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14/10/2010 Aniruddha Guruprasad

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STATE OF THE INDIAN ECONOMY


Prepared for Prof. S. Srinivasan

Prepared by,

Aniruddha Guruprasad

14TH November 2010.

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EXECUTIVE SUMMARY
This report analyses the state of the Indian economy, its history, present condition and its future growth in the world

State Of Indian Economy


The economy of India is the eleventh largest economy in the world by nominal GDP and the fourth largest by purchasing power parity (PPP). Following strong economic reforms from the socialist inspired economy of a postindependence Indian nation, the country began to develop a fast-paced economic growth, as free market principles were initiated in 1990 for international competition and foreign investment India is an emerging economic power with a very large pool of human and natural resources, and a growing large pool of skilled professionals.

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The economy of India is the eleventh largest economy in the world by nominal GDP and the fourth largest by purchasing power parity (PPP). Following strong economic reforms from the socialist inspired economy of a post-independence Indian nation, the country began to develop a fast-paced economic growth, as free market principles were initiated in 1990 for international competition and foreign investment India is an emerging economic power with a very large pool of human and natural resources, and a growing large pool of skilled professionals. According to the book 'Contours of the World Economy, 1-2030AD' by Angus Maddison, India was the largest economy from the year 1 AD until the colonial period whereupon it was taken over by other countries such as China and the U.K. Economists predict that by 2020, India will be among the leading economies of the world. According to the BRIC report, published by Goldman Sachs, India will be the second largest economy after china by 2043 (source: www.wikipedia.org).

Independence To 1991:
Indian economic policy after independence was influenced by the colonial experience and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialization, state intervention in labour and financial markets, a large public sector, business regulation, and central planning. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s. Capitalism and Private enterprise did not exist before 1991. Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990. (source: www.wikipedia.org)

Since 1991:
In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price controls and reduced corporate taxes. While this increased the rate of growth, it also led to high fiscal deficits and a worsening current account. The collapse of the Soviet Union, which was India's major trading partner, and the first Gulf War, which caused a spike in oil prices, caused a major balance-ofpayments crisis for India, which found itself facing the prospect of defaulting on its loans. (source:
www.wikipedia.org)

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Macro Economic Statistics of India:

Gross Domestic Product


The gross domestic product (GDP) or gross domestic income (GDI) is a measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living. ( source:
www.wikipedia.org)

o Composition of GDP: The most direct approach is the product approach, which sums the outputs of every class of enterprise to arrive at the total.

INDIAS GDP:

6 |Page The Gross Domestic Product (GDP) in India expanded at an annual rate of 8.80 percent in the last reported quarter.

Year 2010 2009 2008

Mar 8.60 5.80 8.50

Jun 8.80 6.00 7.80

Sep

Dec

8.60 7.50

6.50 6.10

(Source: www.tradingeconomics.com)

Per Capita Income (PCI)


Per capita income is the numerical quotient of national production by population, in monetary terms. It is a measure of the monetized production per person an economic aggregate such as a country, not of the actual distribution of income or current net wealth in that aggregate. This is what each individual would receive if the periodic income were divided equally among everyone. Per capita income is usually reported in units of currency per annum. When comparing nations per capita income reflects gross national product per person, but it is also used to compare municipalities within nations. (source:www.wikipedia.org)

PCI of India
India's per capita income (nominal) is $1016, ranked 142th in the world. States of India have large disparities. One of the critical problems facing India's economy is the sharp and growing regional variations among India's different states and territories in terms of per capita income, poverty, availability of

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infrastructure and socio-economic development. Although income inequality in India is relatively small, it has been increasing of late. Wealth distribution in India is fairly uneven, with the top 10% of income groups earning 33% of the income. Despite significant economic progress, a quarter of the nation's population earns less than the government-specified poverty threshold of $0.40/day. ( source www.wikipedia.org)

INDIAS PER CAPITA INCOME MAP (2006-2007)

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( source: www.mapsofindia.com)

India's per capita income is not calculated with the help of purchasing power parity (PPP) which effectively regulates conversion rates for purchasing power of currencies. In fact per capital GDP of India is calculated by the Atlas technique and by allotting official exchange rates for translation. (Source: www.mapsofindia.com) INFLATION RATE: In economics, the inflation rate is a measure of inflation, the rate of increase of a price index (for example, a consumer price index). It is the percentage rate of change in price level over time. The inflation rate is used to calculate the real interest rate, as well as real increases in wages, and official measurements of this rate act as input variables to COLA adjustments and inflation derivatives prices. (Source: www.wikipedia.org) If P0 is the current average price level and P 1 is the price level a year ago, the rate of inflation during the year might be measured as follows:

After the year the purchasing power of a unit of money is multiplied by a factor 1 / (1 + inflation rate). (Source: www.wikipedia.org)

Effects of Inflation
Effects of inflation depend upon the nature of inflation. Factors such as rate of inflation, whether it is stable, accelerating or decelerating, whether it is anticipated or unanticipated determine the consequences of inflation. In the context of international trade and price competitiveness, if the domestic inflation rate is higher than the inflation rate in competing countries, then it will make exports less competitive in the international markets and create balance of payment problems. Inflation is a crime against the poor who experience a fall in their real incomes during a period of sustained price rise. Inflation affects 3 main functions of economy viz. Production, Consumption and Distribution.

Effect on production and economic growth:


In economies, where labour is largely unorganized, single digit inflation will increase profitability and therefore lead to greater investment, employment, output, income, demand and prices.

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This happens because wages of unorganized labourers is not indexed to inflation, so wages will fall overtime during inflation whether it is anticipated or not. In case of anticipated inflation, the real wages of organized labor will also fall and may be compensated with a time lag. The firms will gain during the intervening period between anticipated price rise and its compensation to labour. Thus, from the point of view of production and economic growth, single digit inflation has positive impact.

Effect on distribution of income and wealth:


The impact of inflation with regard to distribution of income and wealth is not even on all sections of our society. Organized labourers salaries and wages are indexed to inflation. Debtors become advantageous as during inflation the value of real interest may fall down and creditors face a big disadvantage. Hence during inflation, rich become richer and poor become poorer.

Effect on consumption and economic welfare:


Inflation reduces the purchasing power of money earned by the poor and their economic welfare. The workers who do not get compensated for the increase in price rise, experience reduction in real incomes because their nominal income remains constant for a long period. Economic welfare depends upon consumption of goods and services. During inflation, people consume fewer amounts of goods and services as a result the economic welfare gets affected.

Indias Inflation Rate


The inflation rate in India was last reported at 11.25 percent in July of 2010. From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. GRAPH INDICATING THE INFLATION RATE IN THE RECENT PAST

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Year Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 2009 10.45 9.63 2008 5.51 5.47 8.03 7.87 8.70 7.81 8.63 7.75 9.29 7.69 11.89 11.72 11.64 11.49 13.51 14.97 8.33 9.02 9.77 10.45 10.45 9.70

INTEREST RATE:
Economically Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money, or, money earned by deposited funds. Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is calculated upon the value of the assets in the same manner as upon money. (source: www.wikipedia.org)

Indias Interest Rate


In India, interest rate decisions are taken by the Reserve Bank of India's Central Board of Directors. Since 2000, India's average interest rate was 5.82 percent reaching an historical high of 14.50 percent in August of 2000 and a record low of 3.25 percent in April of 2009. GRAPH INDICATING THE INTEREST RATE IN THE RECENT PAST

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Year 2010 2009 2008

Jan 3.25 4.50 6.00

Feb 3.25 4.00 6.00

Mar 3.38 3.75 6.00

Apr 3.63 3.38 6.00

May 3.75 3.25 6.00

Jun 3.75 3.25 6.00

Jul 4.08 3.25 6.00

Aug 4.50 3.25 6.00

Sep 5.00 3.25 6.00

Oct 3.25 6.00

Nov 5.25 3.25 6.00

Dec 3.25 5.50

* The table above displays the monthly average.

(Source: www.tradingeconomics.com)

Exchange Rate
In finance, it is the value of a foreign nations currency in terms of the home nations currency. For example an exchange rate of 45 Indian Rupees (INR, Rs.) to the United States dollar (USD, $) means that INR 45 is worth the same as USD 1. Generally there are two types of exchange rates, i.e.: Spot Exchange Rate: o The spot exchange rate refers to the current exchange rate. Forward Exchange Rate: o The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

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The Different Exchange rate systems are as follows: Floating exchange rates o A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. Thus, floating exchange rates change freely and are determined by trading in the forex market. (source: www.investopedia.com) Managed floating exchange rates o The system under which a country's exchange rate is not pegged, but the monetary authorities try to manage it rather than simply leaving it to be set by the market. This can be done in two ways: small fluctuations in the exchange rate can be smoothed out by the authorities buying the country's currency when its price would otherwise fall and selling it when its price would otherwise rise. Fixed exchange rate system (pegged exchange rate) o A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable, and is especially useful for small economies where external trade forms a large part of their GDP. ( source: www.wikipedia.org) INDIAS EXCHANGE RATE The Indian Rupee exchange rate (USDINR) depreciated 5.44 percent during the last 12 months. From 1973 until 2010 the USDINR exchange averaged 29.46 reaching an historical high of 51.97 in March of 2009 and a record low of 7.19 in March of 1973. The Indian Rupee spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the INR. (source: www.tradingeconomics.com). TABLE ILLUSTRATING INDIAS EXCHANGE RATE OVER THE YEARS Year 2010 2009 2008 Jan 45.96 48.87 39.37 Feb 46.35 49.31 39.76 Mar 45.48 51.25 40.33 Apr 44.48 50.10 40.03 May 45.82 48.52 42.12 Jun 46.58 47.79 42.85 Jul 46.84 48.45 42.84 Aug 46.37 48.33 43.07 Sep 45.04 48.45 45.52 Oct 44.42 46.72 48.67 Nov 46.57 48.99 Dec 46.61 48.68

* The table above displays the monthly average.

BALANCE OF PAYMENTS AND BALANCE OF TRADE

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Balance of payment:
o A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarises international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

(source:www.wikipedia.org)

Trends in Indias Balance of payment:


o The trends in the Balance of Payments of the country may be studied through a comparison between the pre-liberalisation and post liberalisation era (and by further dividing the study period into four distinct phases as stated below). At the time of independence, higher imports and capital outflows, led by partition, resulted in significant deficit in the balance of payments necessitating running down of the accumulated sterling balances.

First Phase- 1951-52 to 1974: Period of Surplus in BOP: This period covers the first four five year plans. During the first plan, there was an overall deficit in BOT, which was supported by favourable BOP position. The rest of the period was characterized by heavy deficits in BOP. This was mainly because of: Three wars- one with china (1962) and two with Pakistan (1965 and 1971) Several droughts (1965-66 and 1966-77) Excessive price of crude oil Political instability Adverse weather conditions during 1972-75 High inflation rate During this period current account deficit was 1.8% of GDP. India received huge amount of foreign assistance at nominal rates which took care of the deficit in BOP. Second Phase- 1974-1980: Strains appear on BOP, but position still quite comfortable. However, it was in the Fifth Plan (1974-79) that self reliance was recognised as an explicit objective. In the Fifth Plan, invisibles surfaced as an important element of the current account with policy attention on

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tourism and shipping. Discovering the remittances from Indian workers as a new source of meeting the growing financing needs, the period witnessed new confidence in the external sector. The fact remains that the phase till the 1970s represented the era of the dominance of external assistance as a financing instrument in balance of payments.

Third Phase-1980-1992: Period of Serious Problems and BOP Crisis. The Sixth Plan (1980-85) emphasised the strengthening of the impulses of modernisation for the achievement of both economic and technological self reliance. The Seventh Plan (1985-90) conceptualised self-reliance not merely in terms of reduced dependence on aid but also in terms of building up domestic capabilities and reducing import dependence in strategic materials. Achievement of technological competence through liberal imports of technology was also envisaged. Alongside, the winds of change were added by the recommendations of a number of committees set up during the late 1970s and the 1980s.

Fourth Phase-1990-91 onwards The Gulf Crisis: 1990-92 the gulf crisis of 1990 among various other factors led to an unprecedented crisis in the balance of payments. The balance of payments crisis reached its peak in the summer of 1991 when the foreign currency reserves had fallen to almost $1 billion, inflation had risen to an annual rate of 17 percent, industrial production was falling and overall economic growth had declined to 1.1 percent in 1991-92.

Balance of trade:
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports. A positive or favourable balance of trade is known as a trade surplus if the exports are more than imports; a negative or unfavourable balance is when imports are more than exports.

Indias Balance of trade:


o India reported a balance of trade deficit equivalent to 9118.0 Millions in September of 2010. India is leading exporter of gems and jewellery, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are:

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machinery, gems, fertilizers and chemicals. Main trading partners are European Union, The United States, China and UAE India Balance of Trade chart

MONETARY POLICY Monetary policy is one of the tools that a national Government uses to influence its economy. Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives.(source:www.finpipe.com) Modern Monetary Policy

Modern central banking dates back to the great depression of the 1930s. Governments, led by the economic thinking of the great John Maynard Keynes, realized that collapsing money supply and credit availability greatly contributed to this depression. This realization that money supply affected economic activity led to active government attempts to influence money supply through monetary policies. This meant that rather than accepting whatever happened to money supply, they would actively try to influence the amount of money available. The Effectiveness of Monetary Policy

Economists debate the relevant measures of money supply. "Narrow" money supply or M1 is currency in circulation and the currency in easily accessed chequing and savings accounts. "Broader" money supply measures such as M2 and M3 include term deposits and even money market mutual funds. Economists debate the finer points of the implementation and effectiveness of monetary policy but one thing is

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obvious. At the extremes, monetary policy is a potent force. In countries such as the Russian Republic, Poland or Brazil where the printing presses run full tilt to pay for government operations, money supply is expanding rapidly and the currency becomes rapidly worthless compared to goods and services it can buy. Very high levels of inflation or "hyperinflation" is the result. With 30-40% monthly inflation rates, citizens buy hard goods as soon as they receive payment in the currency and those on fixed income have their investments rendered worthless. At the other extreme, restrictive monetary policy has shown its effectiveness with considerable force. Germany, which experienced hyperinflation during the Weimar Republic and never forgot, has maintained a very stable monetary regime and resulting low levels of inflation. When Chairman Paul Volcker of the U.S. Federal Reserve applied the monetary brakes during the high inflation 1980s, the result was an economic downturn and a large drop in inflation. The Bank of Canada, headed by John Crow, targeted 0-3% inflation in the early 1990s and curtailed economic activity to such an extent that Canada actually experienced negative inflation rates in several months for the first time since the 1930s. Without much debate, the effectiveness of monetary policy, its timing and its eventual impacts on the economy are not obvious. That central banks attempt influence the economy through monetary is a given. In any event, insights into monetary policy are very important to the investor. The availability of money and credit are key considerations in the pricing of an investment.

Types of monetary policy:


Monetary Policy: Inflation Targeting Target Market Variable: Long Term Objective:

Interest rate on overnight debt A given rate of change in the CPI

Price Level Targeting Interest rate on overnight debt A specific CPI number Monetary Aggregates The growth in money supply A given rate of change in the CPI Fixed Exchange Rate The spot price of the currency The spot price of the currency Gold Standard Mixed Policy The spot price of gold Usually interest rates Low inflation as measured by the gold price Usually unemployment + CPI change

INSTRUMENTS OF MONETARY POLICY:


Variations in Reserve Ratios Banks are required to maintain a certain percentage of their deposits in the form of reserves or balances with the RBI, it is called Cash Reserve Ratio (CRR). Since reserves are highpowered money or base money, by varying CRR, RBI can reduce or add to the banks

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required reserves and thus affect banks ability to lend. Discount Rate (Bank Rate) Discount rate is the rate of interest charged by the central bank for providing funds or loans to the banking system, which are provided either through lending directly or re-discounting or buying commercial and treasury bills. Open Market Operations (OMOs) OMOs involve buying (outright or temporary) and selling of government securities by the central bank, from or to the public and banks. It involves buying and selling of government by the RBI to influence the volume of cash reserves with commercial banks and thus influence their loans and advances

Other Instruments
Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. o Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system.

OPERATION OF MONETARY POLICY:

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Instrumen
INDIAS MONETARY POLICY:
Reserve Bank of India is the apex Institution of India's monetary system and financial system and plays a leading role in organizing, running, supervising, regulating and developing the monetary and financial system. Preparing and conducting the monetary policy and credit policy are special responsibilities of Reserve bank of India.

RBI expresses its view on economy through changes in monetary policy which is known as Annual Policy Statement. The policy is released every year in April and is reviewed every quarter.

1. Discount R (Bank Rate


Cash reserve ratio (CRR): CRR is the percentage of cash deposits that banks have to maintain with RBI. The RBI had hiked the CRR by 75 points in January 2010. This absorbed Rs. 36000 Crores from the system. In the Annual Policy 2010-11 the CRR was increased by an increase of 25 basis points from 5.75 to 6.0 percent took effect from April 24. This sucked out Rs. 12500 Crores from the banks.

Following are the main points of this policy statement:

2.Reserve Ra

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This move meant that banks had to park more money with the central bank. This money does not earn any interest to them (or negligible returns) and sucks out the liquidity in the banking system. As a result, banks had lesser money with them to lend. This could lead to higher interest rate as there isn't enough liquidity in the system. (source: economic survey 2010-2011)

Repo Rate: Repo Rate is the rate of interest at which the RBI lends money to banks. This also means that Repo Rate is the RBI's lending rate to other banks. When RBI reduces the Repo Rate, the banks can borrow more at a lower cost. This contributes to lowering of the rates. In the Mid-Quarter Monetary Policy Review, September 2010-11, RBI hiked the Repo rate by 25 basis points from 5.75 per cent to 6.0 per cent with immediate effect. This meant that RBI had increased its lending rate to other banks by .25%. For banks the borrowing from RBI became costlier. (source: economic survey 2010-2011) Reverse Repo Rate: Reverse repo rate is the rate at which RBI borrows funds from banks. This is opposite of repo rate. Reverse repo rate is also known as RBI's borrowing rate. In the Annual Monetary Policy 2010-11, RBI increased the reverse repo rate under the LAF by 50 basis points from 4.5 per cent to 5.0 per cent with immediate effect. . This meant that now RBI will be providing 0.50% extra interest on the money which it borrows from the banks. An increase in reverse repo rate means that banks earn higher returns by lending to RBI. (source: economic survey 2010-2011)

Statutory Liquidity Ratio (SLR) : Statutory Liquidity Ratio is the fraction of liquid assets which a bank has to keep an assured amount of funds. The funds may be in the form of cash, gold, government bonds, etc. In October 2009 Credit Policy the RBI had RBI had hiked the SLR by 100 basis points - from 24 to 25 per cent. This measure controls bank's credit expansion and can lead to higher interest rates. In the October 2009 Credit Policy, RBI had hiked the SLR by 100 basis points - from 24 to 25 per cent. It was not touched by RBI in the Annual Monetary Policy 2010-11. (source: economic survey 2010-2011)

Money Supply: During 2009-10, money supply (M3) growth decelerated from over 20.0 per cent at the beginning of the financial year to 16.4 per cent in February 2010 before increasing to 16.8 per cent by March 2010, slightly above the Reserve Banks indicative projection of 16.5 per cent. For policy purposes, M3 growth for 2010-11 was placed at 17.0 per cent. Consistent with this, aggregate deposits of SCBs were projected to grow by 18.0 per cent. The growth in non-food credit of SCBs was placed at 20.0

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per cent. As always, these numbers were provided as indicative projections and not as targets. (source: economic survey 2010-2011)

Motive & Policy Stance of RBI: It is worth note that in the wake of Global Economic crisis, RBI had adopted a suitable monetary policy from September 2008, to boos market confidence and mitigate the adverse impact of global financial slowdown on Indian Economy. RBI was quite successful in achieving its goals but in the late 2009, the food inflation started soaring and RBI shifted to its first phase of exit from the expansionary monetary policy. The moves of RBI included raising the Key Policy rates and restoring the statutory Liquidity Ratio in October 2009. RBI continued to move on the same track and announced 75 basis points increase in CRR in January 2010. Besides RBI stunned the market by mid-cycle increase of 25 basis points each in the policy repo rate and the reverse repo rate under the LAF on March 19, 2010. The latest policy has the following stance:

Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures. Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way. Maintain an interest rate regime consistent with price, output and financial stability. (source: economic survey 2010-2011)

Introduction of Base Rate System: After indicating the base rate system in Annual Policy Statement of April 2009, RBI had constituted a Working Group on Benchmark Prime Lending Rate. Chairman of this working group was Shri Deepak Mohanty. The objective was to review the present benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent. Deepak Mohanty group submitted its report in October 2009 and the same was placed on the Reserve Banks website for public comments. Based on the recommendations of the Group and the suggestions from various stakeholders, the draft guidelines on Base Rate were placed on the Reserve Banks website in February 2010. RBI has now decided to mandate banks to switch over to the system of Base Rate from July 1, 2010. Guidelines on the Base Rate system were issued on April 9, 2010 (source: economic survey 2010-2011)

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Recent news on related to Monetary Policy Dated 2nd-November-2010


The Reserve Bank today raised its key short-term lending rate by 25 basis points and borrowing rate by 50 basis points to check rising prices. The new rates, which come into effect immediately, were announced as part of the first scheduled midquarterly review of the monetary policy. The hike in rates will lead to a rise in cost of funds for the banks and eventually makes loans expensive, which will reduce consumption. While inflation for August was 8.5 per cent according to the new series with 2004-05 as Base Year, food inflation was at a high of 15.10 per cent for the week ended September 4. To check inflation, the RBI had raised these key rates by an identical margin in July. A rate hike by the Reserve Bank of India on Tuesday seems a foregone conclusion. However, it may not lead to a immediate jump in deposit and lending rates of banks. Indias central banker has already hiked key policy rates three times this year, but banks have held firm so far. With soaring inflation, RBI too is expected to act. In such a scenario it would be a good time for borrowers of home or auto loan to still go in for loans. The July quarter monetary policy, to be announced on Tuesday, comes at a time ofhigh inflation which has topped 10 per cent for five months in a row. In fact, this is the longest spell of such inflation since the mid-90s, say some economists. The RBI is under pressure from the government not to tinker too much with the policy rates that may effect growth. Inflation has effected the returns from the stock markets and has also crimped the profits of companies according to Ms Ritika Mankar, economist at Execution Noble. She says in a recent report High inflation is a more powerful negative for stock market returns in India than low GDP growth. In particular, average investment returns across the broader market as well as across sectors have been systematically lower in a high inflation environment. The average stock returns on the Sensex in a high inflation vs low inflation environment are +12 per cent vs 1 per cent.

FISCAL POLICY:
The Government spending policies that influence macroeconomic conditions are called Fiscal Policy. These policies affect tax rates, interest rates and government spending.

Stances of fiscal policy

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The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows:

A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

An expansionary stance of fiscal policy involves government spending exceeding tax revenue. A contractionary fiscal policy occurs when government spending is lower than tax revenue.

Indias Fiscal Policy:


The Indian economy was on a cyclical slowdown after a five-year record boom and there are reasonable expectations that the economy will go for another strong growth phase after this brief slowdown. The impact of the current global crisis on India has been significant in terms of fiscal imbalances and the lower GDP growth rate, though India did not have direct exposure to sub-prime assets. It also dealt a severe blow to investment sentiments and consumer confidence in the economy. The policy response so far has been prompt in the form of monetary easing and fiscal expansion. However, this has sharply reversed the steady fiscal improvement over the past five years and weakened public finances considerably. This phase of fiscal expansion has to be wound down to ensure that macroeconomic stability is not threatened and the economy does not suffer from entrenched inflationary expectations and high capital costs, both of which will adversely impact the potential growth rate. Thus, an exit strategy will have to be carefully designed. The objective of economic policy must be to maximize gains from global integration while ensuring a reduction in poverty and inequity. Therefore, a better way of responding to the crisis is to start the second round of reforms that are now overdue. The focus must now shift to promoting private investment, which can alone sustain rapid growth. It is hoped that the Thirteenth Finance Commission and the forthcoming budget will lay down a road map for bringing the fiscal balance back on the track laid down by the FRBM Act.(source: ABDI working paper series)

EXIM/ FOREIGN TRADE POLICY:


The Republic of India is the second most populous country and the world's most-populous democracy and recently has one of the fastest economic growth rates in the world. With the world's tenth largest military expenditures and eleventh largest economy by nominal rates or fourth largest by purchasing power parity, India is considered to be a regional power, and a potential global power. It is India's growing international influence that increasingly gives it a more prominent voice in global affairs. (source: www.wikipedia.org)

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India has a long history of collaboration with several countries and is considered a leader of the developing world. India was one of the founding members of several international organizations, most notably the United Nations, the Non-Aligned Movement, the Asian Development Bank and the G20 industrial nations. India has also played an important and influential role in other international organizations like East Asia Summit, World Trade Organization, International Monetary Fund (IMF) G8 and IBSA Dialogue Forum. Regional organizations India is a part of include SAARC and BIMSTEC. India has taken part in several UN peacekeeping missions and in 2007, it was the second-largest troop contributor to the United Nations. India is currently seeking a permanent seat in the UN Security Council, along with the G4 nations. (source: www.wikipedia.org)

To become a major player in world trade, a comprehensive approach needs to be taken through the Foreign Trade Policy of India . Increment of exports is of utmost importance, India will have to facilitate imports which, are required for the growth Indian economy. Rationality and consistency among trade and other economic policies is important for maximizing the contribution of such policies to development. Thus, while incorporating the new Foreign Trade Policy of India, the past policies should also be integrated to allow developmental scope of Indias foreign trade. This is the main mantra of the Foreign Trade Policy of India. Objectives of the Foreign Trade Policy of India Trade propels economic growth and national development. The primary purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity. The Foreign Trade Policy of India is based on two major objectives, they are

To double the percentage share of global merchandise trade within the next five years. To act as an effective instrument of economic growth by giving a thrust to employment generation.

Strategy of Foreign Trade Policy of India

Removing government controls and creating an atmosphere of trust and transparency to promote entrepreneurship, industrialization and trades. Simplification of commercial and legal procedures and bringing down transaction costs. Simplification of levies and duties on inputs used in export products. Facilitating development of India as a global hub for manufacturing, trading and services. Generating additional employment opportunities, particularly in semi-urban and rural areas, and developing a series of Initiatives for each of these sectors. Facilitating technological and infrastructural upgradation of all the sectors of the Indian economy, especially through imports and thereby increasing value addition and productivity, while attaining global standards of quality.

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Neutralizing inverted duty structures and ensuring that India's domestic sectors are not disadvantaged in the Free Trade Agreements / Regional Trade Agreements / Preferential Trade Agreements that India enters into in order to enhance exports. Upgradation of infrastructural network, both physical and virtual, related to the entire Foreign Trade chain, to global standards. Revitalizing the Board of Trade by redefining its role, giving it due recognition and inducting foreign trade experts while drafting Trade Policy. Involving Indian Embassies as an important member of export strategy and linking all commercial houses at international locations through an electronic platform for real time trade intelligence, inquiry and information dissemination

INDUSTRIAL POLICY
Post 1990s have seen a sea of change in the Industrial Policy of India. The reluctant Indian Market were opened to foreign companies and investors. Thus Industries started registering impressive growth during the last decade and half. The number of industries in India has increased exponentially in the last few years. Though the main occupation has been agriculture for the bulk of the Indian population, it was realized that India would become a prosperous and a modern state with industrialization. Therefore different programs have been formulated and initiated to build up an adequate infrastructure for rapid industrialization and improve the industrial scenario in India. Industrial Policy revolves around the core parameters like Industrial Licensing. Industrial Entrepreneurs Memorandum. Locational Policy. Policy Relating to Small Scale Undertakings. Environmental issues. The Industrial Policy of India fueled rapid increase in the various sectors in all verticals. But the striking factor was observed in the IT, Telecommunication and Pharmaceutical Industry. The Indian software industry has grown at a massive rate from a mere US $ 150 million in 1991-92 to a staggering US $ 5.7 billion (including over $4 billion worth of software exports) in 1999-2000. No other Indian industry has performed this well against the global competition. The telecommunication industry also marked stupendous growth, so is the pharmaceutical industry. The Industrial Policy of resurgent India has helped Indian industry to grow in leaps and bounds.(source: www.mapsofindia.com)

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The Government of India's liberalized Industrial Policy aims at rapid and substantial economic growth, and integration with the global economy in a harmonized manner. The Industrial Policy reforms have reduced the industrial licensing requirements, removed restrictions on investment and expansion, and facilitated easy access to foreign technology and foreign direct investment. Objectives of the industrial policy:

Maintaining and sustaining productive growth Optimum utilization of human resources To attain international competitiveness and transforming the country into a global player

Following are some important policy measures announced by the Ministry of Finance, Department of Industrial policy to pursue the above objectives.

1. Liberalisation of Industrial Licensing Policy At present, only six industries are under compulsory licensing mainly on account of environmental, safety and strategic considerations. Similarly, there are only three industries reserved for the public sector. (www.economywatch.com) 2. Introduction of Industrial Entrepreneurs' Memorandum (IEM) Industries not requiring compulsory licensing are to file an Industrial Entrepreneurs' Memorandum (IEM) to the Secretariat for Industrial Assistance (SIA). No industrial approval is required for such exempted industries. Amendments are also allowed to IEM proposals filed after 1.7.1998. (www.economywatch.com) 3. Liberalisation of the Location Policy A significantly amended locational policy in tune with the liberlised licensing policy is in place. No industrial approval is required from the Government for locations not falling within 25 kms of the periphery of cities having a population of more than one million except for those industries where industrial licensing is compulsory. Non-polluting industries such as electronics, computer software and printing can be located within 25 kms of the periphery of cities with more than one million population. Permission to other industries is granted in such locations only if they are located in an industrial area so designated prior to 25.7.91. Zoning and land use regulations as well as environmental legislations have to be followed. (www.economywatch.com) 4. Policy for Small Scale A differential investment limit has been adopted since 9th October 2001 for 41 reserved items where the investment limit upto rupees five crore is prescribed for qualifying as a small scale unit. The investment limit for tiny units is Rs. 25 lakhs. (www.economywatch.com)

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749 items are reserved for manufacture in the small scale sector. All undertakings other than the small scale industrial undertakings engaged in the manufacture of items reserved for manufacture in the small scale sector are required to obtain an industrial licence and undertake an export obligation of 50% of the annual production. This condition of licensing is, however, not applicable to those undertakings operating under 100% Export Oriented Undertakings Scheme, the Export Processing Zone (EPZ) or the Special Economic Zone Schemes (SEZs). (www.economywatch.com) 5. Non-Resident Indians Scheme The general policy and facilities for Foreign Direct Investment as available to foreign investors/company are fully applicable to NRIs as well. In addition, Government has extended some concessions specially for NRIs and overseas corporate bodies having more than 60% stake by the NRIs. These inter-alia includes (i) NRI/OCB investment in the real estate and housing sectors upto 100% and (ii) NRI/OCB investment in domestic airlines sector upto 100%. NRI/OCBs are also allowed to invest upto 100% equity on non-repatriation basis in all activities except for a small negative list. Apart from this, NRI/OCBs are also allowed to invest on repatriation/non-repatriation under the portfolio investment scheme. (www.economywatch.com) 6. Electronic Hardware Technology Park (EHTP)/Software Technology Park (STP) scheme for building up strong electronics industry and with a view to enhancing export, two schemes viz. Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) are in operation. Under EHTP/STP scheme, the inputs are allowed to be procured free of duties. (www.economywatch.com) The Directors of STPs have powers to approved fresh STP/EHTP proposals and also grand post-approval amendment in respect of EHTP/STP projects as have been given to the Development Commissioners of Export Processing Zones in the case of Export Oriented Units. All other application for setting up projects under these schemes, are considered by the Inter-Ministerial Standing Committee (IMSC) Chaired by Secretary (Information Technology). The IMSC is serviced by the SIA. (www.economywatch.com) 7. Policy for Foreign Direct Investment (FDI) The Department has put in place a liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership. Some of the recent initiatives taken to further liberalise the FDI regime, inter alia, include opening up of sectors such as Insurance (upto 26%); development of integrated townships (upto 100%); defence industry (up to 26%); tea plantation (utp 100% subject to divestment of 26% within five years to FDI); Enhancement of FDI limits in private sector banking, allowing FDI up to 100% under the automatic route for most manufacturing activities in SEZs; opening up B2B ecommerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to 100% foreign investment subject to 26% divestment condition; etc.

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The Department has also strengthened investment facilitation measures through Foreign Investment Implementation Authority (FIIA). (www.economywatch.com)

AGRICULTURAL POLICY
Agricultural policy describes a set of laws relating to domestic agriculture and imports of foreign agricultural products. Governments usually implement agricultural policies with the goal of achieving a specific outcome in the domestic agricultural product markets. Outcomes can involve, for example, a guaranteed supply level, price stability, product quality, product selection, land use or employment.(source: www.wikipedia.org)

Agriculture in India
Agriculture in India has a long history, dating back to ten thousand years. Today, India ranks second worldwide in farm output. Agriculture and allied sectors like forestry and logging accounted for 16.6% of the GDP in 2007, employed 52% of the total workforce (source: "CIA Factbook:
India")

and despite a steady decline of its share in the GDP, is still the largest economic sector and plays a

significant role in the overall socio-economic development of India.

India is the largest producer in the world of milk, cashew nuts, coconuts, tea, ginger, turmeric and black pepper , Coffee (source:www.wikipedia.org). It also has the world's largest cattle population (281 million). It is the second largest producer of wheat, rice, sugar, groundnut and inland fish. It is the third largest producer of tobacco. India accounts for 10% of the world fruit production with first rank in the production of banana and sapota(source:www.wikipedia.org)

NATIONAL AGRICULTURE POLICY Ministry of Agriculture, Department of Agriculture & Co-operation, Government of India Agriculture is a way of life, a tradition, which, for centuries, has shaped thethought, the outlook, the culture and the economic life of the people of India. Agriculture, therefore, is and will continue to be central to all strategies for planned socio-economic development of the country. Rapid growth of agriculture is essential not only to achieve self-reliance at national level but also for household food security and to bring about equity in distribution of income and wealth resulting in rapid reduction in poverty levels. 2. Indian agriculture has, since Independence, made rapid strides. In taking the annual foodgrains production from 51 million tonnes of the early fifties to 206 million tonnes at the turn of the century, it has contributed

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significantly in achieving self sufficiency in food and in avoiding food shortages in our country. The pattern of growth of agriculture has, however, brought in its wake, uneven development, across regions and crops as also across different sections of farming community and is characterized by low levels of productivity and degradation of natural resources in some areas. Capital inadequacy, lack of infrastructural support and demand side constraints such as controls on movement, storage and sale of agricultural products, etc., have continued to affect the economic viability of agriculture sector. Consequently, the growth of agriculture has also tended to slacken during the nineties. 3. Agriculture has also become a relatively unrewarding profession due to generally unfavourable price regime and low value addition, causing abandoning of farming and increasing migration from rural areas. The situation is likely to be exacerbated further in the wake of integration of agricultural trade in the global system, unless immediate corrective measures are taken. 4. Over 200 million Indian farmers and farm workers have been the backbone of India's agriculture. Despite having achieved national food security the well being of the farming community continues to be a matter of grave concern for the planners and policy makers in the country. The establishment of an agrarian economy which ensures food and nutrition to India's billion people, raw materials for its expanding industrial base and surpluses for exports, and a fair and equitable reward system for the farming community for the services they provide to the society, will be the mainstay of reforms in the agriculture sector. 5. The National Policy on Agriculture seeks to actualise the vast untapped growth potential of Indian agriculture, strengthen rural infrastructure to support faster agricultural development, promote value addition, accelerate the growth of agro business, create employment in rural areas, secure a fair standard of living for the farmers and agricultural workers and their families, discourage migration to urban areas and face the challenges arising out of economic liberalization and globalisation. Over the next two decades, it aims to attain: A growth rate in excess of 4 per cent per annum in the agriculture sector Growth that is based on efficient use of resources and conserves our soil, water and bio-diversity; Growth with equity, i.e., growth which is widespread across regions and farmers; Growth that is demand driven and caters to domestic markets and maximises benefits from exports of agricultural products in the face of the challenges arising from economic liberalization and globalisation; Growth that is sustainable technologically, environmentally and economically.

Sustainable Agriculture 6. The policy will seek to promote technically sound, economically viable, environmentally non-degrading,

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and socially acceptable use of country's natural resources - land, water and genetic endowment to promote sustainable development of agriculture. Measures will be taken to contain biotic pressures on land and to control indiscriminate diversion of agricultural lands for non-agricultural purposes. The unutilized wastelands will be put to use for agriculture and afforestation. Particular attention will be given for increasing cropping intensity through multiple-cropping and inter-cropping. 7. The Government accords abiding importance to improving the quality of the country's land and soil resources. Reclamation of degraded and fallow lands as well as problem soils will be given high priority to optimize their productive use. Special emphasis will be laid on conserving soils and enriching their fertility. Management of land resources on watershed basis will receive special attention. Areas of shifting cultivation will also receive particular attention for their sustainable development. Integrated and holistic development of rainfed areas will be promoted by conservation of rain water by vegetative measures on watershed basis and augmentation of biomass production through agro and farm forestry with the involvement of the watershed community. All spatial components of a watershed, i.e. arable land, non-arable and drainage lines will be treated as one geo-hydrological entity. Management of grazing land will receive greater attention for augmenting availability of animal feed and fodder. A long-term perspective plan for sustainable rainfed agriculture through watershed approach will be vigorously pursued for development of two thirds of India's cropped area which is dependent on rains. 8. Rational utilization and conservation of the country's abundant water resources will be promoted. Conjunctive use of surface and ground water will receive highest priority. Special attention will be focused on water quality and the problem of receding ground-water levels in certain areas as a result of overexploitation of underground aquifers. Proper on-farm management of water resources for the optimum use of irrigation potential will be promoted. Use of in situ moisture management techniques such as mulching and use of micro overhead pressured irrigation systems like drip and sprinkler and green house technology will be encouraged for greater water use efficiency and improving productivity, particularly of horticultural crops. Emphasis will be placed on promotion of water harvesting structures and suitable water conveyance systems in the hilly and high rainfall areas for rectification of regional imbalances. Participatory community irrigation management will be encouraged. 9. Erosion and narrowing of the base of India's plant and animal genetic resources in the last few decades has been affecting the food security of the country. Survey and evaluation of genetic resources and safe conservation of both indigenous and exogenously introduced genetic variability in crop plants, animals and their wild relatives will receive particular attention. The use of bio-technologies will be promoted for evolving plants which consume less water, are drought resistant, pest resistant, contain more nutrition, give higher yields and are environmentally safe. Conservation of bio-resources through their ex situ preservation in Gene Banks, as also in situ conservation in their natural habitats through bio-diversity parks, etc., will

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receive a high priority to prevent their extinction. Specific measures will also be taken to conserve indigenous breeds facing extinction. There will be a time bound programme to list, catalogue and classify country's vast agro bio-diversity. 10. Sensitization of the farming community with the environmental concerns will receive high priority. Balanced and conjunctive use of bio-mass, organic and inorganic fertilizers and controlled use of agro chemicals through integrated nutrients and pest management (INM & IPM) will be promoted to achieve the sustainable increases in agricultural production. A nation-wide programme for utilization of rural and urban garbage, farm residues and organic waste for organic matter repletion and pollution control will be worked out. 11. Agro forestry and social forestry are prime requisites for maintenance of ecological balance and augmentation of bio-mass production in the agricultural systems. Agro-forestry will receive a major thrust for efficient nutrient cycling, nitrogen fixation, organic matter addition and for improving drainage. Farmers will be encouraged to take up farm/agro-forestry for higher income generation by evolving technology, extension and credit support packages and removing constraints to development of agro and farm forestry. Involvement of farmers and landless labourers will be sought in the development of pastures/forestry programmes on public wastelands by giving financial incentives and entitlements to the usufructs of trees and pastures. 12. The history and traditional knowledge of agriculture, particularly of tribal communities, relating to organic farming and preservation and processing of food for nutritional and medicinal purposes is one of the oldest in the world. Concerted efforts will be made to pool, distill and evaluate traditional practices, knowledge and wisdom and to harness them for sustainable agricultural growth. Food and Nutritional Security 13. Special efforts will be made to raise the productivity and production of crops to meet the increasing demand for food generated by unabated demographic pressures and raw materials for expanding agro-based industries. A regionally differentiated strategy will be pursued, taking into account the agronomic, climatic and environmental conditions to realize the full growth potential of every region. Special attention will be given to development of new crop varieties, particularly of food crops, with higher nutritional value through adoption of bio-technology particularly, genetic modification, while addressing bio-safety concerns. 14. A major thrust will be given to development of rainfed and irrigated horticulture, floriculture, roots and tubers, plantation crops, aromatic and medicinal plants, bee-keeping and sericulture, for augmenting food supply, exports and generating employment in the rural areas. Availability of hybrid seeds and disease-free planting materials of improved varieties, supported by network of regional nurseries, tissue culture

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laboratories, seed farms will be promoted to support systematic development of horticulture having emphasis on increased production, post-harvest management, precision farming, bio-control of pests and quality regulation mechanism and exports. 15. Animal husbandry and fisheries also generate wealth and employment in the agriculture sector. Development of animal husbandry, poultry, dairying and aqua-culture will receive a high priority in the efforts for diversifying agriculture, increasing animal protein availability in the food basket and for generating exportable surpluses. A national livestock breeding strategy will be evolved to meet the requirements of milk, meat, egg and livestock products and to enhance the role of draught animals as a source of energy for farming operations and transport. Major thrust will be on genetic upgradation of indigenous/native cattle and buffaloes using proven semen and high quality pedigreed bulls and by expanding artificial insemination network to provide services at the farmer's doorstep. 16. Generation and dissemination of appropriate technologies in the field of animal production as also health care to enhance production and productivity levels will be given greater attention. Cultivation of fodder crops and fodder trees will be encouraged to meet the feed and fodder requirements and to improve animal nutrition and welfare. Priority attention will also be given to improve the processing, marketing and transport facilities, with emphasis on modernization of abattoirs, carcass utilization and value addition thereon. Since animal disease eradication and quarantine is critical to exports, animal health system will be strengthened and disease free zones created. The involvement of cooperatives and the private sector will be encouraged for development of animal husbandry, poultry and dairy. Incentives for livestock and fisheries production activities will be brought at par with incentives for crop production. 17. An integrated approach to marine and inland fisheries, designed to promote sustainable aquaculture practices, will be adopted. Biotechnological application in the field of genetics and breeding, harmonal applications immunology and disease control will receive particular attention for increased aquaculture production. Development of sustainable technologies for fin and shell fish culture as also pearl-culture, their yield optimization, harvest and post-harvest operations, mechanization of fishing boats, strengthening of infrastructure for production of fish seed, berthing and landing facilities for fishing vessels and development of marketing infrastructure will be accorded high priority. Deep sea fishing industry will be developed to take advantage of the vast potential of country's exclusive economic zone. Generation and Transfer of Technology 18. A very high priority will be accorded to evolving new location-specific and economically viable improved varieties of agricultural and horticultural crops, livestock species and aquaculture as also conservation and judicious use of germplasm and other biodiversity resources. The regionalization of agricultural research, based on identified agro-climatic zones, will be accorded high priority. Application of

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frontier sciences like bio-technology, remote sensing technologies, pre and post-harvest technologies, energy saving technologies, technology for environmental protection through national research system as well as proprietary research will be encouraged. The endeavour will be to build a well organized, efficient and result-oriented agriculture research and education system to introduce technological change in Indian agriculture. Upgradation of agricultural education and its orientation towards uniformity in education standards, women empowerment, user-orientation, vocationalization and promotion of excellence will be the hallmark of the new policy.. 19. The research and extension linkages will be strengthened to improve quality and effectiveness of research and extension system. The extension system will be broad based and revitalized. Innovative and decentralized institutional changes will be introduced to make the extension system farmer-responsible and farmer-accountable. Role of Krishi Vigyan Kendras (KVKs), Non-Governmental Organizations (NGOs), Farmers Organizations, Cooperatives, corporate sector and para-technicians in agricultural extension will be encouraged for organizing demand driven production systems. Development of human resources through capacity building and skill upgradation of public extension functionaries and other extension functionaries will be accorded a high priority. The Government will endeavour to move towards a regime of financial sustainability of extension services through affecting in a phased manner, a more realistic cost recovery of extension services and inputs, while simultaneously safeguarding the interests of the poor and the vulnerable groups. 20. Mainstreaming gender concerns in agriculture will receive particular attention. Appropriate structural, functional and institutional measures will be initiated to empower women and build their capabilities and improve their access to inputs, technology and other farming resources. Inputs Management 21. Adequate and timely supply of quality inputs such as seeds, fertilizers, plant protection chemicals, biopesticides, agricultural machinery and credit at reasonable rates to farmers will be the endeavour of the Government. Soil testing and quality testing of fertilisers and seeds will be ensured and supply of spurious inputs will be checked. Balanced and optimum use of fertilizers will be promoted together with use of organic manures & bio-fertilizers to optimize the efficiency of nutrient use. 22. Development, production and distribution of improved varieties of seeds and planting materials and strengthening and expansion of seed and plant certification system with private sector participation will receive a high priority. A National Seed Grid will be established to ensure supply of seeds especially to areas affected by natural calamities. The National Seeds Corporation (NSC) and State Farms Corporation of India (SFCI) will be restructured for efficient utilization of investment and manpower.

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23. Protection to plant varieties through a sui generis legislation, will be granted to encourage research and breeding of new varieties particularly in the private sector in line with India's obligations under TRIPS Agreement. The farmers will, however, be allowed their traditional rights to save, use, exchange, share and sell their farm saved seeds except as branded seeds of protected varieties for commercial purpose. The interests of the researchers will also be safeguarded in carrying out research on proprietary varieties to develop new varieties. 24. Integrated pest management and use of biotic agents in order to minimize the indiscriminate and injudicious use of chemical pesticides will be the cardinal principle covering plant protection. Selective and eco-friendly farm mechanization through appropriate technology will be promoted, with special reference to rainfed farming to reduce arduous work and to make agriculture efficient and competitive as also to increase crop productivity. Incentives for Agriculture 25. The Government will endeavour to create a favourable economic environment for increasing capital formation and farmer's own investments by removal of distortions in the incentive regime for agriculture, improving the terms of trade with manufacturing sectors and bringing about external and domestic market reforms, backed by rationalization of domestic tax structure. It will seek to bestow on the agriculture sector in as many respects as possible benefits similar to those obtaining in the manufacturing sector, such as easy availability of credit and other inputs, and infrastructure facilities for development of agri-business industries and development of effective delivery systems and freeing movement of agro produce. 26. Consequent upon dismantling of Quantitative Restrictions on imports as per WTO Agreement on Agriculture, Commodity-wise strategies and arrangements for protecting the grower from adverse impact of undue price fluctuations in world markets and for promoting exports will be formulated. Apart from price competition, other aspects of marketing such as quality, choice, health and bio-safety will be promoted. Exports of horticultural produce and marine products will receive particular emphasis. A two-fold long term strategy of diversification of agricultural produce and value addition enabling the production system to respond to external environment and creating export demand for the commodities produced in the country will be evolved with a view to providing the farmers incremental income from export earnings. A favourable economic environment and supportive public management system will be created for promotion of agricultural exports. Quarantine, both of exports and imports, will be given particular attention so that Indian agriculture is protected from the ingress of exotic pests and diseases. 27. In order to protect the interest of farmers in context of removal of Quantitative Restrictions, continuous monitoring of international prices will be undertaken and appropriate tariffs protection will be provided. Import duties on manufactured commodities used in agriculture will be rationalized. The domestic

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agricultural market will be liberalized and all controls and regulations hindering increase in farmers' income will be reviewed and abolished to ensure that agriculturists receive prices commensurate with their efforts, investment. Restrictions on the movement of agricultural commodities throughout the country will be progressively dismantled. 28. The structure of taxes on foodgrains and other commercial crops will be reviewed and rationalized. Similarly, the excise duty on materials such as farm machinery and implements, fertilizers, etc., used as inputs in agricultural production, post harvest storage and processing will be reviewed. Appropriate measures will be adopted to ensure that agriculturists by and large remain outside the regulatory and tax collection systems. Farmers will be exempted from payment of capital gains tax on compulsory acquisition of agricultural land. Investments in Agriculture 29. The Agriculture sector has been starved of capital. There has been a decline in the public sector investment in the agriculture sector. Public investment for narrowing regional imbalances, accelerating development of supportive infrastructure for agriculture and rural development particularly rural connectivity will be stepped up. A time-bound strategy for rationalisation and transparent pricing of inputs will be formulated to encourage judicious input use and to generate resources for agriculture. Input subsidy reforms will be pursued as a combination of price and institutional reforms to cut down costs of these inputs for agriculture. Resource allocation regime will be reviewed with a view to rechannelizing the available resources from support measures towards asset formation in rural sector. 30. A conducive climate will be created through a favourable price and trade regime to promote farmers' own investments as also investments by industries producing inputs for agriculture and agro based industries. Private sector investments in agriculture will also be encouraged more particularly in areas like agricultural research, human resource development, post-harvest management and marketing. 31. Rural electrification will be given a high priority as a prime mover for agricultural development. The quality and availability of electricity supply will be improved and the demand of the agriculture sector will be met adequately in a reliable and cost effective manner. The use of new and renewable sources of energy for irrigation and other agricultural purposes will also be encouraged. 32. Bridging the gap between irrigation potential created and utilized, completion of all on-going projects, restoration and modernization of irrigation infrastructure including drainage, evolving and implementing an integrated plan of augmentation and management of national water resources will receive special attention for augmenting the availability and use of irrigation water. 33. Emphasis will be laid on development of marketing infrastructure and techniques of preservation, storage

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and transportation with a view to reducing post-harvest losses and ensuring a better return to the grower. The weekly periodic markets under the direct control of panchayat raj institutions will be upgraded and strengthened. Direct marketing and pledge financing will be promoted. Producers markets on the lines of Ryatu Bazars will be encouraged through out the width and the breadth of the country. Storage facilities for different kinds of agricultural products will be created in the production areas or nearby places particularly in the rural areas so that the farmers can transport their produce to these places immediately after harvest in shortest possible time. The establishment of cold chains, provision of pre cooling facilities to farmers as a service and cold storage in the terminal markets and improving the retail marketing arrangements in urban areas will be given priority. Upgradation and dissemination of market intelligence will receive particular attention. 34. Setting up of agro-processing units in the producing areas to reduce wastage, especially of horticultural produce, increased value addition and creation of off-farm employment in rural areas will be encouraged. Collaboration between the producer cooperatives and the corporate sector will be encouraged to promote agro-processing industry. An inter-active coupling between technology, economy, environment and society will be promoted for speedy development of food and agro-processing industries and build up a substantial base for production of value added agro-products for domestic and export markets with a strong emphasis on food safety and quality. The Small Farmers Agro Business Consortium (SFAC) will be energized to cater to the needs of farmer entrepreneurs and promote public and private investments in agri-business. Institutional Structure 35. Indian agriculture is characterized by pre-dominance of small and marginal farmers. Institutional reforms will be so pursued as to channelize their energies for achieving greater productivity and production. The approach to rural development and land reforms will focus on the following areas: Consolidation of holdings all over the country on the pattern of north western States. Redistribution of ceiling surplus lands and waste lands among the landless farmers, unemployed youth with initial start up capital; Tenancy reforms to recognize the rights of the tenants and share croppers; Development of lease markets for increasing the size of the holdings by making legal provisions for giving private lands on lease for cultivation and agri business; Updating and improvement of land records, computerization and issue of land pass-books to the farmers; and Recognition of women's rights in land. 36. The rural poor will be increasingly involved in the implementation of land reforms with the help of

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Panchayati Raj Institutions, Voluntary Groups, Social Activists and Community Leaders. 37. Private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured markets for crop production, especially of oilseeds, cotton and horticultural crops. 38. Progressive institutionalization of rural and farm credit will be continued for providing timely and adequate credit to farmers. The rural credit institutions will be geared to promote savings, investments and risk management. Particular attention will be paid to removal of distortions in the priority sector lending by Commercial Banks for agriculture and rural sectors. Special measures will be taken for revamping of cooperatives to remove the institutional and financial weaknesses and evolving simplified procedure for sanction and disbursement of agriculture credit. The endeavour will be to ensure distribution equity in the disbursement of credit. Micro-credit will be promoted as an effective tool for alleviating poverty. Self Help Group - Bank linkage system, suited to Indian rural sector, will be developed as a supplementary mechanism for bringing the rural poor into the formal banking system, thereby improving banks outreach and the credit flows to the poor in an effective and sustainable manner. 39. The basic support to agriculture has been provided by the cooperative sector assiduously built over the years. The Government will provide active support for the promotion of cooperative-form of enterprise and ensure greater autonomy and operational freedom to them to improve their functioning. The thrust will be on: Structural reforms for promoting greater efficiency and viability by freeing them from excessive bureaucratic control and political interference; Creation of infrastructure and human resource development; Improvement in financial viability and organizational sustainability of cooperatives; Democratisation of management and increased professionalism in their operations; and Creating a viable inter-face with other grass-root Organizations.

40. The Legislative and regulatory framework will be appropriately amended and strengthened to achieve these objectives. Risk management 41. Despite technological and economic advancements, the condition of farmers continues to be unstable due to natural calamities and price fluctuations. National Agriculture Insurance Scheme covering all farmers and all crops throughout the country with built in provisions for insulating farmers from financial distress caused

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by natural disasters and making agriculture financially viable will be made more farmer specific and effective. Endeavour will be made to provide a package insurance policy for the farmers, right from sowing of the crops to post-harvest operations, including market fluctuations in the prices of agricultural produce. 42. In order to reduce risk in agriculture and impart greater resilience to Indian agriculture against droughts and floods, efforts will be made for achieving greater flood proofing of flood prone agriculture and drought proofing of rainfed agriculture for protecting the farmers from vagaries of nature. For this purpose, contingency agriculture planning, development of drought and flood resistant crop varieties, watershed development programmes, drought prone areas and desert development programmes and rural infrastructure development programmes will receive particular attention. 43. The Central Government will continue to discharge its responsibility to ensure remunerative prices for agricultural produce through announcement of Minimum Support Prices policy for major agricultural commodities. The food, nutrition and other domestic and exports requirements of the country will be kept in view while determining the support prices of different commodities. The price structure and trade mechanism will be continuously reviewed to ensure a favourable economic environment for the agriculture sector and to bring about an equitable balance between the rural and the urban incomes. The methodology used by the Commission on Agricultural Costs & Prices (CACP) in arriving at estimates of costs of production will be periodically reviewed. The price structure of both inputs and outputs will be monitored to ensure higher returns to the farmers and bring about cost effectiveness throughout the economy. Domestic market prices will be closely monitored to prevent distress sales by the farmers. Public and cooperative agencies undertaking marketing operations will be strengthened. 44. The Government will enlarge the coverage of futures markets to minimize the wide fluctuations in commodity prices as also for hedging their risks. The endeavour will be to cover all important agricultural products under futures trading in course of time. Management Reforms 45. Effective implementation of policy initiatives will call for comprehensive reforms in the management of agriculture by the Central and the State Governments. The Central Government will supplement/complement the State Governments' efforts through regionally differentiated Work Plans, comprising crop/area/target group specific interventions, formulated in an inter-active mode and implemented in a spirit of partnership with the States. The Central Government will move away from schematic approach to Macro-Management mode and assume a role of advocacy, articulation and facilitation to help the States in their efforts towards achieving accelerated agricultural development. 46. The Government will focus on quality aspects at all stages of farm operations from sowing to primary

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processing. The quality of inputs and other support services to farmers will be improved. Quality consciousness amongst farmers and agro processors will be created. Grading and standardization of agricultural products will be promoted for export enhancement. Application of science and technology in agriculture will be promoted through a regular system of interface between S&T institutions and the users/potential users, to make the sector globally competitive. 47. The database for the agriculture sector will be strengthened to ensure greater reliability of estimates and forecasting which will help in the process of planning and policy making. Efforts will be made to significantly improve and harness latest remote sensing and information technology to capture data, collate it, add value and disseminate it to appropriate destinations for managing the risk and in accelerating the growth process. The objective will be to engage in a meaningful continuous dialogue with the external environment in the changing scenario and to have on-line and real time system of 'Agriculture on line' capacity to analyze the signals emanating from the farms and the markets for the benefit of the farmers. 48. The Government of India trust that this Statement of National Agriculture Policy will receive the fullest support of all sections of the people and lead to sustainable development of agriculture, create gainful employment on a self sustaining basis in rural areas, raise standards of living for the farming communities, preserve environment and serve as a vehicle for building a resurgent national economy. Source Ministry of Agriculture, Department of Agriculture & Co-operation, Government of India

INVESTMENT POLICY:
An investment policy is any government regulation or law that encourages or discourages foreign investment in the local economy (source:www.wikipedia.org) As globalization integrates the economies of neighbouring and of trading states, they are typically forced to trade off such rules as part of a common tax, tariff and trade regime, e.g. as defined by a free trade pact. Investment policy favouring local investors over global ones is typically discouraged in such pacts, and the idea of a separate investment policy rapidly becomes a fiction or fantasy, as real decisions reflect the real need for nations to compete for investment, even from their own local investors. (source:www.wikipedia.org) Foreign Direct Investment: FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. (www.economywatch.com)

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Types of Foreign Direct Investment: FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This classification is based on the types of restrictions imposed, and the various prerequisites required for these investments. (www.economywatch.com) An outward-bound FDI is backed by the government against all types of associated risks. This form of FDI is subject to tax incentives as well as disincentives of various forms. Risk coverage provided to the domestic industries and subsidies granted to the local firms stand in the way of outward FDIs, which are also known
as direct investments abroad. (www.economywatch.com)

Different economic factors encourage inward FDIs. These include interest loans, tax breaks, grants, subsidies, and the removal of restrictions and limitations. Factors detrimental to the growth of FDIs include necessities of differential performance and limitations related with ownership patterns. (www.economywatch.com) Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place when a multinational corporation owns some shares of a foreign enterprise, which supplies input for it or uses the output produced by the MNC. Horizontal foreign direct investments happen when a multinational company carries out a similar business operation in different nations. (www.economywatch.com) Foreign Direct Investment is guided by different motives. FDIs that are undertaken to strengthen the existing market structure or explore the opportunities of new markets can be called market-seeking FDIs. Resourceseeking FDIs are aimed at factors of production which have more operational efficiency than those available in the home country of the investor. (www.economywatch.com) Some foreign direct investments involve the transfer of strategic assets. FDI activities may also be carried out to ensure optimization of available opportunities and economies of scale. In this case, the foreign direct investment is termed as efficiency-seeking.(www.economywatch.com) Foreign Direct Investment (FDI) in India is permitted as under the following forms of investments. 1. 2. 3. 4. Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments.

Forbidden Territories: FDI is not permitted in the following industrial sectors: 1. 2. 3. 4. 5. Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

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(source:www.finance.indiamart.com) Foreign Investment through GDRs Foreign Investment through GDRs is treated as Foreign Direct Investment Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads. (source:www.finance.indiamart.com) Clearance from FIPB There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance. (source:www.finance.indiamart.com) Use of GDRs The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India. (source:www.finance.indiamart.com) Restrictions However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India. (source:www.finance.indiamart.com) Foreign Institutional Investment: The term foreign institutional investment denotes all those investors or investment companies that are not located within the territory of the country in which they are investing. These are actually the outsiders in the financial markets of the particular company. Foreign institutional investment is a common term in the financial sector of India. (source:www.finance.indiamart.com) The types of institutions that are involved in the foreign institutional investment are as follows:

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Mutual Funds Hedge Funds Pension Funds

Insurance Companies (source:www.finance.indiamart.com) The economies like India, which are growing very rapidly, are becoming hot favorite investment

destinations for the foreign institutional investors. These markets have the potential to grow in the near future . This is the prime reason behind the growing interests of the foreign investors. The promise of rapid growth of the investable fund is tempting the investors and so they are coming in huge numbers to these countries. The money, which is coming through the foreign institutional investment is referred as 'hot money' because the money can be taken out from the market at anytime by these investors. (source:www.finance.indiamart.com) The foreign investment market was not so developed in the past. But once the globalization took the whole world in its grip, the diversified global market became united. Because of this the investment sector became very strong and at the same time allowed the foreigners to enter the national financial market. At the same time the developing countries understood the value of foreign investment and allowed the foreign direct investment and foreign institutional investment in their financial markets. Although the foreign direct investments are long term investments but the foreign institutional investments are unpredictable. The Securities and Exchange Board of India looks after the foreign institutional investments in India. SEBI has imposed several rules and regulations on these investments. (source:www.finance.indiamart.com)

MANN + HUMMEL

Brief history of the company: The MANN+HUMMEL Group is a development partner and original equipment supplier to the international automotive and mechanical engineering industries. The Groups product portfolio includes air filter systems, intake manifold systems, liquid filter systems, cabin filters and cylinder head covers made of plastic with many integrated functions for the automotive industry, as well as filter elements for vehicle servicing and repair. For general engineering, process engineering and industrial manufacturing sectors the companys product range includes industrial filters, a series of products to reduce carbon emission levels in diesel engines, membrane filters for water filtration, filter systems and complete lines as well as units for conveying, dosing and drying of free flowing plastics.

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With 41 locations all over the world and 11,800 employees, MANN+HUMMEL is one of the major corporations in automotive components. In 2009 the corporation achieved a total revenue of 1.672 billion.

Impact of Indias Economic Situation on the company


Since the Indian Economy has come out of the slump, one can see tremendous boost in economy. Automobile sales have increased by 20-30%, the festive season alone saw a sales of 33.88% increase over the previous year. Mann and Hummel are the major suppliers for the top automobile companies, the increase in sales will result growth for Mann and Hummel as well. This in turn will boost up the industries who supply to Mann and Hummel, in short the boost will not only impact Mann and Hummel, but also their stakeholders.

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