Académique Documents
Professionnel Documents
Culture Documents
Chapter 1
Introduction
b) The New Economic View: The Third World countries were a part of a
highly integrated and complex international system and that the best
development policies also can be nullified by external forces over which the
less developed countries have no control. This gave birth to a more recent
approach that attempts to combine economic and institutional factors into a
social system model of development.
The new approach is called the „international-structuralist‟ model. This
has two major streams of thought. One is the Neo-Marxist view that highlights
the exploitation of poor countries by the rich countries. The second view
blames the inappropriateness of advice given by international agencies and
other experts. Both these streams reject the exclusive emphasis on the growth
of GNP. This new approach wants more emphasis to be placed on the needed
structural and institutional reforms so as to eradicate absolute poverty, provide
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Indian And Global Economic Development
Economic Growth:
Prof. Simon Kuznet defines economic growth as follows:
‘It is a long-term rise in capacity to supply increasingly diverse
economic goods to its population, this growing capacity being based on
advancing technology and the institutional and ideological adjustments that it
demands.’
This definition suggests –
1. Indicator of economic growth is the increase in the capacity of the
economy to produce goods and service.
2. An advance technology is necessary for this long-term growth of
capacity,.
3. Growth calls certain adjustments, both institutionally and ideologically.
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These are the indicators mentioned by Prof. Kooznets. But there are
some more indicators.
7. Increase in the real GNP – An increase in the economy‟s real national
income over a long period of time is taken as a measure of economic
growth. Such economic growth is required for economic development.
So it is taken as an indicator of development. Increase in national
income means there is an increase in country‟s total output of final
goods and services in real term at stable prices. But this has following
limitations:
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Indian And Global Economic Development
a) This measure does not take into account the changes in population.
b) It cannot reflect the externalities or social costs of development
including loss to environment, pollution, overcrowding of cities, etc.
c) it tells us nothing about the distribution of income.
8. Welfare – Economic welfare is measured by considering the flow of
goods and services. But this has following limitations:
a) What weight age be given b) What composition be judged to be
better, c) How goods are produced d) How to measure tastes, etc. are
problems which place severe limitation.
In spite of this consumption pattern and changes in it can be viewed ans
an index.
9. Social Indicators – Economic development is a much wider concept.
Several social indicators have been suggested. These include health,
nutrition, education, employment, consumption pattern, social security,
etc. such indicators describe the quality of life..
10. Other indicators – Capital formation is another indicator. In advanced
economies there is high capital output ratio. Changing structure or
imports and exports can also serve as an indicator. An underdeveloped
country imports manufactured goods and exports raw materials and
primary products. Use of energy is another indicator. In developed
countries there is high-energy consumption.
All these and many more indicators can be mentioned. But for the sake of
simplicity of calculation, understanding and objectivity, economists as well as
U.N. Organization very frequently use GNP per capita as the ready reckoner of
development.
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Indian And Global Economic Development
a) Low per capita income – The per capita income in India according to
the World Development Report is about US $450. Whereas in the
developed country like USA it is $30000.
b) Other quality of life indicators –Nutrition, mother and the child‟s care,
basic education, drinking water and sanitation are the most basic needs. In
respect of these, where advanced countries have achieved almost 100%
success, in India the level of achievement is much lower.
5. Pressure of population – Rapid growth in population puts pressure on
Indian economy. India‟s population in 1921 stood at 25 crores. In 1951 it
grew at 36.1 crores and in 2001 it was 101.2 crores. Very soon India will be
ranked first, as she has high growth rate of population. The figures of
dependent on agriculture in the year 1951 and 2001 are 25.3 crores and 62.7
crores which reduces the average holding of agricultural land to 3.5 acres.
The number of working population has only doubled during the period of
50 years; but at the same time the number of unproductive consumers has
gone up from 20.6 crores in 1951 to 69 crores in 2001; while working
population was 15.5 crores & 32.3 crores respectively. In other words the
dependency burden has increased from 57% to 70%.
With growing population, when job opportunities are not growing, the
obvious result is swelling number of the unemployed. According to
planning commission the backlog of unemployment in 1951 was 5 lakhs
inflated high to 75 lacks in 2001.
The metro cities are swollen with a large number of slum area leading
towards the overburden to drinking water, medical facilities, transportation,
dwellings, education, etc.
The number of children below 14 years have grown from 14.4 crores to
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Chapter 2
Agricultural Development in India
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Productivity of Indian Agricultural
Causes of low productivity of Indian Agriculture.
Agriculture Productivity – Productivity means input output ratio. Low Productivity
in agriculture can be judged either as productivity per hectare i.e. Land productivity or
productivity per worker ie. Labour productivity. In 1960-51 the average productivity
was Rs 500. as against Rs.1700 per worker in large establishments and Rs. 1500 in
commerce, transport and communication. In short the labour productivity was the
lowest in agriculture. Low productivity means the output is low comparing to the
input. In 1998 the per hectare yield of wheat in India was 2583 kilograms per hectare
comparing with UK – 7560 kg, France – 7600 kg, China – 3670 kg, is very low. It is
true that the productivity of Indian agriculture has improved to a certain extent in the
last 50 years. But when we compare our productivity with those in other countries, the
picture appears to be miserable one.
Cause of low productivity of Indian Agriculture –
1. Pressure of population on Agriculture – The percentage of people depended
upon agriculture as their mean of livelihood was 70% remained stable from 1901
to 1970. In 1901 only 16.3 crores of the people out of 23.6 crores of total
population were depended upon agriculture. In 1981 it went up to 48.3 crores out
of 64.4 crores with above 70% of total population. This shows a tremendous
pressure of population on agriculture.
2. Unfavourable Rural Atmosphere – The overall atmosphere in rural area is
unfavorable for an increase in productivity. Illiteracy, ignorance, superstitions,
conservativeness and outdated customs are some of the reasons for unfavorable
atmosphere. To make the things worse, political rivalries have polluted the
atmosphere of villages. All these things keep the productivity of agriculture low.
3. Inadequacy of Non-farm services – Several non-farm services like, provision of
finance, technical advice, marketing and so on are inadequate keeps the
productivity low. Even today regulated markets are limited and whatever regulated
markets are available not function at their fullest efficiency.
4. The small size of agriculture holding – The average size of land holding in India
is very small. Out of the total holdings in India, 59% are between 0 to 2.5 acres,
while 20% are between 2.5 to 5 acres each. In other words land-holding
percentage below 5 acres is 70%. Such small pieces of land prove unproductive.
5. System of Land Tenure – Agriculture has inherited, number of system of land
tenure. Landlords own the land and the tiller (cultivator / farmer) labour in it. He
pays the landlord. Even though the „land for tiller‟ was introduced. It has not been
implemented properly. There are many intermediaries between the government
and the tiller of the land. As the tiller does not own the land, he never pays the
attention towards cultivation. So there is less productivity of agriculture.
6. Outdated techniques of production – After Green Revolution the modern
techniques of farming is introduced to Indian farmers. Still majority of Indian
farmers use the traditional outdated farming techniques. Unless they use the
modern farming techniques, the productivity of agriculture is not going to
increase.
7. Inadequate irrigation facilities – In spite of huge investments in medium and
large irrigation projects during the last five decades, over 2/3rd of the agricultural
13
land in India is under dry farming depending upon monsoon. Monsoon remains
only for four months. The annual rainfall all over India varies from 5 cm to 1250
cm. Obviously there exists the need of irrigation, which results in low productivity
of agriculture.
14
of them acquire a huge space. At the same time the transport system should be cost
effective.
4. Market information – Information regarding prices, demand and arrivals at the
markets should be readily available to all concerned. This enables the producers to
explore more profitable markets and the consumers to find out cheaper or better
quality products. This may reduce the market imperfections.
5. Organized Markets – Sound marketing system needs the existence of organized
agencies in the market. There is always a danger of middlemen who exploit the
farmers. Also the services like credit, warehousing, transportation, and regulation
of markets can be efficiently carried out when they are organized.
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raising fingers under a piece of cloth. The arhtaia (agent) announces the name of
the highest bidder. Another system is auction in the open, which is unscientific. In
both the system commission agents and traders cheat the ignorant farmers.
7. Lack of Grading and Standardization – The lack of proper grading of different
varieties of agricultural produce is another defect. The arrangements for grading
are inadequate. Thus pricing the goods according to grades becomes impossible.
As a result the farmer can‟t secure a fair price for their product. On the other hand
consumer too deprived of getting the good quality in return of their money. This
defect becomes serious in the global context.
8. Lack of Organized Agencies – Most of the Indian farmers sell their produce
independently. In doing so they meet the powerful intermediaries and merchants
and both of them conspire against the farmers.
9. Lack of storage facilities – Storage facilities for agricultural produce are highly
inadequate and whatever facilities available are not scientific. Grains are stored in
earthen cylinders, mud houses, where produce are exposed to dampness, ants, rats
and so on. This problem forces the farmers to dispense their produce immediately
after harvest.
10. Lack of market intelligence – Agricultural market is primary market. Farmers
don‟t know the prices of the agricultural commodities in the primary market as
well as secondary market. They depend upon the traders and traders seek their own
benefits. In absence of adequate market information, market imperfection persists
to the great disadvantage of the individual producers and consumers as well as for
the government.
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measures with respect to different commodities. This continued till the sixties. In
1957 Government adopted a phased programme of the decimal system beginning
with decimal coins. Since 1962 throughout the country it was made compulsory to
use metric weights.
3. Provision of credit - The farmers must meet the expenses for their daily
requirements of life. At the same time they can have an adequate holding capacity
and make the best of market opportunities. Moreover to take the produce to the
market, they need credit. Thus credit is important for farmer as well as agricultural
marketing system. In the last few years, co-operative credit institutions have made
considerable progress.
4. Grading and standardization – The grading of the goods according to quality
lead to get good price. It is also necessary to stop mixing inferior goods and cheat
producers and consumers by the middlemen in the marketing system. Grading also
tend the farmers to grow qualitative produce to fetch good price. For the purpose
in 1937 the Agricultural Produce (Grading and Marketing) Act was passed. Under
this act a certificate of grades issued to graded goods. After independence, during
the planning period, agricultural products were listed as „Agmark‟ goods. Some of
the agricultural produce listed as Agmark are rice, wheat, coffee, tobacco, oilseeds,
cotton, etc. Rigorous quality control has been introduced in the fields of export.
5. Betterment of Transport – Means of transport for carrying goods to the market
speedily and at a low cost should make available. During the Planning Period rapid
progress has been made in this respect. In 1950-51, there were 1.6 lakh kilometers
surfaced roads and 2.5 lakh kilometers of unsurfaced roads. In 1995-96, there were
15.7 lakh kilometers of surfaced roads and 18.03 lakh kilometers of unsurfaced
roads. In the new Millennium Government of India has launched the „Golden
Quadrangle‟ project. Under which the four metro cities in India would be
connected with fast roads track. Cities like Pune and Mumbai are connected with
speedways. The length of railways increased from 55.5 thousand kilometers to
62.5 thousand kilometers during this period i.e. 1997-98. The shipping tonnage,
which stood at 1.9 lakh tones in 1947 increased to 68.43 lakh tones in 1997-98.
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newspapers as well as broadcasted on various radio stations. However this
information cannot be reached to every farmer in the country. On the other hand
farmers never take advantages of such facilities.
8. Setting up of Regulated Markets – Government has taken a very important
measure to improve the agricultural marketing. The setting up of regulated markets
is the important measure. Today there are more than 7000 regulated markets in the
country. And almost 80% of agricultural produce is being sold through these
regulated markets. But these regulated markets have their own drawbacks.
9. Organization of Co-operative Marketing – Government has given all possible
encouragement to multipurpose co-operative societies which give emphasis on
credit and marketing. The primary marketing societies are linked to central
marketing societies and further with National Agriculture Co-Operative Marketing
Federation (NAFED). National Co-operative Development Corporation (NCDC)
established in 1965, plays important role in planning and promoting programmes
for the production, processing, storage and marketing of agricultural produce
through co-operative channels.
10. Special Commodity Boards – A number of specialized commodity boards have
been established for promoting and operating properly the marketing of rubber,
coffee, tea, tobacco, spices, coconut, oilseeds, vegetables oils and so on. National
Dairy Development Board (NDDB) has successfully organized the marketing of
dairy products. In recent years the government of India has set up a number of
development councils for special commodities like rice, pulses, jute, cotton,
tobacco, oilseeds, sugarcane, etc.
11. Promoting Exports of Agricultural products – Exports in agricultural products
is showing increase in recent years. In 1999-2000 the share of agriculture and
allied products stood at 14.5% valued at Rs. 26164 crores. Agricultural exports
include pulses rice, wheat, cashew nuts, edible oils, etc.
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large-scale production. Because of industrialization joint family broke into nuclear
families. This causes the subdivision of holding.
4. Widespread indebtedness of farmers – Indian farmers are well known for their
indebtedness. Absences of institutional credit supply farmers depend upon the
moneylenders and indigenous bankers. They exploit the farmers for the repayment
of loans they have taken. As a result farmers have to surrender their lands to the
moneylenders, piece by piece. This causes the fragmentation of land.
5. British System of Law and Judiciary – British rulers introduced various laws
and judiciaries in India. They established the hierarchy of judicial courts. The
major defect of this judiciary system is delay in justice as it has many chances for
appealing in higher courts. Thus it has become costly affair. Indian farmers
involved in the dispute tend to either sell or mortgage their lands to meet the court
expenditures. Thus the British system of laws and judiciary helped the
fragmentation of land.
6. Decline of handicraft and village industries – in the later half of 19th century
India experienced the decline of handicraft and village industries. The large-scale
production with the help of machines was one of the reasons. Commodities were
made available which was produced with machines in rural areas. This resulted de-
industrialization in rural areas. Obviously agricultural sector is the only source of
income for rural population. It resulted the large agricultural land broken into
small pieces.
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Konkan region or hilly areas are so small that farmers cannot use even a bullock-
driven plough.
4. Wasteful and costly – Farming with small and fragmented landholdings is
wasteful and costly in many ways. Many smallholdings are divided into small
fragments at two different sides of the villages. The farmer cannot supervise all
the pieces simultaneously. He has to waste is time and energy in traveling from
one piece to another piece of land. There is wastage of land under bunds,
boundaries and the access ways. In India about 12% of the land is wasted under
boundaries and access ways.
5. Exploitation and misery – small agricultural producers are dependent upon the
mercy and goodwill of the large landowners. These landlords have all the
political, social and economic power to exploit these masses. They are forced to
work for such landlords. Small landholders are trapped in the chronic poverty
where there is no escape. These small peasants are gradually transformed to tenant
farmers and sharecroppers, then landless labours then job-hunters and finally the
slum-dwellers on the outskirts of the modern city.
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modern technique is adopted it involves a time schedule of watering the plants. It
is highly difficult to serve this need in a country like India. An alternative to this
situation is irrigation. It is very costly matter and even if it is done large areas
remain no irrigated.
5. Lack of supplementary services – Prof. Griffin has pointed out, ”If peasants
sometimes appear to be unresponsive or hostile to proposed technical changes, it is
probably because the risks are high, the returns to the cultivator are low or because
credit facilities and marketing outlets are inadequate and the necessary inputs
including knowledge are missing.” Thus quality seeds, pesticides, insecticides,
fertilizers, transport, marketing system, etc. are the necessary supplementary
services. These help in building confidence for the use of modern methods.
6. Alien contents – With the seeds, some quality food is not accepted in India. Cattle
with emotions kept till their death but not sold out to butcher. In such
circumstances cattle farm for butchery is highly unacceptable concept. A country
like India where majority population is vegetarian may not accept poultry, piggery,
and goatary as the supporting to agriculture. But day-by-day things are changing.
7. Knowledge and skills - Many times modern techniques and particularly machines
are not suitable or affordable in the Indian environment. A proper alteration should
be made according to the local conditions and requirements. In case of failure of a
machine, farmer should know the technology and could repair them. There must
be a set up to repair those gadgets.
8. Fear of unemployment – Over mechanization may lead to unemployment is a
fear factor in the Indian mentality. Indian agriculture is already overburdened with
the disguised unemployment. Mechanization may put extra pressure upon it. So
mechanization must be well-planned phased programme with provisions of
rehabilitation of the displaced workers.
9. Disadvantages at markets – A small, uneducated and poor farmer, while buying
inputs like machines, seeds, fertilizers, etc. is always being cheated in the market.
His bargaining power is extremely low. A common sense prompts him not to go
for the modern tools and techniques available in the market and tempt him to adopt
the traditional ways of farming.
10. Social and systemic constraints – Majority of farmers are small landholders.
They are on the mercy of moneylenders and landlords. These small peasants are
voiceless. Even if government has given many facilities like subsidies, credit
facilities, etc. the small farmer is far away from them. The landlords or the large
holders take all the benefits of the various schemes. Red tapism and malpractices
in beurocracy make the farmers to neglect those facilities. He never turns up to
these schemes.
This problem can be concluded with Prof. Todaro‟s words. “Peasant farmers do act
rationally and are responsive to economic incentives and opportunities. Where
innovation and change fail to occur, we should not assume that peasants are stupid,
irrational or conservative; instead we should examine carefully the environment in
which the small farmer operates for the particular institutional or commercial
obstacles which may be blocking or frustrating constructive change.”
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Explain the nature of the problems of agricultural Credit.
The Rural Credit survey Committee (1954) has classified the credit for agriculture into
three types.
A) Short Term Credit up to the period of 90 days and used for purchase of seeds,
repairs of implements, for annual operations and payment of wages.
B) Medium term credit for a period of 15 months to 5 years used for improvement of
land, repairing of the wells, purchase of implements and power cattle, etc.
C) Long-term credit for the period exceeding 5 years and extended up to 15 or 20
years, used for purchase of heavy machinery like tractors, digging of wells,
purchase of additional land, etc.
Above-mentioned classification of agricultural credit can give us the idea of credit
needs. But meeting these needs becomes a problem because of following features.
1. Requisition of cheap, adequate and timely supply of credit – Agricultural
sector in LDC like India requires a credit at low rate of interest. The productivity
of agricultural sector is low. It is not in a position to raise the productivity high. So
the cost of borrowing must be low. Private moneylender and profit-oriented
institutions may not offer such a cheap credit to agriculture. Alternatively,
government and co-operative credit institutions must come up to help the needy
farmers. But the coverage of such agencies is limited and several agricultural
needs remain unsatisfied. Moreover timely credit facilities (i.e. most of the
agricultural credit required at a specific time,) must be made available.
2. Small farmers and landless labours – Large landholders can mortgage their land
and meet their credit needs. But the problem with the small landholder remains
unsolved. In India 3/4th of the landholdings are small landholdings. They have
nothing to offer as a security. They are the persons who need these credit facilities
the most.
3. Uncertainty covering credit requirements – Another aspect of this credit
problem is the uncertainty of its requirement. In the industrial sector the demand
can be forecasted and the plan for borrowing can be prepared. Even banks also
sanction loans to these proposals. But in agriculture everything is uncertain and no
precise assessment of credit needs and repayment capacity is possible. So banks
hesitate to give credit facilities to agricultural sector.
4. Government policies – In 1979 Government of India, subsided agricultural loans
worth Rs. 17000 crores. The nationalized banks issued these loans suffered a lot.
As a result banks, especially commercial bank put the agricultural credit into a
blacklist. Since then the problem is persisting. The various decisions taken by
government in regards with agricultural loans may change and differ from time to
time. The credit institutions have fear in their mind that anytime government may
subside all the loans they have given to agriculture.
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Problems of Institutional Credit
In LDC like India several efforts were made to create an institutional structures for
meeting the credit needs of agriculture. These institutes are
1. Government – The Government itself came forward to extend loans to farmers.
The rate of interest at these loans is very low.
2. Co-operative institutes – In India co-operative institutes plays a vital role in
financing agricultural sector.
3. Commercial banks and other institutions – Besides government and co-
operative societies, commercial banks and institutions also entered into the field of
agricultural credit.
All these institutions play an important role in agricultural credit. However,
institutional credit encounters the following problems. They are as follows.
1. Proper Security – The various institutions giving credit requires proper security
on the bases of which the loans are given. However majority of the farmers are not
in a position to provide such securities. They find it difficult to take loans from
them.
2. Procedural Delays – One of the essential requirements of agricultural credit is
that it requires credit at a particular time. On the other hand in case of institutional
credit there is a lot of paper work and procedures to be followed. This leads to the
delay in sanctioning the loans.
3. Uncertain recovery – Due to uncertainty in agriculture the repayment of loans is
also uncertain. In the event of crop failures, arrears to on increasing. When the
loans are not repaid, it difficult to give them the new loan.
4. Benefits to big landlords – Many farmers are the small holders and they cannot
offer their land as the mortgage. The benefit of institutional finance goes to the big
landlords. They can offer their land as the mortgage and make arrangements of the
repayment. Thus the poor farmer is far away from the institutional finance.
5. Inadequate coverage – The financial institutes find it difficult to open branches in
each and every village. Due to this there is an inadequate coverage of institutional
credit. Many times there are regional imbalance in such coverage.
6. Other factors – The small farmers, who are illiterate, have lack of confidence
finds it difficult to approach to the institutions for agricultural credit. These small
farmers prefer to approach moneylenders who are informal and friendlier. They
give the loans to farmers for many nonproductive purposes like marriages.
7. Mismanagement of cooperatives – The government has tried to promote co-
operatives in various sectors. This includes commercial banks, co-operative
societies, which have been set-up to provide agricultural credit. However most of
these co-operatives are mismanaged and they are also running in losses. Due to
this they are not in a position to provide the required agricultural credit.
These are the various problems of institutional credit to agriculture.
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Chapter 3
Industrial Development in India
24
ever-increasing population and on the other hand it is necessary to reduce the
dependence of the population on agriculture. Agriculture and other primary fields
of productions have proven the law of diminishing returns. It is industry, which
keeps the returns constant. This makes it possible to provide greater employment
opportunities by starting large and small-scale units at large.
6. Development of agriculture and other primary producing sectors –
Industrialization also helps in agricultural development and other related activities.
It increases the income of the people. This additional demand increases the
demand of finished goods including agricultural commodities. Industrialization
also provides modern machines and techniques to agricultural sector. Thus
industrialization indirectly helps development of agriculture.
7. Strength and stability of the economy - Following are the ways industrialization
gives strength and stability to economy. Following are the ways industrialization
gives strength and stability to economy.
a) Industrialization makes it possible to undertake the research. Hence there is
progress in techniques of production. This makes to construct roads, dams and
railways profitable by using latest technology. Such infrastructure is the base for
industrialization. b) Industrialization makes the economy more balanced and
stable. c) The ability to stand in the competition is increase and optimum
utilization of economic resources is possible. d) Industrialization makes it possible
to supply the raw material required by the transport and communication and other
sector of the economy and also provides demand for their products.
8. The sovereignty of the Nation – In order to maintain the sovereignty of the
nation, it must not depend on other countries to meet its requirement of arms and
ammunition. Again imports of weapons entirely depend on the international
relations and conditions. Even dependence on imports for capital goods,
machinery damages the sovereignty of the country. So to maintain the sovereignty
of the nation, it is necessary to have industrialization.
9. Welfare functions of the state – The ability or capacity of the industries to create
surplus is large. Similarly, the industrial section is always better organized. It is
possible for the government to charge and collect the taxes from the industries and
use the money for the welfare function of the state.
10. Social Change – Industrialization changes the society by raising the level of
income, standard of living. It also leads the economy towards the aggression. The
industrial society is time scheduled. They work together. This always increases the
new values and ethics in the society. The society leads towards more cultured and
civilized.
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The importance and problems SSI face can be described as follows.
1. Contribution to National income – The SSI and Cottage Industries contribute to
the nation income of India on a very large scale. In the year 1998-99, the total
national income was Rs. 1597416 crores and out of this Rs. 527515 crores was the
contribution of SSI and Cottage Industries. In other words, SSI contributed 1/3rd of
the national income. This would not be possible without the special efforts taken
by the government encouraging the SSI.
2. The Employment Potential – Most of the SSI and Cottage Industries are labour
intensive. The large-scale modern industries make use of more capital than the
labour. The extravagant problem of unemployment in India can be reduced with
turning up the unemployed labour force into SSI. So it is essential to start SSI in
large number as they have large employment potential. Out of every five persons
employed in industry four are employed in small scale or cottage industries.
3. Low Capital Input and Cost of Production – The capital required for the SSI
and cottage industries is comparatively small. As the capital is a scarce resource in
India, it is essential to economize its use and its distribution. A large network of
small scale and cottage industries created in India is therefore most welcomed.
This also stabilizes the base of industry in India. Large-scale industries have per
worker capital of Rs. 3-4 lacks, where as SSI needs Rs. 25 – 30 thousands.
4. Skill required – In the large-scale units a high level of technical and managerial
skills are required. Where the production in the SSI is on small scale and even
unskilled workers can be absorbed in it. Mostly the technical knowledge is handed
over traditionally. But now a day it has become necessary to support the traditional
knowledge with the modern techniques of production.
5. Marginal dispense on Imports – Large-scale industries have often to depend on
imports for machinery, technical skill, raw materials, etc. The SSI has not to
depend on imports. Most of the requirements of the SSI are fulfilled locally and
these industries may even help to increase exports and thus serve to earn foreign
exchange.
6. Decentralized nature and quick results –There is no large time-gap between the
beginning of the investment and getting returns out of it. The gestation (growth)
period is less in SSI. The large-scale industries are centralized in metro-cities.
They develop those regions. While SSI is scattered all over the country and help in
developing backward area.
7. Social Justice – As SSI is spread all over the country, there is not a concentration
of wealth and economic power in any specific region. During last 100 years
specific areas like Mumbai, Kolkata, and Chennai. Backward areas have a chance
to develop themselves because of SSI.
8. Complementary to Large Scale Industries – Large-scale industries are always in
a need of small components and subsidiaries. These are manufactured and supplied
by SSI. Similarly these SSI can provide supplementary employment to the people
engaged in agriculture and may also supply tools and implements required by the
farmers.
9. Large source of supply of consumers goods – The SSI are most suited for
producing consumers goods on a large-scale. It is comparatively easier to produce
consumers goods in the small industries. As the capacity of the small-scale
26
industries is small and so is the market, it is possible for them to cater to the needs
of the consumers in a better manner.
10. Overall performance – It is observed that the overall performance of small-scale
industries has continuously remained remarkable during the 90s. Not only the
share of this sector in total national income is very high, but also the rate of growth
has always remained in the range of 13% to 21%. The exports of this sector have
also recorded a significantly high annual growth rate.
27
4. The problem of Technical Excellence – The technology becomes outdated within
2 t 3 years. The small firms don‟t have the capacity to rationalize the unit every 2
years. Secondly it is difficult to get technically trained workers. Thirdly, the
government has established a network of technical education industries and the
supply of trained technicians do not match. Fourthly, the supervisory staff also
does not get the skill-upgradation opportunities. Finally, while adopting a
particular technology the producers themselves commit mistakes in choosing
between locally available technology, market oriented technology, cost effective
technology an globally competitive technology.
5. Labour Problems – SSI are labour-intensive and they provide employment on a
large scale. But at the same time, this causes the problem of maintaining industrial
peace. Employer-employee relations are friendly when the unit is small. But the
union rivalries and growing unrest among the workers causes many disputes. This
may cause the stopping of the production, which SSI can‟t bare.
6. Other Problems – Besides above problems, the SSI encounter a number of other
problems. They are as follows:
a) Local & state governments‟ control, constraints of power supply, regulations of
factories laws, etc. may cause the difficulties.
b) Pleasing all the officials representing above said authorities becomes a difficult
task.
c) Many of these units are scattered in vast areas and they have to face the
problems of failures of several facilities and services such as power supply, water
supply, communication, transport, etc.
d) Small scale units working as ancillaries to large units have special problems.
They need to supply their product on credit, which delays in recovering from main
units.
e) Borrowing from non-institutional has a very high cost.
f) The holding capacity is limited. So such small units are forced to sell out their
products at whatever price is ruling at the market.
28
formation from public sector was 3.5%, while form private sector was 7.2%.which
grew to 9.2% and 12.4% respectively in the eighth plan (1992-97)
2. Volume of sales handled – The trade of public sector during last five decades is
growing. Sales of industrial units owned by the Central Government have
increased from Rs. 134 crores to Rs. 3320 crores during the period 1959-60 to
1970-71; further it increased to Rs. 304994 crores in 1998-99.
3. Creation of infrastructure – Infrastructure need heavy investment and the rate of
return to these investment is very low. They require longer gestation period. That
is why the private entrepreneurs never turn up in creating such infrastructure. So
this becomes public sector‟s responsibility to create these infrastructures. The
public sector in India has performed a vital service in the field of railways,
passenger road transport, electric supply, telecommunication, etc.
4. Regulation and control of the economy – Developing economy suffers from
shortage of various consumer products. So the control and regulation of the
economy is utmost important. The public sector in India has attained a position,
which can be used for directing economic activities. By 1969-70 the public sector
enjoyed monopoly in the production of lignite, crude oil and supply of electricity.
Half of the steel, fertilizer and petroleum products were produced by public sector.
So it became the price leader. At the same time because of its growing share in the
industrial investment, the public sector can be in a position to control the overall
industrial activities.
5. Social Transformation – Private sector is profit oriented while public sector does
not give importance to profit. They are for the benefit of society. Transportation to
the remote villages are never profitable. But still public sector is engaged in
making available such facilities in spite of big losses.
6. Foundation for industrialization – Though public sector is always an issue of
criticism, it‟s a fact that during the first two decades after independence it has laid
a sound foundation for the industrialization. Government has also accepted the
responsibility of starting or expanding the basic and key industries in public sector
and paved the way of industrial diversification and self-reliance.
7. Export promotion – Right from the beginning public sector has a vision of export
promotion. State Trading Corporation (STC) and Minerals and Metals Trading
Corporation (MMTC) have helped in increasing the export trade of India. The
foreign exchange earnings of the public sector enterprises stood at just Rs. 35
crores in 1955-56 increased to Rs. 18827 crores in 1998-99.
8. Import substitution – Many enterprises in the public sector have been started
with the intension of producing goods, which India has to import. Drug companies
like Hindustan Antibiotics Limited and many petroleum companies and BEL,
BHEL are some of the examples. In recent years India has demonstrated her
strength in import-substitution.
9. Raising internal resources – With the expansion of the public sector it was
expected to generate resources not only for its won expansion but also for
contributing something to the development of other priority sectors. By creating
depreciation, development and reserve funds as well as through retained profits,
the public sector was able to mobilize larger and larger quantities of internal
resources in course of five-year plans. During eighth plan public sector
29
undertakings generated internal resources of Rs. 101212 crores, which averages
annually Rs. 20242.4 crores.
10. Contribution to the Central Exchequer – It is a matter of dispute that the public
sector being facilitated by government may not increase the revenue. But the fact
is public sector units are paying corporate taxes, excise duty, customs duty and
other duties so as to agreement the tax revenue of the government. The total
contribution made by the public sector in this way during the sixth plan was Rs.
27570 crores and in the year 1998-99 it was Rs. 44608 crores.
The above analysis shows that the public sector in India has grown to occupy a
prominent place in the economy.
30
manufacturing PSUs recorded a capacity utilization of more than 75% while 20%
operated at 50% to 75% of their capacity and the remaining 29% operated at below
50% of the capacity. This is highly unsatisfactory situation in view of the over-
growing global competition.
6. Improper control mechanism – Public sector units are accountable to the public.
Hence it has several controls such as finance ministry, the in charge ministry of the
undertaking and the Parliament. It is a high time that the PSUs are given greater
functional autonomy and their governance is left more to professional experts
rather than to the political bosses.
7. Lack of professional management – IAS officers who are transferred from one
posting to another head Most of the PSUs. Efficiency in business decisions
requires prompt operational decisions. The PSUs therefore need some more
autonomy and flexibility. Delegation of authority rather than the present practice
of passing the buck of responsibility to higher authorities is the mantra of
efficiency. Every officer should have a clear idea of his role in the mission of the
unit; unfortunately responsibilities are neither clearly defined nor properly
understood. These enterprises are criticized as colonies for bureaucrats.
8. Providing employment – Provision of employment was one of the intensions of
public sector. But unfortunately it has given more importance rather than the
productivity of the enterprise. Automation of the enterprise has been left aside
wherever it would be possible. Many times it was suggested that wherever it is
possible to atomize the production process with due employment it should be
done. But public sector has ignored it.
9. Pricing Policies – There are different pricing principles, but public sector never
follows them. Because these enterprises are non-profit oriented. Each PSU has its
own objective and its own role in the overall economic development which can be
variously termed as basic, key, vital, crucial, etc. Each one of them has a bearing
on the pricing policy which pulls the price away from cost coverage and towards
the direction of losses.
10. Mounting losses – Most of the public sector units are bearing losses. The
performance of the central public sector is relatively much better, but most of the
state government public enterprises have made continuous losses. The great loss-
makers are the irrigation projects, State Electricity Board and State Road
Transport.
31
needs a huge amount of capital investment. In case of India, it has not been
possible to overcome this kind of geographical hurdles not only because of
unavailability of funds but also lack of strong desire. One more reason is the
availability of suitable land elsewhere in the rest of the country.
2. Historical Factors – Whatever industrialization found in India before
independence was rooted by the British companies as a part of then government‟s
policies. Europeans had factories in Mumbai, Kolkata, Chennai, Hubli, Surat, etc;
more over Europeans settled these cities. Naturally, these cities developed with
industrial area and also the states having these cities came up as industrial states.
Also British policy ruined the indigenous industries and concentrated some cities
with modern industries.
3. Location Factors – Location of the particular industry some times decided by the
availability of raw material. As India had poor transportation facilities, industries
like jute situated in West Bengal, Steel and coal in Bihar & Jharkhand, Fabric in
Maharashtra & Gujarat and so on.
4. The Infrastructure - Other facilities like banking, insurance, power and water
supply, communications also decide the location of the industrial area. At the same
time this facilities should be easily available and cheap.
5. Unwise Policies during the Planning Period – After independence, it was
expected that several efforts would take place to reduce this industrial imbalance.
Since 1956, balanced industrial development is the main objective of industrial
policies during planning period; was declared frequently. But unfortunately
nothing could happen in this regard. What ever was the „productive investment‟,
made in already developed cities like Mumbai, Kolkata, Chennai, Banglore, etc.
This investments made such areas more developed and the rest of the part of the
country remained undeveloped. Central and state governments started many PSUs
in backward areas in Punjab, Hariyana, and Gujarat, which helped developing
those regions. But many of the PSUs in other parts of India failed to develop that
region.
32
1. Special financial assistance to economically backward states. The amount of
assistance to be given was based on population and backwardness of the state.
2. Various facilities and concessions were given to the entrepreneurs who wanted to
start industries in the balanced areas. This incentive includes tax incentives and
subsidies. The facilities given included fully developed plots of land with power,
water facility at nominal rates.
3. The state governments also started their own industrial development corporations.
Eg. The MIDC was started to develop industrial estes in the backward areas of
Maharashtra.
During the sixth five-year plan a committee was formed known as „National
Committee for Development of Backward Areas‟, which made recommendations
regarding how to solve this problem of regional imbalance. These recommendations
were adopted in planning process.
The seventh and eighth five-year plans gave importance to agricultural development
and human resource development (HRD) as instruments, which would help to remove
the regional imbalance.
The ninth five-year plan gave importance to the development of infrastructure in the
less developed states. The planning commission has also recommended the large
transfer of funds from the Central Government to backward states. Special area
development programmes and promotion of private investment in the backward areas
has been recommended in order to remove the regional imbalance.
Although many measures have been adopted through the planning period in order to
remove the regional imbalance, this has helped in the development of certain balanced
areas. However the steps taken to remove regional imbalance are not sufficient as a
result the regional imbalance continues to a great extent. Unless this problem of
regional imbalance is solved effectively it is difficult for a country to have full
industrialization.
33
4. Foreign Direct Investment Policy – This is one of areas where major policy
reforms have taken place. This is to attract foreign capital, which will help in
capital formation. The government has set up Foreign Invest Promotion Board
(FIPB), which is headed by a minister to clear the application for FDI. The FDI is
allowed in most of the areas except agricultural and real estate.
5. Infrastructure – The government has given high priority for the development of
infrastructure. It has allowed private participation and competition in infrastructure
sector. The infrastructure includes setting up of power projects, construction of
roads, etc.
6. Housing Policy –Many changes have been undertaken in order to promote the
housing sector in the country. Various tax incentives are given if loans are taken
for housing constructions. E.g. the interest paid on housing loan is deductible item
from the taxable income of a person. Due to such incentives more people have
been attracted towards housing loans.
7. Small Scale Industries – Certain policy programmes have also been announced
for SSI. One major problem for SSI has been early recovery of their money from
large-scale industries that are the customers of SSI units. A rule has been passed
that if there is such delay in the payment is has to be mentioned in the annual
accounts and reports of the large-scale industries. It is expected that this will help
the SSI units to receive early payments, which is required for their working capital
needs. Also the limits of the SSI units for calculation of their working capital has
been increased which will ensure that such units have adequate working capital.
One of the important reasons for the failure of SSI units has been the shortage of
working capital. It is expected that these policy changes will help to solve their
problems.
8. Tiny Sector – The tiny sector is the part of SSI. Certain specific policy changes
have been announced for the tiny sector. Enhancing or increasing the ceiling limit
from Rs. 5 lakhs to Rs. 25 lakhs revises the definition of tiny sector. It is expected
that the increase in the limit will help the tiny sector to modernize and to adopt
new technology. Similarly the banks have been advised to transfer the 60% of the
their SSI credits to tiny sector.
9. Industrial Policy – The budget of 1999-2000 has made various changes to
improve the development of the country. It includes making changes in the excise
structures, providing tax incentives for mergers and amalgamation, takeovers,
positive change in the custom duty and providing further incentives to the
infrastructure projects within the country. In the budget of the year 2001 further
liberalization has been allowed. With this Indian companies are allowed to invest
in abroad up to a particular limit.
Thus in the recent years the government has taken various policy initiatives in order to
further liberalize the Indian economy and to ensure that the Indian economy is
integrated with the global economy. Such integration will help in the economic
development of the country.
34
Chapter 4
Capital Constraints
35
either to diversify the industrial structure of the country or import substitution. But
both these require capital investment.
9. Coping with Growing Population – Rapidly growing population is the main
characteristic of LDCs. That create two problems a) the capital-labour ratio goes
on falling. b) Fall in average saving rate, which affects the rate of capital
formation. To avoid these downfalls the country requires high rate of capital
formation.
10. Self-reliance – LDCs are more depended on foreign countries. A high rate of
capital formation can gradually make the foreign aid and it‟s subsequent problems
less and makes the country self-reliable by reducing foreign debts.
11. Containing Inflation –LDCs face the price rise problem at the beginning of
economic development leading the inflation. Because on the one hand investment
level is increased followed by rise in the money income but on the other hand, the
supply of goods and services in the market does not increase immediately. The
solution to this problem is to raise the rate of saving so that increased income are
diverted to capital formation rather than going to the market.
12. Breaking the vicious Circle of Poverty – According to Prof. Nurske, the vicious
circle of poverty can be broken through capital formation. Capital formation
increases the physical supply of capital goods like machines, tools and
equipments, helps a better utilization of available resources, and increases the
national output. Such increase is useful to break the vicious circle of poverty.
36
high dependency ratio raises the tendency of low rate of savings, which leads to
low rate of capital formation.
5. Budgetary policy of the government –Governments in the most LDCs tempt to
use deficit budgets as an important source of capital formation, but when deficit
financing crosses the safe limits, it becomes inflationary. The high prices due to
inflation tend people to spend on their current needs rather than savings.
6. Inadequacies of financial markets – Inadequacies of the money and the capital
markets also causes the low rate of capital formation in India.
37
Vicious Circle of Poverty
One of the very important reasons for low capital formation is the
vicious circle of poverty. Prof. Ragnar Nurrkse says, “It implies a circular
constellation (group) of forces tending to act and react upon one another in
such a way as to keep a poor country in the state of poverty.” E.g. A poor man
may not have enough to eat, being unified, his health may be week. Physical
weakness results in low working capacity, which means that he is poor, nor
have enough to eat. In other words „a country is poor because it is poor.‟
The basis of vicious circle is that in LDCs total productivity is low due
to deficiency of capital, imperfect market, economic backwardness and under
development. The vicious circle operates both on the demand side and on the
supply
side.
Low productivity
Capital deficiency
Vicious
Circle of Low income
Poverty
Low investment
Low Savings /Demand
On demand side: The low level of demand leads to low rate of investment and
results in low investment. Hence back to deficiency of capital, low productivity
and low income.
On supply side: Low productivity is reflected in low real income. This means
there is a low savings lead to low investment and deficiency of capital. This in
turn leads to low level of productivity and low income.
The third vicious circle is underdeveloped human and natural resources.
Development of natural resources depends on the productive capacity of the
people in the country. If people are backward, illiterate, having lack of
technical skill and knowledge, then the natural resources remain unutilized or
misutilized which keeps again the people backward.
Thus a country is poor because it is underdeveloped. Because the
country is underdeveloped are poor and remains underdeveloped, as it does not
have necessary resources for promoting development.
38
Population Constraint
The rate of population in a country is influenced by death and birth rate. If both
these rates are equal, there would be no population growth. But the birth rate is
more than the death rate which leads to increase in population. This effect is
explained through this theory.
According to this theory there are three stages related to death rate and birth
rate.
First Stage - In the first stage, the population of a country is more or less
stable. In this stage both death and birth rates are at a high level. This stage
indicates economic backwardness having much low income level. Most of the
people are engaged in the primary sector such as agricultural activities. In this
stage there is inadequacy of health facilities and lack of education. Due to this
the death rate is high at the same time the birth rate is also high because of
ignorance and other social factor.
Third Stage – In the third stage the birth rate also reduces and matches the low
death rate. This is the stage of economic development and industrialization and
urbanization. In this stage the spread of education leads to a change in the
attitude of the people and this helps to decrease the birth rate. Both death and
birth rates are at low level and the rate of growth of population reaches at a
zero level. So this stage is known as „Zero Population Growth Stage‟ which
indicates an advanced, mature and developed economy.
39
In recent times here are a few countries which have gone beyond this point
where the birth rate is much low than the death rate leading to negative
population growth. E.g. Japan, Germany, etc. On the other hand LDCs like
India is visualizing the adverse picture with its high population.
40
least bother about it because they are already poor. On the contrary number of
children is useful for the families as a helping hand and earning source. Further
these children are the support for their old age. Also as Indians are poor they
cannot afford medical facilities which are at high cost. In such circumstance
there is a fear of losing their children because of sickness. Hence they prefer
having more children so that at least some of them would survive.
Early marriages – The census of 1991 shows the average age of a man and a
woman at the time of marriage 22.2 and 18.3 years. But in the developed
countries i.e. Norway 28 and 24; Germany 27 & 24 is really low. Average
Indian marriage age which is on an average is below 20 give more fertile
period to these young couple and helps producing more children.
Universality of Marriage – According to Indian customs and traditions it is
not fare that one should be bachelor or spinster for whole life. One more thing
is that unmarried person is the subject for gossip and teased. So parents are in a
hurry to get their son or daughter married.
Illiteracy and ignorance – There is a close relation between education and
Planned Parenthood. More is the education less is the number of children. But
in India literacy rate in women is quite high. 57 % women of the Indian
population are illiterate so they are having more child birth.
Socio-religious factors – Indian society if full of beliefs and rituals. To peform
some sacred rituals a person must be married and that too have children.
Otherwise he is banned by the community and kept away from such religious
practices. Particularly women are expelled out of the community if she is
childless. One can not claim „moksha‟ if he remains childless. They believe
that such man‟s forefather also would not be benefited in the heavens. More are
the children, more blessed is the father and mother. Such outraged society tends
to produce more children.
41
4. Burden of unproductive consumers – Two third of the population of
India is dependent. People who are in between 15- 64 years of age may not
be actually working. Most of the women do not offer their labour for
productive work because they are uneducated and are busy in nurturing
children.
5. Unemployment – Growing population increased the unemployment and
underemployment. The unemployment in India is of a chronic type with its
roots in underdevelopment of the economy. It only increases the labour
capacity but not the production, because the economy requires is a skilled
manpower.
6. Pressure on social infra-structure – A rapidly growing population puts a
pressure on social overheads. Moreover an increasing investment in social
overheads constitutes a diversion of scarce resources from directly
productive assets to less and long run productive human assets.
7. Capital formation – A growing population created the obstacles in capital
formation. It raises the propensity to consume and reduces the tendency to
save. It also increases the demand for capital because the consumption
goods in larger quantities would require more capital. It also causes the
diversion of funds to social overheads. So the capital formation is less.
8. Reduction of resources – Growing population creates imbalances between
nature and man. Growing human needs are to be fulfilled by using more
and more of the natural resources. This creates a threat of collapse of many
mineral and other rare resources.
9. Damage of environment – Adverse land-man ratio caused by
overcrowding of men pushes men to ecologically sensitive areas like
hillsides and tropical forests. They domicile over there and cause the
damage of environment.
10. International economic relations – The rapidly growing population leads
the country towards the poor country. Emigration and brain drain go against
India because growing population makes the india‟s demand for imports
inelastic.
42
Chapter 5
PLANNING FOR DEVELOPMENT
Planning: Definitions
Hayek - “The direction of productive activity by central authority.”
Dalton – “Planning is the deliberate direction by persons in charge of large
resources of economic activity towards chosen ends.”
Features of planning –
1. Conscious efforts – in an unplanned economy various decisions
regarding what to produce, how to produce and when to produce are all
decided y mechanism. Planning means a conscious effort by the
government to take various economic decisions. So that the economy is
directed in and in some areas controlled in a particular direction.
2. Economic variables – Planning involves influencing various economic
variables like consumption, saving, investment, etc. There are the
variables at macro level i.e. for the whole economy. E.g. the total
income of the country is Rs. 80000 crores of which the savings is 10%.
Supposing this savings is to be increased by 2% then certain policy
decisions will have to be taken by the government and this will be done
through planning process.
3. Country of region – The planning process may be carried out for the
whole country or for a particular region. E.g. In India planning is carried
out by the central government for the whole country. State government,
city corporations, municipalities, etc also carry it out.
4. Time schedule – The planning is for a particular time period. It may e
for 5 years or 10 years or some times it is for 15 years. In India the time
frame adopted is five-year plan and within this the annual plans are
prepared.
43
4. Equitable distribution of income – Some of the LDCs have high-income
inequalities. Planning can be used as an instrument of equalizing
opportunities, wealth and income.
5. Harmonizing wage-relations – Price mechanism can ensure a harmony of
wage relations only under conditions of perfect competition and full
employment. Planning can ensure the utilization of labour in such a way as
to create more demand for the labour of the disadvantaged sections.
6. Coping with major economic changes – Natural calamities, political
instability, eruption of violence, etc. are some of the changes that cannot be
foreseen. These non-economic changes generate economic changes. The
planning authority with the all the resources in materials, men and money at
its command can however cope up with such changes.
7. Wastes of competition and duplication of services – When competition is
not perfect, it breeds several wastes like cutthroat competition, price wars,
wasteful sales promotion, etc. All these wastes can be avoided with
judicious planning.
8. Externalities – Damage to excessive use of non-restorable resources,
health-hazards caused by productive activities to the workers are some of
the externalities. In planned economy, social costs and social benefits are
given due consideration.
9. Creating a climate – Preparation of a plan incorporating a detailed
statement of national economic goals and social objectives create a climate
for a change. It can give a purpose to the actions of the people. A plan of
national campaign against poverty, ignorance and disease may create the
climate to fight for the common cause.
10. Trade and aid – In foreign trade, plan serves a useful purpose. Once the
whole plan is ready the magnitude of trade becomes clear. The govt. can
enter into bilateral trade agreements with other countries.
44
Organization) in different states, which is responsible for carrying out the
survey.
3. Setting objectives – The planning process should have certain objectives,
which are to be fulfilled or achieved. These objectives are laid down in
relations to future development of the economy. Thus objectives can be to
increase the employment or reduce unemployment, to decrease poverty, etc.
these objectives must be realistic and flexible so that if required necessary
changes can be carried out in the objectives.
4. Priorities and targets –Once the objectives are decided the priorities and
the targets have to be laid down. E.g. the objectives may be to increase the
employment level. Within this the priority may be to increase the
employment for rural people or to increase the employment for women. The
target gives a definite number for achieving the objectives.
5. Strategy- The word strategy is a military word. Indicating the technique of
reaching a particular point. In the planning process different strategies
would be required for achieving different objectives. These strategies are to
be planned, implemented and properly discussed. A proper strategy will
help in achieving the target.
6. Internal consistency and balance – The strategies which are decided
should be internally consistent and properly balanced otherwise it may lead
to shortages and surpluses. The balance in planning process includes the
physical and financial balance. The physical balance will try to ensure that
the outputs of various sectors of the economy are properly balanced.
Otherwise it will lead to a situation of non-availability of raw material,
manpower, etc. the financial balance refers to balancing of income and
savings to the supply of goods and services.
7. Mobilization of resources – In order to implement the plan various
resources are required. The sources of finance include taxation provident
fund, deficit financing, etc. the planning process has to ensure how much
amount will be collected from each of these sources. A planning process
also has to consider how the private sector will be able to mobilize the
different resources.
8. Choice of planning a model – For implementing the plan for the economy
various planning models are available. The right type of planning model
will have to be selected which includes – a) Aggregate Growth Model – In
this model the aggregate Growth of the whole economy is considered. B)
Sectorial projection model – In this model the whole of the economy is
divided into sectors and planning is carried out respectively for the sector.
E.g. agricultural sector, industrial sector, etc. c) Comprehensive inter
industry model – This is the most sophisticated model in which activities
of all productive sectors of the economy are inter related. Each industry is
considered a producer of output and at the same time a user and input from
other industry. Depending upon the level of development of a country a
country may se more sophisticated model. India makes use of this
sophisticated model.
45
9. Plan period – The planning process is for a particular time period. It may
be for 5 years, 10 years or 15 years. In India the time frame adopted is 5
year plan in which the annual plan can also be there in order to ascertain
whether the targets are being achieved or not.
10. Efficient administration- A plan may be prepared but if it is not
implemented n a right and efficient manner then the targets and objectives
will not be achieved. Proper implementation of plan requires strong,
efficient and non-corrupt administration.
11. Evaluation – A plan prepared and implemented must be periodically
evaluated. It may become necessary to change the targets in certain
situations. The reasons of not achieving the targets will have to be
discussed and this reasons will to be considered into future planning.
Limitations of Planning:
In spite of several arguments in favour of planning many economist like
Killick say that “It is doubtful whether plans have generated more useful
signals for the future than would otherwise have been forthcoming.” In other
words, the experiment of planning in most of the LDCs over the past few
decades has not fulfilled the expectations of the people. Here are the limitations
of planning.
1. Deficiencies in plans and their implementation – Plans are over-
ambitious. They look like election manifestoes, promising too many things
within a short span of the plan period. There arises a gap between plan
formulation and implementation.
2. Insufficient and unreliable data – The quality and reliability of the data
decides what will happen to the plan. The situation becomes worse if
trained economists and statisticians are not available.
3. Unanticipated economic disturbances – LDCs are greatly dependent upon
external variables like inter-national price changes, trade fluctuations,
import-export policies of developed countries, etc. Beside that uncertainties
arising out of calamities like wars, floods, droughts and so on. All these
factors render even short-run forecasting difficult.
4. Institutional weaknesses - The planning process of the LDCs suffer from
several institutional weakness like separation of the planning agency from
the implementers, the lack of continuous dialogue among planners,
administrators and political leaders. In addition, there are weaknesses like
incompetent and corrupt administration, red-tapism, resistance to
innovation and change, inter-departmental rivalries, etc.
5. Lack of political will – The ultimate cause of plan failures is largely
attributed to a lack of commitment and political will on the part many Third
world leaders and high level civil servants. A political will requires unusual
ability and political courage to challenge the various vested groups and to
persuade them for the planning and completion of the plan.
6. Reduction in lines of control – Planning in India is only indicative. It
gives guidelines. Several institutes, firms and individuals implement the
46
plan. The success of such a plan can be ensured through various lines of
control wherein, the decisions like what to produce, how to produce, how
much to produce, fro whom to produce are taken by private individuals.
With the adoption of economic reforms and the policy of liberalization, all
these lines of control have considerably weakened and some of which have
actually be discarded.
7. Socio-cultural Barriers – In an open economy working in close co-
operation with other countries of the world existing at various levels of
development, the social-cultural aspects achieve great importance. The
competitiveness of an economy depends upon the quality of population not
only in terms of education and health but also in terms of motivation, work
culture and work ethic. In absence of these Indian planning is bound to face
hurdles at every step.
8. The hazard of population growth – A rapidly growing population forces
several limitations upon planning. The growing numbers for satisfying their
minimum needs takes away the additional income resulting from growth.
This adversely affects the rates of saving and investment. The growing
dependency burden also dampens the efforts of development. Finally the
planning collapse.
9. Inherent drawbacks of public sector – Public sector and government
departments have to go by rules. Public accountability demands this. But
this fact entails red-tapism, delays, and misuse of power and increases
corruption.
10. Allocating real resources – How to allocate men, machines, land,
electricity, steel and imported goods is not decided properly. Only
allocation of money is not the real resource. All the above mentions should
be allocated properly. But this is not possible for want of control.
47
Chapter 6
Human Resource Development
* Explain the term ‘Population Dynamics’. State the factors / elements
responsible for population dynamics.
* Write a short note on ‘Population Dynamics’.
48
outside he home have led to fall in fertility rate. This fall in fertility rate is
because of fall in infant mortality rate. Along with the control of infant
mortality, various health programmes are also found to be instrumental in
lowering fertility rates.
6. Socio-cultural transformation: There are several socio-cultural factors
affect the living styles and the family size. They are disintegration of joint
family, a closer relation between work and earning and urbanization,
emergence of a new industrial culture and acceptance of a new set of values
and above all the challenges of a highly competitive and dynamic new
world. These all tend to reorient the minds of people and make them
conscious about the number and the quality of their children
49
quality of their own individual, family and social life and b) the role
they themselves play in determining the nature of that population
change.
Population education has to be given through formal channels of
schools, colleges, technical and professional education institutions, etc
through curricular and co-curricular.
3. Birth control measures: Instead of having big families it is worth to
have a small family and to take care of health and welfare of children.
This should be given widest possible publicity. Controlled fertility will
have to be made an integral part of the public health programme. The
govt. can provide health an contraceptive services in order to encourage
the desired behaviour.
The right policy of popularizing and distributing contraceptives is of
utmost important. In poverty-ridden sections, vasectomies (family
planning surgery) and mechanical devices like copper-T are very
important. At the same time, other alternatives should also be within an
easy reach (both physically and financially) of the population.
4. Public Health: Dr. Notestein observes that the healthy life develops the
interest in the dignity and material well being of the individual essential.
This reduces the rate of fertility.
The World Development Report 1991 suggests two tasks. A) To provide
nutrition to improve the mental and physical well being of children and
adults. B) To improver the control and treatment of disease.
5. Political factors: Along with political leaders, the civil servants and the
middle classes can play the vital role in the population policy. China is
the best example of how a strong political will coupled with a well
thought-out pan can make population policy successful. On the other
hand Indian experiment of mid-1970s illustrates how politics can set the
clock back on the population front. So it is necessary that all the political
parties should have a code of conduct to be accepted in which they
should avoid taking political advantages by damaging social harmony in
general, and population policy in particular.
6. Social determinants: The success of population policy demands public
participation and involvement. The role of voluntary social
organizations and of other institutions with a mass base, in this respect is
important. Along with hospital and dispensaries, universities, collages,
youth and women‟s clubs and a host of other voluntary organizations
can take part in this point.
7. Migration: In a developing economy, where efforts at lowering fertility
are well under way, migration could be of great help in facilitating the
transition to low fertility. Third World nations have rural-urban
migration. A massive rural-urban migration in the past fe years has
created an imbalance in the distribution of population. This trend can be
reverted by creating economic and social opportunities in the rural areas,
such as making small farms profitable through better techniques, high
yielding varieties of seeds, crop-protection programme, etc.
50
State the present position of education.
Explain the problems of Education in LDCs.
The term education contains, general, technical and vocational education,
which also relates to formal and non-formal education.
General education – It is imparted through schools, colleges, technical
institutions, etc involves well planned, time bound, time schedules of teaching
and evaluation. LDCs have to face many problems in planning the formal
education. Primary education must reach to all. Secondary education is also
be given importance because it is useful in all levels in government, industry,
commerce and agriculture. It must be broad-based to provide education in
science, mathematics, arts and humanities. General education provides basic
education to be a good citizen, to orient the minds of students towards change
and development, equip them with general skills like literacy, numeric ability,
etc.
Technical and vocational education – Building technical capacity is
necessary for economic growth. Use of computers has caused a major
technological change. This needs the expansion and improvement of primary
and secondary education and the creation of incentives to increase the supply
and demand for more specialized technical training. Technical education is
required to be imparted at various levels. Technical trades like electrician,
mechanic, welder, etc. is required to be taught for manning the basic cadre of
workers. For higher level of technical education, poly-techniques institutions,
engineering collages are established.
Vocational education is essential to prepare typist, surveyors, and field
workers of various types, veterinary assistants, and other sub-professionals to
fill various posts of key importance in a developing economy.
The developing countries have been following policies of spreading
education- especially formal education- to all the sections of the society.
Though health and education are important components of HRD, government
spends larger amounts on education than on health.
51
revenue in the immediate future. So this investment is a constraint in
education in the LDCs.
3. Dearth of trained staff.- It is necessary to have trained staff in the field of
education. For want of an adequate institutional set-up, training facilities
cannot be increased rapidly. Many who have no aptitude of becoming good
teachers turn to this profession only out of unemployment.
4. Teaching and learning aids – To expand the horizons of knowledge
teaching aids play an important role. LDCs cannot mobilize the resources
for this purpose. They even don‟t have necessary skills to prepare and se
this material.
5. Inertia (Lethargy) and inefficiency – World Development Report
observes a large proportion of students who complete primary education in
low-income countries fail to reach national or international standards of
achievement in maths, science and reading. Use of technology in
educational sector changes very slowly. Still the useless technique of
cramming (reciting/revise) and forgetting after the exam is going on in the
LDCs. This never evaluate a student‟s personality and intellectual and his
power of thinking, reflecting, reasoning. The teaching methods and learning
techniques are rusty, irritable and antiqued.
6. Poor management and distorted incentives – The society‟s needs are not
perceived. No sufficient information is available. Structural rigidities are a
great obstacle. Corruption, political interference and a distortion of values
may make the system unrelated to the primary goals of development.
7. Maladjustment of social needs, especially at primary level – A minimal
arithmetical and clerical skills can be given at primary and secondary
levels, which is useful in all fields and all levels. But education system is
poor because a) 70% children live and enrolled in rural area. What they
learn in the schools is useless in their daily life. B) Primary schools are the
feeders to the high schools. Hardly 25-30% students from the primary
schools reach the high schools and 20% reach the collage. And out of those
who complete higher education, hardly 30% get employment.
8. Problems of higher education - Even though there are higher educational
institutes in LDCs, they are misadjusted to the real needs of development.
The basic mis-adjustment is these institutes are established on the lines of
developed countries instead of their own needs. Thus the imported structure
is bound to meet with limited success. Moreover per student cost of higher
education is 85-88 times than those of primary education. A serious
problem of higher education is that this system is overblown and produces
an output that greatly exceeds the capacity of the economy to absorb them.
This results in a wasteful use of resources, unemployment and
underemployment.
&&&
52
The specifically designed anti-poverty programmes for generation of self
employment and wage employment in rural areas have been redesigned ad
restructured to improve their impact on poor. The economic survey, 1999-2000
gives a very lucid and latest classification of various employments in India.
1. Self-Employment Programmes Swarnajayanti Gram Swarozgar
Yojana (SGSY)
Integrated Rural Development Programme (IRDP) and allied programmes
such as Training Of Rural Youth For Self Employment (TRYSEM),
Development Of Women And Children In Rural Areas (DWCRA) and Million
Wells Scheme (MWS) have been restructured in to a single self-employment
programme called the „Swarnajayanti Gram Swarozgar Yojana‟(SGSY) from
April 1999. It has following objectives a) Focused approach to poverty
lessening/improvement. B) Capitalizing advantages of group lending. C)
Overcoming the problems associated with multiplicity of programme. The
SGSY is conceived as a holistic programme of micro enterprises covering all
aspects of self-employment, which includes organizing rural poor into self-help
groups (SHGs). The object of SGSY is to bring up the poor family above the
poverty line by earning monthly Rs. 2000. Subsidy of 30% of the project cost
or Rs.7500, which ever is less, is given under this aid. SGSY is funded by the
center and the states in the ratio of 75-25.
2. Wage Employment programmes:
There are two programmes under wage employment programme. They are
i) Jawahar Gram Samridhi Yojana (JGSY) ii) the employment Assurance
scheme (EAS)
i) Jawahar Gram Samridhi Yojana (JGSY) – in April 1999 Jawahar
Rozgar Yojana has been structured, streamlined, and renamed as Jawahar
Gram Samridhi Yojana (JGSY). The primary objective of JGSY is
creation of demand driven village infrastructure. And to generate the
supplementary employment for the unemployed poor in the rural areas is
the secondary objective. Families below poverty line are benefited under
this scheme.22.5% of the annual allocation must be spent on beneficiary
schemes for Scheduled Castes/ tribes and 3% for the disabled.
ii) The Employment Assurance Scheme (EAS) – This scheme was
launched on 2nd October 1993 in 1772 identified backward blocks situated
in draught prone, desert, tribal and hill areas. This scheme was
restructured as a single wage employment programme from April 1999
with a fixed annual outlay. The primary objective of the EAS is creation
of additional wage employment opportunities during the period of acute
shortage of wage employment through manual work for the rural poor
living below the poverty line. The secondary objective is the creation of
durable community, social and economic assets to sustain future
employment and development. The Zilla Parishads are designated as the
implementing authorities of the scheme.
3. Urban Employment and Anti-poverty Programme (UEPP)
53
This programme is specially planned for the urban areas. There are two
schemes under this programme. They are I) Prime Minister‟s Rozgar Yojana
(PMRY) ii) The Swarna Jayanti Shahari Rozgar Yojana (SJSRY)
i) Prime Minister’s Rozgar Yojana (PMRY) – This scheme was
launched in urban areas in 1993-94 and extended to rural areas also from
1994-95 for providing self-employment to educated unemployed. In
Eighth Plan (1992-97) it attempted to generate employment for more
than a million people by setting up of seven lakh micro-enterprises. In
Ninth Plan (1997-2002) the scheme was continued with certain
modifications.
ii) The Swarna Jayanti Shahari Rozgar Yojana (SJSRY) – Nehru
Rozgar Yojana (NRY), Urban Basic Services for the Poor (UBSP) and
Prime Minister‟s Integrated Urban Poverty Alleviation Programme
(PMIUPEP) were combined together and The Swarna Jayanti Shahari
Rozgar Yojana (SJSRY) came into operation from December 1997.
Under this scheme the urban unemployed or underemployed poor living
below poverty line and educated up to std. IX are provided employment
through setting up of self-employment ventures or provision of wage
employment. The scheme gives special impetus to empower and uplift
the poor women and launches a special programme, namely,
Development of Women and Children in Urban Area (DWCUA).
54
Chapter 7
55
2. Technological progress – Technical knowledge is important in today‟s
production. Traditionally, land, labour and capital were given importance.
But today, we find that technical knowledge and innovation change the
comparative advantage of a country. With technology an innovation, a
nation can increase it‟s competitiveness. New ideas, new products, new
processes, new inventions, etc. are coming out at such a speed that products
become outdated much before they are worn out.
3. Lessons from the American Text of Development – USA is the largest
economy in the world has greatly benefited though the development of new
technologies. India has got the potential to become the cradle of innovators,
designers, thinker, artists and entrepreneurs because she has democratic,
secular, diverse, individualistic society. But firmly establishing the
conditions listed above as American lessons is a challenge, which calls for
a political will, and courage to remove communalism, fanaticism,
regionalism and what Gandhi has once called „misguided patriotism‟.
4. Global Trading – Communication technology reaches millions and
millions of people around the world. Globalization is a fact and not an
option. Trade in goods must increase. But trade in commercial services has
still greater a scope to increase. Freedom of trade in goods and services is
itself a challenge because such a trade imposes a strong discipline on local
producers as well as labourers. Higher levels of work ethic and productivity
norms, which need to be accepted as a challenge.
5. Financial Sector Integration – Private capital flows for direct and
portfolio investment to developing countries has grown rapidly. According
to World Bank‟s Report (2000-01) net private capital flows to the low and
middle income economies have increased for 6.28 times in eight years. And
a seven times growth in foreign direct investment. Financial market reforms
would encompass foreign exchange market, stock market, banking sector
reforms and so on. It involves several considerations and several issues.
India will have to adapt its policies to sort out these issues and turn the
difficulties into opportunities by carrying out second-generation reforms.
6. Outward orientation – Economies emphasizing exports of manufactured
goods have given a better performance than inward looking economies like
Indian one. India will have to give an outward orientation to her economy.
The growth of manufacturing exports form India faces three basic hurdles –
a) poor infrastructure b) high cost of capital and c) high barriers to imports.
By removing the hurdles, we can accept the challenge. Similarly
knowledge-oriented services need to be exported in larger and larger
quantities.
7. Higher education – The knowledge economy requires highly educated
people. But for that primary education is important. Education plays an
important role in HRD. To flourish the Indian creativity it has to be
rewarded. A system of intellectual property rights will open up possibilities
of large rewards for innovators.
8. Legislative Reforms – Industrial Relation Act, Factory Acts and such other
business laws need amendments that would facilitate the structural reforms
56
in the Indian economy. Several barriers to domestic trade and transport will
have to be removed.
9. High growth rates in Agricultural sector - Indian farmers must be free
from all domestic restrictions on storage, transport and sale of agricultural
products. Public investments on irrigation, agricultural research and
infrastructure must be enhanced as to remove market imperfections and
help exports of agricultural products.
10. Empowering the poor – Employment programmes are the most effective
kind of anti-poverty measures. They should be strengthened. HRD policies
should be reoriented. Private sector initiatives in the service sector such as
health, education, etc. is the today‟s need.
These are the challenges of economic reform. They are worth accepting. What
needed is the courage and will to introduce these reforms and take corrective
steps to ptotest the vulnerable sectors from their fall-out. If this done, the
Indian economy can demonstrate a rare capacity of rapid growth.
***
57
because the private sector does not come forward to accommodate the poor
by providing free or cheap medical aid.
3. Macro economic management – The state has to intervene to promote
industries where the poor and the unorganized workers are seeking
employment. The state has also to come forward in rectifying the regional
imbalances in respect of economic development in general and industrial
development in particular. Besides financial assistance to small-scale
industries, boosting the micro finance schemes and plugging the credit
gaps, supply9ing market information to the agricultural sector etc. are other
examples of micro economic management.
4. Reform of the public sector – Many public sector enterprises are
experiencing hardships due to lack of autonomy, red-tapism, interference
from the politicians as well as the bureaucrats and several other drawbacks.
The reformulation of policy and restructuring of the administrative set- up
with regard to public sector is an urgent need of the hour.
5. Market failures – The market failure comes from the lack of wage and
price flexibility which leads to evils like business fluctuations,
unemployment and inflation. Under such circumstances the state has to
come forward.
6. External constraints – Problems arise when government lose creditability
in financial markets. In this situation private investors are likely to be
scared away. In such cases the government of the country is called upon to
become active obtain assistance from international as well as foreign
agencies.
7. Conflicting interests – In a federal country like India, the interests of
constituent states are likely to be conflicting. Conflicts may also arise
among national interests of various countries. Sometimes nations resort to
anti-social practices like dumping. In all such cases, not only state
intervention by state initiative in securing international co-operation is
needed.
From World War II the United States emerged not only victorious but as a big
brother with its economy intact – able and willing to help top reconstruct the
economies of the countries all over the world. The major international
economic institutions, which were created during the post warr period, were
GATT, the Bretton Woods exchange rate system, the International Monetary
58
Fund (IMF), and International Bank for Reconstruction and Development
(IBRD) or the World Bank. But still there were major economic crises.
Under the leadership of John Maynard Keynes, nations gathered in
1944 at Bretton Woods, and hammered out an agreement that led to the
formation of major economic institutions. The outcome was a system for
regulating international financial transactions. The participants of the
conference were aware of the rigidities of the Gold Standard. They wanted the
Bretton Woods system to replace the gold standard. This system established a
parity of each currency in terms of both the US dollar and Gold.
American economy was the strongest economy unaffected by the war
and because the USA had stated a plan of helping the nations rebuild their
economies, American dollar enjoyed a prestige backed by a worldwide
demand. This made the dollar a hard currency. In addition the Bretton Woods
Agreement had almost recognized the US dollar as an international currency.
For the first three decades after World War II, under the Bretton woods
arrangements, the US dollar was the key currency. Most ot the international
trade and finance were carried out in dollars. In international transactions,
payments were very often made and accepted in dollars. Exchange rate parties
were quoted in dollars. Private and government reserves were kept invested
dollar securities. This period was remarkable for rapid recovery and beginnings
of development of the LDCs. During this period, the world was on a dollar
standard and the US dollar was the world currency because of its stability,
convertibility and worldwide acceptability.
This situation last up to the trade deficits of the US. Growing overseas
investments by the American companied resulted in a piling u of dollars
abroad. By the beginning of the 70s, the stock of liquid dollar balances had
become so large that governments found it difficult to maintain the official
parties with the dollar. Dollar no longer enjoyed public confidence. In 1971
President Nixon officially served the connection between the dollar and gold.
With this the US dollar would no longer allow an automatic conversion of
dollars into other currencies no would it allow the conversion of dollars into
gold for $35 per ounce. As the US abandoned the Bretton Woods system, the
role of dollar as the world currency came to an end.
()()()()()
59
undisclosed basket of the currencies of the countries with which India was
trading partner. The basket composition was at the discretion of the RBI,
subject to approval of Government of India. The basket linked management of
the exchange rate of rupee, however, did not fully reflect the market dynamics
and developments in exchange rates of competing countries, the rupee‟s
external value has been allowed to determined by market forces in a phased
manner following the payments difficulties since the early 90s.
###
60
Chapter 8
International Economic Co-operation
[A]
International Monetary Fund (IMF)
The Bretton Woods Conference (1944) paved the way for the establishment of
IMF. The fund came into existence in Dec 1945 with a modest membership of
44 nations. The number has gone up to 145 in 1990. The establishment of the
IMF is a landmark in international monetary co-operation.
The purpose of IMF
1. To promote international monetary co-operation through a permanent
institution which provides the machinery for consultation and collaboration
on international monetary problems.
2. To facilitate smooth and stable growth of multilateral international trade.
3. To promote stability in exchange and to avoid competitive exchange
depreciation.
4. To remove temporary disequilibrium in the balance of payment of member
countries.
5. To assist in the establishment of a multilateral system of payments in
respect of current transactions between members and in the elimination of
foreign exchange restrictions, which obstructs the growth of world trade.
Organization
1. Every member country is required to subscribe to the capital of the fund at
fixed quota.
2. USA, UK, China, France and India have the largest share in the initial
capital, which is $8.5 billion.
3. The contribution of member countries was collected partly in gold and
partly in domestic currency. A member country has to pay 25% of this
quota in gold.
4. In 1969, IMF introduced a new currency called Special Drawing Rights
(SDRs)
Management
1. The fund is carried by the Board of Executive Directors under the direction
of Board of Governors and each member country deputing its governor to
the Board of Governors.
2. The board of Executive Directors consists of 20 members of whom five are
appointed by each of the five largest quota holding members. Rest of the
members elects the remaining fifteen.
3. A managing director who is also the „chairman‟ of the board heads the
Board.
61
Functions of IMF
1. Short-term Credit Institutions – The fund serves as a short –term credit
institution and assets to the country facing a temporary disequilibrium in its
balance of payments. A temporary disequilibrium can be caused by crop
failure or other natural calamities, which can be effectively overcome by
the fund.
2. Adjustment by Consensus – In the absence of a forum like the IMF, the
rivalries among different countries of the world would have caused a great
damage to al the countries. The IMF no only maintains a reserve of
currencies but also examines the accuracy or otherwise of the currency
parties of the member countries.
3. Active dispensation of justice – The IMF helps to tide over the balance of
payment deficit. It also asks the countries facing a balance of payment
surplus to revalue their currencies.
4. Training and technical assistance – The fund provides technical
assistance to member countries in the formulation and execution of general
economic policies, fiscal as well as monetary policies. It also provides
training either at its headquarter or by sending its representatives for a
period up to six months in member countries.
5. Publication – The fund also brings out several publications for the benefit
of all the member countries. The annual reports of the executive directors,
balance of payment year book, the annual report of exchange restrictions,
international financial news survey, international financial statistics,
schedule of par values are some of the regular publication of the IMF.
Evaluation of IMF
A] Achievements
1. The fund has been useful as a short-term credit institution.
2. The fund‟s technical advice and assistance programme has helped the
members from the third World.
3. It has also provided assistance to many LDCs to strengthen their central
banking and monetary systems.
4. It has co-operated with many international organizations, to promote
economic development of many countries.
5. It has maintained a limited flexibility of exchange rates.
6. It has established various special funds like the compensatory financing
fund for meeting fluctuations in exports earning, etc.
B] Failures
1. One serious charge against the IMF is that it has served as the Rich Nations
Club.
2. Though it is a fact that the IMF has helped to reduce exchange rate
fluctuations, the fact remains that the fund could not take effective steps to
remove the scarcity of certain currencies.
62
3. In the field of liberalization of trade and international liquidity, the success
that the fund has achieved, is very limited.
[B]
SOUTH ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION
(SAARC)
SAARC was established in December 1985. The member countries were
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
63
The imports from Bangladesh, which were limited earlier, have started growing
in recent years.
In case of Pakistan, imports have shot-up signifying a better economic co-
operation.
In case of Nepal also, India‟s export surplus is diminishing and imports from
Nepal are growing.
India‟s trade relations with Bhutan are however declining.
In respect of Sri Lanka, India‟s exports have continuously increased but the
imports in money terms have remained stagnant.
[C]
GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)
The agreement, which had the membership of 83 nations and coverage of four-
fifth of the world trade, came into existence in 1947. In 1960 a provision was
made for the creation of a board of representatives for the administration of the
agreement. This board kept a watch so as to ensure that the conditions agreed
upon by the member countries were observed. The General Agreement on
Tariffs and Trade (GATT) is the first successful effort at increasing
international co-operation in the field of trade aimed at removing trade barriers
and laying down a cod of conduct for the member countries.
The main objectives of the GATT are as under:
1. World trade should be placed on a non-discriminatory footing.
2. Domestic industries may e protected by raising tariffs but no other
commercial measures should be taken.
3. The international co-operation and consultations should aim at
protecting theinterests of the member country.
64
4. The agreement should server as a frame for negotiations among the
member countries, regarding tariffs and the removal of trade barriers.
Various rounds of discussions held from time to time on matters of trade
and tariffs, settlements of complaints or disputes and encouragement of
bilateral trade pacts are the characteristic features of this Agreement.
The developing countries have been given a special treatment in the
GATT in as much as it allowed –
1. Uni-lateral facilities
2. Physical restrictions
3. Freedom of extending financial help for the growth of exports.
Even though GATT is called “Rich Nations‟ Club” it is not denied the fact that
the GATT has facilitate the growth of trade and has provided a forum for
mutual consultations and settlement of disputes.
65
varieties. India can provide for protection of plant varieties by patent or some
other effective method after completing the first transitional ten years.
4. Possibility of bio-piracies – India is rich in herbal wealth and has inherited
traditional wisdom regarding its use. This whole traditional knowledge is in
danger of bio-piracy. Unless we are alert enough, foreign companies and multi-
nationals will try to take patents of preparations based on Indian herbal wealth
and wisdom.
5. TRIMs and its effects – The main provisions of TRIMs are as follows
which have become harmful to Indian economy –
1. Removal of all restrictions on foreign investments
2. Non-discrimination between national and foreign companies
3. Opening all areas for foreign investment
4. No ceiling on equity participation by foreigners
5. Free imports of raw materials and components
6. No obligations regarding use of local material or export of out put
7. Removal of restriction on repatriation of dividend, interest and royalty
7. Effects on Textile – Certain proposals under this agreement aim at
liberalizing the trade of textile and clothing. The liberalization is supposed to
take place in a planned manner spread over ten years. The provisions of this
move also are titled in favour of the developed countries. As a result, India‟s
most important sector is also likely to be in danger.
$$$
[D]
WORLD TRADE ORGANIZATION (WTO)
Principles of WTO –
1. Non-discrimination – this principle implies that all trading partners shall be
granted the most favoured nation treatment and foreign goods, capital,
services, trade marks, and patents are given the same treatment as is given
to their national or domestic counterparts.
2. Freedom of trade – The most important and ultimate objective of WTO is
progressive liberalization of trade so that there remain no barriers in the free
flows of goods and services internationally.
3. Stability and predictability – The WTO is committed no to create or raise
trade barriers arbitrarily.
4. Fair competition – The WTO system of trade, it is claimed aims at creating
open fair and undistorted competition.
66
5. Cases of developing countries - In respect of developing countries,
especially the least developed, is given more time to adjust and is given
special privileges.
Functions of WTO –
1. Facilitating the implementation, administration and operation for the
furthering of the objectives of multilateral trade agreements and providing
the framework for such implementation and operation.
2. Providing a forum for negotiations among the members concerning their
multilateral trade relations.
3. Administering the „Understanding on Rules And Procedures Governing the
Settlement of Disputes‟
4. Administering the Trade Review Mechanism.
5. Achieving greater global economic policy co-ordination in co-operation
with such agencies as IMF, IBRD, etc.
67
[E]
EURO-DOLLAR MARKET AND EURO CURRENCY
During the periods when some strong national currency performed as an
international currency, international liquidity was no problem and trade and
transactions were facilitated. On the other hand, the absence fo such a strong
currency or the fluctuations in the exchange rates of national currencies vis-à-
vis (in comparison with) the strong currency has always created obstacles in the
growth of trade.
68
exchange rate markets enabled the West European countries to resume
currency convertibility. This gave a further motivation to the growth of the
Eurodollar market.
3. The political factor- The cold war between the capitalist and the
communist blocks of countries also contributed to the growth of the Euro
market. A fear always creep around in the minds of banks that the dollar
balances might be seized by the US if the cold war turned hot. This
tendency served to supplement the dollar resources of the Euro market.
4. Deficits in the American Balance of Payment – Since 1950, the USA
continuously experienced deficits, which went on increasing during the
subsequent period. This was another important factor leading to the rapid
growth of the Euro market.
5. The Regulation ‘Q’ – The regulations of the Federal Reserve System,
which prohibited interest payment deposits for a period of less than 30 days
greatly, contributed the fast growth of the Euro dollar market. This is
because the Eurodollar market paid interest for less than 30 days also.
6. Innovations in Banking – The beginning of innovative banking in Europe
and America attracted more and more customers encouraging the growth of
the Euro market.
7. The Petrodollars – The flow of petrodollars, which resulted from OPEC‟s
hikes in oil prices since 1973, has been a significant source of the
Eurodollar market.
8. The participants in the market – Participants in the Euro currency
business include governments, international organization, commercial
banks, central banks, the multinational corporations, export-import firms
and trading firms and individuals also.
$$$
69
Chapter 9
FOREIGN CAPITAL
70
working of foreign firms has a demonstration effect on local firms and
entrepreneurs as well as workers. These new values and attitude are the
basic to economic development.
Some problems related with foreign capital can be spelt out as arguments
against foreign capital. They are as follows.
1. Distortion of priorities – Most of the LDCs have prepared their own plans
for development according to their priorities. But the lending governments
may tie their aid to some projects, which may not stand priority.
2. Inappropriate techniques – Foreign capital is said to help a transfer of
technology and modern managerial skills, etc. Sometimes this is
inapplicable in the recipient countries.
3. Balance of payment problems – To overcome balance of payment
problems, LDCs resort to foreign borrowing. Multinational companies‟
71
investment helps in rise in income and employment. This creates
inflationary pressures. But still developing countries have to face a serious
problem of deficit in their balance of payment.
4. Debt trap – Continued dependence on foreign capital and unproductive or
inefficient utilization of external debt may put a country in what is known
as a debt-trap. A country can be said to be caught in a debt-trap when it is
required to borrow for repaying of old debts. But this situation may arise
even when a country is capable of repaying because their export –earnings
is much more.
5. Wasteful utilization – Borrowing is a softer option. When external debt is
easily available, a government is tempted to go on borrowing. Such easy
loans tend to be utilized in a wasteful manner. Where they get invested may
not stand priority.
6. Gap between rural & urban sector – Foreign companies are interested to
invest in urban areas where they get ready infrastructure. They help the
development of urban areas. This creates a wide gap between urban and
rural areas. This encourages the rural-urban migration.
7. Damaging the domestic entrepreneurship – Foreign capital accompanied
by foreign managerial skills and direct investment has damaging effects on
domestic entrepreneurship of the host economies.
8. Erosion of Sovereignty – The most important objection to foreign aid
when it comes through official channels is that it curbs the sovereignty of
the LDCs. The conditions set by the donor countries are so humiliating that
if the country were not in need of aid would not have accepted them.
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B] Public Foreign Investment –
1. Bilateral loans – An LDC might enter into an agreement with an advanced
country and under such an agreement, a loan may be made by the lender to
the borrower country. Such agreement may or may not specify the purpose
of the loan.
2. Bilateral soft loan – The lender country may grant a „soft‟ loan, under a
bilateral agreement. According to Public Law 480, the American president
is empowered to give such loans to poor countries for specific reasons. The
purpose of these loans is to purchase goods and commodities from specific
(lender) country.
3. Multilateral loans – When developed countries contribute to „sow agency‟
brought into existence for the purpose of giving development assistance to
the LDCs and by agreement the loan made by such agency becomes a
multilateral loan.
4. Intergovernmental grants – Grants given officially by one government to
another government fall into this category. Such grants are usually
conditional and for specific purposes only.
C] Tied and Untied Aid – Source, project and commodities can tie Aid, or it
may be tied by both project and source and become double tying aid. Untied
aid on the other hand is a general-purpose aid, which is also known as „non-
project aid‟ or „programme aid‟
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