernization and globalization, the pattern of

employment or choice of choosing one’s occupation or job and work culture has changed
tremendously. From community-based, it has become individual based.

Instead of being forced to get occupied in traditional jobs, modern India has given freedom to
everyone to choose any profession of one’s liking.Today, instead of being facilitator, the
government has become the generator/creator of employment and the biggest employer. The
government is supposed to create more employment opportunities for the people, whether job
market requires employing more people or not. And still a large number of people remain
unemployed.

Employment pattern in Ancient and medieval India

In ancient and medieval India, there was work, employment and dignity and honour for all in
India. There was no dearth of employment opportunities for persons willing to work. Everybody
was usually busy in one’s own hereditary/traditional occupations. Instead of holding others
responsible for their unemployment, the system blamed “Adharma” (immoral behavior),
“Alasya” (laziness) and “Agyan” (ignorance) for unemployment and all evils like exploitation,
poverty and helplessness that follow unemployment automatically.
The traditional system of occupations had maintained differentiation between various
occupations, which was dependent on attitude and aptitude of people. But, the main feature of
traditional system was that it encouraged interdependence in social matters.
The system as a whole had led the society to have more production, economic efficiency and
specialization in various areas of activities like spinning, weaving, pottery making, bead making,
seal making, terra-cotta, handicrafts, brick-laying, metal work etc.

Problems of traditional pattern of employment

Different occupations were community based and not individual based. There was not much
choice to individuals in matter of occupation in traditional system. With the passage of time,
the system became too rigid. It put hurdles on the way of creative minds of some
individuals, who were not allowed to pursue work of their interest. The rigidity led to
heartburn and heart-burn to changes, somewhere rationally, and somewhere it happened in a
jest for change.

Changes with modernity

With modernity, white collared jobs gained popularity. Access to modern occupations, especially
white-collared jobs, depends on formal education, certificates/degrees/diplomas. Now people
learn and hone their skills in formal centers of education and training. They have to attain
certificates/diplomas from formal training centers to get employment or to further their future
prospects. In present competitive world a degree is not enough to get placed. Recruiters look for
multi-skilled candidates. A job-seekers need to equip himself with other skills in extra curricular
activities in different fields.
Problems created by modernity

Changes in modern pattern of employment has led to growing aversion towards the traditional
occupations and have generated new kinds of problems. People have been caught within the
vicious circle of modernity. They are still moving in circles in an effort to find out a foolproof
solution. But it seems very difficult to come out the web of modernity. While trying, the system
ignored simple solutions of the present problems of unemployment.
The process of modernization has adversely affected employment prospects of unskilled
workers, especially in rural areas. New kinds of occupations are continuously being added to the
traditional jobs of pre-industrial-society of earlier days. Many traditional occupations have
become obsolete. With it, different kinds of problems are cropping up every day. Once changed,
the system never returned to its original form.

Traditional pattern of occupations

Unique traditional occupational pattern of India
The traditional occupational pattern of India is unique in many ways -
• Employment, dignity and honor for all – Unique traditional occupational pattern of India has
provided employment, dignity and honor for all. At present, aversion of modern youths from
their traditional occupations has today rendered millions of them unemployed or underemployed.
Most of their time energy and effort are wasted in search and pursuit of those jobs, for which
they neither have aptitude nor attitude or which are beyond their reach for one reason or the
other. This time they could have utilized otherwise for constructive purposes.

Twenty first century India

Modern India has everything a nation needs for development. Total labour-force is about half a million.
It is estimated that by 2020, India will have the largest and youngest labour force in the world. Its
average age will be less than 30 years. There is no dearth of talent, intelligence, quality or knowledge in
any given area. There is tremendous amount of skilled and unskilled manpower, all kinds of raw
materials, a good legal system, a huge market and potential to export virtually everything, provided the
cost of its inputs are kept at international levels. India is the 11th largest economy in the world and is
4th largest purchasing power parity.
It is the world’s youngest country and land of entrepreneurship with largest number of self employed.
About 52% of Indians are self-employed, about 55% in rural communities and 41% in urban areas. Many
of these (about 20%, according to the international labor organization) are at the bottom of pyramid.
Recent global financial and economic turmoil, India has shown that it has talent for creativity in the face
of adversity. It has the capacity to emerge without much difficulty from the crisis. Bringing together
India’s creativity in entrepreneurship and youthful dynamism could lead to sustained inclusive growth
and overcome the recent economic slowdown.
UNIT 2

Economic planning:

Economic planning refers to a coordinating mechanism outside the mechanisms of the market.
There are various types of planning procedures and different ways of conducting economic
planning. As a coordinating mechanism for socialism and an alternative to the market, planning
is defined as a direct allocation of resources; contrasted to the indirect allocation of the market.

The level of centralization in decision-making in planning depends on the specific type of

planning mechanism employed. As such, there is a distinction to be made between centralized
planning and decentralized planning. An economy primarily based on central planning is referred
to as a planned economy. In a centrally planned economy the allocation of resources is
determined by a comprehensive plan of production which specifies output requirements.
Planning may also take the form of directive planning or indicative planning.

Most modern economies are mixed economies incorporating various degrees of markets and
planning .A distinction can be made between physical planning (as in pure socialism) and
financial planning (as practiced by governments and private firms in capitalism). Physical
planning involves economic planning and coordination conducted in terms if disaggregated
physical units; whereas financial planning involves plans formulated in terms of financial units.

5 essential objectives of economic planning in India:

Planning without an objective is like driving without any destination. There are generally two
sets of objectives for planning, namely the short-term objectives and the long-term objectives.
While the short-term objectives vary from plan to plan, depending on the immediate problems
faced by the economy, the process of planning is inspired by certain long term objectives. In case
of our Five Year plans, the long-term objectives are:

(i) A high rate of growth with a view to improvement in standard of living.

(ii) Economic self-reliance;

(iii) Social justice and

(iv) Modernization of the economy

(v) Economic stability

(i) High Rate of Growth

All the Indian Five Year Plans have given primary importance to higher growth of real national
income. During the British rule, Indian economy was stagnant and the people were living in a
state of abject poverty. The Britishers exploited the economy both through foreign trade and
colonial administration. While the European industries flourished, the Indian economy was
caught in a vicious circle of poverty. The pervasive poverty and misery were the most important
problem that has to be tackled through Five Year Plan.

During the first three decades of planning, the rate of economic growth was not so encouraging
in our economy Till 1980, the average annual growth rate of Gross Domestic Product was 3.73
percent against the average annual growth rate of population at 2.5 percent. Hence the per-capita
income grew only around 1 percent. But from the 6th plan onwards, there has been considerable
change in the Indian economy. In the Sixth, Seventh and Eight plans the growth rate was 5.4
percent, 5.8 percent and 6.8 percent respectively. The Ninth Plan, started in 1997 targeted a
growth rate of 6.5 percent per annum and the actual growth rate was 6.8 percent in 1998 - 99 and
6.4 percent in 1999 - 2000. This high rate of growth is considered a significant achievement of
the Indian planning against the concept of a Hindu rate of growth.

(ii) Economic Self Reliance

Self reliance means to stand on one’s own legs. In the Indian context, it implies that dependence
on foreign aid should be as minimum as possible. At the beginning of planning, we had to import
food grains from USA to meet our domestic demand. Similarly, for accelerating the process of
industrialization, we had to import, capital goods in the form of heavy machinery and technical
know-how. For improving infrastructure facilities like roads, railways, power, we had to depend
on foreign aid to raise the rate of our investment.

As excessive dependence on foreign sector may lead to economic colonialism, the planners
rightly mentioned the objective of self-reliance from the third Plan onwards. In the Fourth Plan
much emphasis was given to self-reliance, more specially in the production of food grains. In the
Fifth Plan, our objective was to earn sufficient foreign exchange through export promotion and
important substitution.

By the end of the fifth plan, Indian became self-sufficient in food-grain production. In 1999-
2000, our food grain production reached a record of 205.91 million tons. Further, in the field of
industrialization, now we have strong capital industries based on infrastructure. In case of
science and technology, our achievements are no less remarkable. The proportion of foreign aid
in our plan outlays have declined from 28.1 percent in the Second Plan to 5.5 percent in the
Eighth Plan. However, in spite of all these achievements, we have to remember that hike in price
of petroleum products in the international market has made self-reliance a distant possibility in
the near future.

(iii) Social Justice:

Social justice means to equitably distribute the wealth and income of the country among different
sections of the society. In India, we find that a large number of people are poor; while few lead a
luxurious life. Therefore, another objective of development is to ensure social justice and to take
care of the poor and weaker sections of the society. The Five-Year Plans have highlighted four
aspects of social justice. They are:
(i) Application of democratic principles in the political structure of the country;

(ii) Establishment of social and economic equity and removal of regional disparity;

(iii) Putting an end to the process of centralization of economic power; and

(iv) Efforts to raise the condition of backward and depressed classes.

Thus the Five Year Plans have targeted to uplift the economic condition of socio-economically
weaker sections like scheduled caste and tribes through a number of target oriented
programmers. In order to reduce the inequality in the distribution of landed assets, land reforms
have been adopted. Further, to reduce regional inequality specific programmers have been
adopted for the backward areas of the country.

In spite of various efforts undertaken by the authorities, the problem of inequality remains as
great as ever. According to World Development Report (1994) in India the top 20 percent of
household enjoy 39.3 percent of the national income while the lowest 20 percent enjoy only 9.2
percent of it. Similarly, another study points out that the lowest 40 percent of rural household
own only 1.58 percent of total landed asset while the top 5.44 percent own around 40 percent of
land. Thus the progress in the field of attaining social justice has been slow and not satisfactory.

(iv) Modernization of the Economy:

Before independence, our economy was backward and feudal in character. After attainment of
independence, the planners and policy makers tried to modernize the economy by changing the
structural and institutional set up of the country. Modernization aims at improving the standard
of living of the people by adopting a better scientific technique of production, by replacing the
traditional backward ideas by logical reasoning's and bringing about changes in the rural
structure and institutions.

These changes aim at increasing the share of industrial output in the national income, upgrading
the quality of products and diversifying the Indian industries. Further, it also includes expansion
of banking and non-banking financial institutions to agriculture and industry. It envisages
modernization of agriculture including land reforms.

(v) Economic Stability:

Economic stability means to control inflation and unemployment. After the Second Plan, the
price level started increasing for a long period of time. Therefore, the planners have tried to
stabilize the economy by properly controlling the rising trend of the price level. However, the
progress in this direction has been far from satisfactory.

Thus the broad objective of Indian plans has been a non-inflationary self-reliant growth with
social justice.
FIVE-YEAR PLANS OF INDI A:

The economy of India is based in part on planning through its five-year plans, which are
developed, executed and monitored by the Planning Commission of India. The eleventh plan
completed its term in March 201 2 and the twelfth plan is currently underway. Prior to the fourth
plan, the allocation of state resources was based on schematic patterns rather than a transparent
and objective mechanism, which led to the adoption of the gadgil formula in 1969. Revised
versions of the formula have been used since then to determine the allocation of central
assistance for state plans.

The first Indian Prime Minister, Jawaharlal Nehru presented the kushagra nijhara. first five-year
plan to the Parliament of India and needed urgent attention. The total planned budget of 2069
crore was allocated to seven broad areas: irrigation and energy (27.2 percent) , agriculture and
community development (17.4 percent), transport and communications (24 percent), industry
(8.4 percent), social services (1 6.64 percent), land rehabilitation (4.1 percent), and for other
sectors and services (2.5 percent).The most important feature of this phase w as active role of
state in all economic sectors. S uch a role was justified at that time because immediately after
independence, India was facing basic problems—deficiency of capital and low capacity to save.

The target growth rate was 2.1% annual gross domestic product (GDP) growth; the achieved
growth rate was 3.6%The net domestic product went up by 15%. The monsoon was good and
there were relatively high crop yields, boosting exchange reserves and the per capita income,
which increased by 8%. National income increased more than the per capita income due to rapid
population growth. Many irrigation projects were initiated during this period, including the
Bhakra Dam and Hirakud Dam. The World Health Organization, with the Indian government,
addressed children's health and reduced infant mortality, indirectly contributing to population
growth.

At the end of the plan period in 1956, five Indian Institutes of Technology (IITs) were started as
major technical institutions. The University Grant Commission was set up to take care of funding
and take measures to strengthen the higher education in the country. ] Contracts were signed to
start five steel plants, which came into existence in the middle of the second five-year plan. The
plan was successful.

 1 First Plan (1951-1956) 

 2 Second Plan (1956–1961) 
 3 Third Plan (1961–1966) 
 4 Fourth Plan (1969–1974) 
 5 Fifth Plan (1974–1979) 
 6 Sixth Plan (1980–1985) 
 7 Seventh Plan (1985–1990) 
 8 Eighth Plan (1992–1997) 
 9 Ninth Plan (1997–2002) 
 10 Tenth Plan (2002–2007) 
  11 Eleventh Plan (2007–2012) 
 12 Twelfth Plan (2012–2017) 

First Plan (1951-1956):

• Industrial sector • Energy and Irrigation • Transport and Communications • Land rehabilitation
• Social services • Developments of agriculture and community • Miscellaneous issues

The target set for the growth in the gross domestic product was 2.1percent every year. In reality,
the actual achieved with regard to gross domestic product was 3.6 percent per annual. This is a
clear indication of the success of the 1st five year plan.

Some important events that took place during the tenure of the 1st five year plan: The following
Irrigation projects were started during that period: • Mutter Dam • Hirakud Dam • Bhakra Dam.

The government had taken steps to rehabilitate the landless workers, whose main occupation was
agriculture. These workers were also granted fund for experimenting and undergoing training in
agricultural know how in various cooperative institutions. Soil conservation, was also given
considerable importance. The Indian government also made considerable effort in improving
posts and telegraphs, railway services, road tracks, civil aviation. Sufficient fund was also
allocated for the industrial sector. In addition measures were taken for the growth of the small
scale industries. 1st three plans (1951-1965) had industrial growth of 8% steady growth.

Second Plan (1956–1961):

The second five-year plan focused on industry, especially heavy industry. Unlike the First plan,
which focused mainly on agriculture, domestic production of industrial products was encouraged
in the Second plan, particularly in the development of the public sector. The plan followed the
Mahalanobis model, an economic development model developed by the Indian statistician
Prasanta Chandra Mahalanobis in 1953. The plan attempted to determine the optimal allocation
of investment between productive sectors in order to maximize long-run economic growth . It
used the prevalent state of art techniques of operations research and optimization as well as the
novel applications of statistical models developed at the Indian Statistical Institute. The plan
assumed a closed economy in which the main trading activity would be centered on importing
capital goods.

Hydroelectric power projects and five steel mills at Bhilai, Durgapur, and Rourkela were
established. Coal production was increased. More railway lines were added in the north east.

The Atomic Energy Commission was formed in 1958 with Homi.J.Bhabha as the first chairman.
The Tata Institute of Fundamental Research was established as a research institute. In 1957 a
talent search and scholarship program was begun to find talented young students to train for
work in nuclear power.

The total amount allocated under the second five-year plan in India was Rs. 4,800crore. This
amount was allocated among various sectors:
  Power and irrigation 
 Social services 
 Communications and transport 
 Miscellaneous 

Target Growth:4.5% Growth achieved:4.0%[

Third Plan (1961–1966):

The third plan stressed on agriculture and improvement in the production of wheat, but the brief
Sino-Indian War of 1962 exposed weaknesses in the economy and shifted the focus towards the
Defense industry or Indian army. In 1965–1966, India fought a [Indo-Pak] War with Pakistan.
Due to this there was a severe drought in 1965. The war led to inflation and the priority was
shifted to price stabilization. The construction of dams continued. Many cement and fertilizer
plants were also built. Punjab began producing an abundance of wheat.

Many primary schools have been started in rural areas. In an effort to bring democracy to the
grassroot level, Panchayat elections have been started and the states have been given more
development responsibilities.

State electricity boards and state secondary education boards were formed. States were made
responsible for secondary and higher education. State road transportation corporations were
formed and local road building became a state responsibility.

Target Growth: 5.6% Actual Growth: 2.4%

Fourth Plan (1969–1974)

At this time Indira Gandhi was the Prime Minister. The Indira Gandhi government nationalized
14 major Indian banks and the Green Revolution in India advanced agriculture. In addition, the
situation in East Pakistan (now Bangladesh) was becoming dire as the [Indo-Pakistan War of
1971] and Bangladesh Liberation War took Funds earmarked for the industrial development had
to be diverted for the war effort. India also performed the Smiling Buddha underground nuclear
test in 1974, partially in response to the United States deployment of the Seventh Fleet in the
[Bay of Bengal]. The fleet had been deployed to warn India against attacking West Pakistan and
extending the war.

Target Growth: 5.7% Actual Growth: 3.3%

Fifth Plan (1974–1979):

Stress was by laid on employment, poverty alleviation, and justice. The plan also focused on
self-reliance in agricultural production and defense. In 1978 the newly elected Morarji Desai
government rejected the plan. Electricity Supply Act was enacted in 1975, which enabled the
Central Government to enter into power generation and transmission.
The Indian national highway system was introduced and many roads were widened to
accommodate the increasing traffic. Tourism also expanded.

Target Growth: 4.4% Actual Growth: 5.0

Sixth Plan (1980–1985):

The sixth plan also marked the beginning of economic liberalization. Price controls were
eliminated and ration shops were closed. This led to an increase in food prices and an increase in
the cost of living. This was the end of Nehruvian socialism and Rajeev Gandhi was prime
minister during this period.

Family planning was also expanded in order to prevent overpopulation. In contrast to China's
strict and binding one-child policy, Indian policy did not rely on the threat of force More
prosperous areas of India adopted family planning more rapidly than less prosperous areas,
which continued to have a high birth rate. The sixth five year plan was a great success to indian
economy.

Target Growth: 5.2% Actual Growth: 5.4%

Seventh Plan (1985–1990):

The Seventh Plan marked the comeback of the Congress Party to power. The plan laid stress on
improving the productivity level of industries by upgrading of technology.

The main objectives of the 7th five-year plans were to establish growth in areas of increasing
economic productivity, production of food grains, and generating employment.

As an outcome of the sixth five- year plan, there had been steady growth in agriculture, control
on rate of Inflation, and favorable balance of payments which had provided a strong base for the
seventh five Year plan to build on the need for further economic growth. T he 7th Plan had
strived towards socialism and energy production at large. The thrust areas of t he 7th Five year
plan have been enlisted below:

 Social Justice 
 Removal of oppression of the weak 
 Using modern technology 
  Agricultural development 
 Anti-poverty programs 
 Full supply of food, clothing, and shelter 
 Increasing productivity of small- and large-scale farmers 
 Making India an Independent Economy 

Based on a 15-year period of striving towards steady growth, the 7th Plan was focused on
achieving the pre-requisites of self-sustaining growth by the year 2000. The Plan expected a
growth in labor force of 39 million people and employment was expected to grow at the rate of 4
percent per year.

Some of the expected outcomes of the Seventh Five Year Plan India are given b elow:

 Balance of Payments (est imates): Export – 33,000crore (US$5.7 billio ), Imports – (-)
 54,000crore (US$9.3 billion), Trade Balance – (-) 21,000crore (US$3.6 billion) 
 Merchandise exports (estimates): 60,653crore (US$10.4 billion) 
  Merchandise imports (est imates): 95,437crore (US$16.4 billion) 
• Projections for Balance o f Payments: Export – 60,700crore (US$10.4 billion), Imports –
(-) 95,400crore (US$16.4 billion), Trade Balance- (-) 34,700crore (US $6.0 billion)

Under the Seventh Five Year Plan, India strove to bring about a self-sustained economy in the
country with valuable contributions from voluntary agencies and the general populace.

Target Growth: 5.0% Actual Growth: 6.1%

Eighth Plan (1992–1997):

1989–91 was a period of economic instability in India and hence no five-year plan was
implemented. Between 1990 and 1992, there were only Annual Plans. In 1991, India faced a
crisis in Foreign Exchange (Forex) reserves, left with reserves of only about US$1 billion. Thus,
under pressure, the country took the risk of reforming the socialist economy. P.V. Narasimha
Rao was the twelfth Prime Minister of the Republic of India and head of Congress Party, and led
one of the most important administrations in India's modern history overseeing a major economic
transformation and several incidents affecting national security. At that time Dr. Manmohan
Singh (currently, Prime Minister of India) launched India's free market reforms that brought the
nearly bankrupt nation back from the edge. It was the beginning of privatization and
liberalization in India.

Modernization of industries was a major highlight of the Eighth Plan. Under this plan, the
gradual opening of the Indian economy was undertaken to correct the burgeoning deficit and
foreign debt. Meanwhile India became a member of the World Trade Organization on 1 January
1995.This plan can be termed as Rao and Manmohan model of Economic development. The
major objectives included, controlling population growth, poverty reduction, employment
generation, strengthening the infrastructure, Institutional building, tourism management, Human
Resource development, Involvement of Panchayat raj, Nagar Palikas, N.G.O'S and
Decentralization and people's participation. Energy was given priority with 26.6% of the outlay.
An average annual growth rate of 6.78% against the target 5.6% was achieved.

To achieve the target of an average of 5.6% per annum, investment of 23.2% of the gross
domestic product was required. The incremental capital ratio is 4.1.The saving for investment
was to come from domestic sources and foreign sources, with the rate of domestic saving at
21.6% of gross domestic production and of foreign saving at 1.6% of gross domestic production.
Ninth Plan (1997–2002):

Ninth Five Year Plan India runs through the period from 1997 to 2002 with the main aim of
attaining objectives like speedy industrialization, human development, full-scale employment,
poverty reduction, and self-reliance on domestic resources.

Background of Ninth Five Year Plan India: Ninth Five Year Plan was formulated amidst the
backdrop of India's Golden jubilee of Independence.

The main objectives of the Ninth Five Year Plan of India are:

 to prioritize agricultural sector and emphasize on the rural development 

 to generate adequate employment opportunities and promote poverty reduction 
 to stabilize the prices in order to accelerate the growth rate of the economy 
  to ensure food and nutritional security. 
 to provide for the basic infrastructural facilities like education for all, safe drinking water,
 primary health care, transport, energy 
  to check the growing population increase 
 to encourage social issues like women empowerment, conservation of certain benefits for
 the Special Groups of the society 
 to create a liberal market for increase in private investments 

During the Ninth Plan period, the growth rate was 5.35 per cent, a percentage point lower than
the target GDP growth of 6.5 per cent.

Tenth Plan (2002–2007):

 Attain 8% GDP growth per year. 

  Reduction of poverty rate by 5 percentage points by 2007. 
 Providing gainful and high-quality employment at least to the addition to the labour
 force. 
  Reduction in gender gaps in literacy and wage rates by at least 50% by 2007. 
 20 point programme was introduced. 

Target growth: 8.1% Growth achieved:7.7%

Eleventh Plan (2007–2012):

The eleventh plan has the following

objectives: 1. Income & Poverty
o Accelerate GDP growth from 8% to 10% and then maintain at 10% in the 12th
Plan in order to double per capita income by 2016–17
o Increase agricultural GDP growth rate to 4% per year to ensure a broader spread
of benefits
o Create 70 million new work opportunities.
 o Reduce educated unemployment to below 5%.
o Raise real wage rate of unskilled workers by 20 percent.
o Reduce the headcount ratio of consumption poverty by 10 percentage points.
2. Education
o Reduce dropout rates of children from elementary school from 52.2% in 2003–04
to 20% by 2011–12
o Develop minimum standards of educational attainment in elementary school, and
by regular testing monitor effectiveness of education to ensure quality
o Increase literacy rate for persons of age 7 years or above to 85%
o Lower gender gap in literacy to 10 percentage point
o Increase the percentage of each cohort going to higher education from the present
10% to 15% by the end of the plan.
3. Health
o Reduce infant mortality rate to 28 and maternal mortality ratio to 1 per 1000 live
births
o Reduce Total Fertility Rate to 2.1
o Provide clean drinking water for all by 2009 and ensure that there are no slip-
backs
o Reduce malnutrition among children of age group 0–3 to half its present level
o Reduce anaemia among women and girls by 50% by the end of the plan
4. Women and Children
o Raise the sex ratio for age group 0–6 to 935 by 2011–12 and to 950 by 2016–17
o Ensure that at least 33 percent of the direct and indirect beneficiaries of all
government schemes are women and girl children
o Ensure that all children enjoy a safe childhood, without any compulsion to work
5. Infrastructure
o Ensure electricity connection to all villages and BPL households by 2009 and
round-the-clock power.
o Ensure all-weather road connection to all habitation with population 1000 and
above (500 in hilly and tribal areas) by 2009, and ensure coverage of all
significant habitation by 2015
o Connect every village by telephone by November 2007 and provide broadband
connectivity to all villages by 2012
o Provide homestead sites to all by 2012 and step up the pace of house construction
for rural poor to cover all the poor by 2016–17
6. Environment
o Increase forest and tree cover by 5 percentage points.
o Attain WHO standards of air quality in all major cities by 2011–12.
o Treat all urban waste water by 2011–12 to clean river waters.
o Increase energy efficiency by 20%

Target growth: 8.3% Growth achieved:7.9%

Twelfth Plan (2012–2017):

12th Five Year Plan of the Government of India (2012–17) had decided for the growth rate at
8.2% but NDC on 27th Dec 2012 approved 8% growth rate for 12th five year plan.;

With the deteriorating global situation, the Deputy Chairman of the Planning Commission Mr.
Montek Singh Ahluwalia has said that achieving an average growth rate of 9 per cent in the next
five years is not possible. The Final growth target has been set at 8% by the endorsement of plan
at the National Development Council meeting held in New Delhi.

"It is not possible to think of an average of 9 per cent (in 12th Plan). I think somewhere between
8 and 8.5 per cent is feasible,” Mr. Ahluwalia said on the sidelines of a conference of State
Planning Boards and departments. The approached paper for the 12th Plan, approved last year,
talked about an annual average growth rate of 9 per cent.

“When I say feasible...that will require major effort. If you don’t do that, there is no God given
right to grow at 8 per cent. I think given that the world economy deteriorated very sharply over
the last year...the growth rate in the first year of the 12th Plan (2012-13) is 6.5 to 7 per cent.”

He also indicated that soon he would share his views with other members of the Commission to
choose a final number (economic growth target) to put before the country’s NDC for its
approval.

Though the 12th Plan has taken off, it is yet to be formally approved. The Planning Commission
has set a deadline of September for taking the approval of the National Development Council.
The council is expected to meet after July subject to the convenience of the Prime Minister.

Poverty The government intends to reduce poverty by 10 per cent during the 12th Five-Year
Plan. Mr Ahluwalia said, “We aim to reduce poverty estimates by9 per cent annually on a
sustainable basis during the Plan period.”

Earlier, addressing a conference of State Planning Boards and Planning departments, he said the
rate of decline in poverty doubled during the 11th Plan. The commission had said, while using
the Tendulkar poverty line, the rate of reduction in the five years between 2004–05 and 2009–10,
was about 1.5 percentage points each year, which was twice that when compared to the period
between 1993-95 to 2004-05. what is the government focus of now a five-year plan, i.e. 2012–
2017

India’s new industrial policy:

The Industrial Policy plan of a country, sometimes shortened IP, is its official strategic effort to
encourage the development and growth of the manufacturing sector of the economy. The
government takes measures "aimed at improving the competitiveness and capabilities of
domestic firms and promoting structural transformation." A country's infrastructure
(transportation, telecommunications and energy industry) is a major part of the manufacturing
sector that usually has a key role in IP.
Industrial policies are sector specific, unlike broader macroeconomic policies. They are
sometimes labeled as interventionist as opposed to laissez-faire economics. Examples of
horizontal, economy wide policies are tightening credit or taxing capital gain, while examples of
vertical, sector-specific policies comprise protecting textiles from imports or subsidizing export
industries. Free market advocates consider industrial policies as interventionist measures typical
of mixed economy countries.

Many types of industrial policies contain common elements with other types of interventionist
practices such as trade policy and fiscal policy. An example of a typical industrial policy is
import-substitution-industrialization (ISI), where trade barriers are temporarily imposed on some
key sectors, such as manufacturing By selectively protecting certain industries, these industries
are given time to learn (learning by doing) and upgrade. Once competitive enough, these
restrictions are lifted to expose the selected industries to the international market.

Industrial Policy:
The Government continued with industrial reforms in 1998-99. Coal and lignite, petroleum
(other than crude) and its distillation products, bulk drugs and sugar were deli censed. At present,
only five items of health, strategic and security considerations remain under the purview of
industrial licensing. Coal and lignite and mineral oils were also removed from the list of
industries reserved for the public sector.

To provide a strong stimulus to the infrastructure sector, boost industrial growth and accelerate
overall economic activity, the Union Budget substantially increased allocations for energy,
transport and communications. The Budget also announced disinvestment of specified portions
of equity from select PSEs like IOC, GAIL, CONCOR and VSNL. A separate package of
measures was announced in the Budget for the SSI sector. A number of items including some
farm implements and tools have been removed from the products reserved for exclusive
manufacture by SSI sector.

The prevailing customs tariff structure was revised to provide a level playing field to the
domestic industry by imposing an additional non- moveable duty of 4 per cent on majority of
imports. The duty was designed to compensate indigenous industry for price disadvantage
suffered on account of sales tax and other local taxes.

Reforms initiated by the Government to revive the depressed capital markets and rejuvenate
corporate growth include the issue of an ordinance permitting companies to buy back their own
shares; awarding nomination facility to holders of shares/debentures and fixed deposits;
permission for inter corporate investments without prior approval of the Government;
establishment of Investor Education and Protection Fund; and statutory enforcement of
Accounting Standards. Certain changes in the provision on buy-back of shares like restricting
buy-back to 25 per cent of paid-up capital and free reserves and defining ‘free reserves’ for the
purpose of buy-back, have been introduced through the Companies (Amendment) Ordinance,
1999.
 The Government also constituted separate Task Forces on steel, capital goods and commercial
vehicles for addressing the problems being faced by these industries. In the light of their
recommendations, seven inputs used in steel manufacturing have been exempted from special
customs duty. “Seconds” and “defectives” of specified steel inputs have been permitted for
imports against specified values.

It has been decided that depreciation, for income-tax purposes, will also be allowed at 40 per
cent for commercial vehicles purchased between October 1, 1998 and March 31, 1999 and at 60
per cent in cases where purchase has been made to replace condemned vehicles (over 15 years of
age) in the same period. A Council on Trade and Industry to the Prime Minister has been set up
for deliberating on critical policy issues put forward by industry leaders for accelerating
industrial growth.

New Industrial Policy 1991 September 25, 2011 1 Comment With an aim of "continuity with
change" the New Industrial Policy of 1991 was introduced. This policy aimed at correcting the
distortion and weakness of the Industrial Structure of the country that had developed since Nehru
Era. This policy was a comprehensive document which was divided into 5 parts: Industrial
Licensing Policy Foreign Investment Foreign Technology Agreements Public Sector MRTP Act
A. Industrial Licensing Policy This policy abolished the Industrial licensing for all projects
except for a short list of industries related to security and strategic concerns, social reasons,
hazardous chemicals and overriding environmental reasons, and items of elitist consumption. So,
for all industries except mentioned below, Industrial Licensing was abolished.

Arms and ammunition and allied items of defense equipment, Defence aircraft and warships.
Atomic Energy. Coal and Lignite. Mineral oils. Mining of Iron Ore, Manganese Ore, Chrome
Ore, Gypsum, Sulphur, Gold And Diamond. Mining of Copper, Lead, Zinc, Tin, Molybdenum
And Wolfram. Minerals specified in the Schedule to the Atomic Energy (Control of Production
and Use) Order, 1953. Railway transport. Please note that in this policy, industries reserved for
the small scale sector were continued to be so reserved. A provision was made that in cases
where imported capital goods are required, automatic clearance is given, provided there is
foreign exchange availability is ensured through foreign equity.

The towns where the population was more than 10 Lakh (Metro Cities), there was now no need
to seek a Government Approval except those which were placed under compulsory licensing or
attracted local restrictions. The definition of Tiny Unit was changed and now a tiny unit was
having an investment limit of Less than ` 5 Lakh. Please note that today, the units where
investment in Plant & Machinery is up to ` 25 lakh is called a "Tiny Enterprise", irrespective of
the location of the unit. This change was based upon the recommendation of Abid Hussain
Committee. Except the following 18 Industries, all were delicensed from the B & C Schedules of
the Industrial Policy of 1956: Coal and Lignite. Petroleum (other than crude) and its distillation
products. Distillation and brewing of alcoholic drinks. Sugar. Animal fats and oils. Cigars and
cigarettes of tobacco and manufactured tobacco substitutes. Asbestos and asbestos-based
products. Plywood, decorative veneers, and other wood based products such as particle board,
medium density fibre board, block board. Raw hides and skins, leather, chamois leather and
patent leather. Tanned or dressed furskins. Motor cars. Paper and Newsprint except bagasse-
based units.

Electronic aerospace and defence equipment; All types. Industrial explosives, including
detonating fuse, safety fuse, gun powder, nitrocellulose and matches. Hazardous chemicals.
Drugs and Pharmaceuticals (according to Drug Policy). Entertainment electronics (VCRs, colour
TVs, C.D. Players, Tape Recorders). White Goods (Domestic Refrigerators, Domestic
Dishwashing machines, Programmable Domestic Washing Machines, Microwave ovens, Air
conditioners). B. Investments: 34 Industries were placed under the automatic approval route for
direct foreign investment up to 51 percent foreign equity. It was promised that there will be no
bottlenecks of any kind in this process provided that foreign equity covers the foreign exchange
requirement for imported capital goods.

A promise to carry out some amendments in Foreign Exchange Regulation Act (1973) was also
made. In the Industrial Policy of 1991, the NRIs were allowed to 100% equity investments on
non-repatriation basis in all activities except the negative list. C. Foreign Technology
Agreements Automatic permission was given for foreign technology agreements in high priority
industries upto a lump sum payment of Rs. 1 crore, 5% royalty for domestic sales and 8% for
exports, subject to total payment of 8% of sales over a 10 year period from date of agreement or
7 years from commencement of production. D. Public Sector A promise was made to review the
portfolio of public sector investments with a view to focus the public sector on strategic, high-
tech and essential infrastructure.
This indicated a disinvestment of the public sector. The PSUs which were chronically sick and
which are unlikely to be turned around were to be referred to the Board for Industrial and
Financial Reconstruction (BIFR). It was promised that Boards of public sector companies would
be made more professional and given greater powers. E. MRTP Act The MRTP Act will be
amended to remove the threshold limits of assets in respect of MRTP companies and dominant
undertakings. This eliminates the requirement of prior approval of Central Government for
establishment of new undertakings, expansion of undertakings, merger, amalgamation and
takeover and appointment of Directors under certain circumstances. The MRTP Limit for MRTP
companies was made ` 100 Crore. The above reforms were introductory in nature and the series
of reforms continued and are continuing even today.

Economic problems

Poverty:
What does it mean to be poor? How is poverty measured? Third World countries are often
described as “developing” while the First World, industrialized nations are often “developed”.
What does it mean to describe a nation as “developing”? A lack of material wealth does not
necessarily mean that one is deprived. A strong economy in a developed nation doesn’t mean
much when a significant percentage (even a majority) of the population is struggling to survive.

Successful development can imply many things, such as (though not limited to):

 An improvement in living standards and access to all basic needs such that a person has
 enough food, water, shelter, clothing, health, education, etc; 
 A stable political, social and economic environment, with associated political, social and
economic freedoms, such as (though not limited to) equitable ownership of land and
 property; 
  The ability to make free and informed choices that are not coerced; 
 Be able to participate in a democratic environment with the ability to have a say in one’s
 own future; 
  To have the full potential for what the United Nations calls Human Development: 
 At household, community, societal, national and international levels, various aspects of
the above need to be provided, as well as commitment to various democratic institutions
 that do not become corrupted by special interests and agendas. 
 Yet, for a variety of reasons, these “full rights” are not available in many segments of
various societies from the richest to the poorest. When political agendas deprive these
 possibilities in some nations, how can a nation develop? Is this progress? 
 Politics have led to dire conditions in many poorer nations. In many cases, international
political interests have led to a diversion of available resources from domestic needs to
western markets. (See the structural adjustment section to find out more about this.) This
has resulted in a lack of basic access to food, water, health, education and other important
social services. This is a major obstacle to equitable development. 

Inequality:

While poverty alleviation is important, so too is tackling inequality. Inequality is often discussed
in the context of relative poverty, as opposed to absolute poverty.

That is, even in the wealthiest countries, the poor may not be in absolute poverty (the most basic
of provisions may be obtainable for many) or their level of poverty may be a lot higher than
those in developing countries, but in terms of their standing in society, their relative poverty can
also have serious consequences such as deteriorating social cohesion, increasing crime and
violence, and poorer health.

Some of these things are hard to measure, such as social cohesion and the level of trust and
comfort people will have in interacting with one another in the society. Nonetheless, over the
years, numerous studies have shown that sometimes the poor in wealthy countries can be
unhappier or finding it harder to cope than poor people in poorer countries.

In the context of tackling poverty then, the Overseas Development Institute (ODI) for example
sees poverty reduction as a twin function of

1. The rate of growth, and

2. Changes in income distribution.

The ODI also adds that as well as increased growth, additional key factors to reducing poverty
will be:

 The reduction in inequality 

 The reduction in income differences 

A few places around the world do see increasing rates of growth in a positive sense. But
globally, there is also a negative change in income distribution. The reality unfortunately is that
the gap between the rich and poor is quite wide in most places.

parallel economy:

Parallel economy, based on the black money or unaccounted money, is a big menace to the
Indian economy. It is also a cause of big loss in the tax-revenues for the government. As such, it
needs to be curbed. Its elimination will benefit the economy in more than one way.

In a general way, we can define black economy as the money that is generated by activities that
are kept secret, in the sense that these are not reported to the authorities. As such, this money is
also not accounted to (he fiscal authorities i.e., taxes are not paid on this money.

An estimate by Suraj B. Gupta had put the size of black money at over 50 per cent of GDP (at
factor cost) in 1987-88. It is also stated that annual rate of growth of black economy is higher
than the annual growth rate of GDP.

According to Global Financial Integrity Study of 2009, $ 1.4 trillion belongs to Indians were
parked in safe havens abroad. $ 1.4 trillion is equivalent to Rs. 70lakh crore, more than India’s
national income of around Rs. 50lakh crore.

A statement from the Swiss Central Bank declared that Indians have $2.5 billion deposits in
various Swiss Banks. It is suspected that the deposits of Indians in tax havens are mostly being
withdrawn and shifted to a third country; making it difficult for the government to gather any
further details once the accounts are closed.
Harmful Effects of Parallel Economy:

The circulation of black money has adversely affected the economy in several ways. First, is the
misdirection of precious national resources? A part of black money is kept in a form that
contributes nothing/little to productive activities. Again, much around half to two third is
squandered away on ostentatious consumption of goods and services.

Second, it has enormously worsened the income distribution, and has thereby undermined the
fabric of the society.

Third, the existence of a big-sized unreported segment of the economy is a big handicap in
making a correct analysis and formulation of right policies for it. Nor. it is possible to monitor
the development in the economy with precision.

Fourth, the black money has eroded the social values of the society. The undeclared income is
‘earned’ by illegitimate ways. This is spent in undesirable and vulgar manner

Unemployment:

Unemployment (or joblessness) occurs when people are without work and actively seeking work.
The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a
percentage by dividing the number of unemployed individuals by all individuals currently in the
labor force. During periods of recession, an economy usually experiences a relatively high
unemployment rate. According to International Labor Organization report, more than 197
million people globally are out of work or 6% of the world's workforce were without a job in
2012.

There remains considerable theoretical debate regarding the causes, consequences and solutions
for unemployment. Classical economics, New classical economics, and the Austrian School of
economics argue that market mechanisms are reliable means of resolving unemployment. These
theories argue against interventions imposed on the labor market from the outside, such as
unionization, bureaucratic work rules, minimum wage laws, taxes, and other regulations that they
claim discourage the hiring of workers.

Keynesian economics emphasizes the cyclical nature of unemployment and recommends

government interventions in the economy that it claims will reduce unemployment during
recessions. This theory focuses on recurrent shocks that suddenly reduce aggregate demand for
goods and services and thus reduce demand for workers. Keynesian models recommend
government interventions designed to increase demand for workers; these can include financial
stimuli, publicly funded job creation, and expansionist monetary policies.
In addition to these comprehensive theories of unemployment, there are a few categorizations of
unemployment that are used to more precisely model the effects of unemployment within the
economic system. The main types of unemployment include structural unemployment which
focuses on structural problems in the economy and inefficiencies inherent in labour markets,
including a mismatch between the supply and demand of laborers with necessary skill sets.
Structural arguments emphasize causes and solutions related to disruptive technologies and
globalization. Discussions of frictional unemployment focus on voluntary decisions to work
based on each individuals' valuation of their own work and how that compares to current wage
rates plus the time and effort required to find a job. Causes and solutions for frictional
unemployment often address job entry threshold and wage rates. Behavioral economists
highlight individual biases in decision making, and often involve problems and solutions
concerning sticky wages and efficiency wages.

Limitations of the unemployment:

Some critics believe that current methods of measuring unemployment are inaccurate in terms of
the impact of unemployment on people as these methods do not take into account the 1.5% of the
available working population incarcerated in U.S. prisons (who may or may not be working
while incarcerated), those who have lost their jobs and have become discouraged over time from
actively looking for work, those who are self-employed or wish to become self-employed, such
as tradesmen or building contractors or IT consultants, those who have retired before the official
retirement age but would still like to work (involuntary early retirees), those on disability
pensions who, while not possessing full health, still wish to work in occupations suitable for their
medical conditions, those who work for payment for as little as one-hour per week but would
like to work full-time.

These people are "involuntary part-time" workers, those who are underemployed, e.g., a
computer programmer who is working in a retail store until he can find a permanent job,
involuntary stay-at-home mothers who would prefer to work, and graduate and Professional
school students who were unable to find worthwhile jobs after they graduated with their
Bachelor's degrees.

Internationally, some nations' unemployment rates are sometimes muted or appear less severe
due to the number of self-employed individuals working in agriculture. Small independent
farmers are often considered self-employed; so, they cannot be unemployed. The impact of this
is that in non-industrialized economies, such as the United States and Europe during the early
19th century, overall unemployment was approximately 3% because so many individuals were
self-employed, independent farmers; yet, unemployment outside of agriculture was as high as
80%.

Many economies industrialize and experience increasing numbers of non-agricultural workers.

For example, the United States' non-agricultural labour force increased from 20% in 1800, to
50% in 1850, to 97% in 2000. The shift away from self-employment increases the percentage of
the population who are included in unemployment rates. When comparing unemployment rates
between countries or time periods, it is best to consider differences in their levels of
industrialization and self-employment.
It is possible to be neither employed nor unemployed by ILO definitions, i.e., to be outside of the
"labour force."] These are people who have no job and are not looking for one. Many of these are
going to school or are retired. Family responsibilities keep others out of the labour force. Still
others have a physical or mental disability which prevents them from participating in labour
force activities. And of course some people simply elect not to work, preferring to be dependent
on others for sustenance.

Definition of Disinvestment
At the very basic level, disinvestment can be explained as follows:
“Investment refers to the conversion of money or cash into securities, debentures, bonds or any
other claims on money. As follows, disinvestment involves the conversion of money claims or
securities into money or cash.”
Disinvestment can also be defined as the action of an organisation (or government) selling or
liquidating an asset or subsidiary. It is also referred to as ‘divestment’ or ‘divestiture.’
In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a
government-owned enterprise.
A company or a government organisation will typically disinvest an asset either as a strategic
move for the company, or for raising resources to meet general/specific needs.
Objectives of Disinvestment
The new economic policy initiated in July 1991 clearly indicated that PSUs had shown a very
negative rate of return on capital employed. Inefficient PSUs had become and were continuing to
be a drag on the Government’s resources turning to be more of liabilities to the Government than
being assets. Many undertakings traditionally established as pillars of growth had become a
burden on the economy. The national gross domestic product and gross national savings were
also getting adversely affected by low returns from PSUs. About 10 to 15 % of the total gross
domestic savings were getting reduced on account of low savings from PSUs. In relation to the
capital employed, the levels of profits were too low. Of the various factors responsible for low
profits in the PSUs, the following were identified as particularly important:

 Price policy of public sector undertakings

 Under–utilisation of capacity
 Problems related to planning and construction of projects
 Problems of labour, personnel and management
 Lack of autonomy

Hence, the need for the Government to get rid of these units and to concentrate on core activities
was identified. The Government also took a view that it should move out of non-core businesses,
especially the ones where the private sector had now entered in a significant way. Finally,
disinvestment was also seen by the Government to raise funds for meeting general/specific
needs.
In this direction, the Government adopted the 'Disinvestment Policy'. This was identified as an
active tool to reduce the burden of financing the PSUs. The following main objectives of
disinvestment were outlined:
 To reduce the financial burden on the Government
 To improve public finances
 To introduce, competition and market discipline
 To fund growth
 To encourage wider share of ownership
 To depoliticise non-essential services

Importance of Disinvestment
Presently, the Government has about Rs. 2 lakh crore locked up in PSUs. Disinvestment of the
Government stake is, thus, far too significant. The importance of disinvestment lies in utilisation
of funds for:

 Financing the increasing fiscal deficit

 Financing large-scale infrastructure development
 For investing in the economy to encourage spending
 For retiring Government debt- Almost 40-45% of the Centre’s revenue receipts go towards
repaying public
debt/interest
 For social programs like health and education

Disinvestment also assumes significance due to the prevalence of an increasingly competitive

environment, which makes it difficult for many PSUs to operate profitably. This leads to a rapid
erosion of value of the public assets making it critical to disinvest early to realize a high value.

Balanced Regional Development:

Balanced regional development – a key government objective – provides the basis for the WDC
Policy Team’s work. The team publishes policy commentary and analysis on development issues
for the Western Region.

I. GENERAL APPROACH

Balanced development of different parts of the country, extension of the benefits of economic
progress to the less developed regions and widespread diffusion of industry are among the major
aims of planned development. Successive Five Year Plans seek to realize these aims in larger
measure. Expansion of the economy and more rapid growth increase progressively the capacity
to achieve a better balance between national and regional development. In striving for such a
balance, certain inherent difficulties have to be met, especially in the early phases of economic
development. As resources are limited, frequently advantage lies in concentrating them at those
points within the economy at which the returns are likely to be favorable. As development
proceeds investments are undertaken over a wider area and resources can be applied at a large
number of points, thereby resulting in greater spread of benefits. In the interest of development
itself, the maximum increase in national income should be achieved and resources obtained for
further investment. The process is a cumulative one, each stage determining the shape of the
next. In some fields, as in industry, intensive and localized development may be inevitable.
Along with this, in other areas, the aim should be to provide for more dispersed advance in
sectors like agriculture, small industries, power, communications and social services. Equally
with industry, investment in economic and social overheads helps to create numerous promising
centers for growth. Once a minimum in terms of national income and growth in different sectors
is reached, without affecting the progress of the economy as a whole, it becomes possible to
provide in many directions for a larger scale of development in the less developed regions. A
large country with extensive natural resources, viewing each phase of its development in the
perspective of a long-term plan, has the means not only to realise a high and sustained rate of
growth but also to enable its less developed regions to come up to the level of the rest.

2. The two aims—increase in national income and more balanced development of different parts
of the country—are thus related to one another and, step by step, it becomes possible to create
conditions in which resources in terms of natural endowment, skill and capital in each region are
fully utilized. Sometimes the sense of lagging behind in development may be due not so much to
a slower rate of overall growth in the region as to inadequate or tardy development in specific
fields, such as, agriculture, irrigation, power or industry or employment. In each region the
nature of the problem and the impediments to rapid development in particular fields should be
carefully studied, and appropriate measures devised for accelerated development. The essential
object should be to secure the fullest possible utilization of the resources of each region, so that it
can contribute its best to the national pool and take its due share from the benefits accruing from
national development.

3. The growth potential of each region should be fully developed, but the precise manner in
which this goal is achieved and the stages of growth will not be identical. Some regional factors,
such as those connected with physical features and geographical location, cannot be easily
altered, but there are others which can be influenced by raising levels of education and skill,
developing power and, generally, by applying science and technology on a larger scale. Large
scale industries, especially basic and heavy industries, frequently serve as a spearhead of
intensive and broad-based development. However, not all regions can offer equally favorable
conditions for the development of industry. It is also possible to over-estimate the significance of
the location of large industrial units in relation to the living standards of the bulk of the
population. There are many examples, both of countries and of regions within a country, in
which, with limited development in industry, an appreciable rise in living standards has been
achieved through the fuller utilization of local natural and human resources. There are also
instances of areas around massive projects where no great impact on the levels of living of the
people is to be observed. Apart from the basic and capital goods industries and other large
industries, there are other industries whose possibilities need to be fully explored, such as labour
intensive industries of the traditional type, small scale industries of the modern type, agricultural
processing industries, forest industries, assembly operations and recreational industries. Each
region should endeavor to identify, plan for and promote industries which are specially suited to
its conditions and for which it can provide relatively greater facilities.

II. POLICIES FOR REGIONAL GROWTH

4. The general approach set out above was expressed through a variety of policies and
programmes which were embodied in the Second Five Year Plan. Among the most important of
these were :
 1. the priority given to programmes like agriculture, community development, irrigation,
specially minor irrigation, local development works, etc. which spread over the entire
area within the shortest possible time;
2. provision of facilities such as power, water supply, transport and communications,
training institutions, etc. in areas which were lagging behind industrially or where there
was greater need for providing opportunities for employment;
3. programmes for the expansion of village and small industries; and
4. in the location of new enterprises, whether public or private, consideration given to the
need for developing a balanced economy in different parts of the country. In particular,
this aspect was to be kept in view where the location of an industry was not determined
almost entirely by the availability of raw materials or other natural resources. In addition
to these measures, the Second Plan envisaged an effort to promote greater mobility of
labor between different parts of the country and to organize schemes of migration and
settlement from more to less densely populated areas, The Plan also suggested that there
should be continuous study of the problem of regional disparities and suitable indicators
of regional development should be evolved.

5. In drawing up and implementing the Second Plan, the regional aspects of development were
dealt with in three different ways. Firstly, through the plans of States emphasis was given to
programmes which had a direct bearing on the welfare of the people in different parts of the
country. Secondly, special programmes were undertaken in particular areas where development
had either received a temporary setback, or was being held back by certain basic deficiencies. In
the third place, steps were taken to secure more dispersed development of industry which, in
turn, creates conditions for development in several related fields.

6. Programmes of agriculture, community development, village and small industries, irrigation

and power, communications and social services have the widest coverage, and aim at providing
basic facilities and services to people in all regions. Since these programmes are included in the
plans of States, it is largely through the shape given to State plans and the changes through which
they pass in the course of the Plan period that the benefits of development are carried to every
part of the country. River valley projects formed a most important segment in the plans of
several States and large investments have been made in multi-purpose projects like the Hirakud,
Kosi, Chambal, Rihand, D.V.C., Bhakra Nangal, Koyna and Nagar-junasagar. These and other
projects were essential for the development of vast regions in the country, some of which
suffered from scarcity or unemployment or were otherwise poorly developed. Implementation of
agricultural production and community development programmes, and of education and health
schemes aiso carried the benefits of development to the remotest areas.

7. In addition to these general or overall programmes of development, both in the First and the
Second Plan, special schemes were formulated for particular areas which had difficult problems
to face. Thus, in 1953-54 a programme of permanent improvements in scarcity areas was taken
in hand in several States at a total cost of about Rs. 40crores. Tlie programme included medium
as well as minor irrigation schemes, construction of embankments for flood protection and land
reclamation and contour bonding schemes. Again, in-1957, when scarcity conditions developed
in some States, the problem was studied and additional development programmes were taken up.
For less developed areas situated in different States, such as, Vidharba and Marathwada, the
eastern districts and other backward areas in Uttar Pradesh and hill areas in Punjab and Uttar
Pradesh, the States concerned have frequently provided for special outlays within their plans, and
have made special arrangements for the representatives of sucli areas to purtic:pale in making
their own plans. In States like Madhya Pradesh, Orissa and Assam, additional programmes have
been undertaken in areas inhabited by backward classes. These include roads and
communications, multi-purpose development blocks, forest cooperative societies, and measures
to improve upon the existing systems of shifting cultivation. A study of the problems of
inaccessible areas in different States has also been undertaken by the Ministry of Food and
Agriculture.

8. As regards the diffusion of industrial activity, so far as the larger industries are concerned,
economic and technical considerations are always important and in practice only marginal
deviations are feasible. The disadvantages which particular areas may have for the location of the
larger projects are not always basic or irremediable for at times they may reflect only the lack of
basic facilities and services. In the location of public sector projects, the claims of relatively
backward areas have been kept in view wherever this could be done without giving up essential
technical and economic criteria. The location of several important projects like the steel plants
has been determined on the basis of expert study and on economic considerations. But as tic are
situated in areas which were hitherto industrially backward, the latter will benefit. Similarly,
schemes for the development of certain natural resources such as lignite deposits in Arcot, iron
ore in Orissa, bauxite deposits in Salem and lead and zinc deposits in Rajasthan will benefit areas
which have been relatively less developed.

9. While, in the selection of sites for basic capital and producer goods industries, proximity to
raw materials and other economic considerations have naturally been important, it was felt that
in a wide range of consumer goods and processing industries it was possible to foster regional
patterns of development. These include cotton textiles, sugar, light engineering industries such as
bicycles, sewing machines, electric motors, radio receivers, re-rolling of steel and non-ferrous
metals from billets and semis, molded plastics and manufacture and further processing of bulk
drugs from penultimate products. Typical examples are the establishment of textile units in
Rajasthan, Orissa, Assam and Punjab; sugar factories and distilleries in Andhra Pradesh, Madras,
Mysore and Maharashtra; steel re-rolling mills in Assam, Madhya Pradesh, Kerala and North
Bihar and tyre and tubes factory and electric lamps factory in Kerala. In the case of light
engineering industries, the decision to sell steel at a uniform price at all rail-heads is an important
step taken during the Second Plan for securing their wider dispersal. The policy followed
regarding the licensing of new units in the sugar industry has assisted development in the
peninsula. Similarly, new cotton textile mills have been encouraged to come up in areas in which
the industry had not so far developed.

10. To some extent the development of new processes and new uses of raw materials has assisted
in the spread of industry. Thus, a beginning was made with the use of biogases as a raw material
for paper, and a number of paper factories based on the use of biogases have been approved for
being set up in sugarcane growing areas. In Uttar Pradesh a synthetic rubber plant is being
established on the basis of alcohol, which was formerly being used mainly for admixture with
petrol. A decision has been taken to license pig iron plants, each up to a capacity of about
100,000 tons, in areas where non-metallurgical coals locally available could be used, if
necessary, along with coke produced from metallurgical coal. Besides increasing the production
of pig iron this will ensure dispersal of the industry. In encouraging such developments care has
of course to be taken to ensure that a balance is maintained between regional distribution and
considerations of economy in production.

11. Village and small industries are spread all over the country and various forms of assistance
provided by the Central and State Governments are made available in the areas according to the
programmes which are undertaken. Industrial estates have been set up in all States, and
increasingly they are to be located in the smaller towns and rural areas.

Industrial sickness:

Industrial sickness is defined in India as "an industrial company (being a company registered for
not less than five years) which has, at the end of any financial year, accumulated losses equal to,
or exceeding, its entire net worth and has also suffered cash losses in such financial year and the
financial year immediately preceding such financial year"

Industrial Sickness in India:

Industrial sickness especially in small-scale Industry has been always a demerit for the Indian
economy, because more and more industries like – cotton, Jute, Sugar, Textiles small steel and
engineering industries are being affected by this sickness problem.

As per an estimate 300 units in the medium and large scale sector were either closed or were on
the stage of closing in the year 1976. About 10% of 4lakhs unit were also reported to be ailing.
And this position also remains same in the next decades. At the end of year 1986, the member of
sick units in the portfolio of scheduled commercial banks stood at 1.47,740 involving an
outstanding bank credit of Rs. 487crores.

 Where the total numbers of large Industries which are sick were 637 units at the end of
 year 1985 increased to 714 units in the end of next year 1986. 
 Likewise on the other hand the number of sick small scale units was also increased 1.18
 lacks at the end of 1985 to 1.46lakhs at the end of 1986. 
 The bank amount which was outstanding in case of large industries for the same period
 also increased from Rs.2,900crores to Rs. 3287crores at the end of year 1986 
 Dues of Small Scale sector also increased from Rs.1071crores to Rs.1306 at the end of
 the year 1986. 
 Of the 147, 740 sick industrial units which contains large medium as well as small scale
involving the total bank loan (credit) of Rs. 4874 at the end of the year 1986. 

Causes of sickness in small scale industry:

The different types of industrial sickness in Small Scale Industry (SSI) fall under two important
categories. They are as follows:

Internal causes for sickness:

We can say pertaining to the factors which are within the control of management. This sickness
arises due to internal disorder in the areas justified as following:

a) Lack of Finance: This including weak equity base, poor utilization of assets, inefficient
working capital management, absence of costing & pricing, absence of planning and budgeting
and inappropriate utilization or diversion of funds.

b) Bad Production Policies : The another very important reason for sickness is wrong selection of
site which is related to production, inappropriate plant & machinery, bad maintenance of Plant &
Machinery, lack of quality control, lack of standard research & development and so on.

c) Marketing and Sickness : This is another part which always affects the health of any sector as
well as SSI. This including wrong demand forecasting, selection of inappropriate product mix,
absence of product planning, wrong market research methods, and bad sales promotions.

d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is
inappropriate personnel management policies which includes bad wages and salary
administration, bad labor relations, lack of behavioral approach causes dissatisfaction among the
employees and workers.

e) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or
bad corporate management which includes improper corporate planning, lack of integrity in top
management, lack of coordination and control etc.

External causes for sickness:

a) Personnel Constraint: The first for most important reason for the sickness of small scale
industries are non availability of skilled labour or manpower wages disparity in similar industry
and general labour invested in the area.

b) Marketing Constraints: The second cause for the sickness is related to marketing. The sickness
arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in
global marketing scenario, excessive tax policies by govt. and market recession.

c) Production Constraints: This is another reason for the sickness which comes under external
cause of sickness. This arises due to shortage of raw material, shortage of power, fuel and high
prices, import-export restrictions.

d) Finance Constraints: The another external cause for the sickness of SSIs is lack of finance.
This arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable
investments, fear of nationalization.
 Low Capital formation:

Capital formation is a concept used in macroeconomics, national accounts and financial

economics. Occasionally it is also used in corporate accounts. It can be defined in three ways:

 It is a specific statistical concept used in national accounts statistics, econometrics and

macroeconomics. In that sense, it refers to a measure of the net additions to the (physical)
capital stock of a country (or an economic sector) in an accounting interval, or, a measure
of the amount by which the total physical capital stock increased during an accounting
period. To arrive at this measure, standard valuation principles are used.

 It is used also in economic theory, as a modern general term for capital accumulation,
referring to the total "stock of capital" that has been formed, or to the growth of this total
 capital stock. 
 In a much broader or vaguer sense, the term "capital formation" has in more recent times
been used in financial economics to refer to savings drives, setting up financial
institutions, fiscal measures, public borrowing, development of capital markets,
privatization of financial institutions, development of secondary markets. In this usage, it
refers to any method for increasing the amount of capital owned or under one's control, or
any method in utilising or mobilizing capital resources for investment purposes. Thus,
capital could be "formed" in the sense of "being brought together for investment
purposes" in many different ways. This broadened meaning is not related to the statistical
measurement concept nor to the classical understanding of the concept in economic
theory. Instead, it originated in credit-based economic growth during the 1990s and
2000s, which was accompanied by the rapid growth of the financial sector, and
consequently the increased use of finance terminology in economic discussions. 

SECTORAL COMPOSITION OF GDP:

The composition of GDP in India and the changes in it .The composition of GDP in India has
undergone substantial changes since 1950- 51. The share of agriculture has declined while that of
industrial and service sectors has increased. Economic activities can be divided into three
categories: primary activities, secondary activities and tertiary activities. Primary activities
include i) agriculture, ii) forest and logging, and iii) fishing. Secondary activities include i)
mining and aqua iii) electricity, gas and water supply, and iv) construction. Tertiary activities
include i) trade, ii) hotels and restaurant, iii) transport (railways, road, air, waterways), iv)
storage, v) communication, vi) banking and insurance,vii) real estate, and viii) public
administration and defense. The tertiary activities are also called service activities. ,
The decline in the share of the primary sector in GDP has taken place as the secondary and
tertiary sectors have registered higher growth rate than the primary sector.

Unit 3

Foreign exchange reserves:

Foreign-exchange reserves (also called forex reserves or FX reserves) are assets held by central
banks and monetary authorities, usually in different reserve currencies, mostly the United States
dollar, and to a lesser extent the euro, the United Kingdom pound sterling, and the Japanese yen,
and used to back its liabilities, e.g., the local currency issued, and the various bank reserves
deposited with the central bank, by the government or financial institutions

In a strict sense, foreign-exchange reserves should only include foreign currency deposits and
bonds. However, the term in popular usage commonly also adds gold reserves, special drawing
rights (SDRs), and International Monetary Fund (IMF) reserve positions. This broader figure is
more readily available, but it is more accurately termed official international reserves or
international reserves.

Foreign Exchange reserves are called Reserve Assets in the Balance of Payments and are located
in under the financial account. Hence, they are usually an important part of the International
Investment Position of a country. The reserves are labeled as reserve assets under assets by
functional category. In terms of financial assets classifications, the reserve assets can be
classified as Gold bullion, Unallocated gold accounts, Special drawing rights, currency, Reserve
position in the IMF, interbank position, other transferable deposits, other deposits, debt
securities, loans, equity (listed and unlisted), investment fund shares and financial derivatives,
such as forward contracts and options. There is no counterpart for reserve assets in liabilities of
the International Investment Position. Usually, when the monetary authority of a country has
some kind of liability, this will be included in other categories, such as Other Investments In the
Central Bank’s Balance Sheet, foreign exchange reserves are assets, along with domestic credit

Purpose:
Official international reserves assets allow a central bank to purchase the domestic currency,
which is considered a liability for the central bank (since it prints the money or fiat currency as
IOUs). Thus, the quantity of foreign exchange reserves can change as a central bank implements
monetary policy but this dynamics should be analyzed generally in the context of the level of
capital mobility, the exchange rate regime and other factors. This is known as Trilemma or
Impossible trinity. Hence, in a world of perfect capital mobility, a country with fixed exchange
rate would not be able to execute an independent monetary policy.

A central bank that implements a fixed exchange rate policy may face a situation where supply
and demand would tend to push the value of the currency lower or higher (an increase in demand
for the currency would tend to push its value higher, and a decrease lower) and thus the central
bank would have to use reserves to maintain its fixed exchange rate. Under perfect capital
mobility, the change in reserves is a temporary measure, since the fixed exchange rate attaches
the domestic monetary policy to that of the country of the base currency. Hence, in the long term,
the monetary policy has to be adjusted in order to be compatible with that of the country of the
base currency. Without that, the country will experience outflows or inflows of capital. Fixed
pegs were usually used as a form of monetary policy, since attaching the domestic currency to a
currency of a country with lower levels of inflation should usually assure convergence of prices.

In a pure flexible exchange rate regime or floating exchange rate regime, the central bank does
not intervene in the exchange rate dynamics; hence the exchange rate is determined by the
market. Theoretically, in this case reserves are not necessary. Other instruments of monetary
policy are generally used, such as interest rates in the context of an inflation targeting regime.
Milton Friedman was a strong advocate of this arrangement, since he considered that
independent monetary (and in some cases fiscal) policy and openness of the capital account are
more valuable than a fixed exchange rate. Also, he valued the role of exchange rate as a price. As
a matter of fact, he believed that sometimes could be less painful and thus desirable to adjust
only one price (the exchange rate) than the whole set of prices of goods and wages of the
economy, that are less flexible.

Mixed exchange rate regimes ('dirty floats', target bands or similar variations) may require the
use of foreign exchange operations to maintain the targeted exchange rate within the prescribed
limits, such as fixed exchange rate regimes. As seen above, there is an intimate relation between
exchange rate policy (and hence reserves accumulation) and monetary policy. Foreign exchange
operations can be (sterilized and unsterilized.

The last will cause an expansion or contraction in the amount of domestic currency in
circulation, and hence directly affect inflation and monetary policy. For example, to maintain the
same exchange rate if there is increased demand, the central bank can issue more of the domestic
currency and purchase foreign currency, which will increase the sum of foreign reserves. Since
(if there is no sterilization) the domestic money supply is increasing (money is being 'printed'),
this may provoke domestic inflation. Also, some central banks may let the exchange rate
appreciate to control inflation, usually by the channel of cheapening tradable goods.

Reserve accumulation:

Since the end of the Breton Woods system, many countries adopted flexible exchange rate. In
theory reserves are not needed under this type of exchange rate arrangement, thus the expected
trend should be a decline in foreign exchange reserves. However, the opposite happened and
foreign reserves present a strong upward trend. Reserves grew more than gross domestic product
(GDP) and imports in many countries. The only ratio that is relatively stable is foreign reserves.

Precautionary Aspect:

The traditional use of reserves is as savings for potential times of crises, especially balance of
payments crises. As we will see below, originally those fears were related to the current account,
but this gradually changed to include financial account needs as well. Originally, the creation of
the IMF was viewed as a response to the need of countries to accumulate reserves. If a specific
country is suffering from a balance of payments crisis, he would be able to borrow from the IMF,
as this would be a pool of resources, and so the need to accumulate reserves would be lowered.
However, the process of obtaining resources from the Fund is not automatic, which can cause
problematic delays especially when markets are stressed. Hence, the fund never fulfilled
completely its role, serving more as provider of resources for longer term adjustments. Another
caveat of the project is the fact that when the crisis is generalized, the resources of the IMF could
prove insufficient. After the 2008 crisis, the members of the Fund had to approve a capital
increase, since its resources were strained. Some critics point out that the increase in reserves in
Asian countries after the 1997 Asia crisis was a consequence of disappointment of the countries
of the region with the IMF. During the 2008 crisis, the Federal Reserve instituted currency swap
lines with several countries, alleviating liquidity pressures in dollars, thus reducing the need to
use reserves.

External trade:

As most countries engage in international trade, reserves would be important to assure that trade
would not be interrupted in the event of a stop of the inflow of foreign exchange to the country,
what could happen during a financial crisis for example. A rule of thumb usually followed by
central banks is to at least hold an amount of foreign currency equivalent to three months of
imports. As commercial openness increased in the last years (part of the process known as
globalization), this factor alone could be responsible for the increase of reserves in the same
period. As imports grew, reserves should grow as well to maintain the ratio. Nonetheless,
evidence suggests that reserve accumulation was faster than what would be explained by trade,
since the ratio has increased to several months of imports. The external trade factor also explains
why the ratio of reserves in months of imports is closely watched by credit risk agencies.

Financial openness:

Besides external trade, the other important trend of the last decades is the opening of the
financial account of the balance of payments. Hence, financial flows, such as direct investment
and portfolio investment became more important. Usually financial flows are more volatile,
which enforces the necessity of higher reserves. The rule of thumb for holding reserves as a
consequence of the increasing of financial flows is known as Guidotti-Greenspan rule and it
states that a country should hold liquid reserves equal to their foreign liabilities coming due
within a year. An example of the importance of this ratio can be found in the aftermath of the
crisis of 2008, when the Korean Won depreciated strongly. Because of the reliance of Korean
banks on international wholesale financing, the ratio of short-term external debt to reserves was
close to 100%, which exacerbated the perception of vulnerability.
Exchange rate policy:

Reserves accumulation can be an instrument to interfere with the exchange rate. Since the first
General Agreement on Tariffs and Trade (GATT) of 1948 to the foundation of the World Trade
Organization (WTO) in 1995, the regulation of trade is a major concern for most countries
throughout the world. Hence, commercial distortions such as subsides and taxes are strongly
discouraged. However, there is no global framework to regulate financial flows. As an example
of regional framework, members of the European Union are prohibited of introducing capital
controls, except in an extraordinary situation. The dynamics of the China’s trade balance and
reserve accumulation during the first decade of the 2000 was one of the main reasons for the
interest in this topic. Some economists are trying to explain this behavior. Usually, the
explanation is based on a sophisticated variation of mercantilism, such as to protect the take-off
in the tradable sector of an economy, by avoiding the real exchange rate appreciation that would
naturally arise from this process. One attempt uses an standard model of open economy
intertemporal consumption to show that it is possible to replicate a tariff on imports or a subsidy
on exports by closing the current account and accumulating reserves. Another is more related to
the economic growth literature. The argument is that the tradable sector of an economy is more
capital intense than the non-tradable sector. The private sector invests too little in capital, since it
fails to understand the social gains of a higher capital ratio given by externalities (like
improvements in human capital, higher competition, technological spillovers and increasing
returns to scale). The government could improve the equilibrium by imposing subsidies and
tariffs, but the hypothesis is that the government is unable to distinguish between good
investment opportunities and rent seeking schemes. Thus, reserves accumulation would
correspond to a loan to foreigners to purchase a quantity of tradable goods from the economy. In
this case, the real exchange rate would depreciate ant the growth rate would increase. In some
cases, this could improve welfare, since the higher growth rate would compensate the loss of the
tradable goods that could be consumed or invested. In this context, foreigners have the role to
choose only the useful tradable goods sectors.

Intergenerational savings:

Reserves accumulations can be seen as a way of “forced savings”. The government, by closing
the financial account, would force the private sector to buy domestic debt in the lack of other
alternative. With these resources, the government buys foreign assets. Thus, the government
coordinates the savings accumulation in the form of reserves. Sovereign Wealth Funds are
examples of governments that try to save the windfall of booming exports as long-term assets to
be used when the source of the windfall is extinguished.

Costs:

There are costs in maintaining large currency reserves. Fluctuations in exchange markets result
in gains and losses in the purchasing power of reserves. In addition to fluctuations in exchange
rates, the purchasing power of fiat money decreases constantly due to devaluation through
inflation. Therefore, a central bank must continually increase the amount of its reserves to
maintain the same power to manipulate exchange rates. Reserves of foreign currency provide a
small return in interest. However, this may be less than the reduction in purchasing power of that
currency over the same period of time due to inflation, effectively resulting in a negative return
known as the "quasi-fiscal cost". In addition, large currency reserves could have been invested in
higher yielding assets.

Several calculations have been attempted to measure the cost of reserves. The traditional one is
the spread between government debt and the yield on reserves. The caveat is that higher reserves
can decrease the perception of risk and thus the government bond interest rate, so this measures
can overstate the cost. Alternatively, another measure compares the yield in reserves with the
alternative scenario of the resources being invested in capital stock to the economy, which is
hard to measure. One interesting measure tries to compare the spread between short term foreign
borrowing of the private sector and yields on reserves, recognizing that reserves can correspond
to a transfer between the private and the public sectors. By this measure, the cost can reach 1%
of GDP to developing countries. While this is high, it should be viewed as an insurance against a
crisis that could easily cost 10% of GDP to a country. In the context of theoretical economic
models it is possible to simulate economies with different policies (accumulate reserves or not)
and directly compare the welfare in terms of consumption. Results are mixed, since they depend
on specific features of the models.

History:

The modern exchange market as tied to the prices of gold began during 1880. Of this year the
countries significant by size of reserves were Austria, Belgium, Canada, Denmark, Finland,
Germany and Sweden.

Official international reserves, the means of official international payments, formerly consisted
only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar
functioned as a reserve currency, so it too became part of a nation's official international reserve
assets. From 1944–1968, the US dollar was convertible into gold through the Federal Reserve
System, but after 1968 only central banks could convert dollars into gold from official gold
reserves, and after 1973 no individual or institution could convert US dollars into gold from
official gold reserves. Since 1973, no major currencies have been convertible into gold from
official gold reserves. Individuals and institutions must now buy gold in private markets, just like
other commodities. Even though US dollars and other currencies are no longer convertible into
gold from official gold reserves, they still can function as official international reserves.

Central banks throughout the world have sometimes cooperated in buying and selling official
international reserves to attempt to influence exchange rates and avert financial crisis. For
example, in the crisis of 1890, the Bank of England borrowed GBP 2 million from the Banque de
France. The same was true for the Louvre Accord and the Plaza Accord. More recently, the Fed
organized Central bank liquidity swaps with other institutions. During the crisis of 2008,
developed countries authorities adopted extra expansionary monetary and fiscal policies, which
led to the appreciation of currencies of some emerging markets. The resistance to appreciation
and the fear of lost competitiveness led to policies aiming to prevent inflows of capital and more
accumulation of reserves. This pattern was called Currency war by an exasperated Brazilian
authority.
Balance of payment &balance of trade:

The balance of payments accounts of a country record the payments and receipts of the
residents of the country in their transactions with residents of other countries. If all
transactions are included, the payments and receipts of each country are, and must be,
equal. Any apparent inequality simply leaves one country acquiring assets in the others.
For example, if Americans buy automobiles from Japan, and have no other transactions
with Japan, the Japanese must end up holding dollars, which they may hold in the form of
bank deposits in the United States or in some other U.S. investment. The payments of
Americans to Japan for automobiles are balanced by the payments of Japanese to U.S.
individuals and institutions, including banks, for the acquisition of dollar assets. Put
another way, Japan sold the United States automobiles, and the United States sold Japan
dollars or dollar-denominated assets such as Treasury bills and New York office
buildings....

Although the totals of payments and receipts are necessarily equal, there will be inequalities—
excesses of payments or receipts, called deficits or surpluses—in particular kinds of transactions.
Thus, there can be a deficit or surplus in any of the following: merchandise trade (goods),
services trade, foreign investment income, unilateral transfers (foreign aid), private investment,
the flow of gold and money between central banks and treasuries, or any combination of these or
other international transactions.

IMPORTS: Goods and services produced by the foreign sector and purchased by the domestic
economy. In other words, imports are goods purchased from other countries. The United States,
for example, buys a lot of the stuff produced within the boundaries of other countries, including
bananas, coffee, cars, chocolate, computers, and, well, a lot of other products. Imports, together
with exports, are the essence of foreign trade--goods and services that are traded among the
citizens of different nations. Imports and exports are frequently combined into a single term, net
exports (exports minus imports)....

EXPORTS: The sale of goods to a foreign country. The United States, for example, sells a lot of
the stuff produced within our boundaries to other countries, including wheat, beef, cars,
furniture, and, well, almost every variety of product you care to name. In general, domestic
producers (and their workers) are elated with the prospect of selling their goods to foreign
countries--leading to more buyers, a higher price, and more profit. The higher price, however, is
bad for domestic consumers. In that domestic consumers tend to have far less political clout than
producers, very few criticisms of exports can be heard....
BALANCE OF TRADE: The difference between the value of goods and services exported out of
a country and the value of goods and services imported into the country. The balance of trade is
the official term for net exports that makes up the balance of payments. The balance of trade can
be a "favorable" surplus (exports exceed imports) or an "unfavorable" deficit (imports exceed
exports). The official balance of trade is separated into the balance of merchandise trade for
tangible goods and the balance of services....

A balance of trade surplus is most favorable to domestic producers responsible for the exports.
However, this is also likely to be unfavorable to domestic consumers of the exports who pay
higher prices.

Alternatively, a balance of trade deficit is most unfavorable to domestic producers in competition

with the imports, but it can also be favorable to domestic consumers of the exports who pay
lower prices....

Balance of payments should be distinguished from balance of trade. Balance of trade refers to the
export and import of visible items, i.e., material goods. It is the difference between the value of
visible exports and imports.

Visible items are those items which are recorded in the customs returns; for example, material
goods exported and imported. If the value of visible exports is greater than that of visible
imports, the balance of trade is favourable.

If the value of visible imports is greater than that of visible exports the balance of trade is
unfavourable; if the value of visible exports is equal to that of visible imports, the balance of
trade is in equilibrium. Balance of trade is also known as merchandise account of exports and
imports.

Balance of payments, on the other hand, is a more comprehensive concept because it covers (a)
visible items (i.e., balance of trade or merchandise account) and (b) invisible items.

Invisible items are those items which are not recorded in the customs returns; for example,
services (such as transpiration, banking, insurance, etc.), capital flows, purchase and sale of gold,
etc.

Thus, balance of payments is a broader term than balance of trade; balance of payments includes
both visible as well as invisible items, whereas balance of trade includes only visible items.
Current Foreign Policy:
India foreign policies were formulated by our national leaders ever since India's independence.
The principles of India's foreign policies are -

 Fostering cordial relations with other countries 

 Solving conflicts by peaceful means 
  Sovereignty and equality of all nations 
 Independence of thought and action as per the principles of Non-align Movement or
 NAM 
 Equality in conducting international relations 

India - the founder member of the Non-aligned Movement (NAM), raised its voice representing
collective aspirations and interests of all the developing nations of the world. India Foreign
Policy covers vital issues of development, peace and stability. India was the first country to raise
the question of racial discrimination in South Africa in 1946 and also aims at eradicating
colonialism. Indian foreign policy has been voicing the need for complete disarmament of
nuclear weapons. India has taken several initiatives within the United Nations and outside, like
Disarmament - an action plan for ushering in a nuclear weapons free and non-violent world.
Indian foreign policy has opposed discriminatory treaties such as the Nuclear Non-Proliferation
Treaty (NPT) and Comprehensive Nuclear Test Ban Treaty (CTBT) and has refused to give up
its nuclear program until all nations of the world including nuclear weapon states accepts and
respects the idea of total nuclear disarmament in a phased manner.

India foreign policy has been firmly committed to the purposes and principles of the United
Nations and has made significant contributions like participating in all peace-keeping operations
like those in Korea, Egypt, and Congo in earlier years of its operation and then in Somalia,
Angola, and Rwanda in recent years. India foreign policy focuses on active participation in the
creation of more balanced international economies. India has been an active member of the
Group of 77, and later the core group of the G-15 nations. India foreign policy constantly
addresses other important issues of international importance, such as environmentally sustainable
development and the promotion and protection of human rights.

India Foreign Policy is well aligned with its national interests and security. A well crafted India
Foreign Policy has succeeded in establishing a network of mutually beneficial relations with all
countries of the world, particularly in the improving relations with its neighbors.

India starts 2014 on a note of promise. Internal political transformations are taking shape, and this
can only have a beneficial impact on our economy – and on our foreign policy.

Gateway House presents India’s foreign policy priorities for 2014 – ideas and issues that must be
attended to, urgently, this year, and initiatives taken for our future interests.
Our primary focus should be on our South Asian neighbourhood – particularly on the instability
emanating from the violence in Bangladesh and Afghanistan. We, along with a number of our SAARC
neighbours, will see new leadership emerge; India’s attention must stay on these new players,
internal and external. We must also be seen as a credible leader in multilateral fora, be it in the
Indian Ocean Rim, SAARC or BRICS. All this must be performed within our capabilities but without
compromising on pressing domestic issues such as poverty alleviation or reviving economic growth.

SAARC

Every SAARC country will have had national elections by 2014 – except Sri Lanka. It is a new
democratic start for the region, and an opportunity for India to accomplish the following this year:

Bangladesh

1. New Delhi must ratify the Land Boundary Agreement – for India’s own security – which will
decriminalise the border, cut down smuggling and human trafficking, legalise the inflow of daily
workers into India (through work permits), abate terrorism and put an end to the people living in
limbo for the last 40 years in the enclaves and the adverse possessions of over 3,000 acres of land
that have to be exchanged.

2. Anticipate an increase in terrorist activities after the Bangladeshi national elections. It will be
state-tolerated if the BNP-aligned political formations are dominant, and if the incumbent Awami
League goes ahead with elections (boycotted by the opposition), more violence will surely follow. We
must support going ahead with constitutionally-mandated elections so as not to interrupt the
strengthening of the democratic process in Bangladesh whilst acknowledging strongly that the
Awami League is a secular party which India would prefer to see winning the election.

3. Sign the Teesta Waters Agreement – to build the policy base for water-sharing agreements in
South Asia, and as a precursor for India-Bangladesh-Nepal and Bhutan jointly demanding a
discussion on water-sharing with China.

Sri Lanka

1. The Indian Prime Minister must visit Sri Lanka at the earliest opportunity, probably after our own
national election so he can resume a more normal relationship with credibility.
2. Revive the process for the conclusion of the Comprehensive Economic Cooperation Agreement
(CECA) which will bring in bilateral exchange of investment and services – expanding exchanges
beyond tariff reductions for trade in commodities.

Pakistan

New Delhi must anticipate increased terrorist activity as the U.S. military drawdown from
Afghanistan approaches. To counter this India must:

• Improve surveillance and interdiction capability on the India-Pakistan border, as also against
Pakistani terrorists trying to infiltrate the India-Bangladesh and India-Nepal borders.

• Accelerate psychological warfare to counter Pakistan’s attempts to subvert Afghan political stability
or its economy to the detriment of Afghan and Indian interests.

Afghanistan

1. Step up military training and assistance to Afghan Army and Police in consultation with the U.S.
and Afghanistan’s regional stakeholders.

2. Incentivise Indian business, both private and public sector, to invest substantially in Afghanistan
through

• Increased loan and grant assistance from Exim Bank

• Increased aid programmes that specifically target women’s education and entrepreneurship,
especially investing in the development of artisanal skills for livelihood and export

• Indian investors should form syndicates with Japanese, Korean, Taiwanese, Chinese and U.S.
companies for investment in Afghanistan

North East/Myanmar

1. Build the Seven Sisters’ Corridor to speed up connectivity and development in our North East and
develop linkages with Myanmar; use Thailand and Japan as infrastructure and business partners

2. Develop border trading posts on the India-Myanmar border, formalising the large informal trade

3. Bid for infrastructure projects in Myanmar jointly with Japan and the U.S.
Finance

1. Expedite a quantitative increase in Exim Bank’s book size – a bold move that will encourage Indian
investment overseas, especially in Myanmar and Afghanistan.

2. Strengthen Ministry of External Affairs by increasing its budget, expanding recruitment,

broadening its economic agenda and introducing lateral entry for specific expertise in international
law, environmental and human rights.

Soft power

Use Doordarshan as a tool and asset of Indian foreign policy by:

1. Giving Doordarshan autonomy from Prasar Bharti

2. Taking Doordarshan global by launching an international channel to compete with CCTV9, Al

Jazeera, BBC, and establishing bureaus in 17 capitals and financial centres around the world, to
project India’s unique qualities and soft power.

P-5

The U.S.
Re-build and energise bilateral through technology and innovation linkages. Develop an India-U.S.
Technology Agenda, involving the private sectors of both countries, resolving visa issues and
promoting, inter alia, technology transfers vs. the current licensing model.

China

1. Ease restrictions on Chinese companies to build infrastructure in India as a reciprocal measure to

China opening itself to greater Indian exports – starting with pharmaceuticals – for a more balanced
and sustainable trade relationship

2. Encourage more cultural exchanges with China, with a focus on languages.

Russia

Revive and nurture the strategic relationship

• in the context of Afghanistan, Iran, China

• increase economic content beyond defence, space and nuclear

Iran

India’s source of energy, and access to Afghanistan and Central Asia. Tehran’s own strategic space
and partnership with New Delhi has expanded thanks to the P5+Germany and Iran agreement of
November 2013 on Iran’s nuclear programme. India can now:

• Energetically upgrade the Chahbahar port, as also the road connecting to the Zaranj-Delaram
highway (with its connectivity potential to Central Asia).

• Increase import of gas from Qatar, Iran and other Gulf countries from the current 13.4 million
metric tonnes, build LNG terminals at Indian locations beyond Hazira and Dahej at Gujarat.

Latin America
1. Start negotiations for FTAs with Mexico, Colombia and Peru. The three nations account for $10.5
billion in trade with India. But India’s exports are just $5 billion, are disadvantaged in tariff
compared with the 50 countries that already have FTAs with the Latin trio.

2. Become a member of Inter-American Development Bank (IDB). The IDB disburses over $11 billion
annually for development projects in Latin America – contracts open only for member countries,
which puts India at a disadvantage to the West, Latin America, and Asian members such as China,
Korea and Japan. 2014 offers a window to purchase shares, available this year due to the break-up of
countries in Europe.

Indian Ocean

The zone of contestation, in which the U.S. is the global power and India the preeminent regional
power, is seeing newcomers. New Delhi must:

• Collaborate with the U.S. and major Asian powers like Japan and Australia, in order to secure our
own energy flows from the Gulf and Iran, and further strengthen the principles of Freedom of
Navigation in international waters.

• Demonstrate greater leadership in the Indian Ocean, which opens up opportunities for experienced
and skilled Indian expatriate workers gradually finding West Asia saturated, and leaving for East
Africa which is rich in new oil finds.

There is another significant issue that India must focus on: Climate change. As agreed at the
previous UN Framework Convention on Climate Change at Warsaw, the plans for reducing carbon
emissions will only be finalised in 2015. We should spend this year on domestic solutions like
alternate or renewable energy, and improve our efficiency and delivery. This will form the basis on
which to play a leadership role on future international climate change deliberations.

This feature was compiled by the Gateway House team.

Foreign Exchange Management Act (FEMA):

The Foreign Exchange Management Act (FEMA) is a 1999 Indian law "to consolidate and
amend the law relating to foreign exchange with the objective of facilitating external trade and
payments and for promoting the orderly development and maintenance of foreign exchange
market in India". It was passed in the winter session of Parliament in 1999, replacing the Foreign
Exchange Regulation Act (FERA). This act seeks to make offenses related to foreign exchange
civil offenses. It extends to the whole of India.,[1] replacing FERA, which had become
incompatible with the pro-liberalization policies of the Government of India. It enabled a new
foreign exchange management regime consistent with the emerging framework of the World
Trade Organization (WTO). It is another matter that the enactment of FEMA also brought with it
the Prevention of Money Laundering Act of 2002, which came into effect from 1 July 2005.

Unlike other laws where everything is permitted unless specifically prohibited, under this act
everything was prohibited unless specifically permitted. Hence the tenor and tone of the Act was
very drastic. It required imprisonment even for minor offences. Under FERA a person was
presumed guilty unless he proved himself innocent, whereas under other laws a person is
presumed innocent unless he is proven guilty.

FERA:
FERA, in place since 1974, did not succeed in restricting activities such as the expansion of
transnational corporations (TNCs). The concessions made to FERA in 1991-1993 showed that
FERA was on the verge of becoming redundant .After the amendment of FERA in 1993, it was
decided that the act would become the FEMA. This was done in order to relax the controls on
foreign exchange in India, as a result of economic liberalization. FEMA served to make
transactions for external trade (exports and imports) easier – transactions involving current
account for external trade no longer required RBI’s permission. The deals in Foreign Exchange
were to be ‘managed’ instead of ‘regulated’. The switch to FEMA shows the change on the part
of the government in terms of foreign capital.

Need for its management:

The buying and selling of foreign currency and other debt instruments by businesses, individuals
and governments happens in the foreign exchange market. Apart from being very competitive,
this market is also the largest and most liquid market in the world as well as in India It constantly
undergoes changes and innovations, which can either be beneficial to a country or expose them
to greater risks. The management of foreign exchange market becomes necessary in order to
mitigate and avoid the risks. Central banks would work towards an orderly functioning of the
transactions which can also develop their foreign exchange market

Whether under FERA or FEMA’s control, the need for the management of foreign exchange is
GATT, TRIMS, TRIPS:

The Uruguay Round was the 8th round of multilateral trade negotiations (MTN) conducted
within the framework of the General Agreement on Tariffs and Trade (GATT), spanning from
1986 to 1994 and embracing 123 countries as "contracting parties". The Round led to the
creation of the World Trade Organization, with GATT remaining as an integral part of the WTO
agreements. The broad mandate of the Round had been to extend GATT trade rules to areas
previously exempted as too difficult to liberalize (agriculture, textiles), and to increasingly
important new areas previously not included (trade in services, intellectual property, investment
policy trade distortions). The Round came into effect in 1995 with deadlines ending in 2000
(2004 in the case of developing country contracting parties) under the administrative direction of
the newly created World Trade Organization (WTO).

The Doha Development Round is the next trade round, beginning in 2001 and still unresolved
after missing its official deadline of 2005.

The main objectives of the Uruguay Round were:

 to reduce agricultural subsidies 

 to put restrictions on foreign investment, and 
 to begin the process of opening trade in services like banking and insurance. 

They also wanted to draft a code to deal with copyright violation and other forms of intellectual
property rights.

History:

The round was launched in Punta del Este, Uruguay in September 1986, followed by
negotiations in Geneva, Brussels, Washington, D.C., and Tokyo, with the 20 agreements finally
being signed in Marrakesh—the Marrakesh Agreement—in April 1994.The 1982 Ministerial
Declaration identified problems including structural deficiencies, spill-over impacts of certain
countries' policies on world trade GATT could not manage. To address these issues, the eighth
GATT round (known as the Uruguay Round) was launched in September 1986, in Punta del
Este, Uruguay........ It was the biggest negotiating mandate on trade ever agreed: the talks were
going to extend the trading system into several new areas, notably trade in services and
intellectual property, and to reform trade in the sensitive sectors of agriculture and textiles; all
the original GATT articles were up for review.

The round was supposed to end in December 1990, but the US and EU disagreed on how to
reform agricultural trade and decided to extend the talks. Finally, In November 1992, the US and
EU settled most of their differences in a deal known informally as "the Blair House accord", and
on April 15, 1994, the deal was signed by ministers from most of the 123 participating
governments at a meeting in Marrakesh, Morocco.[ The agreement established the World Trade
Organization, which came into being upon its entry into force on January 1, 1995, to replace the
GATT system. It is widely regarded as the most profound institutional reform of the world
trading system since the GATT's establishment.

Achievements:
The GATT still exists as the WTO's umbrella treaty for trade in goods, updated as a result of the
Uruguay Round negotiations (a distinction is made between GATT 1994, the updated parts of
GATT, and GATT 1947, the original agreement which is still the heart of GATT 1994). The
GATT 1994 is not, however, the only legally binding agreement included in the Final Act; a long
list of about 60 agreements, annexes, decisions and understandings was adopted. In fact, the
agreements fall into a simple structure with six main parts:

  an umbrella agreement (the Agreement Establishing the WTO); 

 goods and investment (the Multilateral Agreements on Trade in Goods including the
 GATT 1994 and the Trade Related Investment Measures (TRIMS)); 
  services (General Agreement on Trade in Services (GATS)); 
 intellectual property (Agreement on Trade-Related Aspects of Intellectual Property
 Rights (TRIPS)); 
 dispute settlement (DSU); 
 reviews of governments' trade policies (TPRM). 

The agreements for the two largest areas under the WTO, goods and services, share a three-part
outline:

 broad principles (such as the General Agreement on Tariffs and Trade and General
 Agreement on Trade in Services); 
  extra agreements and annexes; 
 lengthy schedules (lists) of commitments made by individual countries. One of the
achievements of the Uruguay round would be the Uruguay Round Agreement on
Agriculture, administered by the WTO, which brings agricultural trade more fully under
 the GATT. Prior to the Uruguay Round, conditions for agricultural trade were 
deteriorating with increasing use of subsidies, build-up of stocks, declining world prices
and escalating costs of support. It provides for converting quantitative restrictions to
tariffs and for a phased reduction of tariffs. The agreement also imposes rules and
disciplines on agricultural export subsidies, domestic subsidies, and sanitary and
phytosanitary (SPS) measures through the Agreement on the Application of Sanitary and
Phytosanitary Measures 

Criticism:

Groups such as Oxfam have criticized the Uruguay Round for paying insufficient attention to the
special needs of developing countries. One aspect of this criticism is that figures very close to
rich country industries—such as former Cargill executive Dan Amstutz—had a major role in the
drafting of Uruguay Round language on agriculture and other matters. As with the WTO in
general, non-governmental organizations (NGOs) such as Health Gap and Global Trade Watch
also criticize what was negotiated in the Round on intellectual property and industrial tariffs as
setting up too many constraints on policy-making and human needs. Some articles have pointed
out some reasons why the Uruguay Round resulted in an unbalanced outcome. An article asserts
that the developing countries’ lack of experience in WTO negotiations and lack of knowledge of
how the developing economies would be affected by what the industrial countries wanted in the
WTO new areas; the intensified mercantilist attitude of the GATT/WTO’s major power, the US.;
the structure of the WTO that made the GATT tradition of decision by consensus ineffective, so
that a country would not preserve the status quo, were the reasons for this imbalance.

The Agreement on Trade Related Investment Measures (TRIMs) are rules that apply to the
domestic regulations a country applies to foreign investors, often as part of an industrial policy.
The agreement was agreed upon by all members of the World Trade Organization. The
agreement was concluded in 1994 and came into force in 1995. (The WTO wasn't established at
that time, it was its predecessor, the GATT (General Agreement on Trade and Tariffs. The WTO
came about in 1994-1995.)

Policies such as local content requirements and trade balancing rules that have traditionally been
used to both promote the interests of domestic industries and combat restrictive business
practices are now banned.

Trade Related Investment Measures is the name of one of the four principal legal agreements of
the WTO trade treaty.TRIMs are rules that restrict preference of domestic firms and thereby
enable international firms to operate more easily within foreign markets.

(1) Trade-Related Investment Measures:

In the late 1980s, there was a significant increase in foreign direct investment throughout the
world. However, some of the countries receiving foreign investment imposed numerous
restrictions on that investment designed to protect and foster domestic industries, and to prevent
the outflow of foreign exchange reserves. Examples of these restrictions include local content
requirements (which require that locally-produced goods be purchased or used), manufacturing
requirements (which require the domestic manufacturing of certain components), trade balancing
requirements, domestic sales requirements, technology transfer requirements, export
performance requirements (which require the export of a specified percentage of production
volume), local equity restrictions, foreign exchange restrictions, remittance restrictions, licensing
requirements, and employment restrictions.

These measures can also be used in connection with fiscal incentives as opposed to requirement.
Some of these investment measures distort trade in violation of GATT Article III and XI, and are
therefore prohibited. Until the completion of the Uruguay Round negotiations, which produced a
well-rounded Agreement on Trade-Related Investment Measures (hereinafter the "TRIMs
Agreement"), the few international agreements providing disciplines for measures restricting
foreign investment provided only limited guidance in terms of content and country coverage. The
OECD Code on Liberalization of Capital Movements, for example, requires members to
liberalize restrictions on direct investment in a broad range of areas.

The OECD Code's efficacy, however, is limited by the numerous reservations made by each of
the members. In addition, there are other international treaties, bilateral and multilateral, under
which signatories extend most-favoured-nation treatment to direct investment. Only a few such
treaties, however, provide national treatment for direct investment. Moreover, although the
APEC Investment Principles adopted in November 1994 provide rules for investment as a whole,
including non-discrimination and national treatment, they have no binding force.

(2) Legal Framework:

GATT 1947 prohibited investment measures that violated the principles of national treatment
and the general elimination of quantitative restrictions, but the extent of the prohibitions was
never clear. The TRIMs Agreement, however, contains statements prohibiting any TRIMs that
are inconsistent with the provisions of Articles III or XI of GATT 1994. In addition, it provides
an illustrative list that explicitly prohibits local content requirements, trade balancing
requirements, foreign exchange restrictions and export restrictions (domestic sales requirements)
that would violate Article III:4 or XI:1 of GATT 1994.

TRIMs prohibited by the Agreement include those that are mandatory or enforceable under
domestic law or administrative rulings, or those with which compliance is necessary to obtain an
advantage (such as subsidies or tax breaks). Figure 8-1 contains a list of measures specifically
prohibited by the TRIMs Agreement. Note that this figure is not exhaustive, but simply
illustrates TRIMs that are prohibited by the TRIMs Agreement. The figure, therefore, calls
particular attention to several common types of TRIMs. We would add that this figure identifies
measures that were also inconsistent with Article III:4 and XI:1 of GATT 1947. Indeed, the
TRIMs Agreement is not intended to impose new obligations, but to clarify the pre-existing
GATT 1947 obligations. Under the WTO TRIMs Agreement, countries are required to rectify
any measures inconsistent with the Agreement, within a set period of time, with a few exceptions

The GATT

The GATT is at the heart of the world multilateral trading system. As its name implies, the
GATT is aimed principally reducing tariffs and other barriers to trade (e.g., quotas) between
GATT members, and the elimination of discriminatory treatment in international commerce.
These objectives of the GATT influence domestic law of member countries, discussed below.

The focus of GATT is trade in goods; trade in services, intellectual property, and investment are
covered under separate agreements (GATS, TRIPs, and TRIMs, respectively) which are also
administered by the WTO.

The WTO:
The WTO was established in 1994 under the WTO Agreement. The WTO is the primary
institution of the world multilateral trading system. The WTO is responsible for the
administration of the trade agreements above (i.e., GATT, GATS, TRIPs, and TRIMs), ongoing
trade negotiations, dispute settlement, and enforcement. Currently, approximately 150 countries
are members of the WTO.

Basic GATT Obligations :

As a member country, Canada has bound itself to conduct its international trade according to the
rules of the GATT. Canada, like other member countries, has the following basic obligations:

 Tariff levels commitment to apply GATT-negotiated tariff levels (and

associated rules for valuation and origin); 

 Most Favoured Nation (MFN) principle commitment to not discriminate
in the treatment of like goods imported from different trading partners
(subject to exception for free trade areas, such as NAFTA); 

 National Treatment commitment to not discriminate between like goods

of domestic and foreign origins; 
 Subsidies and Countervailing Duties rules; and 

 Dumping and Anti-Dumping Duties rules. 

These obligations are reflected in Canadian domestic customs laws, discussed below.

Canadian Domestic Law Customs Laws :

In order to fulfil Canada obligations under the GATT, Canadian domestic laws reflect the basic
GATT obligations.

For example, the Canadian rules on tariffs, set out in the Customs Tariff, reflect the tariffs for
goods negotiated under the GATT/WTO framework. These tariffs are the basic GATT MFN
rate, but the Customs Tariff also sets out more preferential rates, which reflects the rates
negotiated under free trade agreements such as NAFTA and arrangements with developing
countries (e.g., the General System of Preferences rate).

As a further example, the Canadian rules for valuation for duty purposes reflect the requirements
of GATTS Article VII, which requires member countries determine the value based on the actual
value of the imported goods (a separate agreement on the implementation of Article VII further
specifies that this value is to be the transaction value of the imported goods. For more
information on investor disputes, please return to our Practice Area Index and select Valuation).

Canadian Domestic Law Trade Laws :

The GATT permits countries to continue applying domestic trade remedies laws such as anti-
dumping and countervailing duties to tackle the unfair trade practices of other countries.
However, the GATT imposes general conditions before these measures can apply, and these
conditions are reflected in Canadas trade laws under the Special Import Measures Act (SIMA).

For example, Article VI of GATT condemns dumping of products of one country into another
country at less than the normal value of those products if it causes or threatens material injury to
an established industry in that country or materially retards the establishment of a domestic
industry.
This requirement for injury is reflected in the bifurcated approach to anti-dumping remedies
under SIMA, where the Canadian Border Agency makes an initial determination of whether
dumping has occurred, and then the Canadian International Trade Tribunal determines whether
there is injury, threat of injury or retardation of an industry, and whether this is caused by the
dumping (if so, then anti-dumping remedies may be applied to the imports of the offending
goods).

Dispute Settlement

Finally, note that the nature of dispute settlement under the WTO concerns challenges by one
state of another states fulfilment of its GATT obligations. These are state-to-state disputes, and
as such, there is no formal mechanism through which private enterprises can challenge the
activities of a country in which they operate.

In contrast, the North American Free Trade Agreement (the NAFTA) and bilateral investment
treaties provide an avenue for private enterprises to challenge governmental actions that threaten
their investments. For more information on investor disputes, please return to our Practice Area
Index and select NAFTA Chapter 11 Disputes and NAFTA Investor Disputes.

important. It is necessary to keep adequate amount of foreign ex. from Import Substitution to
Export Promotion.

Main Features:

- Activities such as payments made to any person outside India or receipts from them, along with
the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the central
government the power to impose the restrictions.

- Restrictions are imposed on people living in India who carry out transactions in foreign
exchange, foreign security or who own or hold immovable property abroad.

- Without general or specific permission of the MA restricts the transactions involving foreign
exchange or foreign security and payments from outside the country to India – the transactions
should be made only through an authorized person.

- Deals in foreign exchange under the current account by an authorized person can be restricted
by the Central Government, based on public interest.

- Although selling or drawing of foreign exchange is done through an authorized person, the RBI
is empowered by this Act to subject the capital account transactions to a number of restrictions.

- People living in India will be permitted to carry out transactions in foreign exchange, foreign
security or to own or hold immovable property abroad if the currency, security or property was
owned or acquired when he/she was living outside India, or when it was inherited by him/her
from someone living outside India.
- Exporters are needed to furnish their export details to RBI. To ensure that the transactions are
carried out properly, RBI may ask the exporters to comply to its necessary requirements.

Export Promotion:

The objectives of this session are to introduce the concept of export promotion and export
development and to explain how responsibilities are distributed among various organizations and
Agencies to formulate approve and implement policies that promote and develop exports. This
session will also describe and list the components of foreign trade and trade promotion policies
and other factors affecting foreign trade. The various levels of export promotion strategies for
example; the enterprise, industrial, and national levels will be introduced together with
explanations of the SWOT approach to export strategies. Newly emerging developing countries
have been unable to significantly increase their export volume on their own. There are many
reasons related to the level of national economic development to explain this. One main reason is
the lack of knowledge about the many complex challenges involved in marketing abroad.
International marketing is a much more complicated process than marketing and selling in the
domestic economy.
To encourage growth of exports, governments can step in and provide business communities
with needed support in various ways. Governments have many different policies,
programmes and activities to help develop competitive products and increase export sales.

Justification for export promotion activities:

Governments can assist businesses in the private sector with a wide range of services, from
simply providing information about current opportunities in the world market to giving
specialized assistance to design and implement marketing programmes and sales campaigns
abroad. These activities may be described by the words "export promotion" or "export
development." The activities are usually carried out by a trade promotion organization (TPO).
In most countries, TPOs concentrate most of their efforts on export promotion; that is, a set of
actions aimed at promoting export of the country's existing production.

The basic objective of Export Promotion:

Export promotion activities are to encourage increased sales of products that are currently
available for export. All promotional efforts are based on existing production and aim at
increasing the value of foreign sales by a given target.

In recent years, some governments have focused on programmes of export development.

Governments were responding to greater liberalization of foreign trade regulations and increased
competition from abroad. Export development is different from export promotion, because
export development aims at producing new export products and/or penetrating new Markets that
were not accessible before. The aim of export development activities is to identify existing
opportunities and encourage new industries or production facilities to be set up in
Order to meet newly identified demands in the international market.
To a great extent, export development can concentrate on product adaptation; that is, use of
existing production capacity to manufacture new products when better markets are found for
those products than for traditional products. The export development approach clearly requires
more effort, resources, and persistence than the simple traditional export promotion approach.
One consequence is that export development cannot always be fully adopted, given limits that
might exist in many countries.

In this manual, the two different definitions will be kept for export promotion and export
development, but they will not always be kept separate as distinct activities.
Most developing countries make export promotion and development a priority in order to
achieve economic development goals. Governments expect that sustained export promotion and
development efforts will help earn additional foreign exchange needed to cover the cost of
imports, solve balance of payments problems, help reduce the burden of increased foreign
indebtedness and create additional employment for people. Export development is not only
desirable, but also absolutely necessary in some countries in order to widen a narrow export
base.

UNIT 4

WTO and various agreement:

The World Trade Organization (WTO) is the international organization dealing with the rules of
trade between nations. As of February 2005, 148 countries are Members of the WTO. In
becoming Members of the WTO, countries undertake to adhere to the 18 specific agreements
annexed to the Agreement establishing the WTO. They cannot choose to be party to some
agreements but not others (with the exception of a few "plurilateral" agreements that are not
obligatory).

Of these agreements, Trade-Related Aspects of Intellectual Property Rights (TRIPS) is expected

to have the greatest impact on the pharmaceutical sector and access to medicines. The TRIPS
Agreement has been in force since 1995 and is to date the most comprehensive multilateral
agreement on intellectual property. The TRIPS Agreement introduced global minimum standards
for protecting and enforcing nearly all forms of intellectual property rights (IPR), including those
for patents. International conventions prior to TRIPS did not specify minimum standards for
patents. At the time that negotiations began, over 40 countries in the world did not grant patent
protection for pharmaceutical products. The TRIPS Agreement now requires all WTO members,
with few exceptions, to adapt their laws to the minimum standards of IPR protection. In addition,
the TRIPS Agreement also introduced detailed obligations for the enforcement of intellectual
property rights.

However, TRIPS also contains provisions that allow a degree of flexibility and sufficient room
for countries to accommodate their own patent and intellectual property systems and
developmental needs. This means countries have a certain amount of freedom in modifying their
regulations and, various options exist for them in formulating their national legislation to ensure
a proper balance between the goal of providing incentives for future inventions of new drugs and
the goal of affordable access to existing medicines.

Key Provisions of TRIPS:

Patent protection:

Patent protection The TRIPS Agreement requires WTO Members to provide protection for a
minimum term of 20 years from the filing date of a patent application for any invention including
for a pharmaceutical product or process. Prior to the TRIPS Agreement, patent duration was
significantly shorter in many countries. For example, both developed and developing countries
provided for patent terms ranging from 15 to 17 years, whilst in certain developing countries,
patents were granted for shorter terms of 5 to 7 years. The TRIPS Agreement also requires
countries to provide patent protection for both processes and products, in all fields of technology.

Before TRIPS, many countries provided only process — but not product — patents. Product
patents provide for absolute protection of the product, whereas process patents provide
protection in respect of the technology and the process or method of manufacture. Protection for
process patents would not prevent the manufacture of patented products by a process of reverse
engineering, where a different process or method from that which has been invented (and
patented) is used. For example, national legislation requiring only process patent protection has
enabled manufacturers in certain countries to make generic versions of patented medicines.
These countries have opted to make use of the transition period that permitted countries to delay,
until 2005, patent protection in the areas of technology that had not been so protected before the
TRIPS Agreement. (See transition periods below).

Protection of data submitted for the registration of pharmaceuticals:

As a condition for permitting the sale or marketing of a pharmaceutical product, drug regulatory
authorities require pharmaceutical companies to submit data demonstrating the safety, quality
and efficacy of the product. The TRIPS Agreement requires that WTO Members protect
undisclosed test data, submitted to drug regulatory authorities for the purposes of obtaining
marketing approval, against unfair commercial use. Since countries have considerable discretion
to define “unfair commercial use”, it is argued that countries can meet their obligations to protect
test data by prohibiting “dishonest” use of data. Use by government authorities to assess the
efficacy and toxicity of a pharmaceutical would not be affected, in this case.

However, it is now argued that data exclusivity is a requirement of the TRIPS Agreement. The
data exclusivity approach grants the originator exclusive rights over their test data and prevents
regulatory authorities from relying on the test data to register generic substitutes. Prior to the
TRIPS Agreement coming into force, most countries allowed reliance on originator test data to
approve generic products. Once test data was submitted by the originator company, the
regulatory authorities could rely on the data to approve subsequent applications on similar
products, or to rely on proof of prior approval of a similar product in another country. Generic
manufacturers need only to prove that their product is chemically identical to the brand-name,
original product, and in some countries, that it is bioequivalent.

This approach enabled swift introduction of generics into the market without registration data-
related costs. Within the data exclusivity approach, once a company has submitted original test
data, no competing manufacturer is allowed to rely on these data for a period of time. Data
exclusivity could thus pose an obstacle to effective use of compulsory licenses, as the entry of
the generic product would be delayed for the duration of the exclusivity period or for the time it
takes to undertake a new compilation of test data. The public interest in limiting data protection
is to promote competition and ensure that data protection does not become the means to block
timely entrance of affordable generic medicines of public health importance.

Transition periods:

The TRIPS Agreement provides for transition periods, permitting developing countries
additional time to bring national legislation and practices into conformity with TRIPS provisions.
There are three main transition periods. First was the 1995–2000 transition period, at the end of
which countries were required to implement the TRIPS Agreement. The 2000–2005 transition
period allowed certain countries to delay providing product patent protection in the areas of
technology that had not been so protected at the time of the TRIPS Agreement coming into
operation in that country. These countries were allowed a further 5 years to put in place a product
patent regime for technologies and products, which they had not thus far provided patent
protection, such as pharmaceuticals and agro-chemicals. During the transition period, these
countries are required to accept patent applications from 1995 onwards and to keep such
applications pending, in a patent "mailbox" until the mailbox is opened in 2005 when the
applications will be assessed. The third transition period allows least-developed countries

(LDCs) until 2006 to implement their obligations under the TRIPS Agreement in view of their
economic, financial and administrative constraints.

This period may still be extended by the TRIPS Council on request of an LDC Member. LDCs
now have a further extension of time, until 2016 with respect to patents on pharmaceutical
products and exclusive marketing rights by the Doha Declaration on the TRIPS Agreement and
Public Health. Thus, LDCs need not provide for, nor enforce patents and data protection with
respect to pharmaceutical products until 1 January 2016 (see below).

The transition periods have meant that pharmaceuticals or medicines patented before developing
countries implemented their TRIPS obligations will not receive patent protection, and thus
generic competition is possible. Medicines patented after developing countries have
implemented their TRIPS obligations are progressively coming onto the market and will
constitute an increasing share of marketed medicines. A substantial change is expected after
2005, when all developing countries will be required to provide patent protection for
pharmaceutical products and the mailbox patents are processed.

The WTO’s rules — the agreements — are the result of negotiations between the members. The
current set were the outcome of the 1986–94 Uruguay Round negotiations which included a
major revision of the original General Agreement on Tariffs and Trade (GATT).

GATT is now the WTO’s principal rule-book for trade in goods. The Uruguay Round also
created new rules for dealing with trade in services, relevant aspects of intellectual property,
dispute settlement, and trade policy reviews. The complete set runs to some 30,000 pages
consisting of about 30 agreements and separate commitments (called schedules) made by
individual members in specific areas such as lower customs duty rates and services market-
opening.

Through these agreements, WTO members operate a non-discriminatory trading system that
spells out their rights and their obligations. Each country receives guarantees that its exports will
be treated fairly and consistently in other countries’ markets. Each promises to do the same for
imports into its own market. The system also gives developing countries some flexibility in
implementing their commitments.

Foreign Direct Investment:

Foreign direct investment (FDI) is a direct investment into production or business in a country by
a company in another country, either by buying a company in the target country or by expanding
operations of an existing business in that country. Foreign direct investment is in contrast to
portfolio investment which is a passive investment in the securities of another country such as
stocks and bonds

Foreign direct investment has many forms. Broadly, foreign direct investment includes "mergers and
acquisitions, building new facilities, reinvesting profits earned from overseas operations and
intercompany loans”. In a narrow sense, foreign direct investment refers just to building new facilities.
The numerical FDI figures based on varied definitions are not easily comparable.

As a part of the national accounts of a country, and in regard to the national income equation
Y=C+I+G+(X-M), I is investment plus foreign investment, FDI is defined as the net inflows of
investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more
of voting stock) in an enterprise operating in an economy other than that of the investor. FDI is
the sum of equity capital, other long-term capital, and short-term capital as shown the balance of
payments. FDI usually involves participation in management, joint-venture, transfer of
technology and expertise. There are two types of FDI: inward and outward, resulting in a net FDI
inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative
number for a given period. Direct investment excludes investment through purchase of shares.
FDI is one example of international factor movements

Types:
 1. Horizontal FDI arises when a firm duplicates its home country-based activities at the
same value chain stage in a host country through FDI.
2. Platform FDI Foreign direct investment from a source country into a destination country
for the purpose of exporting to a third country.
3. Vertical FDI takes place when a firm through FDI moves upstream or downstream in
different value chains i.e., when firms perform value-adding activities stage by stage in a
vertical fashion in a host country.

Horizontal FDI decreases international trade as the product of them is usually aimed at host
country; the two other types generally act as a stimulus for it.

Methods:

The foreign direct investor may acquire voting power of an enterprise in an economy through
any of the following methods:

 by incorporating a wholly owned subsidiary or company anywhere 

 by acquiring shares in an associated enterprise 
 through a merger or an acquisition of an unrelated enterprise 
 participating in an equity joint venture with another investor or enterprise 

Foreign direct investment incentives may take the following forms:

 low corporate tax and individual income tax rates 

 tax holidays 
 other types of tax concessions 
 preferential tariffs 
 special economic zones 
 EPZ – Export Processing Zones 
 Bonded Warehouses 
 Maquiladoras 
 investment financial subsidies 
 soft loan or loan guarantees 
  free land or land subsidies 
 relocation & expatriation 
 infrastructure subsidies 
 R&D support 
 derogation from regulations (usually for very large projects) 

Importance and barriers to FDI

The rapid growth of world population since 1950 has occurred mostly in developing
countriesThis growth has been matched by more rapid increases in gross domestic product, and
thus income per capita has increased in most countries around the world since 1950. While the
quality of the data from 1950 may be of question, taking the average across a range of estimates
confirms this. Only war-torn and countries with other serious external problems, such as Haiti,
Somalia, and Niger have not registered substantial increases in GDP per capita.

Foreign direct investment and the developing world:

A 2011 meta-analysis of the effects of foreign direct investment on local firms in developing and
transition countries suggests that foreign investment robustly increases local productivity growth.
The Commitment to Development Index ranks the "development-friendliness" of rich country
investment policies.
Foreign direct investment in China:

FDI in China, also known as RFDI (renminbi foreign direct investment), has increased
considerably in the last decade, reaching $59.1 billion in the first six months of 2012, making
China the largest recipient of foreign direct investment and topping the United States which had
$57.4 billion of FDI.

During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010.

Foreign direct investment in India:

Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA),
driven by then finance minister Manmohan Singh. As Singh subsequently became the prime
minister, this has been one of his top political problems, even in the current (2012) election India
disallowed overseas corporate bodies (OCB) to invest in India.

Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India
as the second most important FDI destination (after China) for transnational corporations during
2010–2012. As per the data, the sectors that attracted higher inflows were services,
telecommunication, construction activities and computer software and hardware. Mauritius,
Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI
flows were $10.4 billion, a drop of 43% from the first half of the last year.

Institutional investment

The argument that institutional sponsorship signals strong fundamentals makes a lot of sense.
Big institutions make their living buying and selling stocks. Working hard to buy stocks that
are undervalued and offer good prospects, institutional investors employ analysts, researchers
and other specialists to get the best information about companies. The institutions meet regularly
with CEOs, evaluate industry conditions and study the outlook for every company in which they
plan to invest.

Besides, the institutions with large stakes have a stake in increasing the value of their
shareholdings. Big institutional investors can exercise significant voting power and impact
strategic decision making. These shareholders tend to promote value-driven decisions and create
shareholder wealth by ensuring that management maximizes the stream of earnings. Broadly
speaking, research shows that high ownership concentration generally leads to better monitoring
of management, leading to higher stock valuation.
Academic research suggests that institutional holdings pay off. In their study "Does Smart
Money Move Markets?," which was published in the Spring 2003 edition of Institutional
Investor Journals, Scott Gibson of the University of Minnesota and Assem Safieddine of
Michigan State University compared changes in total institutional ownership to stock returns
over the each quarter from 1980 to 1994. During the 15-year period, stocks with the largest
quarterly increase in institutional ownership (about 20% of all stocks) consistently posted
positive returns.

William J. O'Neill, founder of Investor's Business Daily and creator of the canslim stock
selection methodology, argues in his book "How to Make Money in Stocks" (1988) that it is
important to know how many institutions hold positions in a company's stock and if the number
of institutions purchasing the stock now and in recent quarters is increasing. If a stock has no
sponsorship, the odds are good that some looked at the stock's fundamentals and rejected it.

Foreign institutional investment

Introduction
India is an attractive market for foreign investors.In the four years ended December 2013,
foreign investors invested about Rs 371,342 crore (US$ 61.81 billion) in Indian stocks.
Foreign investment is among the primary reasons for India's economic progress. When the
country's government decided to allow 100 per cent foreign direct investment (FDI) in several
sectors, it led to a market full of possibilities. The Centre's initiatives and relaxation of
investment norms have meant that sectors such as automobiles, construction and real estate,
among others, have flourished.
The Indian economy is expected to witness over 100 per cent increase in foreign investment
inflows and cross US$ 60 billion in FY 15 from US$ 29 billion during FY14, according to a
study by an industrial body.

Market size
During FY 14, foreign institutional investors (FIIs) invested a net amount of nearly Rs 80,000
crore (US$ 13.31 billion) in India's equity market, as per data by Securities and Exchange Board
of India (SEBI).
At US$ 4.18 billion, the country's FII inflows are higher than that of other emerging economies
such as Taiwan (US$ 3.6 billion), Indonesia (US$ 2.4 billion), Brazil (US$ 1.2 billion) and South
Africa (US$ 0.7 billion).
FIIs have made a cumulative net investment of Rs 7.08 trillion (US$ 117.77 billion) in shares
since 1992, the year they were allowed into the Indian market. During FY 14, the total number of
FIIs registered in the country was 1,710.
Investments
The following are some of the key investments and developments in India's FII market:
 The Indian equities markets experienced FII net inflow of US$ 2.3 billion in May 2014,
according to an HSBC report. "India still the most loved market in the region," as per the
report. In the Asia region, investors favoured India, which received US$ 7.8 billion of the
US$ 18.8 billion invested in the continent during the period January 1 - May 26, 2014.
  Foreign investment inflows are projected to grow more than double to US$ 60 billion in
FY 15, as per an industry study. Net foreign investment inflows, on the back of
aggressive foreign institutional investmen tin the Indian markets, are also anticipated to
go past the US$ 46.17 billion recorded during FY 13,which is regarded as one of the best
years for overseas investment inflows.
 Deposits made by non-resident Indians (NRIs) increased by US$ 33.29 billion in FY14
against US$ 12.22 billion in the FY 13, as per a Reserve Bank of India (RBI) bulletin.
The increase came about after the RBI announced several relaxations to assist banks
bring in safe money.
 Indian equities continue to be driven by FIIs. In the March quarter, FIIs invested Rs
21,921 crore (US$ 3.64 billion), owning one-fourth of the top 75 listed stocks of the
country. During the quarter, their stakes have increased by 33 basis points sequentially.
 India received foreign exchange (FOREX) remittances to the value of US$ 70 billion in
2013 from its migratory workforce. Other top remittance recipient nations included China
(US$ 60 billion), the Philippines (US$ 25 billion), Mexico (US$ 22 billion), Nigeria
(US$ 21 billion), and Egypt (US$ 17 billion), as per a report released by World Bank.
The report also stated that India's US$ 70 billion in remittance receipts was "more than
the US$ 65 billion earned from the country's flagship software services exports".
 The RBI has allowed Hinduja Foundries, a group company of Hinduja Group, to raise its
foreign investment limit up to 60 per cent of paid-up capital. This hike in investment limit
is under the Portfolio Investment Scheme (PIS).
 Britain's Tesco has sealed an agreement with Tata Group's Trent Ltd that will see the
British company invest US$ 140 million and become the first foreign supermarket to
enter India's US$ 500 billion retail sector. The deal is a 50:50 joint venture with Trent
Hypermarket Ltdwhich operates the Star Bazaar retail business.
Government Initiatives
The RBI has enabled overseas investors, including foreign portfolio investors (FPIs) and NRIs,
to invest up to 26 per cent in insurance and related activities through the automatic route.
"Effective from February 4, 2014, foreign investment by way of FDI, investment by FIIs/FPIs
and NRIs up to 26 per cent under automatic route shall be permitted in insurance sector," stated
the RBI.
The RBI has allowed a number of foreign investors to invest, on repatriation basis, in non-
convertible/ redeemable preference shares or debentures which are issued by Indian companies
and are listed on established stock exchanges in the country.The investment will be within the
overall limit of US$ 51 billion allocated for corporate debt. Long-term investors registered with
SEBI will also be considered as eligible investors.
Road Ahead
Backed by considerable support from the Centre, the FII sectoris set to prosper in India's
economy. The present looks encouraging. Foreign investors' net inflows reached Rs 1 trillion
(US$ 16.63 billion) in stocks in India during 2013, the third time FII investments have breached
the figure following their entry into the Indian market in 1992. Total investments in India's
equity market also touched an all-time high of US$ 150 billion in the same year. According to
market experts, sectors such as food and beverages, financial services, pharmaceuticals and
biotechnology, among others, are attractive to FIIs.